RAMSAY YOUTH SERVICES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

[ ] 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 0-13849

RAMSAY YOUTH SERVICES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 63-0857352
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)

COLUMBUS CENTER
ONE ALHAMBRA PLAZA, SUITE 750
CORAL GABLES, FLORIDA 33134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (305) 569-6993

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
NONE NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

COMMON STOCK, $0.01 PAR VALUE
(TITLE OF CLASS)

Indicate by a 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, and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No. [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No. [X]

The aggregate market value of Common Stock held by non-affiliates on
June 30, 2002 was $14,044,730. For purposes of this computation, all executive
officers, directors and 5% beneficial owners of the common stock of the
registrant have been deemed to be affiliates. Such determination should not be
deemed to be an admission that such directors, officers or 5% beneficial owners
are, in fact, affiliates of the registrant.

The number of share of the registrant's Common Stock outstanding as of
March 14, 2003 was 9,297,831.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's proxy statement to be filed with
the Securities Exchange Commission pursuant to Regulation 14A for the
registrant's 2003 annual meeting of stockholders are incorporated by reference
into Part III of this Form 10-K.

FORWARD-LOOKING STATEMENTS

In connection with the "safe-harbor" provisions of the Private
Securities Litigation Reform Act of 1995, Ramsay Youth Services, Inc. ("Ramsay"
or the "Company") notes that this report contains forward-looking statements
about the Company. The Company is hereby setting forth cautionary statements
identifying important factors that may cause the Company's actual results to
differ materially from those set forth in any forward-looking statements or
information made by or on behalf of or concerning the Company. Some of the most
significant factors include (i) accelerating changes occurring in the behavioral
healthcare and at-risk youth industry, including competition from consolidating
and integrated provider systems and limitations on reimbursement rates, (ii)
federal and state governmental budgetary constraints which could have the effect
of limiting the amount of funds available to support governmental programs,
(iii) statutory, regulatory and administrative changes or interpretations of
existing statutory and regulatory provisions affecting the conduct of the
Company's business and affecting current and prior reimbursement for the
Company's services, and (iv) fluctuations in the numbers of patients receiving
treatment in our health care treatment programs. There can be no assurance that
any anticipated future results will be achieved. As a result of the factors
identified above, and including any other factors, the Company's actual results
or financial condition could vary significantly from the performance or
expectation set forth in any forward-looking statements or information.

ANALYSTS' REPORTS

Investors should also be aware that while the Company does, at
various times, communicate with securities analysts, it is against the Company's
policy to disclose to them any material non-public information or other
confidential information. Accordingly, shareholders should not assume that the
Company agrees with any statement or report issued by an analyst irrespective of
the content of the statement or report. To the extent that reports issued by
securities analysts contain any projections, forecasts or opinions, such reports
are not the responsibility of the Company.

PART I

ITEM 1. BUSINESS.

General

The Company is a provider of behavioral health care treatment
programs and services focused on at-risk and special-needs youth. The Company
offers a full spectrum of treatment programs and services in residential and
non-residential settings. The programs and services are offered through a
network of Company-owned or leased facilities ("Owned Operations") and state or
government-owned facilities ("Management Contract Operations"). See Note 8 of
the Company's Consolidated Financial Statements for information regarding
revenue, profit, assets and other financial information on the Company's Owned
Operations and Managed Contract Operations segments. The Company is
head-quartered in Coral Gables, Florida and has operations in Alabama, Florida,
Georgia, Hawaii, Missouri, Michigan, Nevada, North Carolina, South Carolina,
Texas, Utah and Puerto Rico. The Company also provides a limited range of adult
behavioral healthcare services at certain of its locations in response to
community demand.

The programs and services provided by the Company are designed
through a comprehensive continuum that is directed to meet the demands for
culturally diverse and special-needs populations. The Company's programs are
tailored to service individuals with (i) mental health and

substance abuse issues, (ii) sexually reactive disorders, (iii) developmental
disabilities, and (iv) emotional and behavioral disorders. The Company's
programs cater to special populations such as juvenile offenders, adolescent
females and youth with special education needs.

The primary objective of the Company's programs and services
is to provide a safe and highly structured environment for the evaluation,
treatment, rehabilitation and integration of at-risk and special-needs youth
into their communities as responsible individuals and productive citizens.

DESCRIPTION OF PROGRAMS

Ramsay's specialized behavioral health care programs are
focused on solving the specialized needs of youth by providing effective
treatment interventions, including counseling, social interests, substance
abuse education and treatment, mental health services, cognitive and life
skills development, accredited education and vocational skills. The Company's
goal is to provide a "balanced approach" that develops the social, educational
and vocational skills of the youth and creates responsible, pro-social
individuals. This balanced approach is essential to achieve the program's
objective of integrating the youth into their communities as responsible and
productive individuals.

The following is a summary of the programs and services
offered by the Company:

- - Acute Inpatient Services - Acute inpatient services are generally
provided to individuals needing the most intensive behavioral
healthcare treatment. The most common disorders treated at the
Company's facilities on an acute inpatient basis are mood and
affective disorders (such as depression), psychosis, situational
crises and alcohol and drug dependency. The initial goal of acute
inpatient treatment is to evaluate and stabilize the patient so that
effective treatment can be continued either on an inpatient or
outpatient basis. Under the direction of a psychiatrist, the patient's
condition is assessed, diagnosis is made and prescribed treatment
follows. The treatment regimen utilizes, where appropriate,
medication, individual and group therapy, adjunctive therapy and
family therapy.

- - Residential Treatment Programs - Residential treatment programs
provide safe, secure and highly structured environments for the
evaluation and development of long-term, intensive and transitional
treatment services. The programs focus on a cognitive-behavioral model
with family, group and individual counseling, social and life skills
development and educational and recreational programs. The primary
focus of these services is to reshape antisocial behaviors by
stressing responsibility and achievement of performance and treatment
goals.

- - Community-Based Programs - Community-based programs are designed to
meet the special needs of youths and their families, while enabling
them to remain living at home or in their community. The primary focus
of this program is to provide youths who have a clinically definable
emotional, psychiatric or dependency disorder with therapeutic
services. Youths who are assisted through this program have either
transitioned out of a residential treatment program or do not require
the intensive services of a residential treatment program.

FACILITIES

As of December 31, 2002, the Company's Owned Operations
segment consisted of eleven residential facilities, nine therapeutic community
living facilities and two stand-alone non-residential facilities in which
community-based programs and services are offered. The facilities in the Owned
Operations segment are either owned or leased directly by the Company. As of
December 31, 2002, the Company's Management Contract Operations segment
consisted of eight contracts in which the Company has the right to occupy the
facility.

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The following table sets forth the programs and services
offered by the Company as of December 31, 2002 in the various markets in which
it operates:

MARKET PROGRAMS AND SERVICES
------ ---------------------

OWNED OPERATIONS

Alabama:
Dothan Facility........................ Residential Treatment Programs and
Acute Inpatient Services
Hill Crest Facility.................... Residential Treatment Programs,
Acute Inpatient Services and
Community-Based Programs
Bessemer I............................. Community Based Programs
Bessemer II ........................... Community Based Programs
Higdon Hill ........................... Community Based Programs
Piedmont............................... Community Based Programs

Florida:
Gulf Coast Treatment Center............ Residential Treatment Programs
Manatee Adolescent Treatment Services.. Residential Treatment Programs
Manatee Palms Youth Services........... Residential Treatment Programs and
Community-Based Programs
Riverdale Country School............... Community-Based Programs
Family Counseling Center............... Community-Based Programs

Hawaii:
Pearl City............................. Residential Treatment Programs

Michigan:
Havenwyck Facility..................... Residential Treatment Programs,
Acute Inpatient Services and
Community-Based Programs

Missouri:
Heartland Facility..................... Residential Treatment Programs,
Acute Inpatient Services and
Community-Based Programs
Heartland House........................ Community Based Programs

Nevada:
Briarwood Las Vegas.................... Community Based Programs
Briarwood Reno North................... Community Based Programs
Briarwood Reno South................... Community Based Programs

North Carolina:
Brynn Marr Facility.................... Residential Treatment Programs,
Acute Inpatient Services and
Community-Based Programs

South Carolina:
Coastal Harbor......................... Community Based Programs

Texas:
Mission Vista Facility................. Acute Inpatient Services

Utah:
Benchmark Regional Facility............ Residential Treatment Programs

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MARKET PROGRAMS AND SERVICES
------ ---------------------

MANAGEMENT CONTRACTS

Florida:
Everglades Youth Development Center....... Residential Treatment Programs
Florida Institute for Girls............... Residential Treatment Programs
Kingsley Center........................... Residential Treatment Programs
Okaloosa Youth Academy.................... Residential Treatment Programs
Southern Glades Youth Camp................ Residential Treatment Programs
Milton Girls Juvenile Residential Facility Residential Treatment Programs

Georgia:
McIntosh Youth Development Campus......... Residential Treatment Programs

Puerto Rico:
Bayamon Detention Center.................. Residential Treatment Programs

Market for the Company's Services

Expenditures for the youth services industry totaled $60.0
billion in 2000, and continues to grow at a rate of 9% per annum. The Company
believes that the market for behavioral healthcare and youth services in the
United States will continue to grow based on the following compelling industry
demographics:

- - At least eleven million youth have a serious diagnosable mental,
emotional or behavioral health disorder.

- - Over one million youths enter the juvenile justice system each year
and it is estimated that 60% of these youth have a mental disorder.
Approximately 50% to 75% of these youths also have substance abuse
issues and nearly 40% of them have learning disabilities.

- - Approximately three million children are reported as abused or
neglected each year, of which 90% of them fail to receive the services
they need.

- - The general youth population is expected to grow by 21% by the year
2010.

The Company intends to grow through (i) expansion of
services, markets and products, (ii) aggressive response to requests for
proposals ("RFP's") and (iii) selected strategic acquisitions. Through these
avenues, management intends to capitalize on the behavioral healthcare and
youth services industry's size, fragmentation and multiple payor sources.

- - Expansion of Services - Management believes significant opportunities
exist to penetrate further the Company's existing geographic markets.
Management will continue to capitalize on the Company's reputation for
delivering high quality and cost-effective solutions, to expand the
breadth of service provided to existing customers, and to attract new
customers. In addition, the Company will continue to develop new
programs which respond to state and local agencies' needs to secure
appropriate placements for special needs youth.

- - Aggressive Response to RFPs - The Company is well positioned to expand
into new markets as state and local agencies increasingly seek
providers with the capability to deliver a broader continuum of
services to at-risk youth. Further, management believes this trend
will intensify as state and local governments desire to keep spending
in their respective home states and look to develop local services.
Typically, the solicitation of providers for new and broader service
offerings is accomplished by state agencies through RFPs, a process in
which the Company actively competes in markets management has targeted
for growth. Management believes the Company's history of providing
high quality, cost-effective services gives it a significant
competitive advantage in responding to RFPs. The Company

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prioritizes its target markets based on the needs of each state, the
diversification of funding sources, state and local legislation,
existing relationships and in-state competition.

- - Selected Strategic Acquisitions - The Company intends to pursue
strategic acquisitions of other behavioral healthcare and youth
services providers to penetrate existing markets further and enter new
geographic markets. The behavioral healthcare and youth services
industry are highly fragmented with what the Company estimates to be
approximately 15,000 providers. The Company continually reviews
acquisition opportunities and management believes that a number of
acquisition opportunities currently exist at reasonable valuations.
Further, management believes it can enhance the performance of
acquired facilities by selectively implementing the Company's programs
to expand services. Management believes that the Company's current
infrastructure is capable of supporting a number of acquisitions
affording the opportunity to spread certain fixed operational expenses
over a broader revenue base.

Competition

The fragmented youth-focused behavioral health care industry
is comprised largely of small providers that operate in relatively limited
geographic areas and provide services to a specific youth population. The
Company competes with both public and private for-profit and not-for-profit
organizations. Competition generally is based upon program quality, range and
price of services provided, operational experience and facility location. When
responding to an RFP, the strength and depth of a provider's relationship with
the various payors plays a significant role in the selection process. The
Company believes that its programs and services compete favorably on the basis
of, among other things, the range and quality of programs offered and the
expertise of its management team in the development and implementation of new
programs.

Sources Of Revenue

The Company receives payments from various sources, including
commercial insurance carriers (which provide coverage to insured individuals on
both an indemnity basis and through various managed care plans), state and
local governmental agencies (including state judicial systems), Medicaid and
Medicare. In addition, payments are received directly from individuals,
including co-payments and deductibles related to services covered by these
individuals' benefit plans. The Company also receives payments from school
districts either directly or through management contracts with other entities.

- - State and Local Government Payors - The Company's facilities are
reimbursed for certain services on a per-diem basis by various state
and local government agencies. The per-diem rate is generally based on
the nature and scope of services provided to residents. In addition,
some government programs pay the Company for access to a certain
number of beds.

- - Medicaid - Medicaid is the federal/state health insurance program for
low-income individuals, including welfare recipients. Subject to
certain minimum federal requirements, each state defines the extent
and duration of the services covered by its Medicaid program.
Moreover, although there are certain federal requirements governing
the payment levels for Medicaid services, each state has its own
methodology for making payment for services provided to Medicaid
patients. Various state Medicaid programs cover payment for services
provided to individuals covered under the Medicaid program by the
Company.

- - Commercial Insurance Payors - The Company's facilities are reimbursed
for certain behavioral healthcare services by health maintenance
organizations ("HMO's"), commercial insurance companies and
self-insured employers either on a fee-for-service basis or under
contractual arrangements which include reimbursement on a per-diem,
per-diagnosis basis.

For inpatient services, Blue Cross plans reimburse based on charges or
negotiated rates in all areas in which the Company presently operates
facilities, except Alabama. In certain states in which the Company
operates, Blue Cross reimbursement is approved through a rate-setting
process and,

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therefore, Blue Cross may reimburse the Company at a rate less than
billed charges. Under cost-based Blue Cross programs, such as those in
Alabama, direct reimbursement to facilities typically is lower than
the facility's charges, and patients are not responsible for the
difference between the amount reimbursed by Blue Cross and the
facility's charges.

Most commercial insurance carriers reimburse their policyholders or
reimburse the Company directly for charges at rates and limits
specified in their policies. Patients generally remain responsible for
any amounts not covered under their insurance policies. Generally,
reimbursement for psychiatric inpatient and chemical dependency care
by commercial insurance carriers is limited to a maximum number of
inpatient days per year or during the patient's lifetime, or to a
maximum dollar amount expended, for a patient, in a given period.

- - Medicare - Medicare is the federal health insurance program for the
aged and disabled. Medicare reimburses providers of psychiatric care
for inpatient and outpatient services and providers of long term acute
care services. Medicare reimburses psychiatric hospitals and long term
care hospitals on a reasonable cost basis for inpatient care. Medicare
reimburses providers of hospital outpatient psychiatric services,
including partial hospitalization programs, based on the hospital
prospective payment system. Medicare reimburses other providers of
outpatient psychiatric services on fee for service and reasonable cost
basis. Medicare reimbursement is typically less than the Company's
established charges for services provided to Medicare patients.
Patients are not responsible for the difference between the reimbursed
amount and the established charges other than for applicable
non-covered charges, coinsurance and deductibles. The Medicare program
is administered by the Centers for Medicare and Medicaid Services
("CMS"), formerly known as the Health Care Financing Administration.

Pursuant to the Balanced Budget Refinement Act of 1999, CMS is
required to implement prospective payment systems for both psychiatric
hospitals and long term care hospitals. CMS has recently issued
proposed regulations for a long term care hospital prospective payment
system but has not yet issued proposed rules for a prospective payment
system for psychiatric hospitals. CMS has indicated it intends to
issue proposed rules for the prospective payment system for
psychiatric hospitals on April 25, 2003. It is likely that these new
payment systems will impact the Company's revenues; however, the
significance and the positive or negative nature of such impact is not
yet clear as no proposed rules have yet been issued for psychiatric
hospitals.

Medicare reimbursement to exempt psychiatric and chemical dependency
facilities is currently subject to the payment limitations and
incentives established in the Tax Equity and Fiscal Responsibility Act
of 1982 ("TEFRA"). These facilities are currently paid on the basis of
each facility's historical costs trended forward, with a limit placed
on the rate of increase in per case reimbursable costs. Facilities
with costs less than their respective target rate per discharge are
currently reimbursed based on allowable Medicare costs, plus an
additional incentive payment. Medicare reimbursement under TEFRA to
facilities exempt from prospective payment, such as the Company's
facilities, have been adversely affected by the Balanced Budget Act of
1997 (the "BBA"), passed by Congress in July 1997. Under certain
provisions of the BBA, effective July 1, 1998 for the Company, target
rates per discharge were capped, the formula by which incentive
payments are calculated was modified to reduce these payments and
allowable Medicare capital costs were reduced by 15%. However,
subsequent to the passage of the BBA, Congress has passed the Balanced
Budget Refinement Act of 1999 and the Benefit Improvement and
Protection Act of 2000 (collectively the "New Acts"). Under the New
Acts, the amount of incentive payments was increased effective for
cost reporting periods beginning on or after October 1, 2001.

Regulation

As a behavioral healthcare provider, the Company is subject
to extensive and frequently changing government regulations from a variety of
federal, state and local authorities. These regulations are primarily concerned
with licensure, conduct of operations, reimbursement, financial solvency,
standards of medical care, the dispensing of drugs, patient rights (including
the confidentiality of medical records)

6

and the direct employment of psychiatrists, psychologists, and other licensed
professionals. Regulatory activities affect the Company's business directly by
controlling its operations, restricting licensure of the business entity or by
controlling the reimbursement for services provided, and indirectly by
regulating its customers. In certain cases, more than one regulatory agency may
have authority over the activities of the Company. State licensing laws and
other regulations are subject to amendment and to interpretation by regulatory
agencies with broad discretionary powers. Any new regulations or licensing
requirements, or amendments or interpretations of existing regulations or
requirements, could require the Company to modify its operations materially in
order to comply with applicable regulatory requirements and may have a material
adverse effect on the Company's business, financial condition or results of
operations.

Operators of residential treatment programs for juveniles are
typically expected to provide education programs and, in some instances,
healthcare services. As providers of such services, the Company is required to
comply with applicable state and local regulations. In addition, some programs
require accreditation from the Joint Commission on Accreditation of Healthcare
Organizations, the Commission on Accreditation of Rehabilitation Facilities or
the American Corrections Association.

Federal law contains a number of provisions designed to
ensure that services rendered by providers of healthcare services to Medicare
and Medicaid patients are medically necessary, meet professionally recognized
standards and are billed properly. These provisions include a requirement that
admissions of Medicare and Medicaid patients to a facility must be reviewed in
a timely manner to determine the medical necessity of the admissions. In
addition, the Peer Review Improvement Act of 1982 ("Peer Review Act") provides
that a facility may be required by the federal government to reimburse the
government for the cost of Medicare-paid services determined by a peer review
organization to have been medically unnecessary. Each of the Company's
facilities has developed and implemented a quality assurance program and
implemented procedures for utilization review and retrospective patient care
evaluation to meet its obligations under the Peer Review Act.

The Social Security Act imposes civil sanctions and criminal
penalties upon persons who make or receive kickbacks, bribes or rebates in
connection with federally-funded healthcare programs. The Social Security Act
also provides for exclusion from the Medicare and Medicaid programs for
violations of the anti-kickback rules. The anti-kickback rules prohibit
providers and others from soliciting, offering, receiving or paying, directly
or indirectly, overtly or covertly, any remuneration in return for either
making a referral for a federally-funded healthcare service or item or ordering
any such covered service or item. In order to provide guidance with respect to
the anti-kickback rules, the Office of the Inspector General of the U.S.
Department of Health and Human Service has issued regulations outlining certain
"safe harbor" practices which, although potentially capable of including
prohibited referrals, would not be prohibited if all applicable requirements
were met. A relationship which fails to satisfy a safe harbor is not
necessarily illegal, but could be scrutinized on a case-by-case basis. Since
the anti-kickback rules have been broadly interpreted, they could limit the
manner in which the Company conducts its business. The Company believes that it
currently complies with the anti-kickback rules in planning its activities, and
believes that its activities, even if not within a safe harbor, do not violate
the anti-kickback rules. However, there can be no assurance that (i) government
enforcement agencies will not assert that certain of these arrangements are in
violation of the illegal remuneration statute, (ii) the statute will ultimately
be interpreted by the courts in a manner inconsistent with the Company's
practices or (iii) the federal government or other states in which the Company
operates will not enact similar or more restrictive legislation or restrictions
that could, under certain circumstances, impact the Company's operations.

Under another federal provision, known as the "Stark" law or
"self-referral" prohibition, physicians who have an investment or compensation
relationship with an entity furnishing certain designated health services
(including inpatient and outpatient hospital services) may not, subject to
certain exceptions, refer Medicare patients for designated health services to
that entity. Similarly, facilities may not bill Medicare or any other party for
services furnished pursuant to a prohibited referral. Additionally, law
enforcement authorities, including the Office of the Inspector General, the
courts and Congress are increasing scrutiny of arrangements between healthcare
providers and potential referral sources to ensure that the arrangements are
not designed as a mechanism to exchange remuneration for patient care referrals
and opportunities. Investigators also have demonstrated a willingness to look
behind the formalities of a

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business transaction to determine the underlying purposes of payments between
healthcare providers and potential referral sources. Violation of these
provisions may result in disallowance of Medicare claims for the affected
services, as well as the imposition of civil monetary penalties and program
exclusion. In addition, the Stark law prevents states from receiving federal
Medicaid matching payments for designated health services that are provided as
a result of a prohibited referral. Often as a result of this requirement, a
number of states have enacted prohibitions similar to the Stark law covering
referrals of non-Medicare business. The Company conducts business in numerous
states that have passed legislation which, under certain circumstances, either
may prohibit the referral of private pay patients to healthcare entities in
which the physician has an ownership or investment interest, or with which the
physician has a compensation arrangement, or may require the disclosure of such
interest to the patient. All of these rules are very restrictive, prohibit
submission of claims for payment related to prohibited referrals and provide
for the imposition of civil monetary penalties and criminal prosecution. The
Company is unable to predict how these laws may be applied in the future, or
whether the federal government or states in which the Company operates will
enact more restrictive legislation or restrictions that could under certain
circumstances impact the Company's operations.

In addition to the regulations set forth above, the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA") broadened the
scope of the fraud and abuse laws by adding several criminal provisions for
healthcare fraud offenses that apply to all health benefit programs. This act
also created new enforcement mechanisms to combat fraud and abuse including the
Medicare Integrity Program and an incentive program under which individuals can
receive up to $1,000 for providing information on Medicare fraud and abuse that
leads to the recovery of at least $100 of Medicare funds. In addition, federal
enforcement officials now have the ability to exclude from Medicare and Medicaid
any investors, officers and managing employees associated with business entities
that have committed healthcare fraud. It also establishes a new violation for
the payment of inducements to Medicare and Medicaid beneficiaries in order to
influence those beneficiaries to order or receive services from a particular
provider or practitioner. Although we do not know of any current violations of
the fraud and abuse provisions of HIPPA, if we were found to be in violation
of these provisions, the government could seek penalties against the Company
including exclusion from participation to government payer programs.
Significant fines could cause liquidity problems and adversely affect our
results of operations.

The Department of Health and Human Services (referred to as "HHS")
has enacted standards for information sharing, security and patient
confidentiality. The HHS, in its administrative simplification provisions, has
published two sets of final regulations implementing healthcare transactions
and privacy standards under HIPAA. These regulations apply to what are termed
"covered entities" and, under terms of the regulations, Ramsay is a covered
entity.

The first set of final regulations requires covered entities to use
uniform standards, including data reporting, formatting, and coding for common
healthcare transactions. The Standards for Electronic Transactions Final Rule
was published August 2000 and became effective October 2000 with a compliance
date of October 2002. This effective date has now been delayed to October 2003.

The second set of final regulations imposes new standards relating to
the privacy of individually identifiable health information. The Standards for
Privacy and Individually Identifiable Health Information Final Rule was
published December 2000 and became effective April 2001 with a compliance date
of April 2003. These standards require covered entities to comply with rules
governing the use and disclosure of protected health information. The standards
also require covered entities to enter into certain contractual provisions with
any business associate to whom individually identifiable information is
disclosed.

A third set of regulations under HIPAA, the Final Rule for Security
Standards, was published in February 2003 with a compliance date of April 2005.
The Final Rule establishes minimum security requirements for covered entities
to protect health information in electronic form. In some cases, we will also
have to comply with applicable state regulations regarding privacy and medical
information.

We are currently assessing the privacy and security standards to ensure
that we have the required systems and procedures in place to comply with the new
HIPAA regulations. While we will incur costs to become compliant with the HIPAA
regulations for electronic transaction processing, we believe this will not have
a significant overall impact on our results of operations.

In certain states, the employment of psychiatrists,
psychologists and certain other behavioral healthcare professionals by business
corporations, such as the Company, is a permissible practice. However, other
states have legislation or regulations or have interpreted existing medical
practice licensing laws to restrict business corporations from providing
behavioral healthcare services or from the direct employment of psychiatrists
and, in a few states, psychologists and other behavioral healthcare
professionals. Management believes that the Company is in compliance with these
laws.

State certificate of need or similar statutes generally
provide that prior to the construction or acquisition of new beds or facilities
or the introduction of a new service, a state agency must determine that a need
exists for those beds, facilities or services. In most cases, certificate of
need or similar statutes do not restrict the ability of the Company or its
competitors from offering new or expanded outpatient services. Except for Utah,
all of the states in which the Company operates facilities have adopted
certificate of need or similar statutes.

The Company is also subject to state and federal laws that
govern the submission of claims for reimbursement. These laws generally
prohibit an individual or entity from knowingly and willfully presenting a
claim (or causing a claim to be presented) for payment from Medicare, Medicaid
or other third party payors that is false or fraudulent. The standard for
"knowing and willful" often includes conduct that amounts to a reckless
disregard for whether accurate information is presented by claims processors.
Penalties under these statutes include substantial civil and criminal fines,
exclusion from the Medicare program, and imprisonment. One of the most
prominent of these laws is the Federal False Claims Act, which may be enforced
by the federal government directly, or by a qui tam plaintiff on the
government's behalf. Under the False Claims Act, both the government and the
private plaintiff, if successful, are permitted to recover substantial monetary
penalties, as well as an amount equal to three times actual damages. In some
cases, qui tam plaintiffs and the federal government have taken the position
that violations of the anti-kickback statute and the Stark Law should also be
prosecuted as violations of the federal False Claims Act. Management believes
that the Company has procedures in place to ensure the accurate completion of
claims forms and requests for payment. However, the laws and regulations
defining proper Medicare or Medicaid billing are frequently unclear and have
not been subjected to extensive

8

judicial or agency interpretation. Billing errors can occur despite the
Company's best efforts to prevent or correct them, and we cannot assure you
that the government will regard such errors as inadvertent and not in violation
of the False Claims Act or related statutes. The Company is not currently aware
of any actions against the Company under the False Claims Act.

There are currently numerous legislative and regulatory
initiatives at the state and federal levels addressing patient privacy
concerns. In particular, on December 28, 2000, the Department of Health and
Human Services ("DHHS") released final health privacy regulations implementing
portions of the Administrative Simplification Provisions of the Health
Insurance Portability and Accountability Act of 1996. These final health
privacy regulations have an effective date of April 14, 2001, and a compliance
date of April 14, 2003. Subject to limited exceptions, these regulations
restrict how healthcare providers use and disclose medical records and other
individually identifiable health information, whether communicated
electronically, on paper or orally. The regulations also provide patients with
significant new rights related to understanding and controlling how their
health information is used and disclosed. HIPAA is far-reaching and complex and
the government's delay in providing guidance on some aspects of the law may
affect the timeliness of our compliance efforts. Additionally, different
approaches to HIPAA's provisions and varying enforcement philosophies in the
different states may adversely affect our ability to standardize our products
and services across state lines.

The Company is also subject to regulations promulgated under
the Administrative Simplification Provisions establishing electronic data
transmission standards that all healthcare providers must use when submitting
or receiving certain healthcare transactions electronically. These statutes
vary by state and could impose additional penalties. If the Company fails to
comply with these regulations, we could suffer civil penalties up to $25,000
per calendar year for each violation and criminal penalties with fines of up to
$250,000 per violation. Our facilities will continue to remain subject to any
state laws that are more restrictive than the privacy regulations issued under
the Administrative Simplification Provisions. These state laws could impose
additional penalties for non-compliance.

The Company believes that it is currently in compliance in
all material respects with applicable current statutes and regulations
governing its business. The Company monitors its compliance with applicable
statutes and regulations and works with regulators concerning various
compliance issues that arise from time to time. Notwithstanding the foregoing,
the regulatory approach in the at-risk youth industry and behavioral healthcare
industry is extensive and evolving and there can be no assurance that a
regulatory agency will not take the position, under existing or future statutes
or regulations, or as a result of a change in the manner in which existing
statutes or regulations are or may be interpreted or applied, that the conduct
of all or a portion of the Company's operation within a given jurisdiction is
or will be subject to further licensure and regulation. Expansion of the
Company's businesses to cover additional geographic areas or to different types
of products or customers could also subject it to additional licensure and
regulatory requirements.

Insurance

The Company carries general and professional liability,
comprehensive property damage, malpractice, workers' compensation, and other
insurance coverages that management considers adequate for the protection of
its assets and operations.

The Company maintains self-insured retentions related to its
professional and general liability and workers' compensation insurance
programs. The Company's operations are insured for professional liability on a
claims-made basis and for general liability and workers' compensation on an
occurrence basis. The Company records the liability for uninsured losses
related to asserted and unasserted claims arising from reported and unreported
incidents based on independent valuations which consider claim development
factors, the specific nature of the facts and circumstances giving rise to each
reported incident and the Company's history with respect to similar claims. The
development factors are based on a blending of the Company's actual experience
with industry standards.

9

The Company funds the expected losses of its workers'
compensation claims through a rent-a-captive arrangement with an offshore
entity wholly owned by a United States insurance carrier. The Company also
maintains an aggregate stop loss policy for its workers' compensation claims.

Additional Information

The Company files reports with the Securities and Exchange
Commission ("SEC"), including annual reports on Form 10-K, quarterly reports on
Form 10-Q and other reports from time to time. The public may read and copy any
materials the Company files with the SEC at the SEC's Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The Company is an electronic filer and the SEC maintains an
Internet site at www.sec.gov that contains the reports, proxy and information
statements, and other information filed electronically.

The Company's Internet website address is www.ramsay.com. The
Company makes available free of charge on or through its website its Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K, and amendments to these reports, as soon as reasonably practicable
after the Company electronically files such material with, or furnishes such
material to, the Securities and Exchange Commission. The Company also makes
available on its web site other reports filed with the SEC under the Securities
Exchange Act of 1934, as amended, including its proxy statements and reports
filed by officers and directors under Section 16(a) of that Act. These reports
may be found on the web site by selecting the option entitled "SEC REPORTS"
under the "INVESTOR RELATIONS" area of the web site. The Company does not
intend for information contained in its Web site to be part of this Form 10-K.

The Company maintains a code of ethics that is applicable to
all employees, including the Company's Chief Executive Officer and senior
financial officers. This code requires continued observance of high ethical
standards such as honesty, integrity and compliance with the law in the conduct
of the Company's business.

Employees

As of December 31, 2002, the Company employed approximately
2,362 full-time and 181 part-time employees, including a corporate headquarters
staff of approximately 24 full-time employees. None of the Company's employees
are covered by collective bargaining agreements. The Company considers its
relationship with its employees to be good.

ITEM 2. PROPERTIES.

The following table provides information concerning the
Company's properties as of December 31, 2002:

DATE OPENED NATURE OF
FACILITY (3) OR ACQUIRED OCCUPANCY
------------ ----------- ---------

McIntosh Youth Development Campus October 2002 Right to
Darien, GA(4)..................... Occupy
Macon Behavioral Health System
Macon, GA(5)...................... September 2002 Leased
Briarwood South
Reno, NV.......................... February 2002 Leased
Milton Girls Juvenile Residential
Facility Right to
Milton, FL(4)..................... February 2002 Occupy
Riverdale Country School
Palm Bay, FL...................... August 2001 Leased
Bessemer II
Bessemer, AL...................... September 2000 Owned

10

DATE OPENED NATURE OF
FACILITY (3) OR ACQUIRED OCCUPANCY
------------ ----------- ---------

Manatee Palms Youth Services August 2000 Owned
Bradenton, FL.....................
Manatee Adolescent Treatment Services
Bradenton, FL..................... August 2000 Owned
Kingsley Center Right to
Arcadia, FL(4).................... August 2000 Occupy
Family Counseling Center
Palm Bay, FL...................... July 2000 Leased
Pearl City Right to
Pearl City, HI(4)................. June 2000 Occupy
Southern Glades Youth Camp Right to
Florida City, FL(4)............... April 2000 Occupy
Everglades Youth Development Center
Florida City, FL(4)............... Right to
April 2000 Occupy
Florida Institute for Girls Right to
West Palm Beach, FL(4)............ March 2000 Occupy
Okaloosa Youth Academy Right to
Crestview, FL(4).................. October 1999 Occupy
Bayamon Detention Center Right to
Bayamon, PR(4).................... September 1999 Occupy
Briarwood Las Vegas
Las Vegas, NV...................... June 1999 Owned
Bessemer I
Bessemer, AL....................... April 1999 Owned
Coastal Harbor
Conway, SC......................... October 1998 Owned
Dothan Facility
Dothan, Alabama.................... April 1998 Owned
Heartland House
Nevada, MO......................... August 1997 Owned
Gulf Coast Treatment Center
Fort Walton Beach, FL.............. December 1996 Owned
Higdon Hill
Birmingham, AL..................... July 1996 Owned
Briarwood North
Reno, NV........................... July 1995 Leased
Mission Vista Facility
San Antonio, TX(2)................. November 1991 Leased
Benchmark Regional Facility
Woods Cross, UT.................... August 1986 Owned
Heartland Facility
Nevada, MO......................... April 1984 Owned
Hill Crest Facility
Birmingham, AL..................... January 1984 Owned
Brynn Marr Facility
Jacksonville, NC................... December 1983 Owned
Havenwyck Facility
Auburn Hills, MI(1)................ November 1983 Leased

(1) In September 1998, the Company sold and immediately leased back the
land, building and fixed equipment associated with this facility. The
lease has an initial term of approximately 12 years.

(2) In April 1995, the Company sold and immediately leased back the land,
building and fixed equipment associated with this facility. The lease
has an initial term of 15 years and three successive renewal options
of five years each.

(3) Excludes the Company's Meadowlake Facility and the Company's Pelion
therapeutic living facility which were leased to independent
healthcare providers, and various office leases with remaining lease
terms ranging from one to five years. The Company has pledged
substantially all of its owned real property as collateral for the
Senior Credit Facility.

(4) The Company has the right to occupy these facilities rent free for the
duration of the Company's contract to provide services.

11

(5) In September 2002, the Company entered into a lease agreement for this
110-bed facility in Macon, Georgia with a corporate affiliate of Mr.
Paul J. Ramsay, Chairman of the Board of the Company and beneficial
owner of approximately 60% of the Company's outstanding stock. See
"Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this Form 10-K.

The Company leases office space for its corporate
headquarters in Coral Gables, Florida, (through December 31, 2005) and various
regional offices. These leases have terms which generally range from three to
five years, with renewal options.

ITEM 3. LEGAL PROCEEDINGS.

The Company is party to certain claims, suits and complaints,
whether arising from the acts or omissions of its employees, providers or
others, which arise in the ordinary course of business. The Company has
established reserves at December 31, 2002 for the estimated amount, which might
be recovered from the Company as a result of all outstanding legal proceedings.
In the opinion of management, the ultimate resolution of these pending legal
proceedings is not expected to have a material adverse effect on the Company's
financial position, results of operations or liquidity.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

The Company's Common Stock is traded in the over-the-counter
market and is quoted on the NASDAQ SmallCap Market under the symbol RYOU. On
March 14, 2003, there were 271 holders of record of the Company's Common Stock.
No cash dividends have been declared on the Common Stock since the Company was
organized.

The Company changed its fiscal year end from June 30 to
December 31, effective December 1998.

Effective October 13, 2000, the Company's Common Stock was
delisted from the NASDAQ National Market System and commenced trading on the
NASDAQ Smallcap Market.

12

The following table sets forth the range of high and low
closing sales prices per share of the Company's Common Stock for each of the
quarters during the years ended December 31, 2002 and 2001, as reported on the
NASDAQ SmallCap Market:

HIGH LOW
---- ---

Year ended December 31, 2002
First Quarter..................................... $4.40 $3.63
Second Quarter.................................... 4.83 3.07
Third Quarter..................................... 5.94 3.95
Fourth Quarter.................................... 4.36 3.35

Year ended December 31, 2001
First Quarter..................................... $1.03 $0.69
Second Quarter.................................... 2.70 0.84
Third Quarter..................................... 5.05 1.95
Fourth Quarter.................................... 4.50 2.76

On March 14, 2003, the closing sales price of the Company's
Common Stock was $4.11 per share.

The following table provides information as of December 31,
2002 with respect to compensation plans (including individual compensation
arrangements) under which the Company's equity securities are authorized for
issuance.

EQUITY COMPENSATION PLAN INFORMATION
--------------------------------------------------------------------------

NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE
TO BE ISSUED UPON FOR FUTURE ISSUANCE UNDER
EXERCISE OF WEIGHTED-AVERAGE EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, EXERCISE PRICE OF (EXCLUDING SECURITIES
WARRANTS AND RIGHTS OUTSTANDING OPTIONS, REFLECTED IN COLUMN (A))
PLAN CATEGORY (IN THOUSANDS) WARRANTS AND RIGHTS (IN THOUSANDS)
------------- --------------------- ------------------- --------------------------
(a) (b) (c)

Equity compensation plans approved by
security holders .......................... 2,614 1.27 173

Equity compensation plans not approved by
security holders .......................... 488 8.81 --
----- ---- ---

Total ........................................ 3,102 2.46 173
===== ==== ===

ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth selected consolidated
financial information for the periods shown and is qualified by reference to,
and should be read in conjunction with, the Consolidated Financial Statements
and Notes thereto and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Report on Form 10-K.

13

YEAR ENDED SIX MONTHS YEAR
DECEMBER 31, ENDED ENDED
-------------------------------------------------- DECEMBER 31, JUNE 30,
2002 2001 2000 1999 1998 1998
--------- --------- --------- -------- ------------ ---------
(in thousands, except per share data)

Statement of Operations Data:
Total revenues ........................ $ 145,156 $ 134,416 $ 108,360 $ 81,474 $ 47,892 $ 155,211

Salaries, wages and benefits .......... 90,943 83,563 68,353 49,283 28,313 82,740
Other operating expenses .............. 40,365 37,715 28,310 25,024 17,470 64,255
Provision for doubtful accounts ....... 1,867 2,911 2,817 1,896 1,549 6,649
Depreciation and amortization ......... 2,577 2,430 2,369 2,366 1,627 5,714
Restructuring charges ................. -- -- -- -- -- 2,349
Asset impairment charges .............. 125 124 -- -- -- 18,316
--------- --------- --------- -------- --------- ---------
135,877 126,743 101,849 78,569 48,959 180,023
--------- --------- --------- -------- --------- ---------

Income (loss) from operations ......... 9,279 7,673 6,511 2,905 (1,067) (24,812)

Other income .......................... -- -- -- 1,548 8,059 256
Gain on sale of assets ................ -- -- -- -- 2,039 --
Interest and other financing charges .. (2,475) (3,299) (2,706) (1,268) (1,655) (7,230)
Losses related to asset sales and
closed businesses ................... -- (130) (705) -- (947) (12,483)
--------- --------- --------- -------- --------- ---------
(2,475) (3,429) (3,411) 280 7,496 (19,457)
--------- --------- --------- -------- --------- ---------

Income (loss) before income taxes and
extraordinary item .................. 6,804 4,244 3,100 3,185 6,429 (44,269)
Provision (benefit) for income taxes .. (5,864) 778 248 68 1,591 9,985
--------- --------- --------- -------- --------- ---------

Income (loss) before extraordinary item 12,668 3,466 2,852 3,117 4,838 (54,254)

Extraordinary item:
Loss from early extinguishment of
debt, net of income tax benefit .. -- -- -- -- (2,811) (4,322)
--------- --------- --------- -------- --------- ---------

Net income (loss) ..................... $ 12,668 $ 3,466 $ 2,852 $ 3,117 $ 2,027 $ (58,576)
========= ========= ========= ======== ========= =========

Income (loss) per common share:
Basic:
Before extraordinary item ...... $ 1.37 $ 0.38 $ 0.32 $ 0.35 $ 0.93 $ (15.36)
Extraordinary item:
Loss from early
extinguishment of
debt ...................... -- -- -- -- (0.63) (1.20)
--------- --------- --------- -------- --------- ---------
$ 1.37 $ 0.38 $ 0.32 $ 0.35 $ 0.30 $ (16.56)
========= ========= ========= ======== ========= =========

Diluted:
Before extraordinary item ...... $ 1.11 $ 0.34 $ 0.32 $ 0.33 $ 0.70 $ (15.36)
Extraordinary item:
Loss from early
extinguishment
of debt ................... -- -- -- -- (.47) (1.20)
--------- --------- --------- -------- --------- ---------
$ 1.11 $ 0.34 $ 0.32 $ 0.33 $ 0.23 $ (16.56)
========= ========= ========= ======== ========= =========

Weighted average number of common
shares outstanding:
Basic .............................. 9,278 9,046 8,913 8,890 4,487 3,595
========= ========= ======== ========= =========
Diluted ............................ 11,405 10,340 8,954 9,538 5,971 3,595
========= ========= ========= ======== ========= =========

DECEMBER 31,
-------------------------------------------------------------------- JUNE 30,
2002 2001 2000 1999 1998 1998
------- ------- ------- ------- -------- --------

Balance Sheet Data:
Working capital ......... $10,250 $13,099 $ 8,328 $ 1,162 $ (1,575) $ 2,401
Total assets ............ 73,297 69,011 69,598 56,626 60,628 91,042
Long-term debt, less
current portion ........ 13,865 23,506 24,708 11,561 7,332 14,398
Stockholders' equity .... 37,090 24,325 20,833 17,094 13,914 2,249

14

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

RISK FACTORS

Risks Related to Government Regulation

The Company is subject to extensive and frequently changing
government regulations. See "Business--Regulation."

Risks Associated with Reimbursement Arrangements

Certain of the Company's facilities are reimbursed for
various behavioral healthcare services on a per diem, per-diagnosis basis.
Accordingly, the Company may be reimbursed for services at rates less than
billed charges. To the extent that the patients covered by such arrangements
require more frequent or extensive care than is anticipated, the Company's
operating margins may be reduced and, in certain cases, the revenue derived
from such arrangements may be insufficient to cover the costs of the services
provided. In either event, the Company's business, prospects, financial
condition and results of operations may be materially adversely affected. See
"Business-Sources of Revenue."

The Company renders certain services on a fee-for-service
basis and typically bills various payors, such as governmental programs (e.g.
Medicare and Medicaid) and private insurance plans for services. The Company
derived 36% of its revenues in 2002 from payments made by Medicare and
Medicaid. The Medicare and Medicaid programs are subject to statutory and
regulatory changes, retroactive and prospective rate adjustments,
administrative rulings and funding restrictions, any of which could have the
effect of limiting or reducing reimbursement levels. Also, there can be no
assurance that payments under governmental programs or from other payors will
remain at present levels. Additionally, funds received under all health care
reimbursement programs are subject to audit with respect to the proper billing
for physician services and, accordingly, repayments and retroactive adjustments
of revenue from these programs could occur. Also, the Company's contract with
certain government payors provide for termination in the event the government
does not have adequate funding to support the program.

The Company records amounts due to or from third-party
reimbursement sources based on its best estimates of amounts to be ultimately
received or paid under cost reports filed with appropriate intermediaries. The
final determination of amounts earned under reimbursement programs is subject
to review and audit by these intermediaries. Differences between amounts
recorded as estimated settlements and the audited amounts are reflected as
adjustments to the Company's revenues in the period in which the final
determination is made.

Dependence on Major Customer

For the year ended December 31, 2002, the Company generated
approximately 17.4% of its revenues from the Florida Department of Juvenile
Justice. The loss of our contracts with the Florida Department of Juvenile
Justice or significant reductions in reimbursement rates under our contracts
with the Florida Department of Juvenile Justice could have a material adverse
effect on the Company.

Risk Associated with Puerto Rico Market

As a result of budgetary constraints, on December 15, 2001
the Government of Puerto Rico cancelled the Company's contract to provide
mental health and substance abuse services. In addition, on April 16, 2002 and
August 14, 2002, the Government of Puerto Rico also cancelled the Company's
contracts to provide a 20-bed specialized treatment program and an educational
program to youth in Puerto Rico, respectively. Total revenues from these three
contracts for the years ended December 31, 2002, 2001 and 2000 were
approximately $2.0 million, $6.2 million and $5.6 million, respectively. Total
operating (loss) or income from these contracts for the years ended December
31, 2002, 2001 and 2000 was approximately ($0.3 million), $0.6 million and $1.3
million, respectively. The Company's remaining

15

contract with the Government of Puerto Rico is for the management of the
120-bed Bayamon facility. Although the contract for the management of the
Bayamon facility does not expire until April 27, 2004, there can be no
assurances that the Government of Puerto Rico will not cancel the contract
prior to its expiration date. If the Bayamon contract is cancelled, the Company
may incur additional costs and charges associated with the early termination of
the contract. Total revenues and operating income generated by the Bayamon
facility contract for the year ended December 31, 2002 were approximately $5.8
million and $0.4 million, respectively.

The Company has experienced delays in the collection of
receivables from certain of its contracts in Puerto Rico. During the year ended
December 31, 2002, the Company collected approximately $1.4 million of past due
receivables from the Government of Puerto Rico. As of December 31, 2002, the
Company had approximately $2.0 million in outstanding receivables due from its
contracts in Puerto Rico, of which $1.1 million was over 120 days past due.
Reserves against outstanding Puerto Rico receivables were $1.1 million as of
December 31, 2002. As of March 14, 2003, the Company had collected
approximately $0.9 million of the December 31, 2002 outstanding receivable
balance, all of which related to receivables under 120 days past due. The
Company and its advisors are in active discussions with the Government of
Puerto Rico with respect to the payment of the outstanding receivables.
Although the Company has been advised by its legal counsel that the receivables
due on the Puerto Rico contracts are collectable, there can be no assurances
that the amounts will be collected.

Risks of Financial Leverage

The Company's total indebtedness accounted for approximately
33% of its total capitalization as of December 31, 2002. While the Company
believes it will be able to service its debt, there can be no assurance to that
effect. The degree to which the Company is leveraged could affect its ability
to service its indebtedness, make capital expenditures, respond to market
conditions, take advantage of certain business opportunities or obtain
additional financing. Unexpected declines in the Company's future business, or
the inability to obtain additional financing on terms acceptable to the
Company, if required, could impair the Company's ability to meet its debt
service obligations or fund acquisitions and therefore could have material
adverse effect on the Company's business and future prospects.

Risks Related to Insurance Coverage

The Company carries general and professional liability,
comprehensive property damage, malpractice, workers' compensation, and other
insurance coverages that management considers adequate for the protection of
its assets and operations. There can be no assurance, however, that the
coverage limits of such policies will be adequate to cover losses and expenses
for lawsuits brought or which may be brought against the Company. A successful
claim against the Company in excess of our insurance coverage could have a
material adverse effect on the Company.

Control by Existing Shareholder

As of December 31, 2002, Paul J. Ramsay, our Chairman of the
Board, and entities affiliated with Mr. Ramsay, owned approximately 58% of our
outstanding common stock. Based on Mr. Ramsay's stock ownership, and the stock
ownership of his affiliates, Mr. Ramsay has the ability to control most
corporate actions requiring shareholder approval, including the election of
directors.

Stockholder Rights Plan

The Company's Board of Directors has adopted a Stockholder
Rights Plan, under which the Company distributed a dividend of one common share
purchase price right for each outstanding share of the Company's Common Stock
(calculated as if all outstanding shares of Series C Preferred Stock were
converted into shares of Common Stock). Each right becomes exercisable upon the
occurrence of certain events for a number of shares of the Company's Common
Stock having a market price totaling $72 (subject to certain anti-dilution
adjustments which may occur in the future). The rights currently are not
exercisable and will be exercisable only if a new person acquires 20% or more
(30% or more in the case of certain

16

persons, including investment companies and investment advisors) of the
Company's Common Stock or announces a tender offer resulting in ownership of
20% or more of the Company's Common Stock. The rights, which expire on August
14, 2005, are redeemable in whole or in part at the Company's option at any
time before a 20% or greater position has been acquired, for a price of $.03
per right. These rights may have the effect of discouraging a third party from
making an acquisition proposal for the Company and may thereby inhibit a change
in control. For example, such provisions may deter tender offers for shares of
common stock, which may be attractive to shareholders, or deter purchases of
large blocks of common stock, thereby limiting the opportunity for shareholders
to receive a premium for their shares of common stock or exchangeable shares
over the then-prevailing market prices.

* * * * * * *

The Company cautions that the risk factors described above
could cause actual results or outcomes to differ materially from those
expressed in any forward-looking statements of the Company made by or on behalf
of the Company. Any forward-looking statement speaks only as of the date on
which such statement is made, and the Company undertakes no obligation to
update any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrences of unanticipated events. New factors emerge from time to time and
it is not possible for management to predict all such factors. Further,
management cannot assess the impact of each such factor on the Company's
business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any
forward-looking statements.

OVERVIEW

The Company is a provider of behavioral health care treatment
programs and services focused on at-risk and special needs youth. The Company
offers its full spectrum of programs and services in eleven states and the
Commonwealth of Puerto Rico.

The programs and services are offered through a network of
Company-owned or leased facilities ("Owned Operations") and state or
government-owned facilities ("Management Contract Operations"). During the year
ended December 31, 2001, the Company refined its segment definitions to better
reflect its business operations and management responsibilities. As a result,
prior year information has been reclassified to either the Owned Operations or
Management Contract Operations business segments. Further information regarding
these segments, including the required disclosures of certain segment
information is included in Note 8 of the Consolidated Financial Statements.

The Company receives revenues primarily from the delivery of
diversified programs and services to at-risk and troubled youth in residential
and non-residential settings. The Company receives revenues based on per diem
rates, or flat or cost-based rate contracts. In addition, the Company also
receives revenues from management consulting contracts with other entities.
Revenues under the Company's programs are recognized as services are rendered.
Revenues of the Company's programs and services are affected by changes in the
rates the Company charges, changes in reimbursement rates by third-party
payors, the volume of individuals treated and changes in the mix of payors.

The Company records amounts due to or from third-party
reimbursement sources based on its best estimates of amounts to be ultimately
received or paid under cost reports filed with appropriate intermediaries. The
final determination of amounts earned under reimbursement programs is subject
to review and audit by these intermediaries. Differences between amounts
recorded as estimated settlements and the audited amounts are reflected as
adjustments to the Company's revenues in the period in which the final
determination is made.

Salaries, wages and benefits include facility and program
payrolls and related taxes, as well as employee benefits, including insurance
and workers' compensation coverage. Employee compensation and benefits also
includes general and administrative payroll and related benefit costs,
including salaries and supplemental compensation of officers.

17

Other operating expenses include all expenses not otherwise
presented separately in the Company's statements of operations. Significant
components of these expenses at the operating level include items such as food,
pharmaceuticals, utilities, supplies, rent and insurance. Significant
components of these expenses at the administrative level include legal,
accounting, investor relations, marketing, consulting and travel expense.

The Company's quarterly results may fluctuate significantly
as a result of a variety of factors, including the timing of the opening of new
programs. When the Company opens a new program, the program may be unprofitable
until the program's population, and net revenues contributed by the program,
approach intended levels, primarily because the Company staffs its programs in
anticipation of achieving such levels. The Company's quarterly results may also
be impacted by seasonality, as revenues generated from behavioral healthcare
services are seasonal in nature.

On August 4, 2000, the Company consummated the acquisition of
the operating assets of Charter Behavioral Health System of Manatee Palms, L.P.
("Manatee Palms System") and the corresponding real estate from Charter
Behavioral Health Systems, LLC and Crescent Real Estate Funding VII, L.P. The
Manatee Palms System consists of two facilities which the Company manages under
its Owned Operations and one managed contract which the Company manages under
its Management Contract Operations. The results of operations of Manatee Palms
are included in the Company's financial statements as of the closing date of
the acquisition.

CRITICAL ACCOUNTING POLICIES

The preparation of the Company's consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
Company's estimates, judgments and assumptions are continually evaluated based
on available information and experience. Because of the use of estimates
inherent in the financial reporting process, actual results could differ from
those estimates.

Certain of the Company's accounting policies require higher
degrees of judgment than others in their application. These include estimating
the allowance for doubtful accounts and impairment of goodwill and other
intangible assets. In addition, Note 1 to the Consolidated Financial Statements
includes further discussion of our significant accounting policies.

Management believes the following critical accounting
policies, among others, affect its more significant judgments and estimates
used in the preparation of its consolidated financial statements.

Allowance for Doubtful Accounts

The Company carries accounts receivables at the amount it
deems to be collectable. Estimates are used in determining the Company's
allowance for doubtful accounts and are based on the Company's historical
collection experience, current trends and credit policy. Although the Company
believes its allowance is sufficient, if the financial condition of the
Company's customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. The Company
continually evaluates the adequacy of its allowance for doubtful accounts. See
"Liquidity and Capital Resources."

Revenue Recognition

The Company records its revenues at the time services are
provided, based on estimated reimbursable amounts from Medicare, Medicaid and
other contracted reimbursement programs. Amounts received by the Company for
treatment of individuals covered by such programs, which may be based on the
cost of services provided or predetermined rates, are generally less than the
established billing rates of

18

the Company's facilities. We also estimate the amount of uncollectible
receivables each period and record valuation allowances based on historical
collection rates, the age of unpaid amounts and information about the
creditworthiness of the customers. Final determination of amounts earned under
contracted reimbursement programs is subject to review and audit by the
appropriate agencies. Differences between amounts recorded as estimated
settlements and the audited amounts are reflected as adjustments to revenues in
the period the final determination is made.

Self-Insurance Reserves

The Company carries general and professional liability,
comprehensive property damage, malpractice, workers' compensation, and other
insurance coverages that management considers adequate for the protection of
its assets and operations.

The Company maintains self-insured retentions for its
professional and general liability and workers' compensation insurance
programs. The Company's operations are insured for professional liability on a
claims-made basis and for general liability and workers' compensation on an
occurrence basis. The Company records the liability for uninsured losses
related to asserted and unasserted claims arising from reported and unreported
incidents based on independent valuations which consider various factors,
including claim development factors, the specific nature of the facts and
circumstances giving rise to each reported incident and the Company's history
with respect to similar claims. The development factors are based on a blending
of the Company's actual experience with industry standards.

The Company funds the expected losses of its workers'
compensation claims through a rent-a-captive arrangement with an offshore
entity wholly owned by a United States insurance carrier. The Company also
maintains an aggregate stop loss policy for its workers' compensation claims.

Goodwill and Intangible Assets

Purchase price accounting requires extensive use of
accounting estimates and judgments to allocate the purchase price to the fair
market value of the assets and liabilities purchased. The cost of acquired
companies is allocated first to their identifiable assets based on estimated
fair values. Costs allocated to the identifiable intangible assets are
generally amortized on a straight-line basis over the remaining estimated
useful lives of the assets. The excess of the purchase price over the fair
value of identifiable assets acquired, net of liabilities assumed, is recorded
as goodwill.

The Company annually evaluates the carrying amounts of
goodwill, as well as related amortization periods, to determine whether
adjustments to these amounts or useful lives are required based on current
events and circumstances. The evaluation is based on the Company's projection
of the undiscounted future operating cash flows of the acquired operation over
the remaining useful lives of the related goodwill. To the extent such
projections indicate future undiscounted cash flows are not sufficient to
recover the carrying amounts of related goodwill, the underlying assets are
written down by charges to expense so that the carrying amount is equal to the
fair value of the asset.

Income Taxes

The Company evaluates the need for a deferred tax asset
valuation allowance by assessing whether it is more likely than not that it
will realize its deferred tax assets in the future. The assessment of whether
or not a valuation allowance is required often requires significant judgment
including the forecast of future taxable income and the evaluation of tax
planning initiatives. Adjustments to the deferred tax valuation allowance are
made to earnings in the period when such assessment is made.

In addition, the Company has operations in tax jurisdictions
located in several states and is subject to audit in these jurisdictions. Tax
audits by their nature are often complex and can require several years to
resolve. Accruals for tax contingencies require management to make estimates
and judgments with respect to the ultimate outcome of a tax audit. Actual
results could vary from these estimates.

19

RESULTS OF OPERATIONS

OWNED OPERATIONS SEGMENT

YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2002 2001 2000
--------------------- --------------------- --------------------

Revenues .............................. $116,464 100.0% $106,140 100.0% $87,506 100.0%

Expenses:
Salaries, wages and benefits ........ 67,978 58.4% 62,559 59.0% 51,520 58.8%
Other operating expenses ............ 31,265 26.8% 28,463 26.8% 23,323 26.7%
Provision for doubtful accounts ..... 1,778 1.5% 2,631 2.5% 2,371 2.7%
Depreciation and amortization ....... 2,319 2.0% 2,156 2.0% 1,744 2.0%
Asset impairment .................... 125 0.1% 124 0.1% -- --
-------- ----- -------- ----- ------- -----
Total operating expenses .......... 103,465 88.8% 95,933 90.4% 78,958 90.2%
-------- ----- -------- ----- ------- -----
Income from operations ................ $ 12,999 11.2% $ 10,207 9.6% $ 8,548 9.8%
======== ===== ======== ===== ======= =====

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenues increased by 9.7%, or $10.3 million, to $116.5
million in 2002 compared to $106.1 million in 2001. The increase in revenues
during the period is primarily a result of (i) an increase of $4.4 million due
to a 4.5% increase in resident days (from 352,771 in 2001 to 368,760 in 2002),
(ii) an increase of $5.0 million due to an increase in average rates due to
increases in per diems and a favorable per diem mix, (iii) an increase of $1.6
million due to a new contract awarded to one of the Company's facilities which
began on February 18, 2002, and (iv) a reduction in the general cost report
settlements which resulted in an increase in revenue of $0.8 million. The
aforementioned increases were partially offset by the closure of a 20-bed
facility in Puerto Rico, which decreased revenues by $1.5 million.

Salaries, wages and benefits increased from $62.6 million, or
59.0% in 2001 to $68.0 million, or 58.4% in 2002. Salaries, wages and benefits
in 2002 did not fluctuate significantly as a percentage of revenue when
compared to 2001.

Other operating expenses increased from $28.5 million, or
26.8% in 2001 to $31.3 million, or 26.8% in 2002. Other operating expenses did
not fluctuate significantly as a percentage of revenue when compared to 2001.

Provisions for doubtful accounts decreased from $2.6 million,
or 2.5% in 2001 to $1.8 million, or 1.5% in 2002. The decrease as a percentage
of revenues is primarily due to the increase in the Company's residential
treatment services as a percentage of total revenues. The Company's experience
has been that, due primarily to the longer lengths of stay, residential
treatment services typically have higher collection percentages than acute
inpatient services. In addition, in 2001 the Company recorded additional
reserves due to payment delays experienced by the Company from one of its payor
sources in its Jacksonville, North Carolina facility and to financial
difficulties experienced by one of the Company's former referral sources in its
Nevada, Missouri facility.

Depreciation and amortization expense increased from $2.2
million, or 2.0% from 2001 to 2.3 million, or 2.0% in 2002. Depreciation and
amortization expense did not fluctuate as a percentage of revenue when compared
to 2001.

During the years 2002 and 2001, the Company closed two of
its therapeutic community living facilities in South Carolina and recorded an
asset impairment charge of $0.1 million in each year. The asset impairment
charges for both years were determined based on the difference between the
carrying value of the asset and the expected net proceeds from the sale.

20

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenues increased by 21.3%, or $18.6 million, to $106.1
million in 2001 compared to $87.5 million in 2000. The increase in revenues
during the period is primarily a result of (i) an increase of $9.8 million due
to a 12.3% increase in resident days (from 274,171 days in 2000 to 308,028 days
in 2001), (ii) an increase of $2.4 million due to an increase in average rates
due to increases in per diems and a favorable per diem mix, (iii) $0.8 million
from a new contract awarded to one of the Company's facilities in July 2001,
and (iv) an increase of $6.8 million attributed to the full year effect of the
Manatee Palms System acquisition on August 4, 2000. The aforementioned
increases were partially offset by a reduction in the general cost report
reserves as a result of favorable cost report settlements which resulted in an
increase in revenues of $1.2 million during the twelve months ended December
31, 2000.

Salaries, wages and benefits increased from $51.5 million, or
58.8% in 2000 to $62.6 million, or 59.0% in 2001. Salaries, wages and benefits
in 2001 did not fluctuate significantly as a percentage of revenue when
compared to 2000.

Other operating expenses increased from $23.3 million, or
26.7% in 2000 to $28.5 million, or 26.8% in 2001. Other operating expenses did
not fluctuate significantly as a percentage of revenue when compared to 2000.

During the year 2001, the Company closed one of its
facilities in South Carolina and recorded an asset impairment charge of $0.1
million. The asset impairment charge was determined based on the difference
between the carrying value of the asset and the expected net proceeds from the
sale.

MANAGEMENT CONTRACT OPERATIONS SEGMENT

The following table states for the period indicated our
management contract operations in dollar and percentage of revenue terms (in
thousands):

YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
2002 2001 2000
-------------------- -------------------- --------------------

Revenues .............................. $28,692 100.0% $28,276 100.0% $20,854 100.0%

Expenses:
Salaries, wages and benefits ........ 19,623 68.4% 18,329 64.8% 14,005 67.2%
Other operating expenses ............ 6,282 21.9% 6,161 21.8% 4,736 22.7%
Provision for doubtful accounts ..... 89 0.3% 280 1.0% 446 2.1%
Depreciation and amortization ....... 148 0.5% 123 0.4% 140 0.7%
------- ----- ------- ----- ------- -----
Total operating expenses .......... 26,142 91.1% 24,893 88.0% 19,327 92.7%
------- ----- ------- ----- ------- -----
Income (loss) from operations ......... $ 2,550 8.9% $ 3,383 12.0% $ 1,527 7.3%
======= ===== ======= ===== ======= =====

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenues during 2002 of $28.7 million approximated revenues
in 2001 as increases in revenues from two new contracts awarded to the Company
in Florida and Georgia were offset by decreases resulting form the termination
of two contracts in Puerto Rico.

Salaries, wages and benefits were $19.6 million, or 68.4% of
revenues in 2002 compared to $18.3 million, or 64.8% in 2001. The increase as a
percentage of revenue is primarily attributable to the termination of one of
the Company's Puerto Rico contracts in December 2001 which had a lower than
segment-average salary cost as a percentage of revenues and start-up cost
related to the Company's new management contract in the Georgia market.

Other operating expenses were $6.3 million, or 21.9% of
revenues in 2002 compared to $6.2 million, or 21.8% of revenues in 2001. Other
operating expenses did not fluctuate significantly as a percentage of revenue
when compared to the same period in the prior year.

21

Fluctuations in the provision for doubtful accounts relate
primarily to the Company's management contracts in Puerto Rico. Due to the
termination of its Puerto Rico contracts, the Company did not increase its
provision for doubtful accounts in its Puerto Rico market during the twelve
months ended December 31, 2002.

Depreciation and amortization expense was $0.1 million, or
0.5% of revenues in 2002 compared to $0.1 million, or 0.4% of revenues in 2001.
Depreciation and amortization expense did not fluctuate significantly as a
percentage of revenue when compared to 2001.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Revenues increased by 35.6%, or $7.4 million, to $28.3
million in 2001 compared to $20.9 million in 2000. The increase in revenues is
primarily due to the full year effect of contracts awarded to the Company in
the Florida market during 2000. The Florida contracts increased resident days
by 39.2% (from 144,779 days in 2000 to 201,552 days in 2001) and increased
revenues by $8.3 million. The aforementioned increases were partially offset by
$0.7 million in contractual allowance reserves recorded by the Company related
to one of its Puerto Rico contracts.

Salaries, wages and benefits were $18.3 million, or 64.8% of
revenues in 2001 compared to $14.0 million, or 67.2% in 2000. The decrease as a
percentage of revenue is primarily attributable to the leveraging of certain
personnel costs in the Florida market as a result of the previously mentioned
new contracts in the Florida market.

Other operating expenses were $6.2 million, or 21.8% of
revenues in 2001 compared to $4.7 million, or 22.7% of revenue. The decrease as
a percentage of revenue is primarily attributable to the increase in revenues
provided by the previously mentioned new contracts in the Florida market.

Fluctuations in the provision for doubtful accounts relate
primarily to the Company's management contracts in Puerto Rico. During 2001,
the Company recorded approximately $0.3 million in the provision for doubtful
accounts related primarily to its management contracts in Puerto Rico.
Including the aforementioned increase in the contractual allowance reserves,
total reserves for Puerto Rico management contract receivables in 2001
increased by $0.8 million. During 2000, the Company recorded approximately $0.4
million in the provision for doubtful accounts related primarily to Puerto Rico
management contract receivables.

CORPORATE AND OTHER

YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2002 2001 2000
------------------- ----------------- -----------------

Revenues:
Owned operations ...................... $ 116,464 $106,140 $ 87,506
Management contract operations ........ 28,692 28,276 20,854
--------- -------- --------
Total revenues ........................... $ 145,156 100.0% $134,416 100.0% $108,360 100.0%

Expenses:
Salaries, wages and benefits .......... 3,342 2.3% 2,675 2.0% 2,828 2.6%
Other operating expenses .............. 2,818 1.9% 3,091 2.3% 251 0.2%
Depreciation and amortization ......... 110 0.1% 151 0.1% 485 0.4%
Interest and other financing
charges ............................. 2,475 1.7% 3,299 2.5% 2,706 2.5%
Losses related to asset sales
and closed businesses ............... -- -- 130 0.1% 705 0.7%
(Benefit) provision for income taxes ... (5,864) (4.0%) 778 0.6% 248 0.2%

22

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Salaries, Wages and Benefits

Corporate office salaries, wages and benefits were $3.3
million, or 2.3% of total consolidated revenues in 2002, compared to $2.7
million, or 2.0% of total consolidated revenues for the same period in 2001.
The increase as a percentage of total consolidated revenues is attributable to
a $0.5 million charge for the restructuring of an employment contract for one
of the Company's executives in June 2002.

Other Operating Expenses

Corporate office other operating expenses were $2.8 million,
or 1.9% of total consolidated revenues in 2002, compared to $3.1 million, or
2.3% of total consolidated revenues for the same period in 2001. The decrease
as a percentage of total consolidated revenues is primarily attributable to the
aforementioned increase in revenues and a reduction in various corporate
expenses.

Depreciation and Amortization

Corporate office depreciation and amortization was $0.1
million, or 0.1% of total consolidated revenues in 2002, compared to $0.2
million, or 0.1% of total consolidated revenues for the same period in 2001.
Corporate office depreciation and amortization did not fluctuate as a
percentage of revenue when compared to prior periods.

Interest and Other Financing Charges

Interest and other financing charges was $2.5 million, or
1.7% of total consolidated revenues for the year ended December 31, 2002,
compared to $3.3 million, or 2.5% of total consolidated revenues for the same
period in 2001. The decrease in interest and other financing charges is
primarily due to a decrease in the Company's average outstanding borrowings
between periods.

Losses Related to Asset Sales and Closed Businesses

During 2001, the Company agreed to accept a $0.1 million
discount for the repayment of a promissory note due to the Company in advance
of the maturity date. This note is now expected to be repaid at its original
maturity date of June 30, 2003 for the undiscounted amount of $1.8 million.

Provision for Income Taxes

During the twelve months ended December 31, 2002, the Company
reversed $6.4 million of the valuation allowance placed on its deferred tax
assets relating to temporary differences that will result in deductible amounts
in future years and net operating loss carryforwards. Future realization of the
tax benefit of an existing deductible temporary difference or carryforward
ultimately depends on the existence of sufficient taxable income within the
carryforward period available under tax law. The Company has reversed a portion
of the valuation allowance because, based on a current review of available
objective and verifiable evidence, it is management's judgment that a portion
of the tax benefits associated with the Company's deferred tax assets will more
likely than not be realized. Such evidence includes updated expectations about
sufficient future years' taxable income which reflect the continuing
improvement in the Company's operating results.

The Company has available federal net operating loss
carryforwards totaling approximately $29.0 million, which expire in the years
2010 to 2017. The Company also has available alternative minimum tax credit
carryforwards of approximately $1.2 million which may be carried forward
indefinitely.

23

The net deferred tax asset represents management's best
estimate of the tax benefits that will more likely than not be realized in
future years at each reporting date. However, there can be no assurance that
the Company can generate taxable income to realize the net deferred tax asset.
In addition, under the Tax Reform Act of 1986, certain future changes in
ownership resulting from the sale of stock may limit the amount of net
operating loss carryforwards that can be utilized on an annual basis. The
Company has and continues to evaluate compliance relating to the utilization of
the net operating loss carryforwards, and believes it has complied in all
respects. A failure to meet the requirements could result in a loss or
limitation of the utilization of carryforwards, which could have a material
adverse effect on the Company's financial position and results of operations in
future periods.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Salaries, Wages and Benefits

Corporate office salaries, wages and benefits were $2.7
million, or 2.0% of total consolidated revenues in 2001, compared to $2.8
million, or 2.6% of total consolidated revenues for the same period in 2000.
During 2001, the Company restructured its corporate office and eliminated five
positions.

Other Operating Expenses

Corporate office other operating expenses were $3.1 million,
or 2.3% of total consolidated revenues in 2001, compared to $0.3 million, or
0.2% of total consolidated revenues for the same period in 2000. The increase
of $2.8 million in corporate office other operating expenses is primarily
attributable to the reversal of a $2.5 million litigation reserve during 2000.
The reserve was reversed because Management of the Company concluded during
2000 that the payment of this liability was remote.

Depreciation and Amortization

Corporate office depreciation and amortization was $0.2
million, or 0.1% of total consolidated revenues in 2001, compared to $0.5
million, or 0.4% of total consolidated revenues for the same period in 2000.
The decrease in corporate office depreciation and amortization is due to
certain projects which were fully amortized during 2000.

Interest and Other Financing Charges

Interest and other financing charges was $3.3 million, or
2.5% of total consolidated revenues for the year ended December 31, 2001,
compared to $2.7 million, or 2.5% of total consolidated revenues for the same
period in 2000. The increase in interest and other financing charges is
primarily due to an increase in the Company's average outstanding borrowings
between periods as a result of the Manatee Palms acquisition and the
subordinated note and warrant purchase agreements entered into by the Company
during 2000. The increase in interest was partially offset by a decrease in
interest rates on the Company's Senior Credit Facility between periods.

Losses Related to Asset Sales and Closed Businesses

Losses related to asset sales and closed businesses was $0.1
million, or 0.1% of total consolidated revenues for 2001 compared to $0.7
million, or 0.7% of total consolidated revenues for the same period in 2000.
During 2001, the Company agreed to accept a $0.1 million discount for the
repayment of a promissory note due to the Company in advance of the maturity
date. This note is now expected to be repaid at its original maturity date of
June 30, 2003 for the undiscounted amount of $1.8 million. On June 7, 2000, the
Company sold five of its contracts to manage charter schools and personal
property with an aggregate book value of $0.8 million for $0.4 million.
Additionally, in December 2000, the Company wrote-off the unpaid balance of the
purchase price and other related assets totaling $0.3 million, increasing the
total loss to $0.7 million.

24

Provision for Income Taxes

Provision for income taxes was $0.8 million, or 0.6% of total
consolidated revenues for 2001, compared to $0.2 million, or 0.2% of total
consolidated revenues for the same period in 2000. The provision for income
taxes was recorded at an effective tax rate significantly less than the
statutory tax rate due to significant net operating loss carryovers.

Impact of Inflation

The behavioral healthcare and at-risk youth industry is labor
intensive, and wages and related expenses increase in inflationary periods.
Additionally, suppliers generally seek to pass along rising costs to the
Company in the form of higher prices. The Company monitors the operations of
its facilities to mitigate the effect of inflation and increases in the costs
of services. To the extent possible, the Company seeks to offset increased
costs through increased rates, new programs and operating efficiencies.
However, reimbursement arrangements may hinder the Company's ability to realize
the full effect of rate increases. To date, inflation has not had a significant
impact on operations.

NEW ACCOUNTING REQUIREMENTS

In July 2001, the FASB issued Statement No. 143, Accounting
for Asset Retirement Obligations. This Statement requires that an asset
retirement cost should be capitalized as part of the cost of the related
long-lived asset and subsequently allocated to expense using a systematic and
rational method. This Statement is required to be adopted in fiscal years
beginning after June 15, 2002. The Company does not anticipate a significant
impact to the results of operations from the adoption of this Statement.

In April 2002, the FASB issued Statement No. 145, Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Correction. This Statement eliminates extraordinary accounting
treatment for reporting gain or loss on debt extinguishment, and amends other
existing authoritative pronouncements to make various technical corrections,
clarifies meanings, or describes their applicability under changed conditions.
The provisions of this Statement are effective for the Company with the
beginning of fiscal year 2003; however, early application of the Statement is
encouraged. Debt extinguishments reported as extraordinary items prior to
scheduled or early adoption of this Statement would be reclassified in most
cases following adoption. The Company does not anticipate a significant impact
on its results of operations from adopting this Statement.

In June 2002, the FASB issued Statement No. 146, Accounting
for Costs Associated with Exit or Disposal Activities. This Statement requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon management commitment to an exit plan. Adoption of
this Statement is required with the beginning of fiscal year 2003. The Company
has not yet completed its evaluation of the impact of adopting this Statement.

In November 2002, the FASB issued Financial Interpretation
(FIN) No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45
clarifies and expands on existing disclosure requirements for guarantees,
including product warranties. FIN No. 45 also requires recognition of a
liability at fair value of a company's obligations under certain guarantee
contracts. The disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. The initial
recognition and measurement provisions of FIN No. 45 are applied only on a
prospective basis to guarantees issued after December 31, 2002, irrespective of
the guarantors' fiscal year-end. The Company does not believe that the
implementation of FIN No. 45 will have a material impact on its financial
condition, results of operations or cash flows.

In December 2002, the FASB issued Statement No. 148,
Accounting for Stock-Based Compensation--Transition and Disclosure, an
amendment of FASB Statement No. 123. This Statement

25

provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company does not anticipate
a significant impact to the results of operations from the adoption of this
Statement.

In January 2003, the FASB issued FIN No. 46, Consolidation of
Variable Interest Entities. FIN No. 46 provides accounting guidance for
consolidation of off-balance sheet entities with certain characteristics
(variable interest entities). All enterprises with variable interest in
variable interest entities created after January 31, 2003, shall apply the
provisions of this interpretation immediately. A public entity with variable
interest in a variable interest entity created before February 1, 2003 shall
apply the provisions of this interpretation no later than the first interim or
annual reporting period beginning after June 15, 2003. The Company does not
believe that the implementation of FIN No. 46 will have a material impact on
its financial condition, results of operations or cash flows.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary liquidity needs are for working
capital, capital expenditures, and debt service. The Company's primary sources
of liquidity are cash flows from operations and borrowings under its revolving
credit line.

At December 31, 2002 and December 31, 2001, the Company had
$10.3 million and $13.1 million, respectively, in working capital and $0.8
million in cash and cash equivalents for both years. Working capital as of
December 31, 2002 was comprised primarily of $0.8 million in cash and cash
equivalents, $20.8 million in accounts receivable and $7.3 million in other
current assets, net of $18.6 million in current liabilities. The decrease in
working capital between periods is primarily a result of a decrease in net
accounts receivable resulting from an increase in collections, partially offset
by an increase in other current assets and current liabilities resulting
primarily from year end timing differences in the payment of certain
liabilities. The excess cash generated by the Company's decrease in accounts
receivable was used to reduce debt.

Cash used by investing activities was $2.3 million for 2002
as compared to cash used in investing activities of $2.0 million in 2001.
During 2002, the Company incurred approximately $2.5 million for property,
plant and equipment additions and received $0.2 million from the sale of
certain assets. During 2001, the Company incurred approximately $2.5 million
for property, plant and equipment additions and received $0.5 million from the
sale of certain assets. During 2000, the Company acquired the Manatee Palms
System for $8.2 million and incurred $2.5 million for property, plant and
equipment additions.

Cash used in financing activities was $9.2 million in 2002 as
compared to $0.8 million in 2001. Cash used in financing activities during 2002
and 2001 related primarily to repayments of borrowings under the Company's term
loan offset by proceeds from borrowing under the revolving credit facility.
During 2000, cash provided by financing activities related primarily to
proceeds from the Company's senior credit facility for the aforementioned
purchase of the Manatee Palms System. In addition, during 2000, the Company
also entered into subordinated note and warrant purchase agreements with two
unrelated financial institutions for an aggregate principal amount of $5
million each.

The Company's senior credit facility, as amended, (the
"Senior Credit Facility") consists of a term loan (the "Term Loan") payable in
monthly installments ranging from approximately $0.1 million to $0.3 million
with final payment of any outstanding principal balance due September 1, 2004
and a revolving credit facility (the "Revolver") for an amount up to the lesser
of $15.0 million or the borrowing base of the Company's receivables (as defined
in the agreement) and an acquisition loan commitment of up to $6.0 million (the
"Acquisition Loan").

26

The Company's Senior Credit Facility also provided for a $1.3
million bridge loan advance under the Acquisition Loan. In connection with the
aforementioned bridge loan advance, a corporate affiliate of Paul J. Ramsay,
Chairman of the Board of the Company, entered into a Junior Subordinated Note
Purchase Agreement with the Senior Credit Facility lender to participate in the
Senior Credit Facility in an amount equal to the bridge loan advance. On August
2, 2002 the Company paid off its $1.3 million bridge loan advance under the
Acquisition Loan.

Interest on the Term Loan and the Revolver varies, and at the
option of the Company, would equal (i) a function of a base rate plus a margin
ranging from 0.5% to 2.0% (4.75% at December 31, 2002), based on the Company's
ratio of total indebtedness to EBITDA or (ii) a function of the Eurodollar rate
plus a margin ranging from 2.0% to 3.5% (3.43% at December 31, 2002), based on
the Company's ratio of total indebtedness to EBITDA.

Interest on the Acquisition Loan varies, and at the option of
the Company, would equal (i) a function of a base rate plus a margin ranging
from 0.75% to 2.25% (5.0% at December 31, 2002), based on the Company's ratio
of total indebtedness to EBITDA or (ii) a function of the Eurodollar rate plus
a margin ranging from 2.25% to 3.75% (3.68% at December 31, 2002), based on the
Company's ratio of total indebtedness to EBITDA.

Additionally, the Company is obligated to pay to the
financial institution an amount equal to one half of 1% of the unused portion
of the Revolver and the Acquisition Loan.

The Senior Credit Facility requires that the Company meet
certain covenants, including (i) the maintenance of certain fixed charge
coverage, interest coverage and leverage ratios, (ii) the maintenance of
certain proforma availability levels (as defined in the credit agreement) and
(iii) a limitation on capital expenditures. The Senior Credit Facility also
prohibits the payment of cash dividends to common stockholders of the Company.

On September 6, 2002 , the Company's Senior Credit facility
was amended to allow for the execution of the Macon Lease (see Transactions
with Affiliates). On March 14, 2003, the Senior Credit Facility was amended
effective December 31, 2002 to extend the maturity date to October 30, 2004.

During the twelve months ended December 31, 2001, the Company
exceeded the capital expenditure limitation in the Senior Credit Facility. On
February 25, 2002, the Company's lender agreed to amend the Senior Credit
Facility, retroactive to December 31, 2001, to provide for among other items:
(i) an increase in the permitted capital expenditures, (ii) a $3.0 million
increase in the revolving credit loan commitment, and (iii) a $1.5 million
additional advance on the term loan.

As of December 31, 2002 and 2001, the Company was in
compliance with all of its debt covenants as stipulated in the Senior Credit
Facility.

The Company and its subsidiaries have pledged substantially
all of their real property, receivables and other assets as collateral for the
Senior Credit Facility.

On January 25, 2000 and June 19, 2000, the Company entered
into subordinated note and warrant purchase agreements with two unrelated
financial institutions for an aggregate principal amount of $5 million each
(the "Subordinated Notes"). The Subordinated Notes permit each of the financial
institutions to exercise, under certain conditions, up to 475,000 warrants
which are convertible into the Company's common stock. The aggregate value of
the warrants at the time of issuance was $861,000. On August 17, 2001, one of
the financial institutions exercised its warrant purchase agreement and
converted 475,000 warrants into 294,597 shares of common stock utilizing the
cashless exercise provision outlined in the warrant agreement. Borrowings under
the Subordinated Notes bear interest at a rate of 12.5% per annum. The interest
is payable quarterly, and the principal balance and any unpaid interest is due
January 24, 2007.

27

In connection with the Subordinated Notes, the Company
incurred loan costs of approximately $679,000. The loan costs are deferred and
amortized ratably over the life of the loans. The amortization is included in
interest and other financing charges in the accompanying consolidated statement
of operations and the unamortized balance is included as unamortized loan costs
in the accompanying consolidated balance sheet.

The aggregate scheduled maturities of Senior Credit Facility,
Subordinate Debt, Capital Lease Obligations and Operating Lease Obligations are
as follows:

CONTRACTUAL Payments Due by Period (in 000's)
OBLIGATIONS

Less than 1-3 4-5 After 5
Total 1 year years years years
------ --------- ------ ----- -------

Long-Term Debt 18,300 3,912 4,388 10,000 --

Capital Lease Obligations 93 26 63 4 --

Operating Leases 19,440 3,681 9,308 4,292 2,159

Total Contractual
Cash Obligations 37,833 7,619 13,759 14,296 2,159

As a result of budgetary constraints, on December 15, 2001
the Government of Puerto Rico cancelled the Company's contract to provide
mental health and substance abuse services. In addition, on April 16, 2002 and
August 14, 2002, the Government of Puerto Rico also cancelled the Company's
contracts to provide a 20-bed specialized treatment program and an educational
program to youth in Puerto Rico, respectively. Total revenues from these three
contracts for the years ended December 31, 2002, 2001 and 2000 were
approximately $2.0 million, $6.2 million and $5.6 million, respectively. Total
operating (loss) or income from these contracts for the years ended December
31, 2002, 2001 and 2000 was approximately ($0.3 million), $0.6 million and $1.3
million, respectively. The Company's remaining contract with the Government of
Puerto Rico is for the management of the 120-bed Bayamon facility. Although the
contract for the management of the Bayamon facility does not expire until April
27, 2004, there can be no assurances that the Government of Puerto Rico will
not cancel the contract prior to its expiration date. If the Bayamon contract
is cancelled, the Company may incur additional costs and charges associated
with the early termination of the contract. Total revenues and operating income
generated by the Bayamon facility contract for the year ended December 31, 2002
were approximately $5.8 million and $0.4 million, respectively.

The Company has experienced delays in the collection of
receivables from certain of its contracts in Puerto Rico. During the year ended
December 31, 2002, the Company collected approximately $1.4 million of past due
receivables from the Government of Puerto Rico. As of December 31, 2002, the
Company had approximately $2.0 million in outstanding receivables due from its
contracts in Puerto Rico, of which $1.1 million was over 120 days past due.
Reserves against outstanding Puerto Rico receivables were $1.1 million as of
December 31, 2002. As of March 14, 2003, the Company had collected
approximately $0.9 million of the December 31, 2002 outstanding receivable
balance, all of which related to receivables under 120 days past due. The
Company and its advisors are in active discussions with the Government of
Puerto Rico with respect to the payment of the outstanding receivables.
Although the Company has been advised by its legal counsel that the receivables
due on the Puerto Rico contracts are collectable, there can be no assurances
that the amounts will be collected.

Management of the Company believes that it can meet its
current cash requirements and future identifiable needs with internally
generated funds from operations and funds available under its

28

Senior Credit Facility. However, in addition to the Risk Factors discussed
elsewhere in this Form 10-K, there are several factors that could affect the
Company's operating results and liquidity, including the following:

- - Ability to Raise Additional Capital. Although the Company believes
that it can obtain additional liquidity, there can be no assurances
that the Company will be able to raise debt or equity capital through
other sources, or if obtained, that it will be on terms acceptable to
the Company. The incurring or assumption by the Company of additional
indebtedness could result in the issuance of additional equity and/or
debt which could have a dilutive effect on current shareholders and a
significant effect on the Company's operations.

- - Ability to Borrow Funds under Senior Credit Facility. The Company's
ability to borrow funds under its Senior Credit Facility may be
terminated if the Company fails to comply with the restrictive
financial and operating covenants contained in the Senior Credit
Facility. If the Company is unable to operate its business within the
covenants specified in the Senior Credit Facility, the Company's
ability to obtain future amendments to the covenants is not assured,
and the Company's ability to make borrowings required to operate its
business could be restricted or terminated. Such a restriction or
termination would have a material adverse effect on the Company's
liquidity.

TRANSACTIONS WITH AFFILIATES

In December 1999, the Company entered into an agreement with
one of its directors to serve as a senior advisor in connection with legal
issues, acquisitions, financings and other transactions involving the Company.
During the year ended December 31, 2002, the Company paid the director $61,242
(including expense reimbursements) in connection with these advisory services.

In September 2002, the Company entered into a lease agreement
for a 110-bed facility in Macon, Georgia with a corporate affiliate of Mr. Paul
J. Ramsay, Chairman of the Board of the Company and beneficial owner of
approximately 59% of our outstanding common stock (the "Macon Lease"). The
lease has a primary term of five years and two successive five year renewal
options. The lease payments are $432,000 per annum and at each renewal option
are subject to adjustments based on the change in the Consumer Price Index
during the preceding period. In accordance with the terms of the lease, the
Company is responsible for all costs of ownership, including taxes, insurance,
maintenance and repairs. In addition, the Company has the option to purchase
the facility at any time for an amount equal to the aggregate cost of the
facility (as defined in the lease agreement) adjusted for the increase in the
Consumer Price Index between the commencement of the lease and the purchase
date.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, the Company is exposed to
market risk, primarily from changes in interest rates. The Company continually
monitors exposure to market risk and develops appropriate strategies to manage
this risk. The Company is not exposed to any other significant market risks,
including commodity price risk, foreign currency exchange risk or interest rate
risks from the use of derivative financial instruments. Management does not use
derivative financial instruments for trading or to speculate on changes in
interest rates or commodity prices.

Interest Rate Exposure

The Company's exposure to changes in interest rates primarily
results from the variable interest on its Senior Credit Facility. The Company's
debt with fixed interest rates consists of the Subordinated Notes. At December
31, 2002, approximately 47% ($8.3 million outstanding under the Company's
Senior Credit Facility) of the Company's total debt was subject to variable
interest rates. At December 31, 2002, the Company's weighted average effective
interest rate was 9.92%.

29

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Financial statements of the Company and its consolidated
subsidiaries are set forth herein beginning on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by this Item with respect to the
Company's executive officers and directors will be contained in the Company's
definitive Proxy Statement ("Proxy Statement") for its 2003 Annual Meeting of
Stockholders to be held on May 22, 2003 and is incorporated herein by
reference. Such Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days subsequent to December 31, 2002.

ITEM 11. EXECUTIVE COMPENSATION.

The information required with respect to this Item will be
contained in the Proxy Statement, and such information is incorporated herein
by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required with respect to this Item will be
contained in the Proxy Statement, and such information is incorporated herein
by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required with respect to this Item will be
contained in the Proxy Statement, and such information is incorporated herein
by reference.

ITEM 14. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days of the filing date of this
report, that our disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information we are required to disclose
in our reports filed under the Securities Exchange Act of 1934. There have been
no significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of the previously
mentioned evaluation.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(A) DOCUMENTS FILED AS PART OF THE REPORT:

1. FINANCIAL STATEMENTS

Information with respect to this Item is contained
on Pages F-1 to F-28 of this Annual Report on Form
10-K.

30

2. FINANCIAL STATEMENT SCHEDULES

All schedules have been omitted because they are
inapplicable or the information is provided in the
consolidated financial statements, including the
notes thereto.

3. EXHIBITS

Information with respect to this Item is contained
in the attached Index to Exhibits.

(B) REPORTS ON FORM 8-K:

There were no reports on Form 8-K filed during the
year ended December 31, 2002.

(C) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K:

Exhibits required to be filed by the Company
pursuant to Item 601 of Regulation S-K are contained
in Exhibits listed in response to Item 14(a)3, and
are incorporated herein by reference. The
agreements, management contracts and compensatory
plans and arrangements required to be filed as an
Exhibit to this Form 10-K are listed in Exhibits
10.64, 10.66, 10.76, 10.77, 10.104, 10.110, 10.136,
10.137, 10.143, 10.147, 10.153, 10.154, 10.155,
10.156, 10.157, 10.162, 10.163 and 10.164.

31

POWER OF ATTORNEY

The Registrant, and each person whose signature appears below, hereby
appoints Luis E. Lamela and Thomas M. Haythe as attorneys-in-fact with full
power of substitution, severally, to execute in the name and on behalf of the
registrant and each such person, individually and in each capacity stated
below, one or more amendments to the annual report which amendments may make
such changes in the report as the attorney-in-fact acting deems appropriate and
to file any such amendment to the report with the Securities and Exchange
Commission.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto fully authorized.

RAMSAY YOUTH SERVICES, INC.

Dated: 3/24/03 By /s/ Luis E. Lamela
--------------------- ----------------------------------------
Luis E. Lamela
President and Chief Executive Officer

Dated: 3/24/03 By /s/ Marcio C. Cabrera
--------------------- ----------------------------------------
Marcio C. Cabrera
Executive Vice President and
Chief Financial Officer

Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

Signature/Title

Dated: 3/25/03 By /s/ Paul J. Ramsay
--------------------- ----------------------------------------
Paul J. Ramsay
Chairman of the Board of Directors

Dated: 3/24/03 By /s/ Luis E. Lamela
--------------------- ----------------------------------------
Luis E. Lamela
Chief Executive Officer, Executive Vice
Chairman of the Board and Director

32

Signature/Title

Dated: 3/26/03 By /s/ Aaron Beam, Jr.
--------------------- ----------------------------------------
Aaron Beam, Jr.
Director

Dated: 3/24/03 By /s/ Peter J. Evans
--------------------- ----------------------------------------
Peter J. Evans
Director

Dated: 3/25/03 By /s/ Thomas M. Haythe
--------------------- ----------------------------------------
Thomas M. Haythe
Director

Dated: 3/25/03 By /s/ Steven J. Shulman
--------------------- ----------------------------------------
Steven J. Shulman
Director

Dated: 3/25/03 By /s/ Michael S. Siddle
--------------------- ----------------------------------------
Michael S. Siddle
Director

33

CERTIFICATIONS

I, Luis E. Lamela, certify that:

1. I have reviewed this annual report on Form 10-K of Ramsay Youth
Services, Inc.;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures(as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:

a) designed such disclosure controls and procedures 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 annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: March 24, 2003

/s/ Luis E. Lamela
---------------------------
Luis E. Lamela
Chief Executive Officer

34

CERTIFICATIONS

I, Marcio C. Cabrera, certify that:

1. I have reviewed this annual report on Form 10-K of Ramsay Youth
Services, Inc.:

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures(as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:

a) designed such disclosure controls and procedures 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 annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: March 24, 2003

/s/ Marcio C. Cabrera
----------------------------------
Marcio C. Cabrera
Chief Financial Officer

35

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS

The following consolidated financial statements of the Registrant and
its subsidiaries are submitted herewith in response to Item 8 and Item 14(a)(1):

PAGE
NUMBER

Independent Auditors' Report......................................... F-2
Consolidated Balance Sheets - December 31, 2002 and 2001............. F-3
Consolidated Statements of Operations - For the Years Ended
December 31, 2002, 2001 and 2000................................. F-5
Consolidated Statements of Stockholders' Equity - For the Years
Ended December 31, 2002, 2001 and 2000........................... F-6
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 2002, 2001 and 2000................................. F-7
Notes to Consolidated Financial Statements........................... F-8

All schedules have been omitted because they are inapplicable or the
information is provided in the consolidated financial statements, including the
notes thereto.

F-1

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Ramsay Youth Services, Inc. and Subsidiaries

We have audited the consolidated balance sheets of Ramsay Youth
Services, Inc. and subsidiaries (the "Company") as of December 31, 2002 and
2001, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

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

As discussed in Note 1 to the consolidated financial statements, in
2002, the Company changed its method of accounting for goodwill and
indefinite-lived assets to conform to Statement of Financial Accounting
Standards No. 142.

DELOITTE & TOUCHE LLP
Certified Public Accountants

Miami, Florida
March 14, 2003

F-2

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
---------------------------------
2002 2001
--------------- --------------

ASSETS

Current assets
Cash and cash equivalents........................... $796,000 $752,000
Accounts receivable, net............................ 20,771,000 23,307,000
Other current assets................................ 7,301,000 6,091,000
------------- -------------
Total current assets............................ 28,868,000 30,150,000

Other assets
Cash held in trust................................... 1,026,000 1,021,000
Cost in excess of net asset value of purchased
businesses and other intangible assets, net........ 2,263,000 2,232,000
Unamortized loan costs, net.......................... 754,000 1,077,000
Deferred tax asset................................... 6,407,000 --
------------- -------------
Total other assets.............................. 10,450,000 4,330,000

Property and equipment
Land.................................................. 4,635,000 4,659,000
Buildings and improvements............................ 38,770,000 37,829,000
Equipment, furniture and fixtures..................... 13,439,000 12,580,000
------------- -------------
56,844,000 55,068,000

Less accumulated depreciation......................... 22,865,000 20,537,000
------------- -------------
33,979,000 34,531,000
------------- -------------

$ 73,297,000 $ 69,011,000
============= =============

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

(continued)

F-3

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
---------------------------------
2002 2001
-------------- ---------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Accounts payable....................................... $ 7,056,000 $5,604,000
Accrued wages and other accrued liabilities............ 6,756,000 6,366,000
Amounts due to third-party contractual agencies........ 868,000 1,709,000
Current portion of long-term debt...................... 3,938,000 3,372,000
------------ -------------
Total current liabilities........................ 18,618,000 17,051,000

Noncurrent liabilities
Other accrued liabilities.............................. 3,724,000 4,129,000
Long-term debt, less current portion................... 13,865,000 23,506,000
------------ -------------
Total liabilities................................ 36,207,000 44,686,000
------------ -------------

Commitments and contingencies

Stockholders' equity
Common stock $.01 par value - authorized 30,000,000
shares; issued 9,491,681 shares at December 31, 2002,
and 9,445,449 shares at December 31, 2001............ 95,000 94,000
Additional paid-in capital............................. 127,143,000 127,047,000
Accumulated deficit.................................... (86,249,000) (98,917,000)
Treasury stock - 193,850 common shares at December 31,
2002 and 2001........................................ (3,899,000) (3,899,000)
------------ -------------
Total stockholders' equity.................... 37,090,000 24,325,000
------------ -------------

$ 73,297,000 $69,011,000
============ =============

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

(concluded)

F-4

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED
DECEMBER 31,
----------------------------------------------------
2002 2001 2000
--------------- ---------------- ----------------

Provider-based revenue........................... $145,156,000 $134,416,000 $108,360,000

Operating expenses:
Salaries, wages and benefits.................. 90,943,000 83,563,000 68,353,000
Other operating expenses...................... 40,365,000 37,715,000 28,310,000
Provision for doubtful accounts............... 1,867,000 2,911,000 2,817,000
Depreciation and amortization................. 2,577,000 2,430,000 2,369,000
Asset impairment.............................. 125,000 124,000 --
------------ ------------ ------------
TOTAL OPERATING EXPENSES......................... 135,877,000 126,743,000 101,849,000
------------ ------------ ------------

Income from operations........................... 9,279,000 7,673,000 6,511,000
------------ ------------ ------------

Non-operating expenses:
Interest and other financing charges.......... (2,475,000) (3,299,000) (2,706,000)
Losses related to asset sales and closed
businesses.................................. -- (130,000) (705,000)
------------ ------------ ------------
Total non-operating expenses, net........... (2,475,000) (3,429,000) (3,411,000)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES....................... 6,804,000 4,244,000 3,100,000

(Benefit) provision for income taxes............. (5,864,000) 778,000 248,000
------------ ------------ ------------

NET INCOME....................................... $12,668,000 $3,466,000 $2,852,000
============ ============ ============

Income per common share:

Basic:........................................ $1.37 $0.38 $0.32
============ ============ ============

Diluted:...................................... $1.11 $0.34 $0.32
============ ============ ============

Weighted average number of common shares outstanding:
Basic......................................... 9,278,000 9,046,000 8,913,000
============ ============ ============
Diluted....................................... 11,405,000 10,340,000 8,954,000
============ ============ ============

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-5

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

ADDITIONAL
COMMON COMMON PAID-IN ACCUMULATED TREASURY
STOCK SHARES STOCK CAPITAL DEFICIT STOCK
-------------- -------------- -------------- -------------- --------------

Balance at JANUARY 1, 2000................ 9,086,191 $90,000 $126,138,000 ($105,235,000) ($3,899,000)

Issuance of common stock in connection
with employee stock purchase plan....... 34,989 1,000 42,000 -- --
Issuance of warrants in connection with
subordinated debt....................... -- -- 861,000 -- --
Registration costs........................ -- -- (17,000) -- --
Net income................................ -- -- -- 2,852,000 --
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 2000.............. 9,121,180 91,000 127,024,000 (102,383,000) (3,899,000)

Issuance of common stock in connection
with employee stock purchase plan....... 29,672 -- 26,000 -- --
Issuance of common stock in connection
with exercise of warrants............... 294,597 3,000 (3,000) -- --
Net income................................ 3,466,000 --
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 2001.............. 9,445,449 94,000 127,047,000 (98,917,000) (3,899,000)

Issuance of common stock in connection
with employee stock purchase plan....... 16,983 -- 39,000 -- --
Issuance of common stock in connection
with exercise of options and warrants... 29,249 1,000 69,000 -- --
Registration costs........................ -- -- (12,000) -- --
Net income................................ -- -- -- 12,668,000 --
------------- ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 31, 2002.............. 9,491,681 $95,000 $127,143,000 ($86,249,000) ($3,899,000)
============= ============= ============= ============= =============

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-6

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED
DECEMBER 31,
----------------------------------------------
2002 2001 2000
-------------- -------------- -------------

Operating activities
Net income.......................................... $12,668,000 $3,466,000 $2,852,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation..................................... 2,577,000 2,289,000 1,945,000
Amortization, including loan costs and debt
discount....................................... 535,000 693,000 756,000
Loss related to asset sales and closed businesses 17,000 130,000 705,000
Asset impairment................................. 125,000 124,000 ---
Provision for doubtful accounts.................. 1,867,000 2,911,000 2,817,000
Change in operating assets and liabilities net of
effects of business acquired
Decrease (increase) in accounts receivable....... 670,000 (3,850,000) (10,026,000)
(Increase) decrease in other current assets...... (1,076,000) (332,000) 2,331,000
Deferred tax asset............................... (6,407,000) --- ---
Increase (decrease) in accounts payable.......... 1,452,000 (1,989,000) 331,000
(Decrease) increase in accrued salaries, wages
and other liabilities.......................... (16,000) 479,000 (3,493,000)
Decrease in amounts due to third-party
contractual agencies........................ (841,000) (1,923,000) (1,561,000)
----------- ---------- ----------
Total adjustments........................... (1,097,000) (1,468,000) (6,195,000)
----------- ---------- ----------
Net cash provided by (used in) operating activities..... 11,571,000 1,998,000 (3,343,000)
----------- ---------- ----------
Investing activities
Increase in net assets held for sale................. --- --- (39,000)
Expenditures for property and equipment.............. (2,473,000) (2,467,000) (2,503,000)
Acquisitions......................................... --- --- (8,232,000)
(Increase) decrease in cash held in trust............ (5,000) 20,000 852,000
Proceeds from sale of assets......................... 159,000 472,000 100,000
----------- ---------- ----------
Net cash used in investing activities................... (2,319,000) (1,975,000) (9,822,000)
----------- ---------- ----------
Financing activities
Loan costs........................................... (120,000) (42,000) (761,000)
Amounts paid to affiliate............................ --- --- (600,000)
Issuance of employee stock........................... 39,000 26,000 43,000
Net proceeds from exercise of options................ 70,000 --- ---
Proceeds from issuance of debt and warrants.......... 1,531,000 2,007,000 16,983,000
Payments on debt..................................... (10,716,000) (2,801,000) (1,566,000)
Registration costs................................... (12,000) --- (17,000)
----------- ---------- ----------
Net cash (used in) provided by financing activities..... (9,208,000) (810,000) 14,082,000
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.... 44,000 (787,000) 917,000
Cash and cash equivalents at beginning of period........ 752,000 1,539,000 622,000
----------- ---------- ----------
Cash and cash equivalents at end of period.............. $796,000 $752,000 $1,539,000
=========== ========== ==========

Cash paid during the period for:
Interest (net of amount capitalized)............... $2,095,000 $2,941,000 $2,137,000
=========== ========== ==========
Income taxes........................................ $483,000 $429,000 $1,239,000
=========== ========== ==========

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-7

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INDUSTRY

Ramsay Youth Services, Inc. is a provider of behavioral health care
treatment programs and services focused on at-risk and special-needs youth. The
Company offers a full spectrum of treatment programs and services in residential
and non-residential settings. The programs and services are offered through a
network of Company-owned or leased facilities ("Owned Operations") and state or
government-owned facilities ("Management Contract Operations"). The Company is
headquartered in Coral Gables, Florida and has operations in Alabama, Florida,
Georgia, Hawaii, Missouri, Michigan, Nevada, North Carolina, South Carolina,
Texas, Utah and Puerto Rico. The Company also provides a limited range of adult
behavioral healthcare services at certain of its locations in response to
community demand.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Ramsay
Youth Services, Inc. and its majority-owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

CONCENTRATIONS OF CREDIT RISK

The Company provides services to individuals without insurance and
accepts assignments of individuals' third party benefits without requiring
collateral. Exposure to losses on receivables due from these individuals is
principally dependent on each individual's financial condition. The Company
monitors its exposure for credit losses and maintains allowances for anticipated
losses. The mix of the receivables from residents and third-party payors was as
follows:

DECEMBER 31,
--------------------------
2002 2001
----------- -----------
State Agencies............. 52.8% 63.4%
Medicaid................... 22.5 17.3
Medicare................... 7.7 5.5
Commercial................. 7.8 5.7
Managed Care............... 4.9 1.9
Self-Pay................... 1.2 1.2
Other...................... 3.1 5.0
----------- -----------
100.0% 100.0%
=========== ===========

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company carries accounts receivables at the amount it deems to be
collectable. Estimates are used in determining the Company's allowance for
doubtful accounts and are based on the Company's historical collection
experience, current trends and credit policy. Although the Company believes its
allowance is sufficient, if the financial condition of the Company's customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. The Company

F-8

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

continually evaluates the adequacy of its allowance for doubtful accounts.
Recoveries are recognized in the period they are received. The ultimate amount
of accounts receivable that becomes uncollectable could differ from those
estimated.

As a result of budgetary constraints, on December 15, 2001 the
Government of Puerto Rico cancelled the Company's contract to provide mental
health and substance abuse services. In addition, on April 16, 2002 and August
14, 2002, the Government of Puerto Rico also cancelled the Company's contracts
to provide a 20-bed specialized treatment program and an educational program to
youth in Puerto Rico, respectively. Total revenues from these three contracts
for the years ended December 31, 2002, 2001 and 2000 were approximately $2.0
million, $6.2 million and $5.6 million, respectively. Total operating (loss) or
income from these contracts for the years ended December 31, 2002, 2001 and
2000 was approximately ($0.3 million), $0.6 million and $1.3 million,
respectively. The Company's remaining contract with the Government of Puerto
Rico is for the management of the 120-bed Bayamon facility. Although the
contract for the management of the Bayamon facility does not expire until April
27, 2004, there can be no assurances that the Government of Puerto Rico will
not cancel the contract prior to its expiration date. If the Bayamon contract
is cancelled, the Company may incur additional costs and charges associated
with the early termination of the contract. Total revenues and operating income
generated by the Bayamon facility contract for the year ended December 31, 2002
were approximately $5.8 million and $0.4 million, respectively.

The Company has experienced delays in the collection of receivables
from certain of its contracts in Puerto Rico. During the year ended December 31,
2002, the Company collected approximately $1.4 million of past due receivables
from the Government of Puerto Rico. As of December 31, 2002, the Company had
approximately $2.0 million in outstanding receivables due from its contracts in
Puerto Rico, of which $1.1 million was over 120 days past due. Reserves against
outstanding Puerto Rico receivables were $1.1 million as of December 31, 2002.
As of March 14, 2003, the Company had collected approximately $0.9 million of
the December 31, 2002 outstanding receivable balance, all of which related to
receivables under 120 days past due. The Company and its advisors are in active
discussions with the Government of Puerto Rico with respect to the payment of
the outstanding receivables. Although the Company has been advised by its legal
counsel that the receivables due on the Puerto Rico contracts are collectable,
there can be no assurances that the amounts will be collected.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand and short-term, highly
liquid, interest-bearing investments, with original maturities less than three
months, consisting primarily of money market mutual funds. Deposits in banks may
exceed the amount of insurance provided on such deposits. The Company performs
reviews of the credit worthiness of its depository banks. The Company has not
experienced any losses on its deposits of cash in banks.

CASH HELD IN TRUST

Cash held in trust includes cash held in escrow from the sale of
certain assets (see Note 2) and cash and short term investments set aside for
the payment of losses in connection with the Company's self-insured retention
for professional and general liability claims.

COST IN EXCESS OF NET ASSET VALUE OF PURCHASED BUSINESSES AND OTHER INTANGIBLE
ASSETS

Cost in excess of net asset value of purchased businesses relates to
certain acquisitions made by the Company (see Note 4). Prior to January 1, 2002,
amounts were being amortized on a straight-line basis over a term ranging from 3
to 40 years with a weighted average life of approximately 20 years. As the
result of Statement of Financial Accounting Standards ("SFAS") No. 142, GOODWILL
AND OTHER INTANGIBLE ASSETS, a new accounting pronouncement which became
effective in 2002, the Company now evaluates its

F-9

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

intangible assets to determine whether they will continue to be amortized or
will be tested annually for impairment. The Company has completed its initial
test of goodwill and has classified its goodwill in accordance with the
Statement's criteria. Goodwill amortization for the Company for the years ended
December 31, 2002, 2001 and 2000 was $0, $141,000 and $424,000, respectively.

The Company periodically reviews its intangible assets to assess
recoverability. The carrying value of cost in excess of net asset value of
purchased businesses is reviewed by the Company's management if the facts and
circumstances suggest that it may be impaired. The amount of impairment, if any,
would be measured based on discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. As of December
31, 2002 and 2001 costs in excess of net asset value of purchased businesses,
net of accumulated amortization of $1,521,000, was $2,232,000.

FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
------------ ----------- ------------

($000s except for earnings per share amounts)

Reported net income.............................. $12,668 $3,466 $2,852
Add back: Goodwill amortization.................. -- 115 390
------------ ----------- ------------
Adjusted net income.............................. $12,668 $3,581 $3,242
============ =========== ============

Basic earnings per share:
Reported net income.............................. $1.37 $0.38 $0.32
Goodwill amortization............................ -- .01 .04
------------ ----------- ------------
Adjusted net income.............................. $1.37 $0.39 $0.36
============ =========== ============

Diluted earnings per share:
Reported net income.............................. $1.11 $0.34 $0.32
Goodwill amortization............................ -- .01 .04
------------ ----------- ------------
Adjusted net income.............................. $1.11 $0.35 $0.36
============ =========== ============

UNAMORTIZED LOAN COSTS

Loan costs are deferred and amortized ratably over the life of the loan
and are included in interest and other financial charges. Accumulated
amortization of the Company's loan costs as of December 31, 2002 and 2001 was
$1,418,607 and $1,136,000, respectively

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated
depreciation, except for assets considered to be impaired, which are stated at
fair value of the assets as of the date the assets are determined to be
impaired. Upon the sale or retirement of property and equipment, the cost and
related accumulated depreciation are removed from the accounts.

Depreciation is computed substantially on the straight-line method for
financial reporting purposes and on accelerated methods for income tax purposes.
Depreciation is not recorded on assets determined to be impaired or during the
period they are held for sale. The general range of estimated useful lives for
financial reporting purposes is twenty to forty years for buildings and five to
ten years for equipment. For the years ended December 31, 2002, 2001 and 2000,
depreciation expense recorded on the Company's property and equipment totaled
$2,577,000, $2,300,000 and $1,945,000, respectively.

F-10

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

REVENUE RECOGNITION

Revenues are recognized at the time services are provided. Net revenues
include estimated reimbursable amounts from Medicare, Medicaid and other
contracted reimbursement programs. Amounts received by the Company for treatment
of individuals covered by such programs, which may be based on the cost of
services provided or predetermined rates, are generally less than the
established billing rates of the Company's facilities. Final determination of
amounts earned under contracted reimbursement programs is subject to review and
audit by the appropriate agencies. Differences between amounts recorded as
estimated settlements and the audited amounts are reflected as adjustments to
provider based revenues in the period the final determination is made (see Note
13).

MEDICAL EXPENSES

The Company records the cost of medical services when such services are
provided.

INSURANCE

The Company carries general and professional liability, comprehensive
property damage, malpractice, workers' compensation, and other insurance
coverages that management considers adequate for the protection of its assets
and operations.

The Company maintains self-insured retentions related to its
professional and general liability and workers' compensation insurance programs.
The Company's operations are insured for professional liability on a claims-made
basis and for general liability and workers' compensation on an occurrence
basis. The Company records the liability for uninsured losses related to
asserted and unasserted claims arising from reported and unreported incidents
based on independent valuations which consider claim development factors, the
specific nature of the facts and circumstances giving rise to each reported
incident and the Company's history with respect to similar claims. The
development factors are based on a blending of the Company's actual experience
with industry standards.

The Company funds the expected losses of its workers' compensation
claims through a rent-a-captive arrangement with an offshore entity wholly
owned by a United States insurance carrier. The Company also maintains an
aggregate stop loss policy for its workers' compensation claims.

INCOME TAXES

Income taxes are accounted for in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. SFAS No. 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Future tax
benefits are required to be recognized to the extent that realization of such
benefits is more likely than not. A valuation allowance is established for those
benefits that do not meet the more likely than not criteria.

EARNINGS PER SHARE

For all periods presented, the Company has calculated earnings per
share in accordance with SFAS No. 128, EARNINGS PER SHARE. Basic earnings per
share is based on the weighted average number of shares outstanding during each
period. Diluted earnings per share further assumes that, under the treasury
stock method, dilutive stock options and warrants are exercised.

STOCK-BASED COMPENSATION

At December 31, 2002, the Company has eight stock-based employee
compensation plans, which are described more fully in Note 11. The company
accounts for those plans under the recognition and measurement principles of APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related

F-11

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the company had applied the fair value recognition provisions of SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to stock-based employee
compensation.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Because
compensation expense associated with a stock option award is recognized over the
vesting period, the initial impact of applying SFAS No. 123 may not be
indicative of compensation expense in future years, when the effect of the
amortization of multiple awards will be reflected in pro forma net income. The
Company's actual and pro forma information follows:

YEAR ENDED DECEMBER 31,
-------------------------------------------------
2002 2001 2000
--------------- -------------- --------------

Net income, as reported....................... $12,668,000 $3,466,000 $2,852,000
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects....................................... (1,399,000) (1,518,000) (1,213,000)
--------------- -------------- --------------

Pro forma net income............................. $11,269,000 $1,948,000 $1,639,000
=============== ============== ==============

Earnings per share:
Basic - as reported........................... $1.37 $.38 $.32
=============== ============== ==============
Basic - pro forma............................. $1.21 $.22 $.18
=============== ============== ==============

Diluted - as reported......................... $1.11 $.34 $.32
=============== ============== ==============
Diluted - pro forma........................... $.99 $.19 $.18
=============== ============== ==============

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of financial instruments including cash and cash
equivalents, cash held in trust, accounts receivable from services, and accounts
payable approximate fair value as of December 31, 2002 due to the short maturity
of the instruments and reserves for potential losses, as applicable. The
carrying amounts of long-term debt obligations issued pursuant to the Company's
senior credit facility approximate fair value because the interest rates on
these instruments are subject to change with market interest rates.

NEW ACCOUNTING REQUIREMENTS

In July 2001, the Financial Accounting Standard Board ("FASB") issued
Statement No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. This Statement
requires that an asset retirement cost should be capitalized as part of the
cost of the related long-lived asset and subsequently allocated to expense
using a systematic and rational method. This Statement is required to be
adopted in fiscal years beginning after June 15, 2002. The Company does not
anticipate a significant impact to the results of operations from the adoption
of this Statement.

In April 2002, the FASB issued Statement No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTION. This Statement eliminates extraordinary accounting treatment for
reporting gain or loss on debt extinguishment, and amends other existing
authoritative pronouncements to make various technical corrections, clarifies
meanings, or describes their applicability under changed conditions. The
provisions of this Statement are effective for the Company with the beginning of
fiscal year 2003; however, early application of the Statement is encouraged.
Debt extinguishments reported as extraordinary items prior to scheduled or early

F-12

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

adoption of this Statement would be reclassified in most cases following
adoption. The Company does not anticipate a significant impact on its results of
operations from adopting this Statement.

In June 2002, the FASB issued Statement No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This Statement requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management commitment to an exit plan. Adoption of this Statement
is required with the beginning of fiscal year 2003. The Company has not yet
completed its evaluation of the impact of adopting this Statement.

In November 2002, the FASB issued Financial Interpretation (FIN) No.
45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS. FIN No. 45 clarifies and expands
on existing disclosure requirements for guarantees, including product
warranties. FIN No. 45 also requires recognition of a liability at fair value of
a company's obligations under certain guarantee contracts. The disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. The initial recognition and measurement
provisions of FIN No. 45 are applied only on a prospective basis to guarantees
issued after December 31, 2002, irrespective of the guarantors' fiscal year-end.
The Company does not believe that the implementation of FIN No. 45 will have a
material impact on its financial condition, results of operations or cash flows.

In December 2002, the FASB issued Statement No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE, an amendment of FASB
Statement No. 123. This Statement provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company does not anticipate a significant impact to the results of operations
from the adoption of this Statement.

In January 2003, the FASB issued FIN No. 46, CONSOLIDATION OF VARIABLE
INTEREST ENTITIES. FIN No. 46 provides accounting guidance for consolidation of
off-balance sheet entities with certain characteristics (variable interest
entities). All enterprises with variable interest in variable interest entities
created after January 31, 2003, shall apply the provisions of this
interpretation immediately. A public entity with variable interest in a variable
interest entity created before February 1, 2003 shall apply the provisions of
this interpretation no later than the first interim or annual reporting period
beginning after June 15, 2003. The Company does not believe that the
implementation of FIN No. 46 will have a material impact on its financial
condition, results of operations or cash flows.

2. ASSET SALES AND CLOSED BUSINESSES

On June 7, 2000, the Company sold five of its contracts to manage
charter schools and personal property with a book value of approximately
$800,000 (including the net book value of cost in excess of net asset value of
purchased businesses and other intangible assets) for $352,000, resulting in a
loss of $456,000 after transaction costs. Additionally, in December 2000, the
Company cancelled a long term consulting agreement with the purchaser of the
aforementioned contracts and incurred $249,000 in cancellation fees effectively
increasing the total loss to $705,000.

As of December 31, 2000, the assets relating to the Company's facility
in Palm Bay, Florida were reflected as assets held for sale in the accompanying
balance sheets. On May 15, 2001, the Company sold the facility for $2,300,000.
Proceeds from the sale included a $500,000 cash payment at closing and a
$1,800,000, 8% promissory note, due and payable on June 30, 2003. During the
year ended December 31, 2001, the Company agreed to accept a discount of
$130,000 for the full payment of the promissory note and accrued interest. This

F-13

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

note is now expected to be repaid at its original maturity date of June 30, 2003
for the undiscounted amount of $1.8 million. The discount is included as a loss
on sale of assets during the year ended December 31, 2001 in the accompanying
financial statements. For the year ended December 31, 2001, revenues and net
income before taxes from the Palm Bay facility operations were $65,000 and
$40,000, respectively. Revenues and net loss before taxes for the Palm Bay
facility for the year ended December 31, 2000 were $117,000 and $59,000,
respectively.

3. IMPAIRMENT OF ASSETS

In accordance with FASB No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, the Company periodically reviews its long-lived
assets (land, buildings, fixed equipment, cost in excess of net asset value of
purchased businesses and other intangible assets) to determine if the carrying
value of these assets is recoverable, based on the future cash flows expected
from the assets.

During the year ended December 31, 2002 and 2001, the Company closed
two of its community based programs in South Carolina and recorded asset
impairment charges of $125,000 and $124,000, respectively. The asset impairment
charges were determined based on the differences between the carrying value of
the assets and the expected net proceeds from the sale of each facility.

4. ACQUISITIONS

On August 4, 2000, the Company acquired the operating assets of Charter
Behavioral Health System of Manatee Palms, L.P. ("Manatee Palms") from Charter
Behavioral Health Systems, LLC and the corresponding real estate from Crescent
Real Estate Funding VII, L.P. for a cash purchase price of $7,700,000. The
acquisition was accounted for under the purchase method of accounting. In
connection with the acquisition, the Company recorded cost in excess of net
asset value of purchased businesses of $1,892,000. Prior to FASB Statement No.
142, this amount was being amortized on a straight-line basis over a term of 20
years. The operations of Manatee Palms have been included in the Company's
consolidated statement of operations effective August 4, 2000. The Company's
Senior Credit Facility was amended on August 4, 2000 to provide for the approval
of this acquisition (see Note 6).

5. TRANSACTIONS WITH AFFILIATES

At December 31, 2002, three corporate affiliates of Mr. Paul J. Ramsay,
Chairman of the Board of the Company, owned an aggregate voting interest in the
Company of approximately 58.02%, as follows: (i) Ramsay Holdings HSA Limited
owned 9.75% of the outstanding Common Stock of the Company, (ii) Ramsay Holdings
Pty. Ltd. owned approximately 40.13% of the outstanding Common Stock of the
Company and (iii) Paul Ramsay Hospitals Pty. Limited ("Ramsay Hospitals") owned
approximately 8.08% of the outstanding Common Stock of the Company.

In September 2002, the Company entered into a lease agreement for a
110-bed facility in Macon, Georgia with a corporate affiliate of Mr. Paul J.
Ramsay, Chairman of the Board of the Company and beneficial owner of
approximately 59% of the outstanding Common Stock of the Company (the "Macon
Lease"). The lease has a primary term of five years and two successive five year
renewal options. The lease payments are $432,000 per annum and at each renewal
option are subject to adjustments based on the change in the Consumer Price
Index during the preceding period. In accordance with the terms of the lease,
the Company is responsible for all costs of ownership, including taxes,
insurance, maintenance and repairs. In addition, the Company has the option to
purchase the facility at any time for an amount equal to the aggregate cost of
the facility (as defined in the lease agreement) adjusted for the increase in
the Consumer Price Index between the commencement of the lease and the purchase
date.

In December 1999, the Company entered into an agreement with one of its
directors to serve as a senior advisor in connection with legal issues,
acquisitions, financings and other transactions involving the Company. During
the years ended December 31, 2002, 2001 and 2000, the Company paid the director

F-14

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

$61,242, $66,256 and $68,783, respectively (including expense reimbursements) in
connection with these advisory services.

In October 1999, the Company entered into an agreement with Excel
Vocational Alternatives, Inc. ("Excel") for the provision by Excel of consulting
and advisory services in connection with the creation of a Job Corps division
for the Company. An executive officer of the Company is President and has a 50%
ownership interest in Excel. On June 1, 2001, the Company cancelled its
agreement with Excel. During the year ended December 31, 2001 and 2000, the
Company paid Excel $150,000 and $192,500, respectively, in connection with these
advisory services.

6. BORROWINGS

The Company's long-term debt is as follows:

DECEMBER 31,
---------------------------------
2002 2001
---------------- ----------------

Variable rate Term Loan, due October 30, 2003........ $6,102,000 $8,134,000
Revolver, due October 30, 2003....................... 1,911,000 7,503,000
Acquisition Loan, due October 30, 2003............... 287,000 1,849,000
Subordinated Note (net of discount of $289,000), due
January 24, 2007.................................. 4,711,000 4,660,000
Subordinated Note (net of discount of $301,000), due
January 24, 2007.................................. 4,699,000 4,640,000
Other................................................ 93,000 92,000
---------------- ----------------
17,803,000 26,878,000
Less current portion................................. 3,938,000 3,372,000
---------------- ----------------
$13,865,000 $23,506,000
================ ================

The Company's senior credit facility, as amended, (the "Senior Credit
Facility") consists of a term loan (the "Term Loan") payable in monthly
installments ranging from $83,000 to $302,000 with final payment of any
outstanding principal balance due on September 1, 2004 and a revolving credit
facility (the "Revolver") for an amount up to the lesser of $15,000,000 or the
borrowing base of the Company's receivables (as defined in the agreement) and an
acquisition loan commitment of up to $6,000,000 (the "Acquisition Loan").

The Company's Senior Credit Facility also provided for a $1,250,000
bridge loan advance under the Acquisition Loan. On August 2, 2002 the Company
paid off its $1,250,000 bridge loan advance under the Acquisition Loan

In connection with the aforementioned bridge loan advance, a corporate
affiliate of Paul J. Ramsay, Chairman of the Board of the Company, entered into
a Junior Subordinated Note Purchase Agreement with the Senior Credit Facility
lender to participate in the Senior Credit Facility in an amount equal to the
bridge loan advance.

Interest on the Term Loan and the Revolver varies, and at the option of
the Company, would equal (i) a function of a base rate plus a margin ranging
from 0.5% to 2.0% (4.75% at December 31, 2002), based on the Company's ratio of
total indebtedness to EBITDA or (ii) a function of the Eurodollar rate plus a
margin ranging from 2.0% to 3.5% (3.43% at December 31, 2002), based on the
Company's ratio of total indebtedness to EBITDA.

Interest on the Acquisition Loan varies, and at the option of the
Company, would equal (i) a function of a base rate plus a margin ranging from
0.75% to 2.25% (5.0% at December 31, 2002), based on the Company's ratio of
total indebtedness to EBITDA or (ii) a function of the Eurodollar rate plus a

F-15

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

margin ranging from 2.25% to 3.75% (3.68% at December 31, 2002), based on the
Company's ratio of total indebtedness to EBITDA.

Additionally, the Company is obligated to pay to the financial
institution an amount equal to one half of 1% of the unused portion of the
Revolver and the Acquisition Loan.

The Senior Credit Facility requires that the Company meet certain
covenants, including (i) the maintenance of certain fixed charge coverage,
interest coverage and leverage ratios, (ii) the maintenance of certain proforma
availability levels (as defined in the credit agreement) and (iii) a limitation
on capital expenditures. The Senior Credit Facility also prohibits the payment
of cash dividends to common stockholders of the Company.

On September 6, 2002, the Company's Senior Credit Facility was amended
to allow for the execution of the Macon Lease (see Note 5). On March 14, 2003,
the Senior Credit Facility was amended, effective December 31, 2002, to extend
the maturity date to October 30, 2004.

During the twelve months ended December 31, 2001, the Company exceeded
the capital expenditure limitation in the Senior Credit Facility. On February
25, 2002, the Company's lender agreed to amend the Senior Credit Facility,
retroactive to December 31, 2001, to provide for among other items: (i) an
increase in the permitted capital expenditures, (ii) a $3.0 million increase in
the revolving credit loan commitment, and (iii) a $1.5 million additional
advance on the term loan.

As of December 31, 2002 and 2001, the Company was in compliance with
all covenants stipulated in the Senior Credit Facility.

The Company and its subsidiaries have pledged substantially all of
their real property, receivables and other assets as collateral for the Senior
Credit Facility.

On January 25, 2000 and June 19, 2000, the Company entered into
subordinated note and warrant purchase agreements with two unrelated financial
institutions for an aggregate principal amount of $5 million each (the
"Subordinated Notes"). The Subordinated Notes permit each of the financial
institutions to exercise, under certain conditions, up to 475,000 warrants which
are convertible into the Company's common stock. The aggregate value of the
warrants at the time of issuance was $861,000. On August 17, 2001, one of the
financial institutions exercised its warrant purchase agreement and converted
475,000 warrants into 294,597 shares of common stock utilizing the cashless
exercise provision outlined in the warrant agreement. Borrowings under the
Subordinated Notes bear interest at a rate of 12.5% per annum. The interest is
payable quarterly, and the principal balance and any unpaid interest is due
January 24, 2007.

In connection with the Subordinated Notes, the Company incurred loan
costs of approximately $679,000. The loan costs are deferred and amortized
ratably over the life of the loans. The amortization is included in interest and
other financing charges in the accompanying consolidated statement of operations
and the unamortized balance is included as unamortized loan costs in the
accompanying consolidated balance sheet.

The aggregate scheduled maturities of long term debt outstanding during
the next five years are as follows: 2003 -- $3,938,000; 2004 -- $4,411,000; 2005
- -- $25,000; 2006 -- $15,000 and 2007 -- $10,004,000.

7. OPERATING LEASES

On September 28, 1998, the Company sold and leased back the land,
buildings and fixed equipment of its Havenwyck facility in Auburn Hills,
Michigan. The lease has a term of 12 years and currently requires annual minimum
lease payments of approximately $1,387,000, payable monthly.

F-16

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Effective April 1 of each year, the lease payments are subject to upward
adjustments (not to exceed 3% annually) in the consumer price index over the
preceding twelve months.

In August 1997, the Company leased its Meadowlake facility in Oklahoma
to an independent healthcare provider (the "tenant") for an initial term of
three years, with four three-year renewal options. Lease payments total $385,000
per year and at each renewal option are subject to adjustment based on the
change in the consumer price index during the preceding lease period. In
accordance with the terms of the lease agreement, the tenant is responsible for
all costs of ownership, including taxes, insurance, maintenance and repairs. In
addition, the tenant has the option to purchase the facility at any time for
$2,500,000. The book value of the facility was $1,900,000 on December 31, 2002.

In April 1995, the Company sold and leased back the land, buildings and
fixed equipment of its Mission Vista facility in San Antonio, Texas. The lease
at the Mission Vista facility has a primary term of 15 years (with three
successive renewal options of 5 years each) and at December 31, 2002 had
aggregate annual minimum rentals of approximately $601,000, payable monthly.

Rent expense related to noncancellable operating leases amounted to
$4,163,000, $3,916,000 and $3,256,000 for the years ended December 31, 2002,
2001 and 2000, respectively.

Future minimum lease payments required under noncancellable operating
leases as of December 31, 2002 are as follows: 2003 -- $3,681,000; 2004 --
$3,401,000; 2005 -- $3,215,000; 2006 -- $2,692,000, 2007 -- $2,387,000 and
thereafter -- $4,064,000.

8. SEGMENT INFORMATION

The Company is a provider of behavioral health care treatment programs
focused on at-risk and special needs youth in residential and non-residential
settings in eleven states and the Commonwealth of Puerto Rico. During the
quarter ended June 30, 2001, the Company refined its segment definitions to more
appropriately reflect its business operations and management responsibilities.
The primary change from the segment information presented as of December 31,
2000 consists of a change in the names of the segments and the classification of
certain items within the segments. Accordingly, the corresponding information
for earlier periods has been reclassified to reflect the new reportable business
segments, owned operations and management contract operations.

OWNED OPERATIONS

The Company offers its mental health and behavioral health programs and
services at its owned and leased facilities in residential and non-residential
settings.

The residential setting provides a safe, secure and highly structured
environment for the evaluation and development of long-term intensive treatment
services. The programs focus on a cognitive behavioral model with family, group
and individual counseling, social and life skills development, and educational
and recreational programs. The primary focus of these services is to reshape
antisocial behaviors by stressing responsibility and achievement of performance
and treatment goals.

The non-residential setting is designed to meet the special needs of
patients requiring a less structured environment than the residential setting,
but providing the necessary level of treatment, support and assistance to
transition back into society. The primary focus of this program is to provide
patients, with a clinically definable emotional, psychiatric or dependency
disorder, with therapeutic and intensive treatment services. Patients who are
assisted through this program have either transitioned out of a residential
treatment program, or do not require the intensive services of a residential
treatment program.

F-17

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Many of the Company's programs are complemented with specialized
educational services designed to modify behavior and assist individuals in
developing their academic, social, living and vocational skills necessary to
participate successfully in society.

MANAGEMENT CONTRACT OPERATIONS

The Company's programs and services in its management contract
operations are similar in nature to the programs and services offered by the
Company at its owned operations; however, the programs and services are provided
at facilities owned by the contracting governmental agency. These programs and
services focus on solving the specialized needs of the respective agency by
providing effective treatment interventions, including counseling, social
interests, substance abuse education and treatment, mental health services,
cognitive and life skills development, accredited education and vocational
skills. The Company believes that a comprehensive approach, which develops the
social, educational, and vocational skills of the individual, creates
responsible, contributing, pro-social individuals. This comprehensive approach
is essential to achieving the program's objective of reducing recidivism and
integrating the youth into their communities as responsible and productive
individuals.

The following table sets forth, for each of the periods indicated,
certain information about segment results of operations and segment assets.
There are no inter-segment sales or transfers. Segment profit consists of
revenue less operating expenses, exclusive of losses related to asset sales, and
does not include investment income and other, interest and other financing
charges, and income taxes. Total assets are those assets used in the operations
in each segment. Corporate assets include cash and cash equivalents, property
and equipment, intangible assets and notes receivable. The accounting policies
of the reportable segments are the same as those described in the summary of
significant accounting policies.

YEAR ENDED
DECEMBER 31,
------------------------------------------------
2002 2001 2000
-------------- -------------- --------------

SEGMENT REVENUE
Owned operations................................ $116,464,000 $106,140,000 $87,506,000

Management contracts........................... 28,692,000 28,276,000 20,854,000
-------------- -------------- --------------

Total consolidated revenues....................... $145,156,000 $134,416,000 $108,360,000
============== ============== ==============

SEGMENT DEPRECIATION AND AMORTIZATION
Owned operations............................... $2,319,000 $2,156,000 $1,744,000

Management contracts........................... 148,000 123,000 140,000
-------------- -------------- --------------
2,467,000 2,279,000 1,884,000

Reconciling items
Corporate depreciation and amortization........ 110,000 151,000 485,000
-------------- -------------- --------------
Total consolidated revenues....................... $2,577,000 $2,430,000 $2,369,000
============== ============== ==============

SEGMENT PROFIT
Owned operations............................... $12,999,000 $10,207,000 $8,548,000

Management contracts........................... 2,550,000 3,383,000 1,527,000
-------------- -------------- --------------
15,549,000 13,590,000 10,075,000

F-18

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

YEAR ENDED
DECEMBER 31,
------------------------------------------------
2002 2001 2000
-------------- -------------- --------------

Reconciling items:
Corporate expenses............................. (6,270,000) (5,917,000) (3,564,000)
Interest and other financing charges........... (2,475,000) (3,299,000) (2,706,000)
Losses related to asset sales and closed
businesses..................................... -- (130,000) (705,000)
-------------- -------------- --------------
Total consolidated income before income taxes..... $6,804,000 $4,244,000 $3,100,000
============== ============== ==============

SEGMENT CAPITAL EXPENDITURES
Owned operations............................... $2,182,000 $2,053,000 $2,147,000

Management contracts........................... 227,000 246,000 330,000
-------------- -------------- --------------
2,409,000 2,299,000 2,477,000

Reconciling items
Corporate assets............................... 63,000 168,000 26,000
-------------- -------------- --------------
Total consolidated capital expenditures........... $2,472,000 $2,467,000 $2,503,000
============== ============== ==============

AS OF DECEMBER 31,
--------------------------------
2002 2001
-------------- --------------

SEGMENT ASSETS
Owned operations............................... $59,267,000 $57,893,000
Management contracts........................... 5,140,000 6,729,000
-------------- --------------
Total segment assets.............................. 64,407,000 64,622,000

RECONCILING ITEMS
Corporate assets............................... 8,890,000 4,389,000
-------------- --------------
Total consolidated assets......................... $73,297,000 $69,011,000
============== ==============

GEOGRAPHIC AREA DATA

The Company's revenues are derived solely from within the United States
and the Commonwealth of Puerto Rico.

MAJOR CUSTOMERS

Revenues from one payor source (Florida Department of Juvenile Justice)
represented approximately $27,355,000, $22,433,000 and $14,452,000 of
consolidated revenues for the years ended December 31, 2002, 2001 and 2000,
respectively.

9. STOCKHOLDERS' EQUITY

The Certificate of Incorporation of the Company, as amended, authorizes
the issuance of 30,000,000 shares of Common Stock, $.01 par value, 800,000
shares of Class A Preferred Stock, $1.00 par value, and 2,000,000 shares of
Class B Preferred Stock, $1.00 par value, of which 333,333 shares have been
designated as Class B Preferred Stock, Series 1987, $1.00 par value, 152,321
shares have been designated as Series C Preferred Stock, $1.00 par value,
100,000 shares have been designated as Series 1996 Preferred Stock, $1.00 par
value, 100,000 shares have been designated as Series 1997 Preferred Stock, $1.00
par value and 4,000 shares have been designated as Series 1997-A Preferred
Stock.

The Company's Board of Directors has adopted a Stockholder Rights Plan,
under which the Company distributed a dividend of one common share purchase
right for each outstanding share of the

F-19

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Company's Common Stock (calculated as if all outstanding shares of Series C
Preferred Stock were converted into shares of Common Stock). Each right becomes
exercisable upon the occurrence of certain events for a number of shares of the
Company's Common Stock having a market price totaling $72 (subject to certain
anti-dilution adjustments which may occur in the future). The rights currently
are not exercisable and will be exercisable only if a new person acquires 20% or
more (30% or more in the case of certain persons, including investment companies
and investment advisors) of the Company's Common Stock or announces a tender
offer resulting in ownership of 20% or more of the Company's Common Stock. The
rights, which expire on August 14, 2005, are redeemable in whole or in part at
the Company's option at any time before a 20% or greater position has been
acquired, for a price of $.03 per right.

10. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share:

YEAR ENDED
DECEMBER 31,
---------------------------------------------
2002 2001 2000
-------------- -------------- --------------

Net income, as reported.................. $12,668,000 $3,466,000 $2,852,000
============== ============== ==============

Denominator:
Denominator for basic earnings per share -
weighted-average shares............... 9,278,000 9,046,000 8,913,000

Effect of dilutive securities:
Employee stock options and warrants... 2,127,000 1,294,000 41,000
-------------- -------------- --------------
Denominator for diluted earnings per
share -
Adjusted weighted-average shares and
Assumed conversions................ 11,405,000 10,340,000 8,954,000
============== ============== ==============

Basic earnings per share.................... $1.37 $.38 $.32
============== ============== ==============

Diluted earnings per share.................. $1.11 $.34 $.32
============== ============== ==============

For the years ended December 31, 2002, 2001 and 2000, respectively,
552,819, 785,449 and 1,698,938 options and warrants were excluded from the above
computation because their effect would have been antidilutive.

11. OPTIONS AND WARRANTS

The Company's Stock Option Plans provide for options to various key
employees, non-employee directors, consultants and other individuals providing
services to the Company, to purchase shares of Common Stock at no less than the
fair market value of the stock on the date of grant. Options granted become
exercisable in varying increments including (a) 100% one year after the date of
grant, (b) 50% each year beginning one year after the date of grant (c) 33% each
year beginning on the date of grant, (d) 33% each year beginning one year from
the date of grant and (e) 25% each year beginning one year from the date of
grant. Options issued to employees and directors are subject to anti-dilution
adjustments and generally expire the earlier of 10 years after the date of grant
or 60 days after the employee's termination date or the director's resignation.
The weighted average remaining contractual life of all outstanding options at
December 31, 2002 is approximately 8.0 years.

During the year ended December 31, 2002, the Company did not grant any
options under the various Company stock option plans.

F-20

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

On April 4, 2001, the Board of Directors: (i) amended the 1999 Stock
Option Plan (the "1999 Amended Plan") and reduced the number of Common Stock
shares available for issuance to 250,000 and (ii) adopted the Ramsay Youth
Services, Inc. 2001 Stock Option Plan (the "2001 Plan"). Under the 2001 Plan,
1,500,000 shares of Common Stock are available for issuance of awards. Shares
distributed under the 1999 Amended Plan and the 2001 Plan may be either newly
issued shares or treasury shares. During the year ended December 31, 2001, the
Company granted 2,375,000 options under the various Company stock option plans.

During the year ended December 31, 2000, the Company granted 50,000
options under the Ramsay Managed Care, Inc. ("RMCI") Plan.

On August 16, 1999, the Board of Directors adopted the Ramsay Youth
Services, Inc. 1999 Stock Option Plan. Under the 1999 Stock Option Plan,
1,250,000 shares of Common Stock were available for issuance of awards. During
the year ended December 31, 1999, the Company granted 1,250,000 options under
the 1999 Stock Option Plan and 339,000 options under various prior year plans.

On October 14, 1997, the Board of Directors adopted the Ramsay Youth
Services, Inc. 1997 Long Term Incentive Plan (the "1997 Plan"). Under the 1997
Plan, 166,667 shares of Common Stock are available for issuance of awards.
Shares distributed under the 1997 Plan may be either newly issued shares or
treasury shares. Awards granted under the plan may be in the form of stock
appreciation rights, restricted stock, performance awards and other stock-based
awards. During the year ended December 31, 1999, the Company granted 91,500
options under the 1997 Plan.

In connection with a repricing opportunity authorized by the Company's
Board of Directors on November 10, 1995, approximately 500,000 options (of which
11,886 are still outstanding at December 31, 2002) were voluntarily repriced by
the option holders. Under this repricing opportunity, the exercise prices of the
holders' outstanding options were reduced to $7.50 per share, the closing price
for the Common Stock on the NASDAQ National Market System on November 10, 1995.
The Company granted 304,087 options during fiscal year ended June 30, 1997
(including former RMCI options which became options to purchase an aggregate of
104,804 shares of the Company's Common Stock on the date of the merger). These
options, along with the options repriced on November 10, 1995, are not
exercisable until the closing price of the Common Stock, as quoted on the NASDAQ
SmallCap Market System, equals or exceeds $21.00 per share for at least 15
trading days, which need not be consecutive. As of December 31, 2002, none of
these options are exercisable.

On September 10, 1996, the Company entered into an Exchange Agreement
whereby Mr. Paul J. Ramsay exchanged 158,690 options with an exercise price of
$7.50 per share (pursuant to the repricing opportunity discussed above), for
warrants to purchase an aggregate of 166,667 shares of Common Stock at $7.50 per
share. The warrants, which expire in June 2003, are not exercisable until the
closing price of the Common Stock, as quoted on the NASDAQ SmallCap Market
System, equals or exceeds $21.00 per share for at least 15 trading days, which
need not be consecutive, subsequent to September 10, 1996. Most of the options
exchanged were originally granted under the Company's 1991 Stock Option Plan.

The Company has additional warrants outstanding to purchase an
aggregate of 71,000 shares of the Company's Common Stock (44,333 of which are
owned by corporate affiliates of Mr. Ramsay). These warrants were issued in
exchange for warrants to purchase common stock of RMCI, and became warrants of
the Company as part of the merger with RMCI.

As part of the Company's senior and subordinated notes (which were
refinanced on September 30, 1997), the Company issued warrants to Aetna Life
Insurance Company and Monumental Life Insurance Company. These warrants entitled
their holders to purchase an aggregate of 67,338 shares of the Company's Common
Stock at $13.32 per share. These warrants expired on March 31, 2000.

F-21

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

In connection with the January 25, 2000 and June 19, 2000 subordinated
note and warrant purchase agreements, the Company issued warrants to two
unrelated financial institutions to each purchase up to 475,000 shares of the
Company's Common Stock at $1.50 per share. These issuances are exercisable on or
before January 25, 2010 and June 19, 2010, respectively, and contain
anti-dilution provisions.

On August 27, 2001, a financial institution exercised its warrant
purchase agreement. The institution converted 475,000 warrants into 294,597
shares of common stock utilizing a cashless exercise provision as outlined in
the agreement.

The Company has frozen its 1990 and 1991 Stock Option Plans, and
authorized 132,319, 166,667, 166,667, 166,667, 250,000 and 1,500,000 shares
under its 1993, 1995, 1996, 1997, 1999 Amended and 2001 Stock Option Plans,
respectively. At December 31, 2002, 172,862 shares were available for issuance
under these Plans.

Summarized information regarding the Company's Stock Option Plans is as
follows:

Options exercisable based solely on employees rendering additional
service:

WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
--------------- ---------------

Options outstanding at January 1, 2000 2,154,319 $3.87
Granted (non employee) 50,000 $1.56
Canceled (1,056,184) $3.95
---------------

Options outstanding at December 31, 2000 1,148,135 $3.63
Granted 2,375,000 $1.04
Canceled (825,831) $3.67
---------------

Options outstanding at December 31, 2001 2,697,304 $1.34
Granted 0
Exercised (29,249) $2.58
Canceled (73,140) $4.62
---------------

Options outstanding at December 31, 2002 2,594,915
===============

Exercisable at December 31, 2002 960,290 $1.47
===============

Exercisable at December 31, 2001 191,692 $4.30
===============

Exercisable at December 31, 2000 432,024 $5.24
===============

F-22

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Options not exercisable until the closing price for the Common Stock as
quoted on the NASDAQ SmallCap Market System equals or exceeds $21.00 per share
for at least 15 trading days:

WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
--------------- ---------------

Options outstanding at January 1, 2000 275,688 $8.33
Canceled (162,666) $9.13
---------------

Options outstanding at December 31, 2000 113,022 $7.70
Canceled (87,646) $7.62
---------------

Options outstanding at December 31, 2001 25,376 $7.93
Canceled (6,490) $7.50
---------------

Options outstanding at December 31, 2002 18,886 $8.10
===============

Shares of common stock reserved for future issuance at December 31,
2002 are as follows:

Options..................................... 2,613,801
Warrants.................................... 962,769
------------
3,576,570
============

The following table summarizes information about options outstanding at
December 31, 2002.

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------- -------------------------------
WEIGHTED
AVERAGE REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL LIFE AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------ -------------- -------------------- ---------------- ------------- ----------------

$0.85 2,000,000 8.25 $0.85 668,335 $ .85
$1.56 - $2.69 548,751 7.97 2.16 245,791 2.23
$4.69 24,999 .06 4.69 24,999 4.69
$7.50 11,886 1.32 7.50 -- --
$8.25 - $9.38 28,165 4.26 8.46 21,165 8.25
- ------------------ -------------- -------------------- ---------------- ------------- ----------------
$0.85 - $9.38 2,613,801 8.04 $1.27 960,290 $1.47
================== ============== ==================== ================ ============= ================

Pro forma information regarding net income and earnings per share has
been determined as if the Company had accounted for its employee stock options
under the fair value method of SFAS No. 123. The Company did not award any
employee stock options during the year ended December 31, 2002 and during the
year ended December 31, 2000. The fair value of these options was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for grants in the year ended December 31, 2001.

o expected volatility rates of 119% for the year ended December 31,
2001

o risk-free interest rates of 5% for the year ended December 31, 2001

o expected lives of ten years for all periods

o a dividend yield of zero for all periods

F-23

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. (See proforma
disclosure in Note 1)

In addition to the Employee Stock Option plans, the Company also has an
Employee Stock Purchase Plan available to employees.

The Employee Stock Purchase Plan (the "ESPP") allows all eligible
employees to purchase shares of common stock on semi-annual offering dates at a
price that is the lessor of 85% if the fair market value of the shares on the
first day or the last day of the semi-annual period. Employee contributions were
$39,000 for 2002, $44,000 for 2001 and $79,000 for 2000. Through the ESPP, the
Company issued to employees 16,983 shares in 2002, 29,672 shares in 2001 and
34,989 shares in 2000. As of December 31, 2002, 18,356 shares were available for
future issuance.

F-24

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

12. INCOME TAXES

The following table summarizes tax effects comprising the Company's net
deferred tax assets and liabilities:

DECEMBER 31,
------------------------------
2002 2001
-------------- --------------

Deferred tax liabilities:
Book basis of fixed assets over tax basis........ $ -- $57,000
Book basis of intangible assets over tax basis... 41,000 --
Prepaid maintenance.............................. 325,000 396,000
Other............................................ 248,000
-------------- --------------
Total deferred tax liabilities............. 366,000 701,000
Deferred tax assets:
Allowance for doubtful accounts.................. 537,000 735,000
General and professional liability insurance..... 833,000 1,806,000
Accrued employee benefits........................ 726,000 816,000
Capital loss carryovers.......................... 445,000 445,000
Tax basis of fixed assets over book basis........ 116,000 --
Other accrued liabilities........................ 1,182,000 2,568,000
Other............................................ -- 2,000
Net operating loss carryovers.................... 11,014,000 15,899,000
Alternative minimum tax credit carryovers........ 1,150,000 1,150,000
-------------- --------------
Total deferred tax assets.................. 16,003,000 23,421,000
Valuation allowance for deferred tax assets......... (9,230,000) (22,720,000)
-------------- --------------
Deferred tax assets, net of valuation
allowance.................................. 6,773,000 701,000
-------------- --------------
Net deferred tax assets.................... $6,407,000 $ --
============== ==============

The provision for income taxes consists of the following:

YEAR ENDED
DECEMBER 31,
---------------------------------------------
2002 2001 2000
-------------- -------------- --------------

Current income taxes:
Federal.................... $67,000 $185,000 $ --
State...................... 476,000 593,000 248,000
-------------- -------------- --------------
Total 543,000 778,000 248,000
-------------- -------------- --------------
Deferred income taxes:
Federal and State......... (6,407,000) -- --
-------------- -------------- --------------
Total ($5,864,000) $778,000 $248,000
============== ============== ==============

F-25

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

A reconciliation from the U.S. statutory federal income tax rate to the
effective income tax rate follows:

YEAR ENDED
DECEMBER 31,
------------------------------------------
2002 2001 2000
------------- ------------ -------------

U.S. Federal statutory rate.................. 34.0% 34.0% 34.0%
(Decrease) in valuation allowance............ (56.1) (26.5) (20.1)
Non-deductible intangible assets............. -- 4.9 --
State income taxes, net of federal benefit... 4.6 9.2 5.3
Benefit of net operating loss recognized..... (71.1) (6.8) (14.2)

Other........................................ 2.4 3.5 3.0
------------- ------------ -------------
Effective income tax rate.................... (86.2%) 18.3% 8.0%
============= ============ =============

Current accounting standards require that deferred income taxes reflect
the tax consequences on future years of differences between the tax bases of
assets and liabilities and their carrying values for financial reporting
purposes. In addition, future tax benefits, such as net operating loss ("NOL")
carryforwards, are required to be recognized to the extent that realization of
such benefits is more likely than not. A valuation allowance is established for
those benefits that do not meet the more likely than not criteria. A valuation
allowance of $9,230,000 and $22,720,000 has been established for the net
deferred tax assets at December 31, 2002 and 2001, respectively. During the tax
year ended December 31, 2002, the Company reversed a portion of the valuation
allowance because, based on a current review of available objective and
verifiable evidence, it is management's judgment that a portion of the tax
benefits associated with the Company's deferred tax assets will more likely than
not be realized. Such evidence includes, inter alia, updated expectations about
sufficient future years' taxable income which reflect the continuing improvement
in the Company's operating results.

At December 31, 2002, the Company had federal net operating loss
carryovers of approximately $28,985,000, and alternative minimum tax credit
carryovers of approximately $1,150,000 available to reduce future federal income
taxes, subject to certain annual limitations. The net operating loss carryovers
expire from 2010 to 2018.

13. REIMBURSEMENT FROM THIRD-PARTY CONTRACTUAL AGENCIES

The Company records amounts due to or from third-party contractual
agencies based on its best estimates of amounts to be ultimately received or
paid under cost reports filed with the appropriate intermediaries. Final
determination of amounts earned under contractual reimbursement programs is
subject to review and audit by these intermediaries. Differences between amounts
recorded as estimated settlements and the audited amounts are reflected as
adjustments to provider based revenues in the period the final determination is
made.

Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations. Management believes that
adequate provision has been made for any adjustments that may result from future
intermediary reviews and audits and is not aware of any claims, disputes or
unsettled matters concerning third-party reimbursement that would have a
material adverse effect on the Company's financial statements.

The Company derived approximately 83%, 87% and 85% of its revenues from
services provided to individuals covered by various federal and state
governmental programs in the years ended December 31, 2002, 2001 and 2000,
respectively.

F-26

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

14. SAVINGS PLAN

The Company has a 401(k) tax deferred savings plan, administered by an
independent trustee, covering substantially all employees over age twenty-one
meeting a one-year minimum service requirement. The plan was adopted for the
purpose of supplementing employees' retirement, death and disability benefits.
The Company may, at its option, contribute to the plan through an Employer
Matching Account, but is under no obligation to do so. An employee becomes
vested in his Employer Matching Account over a four-year period.

The Company did not contribute to the plan during the years ended
December 31, 2002, 2001 and 2000.

15. COMMITMENTS AND CONTINGENCIES

The Company is party to certain claims, suits and complaints, including
those matters described below, whether arising from the acts or omissions of its
employees, providers or others, which arise in the ordinary course of business.
The Company has established reserves at December 31, 2002 and 2001 for the
estimated amounts, which might be recovered from the Company as a result of all
outstanding legal proceedings. In the opinion of management, the ultimate
resolution of these pending legal proceedings is not expected to have a material
adverse effect on the Company's financial position, results of operations or
liquidity.

Management has evaluated the probability surrounding a litigation claim
sought by the purchaser of one of the Company's former subsidiaries as being
remote. Accordingly, in December 2000, the Company reversed its $2,500,000
litigation reserve.

16. VALUATION AND QUALIFYING ACCOUNTS

Activity in the Company's Valuation and Qualifying Accounts consists of
the following:

DECEMBER 31,
--------------------------------------------
2002 2001 2000
------------- ------------- -------------

Allowance for Doubtful Accounts:

Balance at beginning of period...................... $1,934,000 $2,807,000 $2,615,000
Provision for doubtful accounts...................... 1,867,000 2,911,000 2,817,000
Write-offs of uncollectable accounts receivable...... (1,474,000) (3,784,000) (2,625,000)
------------- ------------- -------------
Balance at end of period............................. $2,327,000 $1,934,000 $2,807,000
============= ============= =============

Tax Valuation Allowance for Deferred Tax Assets:

Balance at beginning of period....................... $22,720,000 $24,151,000 $25,214,000
Deductions........................................... (13,490,000) (1,431,000) (1,063,000)
------------- ------------- -------------
Balance at end of period............................. $9,230,000 $22,720,000 $24,151,000
============= ============= =============

F-27

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

17. SUPPLEMENTAL CASH FLOW INFORMATION

The Company's non-cash investing and financing activities were as
follows:

YEAR ENDED
DECEMBER 31,
-------------------------------------------
2002 2001 2000
------------- ------------- -------------

Cancellation of consulting agreement......... $ -- $ -- $249,000

Issuance of warrants in connection with
subordinated debt......................... -- -- 861

Financed acquisition of property and equipment 31,000 86,000 --

Note received in connection with sale of
property and equipment.................... -- 1,670,000 252,000

18. QUARTERLY RESULTS OF OPERATIONS AND OTHER SUPPLEMENTAL INFORMATION
(UNAUDITED)

Following is a summary of the Company's quarterly results of operations
for the years ended December 31, 2002 and 2001.

QUARTER ENDED
---------------------------------------------------------------
2002 (b) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ----------------------------------------- -------------- --------------- --------------- --------------

Net revenues............................. $35,831,000 $36,709,000 $36,323,000 $36,293,000
Income from operations................... 2,473,000 2,675,000 2,601,000 1,530,000
Income before income taxes............... 1,783,000 2,070,000 2,025,000 926,000
Net income............................... 1,569,000 9,262,000 1,262,000 575,000

INCOME PER COMMON SHARE (a)
Basic.................................... $0.17 $1.00 $0.14 $0.06
Diluted.................................. $0.14 $0.81 $0.11 $0.05

2001 (c)
- -----------------------------------------

Net revenues............................. $31,789,000 $33,840,000 $33,638,000 $35,149,000
Income from operations................... 1,545,000 1,787,000 1,995,000 2,346,000
Income before income taxes............... 560,000 921,000 1,249,000 1,514,000
Net income............................... 384,000 796,000 1,078,000 1,208,000

INCOME PER COMMON SHARE (a)
Basic.................................... $.04 $.09 $.12 $.13
Diluted.................................. $.04 $.08 $.10 $.11

(a) The quarterly earnings per share amounts may not equal the annual amounts
due to changes in the average common and dilutive common equivalent shares
outstanding during the year.

(b) During the quarter ended March 31, 2002, the Company recorded an asset
impairment charge of $0.1 million relating to the difference between the
carrying value of one of its closed therapeutic living facilities and the
expected net proceeds from the sale of the facility.

F-28

RAMSAY YOUTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

During the quarter ended June 30, 2002, the Company recorded a $7.4 million
reversal of the valuation allowance placed on its deferred tax assets
relating to temporary differences that will result in deductible amounts in
future years and net operating loss carryforwards.

During the quarter ended December 31, 2002, the Company incurred
approximately $650,000 in losses in connection with the start-up of the new
McIntosh contract and Macon facility.

(c) During the quarter ended December 31, 2001, the Company recorded an asset
impairment charge of $0.1 million relating to the difference between the
carrying value of one of its closed therapeutic living facilities and the
expected net proceeds from the sale of the facility.

During the quarter ended December 31, 2001, the Company recorded a loss of
$0.1 million relating to a discount on the prepayment of a note receivable
owed to the Company.

F-29

INDEX OF EXHIBITS

Page
Number
-----

2.3 Agreement of sale and purchase dated April 12, 1995 by and between RHCI
San Antonio, Inc. and Capstone Capital Corporation (incorporated by
reference to Exhibit 2.8 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1995). Pursuant to Reg. S-K, Item
601(b)(2), the Company agrees to furnish a copy of the Schedules and
Exhibits to such Agreement to the Commission upon request.............. --

2.4 Agreement and Plan of Merger dated as of October 1, 1996 among Ramsay
Managed Care, Inc., the Company and RHCI Acquisition Corp.
(incorporated by reference to Exhibit 2 to the Company's Current Report
on Form 8-K dated October 2, 1996). Pursuant to Reg. S-K, Item
601(b)(2), the Company agrees to furnish a copy of the Disclosure
Schedules to such Agreement to the Commission upon request............. --

2.5 Agreement and Plan of Merger dated as of July 1, 1997 among Summa
Healthcare Group, Inc., the Company and Ramsay Acquisition Corporation
(incorporated by reference to Exhibit 2.5 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1997).................. --

2.6 Agreement of Purchase and Sale dated as of March 18, 1998 by and
between Ramsay Louisiana, Inc. and Health-One Properties, LLC
(incorporated by reference to Exhibit 2.6 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998). Pursuant to
Reg. S-K, Item 601(b)(2), the Company agrees to furnish a copy of the
Disclosure Schedules and attachments to such Agreement to the
Commission upon request................................................ --

2.7 Stock Purchase Agreement dated as of May 1, 1998 by and among the
Company, Ramsay Managed Care, Inc. and Horizon Health Corporation
(incorporated by reference to Exhibit 2.7 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998). Pursuant to
Reg. S-K, Item 601(b)(2), the Company agrees to furnish a copy of the
Disclosure Schedules and attachments to such Agreement to the
Commission upon request................................................ --

2.8 Asset Purchase Agreement dated as of May 15, 1998 by and among
Greenbrier Hospital, Inc., the Company and Provider Options Holdings,
L.L.C (incorporated by reference to Exhibit 2.8 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).
Pursuant to Reg. S- K, Item 601(b)(2), the Company agrees to furnish a
copy of the Disclosure Schedules and attachments to such Agreement to
the Commission upon request............................................ --

2.9 Purchase Agreement dated as of June 24, 1998 among Charter Behavioral
Health Systems, LLC, the Company, Carolina Treatment Center, Inc.,
Houma Psychiatric Hospital, Inc., Mesa Psychiatric Hospital, Inc., RHCI
San Antonio, Inc., The Haven Hospital, Inc., Transitional Care Ventures
(Arizona), Inc., Transitional Care Ventures (North Texas), Inc. and
Transitional Care Ventures (Texas), Inc. (incorporated by reference to
Exhibit 2.9 to the Company's Current Report on Form 8-K dated October
9, 1998). Pursuant to Reg. S-K, Item 601(b)(2), the Company agrees to
furnish a copy of the Disclosure Schedules and attachments to such
Agreement to the Commission upon request............................... --

2.10 Purchase and Sale Contract dated as of June 25, 1998 among Charter
Behavioral Health Systems, LLC, Carolina Treatment Center, Inc. and
Mesa Psychiatric Hospital, Inc. (incorporated by reference to Exhibit

E-1

2.10 to the Company's Current Report on Form 8-K dated October 9,
1998). Pursuant to Reg. S-K, Item 601(b)(2), the Company agrees to
furnish a copy of the Disclosure Schedules and attachments to such
Agreement to the Commission upon request............................... --

2.11 Purchase and Sale Contract dated as of June 26, 1998 among Crescent
Real Estate Equities Limited Partnership and The Haven Hospital, Inc.
(incorporated by reference to Exhibit 2.11 to the Company's Current
Report on Form 8-K dated October 9, 1998). Pursuant to Reg. S-K, Item
601(b)(2), the Company agrees to furnish a copy of the Disclosure
Schedules and attachments to such Agreement to the Commission upon
request................................................................ --

2.12 Asset Purchase Agreement dated as of July 2, 1998 among West Virginia
University Hospitals, Inc., Psychiatric Institute of West Virginia,
Inc. and the Company (incorporated by reference to Exhibit 2.12 to the
Company's Current Report on Form 8-K dated October 9, 1998). Pursuant
to Reg. S-K, Item 601(b)(2), the Company agrees to furnish a copy of
the Disclosure Schedules and attachments to such Agreement to the
Commission upon request................................................ --

2.13 Amendment No. 1 dated as of September 28, 1998 Purchase Agreement dated
as of June 24, 1998 among Charter Behavioral Health Systems, LLC, the
Company, Carolina Treatment Center, Inc., Houma Psychiatric Hospital,
Inc., Mesa Psychiatric Hospital, Inc., RHCI San Antonio, Inc., The
Haven Hospital, Inc., Transitional Care Ventures (Arizona), Inc.,
Transitional Care Ventures (North Texas), Inc. and Transitional Care
Ventures (Texas), Inc. (incorporated by reference to Exhibit 2.13 to
the Company's Current Report on Form 8-K dated October 9, 1998)........ --

2.14 Agreement of Sale and Purchase dated as of September 28, 1998 by and
among Havenwyck Hospital, Inc., Michigan Psychiatric Services, Inc. and
Capstone Capital Corporation (incorporated by reference to Exhibit 2.14
to the Company's Current Report on Form 8-K dated October 9, 1998).
Pursuant to Reg. S-K, Item 601(b)(2), the Company agrees to furnish a
copy of the Disclosure Schedules and attachments to such Agreement to
the Commission upon request............................................ --

2.15 Stock Purchase Agreement dated as of November 19, 1998 The Rader Group,
Incorporated, a Florida corporation, The Rader Group, Incorporated, a
Colorado corporation, Bill T. Rader, Ph.D. and Ramsay Educational
Services, Inc. (incorporated by reference to Exhibit 2.15 to the
Company's Transition Report on Form 10-K for the six months ended
December 31, 1998)..................................................... --

2.16 Stock Purchase Agreement dated May 14, 1999 between the Company, Ramsay
Hospital Corporation of Louisiana, Inc. and Paul Ramsay Holdings Pty.
Limited (incorporated by reference to Exhibit 2.16 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)..... --

2.17 Asset Purchase Agreement dated as of May 19, 2000 by and among the
Company, Charter Behavioral Health Systems, LLC, the Charter
Subsidiaries, Charter Advantage, LLC and Charter Managed Care Services,
LLC (incorporated by referenced to Exhibit 2.17 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000)..... --

2.18 First Amendment to Asset Purchase Agreement dated as of June 28, 2000
by and among the Company, Charter Behavioral Health Systems, LLC,
Charter Behavioral Health System of Manatee Palms, LP, Charter
Behavioral Health System at Manatee Adolescent Treatment Services, LP,
Charter Advantage, LLC and Charter Managed Care Services, LLC
(incorporated by referenced to Exhibit 2.18 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000)............... --

E-2

2.19 Second Amendment to Asset Purchase Agreement dated July 18, 2000 by and
among the Company, Charter Behavioral Health Systems, LLC, Charter
Behavioral Health System of Manatee Palms, LP, Charter Behavioral
Health System at Manatee Adolescent Treatment Services, LP, Charter
Advantage, LLC and Charter Managed Care Services, LLC (incorporated by
referenced to Exhibit 2.19 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000).............................. --

2.20 Real Estate Purchase Agreement dated June 22, 2000 by and among the
Company and Crescent Real Estate Funding VII, L.P. (incorporated by
referenced to Exhibit 2.20 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000).............................. --

3.1 Restated Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the year ended June 30, 1990).................. --

3.2 Certificate of Amendment of Restated Certificate of Incorporation of
the Company filed on April 17, 1991 (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-2,
Registration No. 33-40762)............................................. --

3.3 Certificate of Correction to Certificate of Amendment of Restated
Certificate of Incorporation of the Company filed on April 18, 1991
(incorporated by reference to Exhibit 3.3 to the Company's Registration
Statement on Form S-2, Registration No. 33-40762)...................... --

3.4 By-Laws of the Company, as amended to date (incorporated by reference
to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the year
ended June 30, 1994)................................................... --

4.13 Amended and Restated Subscription Agreement dated October 26, 1998
between the Company and Paul Ramsay Holdings Pty. Limited ("Holdings
Pty.") (incorporated by reference to Exhibit 4.13 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998).................................................................. --

4.14 Amended and Restated Subscription Agreement dated October 26, 1998
between the Company and Luis E. Lamela (incorporated by reference to
Exhibit 4.14 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998)...................................... --

4.15 Subscription Agreement dated October 26, 1998 between the Company and
Haythe & Curley (incorporated by reference to Exhibit 4.15 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998).............................................................. --

4.16 Subscription Agreement dated as of October 26, 1998 between the Company
and Dauphin Capital Partners I, LP (incorporated by reference to
Exhibit 4.16 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998)...................................... --

4.17 Subscription Agreement dated as of October 26, 1998 between the Company
and Moises Hernandez, M.D. (incorporated by reference to Exhibit 4.17
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).................................................... --

4.18 Subscription Agreement dated as of October 26, 1998 between the Company
and Tom Hodapp (incorporated by reference to Exhibit 4.18 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998).............................................................. --

4.19 Subscription Agreement dated as of October 26, 1998 between the Company
and Aaron Beam (incorporated by reference to Exhibit 4.19 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998).............................................................. --

E-3

4.20 Subscription Agreement dated as of October 26, 1998 between the Company
and Sanford R. Robertson (incorporated by reference to Exhibit 4.20 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).................................................... --

4.21 Revolving Credit Note dated October 30, 1998 by the Company in the
aggregate principal amount of $8,000,000 payable to the order of Fleet
Capital Corporation (incorporated by reference to Exhibit 4.21 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998).............................................................. --

4.22 Secured Promissory Note (Term Note) by the Company in the aggregate
principal amount of $8,000,000 payable to the order of Fleet Capital
Corporation (incorporated by reference to Exhibit 4.22 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998).................................................................. --

4.23 Secured Promissory Note (Acquisition Note) by the Company in the
aggregate principal amount of $6,000,000 payable to the order of Fleet
Capital Corporation (incorporated by reference to Exhibit 4.23 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998).............................................................. --

10.64 Ramsay Health Care, Inc. 1990 Stock Option Plan, as amended to date
(incorporated by reference Exhibit 4.3 to the Company's Registration
Statement on Form S-8 filed on March 6, 1991).......................... --

10.66 Ramsay Health Care, Inc. Deferred Compensation and Retirement Plan
(incorporated by reference to Exhibit 10.79 to the Company's
Registration Statement on Form S-2, Registration No. 33-40762)......... --

10.68 Indemnity Agreement dated as of June 1991 between the Company and
Ramsay Holdings HSA Limited (incorporated by reference to Exhibit 10.84
to the Company's Registration Statement on Form S-2, Registration No.
33-40762).............................................................. --

10.70 Ramsay Health Care, Inc. 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.91 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1992)...................................... --

10.76 Ramsay Health Care, Inc. 1993 Stock Option Plan (incorporated by
reference to Exhibit 10.83 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1993).......................... --

10.77 Ramsay Health Care, Inc. 1993 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.84 to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1993)........... --

10.80 Rights Agreement dated as of August 1, 1995 between the Company and
First Union National Bank of North Carolina, as Rights Agent, which
includes the form of Right Certificate as Exhibit A and the Summary
Rights to Purchase Common Shares as Exhibit B (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on Form 8-K
dated August 1, 1995).................................................. --

10.81 Amendment to Rights Agreement, dated October 3, 1995 between the
Company and First Union National Bank of North Carolina, as Rights
Agent (incorporated by reference to Exhibit 10.102 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1995) --

10.82 Amendment No. 2 to Rights Agreement, dated as of November 1, 1996
between the Company and First Union National Bank of North Carolina, as
Rights Agent (incorporated by reference to Exhibit 10.101 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996).............................................................. --

E-4

10.85 Lease Agreement dated April 12, 1995 between Capstone Capital of San
Antonio, LTD, d/b/a Cahaba of San Antonio, LTD. and RHCI San Antonio,
Inc. (incorporated by reference to Exhibit 10.89 to the Company's
Annual Report on Form 10-K for the year ended June 30, 1995)........... --

10.90 Tax Sharing Agreement dated as of October 25, 1994 between the Company
and RMCI (incorporated by reference to Exhibit 10.5 to RMCI's
Registration Statement on Form S-1 (Registration No. 33-78034) filed
with the Commission on April 24, 1995)................................. --

10.95 Amended and Restated Stock Purchase Agreement dated October 12, 1995 by
and among Paul Ramsay Holdings Pty. Limited, Ramsay Health Care, Inc.
and, solely for the purpose of Section I, III and VI of the agreement,
Ramsay Health Care Pty. Limited (incorporated by reference to Exhibit
10.101 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995).............................................. --

10.96 Amendment to Rights Agreement, date October 3, 1995 between Ramsay
Health Care, Inc. and First Union National Bank of North Carolina, as
Rights Agent (incorporated by reference to Exhibit 10.102 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1995).............................................................. --

10.97 Ramsay Health Care, Inc. 1995 Long Term Incentive Plan (incorporated by
reference to Exhibit 10.103 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1995).......................... --

10.98 Stock Purchase Agreement dated as of August 13, 1996 by and among Paul
Ramsay Holdings Pty. Limited, the Company and, solely for purposes of
Sections I, III and IV thereof, Ramsay Health Care Pty. Limited
(incorporated by reference to Exhibit 10.94 to the Company's Annual
Report on Form 10-K for the year ended June30, 1996)................... --

10.100 Exchange Agreement dated September 10, 1996, by and among the Company,
Paul Ramsay Hospitals Pty. Limited and Paul J. Ramsay, including a
related Warrant Certificate dated September 10, 1996 issued to Ramsay
Hospitals Pty. Limited (incorporated by reference to Exhibit 10.96 to
the Company's Annual Report on Form 10-K for the year ended June 30,
1996).................................................................. --

10.103 Letter Agreement dated as of September 10, 1996 by and among the
Company, Ramsay Health Care Pty. Limited Paul Ramsay Holdings Pty.
Limited, including a related Warrant Certificate dated September 10,
1996 issued to Paul Ramsay Holdings Pty. Limited (incorporated by
reference to Exhibit 10.98 to the Company's Annual Report on Form 10-K
for the year ended June 30, 1996)...................................... --

10.104 Employment Agreement dated August 12, 1996 by and between the Company
and Remberto Cibran (incorporated by reference to Exhibit 10.99 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996).............................................................. --

10.110 Employment Agreement dated as of October 1, 1997 by and between the
Company and Luis E. Lamela (incorporated by reference to Exhibit 10.110
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997).................................................... --

10.116 Lease Agreement dated as of September 28, 1998 between Capstone Capital
Corporation and Havenwyck Hospital, Inc. (incorporated by reference to
Exhibit 10.116 to the Company's Current Report on Form 8-K dated
October 9, 1998)....................................................... --

E-5

10.117 Guaranty of Obligations Pursuant to Lease Agreement described in
Exhibit 10.116 above dated as of September 28, 1998 by the Company in
favor of Capstone Capital Corporation (incorporated by reference to
Exhibit 10.117 to the Company's Current Report on Form 8-K dated
October 9, 1998)....................................................... --

10.126 Amendment No. 3 to Rights Agreement dated as of October 15, 1998
between the Company and First Union National Bank of North Carolina, as
Rights Agent (incorporated by reference to Exhibit 10.126 to the
Company's Annual Report on Form 10-K/A for the year ended June 30,
1998).................................................................. --

10.127 Loan and Security Agreement dated as of October 30, 1998 by and among
the Company, certain subsidiaries of the Company on the signature pages
thereto, Fleet Capital Corporation, as a Lender and as Agent, and the
Lenders from time to time party thereto (incorporated by reference to
Exhibit 10.127 to the Company's Annual Report on Form 10-K/A for the
year ended June 30, 1998).............................................. --

10.128 Subordination Agreement dated October 30, 1998 by and among Holdings
Pty., Paul Ramsay Hospitals Pty. Limited, Ramsay Holdings HSA Limited
and Fleet Capital Corporation, as Agent, and consented to by the
Company and certain of its subsidiaries on the signature pages thereto
(incorporated by reference to Exhibit 10.128 to the Company's Annual
Report on Form 10-K/A for the year ended June 30, 1998)................ --

10.129 Junior Subordinated Loan and Exchange Agreement dated as of October 30,
1998 by and between Holdings Pty. and the Company (incorporated by
reference to Exhibit 10.129 to the Company's Annual Report on Form
10-K/A for the year ended June 30, 1998)............................... --

10.131 First Amendment to Loan and Security Agreement dated as of March 19,
1999 by and among the Company, certain subsidiaries of the Company on
the signature pages thereto, Fleet Capital Corporation, as a Lender and
as Agent for the Lenders, and the Lenders from time to time party
thereto (incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999)........................ --

10.132 Guaranty dated as of March 19, 1999 by and among The Rader Group,
Incorporated, Ramsay Youth Services Puerto Rico, Inc. in favor of Fleet
Capital Corporation, as Lender and Agent for the Lenders, and the
Lenders from time to time party thereto (incorporated by reference to
the Company's Transition Report on Form 10-K for the six months ended
December 31, 1998)..................................................... --

10.133 Security Agreement dated as of March 19, 1999 by and among The Rader
Group, Incorporated, Ramsay Youth Services Puerto Rico, Inc. in favor
of Fleet Capital Corporation, as Lender and Agent for the Lenders, and
the Lenders from time to time party thereto (incorporated by reference
to the Company's Transition Report on Form 10-K for the six months
ended December 31, 1998)............................................... --

10.134 Pledge Amendment dated as of March 19, 1999 by the Company in favor of
Fleet Capital Corporation, as Secured Party (incorporated by reference
to the Company's Transition Report on Form 10-K for the six months
ended December 31, 1998)............................................... --

10.135 Pledge Agreement dated as of March 19, 1999 by and between Ramsay
Educational Services, Inc. in favor of Fleet Capital Corporation, as
Agent for the Lenders (incorporated by reference to the Company's
Transition Report on Form 10-K for the six months ended December 31,
1998).................................................................. --

10.136 First Amendment to Employment Agreement dated December 1, 1998 between
the Company and Luis E. Lamela (incorporated by reference to the
Company's Transition Report on Form 10-K for the six months ended
December 31, 1998)..................................................... --

E-6

10.137 First Amendment to Employment Agreement dated December 1, 1998 between
the Company and Remberto Cibran (incorporated by reference to the
Company's Transition Report on Form 10-K for the six months ended
December 31, 1998)..................................................... --

10.138 Second Amendment to Loan Agreement, Consent and Borrowing Base Change
Notice dated as of June 30, 1999 by and among the Company, certain
subsidiaries of the Company and Fleet Capital Corporation, as agent and
lender (incorporated by reference to Exhibit 10.138 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999)..... --

10.139 Third Amendment to Loan and Security Agreement dated as of November 28,
1999 by and among the Company, the subsidiaries of the Company and
Fleet Capital Corporation as agent and lender (incorporated by
reference to Exhibit 10.139 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999).................................. --

10.140 Fourth Amendment to Loan and Security Agreement dated as of January 25,
2000 by and among the Company, the subsidiaries of the Company and
Fleet Capital Corporation, as agent and lender (incorporated by
reference to Exhibit 10.140 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999).................................. --

10.141 Subordinated Note and Warrant Purchase Agreement dated as of January
25, 2000 by and among the Company, the subsidiaries of the Company as
Guarantors and SunTrust Banks, Inc. as the Purchaser (incorporated by
reference to Exhibit 10.141 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999).................................. --

10.142 Registration Rights Agreement dated as of January 25, 2000 by and
between the Company and SunTrust Banks, Inc. (incorporated by reference
to Exhibit 10.142 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999).......................................... --

10.143 Ramsay Youth Services, Inc. 1999 Stock Option Plan (incorporated by
reference to Exhibit 10.143 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999).................................. --

10.144 Fifth Amendment to Loan and Security Agreement dated as of June 19,
2000 by and among the Company, the subsidiaries of the Company and
Fleet Capital Corporation, as agent and lender. Pursuant to Reg. S-K,
Item 601(b)(2), the Company agrees to furnish a copy of the Schedules
and Exhibits to such Agreement to the Commission upon request
(incorporated by reference to Exhibit 10.144 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000)............... --

10.145 Amended and Restated Subordinated Note and Warrant Purchase Agreement
dated as of June 19, 2000 by and among the Company, the subsidiaries of
the Company as Guarantors and SunTrust Banks, Inc., and ING (U.S.)
Capital, LLC as Purchasers (incorporated by reference to Exhibit 10.145
to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000)......................................................... --

10.146 Sixth Amendment to Loan and Security Agreement dated as of August 4,
2000 by and among the Company, the subsidiaries of the Company and
Fleet Capital Corporation, as agent and lender (incorporated by
reference to Exhibit 10.146 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000).............................. --

10.147 Ramsay Youth Services, Inc. 1999 Employee Stock Purchase Plan
(incorporated by reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-8 dated September 22, 2000)........................ --

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10.148 First Amendment to Amended and Restated Subordinated Note and Warrant
Purchase Agreement and First Amendment to Amended and Restate
Subordination Agreement dated as of July 31, 2000 by and among the
Company, the subsidiaries of the Company listed on the signature pages
hereto, as Guarantors, SunTrust Banks, Inc., and ING (U.S.) Capital,
LLC as Purchasers and Fleet Capital Corporation (incorporated by
reference to Exhibit 10.148 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000).................................. --

10.149 Seventh Amendment to Loan and Security Agreement dated as of March 31,
2001 by and among the Company, the subsidiaries of the Company and
Fleet Capital Corporation, as agent and lender (incorporated by
reference to Exhibit 10.149 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2001)............................. --

10.150 Second Amendment to Amended and Restated Subordinated Note and Warrant
Purchase Agreement and First Amendment to Amended and Restated
Subordination Agreement dated as of April 16, 2001 by and among the
Company, the subsidiaries of the Company listed on the signature pages
hereto, as Guarantors, SunTrust Banks, Inc., and ING (U.S.) Capital,
LLC as Purchasers (incorporated by reference to Exhibit 10.150 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2001).................................................................. --

10.151 Third Amendment to Amended and Restated Subordinated Note and Warrant
Purchase Agreement and Second Amendment to Amended and Restated
Subordination Agreement dated as of February 25, 2002 by and among the
Company, the subsidiaries of the Company listed on the signature pages
hereto, as Guarantors, SunTrust Banks, Inc., and ING (U.S.) Capital,
LLC as Purchasers and Fleet Capital Corporation (incorporated by
reference to Exhibit 10.151 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001) ................................. --

10.152 Eighth Amendment to Loan and Security Agreement dated as of February
25, 2002 by and among the Company, the subsidiaries of the Company and
Fleet Capital Corporation, as agent and lender (incorporated by
reference to Exhibit 10.152 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001) ................................. --

10.153 Second Amendment to Employment Agreement dated July 30, 2002 by and
between the Company and Luis Lamela (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002)........................................... --

10.154 Second Amendment to Employment Agreement dated July 30, 2002 by and
between the Company and Bert Cibran (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002)........................................... --

10.155 Letter Agreement dated July 30, 2002 by and between the Company and
Marcio C. Cabrera (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).................................................................. --

10.156 Letter Agreement dated July 30, 2002 by and between the Company and
Jorge Rico (incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002)..... --

10.157 Letter Agreement dated July 30, 2002 by and between the Company and
Isabel M. Diaz (incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).................................................................. --

10.158 Ninth Amendment to Loan and Security Agreement and Consent dated as of
September 6, 2002 by and among the Company, the subsidiaries of the
Company and Fleet Capital Corporation, as agent and lender
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002).......... --

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10.159 Fourth Amendment to Amended and Restated Subordinated Note and Warrant
Purchase Agreement dated as of September 6, 2002 by and among the
Company, the subsidiaries of the Company as Guarantors and SunTrust
Banks, Inc. and ING Capital, LLC as Purchasers (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2002)......................... --

10.160 Commercial Lease Agreement dated as of September, 2002 between Ramsay
Hospital Properties, Inc. and Ramsay Youth Services of Georgia, Inc.
(incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002).......... --

10.161 Guarantee of Obligation Pursuant to Lease Agreement described in
Exhibit 10.160 above dated as of September, 2002 by the Company in
favor of Ramsay Hospital Properties, Inc. (incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002)...................................... --

10.162 Letter Agreement dated February 24, 2003 by and between the Company and
Marcio C. Cabrera......................................................

10.163 Letter Agreement dated February 24, 2003 by and between the Company and
Jorge Rico.............................................................

10.164 Letter Agreement dated February 24, 2003 by and between the Company and
Isabel M. Diaz.........................................................

10.165 Tenth Amendment to Loan and Security Agreement dated as of March 13,
2003, but effective as of December 31, 2002, by and among the Company,
the subsidiaries of the Company as Guarantors and Fleet Capital
Corporation............................................................

10.166 Code of Ethics for CEO and Senior Financial Officer....................

10.167 First Amendment to Commercial Lease dated as of November 1, 2002
between Ramsay Hospital Properties, Inc. and Ramsay Youth Services of
Georgia, Inc. .........................................................

11 Computation of Net Income Per Share....................................

99.1 Chief Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350...........................................................

99.2 Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350...........................................................

99.3 Press Release dated February 3, 2003...................................

99.4 Press Release dated February 5, 2003...................................

99.5 Press Release dated February 5, 2003...................................

99.6 Press Release dated March 4, 2003......................................

99.7 Press Release dated March 21, 2003.....................................

21 Subsidiaries of the Company............................................

23.1 Independent Auditors' Consent..........................................

Copies of exhibits filed with this Annual Report on Form 10-K or incorporated
herein by reference do not accompany copies hereof for distribution to
stockholders of the Company. The Company will furnish a copy of such exhibits to
any stockholder requesting it.

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