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

                                 FORM 10-Q/A

                               AMENDMENT NO. 1

                                     TO

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

              For the quarterly period ended June 30, 1996


                     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            77067
                  (Address of principal executive offices)           (Zip Code)


                                 (281) 774-5100
              (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_X_    NO__

As of June 30, 1996, there were 450 shares of the Registrant's Common Stock,
no stated value, outstanding.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------




<PAGE> 2


                          PARACELSUS HEALTHCARE CORPORATION

                                     FORM 10-Q/A

                           For the Quarterly Period Ended
                                   June 30, 1996

                                        INDEX
                                                                        Page
                                                                      Reference
                                                                     FORM 10-Q/A
                                                                     -----------

PRELIMINARY STATEMENT                                                       3


PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements

          Condensed Consolidated Balance Sheets -
          June 30, 1996 and September 30, 1995                              4

          Consolidated Statements of Operations -
          Three and nine months ended June 30, 1996 and 1995                5

          Condensed Consolidated Statements of Cash Flows -
          Nine months ended June 30, 1996 and 1995                          6

          Notes to Interim Condensed Consolidated Financial Statements      7

Item 2.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations                              15

PART II.  OTHER INFORMATION                                                21

SIGNATURE                                                                  23

















<PAGE> 3

PRELIMINARY STATEMENT

     Paracelsus Healthcare Corporation (the "Company") is filing this report on
Form  10-Q/A   to  amend  and restate the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996,  filed with the Securities and Exchange Commission
(the "Commission") on August 14, 1996.

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,
filed with 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  Annual  Report  on  Form  10-K  for such period, which  include
restated financial results for calendar years 1992  through  1995  and  for the
quarterly 1995 and 1996 periods.

     To  show  the impact of the restatement entries with respect to previously
reported amounts  for  the three months and nine months ended June 30, 1996 and
1995, the Company has provided  a  description of the restatement entries and a
reconciliation of historical results for the three months and nine months ended
June 30, 1996 and 1995, as previously reported in the filed quarterly report on
Form 10-Q, to the restated results.

     Certain statements in this Form 10-K 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: 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 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> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
                       PARACELSUS HEALTHCARE CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                            (Dollars in thousands)
                                  (Unaudited)
                                                  Restatement - See Note 2
                                                  ------------------------
                                                     June        September
                                                      30,            30,
                                                     1996           1995
                                                 ---------      ---------
<TABLE>
<CAPTION>
<S>                                                <C>           <C>
ASSETS
Current Assets:
   Cash and cash equivalents                       $   1,903     $   2,949
   Marketable securities                              15,590        10,387
   Accounts receivable, net                           65,728        46,247
   Other current assets                               29,043        27,437
   Deferred income taxes                              60,757        32,580
                                                      ------        ------
     Total current assets                            173,021       119,600

Property and equipment                               343,389       268,412
   Less: Accumulated depreciation and
      amortization                                   (97,661)     (102,746)
                                                      ------        ------
                                                     245,728       165,666

Other assets                                          68,711        40,533
                                                      ------        ------
     Total Assets                                  $ 487,460     $ 325,799
                                                     =======       =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
   Accounts payable and other current liabilities  $  76,030     $  69,401
   Current maturities of long-term debt                  439         8,658
                                                      ------        ------
     Total current liabilities                        76,469        78,059

Long-term debt                                       284,642       113,070
Other long-term liabilities                           25,762        25,176
Deferred income taxes                                 36,139        24,619
Minority interest                                        147           126
Stockholder's equity
   Common stock                                        4,500         4,500
   Additional paid-in capital                            390           390
   Unrealized (losses)gains on marketable securities     (27)          137
   Retained earnings                                  59,438        79,722
                                                      ------        ------
     Total stockholder's equity                       64,301        84,749
                                                      ------        ------
     Total Liabilities and Stockholder's Equity    $ 487,460     $ 325,799
                                                     =======       =======
</TABLE>
                            See accompanying notes.
<PAGE> 5

                       PARACELSUS HEALTHCARE CORPORATION
                       CONSOLIDATED STATEMENTS OF INCOME
                            (Dollars in thousands)
                                  (Unaudited)

                                         Restatement - See Note 2
                              -----------------------------------------------
                              Three Months Ended         Nine Months Ended
                                   June 30,                    June 30,
                              ---------------------      -------------------
                                  1996      1995            1996      1995
                              ----------  ---------      --------   --------
<TABLE>
<CAPTION>
<S>                           <C>         <C>             <C>        <C>
Net Revenue                   $130,530    $117,866        $389,175   $372,999
Costs and expenses:
  Salaries and benefits         56,772      52,471         169,934    160,585
  Other operating expenses      56,719      47,359         164,103    151,400
  Provision for bad debts       14,879       9,172          35,070     28,455
  Interest                       5,216       3,952          12,901     11,604
  Depreciation and amortization  4,684       4,251          12,656     12,985
  Settlement costs                   -           -          22,356          -
                                ------       -----          ------     ------
Total costs and expenses       138,270     117,205         417,020    365,029
Income (loss) before minority
  interests and income taxes    (7,740)        661         (27,845)     7,970
Minority interests              (1,065)       (592)         (1,974)    (1,796)
                                ------        ----          ------      -----
Income (loss) before
  income taxes                  (8,805)         69         (29,819)     6,174
Provision (benefit) for
  income taxes                  (3,643)         28         (12,326)     2,532
                                 -----        ----          ------      -----
Net income (loss)             $ (5,162)    $    41        $(17,493)  $  3,642
                                 =====        ====          ======      =====
</TABLE>

                              See accompanying notes.


















<PAGE> 6
                       PARACELSUS HEALTHCARE CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (Dollars in thousands)
                                  (Unaudited)

                                                  Restatement - See Note 2
                                                  -------------------------
                                                       Nine Months Ended
                                                           June 30,
                                                  -------------------------
                                                      1996          1995
                                                  -----------     ---------
<TABLE>
<CAPTION>
<S>                                               <C>             <C>
Cash Flows from Operating Activities:
Net income (loss)                                 $ (17,493)      $  3,642
Non-cash expenses and changes in operating assets
 and liabilities                                    (17,331)         8,522
                                                    -------         ------
Net cash (used in) provided by operating
 activities                                         (34,824)        12,164
                                                    -------         ------
Cash Flows from Investing Activities:
Acquisitions of facilities, net                    (109,385)             -
Purchase of marketable securities                    (3,225)        (4,592)
Additions to property and equipment, net             (8,727)       (10,432)
Decrease in minority interests                       (2,195)        (1,845)
Increase in other assets                             (5,030)        (4,387)
                                                    -------         ------
Net cash used in investing activities              (128,562)       (21,256)
                                                    -------         ------
Cash Flows from Financing Activities:
Borrowings under Credit Facility                    232,000         36,000
Repayments under Credit Facility                    (61,500)       (20,500)
Repayment of long-term debt, net                     (5,369)        (1,120)
Dividends to stockholder                             (2,791)        (4,521)
                                                     ------          -----
Net cash provided by financing activities           162,340          9,859
                                                     ------          -----
Increase (decrease) in cash and cash equivalents     (1,046)           767
Cash and cash equivalents at beginning of period      2,949          1,452
                                                      -----          -----
Cash and cash equivalents at end of period        $   1,903       $  2,219
                                                      =====          =====
Supplementary cash flow information:
     Interest paid                                $  13,786       $  13,077
     Income taxes paid                                5,531           9,728
Unrealized (losses) gains on marketable
  securities:
     Marketable securities                             (278)              5
     Deferred taxes                                     114               2
                                                       ----            ----
Increase (decrease) in stockholder's equity       $    (164)      $       3
                                                       ====            ====
</TABLE>

                            See accompanying notes.
<PAGE> 7


                       PARACELSUS HEALTHCARE CORPORATION

        NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                (Unaudited)

                               June 30, 1996

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 and related
healthcare businesses in selected  markets.  As  of  June 30, 1996, the Company
operated 22 hospitals with 1,957 licensed beds in seven states (including three
psychiatric hospitals with 218 licensed beds), of which 15 were owned and seven
were 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. The Company's business is seasonal
in  nature  and  subject to general  economic  conditions  and  other  factors.
Accordingly, operating  results  for the quarterly and nine month periods ended
June  30, 1996 are not necessarily  indicative  of  the  results  that  may  be
expected  for  the  annual period. 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 Annual
Report on Form 10-K for  such  period, which include restated financial results
for calendar years 1992 through  1995  and  for  the  quarterly  1995  and 1996
periods.

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 1995 periods have been reclassified to conform
to the Company's current presentation.

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.
<PAGE> 8

     The need for prior period restatements was the result of accounting errors
and irregularities 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.

     The impact  of  the restatement entries on the Company's financial results
for the quarterly and  nine  month  periods  ended  June  30,  1996 and 1995 is
summarized  in  the  following  tables.  A reconciliation has been included  to
reconcile to the reported amounts as shown  in  the  Consolidated Statements of
Operations for each respective period.

QUARTER ENDED JUNE 30, 1996

                                          As
                                      Previously     Adjustments        As
                                        Reported         to          Restated
                                        Quarter       Quarter         Quarter
                                         Ended         Ended            Ended
                                       June 30,       June 30,        June 30,
                                         1996           1996            1996
                                       ---------      ----------     ----------
(IN 000'S)
<TABLE>
<CAPTION>
<S>                                    <C>            <C>            <C>
Net revenue                            $133,136       $ (2,606)      $ 130,530

Costs and expenses:
   Salaries and benefits                 56,772                         56,772
   Other operating expenses              51,916          4,803          56,719
   Provision for bad  debts               8,994          5,885          14,879
   Interest                               5,216                          5,216
   Depreciation and  amortization         4,684                          4,684
                                        -------          -----          ------
Total costs and  expenses               127,582         10,688         138,270
Income (loss) before minority
   interests and income taxes             5,554        (13,294)         (7,740)
Minority interests                       (1,144)            79          (1,065)
                                        -------         ------          ------
Income (loss) before income taxes         4,410        (13,215)         (8,805)
Provision (benefit) for income
   taxes                                  1,808         (5,451)         (3,643)
                                          -----         ------           -----
Net income (loss)                      $  2,602      $  (7,764)      $  (5,162)
                                          =====         ======           =====
</TABLE>









<PAGE> 9

QUARTER ENDED JUNE 30, 1995

                                          As
                                      Previously     Adjustments        As
                                        Reported         to          Restated
                                        Quarter       Quarter         Quarter
                                         Ended         Ended            Ended
                                       June 30,       June 30,        June 30,
                                         1995           1995            1995
                                       ---------      ----------     ----------
(IN 000'S)
<TABLE>
<CAPTION>
<S>                                    <C>            <C>            <C>

Net revenue                            $123,545       $ (5,679)      $ 117,866

Costs and expenses:
  Salaries and benefits                  52,652           (181)         52,471
  Other operating expenses               47,178            181          47,359
  Provision for bad  debts                9,172                          9,172
  Interest                                3,952                          3,952
  Depreciation and  amortization          4,251                          4,251
                                       --------          ------        -------
Total costs and  expenses               117,205               -        117,205

Income before minority
  interests and income taxes              6,340          (5,679)           661
Minority interests                         (592)                          (592)
                                          -----           -----          -----
Income before income taxes                5,748          (5,679)            69
Provision for income taxes                2,356          (2,328)            28
                                          -----           -----          -----
Net income                             $  3,392       $  (3,351)        $   41
                                          =====           =====          =====
</TABLE>





















<PAGE> 10

NINE MONTHS ENDED JUNE 30, 1996

                                       As
                                   Previously        Adjustments         As
                                    Reported             to           Restated
                                  Nine Months       Nine Months     Nine Months
                                     Ended              Ended           Ended
                                   June 30,            June 30,        June 30,
                                     1996                1996            1996
                                  ---------          ----------     ----------
(IN 000'S)
<TABLE>
<CAPTION>
<S> 
                                   <C>                <C>            <C>
Net revenue                        $393,726           $ (4,551)      $ 389,175

Costs and expenses:
  Salaries and benefits             169,934                            169,934
  Other operating expenses          152,359             11,744         164,103
  Provision for bad debts            29,185              5,885          35,070
  Interest                           12,901                             12,901
  Depreciation and amortization      12,656                             12,656
  Settlement costs                   22,356                             22,356
                                    -------             ------         -------
Total costs and expenses            399,391             17,629         417,020
Loss before minority
  interests and income taxes         (5,665)           (22,180)        (27,845)
Minority interests                   (2,216)               242          (1,974)
                                    -------             ------          ------
Loss before income taxes             (7,881)           (21,938)        (29,819)
Income tax benefit                   (3,232)            (9,094)        (12,326)
                                      -----              -----          ------
Net loss                           $ (4,649)         $ (12,844)      $ (17,493)
                                     ======             ======          ======
</TABLE>





















<PAGE> 11

NINE MONTHS ENDED JUNE 30, 1995

                                       As
                                   Previously        Adjustments         As
                                    Reported             to           Restated
                                  Nine Months       Nine Months     Nine Months
                                     Ended              Ended           Ended
                                   June 30,            June 30,        June 30,
                                     1995                1995            1995
                                  ---------          ----------     ----------
(IN 000'S)
<TABLE>
<CAPTION>
<S> 
                                   <C>                <C>            <C>
Net revenue                        $375,901           $ (2,902)      $ 372,999

Costs and expenses:
  Salaries and benefits             159,955                630         160,585
  Other operating expenses          144,729              6,671         151,400
  Provision for bad debts            28,455                             28,455
  Interest                           11,604                             11,604
  Depreciation and  amortization     12,985                             12,985
                                   --------              -----         -------
Total costs and  expenses           357,728              7,301         365,029
Income before minority
  interests and income taxes         18,173            (10,203)          7,970
Minority interests                   (1,796)                            (1,796)
                                   --------             ------          ------
Income before income taxes           16,377            (10,203)          6,174
Provision for income taxes            6,713             (4,181)          2,532
                                   --------             ------          ------
Net income                         $  9,664          $  (6,022)       $  3,642
                                    =======              =====          ======
</TABLE>






















<PAGE> 12

NOTE 3. MARKETABLE SECURITIES

In  November  1995,  in  concurrence  with  the  adoption  of   "A   Guide   to
Implementation  of  Statement  of  Financial  Accounting  Standards  No. 115 on
Accounting for Certain Investments in Debt and Equity Securities," the  Company
transferred  certain  of its held-to-maturity debt securities to the available-
for-sale category. The  amortized  cost  of  those  securities  at  the time of
transfer  was  $2.0  million and the gross  unrealized loss on those securities
was immaterial.

NOTE 4. EXCHANGE, ACQUISITION & CLOSURE

On  August  9,  1996,  the  stockholders  of  Champion  Healthcare  Corporation
("Champion") adopted and  approved  the Amended and Restated Agreement and Plan
of Merger dated as of May 29, 1996 (the  "Merger  Agreement"), by and among the
Company, Champion and PC Merger Sub, Inc.,  a wholly  owned  subsidiary  of the
Company, pursuant to which such wholly owned subsidiary will be merged with and
into  Champion (the "Merger"). The Company expects the Merger to consummate  on
or about August 16, 1996 after satisfying certain other terms and conditions of
the Merger Agreement. Upon consummation of the Merger, each share of Champion's
Common  Stock  and  Preferred Stock will convert to one share and two shares of
the  Company's Common  Stock,  respectively.  Dr.  Manfred  George  Krukemeyer,
currently  the  Chairman  of the Board of Directors and sole stockholder of the
Company, will own approximately  60%  of  the  combined  company,  with current
Champion  security  holders  owning the remaining 40%. Among other things,  the
consummation of the Merger is  conditioned  upon the Company and Dr. Krukemeyer
entering into a Dividend and Note Agreement,  pursuant  to  which a dividend of
$21.1  million  plus accrued interest will be paid to Dr. Krukemeyer  no  later
than 60 days after the consummation of the Merger.  Dr. Krukemeyer will in turn
loan the Company  $7.2  million  and  receive a $7.2 million 6.51% subordinated
note from the Company. The Merger will  be  accounted  for  using  the purchase
method of accounting.

On  May  17, 1996, the Company acquired the 139-bed Pioneer Valley Hospital  in
West Valley  City,  Utah,  the  120-bed  Davis  Hospital  and Medical Center in
Layton, Utah and the 129-bed Santa Rosa Medical Center in Milton,  Florida from
another  healthcare  company  (collectively,  the  "Acquired  Hospitals").   In
exchange,  the  other  party  received the Company's 119-bed Peninsula  Medical
Center  in  Ormond  Beach, Florida,  the  135-bed  Elmwood  Medical  Center  in
Jefferson, Louisiana,  the  190-bed  Halstead Hospital in Halstead, Kansas, and
$38.5 million in cash, net of a working  capital differential, which is subject
to final agreement of the parties. The Company also purchased the real property
of Elmwood and Halstead from a real estate investment trust ("REIT"), exchanged
the Elmwood and Halstead real property for  the  Pioneer real property and then
sold the Pioneer real property to the REIT.  The acquisition  of  the  Acquired
Hospitals  was  accounted  for as a purchase transaction.  The Company financed
the acquisition with borrowings under its revolving line of credit. The Company
recorded goodwill of $15.2 million, which is being amortized on a straight line
basis over an estimated useful  life  of  20 years. The results of the Acquired
Hospitals have been included in the operations  of  the  Company  since May 17,
1996. No material gain or loss was recorded on the disposition of the Exchanged
Hospitals.

On  May  17,  1996, the Company acquired the 125-bed PHC Regional Hospital  and
Medical  Center   in  Salt  Lake  City,  Utah  ("PHC  Regional  Hospital")  for
approximately $71.0  million in cash. The Company financed the acquisition with
amounts borrowed under  the  Credit  Facility. The Company recorded goodwill of
<PAGE> 13

$15.8 million in connection with the acquisition, which is being amortized on a
straight line basis over an estimated  useful  life of 20 years. The results of
PHC Regional Hospital have been included in the operations of the Company since
May 17, 1996.

On  March  15,  1996,  the Company closed the 123-bed  Desert  Palms  Community
Hospital in Palmdale, California.

The following unaudited  pro  forma  consolidated results of operations for the
nine months ended June 30, 1996 and 1995 assume that the following transactions
were consummated on October 1, 1994: (i) the acquisition and disposition of the
Acquired Hospitals and the Exchanged Hospitals  in  May  1996, (ii) the sale of
Womans Hospital in Jackson, Mississippi in September 1995 and (iii) the closure
of  Bellwood Health Center, a psychiatric facility in Bellwood,  California  in
April  1995.  PHC  Regional  Hospital  has  not been included in the pro formas
because the predecessor owner operated the hospital  as  a captive cost center;
accordingly,  the  inclusion  of  its  historical  operations  would   not   be
meaningful.  The  pro  forma  financial  information  does  not  purport  to be
indicative  of  the  result  that would have been attained had the transactions
described above occurred on October 1, 1994 ($ in 000's).


                                                     Nine Months Ended
                                                          June 30,
                                                 -------------------------
                                                   1996(a)         1995
                                                 ----------      ---------
<TABLE>
<CAPTION>
<S>                                              <C>            <C>
Net revenue                                      $  397,702     $  376,295
Income(loss) from continuing
 operations                                         (23,805)         9,957
Net income (loss)                                   (13,944)         5,874
</TABLE>

(a) Results for the nine months ended June 30, 1996 include a settlement charge
    of $22.4 million ($13.2 million  after-tax)  relating  to two lawsuits (see
    Item 1 - Note 6).


NOTE 5 - LONG-TERM DEBT


On  December  8, 1995, the Company entered into a Second Amended  and  Restated
Credit Agreement  (the "Agreement")(the "Credit Facility") which provides for a
revolving line of credit  in  the amount of $230.0 million. The Credit Facility
is available  for working capital purposes,  to  fund  acquisitions and for  the
issuance of  letters  of  credit.  Borrowings  under  the  Credit Facility bear
interest  at  a  base  rate  or  an  offshore  dollar rate, as defined  in  the
Agreement, plus a margin ranging from 0.25% to 0.75% or 0.75% to 1.125%,
respectively. The Credit  Facility  requires  annual fees ranging from  0.75%
to  1.25%  of  the outstanding amount of the letters  of  credit.  The Company
is also required to pay commitment  fees  ranging from 0.20% to 0.375% of the
unused  portion  of  the Credit Facility.


<PAGE> 14

The Credit Facility  expires  on  November 1998, at which time, the Company can
elect to convert the then outstanding  balance  into  a  four-year  term  loan,
payable in 16 equal quarterly installments, commencing in December 1998.

NOTE 6. SETTLEMENT COSTS

During  March  1996,  the  Company  settled two lawsuits in connection with the
operation of its psychiatric programs.  The  Company  recognized  a  charge for
settlement  costs  totaling $22.4 million in the quarter ended March 31,  1996,
consisting primarily  of  settlement payments,  legal fees and the write off of
certain psychiatric accounts receivable. The Company did not admit liability in
either  case  but  resolved its dispute through the  settlements  in  order  to
facilitate the Champion  acquisition,  re-establish a business relationship and
avoid further legal costs in connection  with  the disputes. The Company funded
payment of such settlement costs through borrowings  under  its Credit Facility
during the quarter ended June 30, 1996.

NOTE 7. CONTINGENCIES

The Company is subject to claims and suits in the ordinary course  of business,
including  those  arising  from  care  and  treatment afforded at the Company's
facilities. It maintains insurance and, where appropriate, reserves with respect
to  the  possible  liability arising from such  claims.  Although  the  Company
believes that its insurance  and  loss  reserves  are adequate, there can be no
assurance that such insurance and loss reserves will cover all potential claims
that  may  be  asserted and that the outcome of such claims  will  not  have  a
material effect  on the Company's financial position, results of operations and
cash flows.





























<PAGE> 15

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
        FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General
-------
Following changes  in the Company's management which became effective as of the
merger with Champion  Healthcare Corporation on August 16, 1996 (the "Merger"),
management determined that  there  were  financial  performance  and accounting
issues with the pre-merger operating results of the Company.  In October  1996,
the  Company  announced  that  its third quarter results would be substantially
lower than expected.  At the same time, the Board of Directors formed a Special
Committee of non-management members  to  supervise the conduct of an inquiry by
outside legal counsel as to the nature and  reasons  for the earnings shortfall
and investigate the accounting and financial reporting practices and procedures
in periods prior to September 30, 1996.  As a result of  its investigation, the
Special Committee recommended to the Board that the Company  restate  its prior
period  financial  statements.   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 restatements on
the quarterly and nine months periods ended June 30, 1996 and 1995 ($ in 000's).


QUARTER ENDED JUNE 30, 1996
----------------------------
<TABLE>
<CAPTION>

<S>                     <C>                 <C>                <C>
                        As Previously
                          Reported                             As Restated
                           Quarter                               Quarter
                            Ended                                 Ended
                          June 30,                               June 30,
                            1996             Adjustments          1996 
                        ------------         -----------       -----------
Net Revenue             $133,136             $ (2,606)           $130,530
Income(loss) before
  minority interests
  and income taxes         5,554              (13,294)             (7,740)
Net income (loss)          2,602               (7,764)             (5,162)

</TABLE>













<PAGE> 16
QUARTER ENDED JUNE 30, 1995
----------------------------
<TABLE>
<CAPTION>
<S>                     <C>                 <C>                <C>
                        As Previously                             
                          Reported                             As Restated
                           Quarter                               Quarter
                            Ended                                 Ended
                          June 30,                                June 30,
                            1995             Adjustments           1995
                        -----------          -----------       -----------
Net Revenue              $123,545             $ (5,679)           $117,866
Income(loss) before
  minority interests
  and income taxes          6,340               (5,679)                661
Net income (loss)           3,392               (3,351)                 41

</TABLE>


NINE MONTHS ENDED JUNE 30, 1996
-------------------------------
<TABLE>
<CAPTION>
<S>                     <C>                 <C>                <C>
                        As Previously                             
                          Reported                             As Restated
                         Nine Months                           Nine Months
                           Ended                                 Ended
                          June 30,                              June 30,
                            1996             Adjustments          1996
                        -----------          -----------       -----------
Net Revenue               $393,726             $  (4,551)        $389,175
Loss before
  minority interests
  and income taxes          (5,665)              (22,180)         (27,845)
Net loss                    (4,649)              (12,844)         (17,493)
</TABLE>

NINE MONTHS ENDED JUNE 30, 1995
-------------------------------
<TABLE>
<CAPTION>
<S>                     <C>                 <C>                <C>
                        As Previously                             
                          Reported                             As Restated
                        Nine Months                             Nine Months
                           Ended                                  Ended
                          June 30,                               June 30,
                            1995             Adjustments          1995
                        -----------          -----------       -----------
Net Revenue              $375,901             $  (2,902)           $372,999
Income(loss) before
  minority interests
  and income taxes         18,173               (10,203)              7,970
Net income (loss)           9,664                (6,022)              3,642
</TABLE>
<PAGE> 17

  The adjustments consisted primarily of:

                                                       Three Months Ended
                                                             June 30,
                                                       ---------------------
                                                        1996           1995
                                                       --------       ------
<TABLE>
<CAPTION>
<S>                                                    <C>            <C>
(i)   Increase in deductions from
      revenue for receivables from Medicare and
      other government programs                       $ (1,924)       $ (6,483)
(ii)  Increase in operating expenses from the
      reversal of corporate reserves                    (3,003)              -
(iii) Recording of bad debt expense that
      was deferred at two of the psychiatric hospitals
          - Increase in deductions from net revenue       (682)            804
          - Increase in provision for bad debts         (5,885)              -(iv)  Increase in operating expenses for
      deferred facility closure costs                   (1,800)              -
                                                       -------          -------
      Total pre-tax adjustments before minority
          interests                                   $(13,294)       $ (5,679)
                                                       =======          =======

</TABLE>


                                                         Nine Months Ended
                                                             June 30,
                                                       ---------------------
                                                        1996           1995
                                                       --------       ------
<TABLE>
<CAPTION>
<S>                                                    <C>            <C>
(i)   Increase in deductions from
      revenue for receivables from Medicare and
      other government programs                       $ (2,440)       $ (5,435)
(ii)  Increase in operating expenses from the
      reversal of corporate reserves                    (9,234)         (7,301)
(iii) Recording of bad debt expense that
      was deferred at two of the psychiatric hospitals
          - Increase in deductions from net revenue     (2,111)          2,533
          - Increase in provision for bad               (5,885)              -
(iv)  Increase in operating expenses for
      deferred facility closure costs                   (2,510)              -
                                                       -------          -------
      Total pre-tax adjustments before minority
          interests                                   $(22,180)       $(10,203)
                                                       =======          =======

</TABLE>



<PAGE> 18

  The following discussion analyzes the results, as restated, for the quarterly
and  nine month periods ended June 30, 1996, as compared to the  quarterly  and
nine month  periods ended June 30, 1995, respectively. "Same hospitals" as used
in the following  discussion  consist of hospitals owned throughout the periods
of  which  comparative  operating   results   are   presented.   The  following
information  should  be  read  in  conjunction with the consolidated  financial
statements  of the Company, and the related  notes  thereto,  included  in  the
Annual Report on Form 10-K for the year ended December 31, 1996, which included
restated financial results for periods prior thereto.

Results of Operations
---------------------
Quarter ended June 30, 1996 compared with Quarter ended June 30, 1995
---------------------------------------------------------------------

Net revenue for  the  three  months  ended June 30, 1996 was $130.5 million, an
increase of $12.7 million, or 10.7%, over $117.9 million for the same period of
1995. Of the $12.7 million increase, $11.7  million  was  contributed  by "same
hospitals"  located outside of the Los Angeles metropolitan ("LA metro")  area,
$5.5 million  by hospitals acquired net of hospitals divested since April 1995,
offset by a decrease  of  $4.5 million attributable to "same hospitals" located
in the LA metro area. The $11.7  million  increase  in  net  revenue  at  "same
hospitals" located outside of the LA metro area was attributable to an increase
of  $10.4  million  resulting  primarily  from  additional services offered and
medical  staff development efforts, with the remaining  $1.3  million  increase
from  additional  home  health  business  at  hospitals  located  primarily  in
Tennessee.  The  $4.5 million decrease in net revenue at the LA metro hospitals
consisted of a (i)  $2.5  million  decrease  at  the psychiatric hospitals as a
result of the the negative impact on admission resulting from a lawsuit that
was settled  in  March 1996 (see Item 1- Note  6) and insurance companies in
general becoming more  stringent  in  their payments  to  providers of
psychiatric care and (ii) a $2.0 million decrease at the remaining acute care
hospitals despite an increase in volume, largely as a result of a change in
payor  mix  from  private  insurance to managed care and Medicare/Medicaid,
which increased deductions from  revenue,  and  a decline in acuity level.

Expressed  as  a  percentage  of net revenue, operating expenses (salaries  and
benefits, other operating expenses, and provision for bad debts) increased from
92.5% in 1995 to 98.3% in 1996  and  operating  margin  decreased  from 7.5% to
1.7%.  The  5.8% decrease in operating margin in 1996 was primarily due  to  an
increase in provision  for  bad  debt  at the psychiatric hospitals and general
deterioration of operating margins at the  LA metro hospitals, both psychiatric
and acute care,  due to the reasons noted above.

Depreciation  and amortization increased to $4.7  million  in  1996  from  $4.3
million for the  same  period  of  1995.  The  $400,000  increase was primarily
attributable to facilities acquired during 1996, net of divested hospitals.

Interest  expense  increased  $1.3 million over the same period  of  1995,  due
principally to additional borrowings  during  1996 under the Credit Facility to
finance  the  purchases of hospitals, the settlement  costs  of  two  lawsuits,
capital expenditures and fund working capital requirements.

Net loss for the  quarter  ended June 30, 1996 was $5.2 million, as compared to
net income of $41,000 for the  quarter  ended  June  30, 1995. The $5.2 million
decrease was due primarily to a deterioration in the operating  performance  at
the LA metro hospitals.
<PAGE> 19

Nine Months ended June 30, 1996 compared with Nine Months ended June 30, 1995
-----------------------------------------------------------------------------

Net  revenue  for  the  nine  months ended June 30, 1996 was $389.2 million, an
increase of $16.2 million, or 4.3%,  over $373.0 million for the same period of
1995. The increase consisted of $22.3  million  from  "same  hospitals" located
outside of the LA metro area, $808,000 by hospitals acquired net  of  hospitals
divested since April 1995, offset by a decrease of $6.9 million attributable to
"same  hospitals"  located in the LA metro area. The $22.3 million increase  in
net revenue of "same  hospitals"  located  outside  of  the  LA  metro area was
attributable   to  an  increase  of  $17.1  million  resulting  primarily  from
additional services  offered  and  medical  staff development efforts, with the
remaining  $5.2  million  increase  from additional  home  health  business  at
hospitals located primarily in Tennessee.  Of  the $6.9 million decrease in net
revenue  at  the  LA metro hospitals, $4.8 million  was  from  the  psychiatric
hospitals largely as  a  result  of the negative impact on admission resulting
from a lawsuit that was settled in March  1996  (see Item 1- Note 6) and
increasing  difficulties  in  collecting psychiatric accounts  receivable.  The
remaining  $2.1  million  decrease  was attributable  to  the  acute care
hospitals, largely as a result of a change in payor mix from private insurance
to  managed care and Medicare/Medicaid, which increased deductions from revenue,
and a decline in acuity level.

Expressed  as a percentage of net revenue,  operating  expenses  (salaries  and
benefits, other operating expenses, and provision for bad debts) increased from
91.3% in 1995  to  94.8%  in  1996  and operating margin decreased from 8.7% to
5.2%. The 3.5% decrease in operating  margin  in  1996  was  primarily  due  to
general  deterioration  of  operating  margins  at the LA metro hospitals, both
psychiatric and acute care, and  specifically to  an  increase in provision for
bad debt at the psychiatric hospitals, due to reasons noted above. In addition,
such  decrease  in  operating margin was further impacted  by  additional  home
health business, which  was  profitable  but  produced lower margins than other
types of services.

Depreciation and amortization decreased to $12.7  million  in  1996  from $13.0
million  for  the  same  period  of  1995.  The $300,000 decrease was primarily
attributable to facilities and healthcare related business sold or closed since
April 1995, net of hospitals acquired during 1996.

Interest expense increased $1.3 million over  the  same  period  of  1995,  due
principally  to  additional  borrowings  during 1996 under the Revolving Credit
Facility to finance the purchases of hospitals,  the  settlement  costs  of two
lawsuits and capital expenditures and to fund working capital requirements.

During  March 1996, the Company recognized a charge totaling $22.4 million  for
the settlement  of  two lawsuits. Such charge consisted primarily of settlement
payments,  legal fees  and  the  write  off  of  certain  psychiatric  accounts
receivable. See Item 1 - Note 6 for additional information.

Net loss for the nine months ended June 30, 1996 was $17.5 million, as compared
to net income  of  $3.6  million  for  the nine months ended June 30, 1995. The
$21.1 million decrease was due primarily  to  a  settlement  charge recorded in
March  1996  relating  to  two  lawsuits  and a deterioration in the  operating
performance at the LA metro hospitals.




<PAGE> 20

Liquidity and Capital Resources
-------------------------------
Net cash used in operating activities for the  nine  months ended June 30, 1996
was  $34.8  million, compared to net cash provided by operating  activities  of
$12.2 million  for  the same period of 1995. The $47.0 million decrease in cash
was primarily attributable  to  net  losses  recorded for the nine months ended
June 30, 1996, an increase in deferred tax assets  resulting  from  such losses
and an increase in accounts receivable which was primarily attributable  to the
four  acquired  hospitals  in  May  1996. Net cash used in investing activities
increased $107.3 million to $128.6 million  during  1996  from $21.3 million in
1995,  primarily from an increase in use of cash to finance  the  purchases  of
hospitals  in  May  1996.  Net  cash provided by financing activities increased
$152.5 million to $162.3 million  during  1996  from  $9.8 million for the same
1995 period, due primarily to incremental borrowings of  $155.0  million  under
the  Revolving  Credit  Facility  to  finance  the  purchases of hospitals, the
settlement costs of two lawsuits, capital expenditures and fund working capital
requirements.

Net working capital was $96.6 million, an increase of  $55.1 million from $41.5
million at September 30, 1995. The increase mainly resulted from (i)an increase
in deferred tax assets resulting from  net  losses recorded for the nine months
ended  June  30,  1996  and (ii) an increase in accounts  receivable  primarily
attributable to the four  hospitals  acquired  in May 1996. The Company's long-
term debt as a percentage of total capitalization  was  81.6% at June 30, 1996,
compared   to  57.2%  at  September  30,  1995.  The  increase  was   primarily
attributable  to  net  borrowings  of $170.5 million under the Revolving Credit
Facility to finance the purchases of  hospitals,  the  settlement  costs of two
lawsuits, capital expenditures and fund working capital requirements during the
nine months ended June 30, 1996.

On  December  8,  1995,  the  Company  amended and restated its existing Credit
Facility to increase the amount available for borrowings from $125.0 million to
$230.0 million. The Credit Facility is available  for working capital purposes,
to finance capital expenditures, to fund acquisitions  and  for the issuance of
letters  of  credit.  As  of June 30, 1996, the Company had $198.0  million  of
borrowings outstanding under its Credit Facility.

The Company anticipates that  borrowings  under  its  Credit Facility, proceeds
from  the sale of hospital accounts receivable under the  Company's  commercial
paper program  and  internally  generated  cash  flows  from  earnings  will be
sufficient  to  fund  future  acquisitions,  capital  expenditures  and working
capital  requirements through fiscal year 1996. 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.

In  March  1995, the Financial Accounting Standards Board issued SFAS No.  121,
"Accounting  for  the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of,"  which  requires  impairment losses to be recorded on long-
lived assets used in operations when indicators  of  impairment are present and
the undiscounted cash flows estimated to be generated  by those assets are less
than the assets' carrying amount.  The statement also addresses  the accounting
for  long-lived  assets  that are expected to be disposed of. The Company  will
adopt SFAS No. 121 on October  1,  1996,  and,  based on current circumstances,
does not believe the effect of the adoption will be material.


<PAGE> 21

Regulatory Matters
------------------
Various other legislative proposals for healthcare  reform  at both federal and
state levels have been introduced or have been under consideration. 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

During March 1996, the Company  settled  two  lawsuits  in  connection with the
operation  of  its psychiatric programs previously disclosed in  the  Company's
Form 10-K for the  year  ended  September 30, 1995. See Item 1 - Note 6 of this
Form 10-Q.

ITEM 2. CHANGE IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

The Company has filed a registration  statement  on  Form  S-1,  dated June 28,
1996,  as amended, for a proposed offering of the Company's Common  Stock  (the
"Equity Offering"). The Company expects to sell 5.2 million shares, and selling
stockholders of the Company are expected to offer an additional 229,000 shares.
Additionally,  the  underwriters  have  the  option  to  purchase an additional
814,350  shares  to  cover  over-allotments,  if  any.  The  Company's  current
registration statement contemplates a proposed maximum offering price of $10.25
per  share,  which would result in net proceeds to the Company after  estimated
underwriting discounts  and  commissions  of  approximately  $49.8 million. The
Equity Offering is expected to be consummated on or about August  16, 1996. The
final  offering  price and total number of shares to be offered by the  Company
and the selling stockholders  are  subject  to finalization and may differ from
those amounts currently contemplated.

The Company has filed a registration statement on Form S-1 dated June 24, 1996,
as  amended,  for  a proposed offering of $325.0  million  aggregate  principal
amount of Senior Subordinated  Notes  due  2006  (the  "Notes  Offering").  The
Company  expects the Notes to bear interest at approximately 10% per annum. The
Notes Offering  is  expected to be consummated on or about August 16, 1996. The
final terms of the Notes  Offering  are  subject to finalization and may differ
from the terms currently contemplated.

If consummated, the Company expects to use  a  portion of the net proceeds from
the  Notes  Offering  and  the  Equity Offering to prepay  certain  outstanding
indebtedness and reduce other outstanding indebtedness.
<PAGE> 22

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibit

    2.1   Amended and Restated Agreement and Plan of Merger dated as of May 29,
          1996, by and among Paracelsus,  champion  and  PC  Merger  Sub,  Inc.
          (filed as Exhibit 2.1 to Paracelsus' Current Report on Form 8-K, dated
          May 29, 1996, and incorporated herein by reference).
    
(b) Reports on Form 8-K

   -  The  Company  filed on April 19, 1996 a Current Report on Form 8-K, dated
     April 12, 1996, reporting pursuant to Item 5 thereof, that the Company and
     Champion Healthcare  Corporation  had  entered into a definitive Agreement
     and Plan of Merger, dated April 12, 1996.  The  Company  had  also entered
     into  a definitive agreement to acquire the 125-bed PHC Regional  Hospital
     and Medical Center in Salt Lake City, Utah for approximately $70.0 million
     in cash.

  -  The Company  filed on May 30, 1996 a Current Report on Form 8-K, dated May
     17, 1996, reporting  pursuant to Items 2 and 7 thereof, the acquisition of
     Davis Hospital and Medical  Center, Pioneer Valley Hospital and Santa Rosa
     Medical Center from Columbia/HCA  Healthcare Corporation for $38.5 million
     in  cash  and  in  exchange  for  the Company's  Elmwood  Medical  Center,
     Peninsula Medical Center and Halstead  Hospital.  Financial  statements of
     businesses  acquired  and  pro forma financial information as required  by
     Item 7 will be filed on Form 8-K/A no later than July 31, 1996.

  -  The Company filed on July 24, 1996 a Current Report on Form 8-K, dated May
     29, 1996, reporting pursuant  to  Item 5 thereof, the Amended and Restated
     Agreement and Plan of Merger, which amended and restated the Agreement and
     Plan of Merger, dated April 12, 1996,  among  the  Company,  Champion  and
     Merger Sub.

  -  The  Company filed on July 24, 1996 an Amendment No. 1 on Form 8-K/A to  a
     Current Report on Form 8-K, dated May 17, 1996, reporting pursuant to Item
     7  thereof,  the  historical  financial  statements for Davis Hospital and
     Medical Center, Pioneer Valley Hospital and  Santa Rosa Medical Center and
     the Company's pro forma financial statements for  the period through March
     31, 1996.

















<PAGE> 23




                                   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 11, 1997        By: ____________________________
                                       James G. VanDevender
                                   Senior Executive Vice President,
                                      Chief Financial Officer
                                           & Director