##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

FORM 10-Q

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarterly period ended
    September 30, 2004                                       
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number 000-32837



---

United Surgical Partners International,
Inc.

(Exact name of registrant as specified in its
charter)


|                                             |  |                       
|-------------------------------------------- |  | ----------------------
|Delaware                                     |  | 75-2749762            
|(State or other jurisdiction of              |  | (IRS Employer         
|incorporation or organization)               |  | Identification Number)
|                                            
|15305 Dallas Parkway,
    Suite 1600         |  | 75001                 
|Addison, Texas                               |  | (Zip Code)            
|(Address of principal executive
    offices) |  |                       

(972) 713-3500

(Registrants telephone number, including
area code)


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

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

At November 2, 2004 there were
28,490,522 shares of Common Stock outstanding.



---






---










UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

INDEX

|                                             |  |                                                                                                                                |    |      |    | 
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|                                             |  |                                                                                                                                |    | Page
|                                             |  |                                                                                                                                |    |     
|PART I.                                      |  | Financial Information                                                                                                          |    |      |    | 
|Item 1.                                      |  | Financial Statements
    (unaudited)                                                                                           |    |      | 2  | 
|                                             |  | Consolidated Balance Sheets
    as of September 30, 2004 and December 31, 2003                                                 |    |      | 2  | 
|                                             |  | Consolidated Statements of
    Income for the three months and nine months ended
    September 30, 2004 and 2003               |    |      | 3  | 
|                                             |  | Consolidated Statements of
    Comprehensive Income for the three months and nine months ended
    September 30, 2004 and 2003 |    |      | 4  | 
|                                             |  | Consolidated Statements of
    Cash Flows for the nine months ended September 30, 2004 and
    2003                            |    |      | 5  | 
|                                             |  | Notes to Consolidated
    Financial Statements                                                                                 |    |      | 6  | 
|Item 2.                                      |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                                      |    |      | 18 | 
|Item 3.                                      |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                                 |    |      | 31 | 
|Item 4.                                      |  | Controls and Procedures                                                                                                        |    |      | 32 | 
|PART II.                                     |  | Other Information                                                                                                              |    |      |    | 
|Item 1.                                      |  | Legal Proceedings                                                                                                              |    |      | 33 | 
|Item 6.                                      |  | Exhibits and Reports on
    Form 8-K                                                                                           |    |      | 33 | 
|Signatures                                   |  |                                                                                                                                | 34 |     
|Certification of CEO Pursuant to Section 302
|Certification of CFO Pursuant to Section 302
|Certification of CEO Pursuant to Section 906
|Certification of CFO Pursuant to Section 906



Note:Items 2,
3, 4 and 5 of Part II are omitted because they are not
applicable.

1



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##### Table of Contents






PART I. FINANCIAL INFORMATION






|        |                     
|------- | --------------------
|Item 1. | Financial Statements

UNITED SURGICAL PARTNERS INTERNATIONAL,
INC.

AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS


(Unaudited  in thousands, except
per share amounts)


|                                                                                                   |                                                                                                                                                                 |                           |                                            |                   |         |         |         |         |         |         | 
|-------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------------------------------------------ | ----------------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                                                                                                   |                                                                                                                                                                 | September 30, 2004        |                                            | December 31, 2003
|                                                                                                   |                                                                                                                                                                 |                           |                                            |                  
|ASSETS                                                                                            
|Cash and cash equivalents                                                                          |                                                                                                                                                                 | $                         | 204,773                                    |                   |         | $       | 28,519  |        
|Patient receivables, net of allowance for
    doubtful accounts of $5,942 and $8,838, respectively |                                                                                                                                                                 |                           | 32,715                                     |                   |         |         | 56,591  |        
|Other receivables                                                                                  |                                                                                                                                                                 |                           | 14,229                                     |                   |         |         | 20,168  |        
|Inventories of supplies                                                                            |                                                                                                                                                                 |                           | 6,490                                      |                   |         |         | 9,024   |        
|Deferred tax asset, net                                                                            |                                                                                                                                                                 |                           | 8,704                                      |                   |         |         | 6,747   |        
|Prepaids and other current assets                                                                  |                                                                                                                                                                 |                           | 4,611                                      |                   |         |         | 12,548  |        
|                                                                                                   |                                                                                                                                                                 |                           |                                            |                   |         |         |         |        
|                                                                                                   |                                                                                                                                                                 | Total current assets      |                                            |                   | 271,522 |         |         |         | 133,597 |        
|Property and equipment, net                                                                        |                                                                                                                                                                 |                           | 240,358                                    |                   |         |         | 348,063 |        
|Investments in affiliates                                                                          |                                                                                                                                                                 |                           | 40,112                                     |                   |         |         | 32,104  |        
|Intangible assets, net                                                                             |                                                                                                                                                                 |                           | 312,771                                    |                   |         |         | 326,645 |        
|Other assets                                                                                       |                                                                                                                                                                 |                           | 28,985                                     |                   |         |         | 30,100  |        
|                                                                                                   |                                                                                                                                                                 |                           |                                            |                   |         |         |         |        
|                                                                                                   |                                                                                                                                                                 | Total assets              |                                            | $                 | 893,748 |         |         | $       | 870,509 |        
|                                                                                                   |                                                                                                                                                                 |                           |                                            |                   |         |         |         |        
|                                                                                                  
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                          
|Accounts payable                                                                                   |                                                                                                                                                                 | $                         | 13,128                                     |                   |         | $       | 36,453  |        
|Accrued salaries and benefits                                                                      |                                                                                                                                                                 |                           | 21,583                                     |                   |         |         | 19,609  |        
|Income taxes payable                                                                               |                                                                                                                                                                 |                           | 25,998                                     |                   |         |         | 2,921   |        
|Due to affiliates                                                                                  |                                                                                                                                                                 |                           | 9,302                                      |                   |         |         | 5,490   |        
|Accrued interest                                                                                   |                                                                                                                                                                 |                           | 5,608                                      |                   |         |         | 1,739   |        
|Current portion of long-term debt                                                                  |                                                                                                                                                                 |                           | 14,253                                     |                   |         |         | 16,794  |        
|Other accrued expenses                                                                             |                                                                                                                                                                 |                           | 14,775                                     |                   |         |         | 20,634  |        
|                                                                                                   |                                                                                                                                                                 |                           |                                            |                   |         |         |         |        
|                                                                                                   |                                                                                                                                                                 | Total current liabilities |                                            |                   | 104,647 |         |         |         | 103,640 |        
|Long-term debt, less current portion                                                               |                                                                                                                                                                 |                           | 258,437                                    |                   |         |         | 287,950 |        
|Other long-term liabilities                                                                        |                                                                                                                                                                 |                           | 2,191                                      |                   |         |         | 8,327   |        
|Deferred tax liability, net                                                                        |                                                                                                                                                                 |                           | 29,902                                     |                   |         |         | 33,979  |        
|                                                                                                   |                                                                                                                                                                 |                           |                                            |                   |         |         |         |        
|                                                                                                   |                                                                                                                                                                 | Total liabilities         |                                            |                   | 395,177 |         |         |         | 433,896 |        
|Minority interests                                                                                 |                                                                                                                                                                 |                           | 43,926                                     |                   |         |         | 45,958  |        
|Stockholders equity:                                                                              |                                                                                                                                                                 |                           |                                            |                   |         |         |         |        
|                                                                                                   | Common stock, $0.01 par value;
    200,000 shares authorized; 28,454 and 27,705 shares
    issued at September 30, 2004 and December 31, 2003,
    respectively |                           |                                            | 285               |         |         |         | 277     |        
|                                                                                                   | Additional paid-in capital                                                                                                                                      |                           |                                            | 343,232           |         |         |         | 330,519 |        
|                                                                                                   | Treasury stock, at cost, 31 and 52 shares at
    September 30, 2004 and December 31, 2003, respectively                                                         |                           |                                            | (647              | )       |         |         | (986    | )      
|                                                                                                   | Deferred compensation                                                                                                                                           |                           |                                            | (7,823            | )       |         |         | (4,548  | )      
|                                                                                                   | Receivables from sales of stock                                                                                                                                 |                           |                                            |                  |         |         |         | (1      | )      
|                                                                                                   | Accumulated other comprehensive income, net of tax                                                                                                              |                           |                                            | 9,556             |         |         |         | 32,852  |        
|                                                                                                   | Retained earnings                                                                                                                                               |                           |                                            | 110,042           |         |         |         | 32,542  |        
|                                                                                                   |                                                                                                                                                                 |                           |                                            |                   |         |         |         |        
|                                                                                                   |                                                                                                                                                                 |                           | Total stockholders equity                 |                   |         | 454,645 |         |         |         | 390,655 | 
|                                                                                                   |                                                                                                                                                                 |                           |                                            |                   |         |         |         |        
|                                                                                                   |                                                                                                                                                                 |                           | Total liabilities and stockholders equity |                   | $       | 893,748 |         |         | $       | 870,509 | 
|                                                                                                   |                                                                                                                                                                 |                           |                                            |                   |         |         |         |        

See accompanying notes to consolidated financial
statements.

2



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL,
INC.

AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF INCOME


(Unaudited  in thousands, except
per share amounts)


|                                                              |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |         |      |      | 
|------------------------------------------------------------- | --------------------------------------------------------- | ----------------------- | ------ | ----------------- | ---- | ---- | ------ | ------ | ----- | ---- | ------- | ------- | ---- | ---- | ------- | ------- | ---- | ---- | 
|                                                              |                                                           |                         |        |                  
|                                                              |                                                           | Three Months Ended      |        | Nine Months Ended
|                                                              |                                                           | September 30,           |        | September 30,    
|                                                              |                                                           |                         |        |                  
|                                                              |                                                           | 2004                    |        | 2003              |      | 2004 |        | 2003  
|                                                              |                                                           |                         |        |                   |      |      |        |       
|Net patient service revenue                                   |                                                           | $                       | 87,179 |                   |      | $    | 67,598 |        |       | $    | 251,934 |         |      | $    | 198,148 |        
|Management and administrative services revenue                |                                                           |                         | 9,089  |                   |      |      | 9,482  |        |       |      | 28,296  |         |      |      | 26,681  |        
|Equity in earnings of unconsolidated affiliates               |                                                           |                         | 3,622  |                   |      |      | 4,624  |        |       |      | 14,081  |         |      |      | 10,429  |        
|Other income                                                  |                                                           |                         | 289    |                   |      |      | 365    |        |       |      | 665     |         |      |      | 1,013   |        
|                                                              |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |        
|                                                              | Total revenue                                             |                         |        | 100,179           |      |      |        | 82,069 |       |      |         | 294,976 |      |      |         | 236,271 |     
|Salaries, benefits, and other employee costs                  |                                                           |                         | 25,304 |                   |      |      | 18,798 |        |       |      | 71,973  |         |      |      | 53,601  |        
|Medical services and supplies                                 |                                                           |                         | 16,144 |                   |      |      | 12,231 |        |       |      | 45,875  |         |      |      | 35,361  |        
|Other operating expenses                                      |                                                           |                         | 18,292 |                   |      |      | 15,472 |        |       |      | 52,477  |         |      |      | 43,938  |        
|General and administrative expenses                           |                                                           |                         | 6,402  |                   |      |      | 6,339  |        |       |      | 20,351  |         |      |      | 18,579  |        
|Provision for doubtful accounts                               |                                                           |                         | 2,226  |                   |      |      | 1,941  |        |       |      | 5,824   |         |      |      | 5,057   |        
|Depreciation and amortization                                 |                                                           |                         | 6,924  |                   |      |      | 5,883  |        |       |      | 19,823  |         |      |      | 16,662  |        
|                                                              |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |        
|                                                              | Total operating expenses                                  |                         |        | 75,292            |      |      |        | 60,664 |       |      |         | 216,323 |      |      |         | 173,198 |     
|                                                              |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |        
|                                                              | Operating income                                          |                         |        | 24,887            |      |      |        | 21,405 |       |      |         | 78,653  |      |      |         | 63,073  |     
|Interest income                                               |                                                           |                         | 278    |                   |      |      | 274    |        |       |      | 662     |         |      |      | 734     |        
|Interest expense                                              |                                                           |                         | (6,927 | )                 |      |      | (6,373 | )      |       |      | (20,169 | )       |      |      | (18,375 | )      
|Loss on early termination of credit facility
    (Note 5)     |                                                           |                         | (1,635 | )                 |      |      |       |        |       |      | (1,635  | )       |      |      |        |        
|Other                                                         |                                                           |                         | 175    |                   |      |      | 589    |        |       |      | 205     |         |      |      | 697     |        
|                                                              |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |        
|                                                              | Total other expense, net                                  |                         |        | (8,109            | )    |      |        | (5,510 | )     |      |         | (20,937 | )    |      |         | (16,944 | )   
|                                                              | Income before minority interests                          |                         |        | 16,778            |      |      |        | 15,895 |       |      |         | 57,716  |      |      |         | 46,129  |     
|Minority interests in income of consolidated
    subsidiaries |                                                           |                         | (6,495 | )                 |      |      | (5,700 | )      |       |      | (21,556 | )       |      |      | (16,614 | )      
|                                                              |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |        
|                                                              | Income from continuing operations before income
    taxes |                         |        | 10,283            |      |      |        | 10,195 |       |      |         | 36,160  |      |      |         | 29,515  |     
|Income tax expense                                            |                                                           |                         | (3,548 | )                 |      |      | (3,834 | )      |       |      | (13,003 | )       |      |      | (11,084 | )      
|                                                              |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |        
|                                                              | Income from continuing operations                         |                         |        | 6,735             |      |      |        | 6,361  |       |      |         | 23,157  |      |      |         | 18,431  |     
|Discontinued operations, net of tax (Note 2):                 |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |        
|                                                              | Income (loss) from discontinued operations                |                         |        | (14               | )    |      |        | (785   | )     |      |         | 4,078   |      |      |         | 2,440   |     
|                                                              | Net gain on disposal of Spanish operations                |                         |        | 50,263            |      |      |        |       |       |      |         | 50,263  |      |      |         |        |     
|                                                              |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |        
|                                                              | Total earnings (loss) from discontinued operations        |                         |        | 50,249            |      |      |        | (785   | )     |      |         | 54,341  |      |      |         | 2,440   |     
|                                                              |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |        
|                                                              | Net income                                                |                         | $      | 56,984            |      |      | $      | 5,576  |       |      | $       | 77,498  |      |      | $       | 20,871  |     
|                                                              |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |        
|Net income per share attributable to common
    stockholders  |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |        
|                                                              | Basic:                                                    |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |         |     
|                                                              |                                                           | Continuing operations   |        | $                 | 0.24 |      |        | $      | 0.23  |      |         | $       | 0.83 |      |         | $       | 0.68 |     
|                                                              |                                                           | Discontinued operations |        |                   | 1.79 |      |        |        | (0.02 | )    |         |         | 1.95 |      |         |         | 0.09 |     
|                                                              |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |        
|                                                              |                                                           |                         | Total  |                   | $    | 2.03 |        |        | $     | 0.21 |         |         | $    | 2.78 |         |         | $    | 0.77 | 
|                                                              |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |        
|                                                              | Diluted:                                                  |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |         |     
|                                                              |                                                           | Continuing operations   |        | $                 | 0.23 |      |        | $      | 0.22  |      |         | $       | 0.79 |      |         | $       | 0.66 |     
|                                                              |                                                           | Discontinued operations |        |                   | 1.71 |      |        |        | (0.02 | )    |         |         | 1.86 |      |         |         | 0.08 |     
|                                                              |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |        
|                                                              |                                                           |                         | Total  |                   | $    | 1.94 |        |        | $     | 0.20 |         |         | $    | 2.65 |         |         | $    | 0.74 | 
|                                                              |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |        
|Weighted average number of common shares                      |                                                           |                         |        |                   |      |      |        |        |       |      |         |         |      |      |         |        
|                                                              | Basic                                                     |                         |        | 28,023            |      |      |        | 27,151 |       |      |         | 27,870  |      |      |         | 27,088  |     
|                                                              | Diluted                                                   |                         |        | 29,329            |      |      |        | 28,398 |       |      |         | 29,257  |      |      |         | 28,033  |     

See accompanying notes to consolidated financial
statements.

3



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL,
INC.

AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME


(Unaudited  in thousands)


|                                                         |                                          |                    |        |                   |   |      |       |       |  |   |        |         |   |   |        |        | 
|-------------------------------------------------------- | ---------------------------------------- | ------------------ | ------ | ----------------- | - | ---- | ----- | ----- |  | - | ------ | ------- | - | - | ------ | ------ | 
|                                                         |                                          |                    |        |                  
|                                                         |                                          | Three Months Ended |        | Nine Months Ended
|                                                         |                                          | September 30,      |        | September 30,    
|                                                         |                                          |                    |        |                  
|                                                         |                                          | 2004               |        | 2003              |   | 2004 |       | 2003 
|                                                         |                                          |                    |        |                   |   |      |       |      
|Net income                                               |                                          | $                  | 56,984 |                   |   | $    | 5,576 |       |  | $ | 77,498 |         |   | $ | 20,871 |       
|Other comprehensive income (loss), net of taxes:         |                                          |                    |        |                   |   |      |       |       |  |   |        |         |   |   |        |       
|                                                         | Foreign currency translation adjustments |                    |        | 591               |   |      |       | 2,030 |  |   |        | (2,584  | ) |   |        | 13,743 | 
|                                                         | Net unrealized gains on securities       |                    |        | 27                |   |      |       | 57    |  |   |        | 70      |   |   |        | 72     | 
|Reclassifications due to sale of Spanish
    operations: |                                          |                    |        |                   |   |      |       |       |  |   |        |         |   |   |        |       
|                                                         | Foreign currency translation adjustments |                    |        | (20,563           | ) |      |       |      |  |   |        | (20,563 | ) |   |        |       | 
|                                                         | Net unrealized gains on securities       |                    |        | (219              | ) |      |       |      |  |   |        | (219    | ) |   |        |       | 
|                                                         |                                          |                    |        |                   |   |      |       |       |  |   |        |         |   |   |        |       
|                                                         | Other comprehensive income (loss)        |                    |        | (20,164           | ) |      |       | 2,087 |  |   |        | (23,296 | ) |   |        | 13,815 | 
|                                                         |                                          |                    |        |                   |   |      |       |       |  |   |        |         |   |   |        |       
|                                                         | Comprehensive income                     |                    | $      | 36,820            |   |      | $     | 7,663 |  |   | $      | 54,202  |   |   | $      | 34,686 | 
|                                                         |                                          |                    |        |                   |   |      |       |       |  |   |        |         |   |   |        |       

See accompanying notes to consolidated financial
statements.

4



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL,
INC.

AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited  in thousands)


|                                                           |                                                                                       |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |         |       |         |        |         |  
|---------------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------- | ------- | ----- | ------- | ------ | ------- | -
|                                                           |                                                                                       |                                                
|                                                           |                                                                                       | Nine Months Ended                              
|                                                           |                                                                                       | September 30,                                  
|                                                           |                                                                                       |                                                
|                                                           |                                                                                       | 2004                                            |                                                                                                                                          | 2003                                                          
|                                                           |                                                                                       |                                                 |                                                                                                                                          |                                                               
|Cash flows from operating activities:                      |                                                                                       |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |        
|                                                           | Income from continuing operations                                                     |                                                 | $                                                                                                                                        | 23,157                                                         |                                                         |         | $       | 18,431  |      
|                                                           | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |         |      
|                                                           |                                                                                       |                                                 | Provision for doubtful accounts                                                                                                          |                                                                |                                                         | 5,824   |         |         |       | 5,057   |       
|                                                           |                                                                                       |                                                 | Depreciation and amortization                                                                                                            |                                                                |                                                         | 19,823  |         |         |       | 16,662  |       
|                                                           |                                                                                       |                                                 | Amortization of debt issue costs and discount                                                                                            |                                                                |                                                         | 1,592   |         |         |       | 1,364   |       
|                                                           |                                                                                       |                                                 | Deferred income tax expense                                                                                                              |                                                                |                                                         | 2,567   |         |         |       | 8,352   |       
|                                                           |                                                                                       |                                                 | Loss on early termination of credit facility                                                                                             |                                                                |                                                         | 1,635   |         |         |       |        |       
|                                                           |                                                                                       |                                                 | Equity in earnings of unconsolidated affiliates                                                                                          |                                                                |                                                         | (14,081 | )       |         |       | (10,429 | )     
|                                                           |                                                                                       |                                                 | Minority interests in income of consolidated
    subsidiaries                                                                            |                                                                |                                                         | 21,556  |         |         |       | 16,614  |       
|                                                           |                                                                                       |                                                 | Equity-based compensation                                                                                                                |                                                                |                                                         | 2,567   |         |         |       | 2,119   |       
|                                                           |                                                                                       |                                                 | Increases (decreases) in cash from changes
    in operating assets and liabilities, net of effects from
    purchases of new businesses: |                                                                |                                                         |         |         |         |       |         |       
|                                                           |                                                                                       |                                                 |                                                                                                                                          | Patient receivables                                            |                                                         |         | (5,762  | )       |       |         | (8,427 | )      
|                                                           |                                                                                       |                                                 |                                                                                                                                          | Other receivables                                              |                                                         |         | 3,789   |         |       |         | 24,122 |        
|                                                           |                                                                                       |                                                 |                                                                                                                                          | Inventories of supplies, prepaids and other
    current assets |                                                         |         | 1,078   |         |       |         | 3,464  |        
|                                                           |                                                                                       |                                                 |                                                                                                                                          | Accounts payable and other current liabilities                 |                                                         |         | 12,477  |         |       |         | (300   | )      
|                                                           |                                                                                       |                                                 |                                                                                                                                          | Long-term liabilities                                          |                                                         |         | 351     |         |       |         | (5,561 | )      
|                                                           |                                                                                       |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |        
|                                                           |                                                                                       |                                                 |                                                                                                                                          |                                                                | Net cash provided by operating activities               |         |         | 76,573  |       |         |        | 71,468  |  
|                                                           |                                                                                       |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |        
|Cash flows from investing activities:                      |                                                                                       |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |        
|                                                           | Purchases of new businesses and equity interests,
    net of cash received            |                                                 |                                                                                                                                          | (40,735                                                        | )                                                       |         |         | (37,791 | )    
|                                                           | Proceeds from sale of Spanish operations                                              |                                                 |                                                                                                                                          | 163,205                                                        |                                                         |         |         |        |      
|                                                           | Purchases of property and equipment                                                   |                                                 |                                                                                                                                          | (16,802                                                        | )                                                       |         |         | (17,687 | )    
|                                                           | Increase in deposits and notes receivable                                             |                                                 |                                                                                                                                          | (1,926                                                         | )                                                       |         |         | (4,257  | )    
|                                                           |                                                                                       |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |        
|                                                           |                                                                                       |                                                 |                                                                                                                                          |                                                                | Net cash provided by (used in) investing
    activities |         |         | 103,742 |       |         |        | (59,735 | )
|                                                           |                                                                                       |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |        
|Cash flows from financing activities:                      |                                                                                       |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |        
|                                                           | Proceeds from long-term debt                                                          |                                                 |                                                                                                                                          | 17,923                                                         |                                                         |         |         | 39,392  |      
|                                                           | Payments on long-term debt                                                            |                                                 |                                                                                                                                          | (22,672                                                        | )                                                       |         |         | (39,286 | )    
|                                                           | Proceeds from issuances of common stock                                               |                                                 |                                                                                                                                          | 6,473                                                          |                                                         |         |         | 2,030   |      
|                                                           | Distributions on investments in affiliates                                            |                                                 |                                                                                                                                          | (7,533                                                         | )                                                       |         |         | (5,649  | )    
|                                                           |                                                                                       |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |        
|                                                           |                                                                                       |                                                 |                                                                                                                                          |                                                                | Net cash used in financing activities                   |         |         | (5,809  | )     |         |        | (3,513  | )
|                                                           |                                                                                       |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |        
|Net cash provided by (used in) discontinued
    operations |                                                                                       |                                                 | 1,516                                                                                                                                    |                                                                |                                                         |         | (10,178 | )      
|                                                           |                                                                                       |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |        
|Effect of exchange rate changes on cash                    |                                                                                       |                                                 | 232                                                                                                                                      |                                                                |                                                         |         | (223    | )      
|                                                           |                                                                                       |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |        
|Net increase (decrease) in cash and cash
    equivalents   |                                                                                       |                                                 | 176,254                                                                                                                                  |                                                                |                                                         |         | (2,181  | )      
|Cash and cash equivalents at beginning of period           |                                                                                       |                                                 | 28,519                                                                                                                                   |                                                                |                                                         |         | 47,571  |        
|                                                           |                                                                                       |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |        
|Cash and cash equivalents at end of period                 |                                                                                       | $                                               | 204,773                                                                                                                                  |                                                                |                                                         | $       | 45,390  |        
|                                                           |                                                                                       |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |        
|Supplemental information:                                  |                                                                                       |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |        
|                                                           | Interest paid                                                                         |                                                 | $                                                                                                                                        | 18,190                                                         |                                                         |         | $       | 16,270  |      
|                                                           | Income taxes paid                                                                     |                                                 |                                                                                                                                          | 6,631                                                          |                                                         |         |         | 4,827   |      
|                                                           | Non-cash transactions:                                                                |                                                 |                                                                                                                                          |                                                                |                                                         |         |         |         |      
|                                                           |                                                                                       | Assets acquired under capital lease obligations |                                                                                                                                          | $                                                              | 22,750                                                  |         |         | $       | 2,712 |        
|                                                           |                                                                                       | Issuance of common stock for service contracts  |                                                                                                                                          |                                                                |                                                        |         |         |         | 254   |        
|                                                           |                                                                                       | Issuance of common stock to employees           |                                                                                                                                          |                                                                | 4,711                                                   |         |         |         | 2,881 |        

See accompanying notes to consolidated financial
statements

5



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES



NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


(Unaudited)




|    |                      
|--- | ---------------------
|(1) | Basis of Presentation



| |                                
| | -------------------------------
| | (a) Description of
    Business

United Surgical Partners International, Inc., a
Delaware Corporation, and subsidiaries (USPI or the Company) was
formed in February 1998 for the primary purpose of ownership and
operation of surgery centers, private surgical hospitals and
related businesses in the United States and Europe. At
September 30, 2004, USPI, headquartered in Dallas, Texas,
operated 74 short-stay surgical facilities. Of these 74
facilities, USPI consolidates the results of 36, accounts for 37
under the equity method, and holds no ownership in the remaining
facility, which is operated by USPI under a management contract.
USPI operates in two countries, with 71 of its 74 facilities
located in the United States of America; the remaining three
facilities are located in the United Kingdom. Most of the
Companys U.S. facilities are jointly owned with local
physicians and a not-for-profit healthcare system that has other
healthcare businesses in the region. At September 30, 2004,
the Company had agreements with 20 not-for-profit healthcare
systems providing for joint ownership of 43 of the
Companys 71 U.S. facilities and also providing a
framework for the planning and construction of additional
facilities in the future. All of the Companys
U.S. facilities include physician owners.

Through its majority-owned subsidiary Global
Healthcare Partners Limited (Global), incorporated in England,
USPI manages and wholly owns three private surgical hospitals in
the greater London area.

During September 2004, the Company completed the
sale of its Spanish operations (Note 2). At the time of the
sale, the Company managed and owned a majority interest in eight
private surgical hospitals and one ambulatory surgery center in
Spain.

USPI is subject to changes in government
legislation that could impact Medicare, Medicaid, and foreign
government reimbursement levels and is also subject to increased
levels of managed care penetration and changes in payor patterns
that may impact the level and timing of payments for services
rendered.

USPI maintains its books and records on the
accrual basis of accounting, and the consolidated financial
statements are prepared in accordance with accounting principles
generally accepted in the United States of America. The
accompanying consolidated financial statements and notes should
be read in conjunction with the Companys Form 10-K.
It is managements opinion that the accompanying
consolidated financial statements reflect all adjustments (which
are normal recurring adjustments) necessary for a fair
presentation of the results for the interim period and the
comparable period presented. The results of operations for any
interim period are not necessarily indicative of results for the
full year.



|    |                          
|--- | -------------------------
|(b) | Equity-Based Compensation

USPI applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its stock option
grants to employees. Accordingly, USPI generally does not record
compensation expense related to stock option grants because USPI
generally issues options for which the option exercise price
equals the current market price of the underlying stock on the
date of grant. SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure,
established accounting and disclosure requirements using a fair
value based method of accounting for stock-based employee
compensation plans. As permitted under SFAS No. 123,
the Company has elected to continue to apply the intrinsic value
based method of accounting described above, and has adopted the
disclosure requirements of SFAS No. 123 and
SFAS No. 148. Had USPI determined compensation cost
based on the fair value at the grant date for its

6



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

stock options under SFAS No. 123,
USPIs net income would have been the pro forma amounts
indicated below (in thousands, except per share data):

|                           |                                                                                                                                     |                    |   |                   |   |      |   |        |   |  |   |        |   |  |   |        |  
|-------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | ------------------ | - | ----------------- | - | ---- | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                           |                                                                                                                                     |                    |   |                  
|                           |                                                                                                                                     | Three Months Ended |   | Nine Months Ended
|                           |                                                                                                                                     | September 30,      |   | September 30,    
|                           |                                                                                                                                     |                    |   |                  
|                           |                                                                                                                                     | 2004               |   | 2003              |   | 2004 |   | 2003  
|                           |                                                                                                                                     |                    |   |                   |   |      |   |       
|Net income:                |                                                                                                                                     |                    |   |                   |   |      |   |        |   |  |   |        |   |  |   |       
|                           | As reported                                                                                                                         |                    | $ | 56,984            |   |      | $ | 5,576  |   |  | $ | 77,498 |   |  | $ | 20,871 |  
|                           | Add: Total stock-based employee compensation
    expense included in reported net income, net of taxes                              |                    |   | 569               |   |      |   | 618    |   |  |   | 1,669  |   |  |   | 1,377  |  
|                           | Less: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of taxes |                    |   | (1,688            | ) |      |   | (1,648 | ) |  |   | (4,985 | ) |  |   | (4,478 | )
|                           |                                                                                                                                     |                    |   |                   |   |      |   |        |   |  |   |        |   |  |   |       
|                           | Pro forma                                                                                                                           |                    | $ | 55,865            |   |      | $ | 4,546  |   |  | $ | 74,182 |   |  | $ | 17,770 |  
|                           |                                                                                                                                     |                    |   |                   |   |      |   |        |   |  |   |        |   |  |   |       
|Basic earnings per share   |                                                                                                                                     |                    |   |                   |   |      |   |        |   |  |   |        |   |  |   |       
|                           | As reported                                                                                                                         |                    | $ | 2.03              |   |      | $ | 0.21   |   |  | $ | 2.78   |   |  | $ | 0.77   |  
|                           | Pro forma                                                                                                                           |                    |   | 1.99              |   |      |   | 0.17   |   |  |   | 2.66   |   |  |   | 0.66   |  
|Diluted earnings per share |                                                                                                                                     |                    |   |                   |   |      |   |        |   |  |   |        |   |  |   |       
|                           | As reported                                                                                                                         |                    | $ | 1.94              |   |      | $ | 0.20   |   |  | $ | 2.65   |   |  | $ | 0.74   |  
|                           | Pro forma                                                                                                                           |                    |   | 1.90              |   |      |   | 0.16   |   |  |   | 2.54   |   |  |   | 0.63   |  

The fair values in the table above were estimated
at the date of grant using the Black-Scholes valuation model
with the following assumptions: risk-free interest rates ranging
from 2.1% to 6.3%, expected dividend yield of zero, expected
volatility of the market price of the Companys common
stock of 40%, and an expected life of the option ranging from
three to five years.

Total stock-based employee compensation expense
included in net income, as reported, primarily consists of
expense under the Companys Deferred Compensation Plan,
grants of restricted stock to employees, and continued
amortization of expense related to a December 2000 grant of
stock options at a price lower than the current market price at
the date of grant. The compensation amounts related to these
grants are being amortized into expense over the estimated
service periods.

The Company accounts for equity instruments
issued to non-employees in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force
(EITF) Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services.



|    |                           
|--- | --------------------------
|(2) | Sale of Spanish Operations

On July 29, 2004, the Company entered into
an agreement to sell its Spanish operations, consisting of the
Companys 97% share of its Spanish holding company, United
Surgical Partners Europe, S.L. (USPE), which holds ownership
interests in and manages nine short-stay surgical facilities in
Spain. The Companys Spanish operations, historically
included in the Companys Western Europe segment,
represented a component of USPI, as that term is
defined in Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets(SFAS No. 144), and USPI will
have no significant continuing involvement in the operations.
Accordingly, the results of the companys Spanish
operations and sale of USPE are reported as discontinued
operations in the accompanying consolidated statements of
income.

7



---



##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Under the terms of the sale, USPI sold its entire
97% interest in USPE to a Spanish investment group. Total
proceeds of the sale were approximately $192.9 million, of
which approximately $18.1 million was deferred (the
Reinvestment). After estimated costs of the sale of
approximately $7.7 million and net of the $3.9 million
of cash the Companys Spanish subsidiaries held at the date
of sale, the net cash proceeds to USPI in September 2004 totaled
$163.2 million. The Company has recorded a gain on the
disposal transaction of approximately $72.5 million, which
nets to $50.3 million after sale-related income taxes the
Company expects to pay during the fourth quarter of 2004. The
sales price and resultant gain and tax liability are subject to
final adjustment, expected during the fourth quarter of 2004. In
addition, the Company indemnified the buyers against tax and
other contingencies, one of which is considered reasonably
possible of requiring a payment by the Company in the future, as
discussed more fully in Note 8. Final determination of the
sales price, in the form of final working capital true-ups, is
expected during the fourth quarter, as is the final
determination of the income tax expense arising from the sale.

To account for the Reinvestment, USPI carries a
noncurrent note receivable from the buyers of $18.1 million
at September 30, 2004, included in other assets in the
accompanying consolidated balance sheet, which represents the
portion of the sales price that, by agreement with the buyers,
will be collected in January 2007 (the Maturity Date). This
deferred sales price represents the present value of the
$19.8 million payment (the Maturity Value) that the Company
will receive at the Maturity Date when it
(a) receives  16.0 million
from the buyers and (b) uses that amount to purchase
$19.8 million under a forward currency exchange contract
the Company has entered into with a currency broker to hedge the
Companys exposure to currency exchange rate fluctuations
prior to January 2007. USPI will accrete this note receivable to
the Maturity Value by recording interest income monthly at a
rate of approximately 4%.

The Reinvestment contractually is structured as a
subsidiary of USPI holding a 15% ownership interest in the
buyer. However, USPI has assigned its voting, dividend, and
other participation rights to the buyer, and the terms of the
Reinvestment call for the shares to be surrendered to the buyer
in January 2007 in exchange
for  16.0 million,
the collection of which is guaranteed by a bank. Accordingly,
USPI has no continuing involvement in the Spanish operations and
has treated the deferral of this amount as a financing and the
disposal as a discontinued operation.

In accordance with the requirements of
SFAS No. 144, the Company has reclassified its
historical results of operations to remove the Spanish
operations from its revenues and expenses on the accompanying
income statements, collapsing the net income related to the
Spanish operations into a single line, income (loss) from
discontinued operations. The gain on the sale is recorded
separately. The following table summarizes certain amounts
related to the Companys discontinued operations for the
periods presented (in thousands, except per share amounts):

|                                                                   |                                               |                    |        |                   |   |      |        |      |   |   |        |         |   |   |        |        |  
|------------------------------------------------------------------ | --------------------------------------------- | ------------------ | ------ | ----------------- | - | ---- | ------ | ---- | - | - | ------ | ------- | - | - | ------ | ------ | -
|                                                                   |                                               |                    |        |                  
|                                                                   |                                               | Three Months Ended |        | Nine Months Ended
|                                                                   |                                               | September 30,      |        | September 30,    
|                                                                   |                                               |                    |        |                  
|                                                                   |                                               | 2004               |        | 2003              |   | 2004 |        | 2003
|                                                                   |                                               |                    |        |                   |   |      |        |     
|Revenues(1)                                                        |                                               | $                  | 24,087 |                   |   | $    | 26,751 |      |   | $ | 99,078 |         |   | $ | 86,152 |       
|Income (loss) from discontinued operations before
    income taxes |                                               | $                  | (34    | )                 |   | $    | (1,085 | )    |   | $ | 6,305  |         |   | $ | 4,054  |       
|                                                                   | Income tax (expense) benefit                  |                    |        | 20                |   |      |        | 300  |   |   |        | (2,227  | ) |   |        | (1,614 | )
|                                                                   |                                               |                    |        |                   |   |      |        |      |   |   |        |         |   |   |        |       
|                                                                   | Income (loss) from discontinued operations(1) |                    | $      | (14               | ) |      | $      | (785 | ) |   | $      | 4,078   |   |   | $      | 2,440  |  
|                                                                   |                                               |                    |        |                   |   |      |        |      |   |   |        |         |   |   |        |       
|Gain on sale of discontinued operations before
    income taxes    |                                               | $                  | 72,493 |                   |   |      |       |      |   | $ | 72,493 |         |   |   |       |       
|                                                                   | Income tax expense                            |                    |        | (22,230           | ) |      |        |     |   |   |        | (22,230 | ) |   |        |       |  
|                                                                   |                                               |                    |        |                   |   |      |        |      |   |   |        |         |   |   |        |       
|                                                                   | Net gain on sale of discontinued operations   |                    | $      | 50,263            |   |      | $      |     |   |   | $      | 50,263  |   |   | $      |       |  
|                                                                   |                                               |                    |        |                   |   |      |        |      |   |   |        |         |   |   |        |       

8



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                   |                                            |                    |   |                   |      |      |   |       |       |   |   |      |      |  |   |      |      | 
|---------------------------------- | ------------------------------------------ | ------------------ | - | ----------------- | ---- | ---- | - | ----- | ----- | - | - | ---- | ---- |  | - | ---- | ---- | 
|                                   |                                            |                    |   |                  
|                                   |                                            | Three Months Ended |   | Nine Months Ended
|                                   |                                            | September 30,      |   | September 30,    
|                                   |                                            |                    |   |                  
|                                   |                                            | 2004               |   | 2003              |      | 2004 |   | 2003 
|                                   |                                            |                    |   |                   |      |      |   |      
|Earnings (loss) per diluted share: |                                            |                    |   |                   |      |      |   |       |       |   |   |      |      |  |   |     
|                                   | Income (loss) from discontinued operations |                    | $ |                  |      |      | $ | (0.02 | )     |   | $ | 0.14 |      |  | $ | 0.08 |     
|                                   | Gain on sale of discontinued operations    |                    |   | 1.71              |      |      |   |      |       |   |   | 1.72 |      |  |   |     |     
|                                   |                                            |                    |   |                   |      |      |   |       |       |   |   |      |      |  |   |     
|                                   |                                            | Total              |   | $                 | 1.71 |      |   | $     | (0.02 | ) |   | $    | 1.86 |  |   | $    | 0.08 | 
|                                   |                                            |                    |   |                   |      |      |   |       |       |   |   |      |      |  |   |     



---



|    |                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------
|(1) | 2004 amounts are prior to September 9, 2004,
    the effective date of the sale of the Spanish operations.



|    |                                               
|--- | ----------------------------------------------
|(3) | Acquisitions and Equity Method
    Investments

Effective January 1, 2004, the Company
acquired a controlling interest in an ambulatory surgery center
in Torrance, California in which the Company had previously
owned a noncontrolling interest. The $9.8 million cost was
paid in cash in December 2003 and was included in other
noncurrent assets at December 31, 2003.

Effective May 1, 2004, the Company acquired
a controlling interest in an ambulatory surgery center in
Austintown, Ohio, in which the Company had previously owned a
noncontrolling interest, for $6.4 million in cash.

Effective July 1, 2004, the Company acquired
a controlling interest in an ambulatory surgery center in
Reading, Pennsylvania, for $14.6 million in cash.

Effective August 1, 2004, the Company
acquired a controlling interest in an ambulatory surgery center
in Dallas, Texas which the Company had previously owned a
noncontrolling interest, for $3.2 million in cash.

Following are the unaudited pro forma results for
the three months and nine months ended September 30, 2004
and 2003 as if the acquisitions discussed above had occurred on
January 1 of each year (in thousands, except per share amounts):

|                                                          |  |                    |         |                   |  |      |        |      |  |   |         |  |  |   |         | 
|--------------------------------------------------------- |  | ------------------ | ------- | ----------------- |  | ---- | ------ | ---- |  | - | ------- |  |  | - | ------- | 
|                                                          |  |                    |         |                  
|                                                          |  | Three Months Ended |         | Nine Months Ended
|                                                          |  | September 30,      |         | September 30,    
|                                                          |  |                    |         |                  
|                                                          |  | 2004               |         | 2003              |  | 2004 |        | 2003
|                                                          |  |                    |         |                   |  |      |        |     
|Net revenues                                              |  | $                  | 100,690 |                   |  | $    | 87,724 |      |  | $ | 303,546 |  |  | $ | 253,079 | 
|Income from continuing operations                         |  |                    | 6,745   |                   |  |      | 7,254  |      |  |   | 24,126  |  |  |   | 20,900  | 
|Diluted earnings per share from continuing
    operations |  | $                  | 0.23    |                   |  | $    | 0.26   |      |  | $ | 0.82    |  |  | $ | 0.75    | 

The Company also engages in investing
transactions that are not business combinations. These
transactions primarily consist of acquisitions and sales of
noncontrolling equity interests in surgical facilities and the
investment of additional cash in surgical facilities under
development. During the nine months ended September 30,
2004, these transactions resulted in a net cash outflow of
$16.5 million, of which the most significant transaction
was the acquisition of noncontrolling interests in a surgical
hospital and an ambulatory surgery center in Oklahoma City,
Oklahoma, for $13.3 million in cash.

The Company controls a significant number of its
investees and therefore consolidates their results.
Additionally, the Company invests in a significant number of
facilities in which the Company has significant influence but
does not have control; the Company uses the equity method to
account for these investments. The majority of these investees
are partnerships or limited liability companies, which require
the associated tax benefit or expense to be recorded by the
partners or members. Summarized financial

9



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

information for the Companys equity method
investees on a combined basis was as follows (income statement
amounts are in thousands and reflect 100% of the investees
results on an aggregated basis):

|                                                 |                  |                    |    |                   |  |      |    |        |  |  |    |         |  |  |    |         | 
|------------------------------------------------ | ---------------- | ------------------ | -- | ----------------- |  | ---- | -- | ------ |  |  | -- | ------- |  |  | -- | ------- | 
|                                                 |                  |                    |    |                  
|                                                 |                  | Three Months Ended |    | Nine Months Ended
|                                                 |                  | September 30,      |    | September 30,    
|                                                 |                  |                    |    |                  
|                                                 |                  | 2004               |    | 2003              |  | 2004 |    | 2003  
|                                                 |                  |                    |    |                   |  |      |    |       
|Unconsolidated facilities operated at period end |                  |                    | 37 |                   |  |      | 32 |        |  |  | 37 |         |  |  | 32 |        
|Income statement information                     |                  |                    |    |                   |  |      |    |        |  |  |    |         |  |  |    |        
|                                                 | Revenues         |                    | $  | 80,251            |  |      | $  | 65,443 |  |  | $  | 241,281 |  |  | $  | 168,417 | 
|                                                 | Operating income |                    |    | 21,104            |  |      |    | 22,780 |  |  |    | 76,662  |  |  |    | 52,664  | 
|                                                 | Net income       |                    |    | 18,270            |  |      |    | 20,729 |  |  |    | 69,172  |  |  |    | 46,573  | 



|    |                   
|--- | ------------------
|(4) | Earnings Per Share

Basic earnings per share is computed on the basis
of the weighted average number of common shares outstanding.
Diluted earnings per share is computed on the basis of the
weighted average number of common shares outstanding plus the
effect of outstanding options, warrants and restricted stock,
except where such effect would be antidilutive. The following
table sets forth the computation of basic and diluted earnings
per share for the three months and nine months ended
September 30, 2004 and 2003 (in thousands, except per share
amounts):

|                                                |                               |                    |        |                   |        |      |        |       |       |  |        |        |        |  |        |        |        | 
|----------------------------------------------- | ----------------------------- | ------------------ | ------ | ----------------- | ------ | ---- | ------ | ----- | ----- |  | ------ | ------ | ------ |  | ------ | ------ | ------ | 
|                                                |                               |                    |        |                  
|                                                |                               | Three Months Ended |        | Nine Months Ended
|                                                |                               | September 30,      |        | September 30,    
|                                                |                               |                    |        |                  
|                                                |                               | 2004               |        | 2003              |        | 2004 |        | 2003 
|                                                |                               |                    |        |                   |        |      |        |      
|Net income attributable to common shareholders: |                               |                    |        |                   |        |      |        |       |       |  |        |        |        |  |        |       
|                                                | Continuing operations         |                    | $      | 6,735             |        |      | $      | 6,361 |       |  | $      | 23,157 |        |  | $      | 18,431 |       
|                                                | Discontinued operations       |                    |        | 50,249            |        |      |        | (785  | )     |  |        | 54,341 |        |  |        | 2,440  |       
|                                                |                               |                    |        |                   |        |      |        |       |       |  |        |        |        |  |        |       
|                                                |                               | Total              |        | $                 | 56,984 |      |        | $     | 5,576 |  |        | $      | 77,498 |  |        | $      | 20,871 | 
|                                                |                               |                    |        |                   |        |      |        |       |       |  |        |        |        |  |        |       
|Weighted average common shares outstanding      |                               |                    | 28,023 |                   |        |      | 27,151 |       |       |  | 27,870 |        |        |  | 27,088 |       
|Effect of dilutive securities:                  |                               |                    |        |                   |        |      |        |       |       |  |        |        |        |  |        |       
|                                                | Stock options                 |                    |        | 1,186             |        |      |        | 925   |       |  |        | 1,267  |        |  |        | 648    |       
|                                                | Warrants and restricted stock |                    |        | 120               |        |      |        | 322   |       |  |        | 120    |        |  |        | 297    |       
|                                                |                               |                    |        |                   |        |      |        |       |       |  |        |        |        |  |        |       
|Shares used for diluted earnings per share      |                               |                    | 29,329 |                   |        |      | 28,398 |       |       |  | 29,257 |        |        |  | 28,033 |       
|                                                |                               |                    |        |                   |        |      |        |       |       |  |        |        |        |  |        |       
|Basic earnings per share:                       |                               |                    |        |                   |        |      |        |       |       |  |        |        |        |  |        |       
|                                                | Continuing operations         |                    | $      | 0.24              |        |      | $      | 0.23  |       |  | $      | 0.83   |        |  | $      | 0.68   |       
|                                                | Discontinued operations       |                    |        | 1.79              |        |      |        | (0.02 | )     |  |        | 1.95   |        |  |        | 0.09   |       
|                                                |                               |                    |        |                   |        |      |        |       |       |  |        |        |        |  |        |       
|                                                |                               | Total              |        | $                 | 2.03   |      |        | $     | 0.21  |  |        | $      | 2.78   |  |        | $      | 0.77   | 
|                                                |                               |                    |        |                   |        |      |        |       |       |  |        |        |        |  |        |       
|Diluted earnings per share:                     |                               |                    |        |                   |        |      |        |       |       |  |        |        |        |  |        |       
|                                                | Continuing operations         |                    | $      | 0.23              |        |      | $      | 0.22  |       |  | $      | 0.79   |        |  | $      | 0.66   |       
|                                                | Discontinued operations       |                    |        | 1.71              |        |      |        | (0.02 | )     |  |        | 1.86   |        |  |        | 0.08   |       
|                                                |                               |                    |        |                   |        |      |        |       |       |  |        |        |        |  |        |       
|                                                |                               | Total              |        | $                 | 1.94   |      |        | $     | 0.20  |  |        | $      | 2.65   |  |        | $      | 0.74   | 
|                                                |                               |                    |        |                   |        |      |        |       |       |  |        |        |        |  |        |       



|    |               
|--- | --------------
|(5) | Long-Term Debt

On September 27, 2004, the Company
terminated its primary U.S. revolving credit facility,
under which no amounts were outstanding. The Companys
management initiated this termination in advance of

10



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

the scheduled maturity date of November 2005
given the Companys ongoing positive operating cash flows
coupled with the receipt of approximately $163.2 million in
cash related to the sale of the Spanish operations. Accordingly,
the Company wrote off approximately $1.6 million
($1.1 million after the related tax benefit) in unamortized
debt issue costs during the third quarter of 2004.



|    |                    
|--- | -------------------
|(6) | Segment Disclosures

Statement of Financial Accounting Standards
No. 131, Disclosures About Segments of an Enterprise and
Related Information,establishes standards for reporting
information about operating segments in financial statements.
USPIs business is the operation of surgery centers,
private surgical hospitals and related businesses in the United
States and the United Kingdom. USPIs chief operating
decision maker, as that term is defined in the accounting
standard, regularly reviews financial information about its
surgical facilities for assessing performance and allocating
resources both domestically and abroad. Accordingly, USPIs
reportable segments consist of (1) U.S. based
facilities and (2) United Kingdom based facilities. Prior
to the Companys September 2004 sale of its Spanish
operations, the Company operated in two segments: the United
States and Western Europe. The Western Europe segment consisted
of operations in Spain and the United Kingdom. As a result of
the sale of its Spanish operations, the Companys
non-U.S. segment now consists solely of its operations in
the United Kingdom. Accordingly, all amounts related to the
Spanish operations have been removed from all periods presented
in the Companys segment disclosures.

|                                                  |  |        |         |         |  |       |         |   |  |   |         |  
|------------------------------------------------- |  | ------ | ------- | ------- |  | ----- | ------- | - |  | - | ------- | -
|                                                  |  | United |         | United  |  |      
|Three Months Ended September 30, 2004 (unaudited) |  | States |         | Kingdom |  | Total
|                                                  |  |        |         |         |  |      
|Net patient service revenue                       |  | $      | 65,860  |         |  | $     | 21,319  |   |  | $ | 87,179  |  
|Other revenue                                     |  |        | 13,000  |         |  |       |        |   |  |   | 13,000  |  
|                                                  |  |        |         |         |  |       |         |   |  |   |         |  
|Total revenues                                    |  | $      | 78,860  |         |  | $     | 21,319  |   |  | $ | 100,179 |  
|                                                  |  |        |         |         |  |       |         |   |  |   |         |  
|Depreciation and amortization                     |  | $      | 5,186   |         |  | $     | 1,738   |   |  | $ | 6,924   |  
|Operating income                                  |  |        | 21,142  |         |  |       | 3,745   |   |  |   | 24,887  |  
|Net interest expense                              |  |        | (5,766  | )       |  |       | (883    | ) |  |   | (6,649  | )
|Income tax expense                                |  |        | (2,957  | )       |  |       | (591    | ) |  |   | (3,548  | )
|Total assets                                      |  |        | 706,174 |         |  |       | 187,574 |   |  |   | 893,748 |  
|Capital expenditures                              |  |        | 4,596   |         |  |       | 1,823   |   |  |   | 6,419   |  

|                                                  |  |        |         |         |  |       |         |   |  |   |         |  
|------------------------------------------------- |  | ------ | ------- | ------- |  | ----- | ------- | - |  | - | ------- | -
|                                                  |  | United |         | United  |  |      
|Three Months Ended September 30, 2003 (unaudited) |  | States |         | Kingdom |  | Total
|                                                  |  |        |         |         |  |      
|Net patient service revenue                       |  | $      | 52,598  |         |  | $     | 15,000  |   |  | $ | 67,598  |  
|Other revenue                                     |  |        | 14,471  |         |  |       |        |   |  |   | 14,471  |  
|                                                  |  |        |         |         |  |       |         |   |  |   |         |  
|Total revenues                                    |  | $      | 67,069  |         |  | $     | 15,000  |   |  | $ | 82,069  |  
|                                                  |  |        |         |         |  |       |         |   |  |   |         |  
|Depreciation and amortization                     |  | $      | 4,554   |         |  | $     | 1,329   |   |  | $ | 5,883   |  
|Operating income                                  |  |        | 19,463  |         |  |       | 1,942   |   |  |   | 21,405  |  
|Net interest expense                              |  |        | (5,346  | )       |  |       | (753    | ) |  |   | (6,099  | )
|Income tax expense                                |  |        | (3,427  | )       |  |       | (407    | ) |  |   | (3,834  | )
|Total assets                                      |  |        | 444,766 |         |  |       | 150,822 |   |  |   | 595,588 |  
|Capital expenditures                              |  |        | 2,929   |         |  |       | 1,241   |   |  |   | 4,170   |  

11



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                                 |  |        |         |         |  |       |         |   |  |   |         |  
|------------------------------------------------ |  | ------ | ------- | ------- |  | ----- | ------- | - |  | - | ------- | -
|                                                 |  | United |         | United  |  |      
|Nine Months Ended September 30, 2004 (unaudited) |  | States |         | Kingdom |  | Total
|                                                 |  |        |         |         |  |      
|Net patient service revenue                      |  | $      | 188,983 |         |  | $     | 62,951  |   |  | $ | 251,934 |  
|Other revenue                                    |  |        | 43,042  |         |  |       |        |   |  |   | 43,042  |  
|                                                 |  |        |         |         |  |       |         |   |  |   |         |  
|Total revenues                                   |  | $      | 232,025 |         |  | $     | 62,951  |   |  | $ | 294,976 |  
|                                                 |  |        |         |         |  |       |         |   |  |   |         |  
|Depreciation and amortization                    |  | $      | 14,790  |         |  | $     | 5,033   |   |  | $ | 19,823  |  
|Operating income                                 |  |        | 67,581  |         |  |       | 11,072  |   |  |   | 78,653  |  
|Net interest expense                             |  |        | (16,525 | )       |  |       | (2,982  | ) |  |   | (19,507 | )
|Income tax expense                               |  |        | (11,216 | )       |  |       | (1,787  | ) |  |   | (13,003 | )
|Total assets                                     |  |        | 706,174 |         |  |       | 187,574 |   |  |   | 893,748 |  
|Capital expenditures                             |  |        | 31,646  |         |  |       | 7,337   |   |  |   | 38,983  |  

|                                                 |  |        |         |         |  |       |         |   |  |   |         |  
|------------------------------------------------ |  | ------ | ------- | ------- |  | ----- | ------- | - |  | - | ------- | -
|                                                 |  | United |         | United  |  |      
|Nine Months Ended September 30, 2003 (unaudited) |  | States |         | Kingdom |  | Total
|                                                 |  |        |         |         |  |      
|Net patient service revenue                      |  | $      | 155,095 |         |  | $     | 43,053  |   |  | $ | 198,148 |  
|Other revenue                                    |  |        | 38,123  |         |  |       |        |   |  |   | 38,123  |  
|                                                 |  |        |         |         |  |       |         |   |  |   |         |  
|Total revenues                                   |  | $      | 193,218 |         |  | $     | 43,053  |   |  | $ | 236,271 |  
|                                                 |  |        |         |         |  |       |         |   |  |   |         |  
|Depreciation and amortization                    |  | $      | 13,203  |         |  | $     | 3,459   |   |  | $ | 16,662  |  
|Operating income                                 |  |        | 55,965  |         |  |       | 7,108   |   |  |   | 63,073  |  
|Net interest expense                             |  |        | (15,778 | )       |  |       | (1,863  | ) |  |   | (17,641 | )
|Income tax expense                               |  |        | (9,716  | )       |  |       | (1,368  | ) |  |   | (11,084 | )
|Total assets                                     |  |        | 444,766 |         |  |       | 150,822 |   |  |   | 595,588 |  
|Capital expenditures                             |  |        | 9,970   |         |  |       | 10,429  |   |  |   | 20,399  |  



|    |                                                 
|--- | ------------------------------------------------
|(7) | Condensed Consolidating Financial
    Statements

The following information is presented as
required by regulations of the Securities and Exchange
Commission in connection with the Companys publicly traded
Senior Subordinated Notes. This information is not routinely
prepared for use by management. The operating and investing
activities of the separate legal entities included in the
consolidated financial statements are fully interdependent and
integrated. Accordingly, the operating results of the separate
legal entities are not representative of what the operating
results would be on a stand-alone basis. Revenues and operating
expenses of the separate legal entities include intercompany
charges for management and other services. The $150 million
10% Senior Subordinated Notes due 2011 were issued in a
private offering on December 19, 2001 and subsequently
registered as publicly traded securities through a Form S-4
effective January 15, 2002 by USPIs wholly owned
finance subsidiary, United Surgical Partners Holdings, Inc.
(USPH), which was formed in 2001. The notes are guaranteed by
USPI, which does not have independent assets or operations, and
USPIs wholly owned subsidiaries domiciled in the United
States. USPIs investees in the United Kingdom are not
guarantors of the obligation, nor were USPIs investees in
Spain. USPIs investees in the United States in which USPI
owns less than 100% are not guarantors of the obligation. The
financial positions and results of operations (below, in
thousands) of the respective guarantors are based upon the
guarantor relationship at the end of the period presented,
except for the Companys Spanish operations,

12



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

which have been classified as discontinued
operations in the condensed consolidated statements of income
shown below.

Condensed Consolidating Balance
Sheets:

|                                         |                                            |            |         |                   |  |               |         |              |  |  |          |          |   |   |         |         | 
|---------------------------------------- | ------------------------------------------ | ---------- | ------- | ----------------- |  | ------------- | ------- | ------------ |  |  | -------- | -------- | - | - | ------- | ------- | 
|                                         |                                            |            |         | Non-Participating |  | Consolidation |         | Consolidated
|As of September 30, 2004                 |                                            | Guarantors |         | Investees         |  | Adjustments   |         | Total       
|                                         |                                            |            |         |                   |  |               |         |             
|Assets:                                  |                                            |            |         |                   |  |               |         |              |  |  |          |          |   |   |         |        
|Current assets:                          |                                            |            |         |                   |  |               |         |              |  |  |          |          |   |   |         |        
|Cash and cash equivalents                |                                            | $          | 193,697 |                   |  | $             | 11,076  |              |  |  |         |          |   | $ | 204,773 |        
|Patient receivables, net                 |                                            |            | 166     |                   |  |               | 32,549  |              |  |  |         |          |   |   | 32,715  |        
|Other receivables                        |                                            |            |        |                   |  |               | 126,444 |              |  |  | (112,215 | )        |   |   | 14,229  |        
|Inventories of supplies                  |                                            |            | 212     |                   |  |               | 6,278   |              |  |  |         |          |   |   | 6,490   |        
|Other                                    |                                            |            | 11,147  |                   |  |               | 2,168   |              |  |  |         |          |   |   | 13,315  |        
|                                         |                                            |            |         |                   |  |               |         |              |  |  |          |          |   |   |         |        
|                                         | Total current assets                       |            |         | 205,222           |  |               |         | 178,515      |  |  |          | (112,215 | ) |   |         | 271,522 | 
|Property and equipment, net              |                                            |            | 31,386  |                   |  |               | 208,972 |              |  |  |         |          |   |   | 240,358 |        
|Investments in affiliates                |                                            |            | 230,563 |                   |  |               | 1,308   |              |  |  | (191,759 | )        |   |   | 40,112  |        
|Intangible assets, net                   |                                            |            | 217,544 |                   |  |               | 110,136 |              |  |  | (14,909  | )        |   |   | 312,771 |        
|Other                                    |                                            |            | 97,740  |                   |  |               | 22,291  |              |  |  | (91,046  | )        |   |   | 28,985  |        
|                                         |                                            |            |         |                   |  |               |         |              |  |  |          |          |   |   |         |        
|                                         | Total assets                               |            | $       | 782,455           |  |               | $       | 521,222      |  |  | $        | (409,929 | ) |   | $       | 893,748 | 
|                                         |                                            |            |         |                   |  |               |         |              |  |  |          |          |   |   |         |        
|                                        
|Liabilities and Stockholders
    Equity
|Current liabilities:                     |                                            |            |         |                   |  |               |         |              |  |  |          |          |   |   |         |        
|Accounts payable                         |                                            | $          | 356     |                   |  | $             | 12,772  |              |  |  |         |          |   | $ | 13,128  |        
|Accrued expenses and other               |                                            |            | 222,838 |                   |  |               | 30,862  |              |  |  | (176,434 | )        |   |   | 77,266  |        
|Current portion of long-term debt        |                                            |            | 2,100   |                   |  |               | 13,744  |              |  |  | (1,591   | )        |   |   | 14,253  |        
|                                         |                                            |            |         |                   |  |               |         |              |  |  |          |          |   |   |         |        
|                                         | Total current liabilities                  |            |         | 225,294           |  |               |         | 57,378       |  |  |          | (178,025 | ) |   |         | 104,647 | 
|Long-term debt                           |                                            |            | 154,958 |                   |  |               | 124,573 |              |  |  | (21,094  | )        |   |   | 258,437 |        
|Other liabilities                        |                                            |            | 23,669  |                   |  |               | 8,424   |              |  |  |         |          |   |   | 32,093  |        
|Minority interests                       |                                            |            |        |                   |  |               | 11,140  |              |  |  | 32,786   |          |   |   | 43,926  |        
|Stockholders equity                     |                                            |            | 378,534 |                   |  |               | 319,707 |              |  |  | (243,596 | )        |   |   | 454,645 |        
|                                         |                                            |            |         |                   |  |               |         |              |  |  |          |          |   |   |         |        
|                                         | Total liabilities and stockholders equity |            | $       | 782,455           |  |               | $       | 521,222      |  |  | $        | 409,929  |   |   | $       | 893,748 | 
|                                         |                                            |            |         |                   |  |               |         |              |  |  |          |          |   |   |         |        

|                          |                      |            |        |                   |  |               |        |              |  |   |         |         |   |   |        |         | 
|------------------------- | -------------------- | ---------- | ------ | ----------------- |  | ------------- | ------ | ------------ |  | - | ------- | ------- | - | - | ------ | ------- | 
|                          |                      |            |        | Non-Participating |  | Consolidation |        | Consolidated
|As of December 31, 2003   |                      | Guarantors |        | Investees         |  | Adjustments   |        | Total       
|                          |                      |            |        |                   |  |               |        |             
|Assets:                   |                      |            |        |                   |  |               |        |              |  |   |         |         |   |   |        |        
|Current assets:           |                      |            |        |                   |  |               |        |              |  |   |         |         |   |   |        |        
|Cash and cash equivalents |                      | $          | 15,147 |                   |  | $             | 13,372 |              |  | $ |        |         |   | $ | 28,519 |        
|Patient receivables, net  |                      |            | 127    |                   |  |               | 56,464 |              |  |   |        |         |   |   | 56,591 |        
|Other receivables         |                      |            | 37,980 |                   |  |               | 21,183 |              |  |   | (38,995 | )       |   |   | 20,168 |        
|Inventories of supplies   |                      |            | 279    |                   |  |               | 8,745  |              |  |   |        |         |   |   | 9,024  |        
|Other                     |                      |            | 11,781 |                   |  |               | 7,514  |              |  |   |        |         |   |   | 19,295 |        
|                          |                      |            |        |                   |  |               |        |              |  |   |         |         |   |   |        |        
|                          | Total current assets |            |        | 65,314            |  |               |        | 107,278      |  |   |         | (38,995 | ) |   |        | 133,597 | 

13



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |         | 
|---------------------------------------- | ------------------------------------------ | ---------- | ------- | ----------------- |  | ------------- | ------- | ------------ |  | - | -------- | -------- | - | - | ------- | ------- | 
|                                         |                                            |            |         | Non-Participating |  | Consolidation |         | Consolidated
|As of December 31, 2003                  |                                            | Guarantors |         | Investees         |  | Adjustments   |         | Total       
|                                         |                                            |            |         |                   |  |               |         |             
|Property and equipment, net              |                                            |            | 36,044  |                   |  |               | 312,587 |              |  |   | (568     | )        |   |   | 348,063 |        
|Investments in affiliates                |                                            |            | 175,504 |                   |  |               | 14,344  |              |  |   | (157,744 | )        |   |   | 32,104  |        
|Intangible assets, net                   |                                            |            | 184,314 |                   |  |               | 158,378 |              |  |   | (16,047  | )        |   |   | 326,645 |        
|Other                                    |                                            |            | 120,142 |                   |  |               | 11,521  |              |  |   | (101,563 | )        |   |   | 30,100  |        
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|                                         | Total assets                               |            | $       | 581,318           |  |               | $       | 604,108      |  |   | $        | (314,917 | ) |   | $       | 870,509 | 
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|                                        
|Liabilities and Stockholders
    Equity
|Current liabilities:                     |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|Accounts payable                         |                                            | $          | 1,396   |                   |  | $             | 35,994  |              |  | $ | (937     | )        |   | $ | 36,453  |        
|Accrued expenses                         |                                            |            | 27,138  |                   |  |               | 24,500  |              |  |   | (1,245   | )        |   |   | 50,393  |        
|Current portion of long-term debt        |                                            |            | 1,763   |                   |  |               | 16,146  |              |  |   | (1,115   | )        |   |   | 16,794  |        
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|                                         | Total current liabilities                  |            |         | 30,297            |  |               |         | 76,640       |  |   |          | (3,297   | ) |   |         | 103,640 | 
|Long-term debt                           |                                            |            | 156,963 |                   |  |               | 264,020 |              |  |   | (133,033 | )        |   |   | 287,950 |        
|Other liabilities                        |                                            |            | 18,998  |                   |  |               | 23,308  |              |  |   |         |          |   |   | 42,306  |        
|Minority interests                       |                                            |            |        |                   |  |               | 11,403  |              |  |   | 34,555   |          |   |   | 45,958  |        
|Stockholders equity                     |                                            |            | 375,060 |                   |  |               | 228,737 |              |  |   | (213,142 | )        |   |   | 390,655 |        
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|                                         | Total liabilities and stockholders equity |            | $       | 581,318           |  |               | $       | 604,108      |  |   | $        | (314,917 | ) |   | $       | 870,509 | 
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        

Condensed Consolidating Statements of
Income:

|                                                                 |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  
|---------------------------------------------------------------- |  | ---------- | ------- | ----------------- |  | ------------- | ------- | ------------ |  | - | ------- | - |  | - | ------- | -
|                                                                 |  |            |         | Non-Participating |  | Consolidation |         | Consolidated
|Nine Months Ended September 30, 2004                             |  | Guarantors |         | Investees         |  | Adjustments   |         | Total       
|                                                                 |  |            |         |                   |  |               |         |             
|Revenues                                                         |  | $          | 68,546  |                   |  | $             | 240,726 |              |  | $ | (14,296 | ) |  | $ | 294,976 |  
|Operating expenses, excluding depreciation and
    amortization  |  |            | 42,332  |                   |  |               | 168,760 |              |  |   | (14,592 | ) |  |   | 196,500 |  
|Depreciation and amortization                                    |  |            | 7,895   |                   |  |               | 11,928  |              |  |   |        |   |  |   | 19,823  |  
|                                                                 |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  
|Operating income                                                 |  |            | 18,319  |                   |  |               | 60,038  |              |  |   | 296     |   |  |   | 78,653  |  
|Interest expense, net                                            |  |            | (12,089 | )                 |  |               | (7,418  | )            |  |   |        |   |  |   | (19,507 | )
|Other income (expense)                                           |  |            | (878    | )                 |  |               | (319    | )            |  |   | (233    | ) |  |   | (1,430  | )
|                                                                 |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  
|Income (loss) before minority interests                          |  |            | 5,352   |                   |  |               | 52,301  |              |  |   | 63      |   |  |   | 57,716  |  
|Minority interests in income of consolidated
    subsidiaries    |  |            |        |                   |  |               | (9,353  | )            |  |   | (12,203 | ) |  |   | (21,556 | )
|                                                                 |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  
|Income (loss) from continuing operations before
    income taxes |  |            | 5,352   |                   |  |               | 42,948  |              |  |   | (12,140 | ) |  |   | 36,160  |  
|Income tax expense                                               |  |            | (11,126 | )                 |  |               | (1,877  | )            |  |   |        |   |  |   | (13,003 | )
|                                                                 |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  
|Incoming from continuing operations                              |  |            | (5,774  | )                 |  |               | 41,071  |              |  |   | (12,140 | ) |  |   | 23,157  |  
|Earnings from discontinued operations, net of tax                |  |            | 2,145   |                   |  |               | 52,196  |              |  |   |        |   |  |   | 54,341  |  
|                                                                 |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  
|Net income (loss)                                                |  | $          | (3,629  | )                 |  | $             | 93,267  |              |  | $ | (12,140 | ) |  | $ | 77,498  |  
|                                                                 |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  

14



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                                                 |  |            |         |                   |  |               |         |              |  |   |        |   |  |   |         |  
|---------------------------------------------------------------- |  | ---------- | ------- | ----------------- |  | ------------- | ------- | ------------ |  | - | ------ | - |  | - | ------- | -
|                                                                 |  |            |         | Non-Participating |  | Consolidation |         | Consolidated
|Nine Months Ended September 30, 2003                             |  | Guarantors |         | Investees         |  | Adjustments   |         | Total       
|                                                                 |  |            |         |                   |  |               |         |             
|Revenues                                                         |  | $          | 60,561  |                   |  | $             | 183,972 |              |  | $ | (8,262 | ) |  | $ | 236,271 |  
|Operating expenses, excluding depreciation and
    amortization  |  |            | 39,425  |                   |  |               | 126,116 |              |  |   | (9,005 | ) |  |   | 156,536 |  
|Depreciation and amortization                                    |  |            | 7,632   |                   |  |               | 9,030   |              |  |   |       |   |  |   | 16,662  |  
|                                                                 |  |            |         |                   |  |               |         |              |  |   |        |   |  |   |         |  
|Operating income                                                 |  |            | 13,504  |                   |  |               | 48,826  |              |  |   | 743    |   |  |   | 63,073  |  
|Interest expense, net                                            |  |            | (12,259 | )                 |  |               | (5,382  | )            |  |   |       |   |  |   | (17,641 | )
|Other expense                                                    |  |            | 234     |                   |  |               | 463     |              |  |   |       |   |  |   | 697     |  
|                                                                 |  |            |         |                   |  |               |         |              |  |   |        |   |  |   |         |  
|Income before minority interests                                 |  |            | 1,479   |                   |  |               | 43,907  |              |  |   | 743    |   |  |   | 46,129  |  
|Minority interests in income of consolidated
    subsidiaries    |  |            |        |                   |  |               | (9,028  | )            |  |   | (7,586 | ) |  |   | (16,614 | )
|                                                                 |  |            |         |                   |  |               |         |              |  |   |        |   |  |   |         |  
|Income (loss) from continuing operations before
    income taxes |  |            | 1,479   |                   |  |               | 34,879  |              |  |   | (6,843 | ) |  |   | 29,515  |  
|Income tax expense                                               |  |            | (9,442  | )                 |  |               | (1,448  | )            |  |   | (194   | ) |  |   | (11,084 | )
|                                                                 |  |            |         |                   |  |               |         |              |  |   |        |   |  |   |         |  
|Income from continuing operations                                |  |            | (7,963  | )                 |  |               | 33,431  |              |  |   | (7,037 | ) |  |   | 18,431  |  
|Earnings from discontinued operations, net of tax                |  |            | 2,274   |                   |  |               | 166     |              |  |   |       |   |  |   | 2,440   |  
|                                                                 |  |            |         |                   |  |               |         |              |  |   |        |   |  |   |         |  
|Net income (loss)                                                |  | $          | (5,689  | )                 |  | $             | 33,597  |              |  | $ | (7,037 | ) |  | $ | 20,871  |  
|                                                                 |  |            |         |                   |  |               |         |              |  |   |        |   |  |   |         |  

Condensed Consolidating Statements of Cash
Flows:

|                                                                                                                 |                                           |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |         | 
|---------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ---------- | ------- | ----------------- | - | ------------- | ------- | ------------ | - | - | ------- | ------- | - | - | ------- | ------- | 
|                                                                                                                 |                                           |            |         | Non-Participating |   | Consolidation |         | Consolidated
|Nine Months Ended September 30, 2004                                                                             |                                           | Guarantors |         | Investees         |   | Adjustments   |         | Total       
|                                                                                                                 |                                           |            |         |                   |   |               |         |             
|Cash flows from operating activities:                                                                            |                                           |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|Net income (loss)                                                                                                |                                           | $          | (5,772  | )                 |   | $             | 41,070  |              |   | $ | (12,141 | )       |   | $ | 23,157  |        
|Changes in operating and intercompany assets and
    liabilities and noncash items included in net income (loss) |                                           |            | 238,300 |                   |   |               | (99,418 | )            |   |   | (85,466 | )       |   |   | 53,416  |        
|                                                                                                                 |                                           |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|                                                                                                                 | Net cash provided by operating activities |            |         | 232,528           |   |               |         | (58,348      | ) |   |         | (97,607 | ) |   |         | 76,573  | 
|Cash flows from investing activities:                                                                            |                                           |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|Purchases of property and equipment, net                                                                         |                                           |            | (4,584  | )                 |   |               | (12,218 | )            |   |   |        |         |   |   | (16,802 | )      
|Purchases of new businesses                                                                                      |                                           |            | (40,717 | )                 |   |               | (18     | )            |   |   |        |         |   |   | (40,735 | )      
|Proceeds from sale of Spanish operations                                                                         |                                           |            |        |                   |   |               | 229,510 |              |   |   | (66,305 | )       |   |   | 163,205 |        
|Other items                                                                                                      |                                           |            | (1,926  | )                 |   |               |         |              |   |   |         |         |   |   | (1,926  | )      
|                                                                                                                 |                                           |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|                                                                                                                 | Net cash used in investing activities     |            |         | (47,227           | ) |               |         | 217,274      |   |   |         | (66,305 | ) |   |         | 103,742 | 

15



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                             |                                                         |            |         |                   |   |               |          |              |   |   |         |         |  |   |         |        |  
|-------------------------------------------- | ------------------------------------------------------- | ---------- | ------- | ----------------- | - | ------------- | -------- | ------------ | - | - | ------- | ------- |  | - | ------- | ------ | -
|                                             |                                                         |            |         | Non-Participating |   | Consolidation |          | Consolidated
|Nine Months Ended September 30, 2004         |                                                         | Guarantors |         | Investees         |   | Adjustments   |          | Total       
|                                             |                                                         |            |         |                   |   |               |          |             
|Cash flows from financing activities:        |                                                         |            |         |                   |   |               |          |              |   |   |         |         |  |   |         |       
|Long-term borrowings, net                    |                                                         |            | (6,534  | )                 |   |               | 1,785    |              |   |   |        |         |  |   | (4,749  | )     
|Proceeds from issuance of common stock       |                                                         |            | 6,473   |                   |   |               |         |              |   |   |        |         |  |   | 6,473   |       
|Other items                                  |                                                         |            | (7,532  | )                 |   |               | (163,913 | )            |   |   | 163,912 |         |  |   | (7,533  | )     
|                                             |                                                         |            |         |                   |   |               |          |              |   |   |         |         |  |   |         |       
|                                             | Net cash provided by (used in) financing
    activities |            |         | (7,593            | ) |               |          | (162,128     | ) |   |         | 163,912 |  |   |         | (5,809 | )
|Net cash provided by discontinued operations |                                                         |            |        |                   |   |               | 1,516    |              |   |   |        |         |  |   | 1,516   |       
|Effect of exchange rate changes on cash      |                                                         |            |        |                   |   |               | 232      |              |   |   |        |         |  |   | 232     |       
|Net increase in cash                         |                                                         |            | 177,708 |                   |   |               | (1,454   | )            |   |   |        |         |  |   | 176,254 |       
|Cash at the beginning of the period          |                                                         |            | 15,147  |                   |   |               | 13,372   |              |   |   |        |         |  |   | 28,519  |       
|                                             |                                                         |            |         |                   |   |               |          |              |   |   |         |         |  |   |         |       
|Cash at the end of the period                |                                                         | $          | 192,855 |                   |   | $             | 11,918   |              |   | $ |        |         |  | $ | 204,773 |       
|                                             |                                                         |            |         |                   |   |               |          |              |   |   |         |         |  |   |         |       

|                                                                                                                 |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |         |  
|---------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------- | ------- | ----------------- | - | ------------- | ------- | ------------ | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                                                                 |                                                         |            |         | Non-Participating |   | Consolidation |         | Consolidated
|Nine Months Ended September 30, 2003                                                                             |                                                         | Guarantors |         | Investees         |   | Adjustments   |         | Total       
|                                                                                                                 |                                                         |            |         |                   |   |               |         |             
|Cash flows from operating activities:                                                                            |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|Net income (loss)                                                                                                |                                                         | $          | (7,963  | )                 |   | $             | 33,431  |              |   | $ | (7,037  | )       |   | $ | 18,431  |        
|Changes in operating and intercompany assets and
    liabilities and noncash items included in net income (loss) |                                                         |            | 41,140  |                   |   |               | (23,267 | )            |   |   | 35,164  |         |   |   | 53,037  |        
|                                                                                                                 |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|                                                                                                                 | Net cash provided by operating activities               |            |         | 33,177            |   |               |         | 10,164       |   |   |         | 28,127  |   |   |         | 71,468  |  
|Cash flows from investing activities:                                                                            |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|Purchases of property and equipment, net                                                                         |                                                         |            | (3,854  | )                 |   |               | (13,833 | )            |   |   |        |         |   |   | (17,687 | )      
|Purchases of new businesses                                                                                      |                                                         |            | (23,920 | )                 |   |               | (13,871 | )            |   |   |        |         |   |   | (37,791 | )      
|Other items                                                                                                      |                                                         |            | (4,257  | )                 |   |               |        |              |   |   |        |         |   |   | (4,257  | )      
|                                                                                                                 |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|                                                                                                                 | Net cash used in investing activities                   |            |         | (32,031           | ) |               |         | (27,704      | ) |   |         |        |   |   |         | (59,735 | )
|Cash flows from financing activities:                                                                            |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|Long-term borrowings, net                                                                                        |                                                         |            | (1,798  | )                 |   |               | 30,031  |              |   |   | (28,127 | )       |   |   | 106     |        
|Proceeds from issuance of common stock                                                                           |                                                         |            | 2,030   |                   |   |               |        |              |   |   |        |         |   |   | 2,030   |        
|Other items                                                                                                      |                                                         |            | (5,649  | )                 |   |               |        |              |   |   |        |         |   |   | (5,649  | )      
|                                                                                                                 |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|                                                                                                                 | Net cash provided by (used in) financing
    activities |            |         | (5,417            | ) |               |         | 30,031       |   |   |         | (28,127 | ) |   |         | (3,513  | )

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UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                         |  |            |        |                   |  |               |         |              |  |   |   |  |  |   |         |  
|---------------------------------------- |  | ---------- | ------ | ----------------- |  | ------------- | ------- | ------------ |  | - | - |  |  | - | ------- | -
|                                         |  |            |        | Non-Participating |  | Consolidation |         | Consolidated
|Nine Months Ended September 30, 2003     |  | Guarantors |        | Investees         |  | Adjustments   |         | Total       
|                                         |  |            |        |                   |  |               |         |             
|Net cash used in discontinued operations |  |            |       |                   |  |               | (10,178 | )            |  |   |  |  |  |   | (10,178 | )
|Effect of exchange rate changes on cash  |  |            |       |                   |  |               | (223    | )            |  |   |  |  |  |   | (223    | )
|Net increase (decrease) in cash          |  |            | (4,271 | )                 |  |               | 2,090   |              |  |   |  |  |  |   | (2,181  | )
|Cash at the beginning of the period      |  |            | 24,712 |                   |  |               | 22,859  |              |  |   |  |  |  |   | 47,571  |  
|                                         |  |            |        |                   |  |               |         |              |  |   |   |  |  |   |         |  
|Cash at the end of the period            |  | $          | 20,441 |                   |  | $             | 24,949  |              |  | $ |  |  |  | $ | 45,390  |  
|                                         |  |            |        |                   |  |               |         |              |  |   |   |  |  |   |         |  



|    |                              
|--- | -----------------------------
|(8) | Commitments and Contingencies

As of September 30, 2004, the Company had
issued guarantees of the indebtedness of its investees to third
parties, which could potentially require the Company to make
maximum aggregate payments totaling approximately
$34.8 million. Of the total, $18.4 million relates to
the debt of consolidated subsidiaries, whose debt is included in
the Companys consolidated balance sheet, and the remaining
$16.4 million relates to the debt of unconsolidated
affiliated companies, whose debt is not included in the
Companys consolidated balance sheet. In accordance with
Financial Accounting Standards Board Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others, the Company has recorded long-term liabilities
totaling approximately $0.1 million related to the
guarantees the Company has issued to unconsolidated affiliates
on or after January 1, 2003, and has not recorded any
liabilities related to guarantees issued prior to that date.
Generally, these arrangements (a) consist of guarantees of
real estate and equipment financing, (b) are secured by the
related property and equipment, (c) require payments by the
Company, when the collateral is insufficient, in the event of a
default by the investee primarily obligated under the financing,
(d) expire as the underlying debt matures at various dates
through 2022,and (e) provide no recourse for the
Company to recover any amounts from third parties.

In September 2004 the Company sold its Spanish
operations (Note 2) and agreed to indemnify the buyers
with respect to tax and other contingencies of the Spanish
entities sold. One of the Spanish entities sold has been
assessed taxes and interest totaling
approximately 1 million
(equal to $1.2 million at September 30, 2004) related
to a transaction it undertook in 2000. The Companys
management believes there should be no tax liability related to
the transaction. Statement of Financial Accounting Standards
No. 5, Accounting for Contingencies(SFAS No. 5) requires that an estimated loss be
accrued by a charge to income when it is probable that a
liability has been incurred and the amount of the loss can be
reasonably estimated. Based on its review of the facts and
circumstances, and reviews by external parties representing the
Company, the Companys management does not consider it
probable that any payment will be made related to this
contingency. However, it is considered reasonably possible, as
that term is defined in SFAS No. 5, that some amount
up to
approximately 1 million
may be paid by the Company at some point in the future related
to this contingency, and accordingly the Company will disclose
the existence of this contingency and the estimated range of
potential loss related to this contingency until it is resolved.
Should facts and circumstances related to this tax assessment
change at some point in the future, the Company will consider
accruing a charge to income. Any such charge would be reflected
in discontinued operations.

In addition, from time to time the Company may be
named as a party to legal claims and proceedings in the ordinary
course of business. The Companys management is not aware
of any claims or proceedings, other than those discussed above,
that might have a material adverse impact on the Company.

17



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                  
|--- | -----------------
|(9) | Subsequent Events

Effective October 1, 2004, the Company
acquired an noncontrolling interest in an ambulatory surgery
center near Baltimore, Maryland, for approximately
$1.5 million in cash.

During October 2004, the Company completed the
acquisition of Same Day Surgery, L.L.C., which owns five
multi-specialty surgery centers in metropolitan Chicago, and
concurrently acquired a portion of the minority ownership
interests in four of these facilities for aggregate
consideration of approximately $38 million in cash.

Also during October 2004, the Company acquired
Specialty Surgicenters, Inc., which operates four surgical
centers, and concurrently acquired a portion of the minority
ownership interests in one of these facilities for aggregate
consideration of approximately $21 million in cash.

In addition, the Company has entered into letters
of intent with various entities regarding possible joint
venture, development, or acquisition projects. These projects
are in various stages of negotiation.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion should be read in
conjunction with the Companys unaudited Consolidated
Financial Statements and the notes thereto included in
Item 1 of this Quarterly Report on Form 10-Q.

Forward-Looking Statements

Certain statements contained or incorporated by
reference in this Quarterly Report on Form 10-Q, including
without limitation statements containing the words
believes, anticipates,
expects, continues, will,
may, should, estimates,
intends, plans, and similar expressions,
and statements regarding the Companys business strategy
and plans, constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements are based on
managements current expectations and involve known and
unknown risks, uncertainties and other factors, many of which
the Company is unable to predict or control, that may cause the
Companys actual results, performance or achievements to be
materially different from those expressed or implied by such
forward-looking statements. Such factors include, among others,
the following: general economic and business conditions, both
nationally and regionally; foreign currency fluctuations;
demographic changes; changes in, or the failure to comply with,
laws and governmental regulations; the ability to enter into or
renew managed care provider arrangements on acceptable terms;
changes in Medicare, Medicaid and other government funded
payments or reimbursement in the United States and the United
Kingdom; liability and other claims asserted against us; the
highly competitive nature of the healthcare industry; changes in
business strategy or development plans of healthcare systems
with which we partner; the ability to attract and retain
qualified physicians and personnel, including nurses and other
health care professionals; our significant indebtedness; the
availability of suitable acquisition and development
opportunities and the length of time it takes to accomplish
acquisitions and developments; our ability to integrate new
businesses with our existing operations; the availability and
terms of capital to fund the expansion of our business,
including the acquisition and development of additional
facilities and certain additional factors, risks, and
uncertainties discussed in this Quarterly Report on
Form 10-Q. Given these uncertainties, investors and
prospective investors are cautioned not to rely on such
forward-looking statements. We disclaim any obligation and make
no promise to update any such factors or forward-looking
statements or to publicly announce the results of any revisions
to any such factors or forward-looking statements, whether as a
result of changes in underlying factors, to reflect new
information as a result of the occurrence of events or
developments or otherwise.

18



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UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Overview

We operate ambulatory surgery centers and private
surgical hospitals in the United States and the United Kingdom.
As of September 30, 2004, we operated 74 facilities,
consisting of 71 in the United States and three in the United
Kingdom. During September 2004, we sold our operations in Spain,
where we had operated nine short-stay surgical facilities. Most
of our U.S. facilities are jointly owned with local
physicians and a not-for-profit healthcare system that has other
healthcare businesses in the region. At September 30, 2004,
we had agreements with 20 not-for-profit healthcare systems
providing for the joint ownership of 43 of our 71
U.S. facilities and also providing a framework for the
planning and construction of additional facilities in the
future. All of our U.S. facilities include physician owners.

Our U.S. facilities, consisting of
ambulatory surgery centers and private surgical hospitals (each
are generally referred to herein as short-stay surgical
facilities), specialize in non-emergency surgical cases,
the volume of which has steadily increased over the past two
decades due in part to advancements in medical technology. These
facilities earn a fee from patients, insurance companies, or
other payors in exchange for providing the facility and related
services a surgeon requires in order to perform a surgical case.
In addition, we in turn earn a monthly fee from each facility we
operate in exchange for managing its operations. All but three
of our facilities are located in the U.S., where we have focused
increasingly on adding facilities with not-for-profit healthcare
system partners (hospital partners). From
December 31, 2001 to September 30, 2004, the number of
facilities we own jointly with hospital partners more than
doubled, increasing from 19 to 43.

In the United Kingdom we operate private
hospitals, which supplement the services provided by the
government-sponsored healthcare systems. Our patients choose to
receive care at private hospitals primarily because of waiting
lists to receive diagnostic procedures or elective surgery at
government-sponsored facilities and pay us either from personal
funds or through private insurance, offered by an increasing
number of employers as a benefit to their employees. Since
acquiring our first two facilities in the United Kingdom in
2000, we have expanded selectively by adding a third facility
and increasing the capacity and services offered at each
facility.

Critical Accounting Policies and
Estimates

Our discussion and analysis of our financial
condition, results of operations and liquidity and capital
resources are based on our consolidated financial statements
which have been prepared in accordance with accounting
principles generally accepted in the United States of America
(GAAP). The preparation of consolidated financial statements
under GAAP requires our management to make certain estimates and
assumptions which impact the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities
as of the date of the consolidated financial statements. These
estimates and assumptions also impact the reported amount of net
earnings during any period. Estimates are based on information
available as of the date financial statements are prepared.
Accordingly, actual results could differ from those estimates.
Critical accounting policies and estimates are defined as those
that are both most important to the portrayal of our financial
condition and operating results and that require
managements most subjective judgments. Our critical
accounting policies and estimates include our policies and
estimates regarding consolidation, revenue recognition, income
taxes, and intangible assets.

Our determination of whether to consolidate an
entity in which we hold an investment, account for it under the
equity method, or carry it at cost has a significant impact on
our financial statements because of the typical business model
under which we operate, particularly in the United States, where
the majority of the facilities we operate are partially owned by
not-for-profit hospital systems, physicians, and other parties.
These quarterly financial statements have been prepared using
the same consolidation policy as was used in the Companys
latest audited financial statements.

19



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Our revenue recognition policy and method of
accounting for income taxes involve significant judgments and
estimates. There have been no significant changes in
assumptions, estimates, and judgments in the preparation of
these quarterly financial statements from the assumptions,
estimates, and judgments used in the preparation of the
Companys latest audited financial statements.

We also consider our accounting policy regarding
intangible assets to be a critical accounting policy given the
significance of intangible assets as compared to the total
assets of the Company and the recent changes in accounting for
intangible assets required under Statement of Financial
Accounting Standards No. 142, Accounting for Goodwill
and other Intangible Assets(SFAS No. 142), which
was issued by the Financial Accounting Standards Board on
July 20, 2001 and was adopted by the Company as of
January 1, 2002. There have been no significant changes in
the application of SFAS No. 142 since the preparation
of the Companys latest audited financial statements.

Acquisitions, Equity Investments and
Development Projects

Effective January 1, 2004, we acquired a
controlling interest in an ambulatory surgery center in
Torrance, California in which we had previously owned a
noncontrolling interest. The $9.8 million cost was paid in
cash in December 2003.

During the second quarter of 2004, two surgical
hospitals and one surgery center developed by us in the United
States opened and began performing cases.

Effective May 1, 2004, we acquired a
controlling interest in an ambulatory surgery center in
Austintown, Ohio, in which we had previously owned a
noncontrolling interest, for $6.4 million in cash.

During the third quarter of 2004, three surgery
centers developed by us in the United States opened and began
performing cases.

Effective July 1, 2004, we acquired a
controlling interest in an ambulatory surgery center in Reading,
Pennsylvania, for approximately $14.6 million in cash.

Effective August 1, 2004, we acquired a
controlling interest in an ambulatory surgery center in Dallas,
Texas which the Company had previously owned a noncontrolling
interest, for $3.2 million in cash.

Effective August 1, 2004, we acquired
noncontrolling interests in a surgical hospital and an
ambulatory surgery center in Oklahoma City, Oklahoma, for
$13.3 million in cash.

We also engage in purchases and sales of
noncontrolling interests in facilities we already operate and
invest additional cash in surgical facilities under development.
These transactions resulted in a net cash outflow of
$3.2 million during the nine months ended
September 30, 2004.

Effective October 1, 2004, we acquired an
noncontrolling interest in an ambulatory surgery center near
Baltimore, Maryland, for approximately $1.5 million in cash.

During October 2004, we completed the acquisition
of Same Day Surgery, L.L.C., which owns five multi-specialty
surgery centers in metropolitan Chicago, and concurrently
acquired a portion of the minority ownership interests in four
of these facilities for aggregate consideration of approximately
$38 million in cash.

Also during October 2004, we completed the
acquisition of Specialty Surgicenters, Inc., which operates four
surgical centers, and concurrently acquired a portion of the
minority ownership interests in one of these facilities for
aggregate consideration of approximately $21 million in
cash.

20



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Sale of Spanish Operations

Effective September 9, 2004, we sold our
Spanish operations, receiving net proceeds of
$163.2 million during September 2004. We expect to pay
sale-related income taxes of approximately $22 million
during the fourth quarter of 2004. Collection of a portion of
the sales proceeds was deferred until January 2007, at which
time we expect to collect an additional $19.8 million in
cash. The present value of this amount, $18.1 million, is
carried as a noncurrent note receivable and included in other
assets on our consolidated balance sheet, and the notes
carrying value will accrete interest income to its settlement
value of $19.8 million in January 2007. Our collection of
this amount is guaranteed by a bank. As discussed more fully in
Item 3, we have entered into a forward contract to hedge
our foreign currency exposure related to this amount. As
discussed more fully in Note 2 to our financial statements,
we recorded a gain of $50.3 million after estimated taxes
and expect to finalize the calculation of the gain as well as
the related income taxes during the fourth quarter of 2004.

Sources of Revenue

Revenues primarily include the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | net patient service revenue of the facilities
    that we consolidate for financial reporting purposes, which are
    typically those facilities in which we have ownership interests
    of greater than 50% or otherwise maintain effective control.                                                                                                                                                                                                                                                                                                                                  
|
| |  | management and administrative services revenue,
    consisting of the fees that we earn from managing the facilities
    that we do not consolidate for financial reporting purposes and
    the fees we earn from providing certain consulting and
    administrative services to physicians. Our consolidated revenues
    and expenses do not include the management fees we earn from
    operating the facilities that we consolidate for financial
    reporting purposes as those fees are charged to subsidiaries and
    thus eliminate in consolidation.                      
|
| |  | our share of the net income or loss of the
    unconsolidated facilities that we account for under the equity
    method of accounting. These amounts are included in revenues as
    these operations are central to our business strategy. Through
    our contracts to manage these facilities, we have an active role
    in their operations. The level of our corporate resources
    devoted to fulfilling these responsibilities is significant and
    generally equal to that devoted to the operations of the
    facilities we consolidate for financial reporting purposes.

The following table summarizes our revenues by
type and as a percentage of total revenue for the periods
presented:

|                                                |                |               |    |               |   |      |    |      |   |  |    |     |   |  |    |     |  
|----------------------------------------------- | -------------- | ------------- | -- | ------------- | - | ---- | -- | ---- | - |  | -- | --- | - |  | -- | --- | -
|                                                |                |               |    |              
|                                                |                | Three Months  |    | Nine Months  
|                                                |                | Ended         |    | Ended        
|                                                |                | September 30, |    | September 30,
|                                                |                |               |    |              
|                                                |                | 2004          |    | 2003          |   | 2004 |    | 2003
|                                                |                |               |    |               |   |      |    |     
|Net patient service revenue                     |                |               | 87 | %             |   |      | 82 | %    |   |  | 85 | %   |   |  | 84 | %  
|Management and administrative services revenue  |                |               | 9  |               |   |      | 12 |      |   |  | 10 |     |   |  | 11 |    
|Equity in earnings of unconsolidated affiliates |                |               | 4  |               |   |      | 6  |      |   |  | 5  |     |   |  | 5  |    
|                                                |                |               |    |               |   |      |    |      |   |  |    |     |   |  |    |    
|                                                | Total revenues |               |    | 100           | % |      |    | 100  | % |  |    | 100 | % |  |    | 100 | %
|                                                |                |               |    |               |   |      |    |      |   |  |    |     |   |  |    |    

Net patient service revenue consists of the
revenues earned by facilities we consolidate for financial
reporting purposes. These revenues increased as a percentage of
our total revenues in the three months September 30, 2004,
as compared to the corresponding prior year period, primarily as
a result of our increasing the number of facilities we
consolidate for financial reporting purposes by seven from
September 30, 2003 to September 30, 2004. While we
also added five unconsolidated facilities during this

21



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UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

time period, the revenues we derive from
unconsolidated facilities are limited to (a) fees we earn
for managing their operations and (b) our share of the net
income of each facility, and thus adding an unconsolidated
facility generally increases our revenues by far less than
adding a consolidated facility. This shift in percentages was
less significant for the nine month periods given that only
three of the incremental seven consolidated facilities were
consolidated for the entire nine months ended September 30,
2004.

Our management and administrative services
revenues are earned from the following types of activities
(dollars in thousands):

|                                                                              |                                                          |               |       |                   |  |      |       |       |  |   |        |        |  |   |        |        | 
|----------------------------------------------------------------------------- | -------------------------------------------------------- | ------------- | ----- | ----------------- |  | ---- | ----- | ----- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                                                              |                                                          |               |       |                   |  |     
|                                                                              |                                                          | Three Months  |       |                  
|                                                                              |                                                          | Ended         |       | Nine Months Ended
|                                                                              |                                                          | September 30, |       | September 30,    
|                                                                              |                                                          |               |       |                  
|                                                                              |                                                          | 2004          |       | 2003              |  | 2004 |       | 2003 
|                                                                              |                                                          |               |       |                   |  |      |       |      
|Management of surgical facilities                                             |                                                          | $             | 4,248 |                   |  | $    | 3,998 |       |  | $ | 13,435 |        |  | $ | 10,949 |       
|Consulting and other services provided to
    physicians and related entities |                                                          |               | 4,841 |                   |  |      | 5,484 |       |  |   | 14,861 |        |  |   | 15,732 |       
|                                                                              |                                                          |               |       |                   |  |      |       |       |  |   |        |        |  |   |        |       
|                                                                              | Total management and administrative service
    revenues |               | $     | 9,089             |  |      | $     | 9,482 |  |   | $      | 28,296 |  |   | $      | 26,681 | 
|                                                                              |                                                          |               |       |                   |  |      |       |       |  |   |        |        |  |   |        |       

The following table reflects the summarized
results of the unconsolidated facilities that we account for
under the equity method of accounting (dollars in thousands):

|                                                                                            |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                            |  |                    |        |                  
|                                                                                            |  | Three Months Ended |        | Nine Months Ended
|                                                                                            |  | September 30,      |        | September 30,    
|                                                                                            |  |                    |        |                  
|                                                                                            |  | 2004               |        | 2003              |  | 2004 |        | 2003
|                                                                                            |  |                    |        |                   |  |      |        |     
|Total revenues                                                                              |  | $                  | 80,251 |                   |  | $    | 65,443 |      |  | $ | 241,281 |   |  | $ | 168,417 |  
|Depreciation and amortization                                                               |  |                    | 4,015  |                   |  |      | 3,060  |      |  |   | 10,948  |   |  |   | 8,330   |  
|Operating income                                                                            |  |                    | 21,104 |                   |  |      | 22,780 |      |  |   | 79,662  |   |  |   | 52,664  |  
|Interest expense, net                                                                       |  |                    | 2,486  |                   |  |      | 1,849  |      |  |   | 6,436   |   |  |   | 5,282   |  
|Net income                                                                                  |  |                    | 18,270 |                   |  |      | 20,729 |      |  |   | 69,172  |   |  |   | 46,574  |  
|Long-term debt                                                                              |  |                    | 90,999 |                   |  |      | 76,221 |      |  |   | 90,999  |   |  |   | 76,221  |  
|USPIs equity in earnings of unconsolidated
    affiliates                                  |  |                    | 3,622  |                   |  |      | 4,624  |      |  |   | 14,081  |   |  |   | 10,429  |  
|USPIs imputed weighted average ownership
    percentage based on affiliates net income(1) |  |                    | 19.8   | %                 |  |      | 22.3   | %    |  |   | 20.4    | % |  |   | 22.4    | %
|USPIs imputed weighted average ownership
    percentage based on affiliates debt(2)       |  |                    | 22.7   | %                 |  |      | 23.6   | %    |  |   | 22.7    | % |  |   | 23.6    | %
|Unconsolidated facilities operated at period end                                            |  |                    | 37     |                   |  |      | 32     |      |  |   | 37      |   |  |   | 32      |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our weighted average percentage ownership in our
    unconsolidated affiliates is calculated as USPIs equity in
    earnings of unconsolidated affiliates divided by the total net
    income of unconsolidated affiliates for each respective period.
    This percentage is lower during the three months ended
    September 30, 2004 than in earlier quarters of 2004 and
    2003, primarily as a result of losses incurred at facilities
    recently opened or under development.
|   
|(2) | Our weighted average percentage ownership in our
    unconsolidated affiliates is calculated as the total debt of
    each unconsolidated affiliate, multiplied by the percentage
    ownership USPI held in the affiliate as of the end of each
    respective period, divided by the total debt of all of the
    unconsolidated affiliates as of the end of each respective
    period.                                                                                               

22



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table summarizes our revenues by
operating segment:

|               |       |               |    |               |   |      |    |      |   |  |    |     |   |  |    |     |  
|-------------- | ----- | ------------- | -- | ------------- | - | ---- | -- | ---- | - |  | -- | --- | - |  | -- | --- | -
|               |       |               |    |              
|               |       | Three Months  |    | Nine Months  
|               |       | Ended         |    | Ended        
|               |       | September 30, |    | September 30,
|               |       |               |    |              
|               |       | 2004          |    | 2003          |   | 2004 |    | 2003
|               |       |               |    |               |   |      |    |     
|United States  |       |               | 79 | %             |   |      | 82 | %    |   |  | 79 | %   |   |  | 82 | %  
|United Kingdom |       |               | 21 |               |   |      | 18 |      |   |  | 21 |     |   |  | 18 |    
|               |       |               |    |               |   |      |    |      |   |  |    |     |   |  |    |    
|               | Total |               |    | 100           | % |      |    | 100  | % |  |    | 100 | % |  |    | 100 | %

The proportion of our revenues earned in the
United Kingdom was higher during the three months and nine
months ended September 30, 2004 than in the prior year
period primarily because the U.S. dollar was weaker against
the British pound in 2004 than in 2003, which had a favorable
impact on our revenues in 2004.

Results of Operations

The following table summarizes certain statement
of income items expressed as a percentage of revenues for the
periods indicated:

|                                                                |  |               |       |               |  |      |       |      |  |  |       |   |  |  |       |  
|--------------------------------------------------------------- |  | ------------- | ----- | ------------- |  | ---- | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                                                                |  |               |       |              
|                                                                |  | Three Months  |       | Nine Months  
|                                                                |  | Ended         |       | Ended        
|                                                                |  | September 30, |       | September 30,
|                                                                |  |               |       |              
|                                                                |  | 2004          |       | 2003          |  | 2004 |       | 2003
|                                                                |  |               |       |               |  |      |       |     
|Total revenues                                                  |  |               | 100.0 | %             |  |      | 100.0 | %    |  |  | 100.0 | % |  |  | 100.0 | %
|Operating expenses, excluding depreciation and
    amortization |  |               | 68.3  |               |  |      | 66.7  |      |  |  | 66.6  |   |  |  | 66.2  |  
|Depreciation and amortization                                   |  |               | 6.9   |               |  |      | 7.2   |      |  |  | 6.7   |   |  |  | 7.1   |  
|                                                                |  |               |       |               |  |      |       |      |  |  |       |   |  |  |       |  
|Operating income                                                |  |               | 24.8  |               |  |      | 26.1  |      |  |  | 26.7  |   |  |  | 26.7  |  
|Minority interests in income of consolidated
    entities       |  |               | 6.5   |               |  |      | 6.9   |      |  |  | 7.3   |   |  |  | 7.0   |  
|Interest and other expense, net                                 |  |               | 6.4   |               |  |      | 6.8   |      |  |  | 6.5   |   |  |  | 7.2   |  
|Loss on early termination of credit facility                    |  |               | 1.6   |               |  |      |      |      |  |  | 0.6   |   |  |  |      |  
|                                                                |  |               |       |               |  |      |       |      |  |  |       |   |  |  |       |  
|Income from continuing operations before income
    taxes       |  |               | 10.3  |               |  |      | 12.4  |      |  |  | 12.3  |   |  |  | 12.5  |  
|Income tax expense                                              |  |               | (3.6  | )             |  |      | (4.6  | )    |  |  | (4.4  | ) |  |  | (4.7  | )
|                                                                |  |               |       |               |  |      |       |      |  |  |       |   |  |  |       |  
|Income from continuing operations                               |  |               | 6.7   |               |  |      | 7.8   |      |  |  | 7.9   |   |  |  | 7.8   |  
|Earnings (loss) from discontinued operations                    |  |               | 50.2  |               |  |      | (1.0  | )    |  |  | 18.4  |   |  |  | 1.0   |  
|                                                                |  |               |       |               |  |      |       |      |  |  |       |   |  |  |       |  
|Net income                                                      |  |               | 56.9  |               |  |      | 6.8   |      |  |  | 26.3  |   |  |  | 8.8   |  
|                                                                |  |               |       |               |  |      |       |      |  |  |       |   |  |  |       |  
|EBITDA less minority interests(a)                               |  |               | 25.3  |               |  |      | 26.3  |      |  |  | 26.1  |   |  |  | 26.7  |  



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | EBITDA is calculated as operating income plus
    depreciation and amortization. We use EBITDA and EBITDA less
    minority interests as analytical indicators for purposes of
    allocating resources and assessing performance. EBITDA is
    commonly used as an analytical indicator within the health care
    industry and also serves as a measure of leverage capacity and
    debt service ability. EBITDA should not be considered as a
    measure of financial performance under generally accepted
    accounting principles, and the items excluded from EBITDA are
    significant components in understanding and assessing financial
    performance. Because EBITDA is not a measurement determined in
    accordance with generally accepted accounting principles and is
    thus susceptible to varying calculation methods, EBITDA as
    presented by United Surgical Partners International may not be
    comparable to similarly titled measures of other companies.

23



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table reconciles EBITDA and EBITDA
less minority interests to income from continuing operations and
to net cash provided by operating activities:

|                                          |                                                                                                                                 |                    |        |                   |   |      |        |        |   |   |        |         |   |   |        |         |  
|----------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------ | ----------------- | - | ---- | ------ | ------ | - | - | ------ | ------- | - | - | ------ | ------- | -
|                                          |                                                                                                                                 |                    |        |                  
|                                          |                                                                                                                                 | Three Months Ended |        | Nine Months Ended
|                                          |                                                                                                                                 | September 30,      |        | September 30,    
|                                          |                                                                                                                                 |                    |        |                  
|                                          |                                                                                                                                 | 2004               |        | 2003              |   | 2004 |        | 2003  
|                                          |                                                                                                                                 |                    |        |                   |   |      |        |       
|Income from continuing operations         |                                                                                                                                 | $                  | 6,735  |                   |   | $    | 6,361  |        |   | $ | 23,157 |         |   | $ | 18,431 |        
|                                          | Income tax expense                                                                                                              |                    |        | 3,548             |   |      |        | 3,834  |   |   |        | 13,003  |   |   |        | 11,084  |  
|                                          | Interest and other nonoperating expense                                                                                         |                    |        | 8,109             |   |      |        | 5,510  |   |   |        | 20,937  |   |   |        | 16,944  |  
|                                          | Depreciation and amortization                                                                                                   |                    |        | 6,924             |   |      |        | 5,883  |   |   |        | 19,823  |   |   |        | 16,662  |  
|                                          |                                                                                                                                 |                    |        |                   |   |      |        |        |   |   |        |         |   |   |        |        
|EBITDA less minority interests            |                                                                                                                                 |                    | 25,316 |                   |   |      | 21,588 |        |   |   | 76,920 |         |   |   | 63,121 |        
|                                          | Minority interests in income of consolidated
    subsidiaries                                                                   |                    |        | 6,495             |   |      |        | 5,700  |   |   |        | 21,556  |   |   |        | 16,614  |  
|                                          |                                                                                                                                 |                    |        |                   |   |      |        |        |   |   |        |         |   |   |        |        
|EBITDA                                    |                                                                                                                                 |                    | 31,811 |                   |   |      | 27,288 |        |   |   | 98,476 |         |   |   | 79,735 |        
|                                          | Provision for doubtful accounts                                                                                                 |                    |        | 2,226             |   |      |        | 1,941  |   |   |        | 5,824   |   |   |        | 5,057   |  
|                                          | Amortization of debt issue costs, discount, and
    deferred compensation                                                       |                    |        | 1,388             |   |      |        | 2,299  |   |   |        | 4,159   |   |   |        | 3,483   |  
|                                          | Interest and other nonoperating expense                                                                                         |                    |        | (8,109            | ) |      |        | (5,510 | ) |   |        | (20,937 | ) |   |        | (16,944 | )
|                                          | Loss on early termination of credit facility                                                                                    |                    |        | 1,635             |   |      |        |       |   |   |        | 1,635   |   |   |        |        |  
|                                          | Income tax expense                                                                                                              |                    |        | (3,548            | ) |      |        | (3,834 | ) |   |        | (13,003 | ) |   |        | (11,084 | )
|                                          | Equity in earnings of unconsolidated affiliates                                                                                 |                    |        | (3,622            | ) |      |        | (4,624 | ) |   |        | (14,081 | ) |   |        | (10,429 | )
|                                          | Net increases in cash from changes in operating
    assets and liabilities, net of effects from purchases of new
    businesses |                    |        | 15,025            |   |      |        | 11,636 |   |   |        | 14,500  |   |   |        | 21,650  |  
|                                          |                                                                                                                                 |                    |        |                   |   |      |        |        |   |   |        |         |   |   |        |        
|Net cash provided by operating activities |                                                                                                                                 | $                  | 36,806 |                   |   | $    | 29,196 |        |   | $ | 76,573 |         |   | $ | 71,468 |        
|                                          |                                                                                                                                 |                    |        |                   |   |      |        |        |   |   |        |         |   |   |        |        

Executive Summary

We continue to grow our existing facilities as
well as to develop new facilities and to add others selectively
through acquisition. On an overall basis, we continue to
experience increases in the volume of services provided and in
the average rates at which our facilities are reimbursed for
those services, resulting in revenue growth at the facilities we
owned during both 2003 and 2004 (same store
facilities). For the nine months ended September 30,
2004, the revenue increases have outpaced increases in operating
expenses, resulting in improvements in the operating margins of
most of our facilities as compared to the prior year period.

However, slower revenue growth, driven by
reductions in reimbursement levels in some markets, and the
performance of four facilities, two of which were recently
opened and two of which are winding down operations, have
adversely impacted our operating margins in 2004, most
significantly during the three months ended September 30,
2004, resulting in an overall decline in same store operating
margins as compared to the three months ended September 30,
2003.

We continue to pursue the strategy of having a
hospital partner, where practical, in addition to physician
partners in each local U.S. market, which we believe
improves the profitability and long-term potential of our
surgical facilities. The overall proportion of our facilities
that have a hospital partner continues to grow, and the majority
of facilities we are currently developing include a hospital
partner.

24



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Revenues

Increases in the volume of surgical cases in the
U.S. and of patient admissions for our hospitals in the United
Kingdom continue to drive increases in our revenues, as does an
increase in the average rate of reimbursement for the surgeries
performed at our U.S. facilities. During the third quarter
of 2004, our domestic case volumes and average rate of
reimbursement grew at slower rates than in the first six months
of the year. Our case volume was adversely affected by three
primary factors. First, hurricanes in the eastern United States
forced delays of surgical cases in some markets, but we believe
the effect was isolated to the third quarter as none of our
facilities were severely damaged by the storms. Second, the
lapse of a managed care contract in one market during the third
quarter of 2004 led to our performing fewer cases at certain
surgery centers. Third, domestic case volume grew more slowly
overall as two of our facilities are winding down operations in
advance of relocating to newer buildings and being merged into
joint venture relationships with hospital partners. Our average
rate of reimbursement is being adversely impacted by new, lower
rates of reimbursement for workers compensation cases performed
at our surgery centers in California and Texas, which went into
effect in January 2004 and September 2004, respectively, and
additionally by the lapse of a managed care contract described
above. Nevertheless, the growth of our same store facilities,
summarized in the following table, continues to be the most
significant component of our overall increase in revenues.

|                           |                                              |                         |  |                   |   |   |  |    |    |  
|-------------------------- | -------------------------------------------- | ----------------------- |  | ----------------- | - | - |  | -- | -- | -
|                           |                                              | Three Months Ended      |  | Nine Months Ended
|                           |                                              | September 30,           |  | September 30,    
|                           |                                              | 2004(1)                 |  | 2004(1)          
|                           |                                              |                         |  |                  
|United States facilities:  |                                              |                         |  |                   |   |   |  |   
|                           | Net revenue                                  |                         |  | 9                 | % |   |  | 19 | % 
|                           |                                              | Surgical cases          |  |                   | 5 | % |  |    | 7  | %
|                           |                                              | Net revenue per case(2) |  |                   | 4 | % |  |    | 11 | %
|United Kingdom facilities: |                                              |                         |  |                   |   |   |  |   
|                           | Net revenue using actual exchange rates      |                         |  | 42                | % |   |  | 37 | % 
|                           | Net revenue using constant exchange rates(3) |                         |  | 26                | % |   |  | 21 | % 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Growth in same store facilities, compared to
    three and nine months ended September 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(2) | Our overall domestic same store growth in net
    revenue per case was favorably impacted by the growth at our
    seven same store surgical hospitals, which on average perform
    more complex cases than ambulatory surgery centers. Net revenue
    per case of our same store ambulatory surgery centers decreased
    by 2% during the three months ended September 30, 2004, as
    compared to the corresponding prior year period, largely as a
    result of the workers compensation reimbursement changes and
    lapse in managed care contract described above. On a
    year-to-date basis, the net revenue per case of our same store
    ambulatory surgery centers is 5% greater than in the
    corresponding prior year period.
|   
|(3) | Measures current year using prior year exchange
    rates. We have experienced strong year over year growth at the
    Highgate facility since acquiring it during the second quarter
    of 2003 as well as steady increases in the revenues of the
    oncology center on the campus of our Parkside facility, which
    became operational during the third quarter of 2003.                                                                                                                                                                                                                                                                                                                                                                     

Joint Ventures With Not-For-Profit
Hospitals

The addition of new facilities continues to be
more heavily weighted to U.S. surgical facilities with a
hospital partner, both as we initiate joint venture agreements
with new systems and as we add facilities to our existing
arrangements. Facilities have been added to hospital joint
ventures both through construction of new facilities (de
novos) and through our contribution of our equity
interests in existing facilities into

25



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

a hospital joint venture structure, effectively
creating three-way joint ventures by sharing our ownership in
these facilities with a hospital partner while leaving the
existing physician ownership intact. We sold all nine of our
Spanish facilities during the third quarter of 2004. The
following table summarizes our facilities as of
September 30, 2004 and 2003:

|                                |                             |                                        |    |      |   |  |    |    |  | 
|------------------------------- | --------------------------- | -------------------------------------- | -- | ---- | - |  | -- | -- |  | 
|                                |                             |                                       
|                                |                             | September 30,                         
|                                |                             |                                       
|                                |                             | 2004                                   |    | 2003
|                                |                             |                                        |    |     
|Hospital partners               |                             |                                        | 20 |      |   |  | 13 |   
|                                |                             |                                        |    |      |   |  |    |   
|United States facilities(1):    |                             |                                        |    |      |   |  |    |   
|                                | With a hospital partner     |                                        |    | 43   |   |  |    | 30 | 
|                                | Without a hospital partner  |                                        |    | 28   |   |  |    | 29 | 
|                                |                             |                                        |    |      |   |  |    |   
|Total U.S. facilities           |                             |                                        | 71 |      |   |  | 59 |   
|United Kingdom facilities       |                             |                                        | 3  |      |   |  | 3  |   
|Spain facilities                |                             |                                        |   |      |   |  | 9  |   
|                                |                             |                                        |    |      |   |  |    |   
|Total facilities operated       |                             |                                        | 74 |      |   |  | 71 |   
|                                |                             |                                        |    |      |   |  |    |   
|Change from September 30, 2003: |                             |                                        |    |      |   |  |    |   
|                                | De novo (newly constructed) |                                        |    | 9    |   |  |    |    | 
|                                | Acquisition                 |                                        |    | 3    |   |  |    |    | 
|                                | Sale of Spanish operations  |                                        |    | (9   | ) |  |    |    | 
|                                |                             |                                        |    |      |   |  |    |   
|                                |                             | Total increase in number of facilities |    |      | 3 |  |    |    |  | 
|                                |                             |                                        |    |      |   |  |    |   



---



|    |                                                                                
|--- | -------------------------------------------------------------------------------
|(1) | At September 30, 2004, physicians own a
    portion of all of these facilities.

Operating Margins

On an overall basis, the increases in revenue at
our same store facilities have continued to outpace the
increases in operating expenses, resulting in improved operating
margins at most of our facilities during the nine months ended
September 30, 2004, as compared to the corresponding prior
year period. However, several factors are contributing to a
reduction in operating margins at some facilities, particularly
during the third quarter of 2004, which has caused our overall
same store operating margins to decrease for the three months
ended September 30, 2004, as compared to earlier periods in
2003 and 2004. The downward pressure on revenues in some
markets, as discussed above, was not in the aggregate
accompanied by a corresponding decrease in personnel and
facility costs. While some of the factors involved, such as
hurricanes in the eastern United States and the lower operating
margins generated at two surgical hospitals we opened during the
second quarter of 2004, are not expected to be permanently
significant factors, it is not known to what extent we will
continue to experience downward pressure on reimbursement.
Reductions in reimbursement due to factors such as the workers
compensation rate decreases in California and Texas, and the
lapse of the managed care contract discussed above could occur
elsewhere in the future. The following table summarizes changes
in our same store EBITDA margins (see footnote 1

26



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

below), comparing the three and nine months ended
September 30, 2004 to the three and nine months ended
September 30, 2003:

|                             |                            |                    |      |                   |       |  |     |       |    
|---------------------------- | -------------------------- | ------------------ | ---- | ----------------- | ----- |  | --- | ----- | ---
|                             |                            | Three Months Ended |      | Nine Months Ended
|                             |                            | September 30,      |      | September 30,    
|                             |                            | 2004(1)            |      | 2004(1)          
|                             |                            |                    |      |                  
|United States facilities:    |                            |                    |      |                   |       |  |     |      
|                             | With a hospital partner    |                    |      | (300              | ) bps |  |     | 380   | bps
|                             | Without a hospital partner |                    |      | (280              | )     |  |     | (60   | )  
|Total U.S. facilities        |                            |                    | (240 | )                 |       |  | 280 |      
|United Kingdom facilities(2) |                            |                    | 190  | bps               |       |  | (10 | ) bps



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | EBITDA margin is calculated as EBITDA divided by
    total revenues. This table aggregates all of the same store
    facilities we operate using 100% of their results. This does not
    represent the overall margin for USPIs operations in
    either the U.S. or Western Europe because we have a variety
    of ownership levels in the facilities we operate, and facilities
    open for less than a year are excluded from same store
    calculations.                                                                                               
|   
|(2) | Uses 2003 exchange rates for both years. In the
    United Kingdom, we have experienced improved operating margins
    largely as a result of the increase in the quantity of services
    performed at the Highgate facility, which we acquired during the
    second quarter of 2003. These increases had a more significant
    impact on the comparison of the three months ended
    September 30, 2004 to the corresponding prior year period
    because this was the first full quarter this facility was
    included in the same store classification.

Three Months Ended September 30, 2004
Compared to Three Months Ended September 30, 2003

Revenues increased by $18.1 million, or
22.0%, to $100.2 million for the three months ended
September 30, 2004 from $82.1 million for the three
months ended September 30, 2003. Of this increase in
revenues, $9.8 million was contributed by same store
facilities, $5.9 million was contributed by newly
constructed or acquired facilities, and $2.4 million was
due to exchange rate fluctuations. The same store increase was
primarily driven by a $5.9 million increase in revenue
earned at or from U.S. facilities, which performed
approximately 5% more surgical cases and received an average of
approximately 4% more per case during the three months ended
September 30, 2004 than in the corresponding prior year
period. The revenues of same store United Kingdom facilities,
when measured using 2003 exchange rates for both periods, were
$3.9 million higher during the three months ended
September 30, 2004 than in the corresponding prior year
period. Facilities acquired since December 31, 2002, and
thus not owned for the same number of months in 2004 and 2003,
contributed net additional revenues in the three months ended
September 30, 2004 of $5.9 million. The
U.S. dollar being weaker relative to the British pound in
2004 resulted in a $2.4 million increase in revenues.

Operating expenses, excluding depreciation and
amortization, increased by $13.6 million, or 24.8%, to
$68.4 million for the three months ended September 30,
2004 from $54.8 million for the three months ended
September 30, 2003. Operating expenses, excluding
depreciation and amortization, as a percentage of revenues,
increased to 68.2% for the three months ended September 30,
2004 from 66.7% for the three months ended September 30,
2003. This increase as a percentage of revenues is primarily
attributable to losses incurred at two recently opened surgical
hospitals during the three months ended September 30, 2004.
Our new and newly expanded facilities hire staff and become
fully equipped for a relatively high number of surgical cases in
their initial months of operations, but the case volumes are not
high enough initially to result in operating margins that are as
favorable as those generated by our more mature facilities. In
addition, we experienced a decrease in revenues due to
hurricanes, the anticipated relocation

27



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

of two facilities, and decreases in rates of
reimbursement for workers compensation cases in California and
Texas and due to the lapse of a managed care contract.

Operating income increased $3.5 million, or
16.3%, to $24.9 million for the three months ended
September 30, 2004 from $21.4 million for the three
months ended September 30, 2003. Operating income, as a
percentage of revenues, decreased slightly to 24.8% for the
three months ended September 30, 2004 from 26.1% for the
three months ended September 30, 2003, primarily as a
result of the lower margins generated at our recently opened
facilities and the slower growth of revenues discussed above.

Depreciation and amortization increased
$1.0 million, or 17.7%, to $6.9 million for the three
months ended September 30, 2004 from $5.9 million for
the three months ended September 30, 2003, primarily as a
result of additional depreciation on tangible assets added
through expansions of our facilities. Depreciation and
amortization, as a percentage of revenues, decreased to 6.9% for
the three months ended September 30, 2004 from 7.2% for the
three months ended September 30, 2003 due to our increased
revenue.

Interest expense, net of interest income,
increased 9.0% to $6.6 million for the three months ended
September 30, 2004 from $6.1 million for the three
months ended September 30, 2003 primarily as a result of
our borrowing a portion of the costs of developing and expanding
facilities.

Net income from continuing operations was
$6.7 million for the three months ended September 30,
2004 compared to $6.4 million for the three months ended
September 30, 2003. This $0.3 million improvement
primarily results from the increased revenues discussed above,
the impact of which was reduced by a $1.1 million after-tax
charge resulting from our terminating our revolving credit
agreement in September 2004, which was earlier than its maturity
date and resulted in our expensing the remaining unamortized
costs of initiating the agreement.

Effective September 9, 2004 we sold our
Spanish operations. As a result, our income statement reflects
the historical results of our Spanish operations in discontinued
operations, for both 2004 and 2003. In addition, our third
quarter 2004 income statement reflects, in discontinued
operations, the $50.3 million gain on the sale of the
Spanish operations.

Nine Months Ended September 30, 2004
Compared to Nine Months Ended September 30, 2003

Revenues increased by $58.7 million, or
24.8%, to $295.0 million for the nine months ended
September 30, 2004 from $236.3 million for the nine
months ended September 30, 2003. Of this increase in
revenues, $34.0 million was contributed by same store
facilities, $17.5 million was contributed by newly
constructed or acquired facilities, and $7.2 million was
due to exchange rate fluctuations. The same store increase was
primarily driven by a $25.5 million increase in revenue
earned at or from U.S. facilities, which performed
approximately 7% more surgical cases and received an average of
approximately 11% more per case during the nine months ended
September 30, 2004 than in the corresponding prior year
period. The revenues of same store United Kingdom facilities,
when measured using 2003 exchange rates for both periods, were
$8.5 million higher during the nine months ended
September 30, 2004 than in the corresponding prior year
period. Facilities acquired since December 31, 2002, and
thus not owned for the same number of months in 2004 and 2003,
contributed net additional revenues in the nine months ended
September 30, 2004 of $17.5 million. The U.S. dollar
being weaker relative to the British pound in 2004 resulted in a
$7.2 million increase in revenues.

Operating expenses, excluding depreciation and
amortization, increased by $40.0 million, or 25.5%, to
$196.5 million for the nine months ended September 30,
2004 from $156.5 million for the nine months ended
September 30, 2003. While same store margins improved from
the prior year, our overall operating expenses, excluding
depreciation and amortization, as a percentage of revenues,
increased to 66.6% for the

28



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

nine months ended September 30, 2004 from
66.3% for the nine months ended September 30, 2003. The
improvement in the margins of our same store facilities was more
than offset by the lower margins earned at facilities we
recently opened or expanded.

Operating income increased $15.6 million, or
24.7%, to $78.7 million for the nine months ended
September 30, 2004 from $63.1 million for the nine
months ended September 30, 2003. Operating income, as a
percentage of revenues, did not change for the nine months ended
September 30, 2004 as compared to the prior year period,
primarily as a result of improved operating margins at our same
store facilities and the leveraging of our corporate overhead
expenses over the increased revenue being offset by the lower
margins earned at facilities we recently opened or expanded.

Depreciation and amortization increased
$3.1 million, or 19.0%, to $19.8 million for the nine
months ended September 30, 2004 from $16.7 million for
the nine months ended September 30, 2003, primarily as a
result of additional depreciation on tangible assets added
through acquisitions and expansions of our facilities.
Depreciation and amortization, as a percentage of revenues,
decreased to 6.7% for the nine months ended September 30,
2004 from 7.1% for the nine months ended September 30, 2003
due to our increased revenue.

Interest expense, net of interest income,
increased 10.6% to $19.5 million for the nine months ended
September 30, 2004 from $17.6 million for the nine
months ended September 30, 2003 primarily as a result of
our borrowing a portion of the costs of acquiring, developing,
and expanding facilities.

Net income from continuing operations was
$23.2 million for the nine months ended September 30,
2004 compared to $18.4 million for the nine months ended
September 30, 2003. This $4.7 million improvement
primarily results from the increased revenues discussed above,
as reduced by the $1.1 million loss on the early
termination of our credit facility, also discussed above.

Effective September 9, 2004 we sold our
Spanish operations. As a result, our income statement reflects
the historical results of its Spanish operations in discontinued
operations, for both 2004 and 2003. In addition, our third
quarter 2004 income statement reflects, in discontinued
operations, the $50.3 million gain on the sale of the
Spanish operations.

Liquidity and Capital Resources

During the nine months ended September 30,
2004, the Company generated $76.6 million of cash flows
from operating activities as compared to $71.5 million
during the nine months ended September 30, 2003. The prior
year period included a nonrecurring net cash inflow of
$11.0 million as a result of the Company modifying its
relationships with the OrthoLink physicians. Excluding this
amount, cash flows from operating activities increased
$16.1 million, or 27%, from the prior year period.

During the nine months ended September 30,
2004, the Companys net cash provided by investing
activities was $103.7 million, consisting primarily of
$163.2 million net proceeds from the sale of our Spanish
operations, partially offset by $16.8 million for the
purchase of property and equipment and $40.7 million for
the purchase of equity ownership interests in surgical
facilities, including those under development. Approximately
$9.3 million of the property and equipment purchases
related to ongoing development and expansion projects and the
remaining $7.5 million represents purchases of equipment at
existing facilities. Net cash used in financing activities
during the nine months ended September 30, 2004 totaled
$5.8 million, which was funded with cash flows from
operating activities. Cash and cash equivalents were
$204.8 million at September 30, 2004 as compared to
$28.5 million at December 31, 2003, and net working
capital was $166.9 million at September 30, 2004 as
compared to $30.0 million at December 31, 2003. The
increase in cash and in working capital is primarily due to our
receipt of cash for the sale of our Spanish operations in
September 2004.

29



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

On September 27, 2004, we terminated our
primary U.S. revolving credit facility, under which no
amounts were outstanding. We initiated this termination in
advance of the scheduled maturity date of November 2005 given
our positive operating cash flows coupled with our receipt of
approximately $163.2 million in cash related to the sale of
our Spanish operations. Accordingly, we expensed approximately
$1.6 million ($1.1 million after the related tax
benefit) in unamortized debt issue costs during the third
quarter of 2004.

Our credit agreement in the United Kingdom
provides for total borrowings of £52.0 million
(approximately $94.1 million as of September 30, 2004)
under four separate facilities. At September 30, 2004,
total outstanding borrowings under this credit agreement were
approximately $63.3 million which represents total
borrowings net of scheduled repayments of $18.5 million
that have been made under the agreement, and approximately
$12.3 million was available for borrowing, primarily for
capital projects specified in the agreement. Borrowings under
the United Kingdom credit facility bear interest at rates of
1.50% to 2.00% over LIBOR and mature in April 2010. We pledged
the capital stock of our U.K. subsidiaries to secure borrowings
under the United Kingdom credit facility. We were in compliance
with all covenants under our U.K. credit agreement as of
September 30, 2004.

In addition, the indenture governing our Senior
Subordinated Notes contains various restrictive covenants,
including covenants that limit our ability and the ability of
certain of our subsidiaries to borrow money or guarantee other
indebtedness, grant liens on our assets, make investments, use
assets as security in other transactions, pay dividends on
stock, enter into sale and leaseback transactions or sell assets
or capital stock. We were in compliance with all covenants
related to our Senior Subordinated Notes as of
September 30, 2004.

Our contractual cash obligations as of
September 30, 2004 may be summarized as follows:

|                                                             |                                          |                                       |         |         |  |         |        |         |  |         |        |        |  |   |        |        |  |   |         |         | 
|------------------------------------------------------------ | ---------------------------------------- | ------------------------------------- | ------- | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------ |  | - | ------ | ------ |  | - | ------- | ------- | 
|                                                             |                                          |                                      
|                                                             |                                          | Payments Due by Period (In Thousands)
|                                                             |                                          |                                      
|                                                             |                                          |                                       |         | Within  |  | 1 to    |        | 4 to    |  | Beyond 
|Contractual Cash Obligations                                 |                                          | Total                                 |         | 1 Year  |  | 3 Years |        | 5 Years |  | 5 Years
|                                                             |                                          |                                       |         |         |  |         |        |         |  |        
|Long term debt obligations (principal plus
    interest)(1): |                                          |                                       |         |         |  |         |        |         |  |         |        |        |  |   |        |        |  |   |         |        
|                                                             | Senior Subordinated Notes                |                                       | $       | 262,500 |  |         | $      | 15,000  |  |         | $      | 30,000 |  |   | $      | 30,000 |  |   | $       | 187,500 | 
|                                                             | U.K. credit facility                     |                                       |         | 77,951  |  |         |        | 8,294   |  |         |        | 21,109 |  |   |        | 23,451 |  |   |         | 25,097  | 
|                                                             | Loans from former owners of subsidiaries |                                       |         | 259     |  |         |        | 232     |  |         |        | 27     |  |   |        |       |  |   |         |        | 
|                                                             | Other debt at operating subsidiaries     |                                       |         | 19,532  |  |         |        | 3,259   |  |         |        | 10,743 |  |   |        | 4,289  |  |   |         | 1,241   | 
|Capitalized lease obligations                                |                                          |                                       | 86,212  |         |  |         | 10,597 |         |  |         | 13,174 |        |  |   | 8,389  |        |  |   | 54,052  |        
|Operating lease obligations                                  |                                          |                                       | 73,685  |         |  |         | 9,330  |         |  |         | 16,801 |        |  |   | 13,837 |        |  |   | 33,717  |        
|                                                             |                                          |                                       |         |         |  |         |        |         |  |         |        |        |  |   |        |        |  |   |         |        
|Total contractual cash obligations                           |                                          | $                                     | 520,139 |         |  | $       | 46,712 |         |  | $       | 91,854 |        |  | $ | 79,966 |        |  | $ | 301,607 |        
|                                                             |                                          |                                       |         |         |  |         |        |         |  |         |        |        |  |   |        |        |  |   |         |        



---



|    |                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amounts shown for long-term debt obligations and
    capital lease obligations include the associated interest. For
    variable rate debt, the interest is calculated using the
    September 30, 2004 rates applicable to each debt instrument.

Our operating subsidiaries, many of which have
minority owners who share in the cash flow of these entities,
have debt consisting primarily of capitalized lease obligations.
This debt is generally non-recourse to USPI, the parent company,
and is generally secured by the assets of those operating
entities. The total amount of these obligations, which was
$60.4 million at September 30, 2004, is included in
our consolidated balance sheet because the borrower or obligated
entity meets the requirements for consolidated financial
reporting. Our average percentage ownership, weighted based on
the individual

30



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

subsidiarys amount of debt and capitalized
leased obligations, of these consolidated subsidiaries was 55.1%
at September 30, 2004. Additionally, our unconsolidated
affiliates that we account for under the equity method have debt
and capitalized lease obligations that are generally
non-recourse to USPI and are not included in our consolidated
financial statements. At September 30, 2004, the total
obligations of these unconsolidated affiliates under debt and
capital lease obligations was approximately $91.0 million.
Our average percentage ownership, weighted based on the
individual affiliates amount of debt and capitalized lease
obligations, of these unconsolidated affiliates was 22.7% at
September 30, 2004. USPI or one of its wholly owned
subsidiaries had collectively guaranteed $16.4 million in
total debt and capital lease obligations of our unconsolidated
affiliates as of September 30, 2004.

In addition, during the fourth quarter of 2004,
we expect to pay income taxes of approximately $22 million
related to the Spanish transaction. We may also pay or receive
additional cash as the final sales price for the transaction is
determined. It is also possible we may have to pay the buyers up
to
approximately 1 million
($1.2 million at September 30, 2004) related to a
Spanish tax contingency for which we indemnified the buyers,
although we do not presently believe the likelihood of our
making any such payment is probable, as discussed more fully in
Note 8 to our financial statements.






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

We have exposure to interest rate risk related to
our financing, investing, and cash management activities.
Historically, we have not held or issued derivative financial
instruments other than the use of variable-to-fixed interest
rate swaps for portions of our borrowings under credit
facilities with commercial lenders as required by the credit
agreements. We do not use derivative instruments for speculative
purposes. Our financing arrangements with commercial lenders are
based on the spread over Prime, LIBOR or Euribor. At
September 30, 2004, $149.1 million of our total
outstanding notes payable was the Senior Subordinated Notes,
which were issued in December 2001 at a 0.8% discount and bear
interest at a fixed rate of 10%, $9.6 million was in other
fixed rate instruments and the remaining $70.6 million was
in variable rate instruments. Accordingly, a hypothetical
100 basis point increase in market interest rates would
result in additional annual expense of $0.7 million. The
Senior Subordinated Notes, which represent 94% of our total
fixed rate debt at September 30, 2004, are considered to
have a fair value, based upon recent trading, of
$172.1 million, which is approximately $23.1 million
higher than the carrying value at September 30, 2004.

Our United Kingdom revenues are a significant
portion of our total revenues. We are exposed to risks
associated with operating internationally, including foreign
currency exchange risk and taxes and regulatory changes.

Our United Kingdom operations operate in a
natural hedge to a large extent because both expenses and
revenues are denominated in local currency. Additionally, our
borrowings and capital lease obligations in the United Kingdom
are currently denominated in local currency. Historically, the
cash generated from our operations in the United Kingdom has
been utilized within that country to finance development and
acquisition activity as well as for repayment of debt
denominated in local currency. Accordingly, we have not
generally utilized financial instruments to hedge our foreign
currency exchange risk. In September 2004, we sold our Spanish
operations. By agreement with the buyer, we will not receive
approximately $16.0 million related to the sale until
January 2007. In September 2004, we entered into a forward
contract with a currency broker to lock in the receipt of
$19.8 million in January 2007, when we receive the
euro-denominated payment.

Inflation and changing prices have not
significantly affected our operating results or the markets in
which we perform services.

31



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##### Table of Contents



UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)





|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

The Companys management, with the
participation of the Companys Chief Executive Officer and
Chief Financial Officer, have evaluated the effectiveness of the
Companys disclosure controls and procedures (as defined by
applicable SEC rules) as of the end of the period covered by
this Quarterly Report on Form 10-Q. Based upon that
evaluation, the Chief Executive Officer and the Chief Financial
Officer have concluded that, as of the end of such period, the
Companys disclosure controls and procedures are effective
in bringing to their attention on a timely basis material
information relating to the Company (including its consolidated
subsidiaries) required to be included in the Companys
periodic filings with the SEC. There have been no significant
changes in the Companys internal controls over financial
reporting (as defined by applicable SEC rules) that occurred
during the Companys fiscal quarter ended
September 30, 2004 that have materially affected or are
reasonably likely to materially affect the Companys
internal controls over financial reporting.

32



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##### Table of Contents






PART II  OTHER
INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

From time to time, we may be named as a party to
legal claims and proceedings in the ordinary course of business.
We are not aware of any claims or proceedings against us or our
subsidiaries that might have a material adverse impact on us.






|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits:

| |       |  |  |                                                                                                                                                                                                                                                                                                                                         
| | ----- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1   |  |  | Second Amended and Restated Certificate of
    Incorporation (previously filed as an exhibit to the
    Companys Registration Statement on Form S-1
    (No. 333-55442) and incorporated herein by reference)                                                                                                                          
| | 3.2   |  |  | Amended and Restated Bylaws (previously filed as
    an exhibit to the Companys Registration Statement on
    Form S-1 (No. 333-55442) and incorporated herein by
    reference)                                                                                                                                                       
| | 4.1   |  |  | Form of Common Stock Certificate (previously
    filed as an exhibit to the Companys Registration Statement
    on Form S-1 (No. 333-55442) and incorporated herein by
    reference)                                                                                                                                                  
| | 4.2   |  |  | Indenture, dated as of December 19, 2001,
    among United Surgical Partners Holdings, Inc., the guarantor
    parties thereto and U.S. Trust Company of Texas, N.A.
    (previously filed as Exhibit 4.2 to the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 2001 and incorporated herein by reference)
| | 31.1* |  |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                  
| | 31.2* |  |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                  
| | 32.1* |  |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                  
| | 32.2* |  |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                  



---



|  |                
|- | ---------------
|* | Filed herewith.

Reports on Form 8-K:

The Company furnished a report on Form 8-K
dated July 1, 2004, pursuant to Item 9 of
Form 8-K, containing a news release announcing the
Companys addition of nine facilities.

The Company furnished a report on Form 8-K
dated July 26, 2004, pursuant to Item 12 of
Form 8-K, containing a news release announcing the
Companys results of operations for the quarter ended
June 30, 2004.

The Company filed a report on Form 8-K dated
July 29, 2004, pursuant to Item 5 of Form 8-K,
containing a news release announcing the Companys creation
of a Spanish joint venture.

The Company furnished a report on Form 8-K
dated August 2, 2004, pursuant to Item 9 of
Form 8-K, containing a news release announcing the
Companys execution of a partnership agreement with
INTEGRIS Health and local physicians in the Oklahoma City market.

The Company furnished a report on Form 8-K
dated September 8, 2004, pursuant to Item 7.01 of
Form 8-K, containing a copy of materials dated September
2004 and prepared with respect to presentations to investors and
others that may be made by senior officers of the Company.

The Company furnished a report on Form 8-K
dated September 9, 2004, pursuant to Item 7.01 of
Form 8-K, containing a news release announcing a joint
venture agreement between the Company and Ascension Health.

The Company filed a report on Form 8-K dated
September 15, 2004, pursuant to Items 2.01, 8.01 and
9.01 of Form 8-K, announcing the Companys sale of its
Spanish operations.

The Company filed a report on Form 8-K dated
September 27, 2004, pursuant to Items 1.02 and 9.01 of
Form 8-K, announcing the Companys voluntary
termination of its U.S. revolving credit facility.

33



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##### Table of Contents






SIGNATURES

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



| |                                             
| | --------------------------------------------
| | UNITED SURGICAL PARTNERS INTERNATIONAL, INC.



| |     |                   
| | --- | ------------------
| | By: | /s/ MARK A. KOPSER

| |                                                      
| | -----------------------------------------------------
| |                                                      
| | Mark A. Kopser                                       
| | Senior Vice President and Chief Financial
    Officer
| | Principal Financial Officer)                         



| |     |                   
| | --- | ------------------
| | By: | /s/ JOHN J. WELLIK

| |                                          
| | -----------------------------------------
| |                                          
| | John J. Wellik                           
| | Senior Vice President, Accounting
    and
| | Administration, and Secretary            
| | (Principal Accounting Officer)           

Date: November 4, 2004

34



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##### Table of Contents



|        |       |  |  |                                                                                                                                                                                                                                                                                                                                          
|------- | ----- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       | 
|Index   |       | 
|        |       | 
|        | 3.1   |  |  | Second Amended and Restated Certificate of
    Incorporation (previously filed as an exhibit to the
    Companys Registration Statement on Form S-1 (No.
    333-55442) and incorporated herein by reference).                                                                                                                          
|        | 3.2   |  |  | Amended and Restated Bylaws (previously filed as
    an exhibit to the Companys Registration Statement on
    Form S-1 (No. 333-55442) and incorporated herein by
    reference).                                                                                                                                                       
|        | 4.1   |  |  | Form of Common Stock Certificate (previously
    filed as an exhibit to the Companys Registration Statement
    on Form S-1 (No. 333-55442) and incorporated herein by
    reference).                                                                                                                                                  
|        | 4.2   |  |  | Indenture, dated as of December 19, 2001,
    among United Surgical Partners Holdings, Inc., the guarantor
    parties thereto and U.S. Trust Company of Texas, N.A.
    (previously filed as Exhibit 4.2 to the Companys
    Annual report on Form 10-K for the year ended December 31,
    2001 and incorporated herein be reference).
|        | 31.1* |  |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                  
|        | 31.2* |  |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                  
|        | 32.1* |  |  | Certification of Chief Executive Officer pursuant
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                     
|        | 32.2* |  |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                  



---



|  |                
|- | ---------------
|* | Filed herewith.

35