<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 September 30, 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)
<TABLE>
<CAPTION>
<S>                                                               <C>


            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)

</TABLE>

                                 (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 November 5, 2001, there were 8,642,914 shares of the registrant's Common
Stock outstanding.

Reference is made to the listing beginning on page 18 of all exhibits filed as a
part of this report.


<PAGE>
<TABLE>
<CAPTION>

                                                  NEXTHEALTH, INC.
                                                      FORM 10-Q

                                                  TABLE OF CONTENTS

Part I - Financial Information                                                                                 Page
------------------------------                                                                                 ----
<S>                                                                                                            <C>

Item 1.   Financial Statements

          Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December
             31, 2000 ........................................................................................  3

          Unaudited Consolidated Statements of Operations for the three and nine-month
             periods ended September 30, 2001 and 2000 .......................................................  4

          Unaudited Consolidated Statements of Cash Flows for the nine-month periods
             ended September 30, 2001 and 2000 ...............................................................  5

          Unaudited Consolidated Statements of Changes in Stockholders' Equity for the
             nine-month period ended September 30, 2001 ......................................................  6

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

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of
             Operations ...................................................................................... 10


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

Item 1.   Legal Proceedings .................................................................................. 18

Item 4.   Submission of Matters to a Vote of Security Holders ................................................ 18

Item 6.   Exhibits and Reports on Form 8-K ................................................................... 18

Signatures ................................................................................................... 19


</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>

                                                                       September 30     December 31,
                                                                           2001            2000
                                                                       ------------     -----------
                                                                        (Unaudited)
<S>                                                                    <C>                <C>
ASSETS
------
  Current Assets:
    Cash and equivalents ...........................................   $  5,546           $ 12,737
    Accounts receivable, less allowance for doubtful accounts
       of $367 and $368, respectively ..............................        964              1,467
    Prepaid expenses ...............................................      1,152                701
    Other current assets ...........................................        645                708
                                                                       --------           --------
         Total current assets ......................................      8,307             15,613

  Property and equipment, net ......................................     32,193             32,871
  Long-term receivables, less allowance for doubtful accounts
      of $13 and $21, respectively .................................         40                 64
  Intangible assets, less amortization of $45 and $527, respectively         69                214
  Other assets .....................................................         22                 22
                                                                       --------           --------
         Total assets ..............................................   $ 40,631           $ 48,784
                                                                       ========           ========

LIABILITIES AND STOCKHOLDERS' EQUITY
  Current Liabilities:
    Accounts payable, trade ........................................   $  1,059           $  1,192
    Accrued expenses and other liabilities .........................      3,849              5,808
                                                                       --------           --------
             Total current liabilities .............................      4,908              7,000

Long-term debt and financing obligation ............................        194             12,587
                                                                       --------           --------
         Total liabilities .........................................      5,099             19,587
Minority interest ..................................................        679                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 September 30, 2001
      and December 31, 2000 ........................................         --                 --
    Common stock, $.01 par value, 16,000,000 shares authorized;
      8,638,888 shares outstanding at September 30, 2001 and
      8,623,513 shares outstanding at December 31, 2000 ............         86                 86
    Additional paid-in capital .....................................     48,168             48,146
    Accumulated deficit ............................................    (13,404)           (19,582)
                                                                       --------           --------

         Total stockholders' equity ................................     34,850             28,650
                                                                       --------           --------
         Total liabilities and stockholders' equity ................   $ 40,631           $ 48,784
                                                                       ========           ========

 The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                       3

<PAGE>

                        NEXTHEALTH, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                   (000s, except share and per share amounts)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                         Three Months Ended             Nine Months Ended
                                                                            September 30,                 September 30,
                                                                      --------------------------   -------------------------
                                                                           2001         2000           2001          2000
                                                                       -----------   -----------   -----------   -----------
<S>                                                                    <C>           <C>           <C>           <C>
Revenue:
   Net operating revenue ...........................................   $     9,786   $     9,280   $    32,303   $    30,425
   Other revenue ...................................................            38           123           439           266
                                                                       -----------   -----------   -----------   -----------
         Total net revenue .........................................         9,824         9,403        32,742        30,691

Operating expenses:
   Salaries and related benefits ...................................         4,305         4,212        13,194        12,130
   General and administrative ......................................         3,395         3,240        10,760         9,707
   Depreciation and amortization ...................................           484           707         1,597         2,106
   Interest expense ................................................            12           340           599           998
   Investment loss .................................................          --            --             288          --
                                                                       -----------   -----------   -----------   -----------
         Total operating expenses ..................................         8,196         8,499        26,438        24,941
                                                                       -----------   -----------   -----------   -----------

Income before income taxes .........................................         1,628           904         6,304         5,750
Income tax provision ...............................................            38            18           126           115
                                                                       -----------   -----------   -----------   -----------
Net income .........................................................   $     1,590   $       886   $     6,178   $     5,635
                                                                       ===========   ===========   ===========   ===========
Shares used in basic per share
  calculation ......................................................     8,638,888     8,619,488     8,638,888     8,619,488
                                                                       ===========   ===========   ===========   ===========
Shares used in diluted per share
  calculation ......................................................    14,549,351    13,986,059    14,535,360    13,839,388
                                                                       ===========   ===========   ===========   ===========
Basic income per common
  share ............................................................   $       .18   $       .10   $       .72   $       .65
                                                                       ===========   ===========   ===========   ===========
Diluted income per common
  share ............................................................   $       .11   $       .06   $       .43   $       .41
                                                                       ===========   ===========   ===========   ===========

 The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                       4

<PAGE>

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


                                                                Nine Months Ended
                                                                   September 30,
                                                          ----------------------------
                                                              2001           2000
                                                          ------------   -------------
<S>                                                        <C>             <C>
Cash flows from operating activities:

  Net income ...........................................   $  6,178        $  5,635
  Adjustments to reconcile net income to cash
    provided by operating activities:
        Depreciation and amortization ..................      1,597           2,106
        Provision for bad debts ........................        185             174
        Provision for income tax .......................         --              25
        Minority Interest ..............................        132             125
        Charge for non-employee options ................         --               4
Changes in operating assets and liabilities:
     Decrease (increase) in assets:
        Accounts receivable ............................        342            (317)
        Other assets ...................................       (387)           (415)
     Decrease in liabilities:
        Accounts payable, accrued expenses
          and other liabilities ........................     (2,123)          1,239
                                                           --------        --------
Net cash provided by operating activities ..............      5,924           8,576

Cash flows from investing activities:

     Purchase of property and equipment ................       (742)           (848)
                                                           --------        --------
Net cash used in investing activities ..................       (742)           (848)
Cash flows from financing activities:
     Proceeds from sale of stock .......................         22             120
     Reduction of long-term borrowings and
        financing obligation ...........................    (12,395)            (95)
                                                           --------        --------
Net cash (used in) provided by financing activities ....    (12,373)             25
                                                           --------        --------

Net (decrease) increase in cash and
  equivalents ..........................................     (7,191)          7,753

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

Cash and equivalents at end of period ..................   $  5,546        $ 11,556
                                                           ========        ========


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


</TABLE>


                                       5

<PAGE>

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

<TABLE>
<CAPTION>

                                              Common Stock       Additional                 Total
                                          ---------------------    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                             --      15,375          22          --           22

Net income for the
 nine months ended
 September 30, 2001                              --          --          --       6,178        6,178
                                          ---------   ---------   ---------   ---------    ---------
Balance at
 September 30, 2001                       $      86   8,638,888   $  48,168   $ (13,404)   $  34,850
                                          =========   =========   =========   =========    =========


 The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                       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 September 30, 2001 and for the three and nine-month periods ended September
30, 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 and nine-month periods ended September 30, 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 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill (and intangible assets deemed
to have indefinite lives) will no longer be amortized but will be subject to
annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. The Company does
not anticipate these statements to have a material impact on the Company's
financials.

NOTE 4 - NET INCOME PER SHARE

Shares used in the diluted per share calculation for the three and nine-month
periods ending September 30, 2001 and 2000 are as stated below:

<TABLE>
<CAPTION>
                                  Three-month period          Nine-month period
                                  ended September 30,        ended September 30,
                                ----------------------    ----------------------
                                   2001        2000          2001        2000
                                ---------   ----------    ---------   ----------
<S>                             <C>          <C>          <C>          <C>
Common shares                   8,638,888    8,619,488    8,638,888    8,619,488
Convertible preferred shares    4,606,500    4,606,500    4,606,500    4,606,500
Dilutive options                  585,268      415,029      574,398      319,418
Dilutive warrants                 718,695      345,042      715,574      293,982
                               ----------   ----------   ----------   ----------

Diluted shares                 14,549,351   13,986,059   14,535,360   13,839,388
                               ==========   ==========   ==========   ==========

</TABLE>




                                       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 and nine-month periods ending September 30, 2001 and 2000 is as
follows:

<TABLE>
<CAPTION>

                                                             Corporate
                                                                and
                                                   Health &    Other
                                      Treatment    Leisure     Items   Consolidated
                                      ---------    --------  --------- ------------
<S>                                   <C>          <C>       <C>       <C>
Three-month period ended
September 30, 2001
---------------------------

Total revenue                          $  6,254      $ 3,567    $    3  $  9,824
Income (loss) before
  income tax expense                      2,591         (660)   (  303)    1,628
Identifiable assets                       8,491       28,862     3,278    40,631
Capital expenditures                         53          126         0       179
Depreciation & amortization
  expense                                    63          417         4       484
Interest expense                              9            2         1        12

Nine-month period ended
September 30, 2001
---------------------------

Total revenue                           $18,187      $14,530    $   25   $32,742
Income (loss) before
  income tax expense                      6,812        1,033    (1,541)    6,304
Identifiable assets                       8,491       28,862     3,278    40,631
Capital expenditures                        272          467         3       742
Depreciation & amortization
  expense                                   277        1,307        13     1,597
Interest expense                            384          214         1       599

Three-month period ended
September 30, 2000
---------------------------

Total revenue                           $ 5,547    $   3,845    $   11  $  9,403
Income (loss) before
  income tax expense                      2,038         (731)     (403)      904
Identifiable assets                      12,510       32,361     2,048    46,919
Capital expenditures                        237          106         1       344
Depreciation & amortization
  expense                                    96          607         4       707
Interest expense                            217          123         0       340
</TABLE>



                                       8

<PAGE>
<TABLE>
<CAPTION>
                                                              Corporate
                                                                 and
                                                    Health &    Other
                                    Treatment       Leisure     Items   Consolidated
                                    ---------       --------  --------- -------------
<S>                                 <C>             <C>       <C>       <C>
Nine-month period ended
September 30, 2000
---------------------------

Total revenue                         $16,297        $ 14,359   $   35  $ 30,691
Income (loss) before
  income tax expense                    6,319             444   (1,013)    5,750
Identifiable assets                    12,510          32,361    2,048    46,919
Capital expenditures                      427             420        1       848
Depreciation & amortization
  expense                                 284           1,810       12     2,106
Interest expense                          637             359        2       998
</TABLE>

NOTE 6- INCOME TAXES

A provision for income taxes was recorded in the three and nine-month periods
ended September 30, 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.

                                       9

<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 and nine-month periods ended September 30, 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 September 30, 2001, the Treatment segment accounted for
approximately 64% of the Company's operating revenues and approximately 45% of
its operating expenses, while the Health and Leisure segment accounted for
approximately 36% of the Company's operating revenue and approximately 52% of
its operating expenses.

Material Changes in Financial Condition

Cash and equivalents for the quarter decreased $7.2 million to $5.5 million or
57%. The decrease is a result of the retirement of the outstanding indebtedness
to Lehman Brothers Holdings Inc. and partially offset by earnings from
operations. See Consolidated Statements of Cash Flows for more information.

Material Changes in Results of Operations

Three-month period ended September 30, 2001 compared to three-month period ended
September 30, 2000

The significant changes in results of operations and net cash provided by
operating activities for the three-month period ended September 30, 2001,
compared to the same period in 2000 are discussed below.

<TABLE>
<CAPTION>

                                                                                    Three Months Ended
                                                                                        September 30,
                                                                  -------------------------------------------------------
                                                                         2001                2000           % Change
                                                                  ---------------      ----------------   ---------------
<S>                                                               <C>                  <C>                <C>
Financial results: (000s, except per share amounts)
  Total net revenue                                              $    9,824           $   9,403               4.5 %
  Total operating expenses                                            8,196               8,499           (   3.6)
  Income before income taxes                                          1,628                 904              80.1
  Basic income per common share                                         .18                 .10              80.0
  Diluted income per common share                                       .11                 .06              83.3
  Net cash provided by operating activities                           2,056               2,583           (  20.4)
Operating data:

  Patient days - Sierra Tucson                                        6,193               5,826               6.3
  Average daily census - Sierra Tucson                                   67                  63               6.3
  Guest days - Miraval                                                8,958              10,133            ( 11.6)
  Room occupancy - Miraval                                               62%                 68%           (  8.8)

</TABLE>


                                       10

<PAGE>

For the three-month period ended September 30, 2001, net income before income
taxes increased $724,000 to $1.6 million or 80.1% when compared to third quarter
of 2000. Net cash provided by operating activities decreased 20.4% resulting in
net cash provided by operating activities of $2.1 million compared to the same
period in 2000.

Total net revenue increased 4.5% to $9.8 million, an increase of $421,000 when
compared to the same period in 2000. Results reflect a 12.9% revenue increase at
Sierra Tucson and a 7.2% revenue decrease at Miraval, when compared to the
corresponding quarter of 2000.

Salaries and related benefits decreased 1% as a percentage of revenue during the
quarter. Salaries and related benefits increased $93,000 to $4.3 million, a 2.2%
increase over the comparable period in 2000. The increase was primarily
attributable to staffing changes in the patient care areas at Sierra Tucson.

General and administrative expense increased $155,000 to $3.4 million, an
increase of 4.8% when compared to the same period in 2000. The increase was
primarily related to cost of sales expenses and additional lease expense.

Interest expense decreased $328,000 to $12,000 or 96.5% when compared to second
quarter 2000. The decrease was a result of the retirement of the outstanding
indebtedness to Lehman Brothers Holdings Inc. in July 2001.

The Company recognized pre-tax income of $1.6 million for the three-month period
ended September 30, 2001. A $38,000 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.

Nine-month period ended September 30, 2001 compared to nine-month period ended
September 30, 2000

The significant changes in results of operations and net cash provided by
operating activities for the nine-month period ended September 30, 2001,
compared to the same period in 2000 are discussed below.

<TABLE>
<CAPTION>
                                                                              Nine Months Ended
                                                                                 September 30,
                                                                 -----------------------------------------------
                                                                    2001             2000           % Change
                                                                 ----------       ----------      --------------
<S>                                                              <C>              <C>             <C>
Financial results: (000's except per share amounts)
  Total net revenue                                               $ 32,742         $ 30,691            6.7 %
  Total operating expenses                                          26,438           24,941            6.0
  Income before income taxes                                         6,304            5,750            9.6
  Basic income per common share                                       0.72             0.65           10.8
  Diluted income per common share                                     0.43             0.41            4.9
  Net cash provided by operating activities                          5,924            8,576          (30.9)
Operating data:

  Patient days - Sierra Tucson                                      18,640           17,405            7.1
  Average daily census - Sierra Tucson                                  68               64            6.3
  Guest days - Miraval                                              27,549            29,427        (  6.4)
  Room occupancy - Miraval                                              63%              68%        (  7.4)
</TABLE>

For the nine-month period ended September 30, 2001, net income before income
taxes increased 9.6% to $6.3 million compared to $5.8 million for the same
period of 2000. Net cash provided by operating activities

                                       11

<PAGE>

decreased to $5.9 million compared to $8.6 million for the nine-month period of
2000. Cash flow was affected by the first quarter 2001 payment of a deposit of
$1.6 million for preliminary settlement of the 1994 IRS Audit.

Total net revenue for the nine-month period ended September 30, 2001 increased
$2.1 million or 6.7% to $32.7 million when compared to the same period of 2000.
The increase is attributable to an 11.8% revenue increase at Sierra Tucson and a
1.2% revenue increase at Miraval.

Salaries and related benefits increased 1% as a percentage of revenue during the
nine-month period. Salaries and related benefits increased $1.1 million to $13.2
million or 8.8% when compared to 2000. The increase is due primarily to staffing
changes in the patient care areas at Sierra Tucson.

General and administrative expense decreased 0.7% as a percentage of revenue
during the nine-month period ended September 30, 2001. General and
administrative expense increased $436,000 or 4.5% to $10.1 million when compared
to the same period of 2000. Included in corporate general and administrative
expenses is $617,000 in costs associated with the proposed merger transaction.
Additional merger-related expenses incurred following the Company's acceptance
of the April 16, 2001 Agreement and Plan of Merger have been deferred.

Interest expense decreased $399,000 to $599,000 or 40% when compared to the
previous year. The decrease resulted from retirement of the outstanding
indebtedness to Lehman Brothers Holdings Inc. in July 2001.

The Company recognized pre-tax income of $6.3 million for the nine-month period
ended September 30, 2001. A $126,000 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.

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 and
nine-month periods ended September 30, 2001. During the three-month period ended
September 30, 2001, 46% of patient revenue was derived from retail payments and
the remaining 54% 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 for the property on which the buildings are located. 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.

Results in the Health and Leisure segment are primarily affected by room
occupancy and average daily rate in addition to expense management. During third
quarter 2001, Miraval's room occupancy rate was approximately 62%, as compared
to 68% for the same quarter last year. This segment also contributed positive
cash flow to the Company's operations during the quarter. Based on third quarter
occupancy and future bookings, management believes that Miraval has experienced,
and may continue to experience, some negative impact

                                       12

<PAGE>

from the general economic downturn and from the tragic events of September 11th.

For the three-month period ended September 30, 2001, the Company had capital
expenditures of approximately $179. At September 30, 2001, the Company's cash
and equivalents were $5.5 million. On July 2, 2001, the Company paid $12.4
million from its cash reserves to fully retire the outstanding indebtedness to
Lehman Brothers Holdings Inc.

Management believes that funds from operations will provide the cash necessary
to meet its short-term capital needs. 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 administrative
offices and space for 16 additional beds, bringing the total number of beds to
79. 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.

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.

                                       13

<PAGE>

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 third quarter occupancy and future bookings, management believes that
Miraval has experienced, and may continue to experience, some negative impact
from the general economic downturn and from the tragic events of September 11th.
Therefore, Miraval has increased its regional marketing focus in an effort to
attract travelers who live within closer proximity. In conjunction with the
Convention and Visitors' Bureau, Miraval is participating in special regional
radio promotions to entice travelers from neighboring states as well as those
who spend the winter months in the Southwest. In addition, special Fall rates
have been offered through travel agencies, through direct mail campaigns and on
Miraval's web site.

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; a continuing economic downturn that
could limit leisure activity spending; or ongoing effects from the events of
September 11, 2001. 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/A for the year ended December 31, 2000, and
the current reports on Form 8-K dated April 18, 2001 and June 22, 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.

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.

                                       14

<PAGE>

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.

Miraval competes for national and international consumers' discretionary income
typically expended upon luxury hotel and resort spas, holistic health and other
related upscale vacation experiences. While management believes that Miraval
occupies a unique market niche, it nevertheless competes with a broad spectrum
of vacation alternatives. It has been categorized as a destination spa, creating
competition with a relatively small number of well-known spas, however, it also
competes in the resort/hotel spa industry. Some of Miraval's competitors may
have greater name recognition as well as longer-standing relationships with
travel agents and meeting planners. While the Company believes that there is
strong consumer demand for Miraval's products and services, historical data does
not exist in this unique market niche to be certain the demand will continue.
The Company believes that Miraval has experienced some negative effects from the
general economic downturn as well as from the tragic events of September 11,
2001.

The Company is committed to increased profitability, however, 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 a continuing economic downturn that could
limit leisure activity spending, experiences ongoing negative effects from the
events of September 11, 2001, or is further impacted by managed care
restrictions on payor reimbursement.

On April 16, 2001, NextHealth, Inc. (the "Company") entered into an Agreement
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"). Upon completion of the Merger (which is
subject to certain conditions, including those described below), 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.

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 fourth 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.

                                       15

<PAGE>

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 into the escrow account cash or 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. As required by the Merger Agreement, on June 15,
2001, Anam furnished the Company with term sheets for debt financing from
lending sources that aggregate more than $40,000,000. The term sheets do not
represent a firm commitment to provide financing for the Merger contemplated by
the Merger Agreement and there can be no assurance that such financings will be
completed, or that Anam will be able to obtain the additional debt or equity
financing necessary to complete the Merger.

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 preliminary proxy statement, as amended, and a related Schedule 13E-3, as
amended, have been filed by the Company with the SEC in connection with a
special meeting of the Company's stockholders to be held for the purpose of
voting on the Merger, the Merger Agreement and the transactions contemplated
thereby. Following the completion of the SEC's review of such documents, a
definitive proxy statement will be mailed to each stockholder, together with
notice of the special meeting. The Schedule 13E-3 was filed with the SEC because
the Merger is subject to the "going private" rules and regulations of the SEC.

     On September 21, 2001, Anam informed the Special Committee that the events
of September 11, 2001 in New York, Washington, D.C. and Pennsylvania, as well as
their aftermath and foreseeable effects, constituted a force majeure pursuant to
the Merger Agreement. Anam further informed the Special Committee that it was
assessing the effect of the force majeure on Anam's obligations under the Merger
Agreement and was evaluating its options. Anam reiterated its position with
respect to force majeure to the Special Committee on October 1, 2001. On October
8, 2001, the Special Committee informed Anam that it is reviewing Anam's
position that a force majeure has occurred under the Merger Agreement.
Notwithstanding whether the events of September 11, 2001 constituted a force
majeure, Anam and the Special Committee are separately continuing to evaluate
whether the events of September 11, 2001, as well as their aftermath and
foreseeable effects, had or will have a material and adverse effect on the
financial condition, assets, results of operations and business of the Company
and it subsidiaries taken as a whole within the meaning of the Merger Agreement.
Anam has informed the Special Committee that it has not yet determined how to
proceed in light of (i) the events of September 11, 2001, as well as their
aftermath and foreseeable effects, and (ii) the effect thereof on the financial
condition, assets, results of operations and business of the Company and its
subsidiaries taken as a whole. If the events of September 11, 2001, as well as
their aftermath and foreseeable effects, constituted a force majeure under the
Merger Agreement and had or will have a material and adverse effect on the
financial condition, assets, results of operations or business of the Company
and its subsidiaries taken as a whole, Anam may have the right to terminate the
Merger Agreement.

                                       16

<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
              Form 8-K dated June 22, 2001

                                       17

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



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



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