<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q

                                   (Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                  ACT OF 1934

                  For the Quarterly Period Ended March 31, 2001

                                       OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

            For the Transition Period from ___________ to ___________


                         Commission File Number: 0-17969
                                                ---------

                                NEXTHEALTH, INC.
                   ----------------------------------------
             (Exact Name of Registrant as Specified in its Charter)


             Delaware                                   86-0589712
--------------------------------           ------------------------------------
(State or Other Jurisdiction of            (I.R.S. Employer Identification No.)
Incorporation or Organization)


16600 N. Lago Del Oro Parkway, Tucson, Arizona                        85739
----------------------------------------------                    ------------
(Address of Principal Executive Offices)                          (Zip Code)


                                 (520) 818-5800
       --------------------------------------------------------------------
              (Registrant's Telephone Number, including Area Code)


                                      N/A
       --------------------------------------------------------------------
         (Former name, former address and former fiscal year, if changed
                               since last report).


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. [X] YES [_] NO

On May 1, 2001, there were 8,636,263 shares of the registrant's Common Stock
outstanding.

Reference is made to the listing beginning on page 15 of all exhibits filed as a
part of this report.

                                       1
<PAGE>

                               NEXTHEALTH, INC.
                                   FORM 10-Q
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
Part I - Financial Information                                                                          Page
------------------------------                                                                          ----
<S>                                                                                                     <C>
Item 1.   Financial Statements

          Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December
             31, 2000.............................................................................       3

          Unaudited Consolidated Statements of Operations for the three months ended
             March 31, 2001 and 2000 .............................................................       4

          Unaudited Consolidated Statements of Cash Flows for the three months ended
             March 31, 2001 and 2000 .............................................................       5

          Unaudited Consolidated Statements of Changes in Stockholders' Equity for the
             three months ended March 31, 2001 ...................................................       6

          Unaudited Notes to the Consolidated Financial Statements ...............................       7

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of
             Operations ..........................................................................       9


Part II - Other Information
---------------------------

Item 1.   Legal Proceedings ......................................................................      15

Item 4.   Submission of Matters to a Vote of Security Holders ....................................      15

Item 6.   Exhibits and Reports on Form 8-K .......................................................      15

Signatures .......................................................................................      16
</TABLE>

                                       2
<PAGE>

                        PART I - FINANCIAL INFORMATION
                        ------------------------------

ITEM 1.   FINANCIAL STATEMENTS

                       NEXTHEALTH, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                  (000s, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                       March 31,   December 31,
                                                                          2001         2000
                                                                      ----------   -----------
                                                                      (Unaudited)
<S>                                                                   <C>          <C>
ASSETS
------
  Current Assets:
    Cash and equivalents ...........................................   $ 14,660      $ 12,737
    Accounts receivable, less allowance for doubtful accounts
       of $315 and $368, respectively ..............................      1,154         1,467
    Prepaid expenses ...............................................        782           701
    Other current assets ...........................................        709           708
                                                                       --------      --------
         Total current assets ......................................     17,305        15,613

  Property and equipment, net ......................................     32,713        32,871
  Long-term receivables, less allowance for doubtful accounts
      of $22 and $21, respectively .................................         66            64
  Intangible assets, less amortization of $581 and $527,
      respectively..................................................        160           214
  Other assets .....................................................         22            22
                                                                       --------      --------

         Total assets ..............................................   $ 50,266      $ 48,784
                                                                       ========      ========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
  Current Liabilities:
    Accounts payable, trade ........................................   $  1,040      $  1,192
    Accrued expenses and other liabilities .........................      4,596         5,808
                                                                       --------      --------
         Total current liabilities .................................      5,636         7,000

Long-term debt and financing obligation ............................     12,552        12,587
                                                                       --------      --------
         Total liabilities .........................................     18,188        19,587

Minority interest ..................................................        591           547

  Stockholders' Equity:
    Preferred stock - undesignated, $.01 par value, 3,924,979
      shares authorized, no shares outstanding .....................         --            --
    Preferred stock, Series A, $.01 par value, 46,065 shares
      authorized; 46,065 shares outstanding at March 31, 2001
      and December 31, 2000 ........................................         --            --
    Common stock, $.01 par value, 16,000,000 shares authorized;
      8,636,263 shares outstanding at March 31, 2001 and
      8,623,513 shares outstanding at December 31, 2000 ............         86            86
    Additional paid-in capital .....................................     48,165        48,146
    Accumulated deficit ............................................    (16,764)      (19,582)
                                                                       --------      --------

         Total stockholders' equity ................................     31,487        28,650
                                                                       --------      --------

         Total liabilities and stockholders' equity ................   $ 50,266      $ 48,784
                                                                       ========      ========
</TABLE>

  The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       3
<PAGE>

                        NEXTHEALTH, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                   (000s, except share and per share amounts)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                 Three Months Ended
                                                       March 31,
                                            ----------------------------
                                                2001           2000
                                            ------------  --------------
<S>                                         <C>           <C>
Revenue:
   Net operating revenue ...............    $    11,854   $    10,708
   Other revenue .......................            190            62
                                            -----------   -----------

         Total net revenue .............         12,044        10,770

Operating expenses:
   Salaries and related benefits........          4,394         3,960
   General and administrative ..........          3,646         3,196
   Depreciation and amortization                    531           695
   Interest expense ....................            311           325
   Investment loss .....................            288          --
                                            -----------   -----------

         Total operating expenses.......          9,170         8,176
                                            -----------   -----------

Income before income taxes .............          2,874         2,594

Income tax provision ...................             56          --
                                            -----------   -----------

Net income .............................    $     2,818   $     2,594
                                            ===========   ===========

Shares used in basic per share
  calculation ..........................      8,636,263     8,586,238
                                            ===========   ===========

Shares used in diluted per share
  calculation ..........................     14,503,821    14,297,892
                                            ===========   ===========

Basic income per common
  share ................................    $       .33   $       .30
                                            ===========   ===========

Diluted income per common
  share ................................    $       .19   $       .18
                                            ===========   ===========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       4
<PAGE>

                        NEXTHEALTH, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                     (000s)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                  Three Months Ended
                                                                      March 31,
                                                                 --------------------
                                                                    2001       2000
                                                                 ---------   --------
<S>                                                              <C>         <C>
Cash flows from operating activities:
  Net income ................................................    $  2,818    $  2,594
  Adjustments to reconcile net income to cash
    provided by operating activities:
        Depreciation and amortization .......................         531         695
        Provision for bad debts .............................          18          22
        Provision for income taxes ..........................          56        --
        Minority Interest ...................................          44          36
Changes in operating assets and liabilities:
     Decrease (increase) in assets:
        Accounts receivable .................................         293        (133)
        Other assets ........................................        (117)       (202)
     (Decrease) increase in liabilities:
        Accounts payable, accrued expenses
          and other liabilities .............................      (1,431)        860
                                                                 --------    --------
Net cash provided by operating activities ...................       2,212       3,872

Cash flows from investing activities:
     Purchase of property and equipment .....................        (274)       (289)
                                                                 --------    --------
Net cash used in investing activities .......................        (274)       (289)

Cash flows from financing activities:
     Proceeds from sale of stock ............................          19          63
     Reduction of long-term borrowings and
        financing obligation ................................         (34)        (32)
                                                                 --------    --------
Net cash (used in) provided by financing activities..........         (15)         31
                                                                 --------    --------

Net increase in cash and
  equivalents ...............................................       1,923       3,614

Cash and equivalents at beginning of period .................      12,737       3,803
                                                                 --------    --------

Cash and equivalents at end of period .......................    $ 14,660    $  7,417
                                                                 ========    ========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       5
<PAGE>

                        NEXTHEALTH, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                          (000s, except share amounts)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                      Additional                   Total
                                    Common Stock       Paid-in    Accumulated  Stockholders'
                                  ----------------
                                  Cost      Shares     Capital     Deficit       Equity
                                  ----    --------    --------    ---------    ---------
<S>                              <C>      <C>         <C>         <C>          <C>
Balance at
 December 31, 2000               $   86   8,623,513   $  48,146   $ (19,582)   $  28,650

Sale of common stock               --        12,750          19        --             19

Net income for the
 three months ended
 March 31, 2001                    --          --          --         2,818        2,818
                                 ------   ---------   ---------   ---------    ---------

Balance at
 March 31, 2001                  $   86   8,636,263   $  48,165   $ (16,764)   $  31,487
                                 ======   =========   =========   =========    =========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       6
<PAGE>

                               NEXTHEALTH, INC.
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                    (000s)
                                  (Unaudited)

NOTE 1 - ORGANIZATION

NextHealth, Inc. and subsidiaries (collectively, the "Company") have operations
in two principal business segments; Treatment, and Health and Leisure through
which it provides both behavioral health care and wellness and preventive health
services. The Treatment segment includes Sierra Tucson, LLC ("Sierra Tucson"),
an inpatient, state licensed, special psychiatric hospital and behavioral health
care center providing treatment for substance abuse and a broad range of mental
health and behavioral disorders. The Health and Leisure segment, Sierra
Health-Styles, Inc. d/b/a Miraval ("Miraval"), is a luxury health resort and spa
which provides a unique vacation experience blending mindfulness, personal
growth and self-awareness programs with a full range of personal services and
recreational activities. The current operations of the Company are located in
Tucson, Arizona.

NOTE 2 - BASIS OF PRESENTATION

The unaudited consolidated financial statements presented herein should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K/A for the year ended
December 31, 2000. The accompanying interim consolidated financial statements as
of March 31, 2001 and for the three-month periods ended March 31, 2001 and 2000
included herein are unaudited, but reflect, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary to
fairly present the results for such periods. Operating results for the
three-month period ended March 31, 2001 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2001.

NOTE 3 - NEW PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities." This statement provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. In July 1999, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 137, which deferred the
effective date of FAS 133 for one year. In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 138, (FAS
138), "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment to FASB Statement No. 133." This statement amended
certain provisions of FAS 133. The Company adopted the provisions of FAS 133 in
the first quarter and there was no impact on the Company's financial position or
results.

NOTE 4 - NET INCOME PER SHARE

Shares used in the diluted per share calculation for the three-month periods
ending March 31, 2001 and 2000 are as stated below: March 31, 2001 March 31,
2000

                                               March 31, 2001   March 31, 2000
                                               --------------   --------------

            Common shares                          8,636,263        8,586,238
            Convertible preferred shares           4,606,500        4,606,500
            Dilutive warrants                        707,980          600,000
            Dilutive options                         553,078          505,154
                                                 ----------       -----------

            Diluted shares                        14,503,821       14,297,892
                                                 ===========      ===========

                                       7
<PAGE>

NOTE 5 - BUSINESS SEGMENT AND OTHER OPERATING DATA

The Company operates in two principal business segments; Treatment, and Health
and Leisure (the Segments) through which it provides both behavioral health care
and wellness and preventive health services. The Segments are located in and
derive all their revenues from their facilities in Tucson, Arizona. The
Treatment Segment is an inpatient, state licensed, special psychiatric hospital
and behavioral health care center providing treatment for substance abuse and a
broad range of mental health and behavioral disorders. Substantially all
revenues in this Segment result from inpatient charges, therapy, professional
fees, and pharmacy charges. The Health and Leisure Segment consists of a luxury
health resort and spa which provides a unique vacation experience blending
mindfulness, personal growth and self-awareness programs with a full range of
personal services and recreational activities. Substantially all revenues in
this Segment result from guest bookings, group bookings and retail sales of
goods and services.

Information about the Company's operations in different business segments for
the three-month periods ending March 31, 2001 and 2000 is as follows:

                                                      Corporate
                                           Health &      and
                                Treatment   Leisure  Other Items  Consolidated
                                ---------   -------  -----------  ------------
2001
-----------------------------
Total revenue ...............    $ 5,915    $ 6,114    $    15       $12,044
Income (loss) before
  income tax benefit ........      2,123      1,251      ( 500)        2,874
Identifiable assets .........     14,324     34,189      1,753        50,266
Capital expenditures ........         64        207          3           274
Depreciation & amortization
  expense ...................         94        433          4           531
Interest expense ............        199        112          0           311

2000
-----------------------------
Total revenue ...............    $ 5,119    $ 5,635    $    16       $10,770
Income (loss) before
  income tax benefit ........      1,921        934      ( 261)        2,594
Identifiable assets .........      8,707     32,698      1,961        43,366
Capital expenditures ........         45        244          0           289
Depreciation & amortization
  expense ...................         93        598          4           695
Interest expense ............        208        117          0           325

NOTE 6- INCOME TAXES

A provision for income taxes was recorded in the three-month period ended March
31, 2001 due to the existence of Alternative Minimum Tax (AMT) requirements. A
valuation allowance has been recorded to offset deferred tax assets which
principally consist of net operating loss carryforwards. The Company intends to
recognize the benefits of deferred tax assets as the net operating loss
carryforwards are utilized in the near term.

                                       8
<PAGE>

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

The following discussion and analysis relates to factors which have affected the
consolidated financial condition and results of operations of the Company for
the three-month period ended March 31, 2001. Reference should also be made to
the Company's unaudited consolidated financial statements and related notes
thereto included elsewhere in this document.

General
-------

NextHealth, Inc. is a leading provider of a broad range of alternative health
care services which focus on prevention and self care. For over fifteen years,
the Company has provided effective programs and services which address
individual wellness and quality-of-life issues through a whole person, mind-body
approach.

For the quarter ended March 31, 2001, the Treatment segment accounted for
approximately 49.1% of the Company's operating revenues and approximately 41.4%
of its operating expenses, while the Health and Leisure segment accounted for
approximately 50.8% of the Company's operating revenue and approximately 53.0%
of its operating expenses.

Material Changes in Financial Condition
---------------------------------------

Cash and equivalents for the quarter increased $1.9 million to $14.7 million or
15.1%. The increase is a result of cash flow from operating activities during
the period. See Consolidated Statements of Cash Flows for more information.

Material Changes in Results of Operations
-----------------------------------------

Three-month period ended March 31, 2001 compared to three-month period ended
March 31, 2000

The significant changes in results of operations and net cash provided by
operating activities for the three-month period ended March 31, 2001, compared
to the same period in 2000 are discussed below.

<TABLE>
<CAPTION>
                                                              Three Months Ended
                                                                    March 31,
                                                       ---------------------------------
                                                         2001       2000       % Change
                                                       -------     -------    ----------
<S>                                                    <C>         <C>        <C>
Financial results: (000s, except per share amounts)
  Total net revenue ...............................     $12,044    $10,770       11.8 %
  Total operating expenses ........................       9,170      8,176       12.2
  Income before income taxes ......................       2,874      2,594       10.8
  Basic income per common share ...................         .33        .30       10.0
  Diluted income per common share .................         .19        .18        5.6
  Net cash provided by operating activities .......       2,212      3,872      (42.9)
Operating data:
  Patient days - Sierra Tucson ....................       6,223      5,658       10.0
  Average daily census - Sierra Tucson ............          69         62       11.3
  Guest days - Miraval ............................       9,746      9,770      ( 0.3)
  Room occupancy - Miraval ........................          68%        68%       0.0
</TABLE>

                                       9
<PAGE>

For the three-month period ended March 31, 2001, net income before income taxes
increased $280,000 to $2.9 million or 10.8% over the comparable quarter of 2000.
Net cash provided by operating activities decreased 42.9% resulting in net cash
provided by operating activities of $2.2 million compared to the same period in
2000. Cash flow was affected by payment of a deposit of $1.6 million for
preliminary settlement of the 1994 IRS audit.

Total net revenue increased $1.3 million to $12.0 million, an increase of 11.8%
when compared to the same period in 2000. Results reflect an 8.5% revenue
increase at Miraval and a 15.9% revenue increase at Sierra Tucson, when compared
to the corresponding quarter of 2000.

Salaries and related benefits decreased 0.3% as a percentage of revenue during
the period. Salaries and related benefits increased $434,000 to $4.4 million,
when compared to the same period in 2000. The increase was primarily
attributable to staffing adjustments related to increased census at Sierra
Tucson.

General and administrative expense increased 0.6% as a percentage of revenue
during the first quarter of 2001. General and administrative expense increased
$450,000 to $3.6 million, an increase of 14.1% when compared to the same period
in 2000. The increase was attributable to corporate expenses related to
exploration of strategic alternatives for the Company as directed by the special
committee appointed by the Company's board of directors, and to increased
consulting charges at Miraval.

Interest expense decreased $14,000 to $311,000 or 4.3% when compared to first
quarter 2000. The decrease reflects the more favorable interest rate on the loan
outstanding in the first quarter 2001 compared to the rate charged in the
corresponding quarter of 2000.

The Company incurred a $288,000 loss on investments during the quarter.

The Company recognized pre-tax income of $2.9 million for the three-month period
ended March 31, 2001. A $56,000 provision for income taxes was recorded during
this period due to the existence of Alternative Minimum Tax (AMT) requirements.
A valuation allowance has been recorded to offset deferred tax assets which
principally consist of net operating loss carryforwards. The Company intends to
recognize the benefits of deferred tax assets as the net operating loss
carryforwards are utilized. However, management will continue to evaluate the
necessity of maintaining the valuation allowance in light of the Company's
profitability results for 2000 and expectations for 2001 and 2002. The
continuation of such positive trends in profitability could allow management to
appropriately reduce the valuation allowance significantly and result in the
recognition of deferred tax assets on the balance sheet perhaps in the latter
part of 2001.

Liquidity and Capital Resources
--------------------------------

Net cash provided by the Treatment segment's operating activities is primarily
affected by census levels and net revenue per patient day. This segment
contributed positive cash flow to the Company's operations during the
three-month period ended March 31, 2001. During this period, 48% of patient
revenue was derived from retail payments and the remaining 52% from insurance,
contracts and other third party payors. Based on current census levels and
operating expenses, Sierra Tucson believes that it will generate adequate cash
flows to sustain the Treatment segment's ongoing operational requirements and to
fund anticipated capital projects. Effective May 1, 2001, Sierra Tucson
instituted a rate increase in some of its treatment programs.

The Company currently leases the Sierra Tucson buildings from a related party,
ODE, L.L.C. The Company amended its lease ("Building Lease") with ODE for the
buildings to provide for a lease term which, when combined with successive
10-year option renewals ("Renewal Options"), will be of the same duration as the
State Land Lease. The annual rent for the buildings is subject to an increase
for the term of each subsequent Renewal Option (if exercised) based upon or
determined by independent appraisal. The first Renewal Option commenced in March
2001, and the annual rent increased to an agreed upon fair market rental of
$500,000 plus an annual increase based on the Consumer Price Index, not to
exceed 3% per annum.

                                       10
<PAGE>

Results in the Health and Leisure segment are primarily affected by room
occupancy and average daily rate in addition to expense management. During first
quarter 2001, Miraval's room occupancy rate was approximately 68%, and this
segment also contributed positive cash flow to the Company's operations during
the quarter. Based on near-term future bookings, management believes that
Miraval may experience some impact from the general economic downturn.

For the three-month period ended March 31, 2001, the Company had capital
expenditures of approximately $274,000. At March 31, 2001, the Company's cash
and equivalents were $14.7 million.

The Company adopted the provisions of FAS 133 in the first quarter and there was
no impact on the Company's financial position or results. (See Note 3 in Notes
to the Consolidated Financial Statements.)

Management believes that funds from operations will provide the cash necessary
to meet its short-term capital needs. The $1.7 million capital improvement
reserve funds from the Lehman transaction are also available if needed. The
Company must continue to focus on revenue growth and expense controls in order
to preserve and improve its liquidity position. Insufficient occupancy levels at
Miraval or any significant decrease in Sierra Tucson's patient levels would
adversely affect the Company's financial position, results of operations and
cash flows.

Business Outlook
----------------

In the Treatment segment (Sierra Tucson), particular emphasis will be placed on
increasing awareness of Sierra Tucson's innovative treatment programs through a
combination of focused advertising, direct mail, field sales, conference
sponsorships and outbound telemarketing campaigns. In addition to continuing its
traditional marketing efforts to the referent therapist community and alumni,
Sierra Tucson will participate in various conferences and professional boards
and organizations. Marketing field representatives will continue their efforts
to enhance Sierra Tucson's national exposure and to increase the number of
prospective patients.

Clinically, Sierra Tucson continually strives to refine its programs. In
response to census increases, staffing adjustments have been made to ensure high
staff to patient ratios and to further enhance the quality of the treatment
experience. Sierra Tucson continues to incorporate new credible therapeutic
techniques, and based on a trend of higher acuity, assessment tools for higher
risk patients have been enhanced, ensuring a better clinical match.

In July 1998, the Company relocated the Sierra Tucson operations to the
facilities previously used by the Company's adolescent care unit (which ceased
operations in 1993). The facilities are located on state leased land, and in
October 1998, the Company entered into a 50-year Commercial Land Lease Agreement
for the property with the Arizona State Land Department. In 1999, the Company
expanded the Sierra Tucson facilities through the addition of space for 16
additional beds as well as additional administrative offices. In 2000,
construction was completed on a 4,220 square foot wing named Desert Oasis. The
new area houses group rooms and medical records as well as staff offices. In
addition, Sierra Tucson also renovated and updated its fitness center in 2000.
Effective May 1, 2001, Sierra Tucson instituted a rate increase in some of its
treatment programs.

The Company currently leases the Sierra Tucson buildings from a related party,
ODE, L.L.C. The Company amended its lease ("Building Lease") with ODE for the
Buildings to provide for a lease term which, when combined with successive
10-year option renewals ("Renewal Options"), will be of the same duration as the
State Land Lease. The annual rent for the Buildings is subject to an increase
for the term of each subsequent Renewal Option (if exercised) based upon or
determined by independent appraisal. The first Renewal Option commenced in
March, 2001 and the annual rent increased to an agreed upon fair market rental
of $500,000 plus an annual increase based on the Consumer Price Index, not to
exceed 3% per annum.

                                       11
<PAGE>

Miraval, the Company's health resort and spa, will continue its focused sales
efforts in targeted cities in 2001 and will also continue to build national
awareness by capitalizing on the media support received in 2000. In November
2000, Miraval was rated the Top Spa in the Zagat Survey 2001 Top U.S. Hotels,
Resorts & Spas. Miraval received a rating of 29 out of a possible 30 in the
Zagat Survey rating system and was thus named the top stand-alone spa in the
United States. In September 2000, Miraval was named the #2 Best Spa in America
in Travel and Leisure's readers' poll. In November 1999, Miraval was voted the
#1 Spa in the World in the Conde Nast Traveler's Readers' Poll, ahead of such
competitors as Canyon Ranch, the Lodge at Skylonda, Rancho La Puerta and Golden
Door. As part of the same poll, Miraval was ranked Number 29 in the "Best of the
Best" among a world-wide combination of resorts, hotels, cruise lines, islands,
monuments, spas and cities. Of the U.S. facilities listed in the "Best of the
Best", Miraval was the third highest.

Miraval's affiliations with American Express Platinum and Virtuoso have proved
to be very successful and the relationships will continue in 2001. In addition,
Miraval has established itself with top corporate meeting planners and incentive
houses. Miraval's advertising campaign has remained solid and benefits have been
realized from sending a consistent message to the public. In addition to
developing relationships with online travel companies, Miraval has launched its
new web site which was developed to maximize and enhance their presence on the
world-wide web.

In 2001, Miraval will continue to focus on improving visibility in the local
market by attending charitable, convention and Chamber of Commerce events. In
addition, specialty programs will be evaluated in an effort to improve occupancy
during summer and shoulder seasons. Based on near-term future bookings,
management believes that Miraval may experience some impact from the general
economic downturn.

Zoning for the property currently occupied by Miraval and the property which is
located to the north of Miraval permits a total of 356 resort hotel rooms and up
to 226 residential units.

As indicated below under the heading "Factors That May Affect Future Results",
the Company has entered into a merger agreement with an entity controlled by
certain members of management that, if completed, would result in the Company
becoming privately held.

Factors That May Affect Future Results
--------------------------------------

Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward looking statements regarding plans and expectations
for the future. Statements looking forward in time are included pursuant to the
"safe harbor" provision of the Private Securities Litigation Reform Act of 1995.
These statements are based on the Company's current expectations or beliefs and
are subject to a number of factors and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. The factors that could cause actual results to differ materially
from those described in the forward-looking statements include: the failure of
the Company's stockholders to approve the merger, and other reasons that could
cause the Merger Agreement (as defined below) to terminate in accordance with
its terms (including Anam's (as defined below) inability to complete the
financing for the merger); competition from other resort hotel/spas and/or
behavioral health facilities; seasonality; or an economic downturn that could
limit leisure activity spending. Further, the Company operates in an industry
sector where securities values may be volatile and may be influenced by economic
and other factors beyond the Company's control. In the context of the forward-
looking information provided in this report, please refer to the discussion of
Factors That May Affect Future Results detailed in the Management's Discussion
and Analysis of Financial Condition and Results of Operations included in the
Company's annual report on Form 10-K, as amended, for the year ended December
31, 2000, and the current report on Form 8-K dated April 18, 2001.

The information below should be read in conjunction with the Company's unaudited
consolidated financial statements and related notes thereto included elsewhere
and in other portions of this document.

In addition, the following other factors could cause actual results and
conditions relating to liquidity and capital resources to differ materially.

                                       12
<PAGE>

The Company's Treatment segment participates in the highly competitive mental
and behavioral health industry, and faces competition for market share resulting
from aggressive pricing practices and increasing competition from companies with
greater resources. Some of these competitors have tax exempt, non-profit status,
are government subsidized or have endowment-related financial support which may
provide lower costs of capital.

Sierra Tucson's operations are accredited by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO"). JCAHO accreditation is
important to the operations of Sierra Tucson since most insurance companies
require such accreditation in order for the treatment of patients to qualify for
insurance payment or reimbursement. If Sierra Tucson were unable to maintain its
JCAHO accreditation, its business would be adversely affected. In May 1999,
Sierra Tucson successfully completed its JCAHO review by receiving accreditation
with commendation. The next scheduled review by JCAHO will be in May 2002.

The Sierra Tucson buildings are currently leased from a related party, ODE,
L.L.C. The Company amended its building lease with ODE to provide for a lease
term which, when combined with successive 10-year option renewals ("Renewal
Options"), will be of the same duration as the State Land Lease. The annual rent
for the buildings is subject to an increase for the term of each subsequent
Renewal Option (if exercised) based upon or determined by independent appraisal.
The first Renewal Option commenced in March 2001, and the annual rent increased
to an agreed upon fair market rental of $500,000 plus an annual increase based
on the Consumer Price Index, not to exceed 3% per annum.

Miraval's unique blending of luxury resort recreational activities with stress
management and self-awareness programs clearly differentiates it from the spas
with which it competes. Because Miraval represents a benchmark for the new and
growing trend in hospitality for lifestyle enhancing products, market data in
this niche cannot easily be ascertained. Due to Miraval's relatively short
history and the uniqueness of its programs and services, the Company cannot
project with a high degree of accuracy the future levels of occupancy or
revenue. While the Company believes that there is strong consumer demand for
Miraval's products and services, the historical data does not exist in this
niche to be certain the demand will continue.

While management believes that Miraval occupies a unique market niche, it
nevertheless competes in the resort hotel/spa industry. Currently, its
competitors have greater name recognition as well as long-standing relationships
with travel agents and meeting planners. Market share must be obtained from
competitors and from introducing new customers to the benefits of the Miraval
product. Longevity in the marketplace plays a key role in attaining credibility
in this highly competitive field. Management cannot anticipate what impact this
will have on future occupancy levels.

While the Company anticipates continued growth in revenues and is committed to
increased profitability, operating results could be adversely impacted if the
business is unable to accurately anticipate customer demand, is unable to
differentiate its products from those of its competitors, is unable to offer
services expeditiously in response to customer demand, is negatively impacted by
an economic downturn that could limit leisure activity spending, or is further
impacted by managed care restrictions on payor reimbursement.

On April 16, 2001, NextHealth, Inc. (the "Company") entered into an Agrement and
Plan of Merger (the "Merger Agreement") with Anam LLC, a Delaware limited
liability company ("Anam"), and NHI Acquisition Corp., a Delaware corporation
("NHI") and a wholly owned subsidiary of Anam. Anam is controlled by William T.
O'Donnell, Jr., the Company's Chairman and Chief Executive Officer, and George
L. Ruff, a Director of the Company, pursuant to which NHI will be merged with
and into the Company (the "Merger"). The Company's stockholders (other than Anam
and its subsidiaries) will receive cash in the amount of $5.65 per share of
outstanding common stock (including shares of common stock issuable upon
conversion of outstanding preferred stock). In addition, all unexercised Company
employee and director options and outstanding warrants will be converted into a
right to receive cash in the amount of $5.65 (less the applicable exercise
price) for each share of common stock issuable upon the exercise of such options
and warrants.

                                       13
<PAGE>

The Company's Board of Directors unanimously approved the Merger Agreement and
the transactions contemplated thereby based upon the unanimous recommendation of
a Special Committee of the Board and the receipt of an opinion from Prudential
Securities Incorporated that the Merger consideration to be received by the
Company's stockholders pursuant to the Merger Agreement is fair to such
stockholders (other than Anam and its controlling affiliates) from a financial
point of view. The Special Committee of the Board is composed exclusively of
directors with no financial interest in the Merger that is different from the
interests of the Company's stockholders generally.

Consummation of the Merger is subject to certain conditions, including the
approval of the Merger, the Merger Agreement and the transactions contemplated
thereby by the Company's stockholders, the receipt of required regulatory
approvals and the completion of Anam's financing for the Merger. The Merger
Agreement also contains customary non-solicitation provisions and termination
fee provisions. Consistent with its fiduciary duties and subject to the terms of
the Merger Agreement, the Company's Board of Directors has reserved its ability
to respond to third parties where appropriate. Assuming Anam obtains the
necessary financing and that all required regulatory approvals have been
received, the Company expects to hold a meeting of its stockholders to vote on
the Merger in the third quarter of this year and, if approved by the Company's
stockholders, the closing of the Merger is expected to occur shortly thereafter,
subject to the satisfaction of the other terms and conditions set forth in the
Merger Agreement.

Anam has deposited a letter of credit in the amount of $2,500,000 into an escrow
account as security for the performance of its obligations under the Merger
Agreement. Anam is required to deposit in the escrow account a letter of credit
in the additional amount of $500,000 when Anam has been notified by the Company
that the Securities and Exchange Commission ("SEC") has no further comment on
the Company's proxy material and related Schedule 13E-3 filed in connection with
the Merger. Anam is also required to furnish the Company with a term sheet and
other evidence that it has a commitment for debt financing in the principal
amount of at least $40 million on or before June 16, 2001; although Anam can
extend this date by 30 days by depositing an additional $1,000,000 in escrow.

In the event the Company accepts a third party offer or the Merger Agreement is
terminated following the occurrence of certain other events set forth in the
Merger Agreement, Anam will be entitled to receive payments in an aggregate
amount of up to $2,400,000 and the return of its deposit.

A copy of the Merger Agreement was attached to the Company's Form 8-K dated and
filed with the SEC on April 18, 2001. The foregoing description of the Merger
Agreement, and the transactions contemplated thereby, do not purport to be
complete and is qualified in its entirety by reference to the full text thereof.

A proxy statement will be filed by the Company with the SEC in connection with a
meeting of the Company's stockholders to be held for the purpose of voting on
the Merger and, because the transaction will be subject to the "going private"
regulations of the SEC, a Schedule 13E-3 will also be filed. A proxy statement
will be mailed to each stockholder with notice of the stockholder meeting to be
held for the purpose of voting upon the Merger, the Merger Agreement and the
transactions contemplated thereby.

                                       14
<PAGE>

                          PART II - OTHER INFORMATION
                          ---------------------------


ITEM 1.  LEGAL PROCEEDINGS

The Company is involved in various litigation and administrative proceedings
arising in the normal course of business. In the opinion of management, any
liabilities that may result from these claims will not, individually or in the
aggregate, have a material adverse effect on the Company's financial position,
results of operations or cash flows.

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

         NONE

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits
              --------

              NONE

         (b)  Reports on Form 8-K
              -------------------
              Form 8-K dated April 18, 2001

                                       15
<PAGE>

                                  SIGNATURES

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

                                   NextHealth, Inc.
                                   --------------------------------------
                                   Registrant



DATE: May 14, 2001                 BY: /s/ William T. O'Donnell, Jr.
                                       ----------------------------------
                                   WILLIAM T. O'DONNELL, JR.
                                   President and Chief Executive Officer



DATE: May 14, 2001                 BY: /s/ Loree Thompson
                                       ----------------------------------
                                   LOREE THOMPSON
                                   Chief Financial Officer

                                       16