<PAGE> 1
                   SECURITIES AND EXCHANGE COMMISSION
                         WASHINGTON, D.C.  20549


                                FORM 10-Q


           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                 THE SECURITIES AND EXCHANGE ACT OF 1934


              FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997

                     Commission file number 1-12055


                    PARACELSUS HEALTHCARE CORPORATION
         (Exact name of registrant as specified in its charter)


                CALIFORNIA                                 95-3565943
        (State or other jurisdiction of                   (IRS Employer
        incorporation or organization)                     Identification No.)

              515 W. GREENS ROAD, SUITE 800, HOUSTON, TEXAS
                (Address of principal executive offices)

                    77067                                   (281) 774-5100
                 (Zip Code)                    (Registrant's telephone number,
                                                    including area code)


Securities registered pursuant to Section 12(b) of the Act:

         COMMON STOCK, NO STATED VALUE              NEW YORK STOCK EXCHANGE
              (Title of Class)                (Name of each exchange on which
                                                         registered)


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[X]       No[   ]

As  of August 14, 1997, there were outstanding 55,013,417 shares  of  the
Registrant's Common Stock, no stated value.





<PAGE> 2

                    PARACELSUS HEALTHCARE CORPORATION
                                FORM 10-Q

                     FOR THE QUARTERLY PERIOD ENDED
                              JUNE 30, 1997

                                  INDEX

                                                                PAGE REFERENCE
                                                                   FORM 10-Q
                                                                --------------
<TABLE>
<CAPTION>
<S>                                                                  <C>
PRELIMINARY STATEMENT                                                 3
FORWARD-LOOKING STATEMENTS                                            3
PART I.

  Item 1.

       FINANCIAL INFORMATION

          Financial Statements-- (Unaudited)

          Condensed Consolidated Balance Sheets--
            June 30, 1997 and December 31, 1996                       5

          Consolidated Statements of Operations--
            Three Months and Six Months Ended
            June 30, 1997 and 1996                                    6

          Condensed Consolidated Statements of Cash Flows--
            Six Months Ended June 30, 1997 and 1996                   7

          Notes to Interim Condensed Consolidated
            Financial Statements                                      8

  Item 2. Management's Discussion and Analysis of Financial
            Condition and Results of Operations                       14

PART II.  OTHER INFORMATION                                           22

SIGNATURE                                                             24

</TABLE>












<PAGE> 3
PRELIMINARY STATEMENT

     In  October  1996,  the  Board  of  Directors  appointed  a  Special
Committee  consisting  of non-management members, to supervise and direct
the conduct of an inquiry by outside legal counsel regarding, among other
things, the Company's accounting  and  financial  reporting practices and
procedures for the periods prior to the quarter ended September 30, 1996.
As  a  result  of  the  inquiry,  the  Company  restated  its   financial
information for periods commencing with January 1, 1992 through the  nine
months  ended  September  30,  1996, as reflected in the Company's Annual
Report on Form 10-K for the year  ended December 31, 1996 (the "1996 Form
10-K"),   filed  with  the  Securities   and   Exchange  Commission  (the
"Commission")  on April 15, 1997. Adjustments and  reclassifications were
necessary   to  correct  errors  and  irregularities  relating   to   (i)
receivables due  from  Medicare and other government programs (ii) use of
corporate  reserves, (iii)  provisions  for  bad  debt  expense  relating
principally  to  two  of  the  Company's psychiatric hospitals in the Los
Angeles  area and (iv) deferral of  facility  closure  costs  which  only
affected the  1996  quarterly information (collectively, the "restatement
entries").   The  following   financial  statements  should  be  read  in
conjunction with the audited consolidated  financial statements and notes
thereto for the year ended December 31, 1996  included  in  the Company's
1996  Form 10-K.

     On August 12, 1997, the Company filed amended quarterly  reports  on
Form  10-Q/A  for the transition period ending December 31, 1995 and each
of the first two  calendar  quarters  of  1996  to  reflect  the restated
results  for  each  respective  period.  The  Company intends to file  an
amended report on Form 10-Q/A for the quarter ended  September  30,  1996
after the filing of this report.

     As  a  result  of  a  change in fiscal year end from September 30 to
December 31 and the reclassification  of  the  psychiatric  hospitals  to
discontinued  operations  effective  September  30,  1996,  the  restated
results  as  filed  on  the  amended Form 10-Q/A for the quarterly period
ended June 30, 1996 do not agree  with  the  amounts  reflected  in  this
report.  To  show  the  impact  of the restatement entries, giving effect
further to the above changes, the  Company  has provided a reconciliation
of historical results for the quarter and six months ended June 30, 1996,
as originally reported in the filed quarterly report on Form 10-Q, to the
restated results as reflected in this report.  Historical results for the
six months ended June 30, 1996 represent the sum of the quarterly results
as originally reported in the Form 10-Q for the  quarterly  periods ended
March 31, 1996 and June 30, 1996.

FORWARD-LOOKING STATEMENTS

     Certain   statements   in   this   Form  10-Q  are  "forward-looking
statements" made pursuant to the safe harbor  provisions  of  the Private
Securities  Litigation  Reform  Act  of  1995. Forward-looking statements
involve a number of risks and uncertainties.  Factors which may cause the
Company's  actual results in future periods  to  differ  materially  from
forecast results  include,  but  are  not  limited  to:  the  outcome  of
litigation  pending  against  the Company and certain affiliated persons;
continued  satisfactory  relations  with the  Company's  Senior  Lenders;
general economic and business conditions, both nationally and  in  the 
regions in which  the  Company  operates; industry  capacity; demographic
changes; existing government regulations and changes in, or  the  failure

<PAGE> 4

to comply  with  government  regulations; legislative  proposals  for
healthcare reform; the  ability  to  enter  into  managed  care  provider
arrangements   on acceptable  terms; changes in Medicare and Medicaid
reimbursement levels; liability and other claims asserted against the
Company; competition; the loss  of  any significant  customer;  changes
in  business  strategy  or development plans; the ability to attract and
retain qualified personnel, including physicians;  the  significant
indebtedness of the Company; and the  availability  and  terms of capital
to fund  the  expansion  of  the Company's business, including the
acquisition of additional facilities.














































<PAGE> 5
PART I.   FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
                      PARACELSUS HEALTHCARE CORPORATION
                    CONDENSED CONSOLIDATED BALANCE SHEETS
                               ($ in 000's)
                                                JUNE 30,      DECEMBER 31,
                                                  1997            1996
                                                --------      -----------
                                                (Unaudited)       (Note 1)
<TABLE>
<CAPTION>
<S>                                            <C>              <C>
ASSETS
Current assets:
    Cash and cash equivalents                  $ 20,766          $ 17,771
    Restricted cash                               3,016             2,358
    Accounts receivable, net                     71,137            64,687
    Deferred income taxes                        28,601            28,739
    Refundable income taxes                      31,003            31,003
    Other current assets                         33,578            53,072
                                                 ------           -------
        Total current assets                    188,101           197,630

Property and equipment                          430,682           420,697
Less:Accumulated depreciation and amortization (121,109)         (109,862)
                                                -------           -------
                                                309,573           310,835

Long-term assets of discontinued operations       7,063            18,499
Assets held for sale                             22,988            22,095
Goodwill                                        116,286           118,168
Other assets                                    110,718           105,605
                                                -------           -------
        Total assets                           $754,729          $772,832
                                                =======           =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                           $ 47,109          $ 40,408
    Accrued liabilities and other               108,413           118,781
    Current maturities of long-term debt          4,660             4,679
                                                -------           -------
        Total current liabilities               160,182           163,868

Long-term debt                                  480,959           491,057
Other long-term liabilities                      63,136            69,420
Stockholders' Equity:
    Common stock                                224,472           224,472
    Additional paid-in capital                      390               390
    Unrealized (losses) gains on marketable
       securities                                   (86)              100
    Accumulated deficit                        (174,324)         (176,475)
                                                -------           -------
        Total stockholders' equity               50,452            48,487
                                                -------           -------
Total Liabilities and Stockholders' Equity     $754,729          $772,832
                                                =======           =======
</TABLE>
                          See accompanying notes.
<PAGE> 6
                    PARACELSUS HEALTHCARE CORPORATION

                  CONSOLIDATED STATEMENTS OF OPERATIONS
                   ($ in 000's, except per share data)
                               (Unaudited)

                                  THREE MONTHS ENDED       SIX  MONTHS ENDED
                                       JUNE 30,                 JUNE 30,
                                  -------------------     ------------------
                                   1997       1996          1997      1996
                                  --------  ---------     --------  --------
                                            (Restated -            (Restated -
                                             See Note 2)          See Note 2)
<TABLE>
<CAPTION>
<S>                              <C>        <C>           <C>       <C>

Net revenue                      $167,256   $ 119,863     $ 335,746 $ 235,186
Costs and expenses:
  Salaries and benefits            68,248      52,992       137,260   106,505
  Other operating expenses         69,041      51,220       135,473   100,808
  Provision for bad debts          10,597       7,053        20,761    13,964
  Interest                         10,624       5,195        21,479     9,014
  Depreciation and amortization     8,276       4,490        15,980     8,279
  Equity in earnings of Dakota
    Heartland Health System        (2,667)          -        (5,226)        -
  Unusual charges                   5,978           -         5,978     2,438
                                  -------      ------        ------    ------
Total costs and expenses          170,097     120,950       331,705   241,008
Income (loss) from continuing
  operations  before minority
  interest and income taxes        (2,841)     (1,087)        4,041    (5,822)
Minority interests                   (640)     (1,065)         (981)   (1,405)
                                  -------      ------         -----    ------
Income (loss) from continuing
  operations before income taxes   (3,481)     (2,152)        3,060    (7,227)
Provision (benefit)for income taxes  (464)       (915)          909    (3,063)
                                  -------      ------         -----    ------
Income (loss) from continuing
  operations                       (3,017)     (1,237)        2,151    (4,164)
Loss from operations of
  discontinued operations, net          -      (3,925)            -   (15,347)
                                  -------       -----         -----    ------
Net income (loss)                $ (3,017)   $ (5,162)     $  2,151 $ (19,511)
                                  =======       =====         =====    ======
Income (loss) per share:
   Continuing operations         $  (0.05)   $  (0.04)     $   0.04 $   (0.14)
   Discontinued operations              -       (0.13)            -     (0.52)
                                  -------       -----          ----     -----
Income (loss) per share          $  (0.05)   $  (0.17)     $   0.04 $   (0.66)
                                  =======       =====          ====     =====
Weighted average common and
   common equivalent shares
   outstanding                      54,879      29,772        56,274    29,772
</TABLE>

                                     See accompanying notes.

<PAGE> 7
                    PARACELSUS HEALTHCARE CORPORATION

             CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                               ($ in 000's)
                                (Unaudited)

                                                     Six  Months Ended
                                                          June 30,
                                                    ----------------------
                                                      1997        1996
                                                    ---------   ----------
                                                               (Restated -
                                                                See Note 2)
<TABLE>
<CAPTION>
<S>                                                 <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                   $   2,151    $ (19,511)
Non-cash expenses and changes in operating
 assets and liabilities                               (10,572)     (10,630)
                                                       ------       ------
Net cash used in operating activities                  (8,421)     (30,141)
                                                       ------       ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of facilities                      12,201           -
Acquisitions of facilities, net                             -     (109,385)
Sale (purchase) of marketable securities               19,284       (3,147)
Additions to property and equipment, net               (8,352)      (3,474)
Increase in other assets, net                            (954)      (5,055)
                                                       ------       ------
Net cash provided by (used in) investing
  activities                                           22,179     (121,061)
                                                       ------       ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Revolving Credit Facility                  -      215,500
Repayments under Revolving Credit Facility            (10,000)     (59,000)
Repayments of debt, net                                  (763)      (5,143)
Dividends to stockholder                                    -       (2,670)
                                                       ------       ------
Net cash (used in) provided by financing
  activities                                          (10,763)     148,687
                                                       ------      -------
Increase (decrease) in cash and cash
  equivalents                                           2,995       (2,515)
Cash and cash equivalents at beginning of year         17,771        4,418
                                                       ------       ------
Cash and cash equivalents at end of period          $  20,766    $   1,903
                                                       ======       ======
Supplemental Cash Flow Information:
  Interest paid                                     $  22,995    $   8,236
  Income taxes paid                                       702        4,577
</TABLE>

                         See accompanying notes.




<PAGE> 8
                      PARACELSUS HEALTHCARE CORPORATION

      NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               (Unaudited)

                              June 30, 1997

NOTE 1.    ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION - Paracelsus  Healthcare  Corporation  (the  "Company")  was
incorporated  in  November  1980  for the principal purpose of owning and
operating  acute  care hospitals and  related  healthcare  businesses  in
selected markets.  The Company presently operates 28 hospitals with 2,915
licensed beds in nine states (including two psychiatric hospitals with 113
licensed beds), of which 21 are  owned, including two through a 50% owned
partnership interest, and seven are leased.

BASIS   OF   PRESENTATION   -   The  accompanying   unaudited   condensed
consolidated financial statements  of  the  Company have been prepared in
accordance  with  generally accepted accounting  principles  for  interim
financial  information   and   with   the   instructions  to  Form  10-Q.
Accordingly,  they  do  not  include  all  of the information  and  notes
required by generally accepted accounting principles for annual financial
statements.  In  the  opinion of management, all  adjustments  considered
necessary for a fair presentation  have  been  included (see Note 2). The
balance  sheet  at December 31, 1996 has been derived  from  the  audited
financial statements  at  that  date  but  does  not  include  all of the
information  and  footnotes  required  by  generally  accepted accounting
principles for complete financial statements. The Company's  business  is
seasonal  in  nature and subject to general economic conditions and other
factors. Accordingly,  operating  results  for  the  three months and six
months ending June 30, 1997 are not necessarily indicative of the results
that  may  be  expected  for  the  year ending December 31,  1997.  These
financial  statements should be read  in  conjunction  with  the  audited
consolidated  financial  statements  and notes thereto for the year ended
December 31, 1996 included in the Company's 1996 Form 10-K.

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

     Certain  account balances for the three months and six months  ended
June 30, 1996 have  been reclassified to conform to the Company's current
presentation, including  the reclassification of operating results of the
discontinued  psychiatric  hospitals   to   "Loss   from   operations  of
discontinued   operations,   net"  in  the  Consolidated  Statements   of
Operations.

NET INCOME (LOSS) PER SHARE -  Net income (loss) per share is computed by
dividing net income (loss) by the  weighted  average number of common and
common equivalent shares outstanding. Fully diluted net income (loss) per
share  is  not  presented  because it was anti-dilutive  or  approximated
primary income (loss) per share. Weighted average number of common shares
outstanding for  the three months and six months ended June 30, 1996 have
<PAGE> 9

been  adjusted  to  reflect  the   66,159.426-for-one   stock   split  in
conjunction   with   the  merger  with  Champion  Healthcare  Corporation
("Champion")  in August 1996.

     In February 1997,  the  Financial  Accounting Standards Board issued
Statement  of  Accounting  Standards ("SFAS")   No.  128,  "Earnings  per
Share," which is required to  be  adopted  on  December 31, 1997. At that
time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior  periods.  Under  the
new requirements for calculating primary earnings per share, the dilutive
effect of stock options will be excluded. The impact will not result in a
material change in primary earnings (loss) per share for the three months
and  six  months ended June 30, 1997 and 1996. The impact of SFAS No. 128
on the calculation  of  fully diluted earnings (loss) per share for these
periods is also not expected to be material.

NOTE 2.    RESTATEMENT OF FINANCIAL STATEMENTS

     In  October  1996,  the  Board  of  Directors  appointed  a  Special
Committee consisting of non-management  members,  to supervise and direct
the conduct of an inquiry by outside legal counsel regarding, among other
things,  the Company's accounting and financial reporting  practices  and
procedures for the periods prior to the quarter ended September 30, 1996.
Such inquiry  resulted  in the Company restating its financial statements
for the periods commencing  January 1, 1992 through the nine months ended
September 30, 1996, as reflected  in  the Company's 1996 Form 10-K, filed
with the Commission on April 15, 1997.

     The need for prior period restatements  was the result of accounting
errors and irregularities at pre-merger Paracelsus  in  four  areas:  (i)
overstatement  of  receivables  due  from  Medicare  and other government
programs; (ii) use of corporate reserves; (iii) provisions  for  bad debt
expense   relating  principally  to  two  of  the  Company's  psychiatric
hospitals in  the Los Angeles area; and (iv) deferral of facility closure
costs which only affected the 1996 quarterly information.

     On August  12,  1997, the Company filed amended quarterly reports on
Form 10-Q/A for the transition  period  ending December 31, 1995 and each
of  the  first  two calendar quarters of 1996  to  reflect  the  restated
results for each  respective  period.  The  Company  intends  to  file an
amended  report  on  Form 10-Q/A for the quarter ended September 30, 1996
after the filing of this report.

     As a result of a  change  in  fiscal  year  end from September 30 to
December  31  and  the reclassification of the psychiatric  hospitals  to
discontinued  operations  effective  September  30,  1996,  the  restated
results as filed  on  the  amended  Form  10-Q/A for the quarterly period
ended  June  30,  1996 do not agree with the amounts  reflected  in  this
report. To show the  impact  of  the  restatement  entries, giving effect
further to the above changes, the Company has provided  a  reconciliation
of historical results for the quarter and six months ended June 30, 1996,
as originally reported in the filed quarterly report on the Form 10-Q, to
the restated results as reflected in this report. Historical  results for
the  six  months  ended June 30, 1996 represent the sum of the  quarterly
results originally  reported  for  the  quarterly periods ended March 31,
1996 and June 30, 1996.



<PAGE> 10
<TABLE>
<CAPTION>
                                                        Quarter Ended June 30, 1996
                            -----------------------------------------------------------------------------
(In 000's, except          As Originally                     (a)       Reclassified      As Reclassified
 per share data              Reported       Adjustments   As Restated    Disc. Oper.      and Restated
                             -----------     -----------  -----------  -----------       ---------------
<S>                          <C>             <C>          <C>          <C>                <C> 
Net revenue                  $ 133,136       $ (2,606)    $ 130,530    $ (10,667)         $ 119,863
Costs and expenses:
  Salaries and benefits         56,772                       56,772       (3,780)            52,992
  Other operating expenses      51,916          4,803        56,719       (5,499)            51,220
  Provision for bad  debts       8,994          5,885        14,879       (7,826)             7,053
  Interest                       5,216                        5,216          (21)             5,195
  Depreciation and amortization  4,684                        4,684         (194)             4,490
                               --------        -------      -------       ------            --------
Total costs and  expenses      127,582         10,688       138,270      (17,320)           120,950
Income (loss)  from continuing
  operations before minority
  interests and income taxes     5,554        (13,294)       (7,740)       6,653             (1,087)
Minority interests              (1,144)            79        (1,065)           -             (1,065)
                                 -----          ------         -----       -----              ------
Income (loss) from continuing
  operations before income taxes 4,410        (13,215)       (8,805)       6,653             (2,152)
Provision (benefit) for
  income taxes                   1,808         (5,451)       (3,643)       2,728               (915)
                                 -----          -----         ------      ------             -------
Income (loss)  from
  continuing operations          2,602         (7,764)       (5,162)       3,925             (1,237)
Loss from operations of
  discontinued operations, net       -              -             -       (3,925)            (3,925)
                                ------          -----        ------       ------              -----
Net income (loss)              $ 2,602       $ (7,764)     $ (5,162)    $      -           $ (5,162)
                                ======          =====        ======       ======              =====
Income (loss) per share:
  Continuing operations        $  0.09       $  (0.26)     $  (0.17)    $   0.13           $  (0.04)
  Discontinued  operations            -             -             -        (0.13)             (0.13)
                                ------         -------        -----        -----            -------
Income (loss) per share        $  0.09       $  (0.26)     $  (0.17)    $      -           $  (0.17)
                                ======         =======       =======      ======            ========
Weight.aver.shares outstanding  29,772         29,772        29,772       29,772             29,772
------------------------------
(a)  Reflects  impact  of  restatement  entries   before   reclassification  of discontinued operations.
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>                                                  Six Months Ended June 30, 1996
                            -----------------------------------------------------------------------------
(In 000's, except           As Originally                     (b)       Reclassified      As Reclassified
 per share data              Reported (a)    Adjustments   As Restated    Disc. Oper.      and Restated
                             -----------     -----------  -----------  -----------       ---------------
<S>                          <C>             <C>          <C>          <C>                <C>
Net revenue                  $ 265,052       $ (6,038)    $ 259,014     $ (23,828)        $ 235,186
Costs and expenses:
  Salaries and benefits        114,389                      114,389        (7,884)          106,505
  Other operating expenses     100,795         10,132       110,927       (10,119)          100,808
  Provision for bad  debts      19,573          5,885        25,458       (11,494)           13,964
  Interest                       9,050                        9,050           (36)            9,014
  Depreciation and amortization  8,668                        8,668          (389)            8,279
  Unusual charge                22,356                       22,356       (19,918)            2,438
                               -------          ------      -------         ------           ------
Total costs and  expenses      274,831         16,017       290,848       (49,840)          241,008
Loss from continuing operations
  before minority interests
  and income taxes              (9,779)       (22,055)      (31,834)       26,012            (5,822)
Minority interests              (1,647)           242        (1,405)            -            (1,405)
                                ------         ------       --------       ------          ---------
Loss from continuing operations
  before income taxes          (11,426)       (21,813)      (33,239)       26,012            (7,227)
Income tax benefit              (4,685)        (9,043)      (13,728)       10,665            (3,063)
                                 ------         ------       -------        -----          ---------
Loss from continuing operations (6,741)       (12,770)      (19,511)       15,347            (4,164)
Loss from operations of
   discontinued operations, net      -              -             -       (15,347)          (15,347)
                                ------          ------       -------       ------         ---------
Net loss                       $(6,741)      $(12,770)    $ (19,511)      $     -         $ (19,511)
                                ======          ======      =======        ======         =========
Loss per share:
  Continuing operations        $ (0.23)      $  (0.43)    $   (0.66)      $   0.52        $   (0.14)
  Discontinued  operations           -              -             -          (0.52)           (0.52)
                                -------         ------       -------       -------        ----------
Loss per share                 $ (0.23)      $  (0.43)    $   (0.66)      $      -        $   (0.66)
                                =======        =======       ======        =======         =========
Weighted aver.shares outstanding 29,772        29,772        29,772         29,772           29,772
----------------------
(a)  Represents the sum of previously reported amounts for the quarters ended March 31, 1996 and June 30,
     1996 in original filed Form 10-Q for each respective period.
(b)  Reflects   impact   of  restatement  entries  before  reclassification  of discontinued operations.
</TABLE>



<PAGE> 12
NOTE 2.    UNUSUAL CHARGES

     In May 1997, the Company recognized unusual charges totaling $6.0 million,
consisting of $3.5 million  relating to the closure of the 125-bed PHC Regional
Hospital and Medical Center ("PHC  Regional  Hospital") in Salt Lake City, Utah
and  $2.5  million  relating  to  a  corporate  reorganization.   Such  charges
consisted primarily of employee severance and related  costs,  and  to a lesser
extent, certain other contract termination costs.

     In  March  1996,  the  Company  recognized  a  charge for settlement costs
totaling $22.4 million in connection with two lawsuits,  of which $19.9 million
was related to a case involving the operation of its psychiatric  programs. The
$19.9 million is reflected, after giving effect to income tax benefit, as "Loss
from  operations  of  discontinued  operations,  net," with the remaining  $2.5
million  reflected  as  an  unusual  charge  in the Consolidated  Statement  of
Operations.

NOTE 3.    DISPOSITION AND CLOSURE OF HOSPITALS

     On  January  31,  1997,  the  Company  closed the  104-bed  Orange  County
Community Hospital of Orange and consolidated  services  into the 53-bed Orange
County  Hospital  of  Buena Park ("Buena Park"). On May 15, 1997,  the  Company
entered into a joint venture  with  a group of physicians, in which the Company
leased  Buena  Park and the 85-bed Bellwood  General  Hospital  in  Bellflower,
California to a limited liability company formed by the joint venture.

     On April 28,  1997,  the  Company  completed  the  sale  of two of its six
psychiatric facilities, the 149-bed Lakeland Regional Hospital  in Springfield,
Missouri and the 70-bed Crossroads Regional Hospital in Alexandria,  Louisiana.
No gain or loss was recognized in connection with such divestiture.

     On May 15, 1997, the Company closed  the inpatient services at PHC Regional
 Hospital and all remaining services in June 1997.

NOTE 4.     LONG-TERM DEBT

     On April 14, 1997 and August 14, 1997, the Company entered into the  First
Amendment  and  the  Second  Amendment, respectively, to the existing five-year
Reducing  Revolving  Credit  Facility   (the   "Credit  Facility")(the  "Credit
Agreement"), which provides among other things:  (i)  a reduction in the credit
commitment from $400.0 million to $200.0 million effective  April  14, 1997 and
to  $165.0  million  effective  August 14, 1997; (ii) interest rates which  (a)
effective April 14, 1997 through  August  13,  1997,  increased   by .50%  on a
monthly basis as compared to rates otherwise in effect prior to April 14, 1997,
(b)  effective August 14, 1997 through June 30, 1998, at the Company's  option,
equal  to LIBOR plus a margin of 3.25% or the prime rate plus a margin of 2.25%
and (c)  effective July 1, 1998 and thereafter, equal to LIBOR plus a margin of
3.75% or the  prime  rate  plus  a margin of 2.75%; (iii) all proceeds from the
sale of  any  collateralized assets, except the  Los Angeles  metropolitan area
("LA metro") facilities (60%  of the sale proceeds in the event of a disposition
of  non-collateralized  assets and the LA metro facilities) and 60%  of  income
tax  refunds  received after August 14,  1997  are  to  be  applied  as  a
permanent reduction  of  the debt  outstanding  under the  Credit Agreement;
(iv) a first priority  lien in certain of the  Company's real and  personal
properties; and (v) additional restrictive  financial  covenants as compared to
those at December 31, 1996. At June 30, 1997, the Company had $136.0 million

<PAGE> 13

outstanding under its Credit Facility and approximately $14.0 million committed
under letter of credit arrangements. Upon closing of the Second Amendment, the
Company had approximately $15.0 million in additional borrowing capacity under
the Credit Agreement, as amended.  


NOTE  5.    CONTINGENCIES

     The  Company is a party to pending litigation in connection  with  several
stockholder related matters. See "Item 2 - Pending Litigation."















































<PAGE> 14
ITEM 2.            MANAGEMENT'S DISCUSSION AND ANALYSIS
          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESTATEMENT  OF FINANCIAL INFORMATION FOR QUARTER AND SIX MONTHS ENDED JUNE 30,
1996

     As a result of the Special Committee's investigation of the accounting and
financial reporting  practices and procedures in periods prior to September 30,
1996, the Company restated  its  financial  information  for periods commencing
with  January  1,  1992 through the nine months ended September  30,  1996,  as
reflected in the Company's  1996  Form 10-K, filed with the Commission on April
15, 1997.  The need for the restatement  of  prior  period financial statements
was the result of accounting errors and irregularities at pre-merger Paracelsus
as discussed in Item 1 - Note 2.

     The following table presents a summary of the impact  of  the  restatement
before reclassification of discontinued operations. See Item 1 - Note  2  for a
more   expanded   presentation  of  the  impact  of  the  restatement  and  the
reclassification of operating results of the discontinued psychiatric hospitals
to  "Loss  from operations  of  discontinued  operations,  net."  The  restated
financial information  should  be  read  in conjunction with the Company's 1996
Form 10-K.

 QUARTER ENDED JUNE 30, 1996
----------------------------
                                   As Originally
                                     Reported                    As Restated
                                   Quarter Ended                Quarter Ended
                                      June 30,                     June 30,
                                       1996       Adjustments        1996
                                  -------------   -----------  -------------
(IN 000'S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
<S>                                <C>             <C>            <C>
Net revenue                        $ 133,136       $  (2,606)      $ 130,530
Income (loss) from continuing
  operations before minority
  interests and income taxes           5,554         (13,294)         (7,740)
Net income (loss)                      2,602          (7,764)         (5,162)
Income (loss) per share            $    0.09       $   (0.26)      $   (0.17)
</TABLE>
















<PAGE> 15
SIX MONTHS ENDED JUNE 30, 1996
------------------------------          (a)
                                   As Originally
                                     Reported                     As Restated
                                  Six Months Ended             Six Months Ended
                                      June 30,                     June 30,
                                        1996     Adjustments        1996
                                  -------------  -----------     -------------
(IN 000'S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
<S>                                <C>             <C>            <C>
Net revenue                        $ 265,052       $  (6,038)     $    259,014
Loss from continuing
  operations before minority
  interests and income taxes          (9,779)        (22,055)          (31,834)
Net loss                              (6,741)        (12,770)          (19,511)
Loss per share                     $   (0.23)      $   (0.43)     $      (0.66)
</TABLE>
----------------
(a)  Represents  the sum of previously  reported  amounts  for  the quarters
     ended March 31, 1996 and June 30,  1996  in  original  filed  Form  10-Q
     for  each respective period.

The adjustments consisted primarily of:

                                            THREE MONTHS           SIX MONTHS
                                                ENDED                 ENDED
                                               JUNE 30,              JUNE 30,
                                                1996                   1996
                                            -------------         ------------
<TABLE>
<CAPTION>
<S>                                         <C>                    <C>
(i)    Increase in deductions from revenue
       for receivables from Medicare and
       other government program            $     (1,924)           $    (4,205)
(ii)   Increase in operating expenses from
       the reversal of corporate reserves        (3,003)                (7,635)
(iii)  Recording of bad debt expense that
       was deferred at two of the psychiatric
       hospitals
         - Increase in deductions from
           net revenue                             (682)                (1,833)
         - Increase in provision for bad debts   (5,885)                (5,885)
(iv)   Increase in operating expenses for
       deferred facility closure costs           (1,800)                (2,497)
                                                 -------                ------
      Total pre-tax adjustments before
         minority interests               $     (13,294)           $   (22,055)
                                                 ======                 ======
</TABLE>

     The  Company  does not believe that the adjustments regarding the Medicare
receivables resulted  from  improper  patient  billing  procedures  under  that
program.


<PAGE> 16

RESULTS OF OPERATIONS

     The  Company made numerous acquisitions and divestitures since April 1996,
including the  merger with Champion.  Additionally, in August 1996, the Company
completed its public  offering  of the $325.0 million senior subordinated notes
(the "Notes") and a sale of 5.2 million  shares of its common stock and entered
into a new Credit Agreement.  Accordingly, the Company's financial position and
portfolio of operating hospitals during the  quarter  and six months ended June
30,  1997  were  significantly  different  from  those of the  comparable  1996
periods.   "Same  hospitals"  as  used  in  the  following   discussion,  where
appropriate, consist of acute care hospitals owned throughout  the  periods for
which  comparative operating results are presented.  Operating results  of  the
Company's  psychiatric  hospitals  have been segregated from those of the acute
care hospitals and are reflected under  the  caption  "Loss  from operations of
discontinued operations, net" in the Consolidated Statements of Operations.

RESULTS OF OPERATIONS - QUARTER ENDED JUNE 30, 1997
COMPARED WITH QUARTER ENDED JUNE 30, 1996

     Net  revenue  for the quarter ended June 30, 1997 was $167.3  million,  an
increase of $47.4 million, or 39.5%, from $119.9 million for the same period of
1996.  The $47.4 million  increase  was  primarily  attributable  to  hospitals
acquired, net of divested hospitals, since May 1996.

     The Company's acute care volumes experienced a 39.4% increase in inpatient
admissions from 12,749 in 1996 to 17,773 in 1997.  Patient days increased  from
61,360  in  1996  to 83,235 in 1997.  Outpatient visits (including home health)
increased 39.5% from  283,844  in 1996 to 396,011 in 1997.  Admissions in "same
hospitals" increased slightly from 9,373 in 1996 to 9,385 in 1997.

     Expressed as a percentage of net revenue, operating expenses (salaries and
benefits, other operating expenses and provision for bad debts)  decreased from
92.8 % in 1996 to 88.4 % in 1997  as  operating  margin  increased from 7.2% to
11.6%.   The   increase   in  operating  margin  was  due  to  (i)  incremental
contributions by hospitals exchanged in May 1996, (ii) higher operating margins
at former Champion hospitals, and (iii) improved operating margins at hospitals
located in the Los Angeles  metropolitan  ("LA  metro")  area.  General factors
contributing  to  the  improvement  in operating margin percentage include  (i)
management's efforts to control costs,  including a corporate reorganization to
reduce corporate overhead costs in May 1997,  (ii)  efficiency and productivity
gains resulting from the implementation of Champion's  operating  standards and
benchmarks and (iii) divestiture or closure of underperforming facilities.

     Interest expense increased $5.4 million from $5.2 million in 1996 to $10.6
million  in  1997, primarily due to (i) an increase in outstanding indebtedness
from the issuance  of  the Notes in August 1996 and additional borrowings under
the  Credit  Facility to finance  acquisitions  and  to  fund  certain  lawsuit
settlement costs,  Champion  merger  costs,  working  capital  requirements and
capital expenditures, (ii) an increase in interest rate on the Credit  Facility
during  1997,  net  of (iii) the redemption in August 1996 of $75.0 million  of
senior subordinated notes.  Approximately  $1.4  million  of  interest  expense
incurred in 1997, which related to borrowings to finance the acquisition of PHC
Regional  Hospital,  was  charged  to  the  loss  contract  accrual  previously
established at December 31, 1996. Accordingly, such amount was not reflected as
interest expense in the 1997 Consolidated Statement of Operations.


<PAGE> 17

     Depreciation  and  amortization  increased  to  $8.3 million in the second
quarter of 1997 from $4.5 million for the same period  of  1996.  The  increase
consisted  of  $4.7  million primarily attributable to the facilities acquired,
net of divested facilities,   since  May 1996, offset by a decrease of $867,000
at the acute care LA metro hospitals held  for  sale,  as a result of recording
these facilities  at their net realizable value as of September  30,  1996,  in
accordance with Statement  of  Financial  Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived  Assets  and for Long-Lived Assets
to Be Disposed Of."

     Loss from continuing operations before income taxes  for the quarter ended
June 30, 1997 included $6.0 million in unusual charges,  consisting of $3.5
million relating to the closure  of  PHC  Regional Hospital and  $2.5  million
relating to a corporate reorganization completed in May 1997 (see Note 2).  It
excluded a loss of $5.2 million attributable to PHC Regional Hospital, which
was  charged  to  the loss contract accrual previously established at December
31, 1996.

     Loss  before income taxes of the discontinued  psychiatric  hospitals  was
$239,000 in  1997,   as   compared to $6.7 million for the comparable period of
1996.  The loss recorded in  1996  was  primarily  attributable  to  additional
provision  for  bad  debts  recorded  on  uncollectible accounts receivable.
After income taxes,  the  loss from  operations  of discontinued operations for
the quarter ended June 30, 1996 was $3.9 million. In accordance  with
Accounting  Principles Board  Opinion  ("APB")  No.  30,  the operating loss
from  discontinued  operations  during  1997  was charged to the disposal loss
accrual previously established in September 1996. Accordingly, such amount was
not reflected in the 1997 Consolidated Statement of Operations.

     The Company's effective  tax rate was 13.3% for 1997, as compared to 42.5%
for the comparable period in 1996.  The  reduced  income  tax  benefit rate for
1997  resulted  primarily  from a $600,000 increase in the valuation  allowance
related to the revaluation of  unused  deferred tax assets at June 30, 1997 and
nondeductible goodwill amortization expense  recorded  during  the quarter then
ended.

     Net  loss for the quarter ended June 30, 1997 was $3.0 million,  or  $0.05
per share,  compared  to  net loss of $5.2 million, or $0.17 per share, for the
same period of 1996. Weighted  average  common  and  common  equivalent  shares
outstanding  increased 84.3% from 29.8 million in 1996 to 54.9 million in 1997,
primarily from  the  issuance  of  19.8  million  shares in connection with the
merger with Champion and from the public offering of  5.2 million shares of the
Company's common stock, both completed in August 1996.  Included  in  the  1997
loss  before income taxes, net loss and net loss per share were unusual charges
of $6.0  million,  $5.2  million and $0.09 per share, respectively. Included in
the 1996 loss before income  taxes, net loss and net loss per share were losses
associated with the discontinued  operations  of $6.7 million, $3.9 million and
$0.13 per share, respectively.

RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1997
COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996

     Net revenue for the six months ended June  30, 1997 was $335.7 million, an
increase of $100.5 million, or 42.8%, from $235.2  million  for the same period
of 1996.  The $100.5 million increase was primarily attributable  to  hospitals
acquired, net of divested hospitals, since May 1996.

<PAGE> 18

     The Company's acute care volumes experienced a 48.2% increase in inpatient
admissions from 24,936 in 1996 to 36,951 in 1997.  Patient days increased  from
128,098  in 1996 to 172,959 in 1997.  Outpatient visits (including home health)
increased  41.5%  from 555,734 in 1996 to 786,291 in 1997.  Admissions in "same
hospitals" increased slightly from 19,020 in 1996 to 19,098 in 1997.

     Expressed as a percentage of net revenue, operating expenses (salaries and
benefits, other operating expenses and provision for bad debts)  decreased from
94.1 % in 1996 to 87.4  %  in  1997  as operating margin increased from 5.9% to
12.6%.  Such  increase was due to (i) incremental  contributions  by  hospitals
exchanged in May  1996,  (ii)  higher  operating  margins  at  former  Champion
hospitals, and (iii) improved operating margins at hospitals located in  the LA
metro area. General factors contributing to the improvement in operating margin
percentage  include  (i)  management's  efforts  to  control costs, including a
corporate reorganization to reduce corporate overhead  costs  in May 1997, (ii)
efficiency  and  productivity  gains  resulting  from  the  implementation   of
Champion's operating standards and benchmarks,  (iii) divestiture or closure of
underperforming facilities and (iv) closing underperforming operating units and
eliminating or reducing unprofitable services at certain hospitals.

     Interest  expense  increased  $12.5  million  from $9.0 million in 1996 to
$21.5  million  in  1997,  primarily  due  to  (i) an increase  in  outstanding
indebtedness  from  the  issuance of the Notes in August  1996  and  additional
borrowings under the Credit  Facility  to  finance  acquisitions  and  to  fund
certain  lawsuit  settlement  costs,  Champion  merger  costs,  working capital
requirements and capital expenditures, (ii) an increase in interest rate on the
Credit  Facility  during  1997, net of (iii) the redemption in August  1996  of
$75.0  million of senior subordinated  notes.  Approximately  $2.7  million  of
interest  expense  incurred in 1997, which related to borrowings to finance the
acquisition of PHC Regional  Hospital, was charged to the loss contract accrual
previously established at December  31,  1996. Accordingly, such amount was not
reflected as interest expense in the 1997 Consolidated Statement of Operations.

     Depreciation and amortization increased to $16.0 million in 1997 from $8.3
million for the same period of 1996. The increase  consisted  of  $9.4  million
primarily  attributable to the facilities acquired, net of divested facilities,
since May 1996, offset by a decrease of $1.7 million at the acute care LA metro
hospitals held for sale, as a result of recording these facilities at their net
realizable value as of September 30, 1996 in accordance with SFAS No. 121.

     Income  from  continuing operations before income taxes for the six months
ended June 30, 1997  included  $6.0 million in unusual charges, consisting of
$3.5 million  relating  to the closure of PHC Regional  Hospital  and  $2.5
million  relating to a corporate  reorganization completed  in  May  1997 (see
Note 2). It excluded  a  loss  of  $10.9  million attributable to PHC Regional
Hospital,  which was charged to the loss contract accrual previously
established at December  31,  1996.  Income  from continuing operations before
income  taxes  for  the comparable 1996 period included  an unusual charge of
$2.4 million relating to the settlement of a lawsuit.

     Income before income taxes of the discontinued  psychiatric  hospitals was
$35,000 in 1997,  as  compared to a loss of $6.1 million (excluding a charge of
$19.9 million for settlement costs related to a lawsuit settled in  March 1996)
for  the  comparable  period  of  1996. The loss recorded in 1996 was primarily
attributable to additional provision  for  bad  debts recorded on uncollectible
accounts  receivable.  In  accordance with APB No. 30,  operating  income  from

<PAGE> 19

discontinued operations during  1997  was  charged to the disposal loss accrual
previously  established in September 1996. Accordingly,  such  amount  was  not
reflected in the 1997 Consolidated Statement of Operations. After income taxes,
loss from  operations   of   discontinued  operations  for the six months ended
June  30,  1996  was $15.3 million, of which $11.8 million  was  related  to  a
lawsuit settlement charge.

     The Company's  effective  tax  rate  was  29.7% for 1997,  as  compared to
42.4%  for  the  comparable  period in 1996. The reduced  tax  rate  for   1997
resulted primarily from a $1.1  million reduction in the valuation allowance on
deferred tax assets established at  December  31, 1996, offset by nondeductible
goodwill amortization expense recorded during the  six  months  ended  June 30,
1997.

     Net  income  for  the six months ended June 30, 1997 was $2.2 million,  or
$0.04 per share, compared  to  a net loss of $19.5 million, or $0.66 per share,
for the same period of 1996. Weighted  average  common  and  common  equivalent
shares outstanding increased 88.9% from 29.8 million in 1996 to 56.2 million in
1997, primarily from the issuance of 19.8 million shares in connection with the
merger with Champion and from the public offering of 5.2 million shares  of the
Company's  common stock, both completed in August 1996. Included in 1997 income
before income  taxes,  net  income  and  net income per share were nonrecurring
charges  of  $6.0  million, $4.2 million and  $0.07  per  share,  respectively,
relating to the unusual  charges described above. Included in 1996  loss before
income taxes, net loss and  net  loss  per  share  were nonrecurring charges of
$28.5 million, $16.8 million and $0.56 per share, respectively,  of which $15.4
million ($0.52 per share) of the net loss was attributable to the  discontinued
operations (including a charge of $11.8 million for settlement costs related to
a  lawsuit), with the remaining $1.4 million ($0.05 per share) related  to  the
settlement of another lawsuit.


LIQUIDITY AND CAPITAL RESOURCES

     Net  cash used in operating activities for  the  six months ended June 30,
1997 was $8.4  million, compared to $30.1 million for the same period of  1996.
The  $21.7 million decrease in net cash used in operating activities was mainly
attributable to (i) the reduction in losses  recorded  for the six months ended
June 30, 1997, as compared to losses recorded for the six months ended June 30,
1996, primarily attributable to a settlement charge for  certain lawsuits and a
deterioration in the operating condition at the LA metro hospitals  and  (ii) a
related increase in deferred  tax  assets  at June 30, 1996 resulting from such
losses, offset by (iii) payments made in 1997 for (a) increased interest
expense, (b) the loss  contract  at  PHC  Regional  Hospital,  (c) the Special
Committee's investigation  and (d) merger related  expenses  associated  with
the Champion acquisition. Net cash provided by investing activities was $22.2
million during 1997,  as compared to net cash used in investing activities of
$121.0 million during 1996. The $143.2 million  increase  was  primarily
attributable to (i) a use of cash of  $109.4 million to acquire hospitals
during  1996, as compared to $12.2 million in cash received from a sale of
certain hospitals  during  1997 and (ii) cash of $19.3 million received from
the liquidation of  marketable securities  held   by  the Company's  wholly-
owned  subsidiary,  Hospital Assurance Company Ltd., during 1997, as compared
to purchases  of  marketable securities of $3.1 million made during 1996,
offset by (iii) an increase in capital expenditures during  1997. Net cash used
in financing activities during 1997  was $10.8 million,  compared to net cash
provided by financing activities of $148.7 million during 1996. The $159.5
<PAGE> 20

million decrease was primarily attributable  to net incremental borrowings of
$162.2 million  during  1996 to purchase hospitals and to pay for the
settlement  costs  of  certain lawsuits, offset by cash dividends of  $2.7
million paid to the former sole stockholder.

     Net working capital was  $27.9  million  at June 30, 1997, a decrease of
$5.9 million from $33.8 million at December 31, 1996.  The  decrease in working
capital was primarily attributable to payments made during the six months ended
June 30, 1997 for cost and expenses accrued at December 31, 1996  for  interest
expense,  the  loss  contract at PHC Regional Hospital, the Special Committee's
investigation and the merger with Champion, using proceeds from the liquidation
of the Company's marketable  securities  and  earnings  generated  in 1997. The
Company's long-term debt as a percentage of total capitalization was  90.5%  at
June 30, 1997, compared to 91.0% at December 31, 1996.

          On  April 14, 1997 and August 14, 1997, the Company entered into  the
First  Amendment   and  the  Second  Amendment,  respectively,  to  the  Credit
Agreement, which provides  among  other  things:  (i) a reduction in the credit
commitment  from $400.0 million to $165.0 million effective  August  14,  1997;
(ii) a revision  in  the  borrowing  rates  as  disclosed  at Note 4; (iii) all
proceeds from the sale of any collateralized assets, except the LA metro 
facilities (60% of  the  sale proceeds in the event  of  a disposition of non-
collateralized  assets and the LA metro facilities) and 60% of  income  tax
refunds received after  August  14, 1997 are to be applied as a permanent
reduction of the debt outstanding under the  Credit  Agreement; (iv) a  first
priority lien  in  certain of the  Company's  real  and  personal properties;
and (v) additional restrictive financial covenants as compared to those at
December 31, 1996.

     In July 1997, the Company received approximately  $24.6 million in refunds
of  previously  paid  Federal  and state income taxes. Such refunds will be used
to pay interest costs and for general working capital needs. The Company
expects  to receive additional Federal and state  income  tax refunds of
approximately $6.4 million in 1998.

     Upon closing of the Second Amendment to the Credit Agreement on  August 14,
1997, the Company had approximately $15.0  million available under its
Credit   Facility  to  fund  future  capital  expenditures,   working   capital
requirements  and  the  issuance  of letters of credit. The Company anticipates
that internally generated cash flows  from  earnings, proceeds from the sale of
hospital accounts receivable under the Company's  commercial paper program, the
Federal and state income taxes refunds received in  July  1997,  and  available
borrowings  under  its  Credit  Agreement  will  be  sufficient to meet present
operating requirements through 1998.  There can be no assurance  that future
developments in the hospital industry or general economic trends will  not
adversely affect the Company's operations or its ability to meet such funding
requirements.  See "Pending  Litigation"  of  this Item for a discussion
regarding certain pending litigation,  the resolution of  which  could
adversely  affect  the  Company's liquidity and its future operating results.

OPERATING PERFORMANCE OF SALT LAKE CITY, UTAH HOSPITALS

     With respect  to the Utah hospitals, the Company recorded  earnings before
interest, income  taxes,  depreciation  and  amortization  ("EBITDA")  of  $8.0
million  and  $16.4  million,  or 35.6% and 32.8% of the Company's consolidated
hospitals' EBITDA, for the three  months  and  six  months ended June 30, 1997,
respectively,  after  excluding  operating  losses of  $3.7  million  and  $8.1
<PAGE> 21
million associated with the loss contract at  PHC Regional Hospital during each
respective  period and closure costs of $3.5 million  in  connection  with  the
closing of that  hospital  in  May  1997. Operating losses relating to the loss
contract, in addition to interest expense  of $1.4 million and $2.7 million for
the   three  months  and  six  months  ended  June  30,   1997,   respectively,
attributable  to   borrowings  to   finance  the  acquisition  of  PHC Regional
Hospital, were charged to the loss contract accrual  previously established  in
1996.  Excluding  the impact of the loss contract at PHC Regional  Hospital and
associated closure costs,  the performance of the Salt Lake area hospitals  for
the three months and six months ended  June  30,  1997 was as expected.

     The Company is actively engaged in discussions with PacifiCare to
renegotiate an amendment of the FHP capitation contract. The company believes
that  it will ultimately reach a favorable agreement with PacifiCare and does
not expect to have to litigate in order to resolve this dispute. 

     The Company is presently considering possible uses for PHC Regional
Hospital and is working with local physicians in evaluating the transfer of
medical/surgical services from Salt Lake Regional Medical Center to
PHC Regional Hospital.


OPERATING PERFORMANCE OF LA METRO HOSPITALS

     As a result of actions taken by management subsequent   to the merger with
Champion  to stabilize the operating conditions and curtail losses  at  the  LA
metro  hospitals,   including   closing  underperforming  operating  units  and
eliminating or reducing unprofitable  services, the Company recorded EBITDA  of
$1.4  million and $3.9 million on  the   LA  metro acute care hospitals for the
three months and six months ended June 30, 1997,  as  compared  to  a  loss  of
$2.0 million and $2.7 million for  the comparable 1996  periods. Losses for the
LA metro psychiatric hospitals, which were charged to the disposal loss accrual
previously established in September 1996, were $142,000 and  $175,000  for  the
three  months  and  six  months  ended June 30, 1997, respectively.  Management
expects the LA metro  hospitals to  generate  positive cash flows through their
disposition date.

PENDING LITIGATION

     Since the Company filed its 1996 Form 10-K with  the  Commission  on April
15,  1997,  there  have  been  two amended complaints  filed in the stockholder
class and derivative  litigation described in that Form  10-K.  A  Consolidated
Class Action Complaint, captioned IN RE PARACELSUS CORP. SECURITIES LITIGATION,
Master  File  No.  H-96-3464,  was  filed which consolidates and amends several
class action complaints described in  the  1996  Form  10-K.  A   First Amended
Derivative  Complaint  was  filed  which amends the previously filed class  and
derivative action captioned CAVEN V.  MILLER No. H-96-4291. Both complaints now
reflect certain facts disclosed in the  1996 Form 10-K that were not alleged in
the previous complaints. The class action complaint  asserts claims against the
Company  under  sections 11 and 12(a)(2)  of the Securities  Act  of  1933, and
claims  against  certain existing and former  officers  and  directors  of  the
Company  under sections 11 and 15 of the Securities Act of 1933. The derivative
action,  which  purports   to   be  filed  on  behalf  of  Champion  Healthcare
Corporation,  asserts  various state  law  claims  against the Company, certain
of its existing and former  officers and directors   or  their  affiliates  and
the lead underwriter for various securities offerings.

     As discussed in the Company's 1996 Form 10-K, the  Company  believes  that
the  outcome  of  certain  of  the  claims  will probably be unfavorable to the
<PAGE> 22

Company. The Company also believes that the stockholder  class actions asserted
against  the  Company  are likely to settle rather  than to proceed  to  trial,
judgment, and appeal and  that,  given  the  circumstances  of these cases, the
terms  of  a  settlement would be structured in a manner to avoid  causing  the
Company  to  seek  protection under the Federal bankruptcy reorganization laws.
In any circumstances where the  Company  could  not structure  a  settlement of
all claims within  its  financial  resources,  it  would vigorously  defend any
attempt to establish the amount of liability or to require  payment  beyond its
resources.  Many  factors will ultimately affect and determine the  results  of
the litigation,  however,  and  the  Company can provide no assurance that  the
results will not  have  a significant adverse effect on it.


REGULATORY MATTERS

      Healthcare reform legislation has been proposed at both Federal and state
levels. The Company cannot predict the effect that such reforms may have on its
business and there can be no assurance   that  any such reforms will not have a
material adverse effect on the Company's  future revenues or liquidity.


PART II.     OTHER INFORMATION

ITEM 1.       LEGAL PROCEEDINGS

     See Part I - Item 2 "Pending Litigation" for  an update of developments on
the pending stockholders' litigation previously disclosed in the Company's 1996
Form 10-K.

ITEM 2. CHANGE IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

At the Company's Annual Meeting of Stockholders on May 28, 1997, the
stockholders approved the following:

1. The election of Messrs. James A. Conroy and L. Stanton Tuttle to serve as
Class I directors for a three-year term expiring at the date of the Annual
Meeting of Stockholders in 2000. Each nominee received the following votes:

                                      VOTES
                                    ----------
               For                  42,105,058
               Withheld                 51,327







<PAGE> 23

2. The ratification of the appointment of Ernst & Young LLP as the Company's
auditors for 1997.
                                      VOTES
                                    ----------
               For                  42,143,009
               Against                   3,934
               Abstain                   9,442

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

11.1     Statement regarding computation of per share earnings of Paracelsus.

27        Financial Data Schedule.

(b)  Reports on Form 8-K

    -  The Company filed on July 7, 1997 a Current Report  on  Form  8-K, dated
   June  27,  1997,  reporting pursuant to Item 6 thereof, that a director, Mr.
   James A. Conroy, had   resigned  from  the  Company's  Board  of  Directors
   as  a  result  of  his disagreement with other  Special  Committee  members
   and  board  members on certain matters relating to the Special Committee's
   investigation.

    -  The Company filed on July 8, 1997 an Amendment No. 1 to the Current
   Report on Form 8-K, dated July 27, 1997, to include a response letter from
   the Company regarding the resignation of Mr. James A. Conroy as a director
   of the Company.
























<PAGE> 24

                                   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.


                                        Paracelsus Healthcare Corporation
                                                        (Registrant)
  
                                           /s/ James G. VanDevender
Dated: August 14, 1997                 By:   ___________________________
                                               James G. VanDevender
                                        Senior Executive Vice President,
                                             Chief Financial Officer
                                                  & Director