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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

(Mark One)

|ý                                            | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|-------------------------------------------- | ----------------------------------------------------------------------------------------
|For the quarterly period ended June 30, 2002
|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

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United Surgical Partners International, Inc.(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

75-2749762(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)

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 ý    No o

At
August 8, 2002 there were 24,446,435 shares of Common Stock outstanding.

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UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX



|PART I. Financial Information |  |        
|----------------------------- |  | -------
|                              |  | Item 1.
|                              |  |        
|                              |  |        
|                              |  |        
|                              |  |        
|                              |  |        
|                              |  | Item 2.
|                              |  | Item 3.
|PART II. Other Information    |  |        
|                              |  | Item 1.
|                              |  | Item 4.
|                              |  | Item 6.
|Signature                     |  | 30     

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

2

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PART I. FINANCIAL INFORMATION

ITEM 1.Financial Statements

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.  AND SUBSIDIARIES  Consolidated Balance Sheets  (in thousands, except per share amounts)

|                                                                                              |                           | June 30, 2002 |         | December 31, 2001
|--------------------------------------------------------------------------------------------- | ------------------------- | ------------- | ------- | -----------------
|
|Assets                                                                                       
|Cash and cash equivalents                                                                     |                           | $             | 25,083  |                  
|Patient receivables, net of allowance for doubtful accounts of $4,672 and $4,726 respectively |                           |               | 37,368  |                  
|Other receivables                                                                             |                           |               | 31,439  |                  
|Inventories of supplies                                                                       |                           |               | 6,782   |                  
|Deferred tax asset                                                                            |                           |               | 6,450   |                  
|Prepaids and other current assets                                                             |                           |               | 6,073   |                  
|                                                                                              |                           |               |         |                  
|                                                                                              | Total current assets      |               | $       | 113,195          
|Property and equipment, net                                                                   |                           |               | 244,928 |                  
|Investments in affiliates                                                                     |                           |               | 16,515  |                  
|Intangible assets, net                                                                        |                           |               | 250,136 |                  
|Other assets                                                                                  |                           |               | 7,894   |                  
|                                                                                              |                           |               |         |                  
|                                                                                              | Total assets              |               | $       | 632,668          
|                                                                                              |                           |               |         |                  
|Liabilities and Stockholders' Equity                                                         
|Accounts payable                                                                              |                           | $             | 23,429  |                  
|Accrued salaries and benefits                                                                 |                           |               | 15,071  |                  
|Due to affiliates                                                                             |                           |               | 7,034   |                  
|Accrued interest                                                                              |                           |               | 1,433   |                  
|Current portion of long-term debt                                                             |                           |               | 10,538  |                  
|Other accrued expenses                                                                        |                           |               | 20,249  |                  
|Deferred tax liability                                                                        |                           |               | 831     |                  
|                                                                                              |                           |               |         |                  
|                                                                                              | Total current liabilities |               | $       | 78,585           
|Long-term debt, less current portion                                                          |                           |               | 263,678 |                  
|Other long-term liabilities                                                                   |                           |               | 3,450   |                  
|Deferred tax liability, net                                                                   |                           |               | 16,137  |                  
|                                                                                              |                           |               |         |                  
|                                                                                              | Total liabilities         |               | $       | 361,850          
|Minority interests                                                                            |                           |               | 18,184  |                  

3

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UNITED SURGICAL PARTNERS INTERNATIONAL, INC.  AND SUBSIDIARIES  Consolidated Balance Sheets (Continued)  (in thousands, except per share amounts)

|                      |                                                   | June 30, 2002                                                                                                                           |  | December 31, 2001 |        
|--------------------- | ------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------
|
|Stockholders' equity: |                                                   |                                                                                                                                         |  |                   |        
|                      | Common stock:                                     |                                                                                                                                         |  |                   |        
|                      |                                                   | Other, $0.01 par value; 200,000 shares authorized; 24,824 and 24,436 shares issued at June 30, 2002 and December 31, 2001, respectively |  |                   | 248    
|                      | Additional paid-in capital                        |                                                                                                                                         |  | 269,722           |        
|                      | Treasury stock, at cost, 326 and 334 shares at    |                                                                                                                                         |  |                   |        
|                      | June 30, 2002 and December 31, 2001, respectively |                                                                                                                                         |  | (6,050            | )      
|                      | Deferred compensation                             |                                                                                                                                         |  | (1,267            | )      
|                      | Receivables from sales of common stock            |                                                                                                                                         |  | (267              | )      
|                      | Accumulated other comprehensive loss, net of tax  |                                                                                                                                         |  | (4,068            | )      
|                      | Accumulated deficit                               |                                                                                                                                         |  | (5,684            | )      
|                      |                                                   |                                                                                                                                         |  |                   |        
|                      |                                                   | Total stockholders' equity                                                                                                              |  |                   | 252,634
|                      |                                                   |                                                                                                                                         |  |                   |        
|                      |                                                   | Total liabilities and stockholders' equity                                                                                              |  | $                 | 632,668
|                      |                                                   |                                                                                                                                         |  |                   |        

See
accompanying notes to consolidated financial statements.

4

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UNITED SURGICAL PARTNERS INTERNATIONAL, INC.  AND SUBSIDIARIES  Consolidated Statements of Income  (Unauditedin thousands, except per share amounts)

|                                                         |         | Three months ended
June 30,                    |        | Six months ended
June 30, |       
|-------------------------------------------------------- | ------- | ---------------------------------------------- | ------ | ------------------------- | ------
|
|Net patient service revenue                              |         | $                                              | 74,393 |                           | $     
|Management and administrative services revenue           |         |                                                | 8,363  |                           |       
|Equity in earnings of unconsolidated affiliates          |         |                                                | 2,397  |                           |       
|Other income                                             |         |                                                | 688    |                           |       
|                                                         |         |                                                |        |                           |       
|                                                         |         | Total revenues                                 |        |                           | 85,841
|Salaries, benefits, and other employee costs             |         |                                                | 20,852 |                           |       
|Medical services and supplies                            |         |                                                | 16,759 |                           |       
|Other operating expenses                                 |         |                                                | 15,319 |                           |       
|General and administrative expenses                      |         |                                                | 6,383  |                           |       
|Provision for doubtful accounts                          |         |                                                | 1,570  |                           |       
|Depreciation and amortization                            |         |                                                | 6,321  |                           |       
|                                                         |         |                                                |        |                           |       
|                                                         |         | Total operating expenses                       |        |                           | 67,204
|                                                         |         |                                                |        |                           |       
|                                                         |         | Operating income                               |        |                           | 18,637
|Interest income                                          |         |                                                | 81     |                           |       
|Interest expense                                         |         |                                                | (6,283 | )                         |       
|Other                                                    |         |                                                | (26    | )                         |       
|                                                         |         |                                                |        |                           |       
|                                                         |         | Total other expense, net                       |        |                           | (6,228
|                                                         |         | Income before minority interest                |        |                           | 12,409
|Minority interest in income of consolidated subsidiaries |         |                                                | (3,418 | )                         |       
|                                                         |         |                                                |        |                           |       
|                                                         |         | Income before income taxes                     |        |                           | 8,991 
|Income tax expense                                       |         |                                                | (2,877 | )                         |       
|                                                         |         |                                                |        |                           |       
|                                                         |         | Net income                                     |        |                           | 6,114 
|Preferred stock dividends                                |         |                                                |       |                           |       
|                                                         |         |                                                |        |                           |       
|                                                         |         | Net income attributable to common stockholders |        | $                         | 6,114 
|                                                         |         |                                                |        |                           |       
|Net income per share attributable to common stockholders |         |                                                |        |                           |       
|                                                         | Basic   |                                                | $      | 0.25                      |       
|                                                         | Diluted |                                                | $      | 0.24                      |       
|Weighted average number of common shares                 |         |                                                |        |                           |       
|                                                         | Basic   |                                                |        | 24,270                    |       
|                                                         | Diluted |                                                |        | 25,655                    |       

See accompanying notes to consolidated financial statements.

5

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UNITED SURGICAL PARTNERS INTERNATIONAL, INC.  AND SUBSIDIARIES  Consolidated Statements of Comprehensive Income (Loss)  (Unauditedin thousands)

|                                                 |                                                                           | Three months ended
June 30, |       | Six months ended
June 30, |  
|------------------------------------------------ | ------------------------------------------------------------------------- | --------------------------- | ----- | ------------------------- | -
|
|Net income                                       |                                                                           | $                           | 6,114 |                           | $
|Other comprehensive income (loss), before taxes: |                                                                           |                             |       |                           |  
|                                                 | Foreign currency translation adjustments                                  |                             |       | 20,732                    |  
|                                                 | Income tax (expense) benefit related to other comprehensive income (loss) |                             |       | (7,256                    | )
|                                                 |                                                                           |                             |       |                           |  
|                                                 | Other comprehensive income (loss)                                         |                             |       | 13,476                    |  
|                                                 |                                                                           |                             |       |                           |  
|                                                 | Comprehensive income (loss)                                               |                             | $     | 19,590                    |  
|                                                 |                                                                           |                             |       |                           |  

See
accompanying notes to consolidated financial statements.

6

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UNITED SURGICAL PARTNERS INTERNATIONAL, INC.  AND SUBSIDIARIES  Consolidated Statements of Cash Flows  (Unauditedin thousands)

|                                                     |                                                                                   | Six months ended
June 30, |                                                                                                                                 
|---------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------- | --------------------------------------------------------------------------------------------------------------------------------
|
|Cash flows from operating activities:                |                                                                                   |                           |                                                                                                                                 
|                                                     | Net income                                                                        |                           | $                                                                                                                               
|                                                     | Adjustments to reconcile net income to net cash provided by operating activities: |                           |                                                                                                                                 
|                                                     |                                                                                   |                           | Provision for doubtful accounts                                                                                                 
|                                                     |                                                                                   |                           | Depreciation and amortization                                                                                                   
|                                                     |                                                                                   |                           | Amortization of debt issue costs and discount                                                                                   
|                                                     |                                                                                   |                           | Equity in earnings of unconsolidated affiliates                                                                                 
|                                                     |                                                                                   |                           | Minority interest in income of consolidated subsidiaries                                                                        
|                                                     |                                                                                   |                           | Amortization of deferred compensation                                                                                           
|                                                     |                                                                                   |                           | Increases (decreases) in cash from changes in operating assets and liabilities, net of effects from purchases of new businesses:
|                                                     |                                                                                   |                           |                                                                                                                                 
|                                                     |                                                                                   |                           |                                                                                                                                 
|                                                     |                                                                                   |                           |                                                                                                                                 
|                                                     |                                                                                   |                           |                                                                                                                                 
|                                                     |                                                                                   |                           |                                                                                                                                 
|                                                     |                                                                                   |                           |                                                                                                                                 
|                                                     |                                                                                   |                           |                                                                                                                                 
|                                                     |                                                                                   |                           |                                                                                                                                 
|Cash flows from investing activities:                |                                                                                   |                           |                                                                                                                                 
|                                                     | Purchases of new businesses and equity interests, net of cash received            |                           |                                                                                                                                 
|                                                     | Purchases of property and equipment                                               |                           |                                                                                                                                 
|                                                     | Sales of property                                                                 |                           |                                                                                                                                 
|                                                     | Decrease (increase) in deposits and notes receivable                              |                           |                                                                                                                                 
|                                                     | Cash released from escrow                                                         |                           |                                                                                                                                 
|                                                     |                                                                                   |                           |                                                                                                                                 
|                                                     |                                                                                   |                           |                                                                                                                                 
|                                                     |                                                                                   |                           |                                                                                                                                 
|Cash flows from financing activities:                |                                                                                   |                           |                                                                                                                                 
|                                                     | Proceeds from long-term debt                                                      |                           |                                                                                                                                 
|                                                     | Payments on long-term debt                                                        |                           |                                                                                                                                 
|                                                     | Proceeds from issuances of common stock                                           |                           |                                                                                                                                 
|                                                     | Payments to repurchase common stock                                               |                           |                                                                                                                                 
|                                                     | Payments for the redemption and dividends of preferred stock                      |                           |                                                                                                                                 
|                                                     | Distributions on investments in affiliates                                        |                           |                                                                                                                                 
|                                                     |                                                                                   |                           |                                                                                                                                 
|                                                     |                                                                                   |                           |                                                                                                                                 
|                                                     |                                                                                   |                           |                                                                                                                                 
|Effect of exchange rate changes on cash              |                                                                                   |                           | 90                                                                                                                              
|                                                     |                                                                                   |                           |                                                                                                                                 
|Net increase (decrease) in cash and cash equivalents |                                                                                   |                           | (8,798                                                                                                                          
|Cash and cash equivalents at beginning of period     |                                                                                   |                           | 33,881                                                                                                                          
|                                                     |                                                                                   |                           |                                                                                                                                 
|Cash and cash equivalents at end of period           |                                                                                   | $                         | 25,083                                                                                                                          
|                                                     |                                                                                   |                           |                                                                                                                                 
|Supplemental information:                            |                                                                                   |                           |                                                                                                                                 
|                                                     | Interest paid                                                                     |                           | $                                                                                                                               
|                                                     | Income taxes paid                                                                 |                           |                                                                                                                                 
|                                                     | Non-cash transactions:                                                            |                           |                                                                                                                                 
|                                                     |                                                                                   |                           | Sale of common stock for notes receivable from employees, net                                                                   
|                                                     |                                                                                   |                           | Common stock issued for purchases of new businesses                                                                             
|                                                     |                                                                                   |                           | Conversion of Series C convertible preferred stock to common stock                                                              
|                                                     |                                                                                   |                           | Accrued dividends on preferred stock                                                                                            
|                                                     |                                                                                   |                           | Assets acquired under capital lease obligations                                                                                 
|                                                     |                                                                                   |                           | Conversion of subordinated notes to Series D preferred stock                                                                    
|                                                     |                                                                                   |                           | Conversion of subordinated debt to common stock                                                                                 
|                                                     |                                                                                   |                           | Issuance of common stock for service contracts                                                                                  

See accompanying notes to consolidated financial statements.

7

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

(1) Basis of Presentation

United Surgical Partners International, Inc. and subsidiaries (USPI or the Company), a Delaware 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 June 30, 2002, USPI, headquartered in Dallas, Texas,
operated 47 surgical facilities in the United States. Of these 47 facilities, USPI consolidates the results of 22, owns a minority or otherwise noncontrolling equity interest in 23, which are
accounted for under the equity method, and holds no ownership interest in the remaining two centers, which are operated by USPI under management contracts. In addition, United Surgical Partners
Europe, S.L. (USPE), a company incorporated in Spain and wholly-owned by USPI, managed and owned a majority interest in seven private surgical hospitals, two surgery centers, and one diagnostic
facility in Spain at June 30, 2002. Global Healthcare Partners Limited (Global), a company incorporated in England and majority-owned by USPI, managed two wholly-owned private surgical
hospitals in the United Kingdom at June 30, 2002.

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.

(2) Acquisitions

Effective February 1, 2002, the Company acquired 100% of a surgical hospital in Murcia, Spain, for total consideration of approximately $8.2 million
in cash (of which $7.5 million was paid at the time of acquisition and $0.7 million will be paid on the first anniversary following consummation of the acquisition) and approximately
$12.6 million in assumed capital lease obligations.

The
Company acquired, through a merger on March 27, 2002, Surgicoe Corporation, which owns, manages, and develops surgical facilities in Georgia, Oklahoma, and Texas. The Company
paid the shareholders of Surgicoe approximately $5.3 million in cash. The terms of the agreement provide for the Company to make additional payments in the future should certain facilities,
including some that are operational and some that are currently under development, meet specified performance targets.

Effective
May 1, 2002, the Company acquired a 67% interest in an ambulatory surgery center in Corpus Christi for $10.8 million in cash. Effective June 1, 2002, the
Company acquired a 57% interest in an ambulatory surgery center in Middleburg Heights, Ohio, a suburb of Cleveland, for $2.1 million in cash.

8

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Following
are the unaudited pro forma results for the six months ended June 30, 2002 and 2001 as if the acquisitions discussed above had occurred on January 1, 2001 (in
thousands, except per share amounts):

Six months ended
June 30,2002

2001Net revenues

$
166,782

$
124,272Net income


10,513


2,073Net income attributable to common stockholders


10,513


325Basic earnings per share


0.43


0.03Diluted earnings per share


0.41


0.02


The
Company also engages in investing transactions that are not business combinations. These transactions 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 six months ended June 30, 2002, these individually immaterial other investing transactions
resulted in cash outflows from USPI in an aggregate net amount of $9.0 million.

(3) 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 convertible preferred stock, convertible debt, and outstanding options, warrants and restricted stock, except where such
effect would be antidilutive. Net income attributable to common stockholders and net income per common share include preferred stock dividends for purposes of this computation for the three months and
six months ended June 30, 2001. No preferred stock dividends are included in this computation for the three months and six months ended June 30, 2002 as all preferred shares were
redeemed prior to January 1, 2002. The

9

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following table sets forth the computation of basic and diluted earnings per share for the three months and six months ended June 30, 2002 and 2001 (in thousands, except per share amounts):

|                                               |                                      | Three months ended
June 30, |        | Six months ended
June 30, |  
|---------------------------------------------- | ------------------------------------ | --------------------------- | ------ | ------------------------- | -
|
|Net income attributable to common shareholders |                                      | $                           | 6,114  |                           | $
|Weighted average common shares outstanding     |                                      |                             | 24,270 |                           |  
|Effect of dilutive securities:                 |                                      |                             |        |                           |  
|                                               | Stock options                        |                             |        | 1,081                     |  
|                                               | Warrants and restricted stock        |                             |        | 304                       |  
|                                               | Convertible subordinated debt        |                             |        | (B                        | )
|                                               | Series C convertible preferred stock |                             |        | (B                        | )
|                                               |                                      |                             |        |                           |  
|Shares used for diluted earnings per share     |                                      |                             | 25,655 |                           |  
|                                               |                                      |                             |        |                           |  
|Basic earnings per share                       |                                      | $                           | 0.25   |                           | $
|Diluted earnings per share                     |                                      | $                           | 0.24   |                           | $

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The
convertible subordinated debt and Series C convertible preferred stock, which were excluded from the computation of 2001 earnings per share because their effect would be
antidilutive, were converted to common stock during 2001 and therefore will not affect earnings per share in the future.

(4) Segment Disclosure

USPI has adopted Statement of Financial Accounting Standards No. 131,Disclosures About Segments of an Enterprise and Related
Information(SFAS 131). SFAS 131 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 Western Europe. USPI's chief operating decision maker, as that term is defined in the
accounting standard, regularly reviews financial information about its surgery centers and private surgical hospitals for assessing performance and allocating resources both domestically and abroad.
Accordingly, USPI's

10

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reportable segments consist of (1) U.S. based facilities and (2) Western Europe based facilities, including those in Spain and the United Kingdom.

|                              |  |   |         | Western Europe |   |         |  
|----------------------------- |  | - | ------- | -------------- | - | ------- | -
|
|Net patient service revenue   |  | $ | 39,369  |                | $ | 23,353  |  
|Other revenue                 |  |   | 10,762  |                |   | 686     |  
|                              |  |   |         |                |   |         |  
|Total revenues                |  | $ | 50,131  |                | $ | 24,039  |  
|                              |  |   |         |                |   |         |  
|Depreciation and amortization |  | $ | 3,878   |                | $ | 1,632   |  
|Operating income              |  |   | 13,179  |                |   | 3,085   |  
|Net interest expense          |  |   | (5,184  | )              |   | (437    | )
|Total assets                  |  |   | 382,000 |                |   | 157,715 |  
|Capital expenditures          |  |   | 2,072   |                |   | 1,341   |  
|
|Net patient service revenue   |  | $ | 23,702  |                | $ | 17,935  |  
|Other revenue                 |  |   | 8,871   |                |   | 410     |  
|                              |  |   |         |                |   |         |  
|Total revenues                |  | $ | 32,573  |                | $ | 18,345  |  
|                              |  |   |         |                |   |         |  
|Depreciation and amortization |  | $ | 3,430   |                | $ | 1,888   |  
|Operating income              |  |   | 6,820   |                |   | 1,222   |  
|Net interest income (expense) |  |   | (3,879  | )              |   | (819    | )
|Total assets                  |  |   | 260,027 |                |   | 112,650 |  
|Capital expenditures          |  |   | 2,361   |                |   | 617     |  
|
|Net patient service revenue   |  | $ | 73,007  |                | $ | 43,117  |  
|Other revenue                 |  |   | 20,270  |                |   | 1,228   |  
|                              |  |   |         |                |   |         |  
|Total revenues                |  | $ | 93,277  |                | $ | 44,345  |  
|                              |  |   |         |                |   |         |  
|Depreciation and amortization |  | $ | 7,106   |                | $ | 3,309   |  
|Operating income              |  |   | 23,813  |                |   | 5,054   |  
|Net interest expense          |  |   | (9,988  | )              |   | (676    | )
|Total assets                  |  |   | 382,000 |                |   | 157,715 |  
|Capital expenditures          |  |   | 4,289   |                |   | 2,195   |  
|
|Net patient service revenue   |  | $ | 42,380  |                | $ | 36,680  |  
|Other revenue                 |  |   | 14,556  |                |   | 891     |  
|                              |  |   |         |                |   |         |  
|Total revenues                |  | $ | 56,936  |                | $ | 37,571  |  
|                              |  |   |         |                |   |         |  
|Depreciation and amortization |  | $ | 6,260   |                | $ | 3,819   |  
|Operating income              |  |   | 10,460  |                |   | 2,616   |  
|Net interest expense          |  |   | (6,815  | )              |   | (1,510  | )
|Total assets                  |  |   | 260,027 |                |   | 112,650 |  
|Capital expenditures          |  |   | 5,458   |                |   | 1,598   |  

11

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(5) Goodwill and Intangible Assets

On July 20, 2001 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, Accounting for Goodwill and Other
Intangible Assets(SFAS 142). SFAS No. 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized but instead tested for impairment at least annually at the reporting unit level (defined as an operating segment or one level below an operating segment). SFAS
No. 142 also requires that intangible assets with definite useful lives be amortized over their respective useful lives to their estimated residual values. The Company fully adopted the
provisions of SFAS No. 142 effective January 1, 2002.

Under
SFAS No.142, the Company is required to perform transitional impairment tests by identified reporting unit for its goodwill and certain other intangible assets as of the date of
adoption. The Company has determined that its reporting units are at the operating segment (country) level. The Company completed the required transitional impairment tests during the six months ended
June 30, 2002. No impairment losses were identified in any reporting unit as a result of these tests.

The
table below shows the Company's net income and earnings per share for the three month and six month periods ended June 30, 2002 and 2001 on a pro forma basis as if the
cessation of amortization of goodwill and indefinite-lived intangible assets had occurred January 1, 2001 (in thousands, except per share amounts):

|                                                                                                       |  | Three months ended
June 30, |       | Six months ended
June 30,
|------------------------------------------------------------------------------------------------------ |  | --------------------------- | ----- | -------------------------
|
|Net income attributable to common shareholders, as reported                                            |  | $                           | 6,114 |                          
|Amortization of goodwill and indefinite-lived intangible assets, net of applicable income tax benefits |  |                             |      |                          
|                                                                                                       |  |                             |       |                          
|Net income attributable to common shareholders, as reported                                            |  | $                           | 6,114 |                          
|                                                                                                       |  |                             |       |                          
|Diluted earnings per share, as reported                                                                |  | $                           | 0.24  |                          
|Amortization of goodwill and indefinite-lived intangible assets, net of applicable income tax benefits |  |                             |      |                          
|                                                                                                       |  |                             |       |                          
|Pro forma diluted earnings per share                                                                   |  | $                           | 0.24  |                          
|                                                                                                       |  |                             |       |                          

Intangible
assets, net of accumulated amortization, consisted of the following:

June 30,
2002

December 31,
2001Goodwill

$
179,866

$
151,804Other intangible assets


70,270


64,005Total

$
250,136

$
215,809


12

---

The
following is a summary of changes in the carrying amount of goodwill by operating segment and reporting unit for the six months ended June 30, 2002 (in thousands):

|                             |  |   |         | Western Europe |   |       
|---------------------------- |  | - | ------- | -------------- | - | ------
|
|Balance at December 31, 2001 |  | $ | 106,579 |                | $ | 26,914
|Additions                    |  |   | 16,530  |                |   | 7,797 
|Other                        |  |   |        |                |   | 2,851 
|                             |  |   |         |                |   |       
|Balance at June 30, 2002     |  | $ | 123,109 |                | $ | 37,562
|                             |  |   |         |                |   |       

Goodwill additions during the six months ended June 30, 2002 resulted primarily from business combinations completed during 2002. Other
changes to the carrying amount of goodwill were primarily due to foreign currency translation adjustments.

Intangible
assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values. The majority of the Company's management
contracts have evergreen renewal provisions and consequently have indefinite useful lives. Effective January 1, 2002, intangible assets with indefinite useful lives are not amortized but
instead tested for impairment at least

13

---

annually. The following is a summary of intangible assets at December 31, 2001 and June 30, 2002 (in thousands):

December 31, 2001Gross
Carrying
Amount

Accumulated
Amortization

TotalDefinite Useful LivesManagement Contracts

$
23,174

$
(3,746
)
$
19,427Other


7,831


(717
)

7,114Total

$
31,005

$
(4,464
)
$
26,541Indefinite Useful LivesManagement Contracts







$
37,362Other








102Total







$
37,464Total intangible assets







$
64,005


June 30, 2002Gross
Carrying
Amount

Accumulated
Amortization

TotalDefinite Useful LivesManagement Contracts

$
25,402

$
(4,847
)
$
20,555Other


9,939


(1,552
)

8,387Total

$
35,341

$
(6,399
)
$
28,942Indefinite Useful LivesManagement Contracts







$
41,190Other








138Total







$
41,328Total intangible assets







$
70,270


Amortization
expense related to intangible assets with definite useful lives was $0.6 million and $0.5 million for the three months ended June 30, 2002 and 2001,
respectively, and $1.1 million and $0.7 million for the six months ended June 30, 2002 and June 30, 2001, respectively. The following

14

---

table provides estimated amortization expense related to intangible assets with definite useful lives for each of the years in the five year period ending December 31, 2006:

Remainder of 2002

$
1,3552003


2,1552004


1,6502005


1,4992006 and thereafter


13,994$
20,653


(6) 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 created 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 Spain and the United
Kingdom are not guarantors of the obligation. 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.

15

---

Condensed Consolidating Balance Sheets:

|As of June 30, 2002                  |                                            | USPI and
Wholly-owned
U.S. Subsidiaries |         | Non-participating
Investees |   | Consolidation
Adjustments |         | Consolidated
Total
|------------------------------------ | ------------------------------------------ | --------------------------------------- | ------- | --------------------------- | - | ------------------------- | ------- | ------------------
|Assets:                              |                                            |                                         |         |                             |   |                           |         |                   
|Current assets:                      |                                            |                                         |         |                             |   |                           |         |                   
|Cash and cash equivalents            |                                            | $                                       | 10,435  |                             | $ | 14,648                    |         | $                 
|Accounts receivable, net             |                                            |                                         | 13      |                             |   | 37,765                    |         |                   
|Other receivables                    |                                            |                                         | 48,651  |                             |   | (10,417                   | )       |                   
|Inventories of supplies              |                                            |                                         | 225     |                             |   | 6,557                     |         |                   
|Other                                |                                            |                                         | 9,639   |                             |   | 2,884                     |         |                   
|                                     |                                            |                                         |         |                             |   |                           |         |                   
|                                     | Total current assets                       |                                         |         | 68,963                      |   |                           | 51,437  |                   
|Property and equipment, net          |                                            |                                         | 40,148  |                             |   | 205,383                   |         |                   
|Investments in affiliates            |                                            |                                         | 171,893 |                             |   | 123                       |         |                   
|Intangible assets, net               |                                            |                                         | 142,578 |                             |   | 108,828                   |         |                   
|Other                                |                                            |                                         | 91,709  |                             |   | 42,682                    |         |                   
|                                     |                                            |                                         |         |                             |   |                           |         |                   
|                                     | Total assets                               |                                         | $       | 515,291                     |   | $                         | 408,453 |                   
|                                     |                                            |                                         |         |                             |   |                           |         |                   
|Liabilities and Stockholders' Equity |                                            |                                         |         |                             |   |                           |         |                   
|Current liabilities:                 |                                            |                                         |         |                             |   |                           |         |                   
|Accounts payable                     |                                            | $                                       | 1,120   |                             | $ | 22,296                    |         | $                 
|Accrued expenses                     |                                            |                                         | 26,170  |                             |   | 17,816                    |         |                   
|Current portion of long-term debt    |                                            |                                         | 1,712   |                             |   | 9,752                     |         |                   
|                                     |                                            |                                         |         |                             |   |                           |         |                   
|                                     | Total current liabilities                  |                                         |         | 29,002                      |   |                           | 49,864  |                   
|Long-term debt                       |                                            |                                         | 172,976 |                             |   | 219,745                   |         |                   
|Other liabilities                    |                                            |                                         | 4,883   |                             |   | 14,704                    |         |                   
|Minority interests                   |                                            |                                         |        |                             |   | 6,683                     |         |                   
|Redeemable preferred stock           |                                            |                                         |        |                             |   |                          |         |                   
|Stockholders' equity                 |                                            |                                         | 308,430 |                             |   | 117,457                   |         |                   
|                                     |                                            |                                         |         |                             |   |                           |         |                   
|                                     | Total liabilities and stockholders' equity |                                         | $       | 515,291                     |   | $                         | 408,453 |                   
|                                     |                                            |                                         |         |                             |   |                           |         |                   

16

---

|As of December 31, 2001              |                                            | USPI and
Wholly-owned
U.S. Subsidiaries |         | Non-participating
Investees |   | Consolidation
Adjustments |         | Consolidated
Total
|------------------------------------ | ------------------------------------------ | --------------------------------------- | ------- | --------------------------- | - | ------------------------- | ------- | ------------------
|Assets:                              |                                            |                                         |         |                             |   |                           |         |                   
|Current assets:                      |                                            |                                         |         |                             |   |                           |         |                   
|Cash and cash equivalents            |                                            | $                                       | 20,396  |                             | $ | 13,485                    |         | $                 
|Accounts receivable, net             |                                            |                                         | 418     |                             |   | 27,538                    |         |                   
|Other receivables                    |                                            |                                         | 47,087  |                             |   | (11,174                   | )       |                   
|Inventories of supplies              |                                            |                                         | 223     |                             |   | 5,462                     |         |                   
|Other                                |                                            |                                         | 9,298   |                             |   | 3,464                     |         |                   
|                                     |                                            |                                         |         |                             |   |                           |         |                   
|                                     | Total current assets                       |                                         |         | 77,422                      |   |                           | 38,775  |                   
|Property and equipment, net          |                                            |                                         | 41,767  |                             |   | 170,449                   |         |                   
|Investments in affiliates            |                                            |                                         | 165,437 |                             |   | 170                       |         |                   
|Intangible assets, net               |                                            |                                         | 119,596 |                             |   | 97,350                    |         |                   
|Other                                |                                            |                                         | 88,148  |                             |   | 33,777                    |         |                   
|                                     |                                            |                                         |         |                             |   |                           |         |                   
|                                     | Total assets                               |                                         | $       | 492,370                     |   | $                         | 340,521 |                   
|                                     |                                            |                                         |         |                             |   |                           |         |                   
|Liabilities and Stockholders' Equity |                                            |                                         |         |                             |   |                           |         |                   
|Current liabilities:                 |                                            |                                         |         |                             |   |                           |         |                   
|Accounts payable                     |                                            | $                                       | 2,121   |                             | $ | 18,512                    |         | $                 
|Accrued expenses                     |                                            |                                         | 24,758  |                             |   | 13,733                    |         |                   
|Current portion of long-term debt    |                                            |                                         | 2,433   |                             |   | 8,841                     |         |                   
|                                     |                                            |                                         |         |                             |   |                           |         |                   
|                                     | Total current liabilities                  |                                         |         | 29,312                      |   |                           | 41,086  |                   
|Long-term debt                       |                                            |                                         | 158,170 |                             |   | 186,093                   |         |                   
|Other liabilities                    |                                            |                                         | 1,936   |                             |   | 14,110                    |         |                   
|Minority interests                   |                                            |                                         |        |                             |   | 5,958                     |         |                   
|Redeemable preferred stock           |                                            |                                         |        |                             |   |                          |         |                   
|Stockholders' equity                 |                                            |                                         | 302,952 |                             |   | 93,274                    |         |                   
|                                     |                                            |                                         |         |                             |   |                           |         |                   
|                                     | Total liabilities and stockholders' equity |                                         | $       | 492,370                     |   | $                         | 340,521 |                   
|                                     |                                            |                                         |         |                             |   |                           |         |                   

17

---

Condensed Consolidating Statements of Income

|Six months ended June 30, 2002                              |  | USPI and
Wholly-owned
U.S. Subsidiaries |        | Non-participating
Investees |   | Consolidation
Adjustments |   | Consolidated
Total |       
|----------------------------------------------------------- |  | --------------------------------------- | ------ | --------------------------- | - | ------------------------- | - | ------------------ | ------
|Revenues                                                    |  | $                                       | 32,708 |                             | $ | 131,921                   |   | $                  | (3,710
|Operating expenses, excluding depreciation and amortization |  |                                         | 23,269 |                             |   | 95,501                    |   |                    | (3,651
|Depreciation and amortization                               |  |                                         | 4,686  |                             |   | 7,304                     |   |                    | (12   
|                                                            |  |                                         |        |                             |   |                           |   |                    |       
|Operating income (loss)                                     |  |                                         | 4,753  |                             |   | 29,116                    |   |                    | (47   
|Interest expense, net                                       |  |                                         | (6,775 | )                           |   | (5,047                    | ) |                    |      
|Other expense                                               |  |                                         | 136    |                             |   | (73                       | ) |                    | (136  
|                                                            |  |                                         |        |                             |   |                           |   |                    |       
|Income (loss) before minority interests                     |  |                                         | (1,886 | )                           |   | 23,996                    |   |                    | (183  
|Minority interests in income of consolidated subsidiaries   |  |                                         |       |                             |   | (2,975                    | ) |                    | (3,131
|Income (loss) before income taxes                           |  |                                         | (1,886 | )                           |   | 21,021                    |   |                    | (3,314
|Income tax expense                                          |  |                                         | (3,619 | )                           |   | (1,384                    | ) |                    |      
|                                                            |  |                                         |        |                             |   |                           |   |                    |       
|Net income (loss)                                           |  | $                                       | (5,505 | )                           | $ | 19,637                    |   | $                  | (3,314
|                                                            |  |                                         |        |                             |   |                           |   |                    |       

|Six months ended June 30, 2001                              |  | USPI and
Wholly-owned
U.S. Subsidiaries |        | Non-participating
Investees |   | Consolidation
Adjustments |   | Consolidated
Total |       
|----------------------------------------------------------- |  | --------------------------------------- | ------ | --------------------------- | - | ------------------------- | - | ------------------ | ------
|Revenues                                                    |  | $                                       | 25,413 |                             | $ | 91,529                    |   | $                  | (3,208
|Operating expenses, excluding depreciation and amortization |  |                                         | 19,159 |                             |   | 68,845                    |   |                    | (2,591
|Depreciation and amortization                               |  |                                         | 4,234  |                             |   | 7,572                     |   |                    | (42   
|                                                            |  |                                         |        |                             |   |                           |   |                    |       
|Operating income (loss)                                     |  |                                         | 2,020  |                             |   | 15,112                    |   |                    | (575  
|Interest expense, net                                       |  |                                         | (5,011 | )                           |   | (4,998                    | ) |                    | (36   
|Other expense                                               |  |                                         | 129    |                             |   | (19                       | ) |                    | (120  
|                                                            |  |                                         |        |                             |   |                           |   |                    |       
|Income (loss) before minority interests                     |  |                                         | (2,862 | )                           |   | 10,095                    |   |                    | (731  
|Minority interests in income of consolidated subsidiaries   |  |                                         |       |                             |   | (1,603                    | ) |                    | (1,598
|Income (loss) before income taxes                           |  |                                         | (2,862 | )                           |   | 8,492                     |   |                    | (2,329
|Income tax expense                                          |  |                                         | (160   | )                           |   | (867                      | ) |                    |      
|                                                            |  |                                         |        |                             |   |                           |   |                    |       
|Net income (loss)                                           |  | $                                       | (3,022 | )                           | $ | 7,625                     |   | $                  | (2,329
|                                                            |  |                                         |        |                             |   |                           |   |                    |       

18

---

Condensed Consolidating Statements of Cash Flows:

|Six months ended June 30, 2002                                                                               |                                                     | USPI and
Wholly-owned
U.S. Subsidiaries |         | Non-participating
Investees |   | Consolidation
Adjustments |         | Consolidated
Total |       
|------------------------------------------------------------------------------------------------------------ | --------------------------------------------------- | --------------------------------------- | ------- | --------------------------- | - | ------------------------- | ------- | ------------------ | ------
|Cash flows from operating activities:                                                                        |                                                     |                                         |         |                             |   |                           |         |                    |       
|Net income (loss)                                                                                            |                                                     | $                                       | (5,505  | )                           | $ | 19,637                    |         | $                  | (3,314
|Changes in operating and intercompany assets and liabilities and noncash items included in net income (loss) |                                                     |                                         | 11,241  |                             |   | (1,277                    | )       |                    | 3,264 
|                                                                                                             |                                                     |                                         |         |                             |   |                           |         |                    |       
|                                                                                                             | Net cash provided by (used in) operating activities |                                         |         | 5,736                       |   |                           | 18,360  |                    |       
|Cash flows from investing activities:                                                                        |                                                     |                                         |         |                             |   |                           |         |                    |       
|Purchases of property and equipment, net                                                                     |                                                     |                                         | (1,966  | )                           |   | (9,174                    | )       |                    |      
|Purchases of new businesses                                                                                  |                                                     |                                         | (27,157 | )                           |   | (7,580                    | )       |                    | 84    
|Other items                                                                                                  |                                                     |                                         | (518    | )                           |   | 1,447                     |         |                    |      
|                                                                                                             |                                                     |                                         |         |                             |   |                           |         |                    |       
|                                                                                                             | Net cash provided by (used in) investing activities |                                         |         | (29,641                     | ) |                           | (15,307 | )                  |       
|Cash flows from financing activities:                                                                        |                                                     |                                         |         |                             |   |                           |         |                    |       
|Long-term borrowings, net                                                                                    |                                                     |                                         | 12,365  |                             |   | (2,014                    | )       |                    |      
|Proceeds from issuance of common stock                                                                       |                                                     |                                         | 2,860   |                             |   | 84                        |         |                    | (84   
|Other items                                                                                                  |                                                     |                                         | (1,281  | )                           |   |                          |         |                    |      
|                                                                                                             |                                                     |                                         |         |                             |   |                           |         |                    |       
|                                                                                                             | Net cash provided by (used in) financing activities |                                         |         | 13,944                      |   |                           | (1,930  | )                  |       
|Effect of exchange rate changes on cash                                                                      |                                                     |                                         |        |                             |   | 40                        |         |                    | 50    
|Net increase (decrease) in cash                                                                              |                                                     |                                         | (9,961  | )                           |   | 1,163                     |         |                    |      
|Cash at the beginning of the period                                                                          |                                                     |                                         | 20,396  |                             |   | 13,485                    |         |                    |      
|                                                                                                             |                                                     |                                         |         |                             |   |                           |         |                    |       
|Cash at the end of the period                                                                                |                                                     | $                                       | 10,435  |                             | $ | 14,648                    |         | $                  |      
|                                                                                                             |                                                     |                                         |         |                             |   |                           |         |                    |       

|Six months ended June 30, 2001                                                                               |                                                     | USPI and
Wholly-owned
U.S. Subsidiaries |         | Non-participating
Investees |   | Consolidation
Adjustments |        | Consolidated
Total |       
|------------------------------------------------------------------------------------------------------------ | --------------------------------------------------- | --------------------------------------- | ------- | --------------------------- | - | ------------------------- | ------ | ------------------ | ------
|Cash flows from operating activities:                                                                        |                                                     |                                         |         |                             |   |                           |        |                    |       
|Net income (loss)                                                                                            |                                                     | $                                       | (3,022  | )                           | $ | 7,625                     |        | $                  | (2,329
|Changes in operating and intercompany assets and liabilities and noncash items included in net income (loss) |                                                     |                                         | 2,934   |                             |   | 2,589                     |        |                    | 2,441 
|                                                                                                             |                                                     |                                         |         |                             |   |                           |        |                    |       
|                                                                                                             | Net cash provided by (used in) operating activities |                                         |         | (88                         | ) |                           | 10,214 |                    |       
|Cash flows from investing activities:                                                                        |                                                     |                                         |         |                             |   |                           |        |                    |       
|Purchases of property and equipment, net                                                                     |                                                     |                                         | (4,869  | )                           |   | (6,569                    | )      |                    |      
|Purchases of new businesses                                                                                  |                                                     |                                         | (6,756  | )                           |   |                          |        |                    | 127   
|Other items                                                                                                  |                                                     |                                         | 790     |                             |   |                          |        |                    |      
|                                                                                                             |                                                     |                                         |         |                             |   |                           |        |                    |       
|                                                                                                             | Net cash provided by (used in) investing activities |                                         |         | (10,835                     | ) |                           | (6,569 | )                  |       
|Cash flows from financing activities:                                                                        |                                                     |                                         |         |                             |   |                           |        |                    |       
|Long-term borrowings, net                                                                                    |                                                     |                                         | (78,034 | )                           |   | (1,834                    | )      |                    |      
|Proceeds from issuance of common stock                                                                       |                                                     |                                         | 130,682 |                             |   | 239                       |        |                    | (239  
|Other items                                                                                                  |                                                     |                                         | (34,658 | )                           |   |                          |        |                    |      
|                                                                                                             |                                                     |                                         |         |                             |   |                           |        |                    |       
|                                                                                                             | Net cash provided by (used in) financing activities |                                         |         | 17,990                      |   |                           | (1,595 | )                  |       
|Effect of exchange rate changes on cash                                                                      |                                                     |                                         |        |                             |   | (108                      | )      |                    |      
|Net increase in cash                                                                                         |                                                     |                                         | 7,067   |                             |   | 1,942                     |        |                    |      
|Cash at the beginning of the period                                                                          |                                                     |                                         | 765     |                             |   | 2,686                     |        |                    |      
|                                                                                                             |                                                     |                                         |         |                             |   |                           |        |                    |       
|Cash at the end of the period                                                                                |                                                     | $                                       | 7,832   |                             | $ | 4,628                     |        | $                  |      
|                                                                                                             |                                                     |                                         |         |                             |   |                           |        |                    |       

(7) Subsequent Events

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.

19

---



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; demographic changes; changes in, or the failure to comply with, laws and governmental regulations; the ability to enter into managed care
provider arrangements on acceptable terms; changes in Medicare, Medicaid and other government funded payments or reimbursement; liability and other claims asserted against us; the highly competitive
nature of healthcare; changes in business strategy or development plans of healthcare systems with which we partner; the ability to attract and retain qualified personnel, included physicians, nurses
and other health care professionals; our significant indebtedness; the availability of suitable acquisition opportunities and the length of time it takes to accomplish acquisitions; 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 and the documents incorporated herein by reference. 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.

Overview

The Company operates surgery centers and private surgical hospitals in the United States and Western Europe. As of June 30, 2002, the Company operated 58
surgical facilities, consisting of 47 in the United States, nine in Spain, and two in the United Kingdom. Of the 47 U.S. facilities, the Company operates 23 through strategic relationships with eleven
major not-for-profit healthcare system partners. Overall, the Company holds ownership in 56 of the facilities and operates the remaining two facilities, both in the United
States, under management contracts.

Critical Accounting Policies

Management of the company is required to make certain estimates and assumptions during the preparation of our consolidated financial statements in accordance with
generally accepted accounting principles. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of
the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates. Certain of our accounting policies have
a more significant impact on our financial statements than others due to the size of the underlying financial statement elements.

20

---

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.

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.

Beginning
January 1, 2002, 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 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. SFAS 142 requires the cessation of amortization of goodwill and
identifiable intangible assets which do not have finite lives and requires that all intangible assets be tested for impairment at least annually.

Acquisitions, Equity Investments and Development Projects

In February 2002, we acquired a surgical hospital in Murcia, Spain for total consideration of approximately $8.2 million in cash (of which
$7.5 million was paid prior to March 31, 2002 and $0.7 million will be paid on the first anniversary following consummation of the acquisition) and approximately
$12.6 million in assumed capital lease obligations.

In
March 2002, we acquired Surgicoe Corporation, which owns, manages, and develops surgical facilities in Georgia, Oklahoma, and Texas. The Company paid the shareholders of
Surgicoe approximately $5.3 million in cash. The terms of the agreement provide for the Company to make additional payments in the future should certain facilities, including some that are
operational and some that are currently under development, meet specified performance targets.

During
February and March 2002, two surgery centers developed by the Company in the United States opened and began performing cases.

In
May 2002, we acquired a 67% interest in an ambulatory surgery center in Corpus Christi for $10.8 million in cash. In June 2002, we acquired a 57% interest in an
ambulatory surgery center in Middleburg Heights, Ohio, a suburb of Cleveland, for $2.1 million in cash.

We
also engage in investing transactions that are not business combinations, consisting of purchases and sales of noncontrolling equity interests in surgical facilities and the
investment of additional cash in surgical facilities under development. During the second quarter of 2002, these transactions resulted in cash outflows in an aggregate net amount of
$9.0 million. The most notable of these transactions were our acquisition of a noncontrolling interest in an ambulatory surgery center in Austintown, Ohio and our acquisition, through a newly
formed joint venture with Robert Wood Johnson University Hospital, of a noncontrolling interest in an ambulatory surgery center in East Brunswick, New Jersey.

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Sources of Revenue

Revenues primarily include:



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

|                                                |  | Three months ended
June 30, |   | Six months ended
June 30, |  
|----------------------------------------------- |  | --------------------------- | - | ------------------------- | -
|
|Net patient service revenue                     |  | 86.7                        | % | 84.5                      | %
|Management and administrative services revenue  |  | 9.7                         |   | 11.8                      |  
|Equity in earnings of unconsolidated affiliates |  | 2.8                         |   | 2.9                       |  
|Other income                                    |  | 0.8                         |   | 0.8                       |  
|                                                |  |                             |   |                           |  
|Total revenue                                   |  | 100.0                       | % | 100.0                     | %

The
percentage of our total revenue that was derived from net patient service revenue increased from 84.5% and 86.4% for the three months and six months ended June 30, 2001,
respectively, to 86.7% for the three months and six months ended June 30, 2002, with a corresponding decrease in the percentage of our total revenue that was derived from management and
administrative services revenue, primarily as a result of our acquiring majority interests in seven surgery centers and one private hospital since June 30, 2001. Our management and
administrative services revenues are derived from entities in which we hold less than a controlling ownership interest.

The
following table reflects the summarized results of the non-consolidated facilities that we account for under the equity method of accounting (in thousands, except number
of facilities):

|                                                       |  | Three months ended
June 30, |        | Six months ended
June 30,
|------------------------------------------------------ |  | --------------------------- | ------ | -------------------------
|
|Total revenues                                         |  | $                           | 35,606 |                          
|Net income                                             |  |                             | 10,145 |                          
|USPI's equity in earnings of unconsolidated affiliates |  |                             | 2,397  |                          
|Unconsolidated facilities operated at period end       |  |                             | 23     |                          

For
the three months ended June 30, 2002 and 2001, approximately 58% and 54% of our revenues were generated from operations in the United States and 42% and 46% from Western
Europe, respectively. For the six months ended June 30, 2002 and 2001, approximately 58% and 50% of our revenues were generated from operations in the United States and 42% and 50% from Western
Europe, respectively. The increase in the percentage of our revenues generated in the United States and corresponding decrease in Western Europe resulted from our development and acquisition
activities being concentrated in the United States during the twelve months ended June 30, 2002. We

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continue to evaluate acquisition and development opportunities in all three countries in which we currently operate as well as in other selected nations in Western Europe.

Results of Operations

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

|                                                            |  | Three months ended
June 30, |   | Six months ended
June 30, |  
|----------------------------------------------------------- |  | --------------------------- | - | ------------------------- | -
|
|Total revenues                                              |  | 100.0                       | % | 100.0                     | %
|Operating expenses, excluding depreciation and amortization |  | 70.9                        |   | 74.2                      |  
|                                                            |  |                             |   |                           |  
|EBITDA(a)                                                   |  | 29.1                        |   | 25.8                      |  
|Minority interests in income of consolidated entities       |  | 4.0                         |   | 2.9                       |  
|                                                            |  |                             |   |                           |  
|EBITDA less minority interest                               |  | 25.1                        |   | 22.9                      |  
|Depreciation and amortization                               |  | 7.4                         |   | 10.3                      |  
|Interest and other expense, net                             |  | 7.2                         |   | 9.2                       |  
|                                                            |  |                             |   |                           |  
|Income before income taxes                                  |  | 10.5                        |   | 3.4                       |  
|Income tax expense                                          |  | 3.4                         |   | 0.5                       |  
|                                                            |  |                             |   |                           |  
|Net income                                                  |  | 7.1                         |   | 2.9                       |  
|                                                            |  |                             |   |                           |  

---

Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

Revenues increased by $25.9 million, or 43%, to $85.8 million for the three months ended June 30, 2002 from $59.9 million for the
three months ended June 30, 2001. Of this increase in revenues, $12.4 million was contributed by facilities acquired or opened since June 30, 2001. The exchange rate of the
European currencies to the U.S. dollar was higher in the three months ended June 30, 2002 as compared to the same period in the prior year, resulting in a positive impact of $1.4 million
on year over year revenues for the facilities in Western Europe that were owned in both 2002 and 2001 ("same store" facilities). Absent this foreign exchange impact, same store facilities in Western
Europe contributed $4.6 million more to consolidated revenue in the three months ended June 30, 2002 as compared to the same period in 2001. The remaining increase in revenues was
contributed by same store U.S. facilities, which performed approximately 18.4% more cases in the three months ended June 30, 2002 as compared to the three months ended June 30, 2001.

Operating
expenses, excluding depreciation and amortization, increased by $16.5 million, or 37%, to $60.9 million for the three months ended June 30, 2002 from
$44.4 million for the three months ended June 30, 2001. Operating expenses, excluding depreciation and amortization, as a percentage of revenues, decreased to 70.9% for the three months
ended June 30, 2002 from 74.2% for the three months ended June 30, 2001, primarily as a result of operating efficiencies at our facilities and improved economies of scale as we expanded.

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EBITDA
less minority interest increased $7.8 million, or 57%, to $21.5 million for the three months ended June 30, 2002 from $13.7 million for the three
months ended June 30, 2001. Of this increase in EBITDA less minority interest, $4.5 million was contributed by facilities acquired or opened since June 30, 2001. EBITDA less
minority interest, as a percentage of revenues, increased to 25.1% for the three months ended June 30, 2002 from 22.9% for the three months ended June 30, 2001, primarily as a result of
improved operating margins at our facilities and the leveraging of our corporate overhead expenses over the increased revenue.

Depreciation
and amortization increased $0.1 million, or 2%, to $6.3 million for the three months ended June 30, 2002 from $6.2 million for the three months
ended June 30, 2001. This amount remained virtually constant because the reduction in expense resulting from the cessation of goodwill amortization required under SFAS 142 largely offset
the additional depreciation on tangible assets added through acquisitions. Depreciation and amortization, as a percentage of revenues, decreased to 7.4% for the three months ended June 30, 2002
from 10.3% for the three months ended June 30, 2001.

Interest
expense, net of interest income, increased 12% to $6.2 million for the three months ended June 30, 2002 from $5.5 million for the three months ended
June 30, 2001 primarily as a result of higher levels of outstanding debt during the three months ended June 30, 2002 than during the prior year period. We used a portion of the proceeds
of our initial public offering of common stock to repay senior and subordinated indebtedness in June 2001 and have incurred debt to fund a portion of our acquisition and development program
since that time.

Provision
for income taxes and our overall effective tax rates were $2.9 million and 32% for the three months ended June 30, 2002, compared to $0.3 million and 13%
for the three months ended June 30, 2001, respectively. The increase in our overall effective tax rate primarily resulted from the U.S. operations no longer having net operating loss
carryforwards to offset current period income in 2002. Our overall effective tax rate in 2002 remains lower than statutory rates primarily as a result of our Spain operations continuing to utilize net
operating loss carryforwards to offset current period income.

Net
income was $6.1 million for the three months ended June 30, 2002 compared to $1.8 million for the three months ended June 30, 2001. This
$4.3 million improvement primarily results from the increased revenues and improved operating efficiencies and economies of scale related to expenses discussed above.

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

Revenues increased by $47.2 million, or 41%, to $160.9 million for the six months ended June 30, 2002 from $113.7 million for the six
months ended June 30, 2001. Of this increase in revenues, $20.4 million was contributed by facilities acquired or opened since June 30, 2001. An additional $5.5 million of
the increase is attributed to including a full six months of operations of OrthoLink, which merged with USPI on February 12, 2001 and therefore was only included for approximately four and
one-half of the six months ended June 30, 2001. The exchange rate of the European currencies to the U.S. dollar was higher in the six months ended June 30, 2002 as compared
to the same period in the prior year, resulting in a positive impact of $0.1 million on year over year revenues for the facilities in Western Europe that were owned in both 2002 and 2001 ("same
store" facilities). Absent this foreign exchange impact, same store facilities in Western Europe contributed $7.0 million more to consolidated revenue in the six months ended June 30,
2002 as compared to the same period in 2001. The remaining increase in revenues was contributed by same store U.S. facilities, which performed approximately 17.6% more cases in the six months ended
June 30, 2002 as compared to the six months ended June 30, 2001.

Operating
expenses, excluding depreciation and amortization, increased by $29.7 million, or 35%, to $115.1 million for the six months ended June 30, 2002 from
$85.4 million for the six months ended

24

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June 30, 2001. Operating expenses, excluding depreciation and amortization, as a percentage of revenues, decreased to 71.5% for the six months ended June 30, 2002 from 75.1% for the six
months
ended June 30, 2001, primarily as a result of operating efficiencies at our facilities and improved economies of scale as we expanded.

EBITDA
less minority interest increased $14.6 million, or 58%, to $39.7 million for the six months ended June 30, 2002 from $25.1 million for the six months
ended June 30, 2001. Of this increase in EBITDA less minority interest, $6.9 million was contributed by facilities acquired or opened since June 30, 2001 and an additional
$2.6 million was attributed to OrthoLink being included for a full six months in 2002. EBITDA less minority interest, as a percentage of revenues, increased to 24.7% for the six months ended
June 30, 2002 from 22.1% for the six months ended June 30, 2001, primarily as a result of improved operating margins at our facilities and the leveraging of our corporate overhead
expenses over the increased revenue.

Depreciation
and amortization increased $0.2 million, or 2%, to $12.0 million for the six months ended June 30, 2002 from $11.8 million for the six months
ended June 30, 2001. This amount remained virtually constant because the reduction in expense resulting from the cessation of goodwill amortization required under SFAS 142 largely offset
the additional depreciation on tangible assets acquired through acquisitions. Depreciation and amortization, as a percentage of revenues, decreased to 7.5% for the six months ended June 30,
2002 from 10.3% for the six months ended June 30, 2001.

Interest
expense, net of interest income, increased 18% to $11.8 million for the six months ended June 30, 2002 from $10.0 million for the six months ended
June 30, 2001 primarily as a result of higher levels of outstanding debt during the six months ended June 30, 2002 than during the prior year period. We used a portion of the proceeds of
our initial public offering of common stock to repay senior and subordinated indebtedness in June 2001 and have incurred debt to fund a portion of our acquisition and development program since
that time.

Provision
for income taxes and our overall effective tax rates were $5.0 million and 32% for the six months ended June 30, 2002, compared to $1.0 million and 31% for
the six months ended June 30, 2001, respectively. Our overall effective tax rate in 2002 remains lower than statutory rates primarily as a result of our Spain operations continuing to utilize
net operating loss carryforwards to offset current period income.

Net
income was $10.8 million for the six months ended June 30, 2002 compared to $2.3 million for the six months ended June 30, 2001. This $8.5 million
improvement primarily results from the increased revenues and improved operating efficiencies and economies of scale related to expenses discussed above.

Liquidity and Capital Resources

During the six months ended June 30, 2002, the Company generated $24.0 million of cash flows from operations as compared to $10.2 million
during the six months ended June 30, 2001.

During
the six months ended June 30, 2002, the Company's net cash required for investing activities was $44.9 million, consisting primarily of $34.7 million for the
purchase of businesses and $11.1 million for the purchase of property and equipment. The $34.7 million primarily represents purchases of new businesses, net of cash acquired, and
incremental investments in unconsolidated affiliates. Most of these transactions are individually insignificant; the most significant amounts are the $10.8 million paid for the surgery center
in Corpus Christi, Texas, the $7.5 million paid for the surgical hospital in Murcia, Spain, and the $5.3 million paid to acquire Surgicoe. Approximately $3.8 million of the
property and equipment purchases related to ongoing development projects. The $44.9 million of cash required for investing activities was funded primarily with cash flows from operations and
additionally with borrowings and a reduction of cash on hand. Net cash provided by financing activities

25

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during the six months ended June 30, 2002 totaled $11.9 million. Cash and cash equivalents were $25.1 million at June 30, 2002 as compared to $33.9 million at
December 31, 2001, and net working capital excluding cash and cash equivalents was $9.5 million at June 30, 2002 as compared to $6.4 million at December 31, 2001.

In
December 2001, we entered into an amended and restated credit facility with a group of commercial lenders providing us with the ability to borrow up to $85.0 million for
acquisitions and general corporate purposes in the United States and Spain or for any new subsidiary that becomes a guarantor of the facility. A total of $10 million of borrowings under the
facility may be used by subsidiaries that are not guarantors, including subsidiaries in the United Kingdom. Borrowings under our amended and restated credit facility mature on December 19,
2004. As of June 30, 2002, $16.4 million was outstanding under this facility and the remaining $68.6 million was available for borrowing based on actual reported consolidated
financial results. Availability under the facility is based upon pro forma EBITDA including EBITDA from acquired entities. Assuming historical purchase multiples of annual EBITDA of potential
acquisition targets, the entire $85.0 million would be available for borrowing to finance acquisitions as of June 30, 2002, of which $16.4 million was drawn at June 30,
2002. The indenture governing our Senior Subordinated Notes and our amended and restated credit facility contain 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.

Additionally,
one of our U.K. subsidiaries has a credit agreement with a commercial lender in the United Kingdom that provides for total borrowings of £42.0 million
(approximately $64.0 million as of June 30, 2002) under three separate facilities. At June 30, 2002, total outstanding borrowings under this term facility were approximately
$47.1 million and approximately $7.8 million was available for borrowings. Borrowings under this agreement bear interest at rates of 1.50% to 2.00% over LIBOR and mature in
April 2010. The Company pledged the capital stock of its U.K. subsidiaries to secure borrowings under this agreement. The Company was in compliance with all debt covenants as of June 30,
2002.

Our
operating subsidiaries, many of which have minority owners who share in the cash flow of these entities, also have debt, consisting primarily of capitalized lease obligations. This
debt is non-recourse to USPI, the parent company, and is secured by the assets of those operating entities. The total amount of these obligations, which was $61.8 million at
June 30, 2002, is included in our consolidated balance sheet because the borrower or obligated entity meets the requirements for consolidated financial reporting. Additionally, our
unconsolidated affiliates that we account for under the equity method have non-recourse debt and capitalized lease obligations that are not included in our consolidated financial
statements. At June 30, 2002, the total obligations of these unconsolidated affiliates under debt and capital lease obligations was approximately $46.4 million. Our average percentage
ownership, weighted based on the individual affiliate's amount of debt and capitalized lease obligations, of these unconsolidated affiliates was 29.2% at June 30, 2002.

Our
acquisition and development program will require substantial capital resources, which we estimate to range from $50.0 million to $60.0 million per year over the next
three years, including an estimated $2.2 million related to additional consideration to the sellers of acquired facilities based upon those facilities achieving certain financial targets. In
addition, the operations of our existing surgical facilities will require ongoing capital expenditures. We believe that existing funds, cash flows from operations and borrowings under our credit
facilities will provide sufficient liquidity for the next twelve months. Thereafter, it is likely that we will require additional debt or equity financing for our acquisitions and development
projects. There are no assurances that the needed capital will be available on acceptable terms, if at all. If we are unable to obtain funds when needed or on acceptable terms, we will be required to
curtail our acquisition and development program.

26

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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
June 30, 2002, $148.9 million of our total outstanding debt 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%, $4.6 million was in other fixed rate instruments and the remaining $66.2 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 97% of our total fixed rate debt at June 30, 2002, are
considered to have a fair value, based upon recent trading, of $154.9 million, which is approximately $6.0 million higher than the carrying value at June 30, 2002.

Our
international revenues are a significant portion of our total revenues. We are exposed to risks associated with operating internationally, including:



Our
international operations operate in a natural hedge to a large extent because both expenses and revenues are denominated in local currency. Additionally, our borrowings in the United
Kingdom are currently denominated in local currency. Historically, the cash generated from our operations in Spain and the United Kingdom have been utilized within each of those countries to finance
development and acquisition activity as well as for repayment of debt denominated in local currency. Accordingly, we have not utilized financial instruments to hedge our foreign currency exchange
risk.

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

27

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PART IIOTHER INFORMATION

ITEM 1.Legal Proceedings

From time to time, the Company is involved in litigation incidental to its business. In the Company's opinion, no litigation to which the Company is currently a
party is likely to have a material adverse effect on the Company's results of operations, cash flows or financial condition.

ITEM 4.Submission of Matters to a Vote of Security Holders

At the Annual Meeting of Stockholders held on May 15, 2002, the following proposals were submitted to stockholders with the following results:



Number of SharesFor

WithheldJames C. Crews

19,567,310

204,559John C. Garrett, M.D.

19,567,560

204,309William H. Wilcox

19,567,560

204,309




Number of SharesFor

19,754,196Against

11,816Abstain

5,857


ITEM 6.Exhibits and Reports on Form 8-K



10.1
*
Supplemental Retirement Plan, dated as of February 12, 200299.1
*
Certification of Chief Executive Officer Pursuant to 18 U.S.C. §135099.2
*
Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350


*
Filed herewith.





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29

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SIGNATURE

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:                                         
|                      |  | By:                                         
|Date: August 12, 2002 |  |                                             

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