##### 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 1934For the quarterly period ended
    September 30, 2006oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For 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
    incorporation or organization)

(IRS Employer
    Identification Number)15305 Dallas Parkway,
    Suite 1600
    Addison, Texas(Address of principal
    executive offices)

75001(Zip Code)    (972) 713-3500
 (Registrants telephone
    number, including area code)
   þ o
  Rule 12b-2
  þ o o
  Rule 12b-2 o þ




---



##### 



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
    INDEX
  
  PART I.
    FINANCIAL INFORMATIONItem 1.

Financial
    Statements


2Consolidated
    Balance Sheets as of September 30, 2006 (unaudited) and
    December 31, 2005


2Consolidated
    Statements of Income for the three months and nine months ended
    September 30, 2006 and 2005 (unaudited)


3Consolidated
    Statements of Comprehensive Income for the three months and nine
    months ended September 30, 2006 and 2005
    (unaudited)


4Consolidated
    Statements of Cash Flows for the nine months ended
    September 30, 2006 and 2005 (unaudited)


5Notes to
    Consolidated Financial Statements (unaudited)


6Item 2.

Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


21Item 3.

Quantitative and
    Qualitative Disclosures About Market Risk


34Item 4.

Controls and
    Procedures


35PART II.
    OTHER INFORMATIONItem 1.

Legal
    Proceedings


35Item 6.

Exhibits and
    Reports on
    Form 8-K


35Signatures


36Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906     1




---



##### Table of Contents



PART I.
    FINANCIAL INFORMATION  ITEM 1.
    Financial
    Statements  UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
 Consolidated Balance Sheets  September 30, 2006


December 31, 2005(Unaudited)(In thousands, except per share amounts)ASSETSCash and cash equivalents

$
25,286


$
130,440Patient receivables, net of
    allowance for doubtful accounts of $9,108 and $6,656,
    respectively


53,310



44,501Other receivables


14,182



10,253Inventories of supplies


9,154



7,819Deferred tax asset, net


15,967



11,654Prepaids and other current assets


31,511



8,443Total current assets


149,410



213,110Property and equipment, net


290,711



259,016Investments in affiliates


149,772



100,500Intangible assets, net


619,699



422,556Other assets


8,659



33,659Total assets

$
1,218,251


$
1,028,841LIABILITIES AND
    STOCKHOLDERS EQUITYAccounts payable

$
22,609


$
19,095Accrued salaries and benefits


26,805



19,572Due to affiliates


69,874



34,997Accrued interest


1,792



1,506Current portion of long-term debt


25,267



15,922Other accrued expenses


27,078



31,072Total current liabilities


173,425



122,164Long-term debt, less current
    portion


346,227



270,564Other long-term liabilities


10,650



4,474Deferred tax liability, net


42,096



36,591Total liabilities


572,398



433,793Minority interests


69,140



63,998Stockholders equity:Common stock, $0.01 par
    value; 200,000 shares authorized; 44,601 and
    44,320 shares issued at September 30, 2006 and
    December 31, 2005, respectively...


446



443Additional paid-in capital


377,631



375,656Treasury stock, at cost, 23 and
    37 shares at September 30, 2006 and December 31,
    2005, respectively


(636
)


(831
)Deferred compensation






(14,128
)Accumulated other comprehensive
    income, net of tax


12,083



3,896Retained earnings


187,189



166,014Total stockholders equity


576,713



531,050Total liabilities and
    stockholders equity

$
1,218,251


$
1,028,841    2




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
 Consolidated Statements of Income  Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005(Unaudited)(In thousands, except per share amounts)Revenues:Net patient service revenue

$
128,170


$
107,260


$
379,931


$
325,414Management and contract service
    revenue


14,551



8,519



36,790



27,388Other revenue


2,066



251



6,362



706Total revenues


144,787



116,030



423,083



353,508Equity in earnings of
    unconsolidated affiliates


7,858



5,747



21,892



17,221Operating expenses:Salaries, benefits, and other
    employee costs


42,642



29,283



117,782



89,617Medical services and supplies


25,765



21,345



76,376



62,680Other operating expenses


23,441



20,753



72,194



63,680General and administrative expenses


9,772



7,486



29,520



23,248Provision for doubtful accounts


2,457



2,592



7,021



7,575Depreciation and amortization


9,224



7,404



25,891



22,586Total operating expenses


113,301



88,863



328,784



269,386Operating income


39,344



32,914



116,191



101,343Interest income


749



1,090



3,308



2,881Interest expense


(8,454
)


(6,587
)


(24,599
)


(20,268
)Loss on early retirement of debt


(14,856
)






(14,856
)


Other


65



283



1,710



537Total other expense, net


(22,496
)


(5,214
)


(34,437
)


(16,850
)Income before minority interests


16,848



27,700



81,754



84,493Minority interests in income of
    consolidated subsidiaries


(12,503
)


(9,563
)


(39,221
)


(29,446
)Income from continuing operations
    before income taxes


4,345



18,137



42,533



55,047Income tax expense


(2,122
)


(6,480
)


(15,526
)


(19,911
)Income from continuing operations


2,223



11,657



27,007



35,136Earnings (loss) from discontinued
    operations, net of tax


626



226



(5,831
)


(114
)Net income

$
2,849


$
11,883


$
21,176


$
35,022Net income per share attributable
    to common stockholders Basic:Continuing operations

$
0.05


$
0.27


$
0.62


$
0.82Discontinued operations


0.02







(0.13
)


Total

$
0.07


$
0.27


$
0.49


$
0.82Diluted:Continuing operations

$
0.05


$
0.26


$
0.59


$
0.78Discontinued operations


0.01







(0.12
)


Total

$
0.06


$
0.26


$
0.47


$
0.78Weighted average number of common
    sharesBasic


43,822



43,221



43,652



42,870Diluted


45,362



45,235



45,394



44,879    3




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
 Consolidated
    Statements of Comprehensive Income  Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005(Unaudited  in thousands)Net income

$
2,849


$
11,883


$
21,176


$
35,022Other comprehensive income (loss),
    net of taxes:Foreign currency translation
    adjustments


1,235



(1,198
)


8,187



(7,328
)Comprehensive income

$
4,084


$
10,685


$
29,363


$
27,694    4




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
 Consolidated Statements of Cash Flows  Nine Months EndedSeptember 30,2006


2005(Unaudited  in thousands)Cash flows from operating
    activities:Net income

$
21,176


$
35,022Adjustments to reconcile net income
    to net cash provided by operating activities:Loss on early retirement of debt


14,856



Loss on discontinued operations


5,831



114Provision for doubtful accounts


7,021



7,575Depreciation and amortization


25,891



22,586Amortization of debt issue costs
    and discount


729



573Deferred income tax expense


3,599



1,717Equity in earnings of
    unconsolidated affiliates, net of distributions received


109



(1,123
)Minority interests in income of
    consolidated subsidiaries, net of distributions paid


(1,925
)


2,221Equity-based compensation


8,980



3,300Increases (decreases) in cash from
    changes in operating assets and liabilities, net of effects from
    purchases of new businesses:Patient receivables


(6,322
)


(8,075
)Other receivables


(1,318
)


9,781Inventories of supplies, prepaids
    and other current assets


(3,083
)


1,519Accounts payable and other current
    liabilities


2,110



11,142Long-term liabilities


3,674



5,817Net cash provided by operating
    activities


81,328



92,169Cash flows from investing
    activities:Purchases of new businesses and
    equity interests, net of cash received


(266,549
)


(59,986
)Purchases of property and equipment


(22,372
)


(21,302
)Returns of capital from
    unconsolidated affiliates


730



133Increase (decrease) in deposits and
    notes receivable


329



(3,498
)Net cash used in investing
    activities


(287,862
)


(84,653
)Cash flows from financing
    activities:Proceeds from long-term debt


298,604



10,332Payments on long-term debt


(238,971
)


(12,482
)Proceeds from issuances of common
    stock and related income tax benefit


8,167



9,593Increase in cash held on behalf of
    unconsolidated affiliates


34,610



14,075Returns of capital to minority
    interest holders


(1,008
)


(1,195
)Net cash provided by financing
    activities


101,402



20,323Cash flows of discontinued
    operations:Operating cash flows


157



542Investing cash flows


5



(278
)Financing cash flows


(173
)


(368
)Net cash used in discontinued
    operations


(11
)


(104
)Effect of exchange rate changes on
    cash


(11
)


(79
)Net (decrease) increase in cash and
    cash equivalents


(105,154
)


27,656Cash and cash equivalents at
    beginning of period


130,440



93,467Cash and cash equivalents at end of
    period

$
25,286


$
121,123Supplemental information:Interest paid

$
23,875


$
16,788Income taxes paid


15,076



13,450Non-cash transactions:Assets acquired under capital lease
    obligations

$
3,677


$
2,138Issuance of common stock to
    employees


30,220



10,609    5




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIESNotes to Consolidated Financial Statements(Unaudited)
  (1)  Basis
    of Presentation
  (a)
    Description
    of Business  not-for-profit not-for-profit
      Form 10-K.
  (b)
    Equity-Based
    Compensation  Share-Based
    Payment Accounting for Stock Issued to Employees
   6




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
    Notes to Consolidated Financial
    Statements  (Continued)
    Three Months Ended


Nine Months EndedSeptember 30, 2005


September 30, 2005Net income:As reported

$
11,883


$
35,022Add: Total stock-based employee
    compensation expense included in reported net income, net of
    taxes


696



2,145Less: Total stock-based employee
    compensation expense determined under fair value based method
    for all awards, net of taxes


(1,252
)


(4,443
)Pro forma

$
11,327


$
32,724Basic earnings per shareAs reported

$
0.27


$
0.82Pro forma


0.26



0.76Diluted earnings per shareAs reported

$
0.26


$
0.78Pro forma


0.25



0.73      7




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
    Notes to Consolidated Financial
    Statements  (Continued)
    Nine MonthsThree Months Ended


EndedSeptember 30,


September 30,2006


2005


2006


2005Equity in earnings of
    unconsolidated affiliates

$
17


$



$
49


$
Salaries, benefits and other
    employee costs


823







2,307



General and administrative expenses


2,164



1,071



6,691



3,300Minority interests in income of
    consolidated subsidiaries


(21
)






(67
)


Expense before income tax benefit


2,983



1,071



8,980



3,300Income tax benefit


(927
)


(375
)


(2,726
)


(1,155
)Total equity-based compensation
    expense, net of tax

$
2,056


$
696


$
6,254


$
2,145       Nine MonthsThree Months


EndedEnded September 30,


September 30,2006


2005


2006


2005Share awards(1)

$
2,446


$
1,071


$
6,917


$
3,300Stock options(2)


465







1,833



ESPP(2)


72







230



Expense before income tax benefit


2,983



1,071



8,980



3,300Income tax benefit


(927
)


(375
)


(2,726
)


(1,155
)Total equity-based compensation
    expense, net of tax

$
2,056


$
696


$
6,254


$
2,145     (1)
    
    Included in the Companys Consolidated Statements of Income
    for both periods.(2)
    
    Included in the Companys Consolidated Statement of Income
    beginning January 1, 2006, reflecting the Companys
    adoption of SFAS 123R. ESPP amounts are net of
    reimbursements by other owners of the Companys investees.  Stock
    Options
   8




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
    Notes to Consolidated Financial
    Statements  (Continued)
    Three Months Ended

Nine Months EndedSeptember 30,

September 30,2006

2005

2006

2005Assumptions:Expected life in years

3.75

(1)

3.75

3.00Risk-free interest rates

4.9%-5.1%

(1)

4.3%-5.1%

3.4%-3.9%Dividend yield

0.0%

(1)

0.0%

0.0%Volatility

30.0%

(1)

30.0%

30.0%Weighted average grant-date fair
    value

$7.39

(1)

$9.83

$7.36     (1)
    
    No stock options were granted during the three months ended
    September 30, 2005.    WeightedWeighted


AverageAverage


Remaining


AggregateNumber of


Exercise


Contractual


IntrinsicStock Options

Shares (000)


Price


Life (Years)


Value ($000)Outstanding at December 31,
    2005


3,470


$
14.09Granted


8



35.40Exercised


(121
)


10.90Forfeited or expired


(10
)


18.10Outstanding at March 31, 2006


3,347


$
14.24



4.5


$
69,718Granted


220



33.44Exercised


(127
)


14.02Forfeited or expired


(2
)


29.70Outstanding at June 30, 2006


3,438


$
15.45



4.3


$
51,441Granted


22



24.49Exercised


(90
)


14.61Forfeited or expired


(4
)


32.19Outstanding at September 30,
    2006


3,366


$
15.44



4.1


$
35,250Exercisable at September 30,
    2006


2,762


$
12.91



4.2


$
33,627     Share
    Awards
   9




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
    Notes to Consolidated Financial
    Statements  (Continued)
    WeightedAverageNumber of


Grant-DateNonvested Shares

Shares (000)


Fair ValueNonvested at December 31, 2005


853


$
23.44Granted


630



33.89Converted/vested(1)


(6
)


24.37Forfeited






Nonvested at March 31, 2006


1,477


$
27.90Granted


270



32.62Converted/vested(1)


(89
)


30.52Forfeited






Nonvested at June 30, 2006


1,658


$
28.52Granted


2



24.49Converted/vested(1)


(14
)


19.98Forfeited


(69
)


27.35Nonvested at September 30,
    2006


1,577


$
28.64     (1)
    
    The Company has granted share awards both in the form of
    nonvested shares and restricted stock units, which convert to
    unrestricted shares upon vesting.        Employee
    Stock Purchase Plan
   10




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
    Notes to Consolidated Financial
    Statements  (Continued)
    3-month 3-month
  Three Months Ended

Nine Months EndedSeptember 30,

September 30,2006

2005

2006

2005Assumptions:Expected life in years

0.25

(1)

0.25

0.50Risk-free interest rate

5.1%

(1)

4.2%-5.1%

2.6%Dividend yield

0.0%

(1)

0.0%

0.0%Volatility

30.0%

(1)

30.0%

30.0%Grant-date fair value per share

$6.36

(1)

$6.36-$7.56

$8.42-$9.97     (1)
    
    As noted above, ESPP purchases were made every six months prior
    to January 1, 2006; accordingly, no ESPP awards were
    initiated during the three months ended September 30, 2005.  (c)
    Revisions
    to Cash Flow Statement  Form 10-K
  Nine Months Ended September 30, 2005Net Cash Provided by (Used in)Operating


Investing


FinancingActivities


Activities


ActivitiesPreviously reported

$
103,399


$
(85,064
)

$
9,400Distributions received from equity
    method investees


16,099







(16,099
)Distributions paid to minority
    interest holders


(26,787
)






26,787Returns of investees capital






133



(133
)Discontinued operations


(542
)


278



368As revised

$
92,169


$
(84,653
)

$
20,323  11




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
    Notes to Consolidated Financial
    Statements  (Continued)
  (2)  Discontinued
    Operations and Other Dispositions
  Accounting for the Impairment or
    Disposal of Long-Lived Assets
  Nine MonthsThree Months Ended


EndedSeptember 30,


September 30,2006


2005


2006


2005Revenues

$
(39
)

$
1,382


$
1,117


$
3,937Earnings (loss) from discontinued
    operations beforeincome taxes

$
(89
)

$
29


$
(137
)

$
(494
)Income tax benefit (expense)


31



(10
)


48



173Earnings (loss) from discontinued
    operations

$
(58
)

$
19


$
(89
)

$
(321
)Earnings (loss) on sale of
    discontinued operationsbefore income taxes

$



$



$
(7,395
)

$
Income tax benefit


684



207



1,653



207Net gain/(loss) on sale of
    discontinued operations

$
684


$
207


$
(5,742
)

$
207Earnings (loss) per diluted share:Earnings (loss) from discontinued
    operations

$



$



$



$
Gain/loss on sale of discontinued
    operations


0.01







(0.12
)


Total

$
0.01


$



$
(0.12
)

$
   not-for-profit
   12




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
    Notes to Consolidated Financial
    Statements  (Continued)
    (3)  Acquisitions
    and Equity Method Investments
              Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Net revenues

$
146,946


$
149,950


$
460,460


$
448,207Income from continuing operations


2,484



13,680



27,918



38,335Diluted earnings per share from
    continuing operations

$
0.05


$
0.30


$
0.62


$
0.85     
    Investment of $4.1 million in a joint venture with one of
    the Companys
    not-for-profit
    hospital partners, which the joint venture used to acquire
    ownership in a surgery center in the Sacramento, California area,
    Receipt of $4.8 million from another of the Companys
    not-for-profit
    hospital partners, as the Company sold a controlling interest in
    a surgical facility in Fort Worth, Texas (Notes 2 and
    7), 13




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
    Notes to Consolidated Financial
    Statements  (Continued)
   
    Payment of $1.3 million of additional purchase price
    related to the purchase of additional ownership in 2005 in a
    facility in Eatontown, New Jersey, which amount had been
    withheld at closing pending the resolution of certain
    contingencies,
    Receipt of $1.3 million for the sale of a facility in
    Phoenix, Arizona, which the Company had acquired in April as
    part of the Surgis acquisition (Note 2),
    Receipt of $0.5 million for the sale of the Lyndhurst
    facility (Note 2),
    Net payment of $2.0 million related to other purchases and
    sales of equity interests and contributions of cash to equity
    method investees.    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Unconsolidated facilities operated
    at period-end


76



52



76



52Income statement information:Revenues

$
161,386


$
111,101


$
432,004


$
320,377Equity in earnings of
    unconsolidated affiliates


177







223



27Operating expenses:Salaries, benefits, and other
    employee costs


40,679



28,278



108,314



79,452Medical services and supplies


33,690



21,618



88,348



61,700Other operating expenses


40,970



28,679



108,124



81,610Depreciation and amortization


7,980



5,306



21,199



14,500Total operating expenses


123,319



83,881



325,985



237,262Operating income


38,244



27,220



106,242



83,142Interest expense, net


(3,780
)


(2,759
)


(9,988
)


(7,853
)Other


(669
)


279



12



354Income before income taxes

$
33,795


$
24,740


$
96,266


$
75,643Balance sheet information:Current assets

$
156,612


$
115,889


$
156,612


$
115,889Noncurrent assets

$
264,079


$
193,453


$
264,079


$
193,453Current liabilities

$
82,131


$
58,642


$
82,131


$
58,642Noncurrent liabilities

$
165,098


$
111,140


$
165,098


$
111,140   (4)  Long-Term
    Debt
   14




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
    Notes to Consolidated Financial
    Statements  (Continued)
         15




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
    Notes to Consolidated Financial
    Statements  (Continued)
  (5)  Earnings
    Per Share
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Net income attributable to common
    shareholders:Continuing operations

$
2,223


$
11,657


$
27,007


$
35,136Discontinued operations


626



226



(5,831
)


(114
)Total

$
2,849


$
11,883


$
21,176


$
35,022Weighted average common shares
    outstanding


43,822



43,221



43,652



42,870Effect of dilutive securities:Stock options


1,160



1,699



1,367



1,747Warrants and restricted stock


380



315



375



262Shares used for diluted earnings
    per share


45,362



45,235



45,394



44,879Basic earnings per share:Continuing operations

$
0.05


$
0.27


$
0.62


$
0.82Discontinued operations


0.02







(0.13
)


Total

$
0.07


$
0.27


$
0.49


$
0.82Diluted earnings per share:Continuing operations

$
0.05


$
0.26


$
0.59


$
0.78Discontinued operations


0.01







(0.12
)


Total

$
0.06


$
0.26


$
0.47


$
0.78   (6)  Segment
    Disclosures
  Disclosures About Segments of an
    Enterprise and Related Information
 16




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
    Notes to Consolidated Financial
    Statements  (Continued)
    Three Months EndedSeptember 30, 2006UnitedUnited States


Kingdom


TotalNet patient service revenue

$
103,578


$
24,592


$
128,170Other revenue


16,617







16,617Total revenues

$
120,195


$
24,592


$
144,787Depreciation and amortization

$
7,084


$
2,140


$
9,224Operating income


36,004



3,340



39,344Net interest expense


(6,838
)


(867
)


(7,705
)Income tax expense


(1,659
)


(463
)


(2,122
)Total assets


1,001,598



216,653



1,218,251Capital expenditures


8,144



2,376



10,520   Three Months EndedSeptember 30, 2005UnitedUnited States


Kingdom


TotalNet patient service revenue

$
85,435


$
21,825


$
107,260Other revenue


8,770







8,770Total revenues

$
94,205


$
21,825


$
116,030Depreciation and amortization

$
5,635


$
1,769


$
7,404Operating income


29,972



2,942



32,914Net interest expense


(4,905
)


(592
)


(5,497
)Income tax expense


(5,927
)


(553
)


(6,480
)Total assets


813,446



194,993



1,008,439Capital expenditures


4,075



5,150



9,225   Nine Months EndedSeptember 30, 2006UnitedUnited States


Kingdom


TotalNet patient service revenue

$
308,918


$
71,013


$
379,931Other revenue


43,152







43,152Total revenues

$
352,070


$
71,013


$
423,083Depreciation and amortization

$
20,000


$
5,891


$
25,891Operating income


105,869



10,322



116,191Net interest expense


(18,843
)


(2,448
)


(21,291
)Income tax expense


(14,088
)


(1,438
)


(15,526
)Total assets


1,001,598



216,653



1,218,251Capital expenditures


17,094



8,955



26,049   17




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
    Notes to Consolidated Financial
    Statements  (Continued)
  Nine Months EndedSeptember 30, 2005UnitedUnited States


Kingdom


TotalNet patient service revenue

$
257,224


$
68,190


$
325,414Other revenue


28,094







28,094Total revenues

$
285,318


$
68,190


$
353,508Depreciation and amortization

$
17,144


$
5,442


$
22,586Operating income


90,077



11,266



101,343Net interest expense


(15,261
)


(2,126
)


(17,387
)Income tax expense


(17,759
)


(2,152
)


(19,911
)Total assets


813,446



194,993



1,008,439Capital expenditures


10,215



13,225



23,440   (7)  Related
    Party Transactions
    (8)  Commitments
    and Contingencies
  Guarantors Accounting and
    Disclosure Requirements for Guarantees, Including Indirect
    Guarantees of Indebtedness of Others
 18




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
    Notes to Consolidated Financial
    Statements  (Continued)
    Form 10-K, Form 10-K, Form 10-K.
    (9)  New
    Accounting Pronouncements
  Accounting for Uncertainty in Income Taxes, an interpretation
    of FASB Statement No. 109. Accounting for Income
    Taxes.
  Fair Value Measurement
  Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans  an amendment of FASB
    Statement No. 87, 88, 106 and 132(R), .
   19




---



##### Table of Contents



UNITED
    SURGICAL PARTNERS INTERNATIONAL, INC.
    AND SUBSIDIARIES
    Notes to Consolidated Financial
    Statements  (Continued)
    (10)  Subsequent
    Events
     20




---



##### Table of Contents



ITEM 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Form 10-Q.
  Forward-Looking
    Statements
  Form 10-Q, Form 10-Q.
  Overview
  not-for-profit
  not-for-profit
   21




---



##### Table of Contents



Critical
    Accounting Policies and Estimates
    not-for-profit
      Acquisitions,
    Equity Investments and Development Projects
           22




---



##### Table of Contents




    Investment of $4.1 million in a joint venture with one of
    our
    not-for-profit
    hospital partners, which the joint venture used to acquire
    ownership in a surgery center in the Sacramento, California area,
    Receipt of $4.8 million from another of our
    not-for-profit
    hospital partners, as we sold a controlling interest in a
    surgical facility in Fort Worth, Texas,
    Payment of $1.3 million of additional purchase price
    related to the purchase of additional ownership in 2005 in a
    facility in Eatontown, New Jersey, which amount had been
    withheld at closing pending the resolution of certain
    contingencies,
    Receipt of $1.3 million for the sale of a facility in
    Phoenix, Arizona, which we had acquired in April as part of the
    Surgis acquisition ,
    Receipt of $0.5 million for the sale of the Lyndhurst
    facility,
    Net payment of $2.0 million related to other purchases and
    sales of equity interests and contributions of cash to equity
    method investees.  Sources
    of Revenue
    
    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 contract service 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.    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Net patient service revenue


89
%


93
%


90
%


92
%Management and contract service
    revenue


10



7



9



8Other


1







1



Total revenues


100
%


100
%


100
%


100
%   gross-up
 23




---



##### Table of Contents



Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Management of surgical facilities

$
7,090


$
4,932


$
18,965


$
15,072Contract services provided to
    physicians, hospitals and related entities


7,461



3,587



17,825



12,316Total management and contract
    service revenues

$
14,551


$
8,519


$
36,790


$
27,388     Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005United States


83
%


81
%


83
%


81
%United Kingdom


17



19



17



19Total


100
%


100
%


100
%


100
%     Equity in
    Earnings of Unconsolidated Affiliates
  not-for-profit
  Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Revenues

$
161,386


$
111,101


$
432,004


$
320,377Equity in earnings of
    unconsolidated affiliates


177







223



27Operating expenses:Salaries, benefits, and other
    employee costs


40,679



28,278



108,314



79,452Medical services and supplies


33,690



21,618



88,348



61,700Other operating expenses


40,970



28,679



108,124



81,610Depreciation and amortization


7,980



5,306



21,199



14,500Total operating expenses


123,319



83,881



325,985



237,262Operating income


38,244



27,220



106,242



83,142Interest expense, net


(3,780
)


(2,759
)


(9,988
)


(7,853
)Other


(669
)


279



12



354Income before income taxes

$
33,795


$
24,740


$
96,266


$
75,643Long-term debt

$
167,128


$
112,401


$
167,128


$
112,401USPIs equity in earnings of
    unconsolidated affiliates

$
7,858


$
5,747


$
21,892


$
17,221USPIs imputed weighted
    average ownership percentage based on affiliates pre-tax
    income(1)


23.2
%


23.2
%


22.7
%


22.8
%USPIs imputed weighted
    average ownership percentage based on affiliates debt(2)


28.6
%


27.2
%


28.6
%


27.2
%Unconsolidated facilities operated
    at period end


76



52



76



52  24




---



##### Table of Contents



(1)
    
    Calculated as USPIs equity in earnings of unconsolidated
    affiliates divided by the total pre-tax income of unconsolidated
    affiliates for each respective period.(2)
    
    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. This percentage is higher in 2006
    due primarily to our acquisition, in the second quarter of 2006,
    of four facilities in which we own a majority economic interest
    but account for under the equity method due to a lack of
    effective control over the facilities operations.  Results
    of Operations
    Three Months Ended


Nine Months EndedSeptember 30,


September 30,2006


2005


2006


2005Total revenues


100
%


100
%


100
%


100
%Equity in earnings of
    unconsolidated affiliates


5.4



4.9



5.2



4.8Operating expenses, excluding
    depreciation and amortization


(71.9
)


(70.2
)


(71.6
)


(69.7
)Depreciation and amortization


(6.3
)


(6.3
)


(6.1
)


(6.4
)Operating income


27.2



28.4



27.5



28.7Minority interests in income of
    consolidated entities


(8.6
)


(8.2
)


(9.3
)


(8.3
)Interest and other expense, net


(15.6
)


(4.6
)


(8.1
)


(4.8
)Income from continuing operations
    before income taxes


3.0



15.6



10.1



15.6Income tax expense


(1.5
)


(5.6
)


(3.7
)


(5.7
)Income from continuing operations


1.5



10.0



6.4



9.9Earnings (loss) from discontinued
    operations


0.5



0.2



(1.4
)


0.0Net income


2.0
%


10.2
%


5.0
%


9.9
%   Executive
    Summary
    year-to-date year-over-year
 25




---



##### Table of Contents



not-for-profit
  year-to-date
  Revenues
      lower-than-expected year-to-date
   26




---



##### Table of Contents



Three Months Ended


Nine Months EndedSeptember 30, 2006


September 30, 2006United States facilities:Net revenue


7.8
%


6.9
%Surgical cases(1)


4.9
%


4.8
%Net revenue per case(2)


2.7
%


2.0
%United Kingdom facilities:Net revenue using actual exchange
    rates


12.8
%


4.3
%Net revenue using constant
    exchange rates(3)


7.3
%


5.6
%All same store facilities:Net revenue using actual exchange
    rates


8.2
%


6.6
%     (1)
    
    There was one fewer surgical day during the three months ended
    September 30, 2006 as compared to the three months ended
    September 30, 2005. Taking this into account would increase
    the growth rate in surgical cases from 4.9% to 6.6%.(2)
    
    Our overall domestic same store growth in net revenue per case
    was favorably impacted by the growth at our nine same store
    surgical hospitals, which on average perform more complex cases
    and thus earn a higher average net revenue per case than
    ambulatory surgery centers. Net revenue per case of our same
    store ambulatory surgery centers increased 1% for the three
    months ended September 30, 2006, as compared to the
    corresponding prior year period. On a
    year-to-date
    basis, the net revenue per case of our same store ambulatory
    surgery centers remained flat as compared to the corresponding
    prior year period.(3)
    
    Calculated using 2006 exchange rates for both periods. We
    believe that using a constant currency translation rate more
    accurately reflects the trend of the business.  Joint
    Ventures With
    Not-For-Profit
    Hospitals
   27




---



##### Table of Contents



September 30,2006


2005United States facilities (1):With a hospital partner


75



62Without a hospital partner


59



29Total U.S. facilities


134



91United Kingdom facilities


3



3Total facilities operated


137



94Change from September 30,
    2005:De novo (newly constructed)


11Acquisition


36Disposals(2)


(4
)Total increase in number of
    facilities


43     (1)
    
    At September 30, 2006, physicians own a portion of all of
    these facilities.(2)
    
    We sold our ownership interests in facilities in Lyndhurst, Ohio
    and Chicago, Illinois during the first quarter of 2006.
    Additionally, we sold our interest in a Phoenix, Arizona
    facility in the third quarter of 2006. Subsequent to the third
    quarter of 2006, we completed a planned sale of an additional
    facility acquired with Surgis.  Facility
    Operating Margins
  year-over-year not-for-profit
   28




---



##### Table of Contents



Three Months Ended


Increase


Nine Months Ended


IncreaseSeptember 30, 2006


(Decrease)


September 30, 2006


(Decrease)United States facilities:With a hospital partner


25.3
%


(30
) bps


26.8
%


(130
) bpsWithout a hospital partner


29.9
%


(180
) bps


31.9
%


(110
) bpsTotal U.S. facilities


26.8
%


(90
) bps


28.3
%


(130
) bpsUnited Kingdom facilities


21.1
%


(40
) bps


22.2
%


(200
) bps     (1)
    
    Operating margin is calculated as operating income 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 the U.K. 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.  Three
    Months Ended September 30, 2006 Compared to Three Months
    Ended September 30, 2005
         29




---



##### Table of Contents































Nine
    Months Ended September 30, 2006 Compared to Nine Months
    Ended September 30, 2005










30



---



##### Table of Contents



year-to-date
    Liquidity
    and Capital Resources
   31




---



##### Table of Contents



32




---



##### Table of Contents



Payments Due by PeriodWithin








BeyondContractual Cash Obligations

Total


1 Year


1 to 3 Years


4 to 5 Years


5 Years(In thousands)Long term debt obligations
    (principal plus interest)(1):U.S. Term loan facility (Term
    B)

$
199,500


$
2,000


$
4,000


$
4,000


$
189,500U.K. credit facility


81,128



11,287



26,998



42,843



U.S. credit facility


25,000











25,000



Other debt at operating
    subsidiaries


33,759



9,973



15,218



7,559



1,009Capitalized lease obligations


83,836



10,471



17,242



13,787



42,336Operating lease obligations


82,253



14,336



22,745



17,236



27,936Total contractual cash obligations

$
505,476


$
48,067


$
86,203


$
110,425


$
260,781     (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,
    2006 rates applicable to each debt instrument.      New
    Accounting Pronouncements
  Accounting for Uncertainty in Income Taxes, an interpretation
    of FASB Statement No. 109.
 33




---



##### Table of Contents



Accounting for
    Income Taxes.
  Fair Value Measurement
  Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans  an amendment of FASB
    Statement No. 87, 88, 106 and 132(R),
    ITEM 3.
    Quantitative
    and Qualitative Disclosures About Market Risk  variable-to-fixed
     34




---



##### Table of Contents



ITEM 4.
    Controls
    and Procedures  Form 10-Q.
 PART II 
    OTHER INFORMATION  ITEM 1.
    Legal
    Proceedings    ITEM 6.
    Exhibits
    and Reports on
    Form 8-K    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).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.  Form 8-K:
  Form 8-K
  Form 8-K
  Form 8-K
  Form 8-K
  Form 8-K
  Form 8-K Form 8-K
 35




---



##### Table of Contents



SIGNATURES      By:
    /s/  Mark
    A. Kopser   Senior Vice President and Chief Financial Officer (Principal
    Financial Officer)
  By:
    /s/  John
    J. Wellik   Senior Vice President, Accounting and
 Administration, and Secretary
 (Principal Accounting Officer)
   36




---



##### 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 o=n
    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).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. 37