##### Table of Contents



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 December 31, 2003

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: 333-94521

IASIS HEALTHCARE CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


|                                |  |                    
|------------------------------- |  | -------------------
|DELAWARE                        |  | 76-0450619         
|(State or Other Jurisdiction of |  | (I.R.S. Employer   
|Incorporation or Organization)  |  | Identification No.)

113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067

(Address of Principal Executive Offices)


(615) 844-2747

(Registrants Telephone Number, Including Area Code)


Not Applicable

(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)


Indicate by check ü whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ü] NO [   ]

Indicate by check mark ü whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES [   ] NO [ü]

As of February 17, 2004, 31,956,113 shares of the
Registrants Common Stock were outstanding.





---

TABLE OF CONTENTS



|                                                   |                                                                                               |                                                                |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION                      
|                                                   | Item 1. Financial Statements                                                                 
|                                                   |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                         
|                                                   |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS                 
|                                                   |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS               
|                                                   |                                                                                               | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                                   | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                   | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                   | Item 4. Controls and Procedures                                                              
|PART II OTHER INFORMATION                         
|                                                   | Item 1. Legal Proceedings                                                                    
|                                                   | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                        
|EXHIBIT INDEX                                     
|EX-10.1  PURCHASE AND SALE AGREEMENT              
|EX-10.2  LETTER AGREEMENT                         
|EX-31.1  CERTIFICATION OF CEO                     
|EX-31.2   CERTIFICATION OF CFO                    
|EX-99.1  ODESSA REGIONAL HOSPITAL, LP FINANCIALS  
|EX-99.2  JORDAN VALLEY HOSPITAL, LP FINANCIALS    
|EX-99.3  MEDICAL CENTER OF SE TEXAS, LP FINANCIALS
|EX-99.4  DAVIS HOSPITAL & MEDICAL, LP FINANCIALS  



---



##### Table of Contents



TABLE OF CONTENTS

|                               |  |         |  |                                                                                                             |  |   
|------------------------------ |  | ------- |  | ----------------------------------------------------------------------------------------------------------- |  | --
|PART I - FINANCIAL INFORMATION |  | 1      
|                               |  | Item 1. |  | Financial Statements                                                                                        |  | 1 
|                               |  |         |  | Condensed Consolidated Balance Sheets  December 31, 2003 (Unaudited) and September 30, 2003                |  | 1 
|                               |  |         |  | Condensed Consolidated Statements of Earnings (Unaudited)  Three Months Ended
December 31, 2003 and 2002   |  | 2 
|                               |  |         |  | Condensed Consolidated Statements of Cash Flows (Unaudited)  Three Months Ended
December 31, 2003 and 2002 |  | 3 
|                               |  |         |  | Notes to Unaudited Condensed Consolidated Financial Statements                                              |  | 4 
|                               |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                       |  | 24
|                               |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                  |  | 32
|                               |  | Item 4. |  | Controls and Procedures                                                                                     |  | 33
|PART II - OTHER INFORMATION    |  | 33     
|                               |  | Item 1. |  | Legal Proceedings                                                                                           |  | 33
|                               |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                            |  | 33





---



##### Table of Contents












PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

IASIS HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)

|                                             |                                                                                                                                                                       |                                            |                           |                                      |           |              |         |               |           |           |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------- | ------------------------------------ | --------- | ------------ | ------- | ------------- | --------- | --------- |  | 
|                                             |                                                                                                                                                                       |                                            |                           |                                      |           | (Unaudited)  |         |               |           |          
|                                             |                                                                                                                                                                       |                                            |                           |                                      |           | December 31, |         | September 30,
|                                             |                                                                                                                                                                       |                                            |                           |                                      |           | 2003         |         | 2003         
|                                             |                                                                                                                                                                       |                                            |                           |                                      |           |              |         |              
|                                             |                                                                                                                                                                       |                                            |                           | ASSETS                               |           |              |         |               |           |           |  | 
|Current assets:                              |                                                                                                                                                                       |                                            |                           |                                      |           |              |         |              
|                                             | Cash and cash equivalents                                                                                                                                             |                                            | $                         | 94,970                               |           |              | $       | 101,070       |          
|                                             | Accounts receivable, net of allowance for doubtful accounts of
$71,013 and $47,028, respectively                                                                      |                                            |                           | 161,513                              |           |              |         | 153,183       |          
|                                             | Inventories                                                                                                                                                           |                                            |                           | 23,961                               |           |              |         | 23,842        |          
|                                             | Prepaid expenses and other current assets                                                                                                                             |                                            |                           | 15,590                               |           |              |         | 16,316        |          
|                                             | Assets held for sale                                                                                                                                                  |                                            |                           | 11,070                               |           |              |         | 11,070        |          
|                                             |                                                                                                                                                                       |                                            |                           |                                      |           |              |         |               |          
|                                             |                                                                                                                                                                       |                                            | Total current assets      |                                      |           | 307,104      |         |               |           | 305,481   | 
|Property and equipment, net                  |                                                                                                                                                                       |                                            | 437,091                   |                                      |           |              | 435,477 |              
|Goodwill                                     |                                                                                                                                                                       |                                            | 252,204                   |                                      |           |              | 252,204 |              
|Other assets, net                            |                                                                                                                                                                       |                                            | 36,798                    |                                      |           |              | 36,837  |              
|                                             |                                                                                                                                                                       |                                            |                           |                                      |           |              |         |               |          
|                                             |                                                                                                                                                                       |                                            | Total assets              |                                      | $         | 1,033,197    |         |               | $         | 1,029,999 | 
|                                             |                                                                                                                                                                       |                                            |                           |                                      |           |              |         |               |          
|                                             |                                                                                                                                                                       |                                            |                           | LIABILITIES AND STOCKHOLDERS EQUITY |           |              |         |               |           |           |  | 
|Current liabilities:                         |                                                                                                                                                                       |                                            |                           |                                      |           |              |         |              
|                                             | Accounts payable                                                                                                                                                      |                                            | $                         | 46,337                               |           |              | $       | 54,172        |          
|                                             | Salaries and benefits payable                                                                                                                                         |                                            |                           | 25,898                               |           |              |         | 29,842        |          
|                                             | Accrued interest payable                                                                                                                                              |                                            |                           | 12,617                               |           |              |         | 20,978        |          
|                                             | Medical claims payable                                                                                                                                                |                                            |                           | 41,290                               |           |              |         | 25,767        |          
|                                             | Accrued expenses and other current liabilities                                                                                                                        |                                            |                           | 20,651                               |           |              |         | 20,529        |          
|                                             | Current portion of long-term debt and capital lease
obligations                                                                                                       |                                            |                           | 6,073                                |           |              |         | 5,903         |          
|                                             |                                                                                                                                                                       |                                            |                           |                                      |           |              |         |               |          
|                                             |                                                                                                                                                                       |                                            | Total current liabilities |                                      |           | 152,866      |         |               |           | 157,191   | 
|Long-term debt and capital lease obligations |                                                                                                                                                                       |                                            | 656,858                   |                                      |           |              | 658,531 |              
|Other long-term liabilities                  |                                                                                                                                                                       |                                            | 27,149                    |                                      |           |              | 27,795  |              
|Minority interest in consolidated entities   |                                                                                                                                                                       |                                            | 12,007                    |                                      |           |              | 10,383  |              
|Stockholders equity:                        |                                                                                                                                                                       |                                            |                           |                                      |           |              |         |              
|                                             | Preferred stock  $0.01 par value, authorized 5,000,000
shares; no shares issued and outstanding at December 31,
2003 and September 30, 2003                          |                                            |                           |                                     |           |              |         |              |          
|                                             | Common stock  $0.01 par value, authorized 100,000,000 shares;
31,985,029 shares issued and 31,956,113 shares
outstanding at December 31, 2003 and September 30, 2003 |                                            |                           | 320                                  |           |              |         | 320           |          
|                                             | Nonvoting common stock  $0.01 par value, authorized
10,000,000 shares; no shares issued and outstanding at
December 31, 2003 and September 30, 2003                  |                                            |                           |                                     |           |              |         |              |          
|                                             | Additional paid-in capital                                                                                                                                            |                                            |                           | 450,720                              |           |              |         | 450,720       |          
|                                             | Treasury stock, at cost, 16,306,541 shares at December 31,
2003 and September 30, 2003                                                                                |                                            |                           | (155,300                             | )         |              |         | (155,300      | )        
|                                             | Accumulated deficit                                                                                                                                                   |                                            |                           | (111,423                             | )         |              |         | (119,641      | )        
|                                             |                                                                                                                                                                       |                                            |                           |                                      |           |              |         |               |          
|                                             |                                                                                                                                                                       | Total stockholders equity                 |                           |                                      | 184,317   |              |         |               | 176,099   |          
|                                             |                                                                                                                                                                       |                                            |                           |                                      |           |              |         |               |          
|                                             |                                                                                                                                                                       | Total liabilities and stockholders equity |                           | $                                    | 1,033,197 |              |         | $             | 1,029,999 |          
|                                             |                                                                                                                                                                       |                                            |                           |                                      |           |              |         |               |          

See accompanying notes.

1



---



##### Table of Contents






IASIS HEALTHCARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(In thousands)

|                                                                            |                               |                          |       |                    |         |      |       |         |         | 
|--------------------------------------------------------------------------- | ----------------------------- | ------------------------ | ----- | ------------------ | ------- | ---- | ----- | ------- | ------- | 
|                                                                            |                               |                          |       | Three Months Ended
|                                                                            |                               |                          |       | December 31,      
|                                                                            |                               |                          |       |                   
|                                                                            |                               |                          |       | 2003               |         | 2002
|                                                                            |                               |                          |       |                    |         |     
|Net revenue:                                                                |                               |                          |       |                    |         |      |       |        
|                                                                            | Net acute care revenue        |                          | $     | 249,390            |         |      | $     | 217,817 |        
|                                                                            | Premium revenue               |                          |       | 68,714             |         |      |       | 36,948  |        
|                                                                            |                               |                          |       |                    |         |      |       |         |        
|                                                                            |                               | Total net revenue        |       |                    | 318,104 |      |       |         | 254,765 | 
|Costs and expenses:                                                         |                               |                          |       |                    |         |      |       |        
|                                                                            | Salaries and benefits         |                          |       | 99,416             |         |      |       | 88,799  |        
|                                                                            | Supplies                      |                          |       | 40,279             |         |      |       | 35,683  |        
|                                                                            | Medical claims                |                          |       | 57,771             |         |      |       | 30,901  |        
|                                                                            | Other operating expenses      |                          |       | 55,828             |         |      |       | 46,513  |        
|                                                                            | Provision for bad debts       |                          |       | 25,098             |         |      |       | 19,711  |        
|                                                                            | Interest, net                 |                          |       | 13,891             |         |      |       | 13,317  |        
|                                                                            | Depreciation and amortization |                          |       | 16,731             |         |      |       | 12,851  |        
|                                                                            |                               |                          |       |                    |         |      |       |         |        
|                                                                            |                               | Total costs and expenses |       |                    | 309,014 |      |       |         | 247,775 | 
|                                                                            |                               |                          |       |                    |         |      |       |         |        
|Earnings before gain on sale of assets,
minority interests and income taxes |                               |                          | 9,090 |                    |         |      | 6,990 |        
|Gain on sale of assets, net                                                 |                               |                          | (151  | )                  |         |      | (780  | )      
|Minority interests                                                          |                               |                          | 991   |                    |         |      | 278   |        
|                                                                            |                               |                          |       |                    |         |      |       |         |        
|Earnings before income taxes                                                |                               |                          | 8,250 |                    |         |      | 7,492 |        
|Income tax expense                                                          |                               |                          | 32    |                    |         |      |      |        
|                                                                            |                               |                          |       |                    |         |      |       |         |        
|Net earnings                                                                |                               | $                        | 8,218 |                    |         | $    | 7,492 |        
|                                                                            |                               |                          |       |                    |         |      |       |         |        

See accompanying notes.

2



---



##### Table of Contents






IASIS HEALTHCARE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)

|                                                                     |                                                                                     |                                                                |                                                        |         |                    |        |      |         |         |        |  
|-------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------------------ | ------- | ------------------ | ------ | ---- | ------- | ------- | ------ | -
|                                                                     |                                                                                     |                                                                |                                                        |         | Three Months Ended
|                                                                     |                                                                                     |                                                                |                                                        |         | December 31,      
|                                                                     |                                                                                     |                                                                |                                                        |         | 2003               |        | 2002
|                                                                     |                                                                                     |                                                                |                                                        |         |                    |        |     
|Cash flows from operating activities:                                |                                                                                     |                                                                |                                                        |         |                    |        |      |        
|                                                                     | Net earnings                                                                        |                                                                | $                                                      | 8,218   |                    |        | $    | 7,492   |        
|                                                                     | Adjustments to reconcile net earnings to
net cash provided by operating activities: |                                                                |                                                        |         |                    |        |      |         |        
|                                                                     |                                                                                     | Depreciation and amortization                                  |                                                        |         | 16,731             |        |      |         | 12,851  |       
|                                                                     |                                                                                     | Minority interests                                             |                                                        |         | 991                |        |      |         | 278     |       
|                                                                     |                                                                                     | Gain on sale of assets, net                                    |                                                        |         | (151               | )      |      |         | (780    | )     
|                                                                     |                                                                                     | Changes in operating assets and liabilities,
net of disposals: |                                                        |         |                    |        |      |         |         |       
|                                                                     |                                                                                     |                                                                | Accounts receivable                                    |         |                    | (8,330 | )    |         |         | (1,069 | )
|                                                                     |                                                                                     |                                                                | Inventories, prepaid expenses and other
current assets |         |                    | 607    |      |         |         | (1,041 | )
|                                                                     |                                                                                     |                                                                | Accounts payable and other accrued liabilities         |         |                    | (5,138 | )    |         |         | (9,471 | )
|                                                                     |                                                                                     |                                                                |                                                        |         |                    |        |      |         |        
|                                                                     |                                                                                     | Net cash provided by operating activities                      |                                                        |         | 12,928             |        |      |         | 8,260   |       
|                                                                     |                                                                                     |                                                                |                                                        |         |                    |        |      |         |        
|Cash flows from investing activities:                                |                                                                                     |                                                                |                                                        |         |                    |        |      |        
|                                                                     | Purchases of property and equipment                                                 |                                                                |                                                        | (17,362 | )                  |        |      | (14,415 | )      
|                                                                     | Proceeds from sale of assets                                                        |                                                                |                                                        | 151     |                    |        |      | 2,463   |        
|                                                                     | Change in other assets                                                              |                                                                |                                                        | (946    | )                  |        |      | (861    | )      
|                                                                     |                                                                                     |                                                                |                                                        |         |                    |        |      |         |        
|                                                                     |                                                                                     | Net cash used in investing activities                          |                                                        |         | (18,157            | )      |      |         | (12,813 | )     
|                                                                     |                                                                                     |                                                                |                                                        |         |                    |        |      |         |        
|Cash flows from financing activities:                                |                                                                                     |                                                                |                                                        |         |                    |        |      |        
|                                                                     | Proceeds from debt borrowings                                                       |                                                                |                                                        |        |                    |        |      | 62,200  |        
|                                                                     | Payment of debt and capital leases                                                  |                                                                |                                                        | (1,504  | )                  |        |      | (57,347 | )      
|                                                                     | Distribution of minority interests                                                  |                                                                |                                                        | (1,343  | )                  |        |      | (300    | )      
|                                                                     | Proceeds from hospital syndication                                                  |                                                                |                                                        | 1,976   |                    |        |      |        |        
|                                                                     |                                                                                     |                                                                |                                                        |         |                    |        |      |         |        
|                                                                     |                                                                                     | Net cash (used in) provided by financing activities            |                                                        |         | (871               | )      |      |         | 4,553   |       
|                                                                     |                                                                                     |                                                                |                                                        |         |                    |        |      |         |        
|Decrease in cash and cash equivalents                                |                                                                                     |                                                                | (6,100                                                 | )       |                    |        |     |        
|Cash and cash equivalents at beginning of period                     |                                                                                     |                                                                | 101,070                                                |         |                    |        |     |        
|                                                                     |                                                                                     |                                                                |                                                        |         |                    |        |      |         |        
|Cash and cash equivalents at end of period                           |                                                                                     | $                                                              | 94,970                                                 |         |                    | $      |     |        
|                                                                     |                                                                                     |                                                                |                                                        |         |                    |        |      |        
|Supplemental disclosure of cash flow information:                    |                                                                                     |                                                                |                                                        |         |                    |        |      |        
|                                                                     |                                                                                     | Cash paid for interest                                         |                                                        | $       | 23,097             |        |      | $       | 18,720  |       
|                                                                     |                                                                                     |                                                                |                                                        |         |                    |        |      |         |        
|                                                                     |                                                                                     | Cash paid for income taxes                                     |                                                        | $       | 21                 |        |      | $       |        |       
|                                                                     |                                                                                     |                                                                |                                                        |         |                    |        |      |         |        
|Supplemental schedule of noncash investing and financing activities: |                                                                                     |                                                                |                                                        |         |                    |        |      |        
|                                                                     |                                                                                     | Capital lease obligations incurred to acquire
equipment        |                                                        | $       |                   |        |      | $       | 3,318   |       
|                                                                     |                                                                                     |                                                                |                                                        |         |                    |        |      |         |        

See accompanying notes.

3



---



##### Table of Contents






IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

1. Basis of Presentation

The unaudited condensed consolidated financial statements include the
accounts of IASIS Healthcare Corporation (IASIS or the Company) and all
subsidiaries and entities under common control of the Company and have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial reporting and in accordance with Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
notes required by accounting principles generally accepted in the United States
for complete financial statements. The condensed and consolidated balance
sheet at September 30, 2003 has been derived from the audited consolidated
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the
United States for complete financial statements. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Companys Annual Report on Form 10-K for the fiscal year ended September
30, 2003.

In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all material adjustments (consisting
of normal recurring items) necessary for a fair presentation of results for the
interim periods presented. The results of operations for any interim period
are not necessarily indicative of results for the full year.

The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the accompanying
unaudited condensed consolidated financial statements and notes. Actual
results could differ from those estimates.

IASIS owns and operates medium-sized acute care hospitals in high-growth
urban and suburban markets. At December 31, 2003, the Company owned or leased
14 acute care hospitals, with a total of 2,024 beds in service, located in four
regions:



| | - |  | Salt Lake City, Utah;                       
| | - |  | --------------------------------------------
|
| | - |  | Phoenix, Arizona;                           
|
| | - |  | Tampa-St. Petersburg, Florida; and          
|
| | - |  | four cities in Texas, including San Antonio.

The Company also owns and operates a behavioral health center in Phoenix
and has an ownership interest in three ambulatory surgery centers. In addition,
the Company owns and operates a Medicaid managed health plan in Phoenix called
Health Choice Arizona, Inc. (Health Choice or the Plan), serving over
90,000 members at December 31, 2003. As more fully described in note 10, the
Company acquired Lake Mead Hospital Medical Center in Las Vegas, Nevada on
February 1, 2004.

2. Recently Issued Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board, (the FASB)
issued Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees(FIN 45). FIN 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation it has undertaken in issuing the guarantee. The Company will
apply FIN 45 to guarantees, if any, issued or modified after December 31, 2002.
The adoption of FIN 45 did not have a material effect on the Companys
consolidated financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities(VIEs), an Interpretation of Accounting Research
Bulletin No. 51 (FIN 46). FIN 46 requires certain VIEs to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the equity for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 is effective for all new VIEs created or acquired after
January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the

4



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

provisions of FIN 46 must be applied for the first interim or annual
period ending after December 15, 2003. The adoption of FIN 46 did not have a
material effect on the Companys results of operations or financial position.

In May 2003, the FASB Issued Statement of Financial Accounting Standards
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities(SFAS 149). SFAS 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. Most provisions of SFAS 149 are effective
for contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. SFAS 149 is not expected to have
a material effect on the Companys financial statements. The Company held no
derivative instruments as of and for the three months ended December 31, 2003.

In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity(SFAS 150). SFAS 150 establishes standards for
how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances) because
that financial instrument embodies an obligation of the issuer. SFAS 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this Statement did not have a
material effect on the Companys financial position or results of operations.

3. Long-Term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consist of the following (in
thousands):

|                                    |  |              |         |               |  |   |         | 
|----------------------------------- |  | ------------ | ------- | ------------- |  | - | ------- | 
|                                    |  | December 31, |         | September 30,
|                                    |  | 2003         |         | 2003         
|                                    |  |              |         |              
|Bank facilities                     |  | $            | 322,000 |               |  | $ | 322,875 | 
|Senior subordinated notes           |  |              | 330,000 |               |  |   | 330,000 | 
|Capital lease obligations and other |  |              | 10,931  |               |  |   | 11,559  | 
|                                    |  |              |         |               |  |   |         | 
|                                    |  |              | 662,931 |               |  |   | 664,434 | 
|Less current maturities             |  |              | 6,073   |               |  |   | 5,903   | 
|                                    |  |              |         |               |  |   |         | 
|                                    |  | $            | 656,858 |               |  |   | 658,531 | 
|                                    |  |              |         |               |  |   |         | 

Bank Facilities

On February 7, 2003, the Company completed the refinancing of its credit
facility to provide for a new $475.0 million credit facility in the form of a
$350.0 million, six year term B loan and a $125.0 million, five year revolving
credit facility (the 2003 credit facility). Proceeds from the 2003 credit
facility were used to refinance amounts outstanding under the 1999 credit
facility and to fund closing and other transaction related costs of $10.9
million incurred in connection with the refinancing. The $125.0 million
revolving credit facility is available for working capital and other general
corporate purposes. Principal payments on the term B loan are due in quarterly
installments of $875,000 until maturity. The 2003 credit facility is also
subject to mandatory prepayment under specific circumstances including a
portion of excess cash flow and the net proceeds from an initial public
offering, asset sales, debt issuances and specified casualty events, each
subject to various exceptions. The 2003 credit facility included a 1%
prepayment penalty on voluntary prepayments under the term loan, which lapsed
on February 7, 2004.

The 2003 credit facility was amended on June 6, 2003 to allow for the
issuance of the Companys 81⁄2% senior subordinated notes, as discussed below.
On February 9, 2004, the 2003 credit facility was further amended

5



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

to, among other things, reduce the applicable margin on the term loans by
150 basis points and increase the annual capital expenditure limitations
beginning in fiscal year 2005.

The 2003 credit facility requires that the Company comply with various
other financial ratios and tests and contains covenants limiting the Companys
ability to, among other things, incur debt, engage in acquisitions or mergers,
sell assets, make investments or capital expenditures, make distributions or
stock repurchases and pay dividends.

The 2003 credit facility is guaranteed by all of the Companys material
subsidiaries (the Subsidiary Guarantors) and these guaranties are secured by
a pledge of substantially all of the Subsidiary Guarantors assets.
Substantially all of the Companys outstanding common stock is pledged for the
benefit of the Companys lenders as security for the Companys obligations
under the 2003 credit facility.

At December 31, 2003, there was $322.0 million outstanding under the
six-year term B loan and no amounts outstanding under the revolving credit
facility. The revolving credit facility includes a $75.0 million sub-limit for
letters of credit that may be issued. At December 31, 2003, the Company had
issued $40.3 million in letters of credit. The loans under the credit
facilities accrued interest at variable rates at specified margins above either
the agent banks alternate base rate or its reserve-adjusted Eurodollar rate.
The weighted average interest rate of outstanding borrowings under the 2003
credit facility was approximately 5.40% for the three months ended December 31,
2003. The Company pays a commitment fee equal to 0.5% of the average daily
amount available under the revolving credit facility.

13% Senior Subordinated Notes

On October 13, 1999, the Company issued $230.0 million of 13% senior
subordinated notes due 2009. On May 25, 2000, the Company exchanged all of its
outstanding 13% senior subordinated notes due 2009 for 13% senior subordinated
exchange notes due 2009 that have been registered under the Securities Act of
1933, as amended (the 1999 Notes). Terms and conditions of the exchange offer
were as set forth in the registration statement on Form S-4 filed with the
Securities and Exchange Commission that became effective on April 17, 2000. The
1999 Notes are unsecured obligations and are subordinated in right of payment
to all existing and future senior indebtedness of the Company. Interest on the
1999 Notes is payable semi-annually on April 15 and October 15.

Except with respect to a change of control, the Company is not required to
make mandatory redemption or sinking fund payments with respect to the 1999
Notes. The Company may redeem the 1999 Notes, in whole or in part, at any time
from October 15, 2004 to October 14, 2008 at redemption prices ranging from
106.500% to 101.625%, plus accrued and unpaid interest. Thereafter, the Company
may redeem the 1999 Notes at a 100% redemption price plus accrued and unpaid
interest. The 1999 Notes are guaranteed, fully and unconditionally, jointly and
severally, by the Subsidiary Guarantors. The Company is a holding company with
no independent assets or operations apart from its ownership of the Subsidiary
Guarantors. At December 31, 2003, all of the Subsidiary Guarantors fully and
unconditionally guaranteed the 1999 Notes and, with the exception of Odessa
Regional Hospital, LP, Jordan Valley Hospital, LP, The Medical Center of
Southeast Texas, LP and Davis Hospital & Medical Center, LP, all were 100%
owned by the Company. The indenture for the 1999 Notes contains certain
covenants, including but not limited to, restrictions on new indebtedness,
asset sales, capital expenditures, dividends and the Companys ability to merge
or consolidate.

81⁄2% Senior Subordinated Notes

On June 6, 2003, the Company issued $100.0 million of 8-1/2% senior
subordinated notes due 2009. On August 14, 2003, the Company exchanged all of
its outstanding 8-1/2% senior subordinated notes due 2009 for 8-1/2% senior
subordinated notes due 2009 that have been registered under the Securities Act
of 1933, as amended (the 2003 Notes). Terms and conditions of the exchange
offer were as set forth in the registration statement on Form S-4 filed with
the Securities and Exchange Commission that became effective on July 16, 2003.
The 2003 Notes are unsecured obligations and are subordinated in right of
payment to all existing and future senior indebtedness of the Company. Interest
on the 2003 Notes is payable semi-annually on April 15 and October 15.

6



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

Except with respect to a change of control, the Company is not required to
make mandatory redemption or sinking fund payments with respect to the 2003
Notes. Subject to certain conditions, at any time prior to June 15, 2006, the
Company may on any one or more occasions redeem up to 35.0% of the aggregate
principal amount of 2003 Notes at a redemption price of 108.5% of the principal
amount thereof, plus accrued and unpaid interest to the redemption date, with
the net cash proceeds of one or more equity offerings. The Company may redeem
the 2003 Notes, in whole or in part, at any time from June 15, 2006 to June 14,
2008 at redemption prices ranging from 104.250% to 102.125%, plus accrued and
unpaid interest. Thereafter, the Company may redeem the 2003 Notes at a 100%
redemption price plus accrued and unpaid interest. The 2003 Notes are
guaranteed, fully and unconditionally, jointly and severally, by the Subsidiary
Guarantors, except Health Choice Arizona, Inc. The indenture for the 2003 Notes
contains certain covenants, including but not limited to, restrictions on new
indebtedness, asset sales, capital expenditures, dividends and the Companys
ability to merge or consolidate.

4. Stock Benefit Plans

The Company, from time to time, grants stock options for a fixed number of
common shares to employees. Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to account for
employee stock option grants in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees,and, accordingly,
uses the intrinsic method to value options and recognizes no compensation
expense for the stock option grants when the exercise price of the options
equals, or is greater than, the market value of the underlying stock on the
date of grant.
Pro forma information regarding interim net earnings is required by SFAS No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure,and
has been determined as if the Company had accounted for its employee stock
options under the fair value method. If the Company had measured compensation
cost for the stock options granted under the fair value based method prescribed
by SFAS No. 123, the Companys net earnings (loss) would have been changed to
the pro forma amounts set forth below (in thousands):

|                                                                                |  |                     |       |              |  |   |       |  
|------------------------------------------------------------------------------- |  | ------------------- | ----- | ------------ |  | - | ----- | -
|                                                                                |  | Three months ended,
|                                                                                |  |                    
|                                                                                |  | December 31,        |       | December 31,
|                                                                                |  | 2003                |       | 2002        
|                                                                                |  |                     |       |             
|Net earnings, as reported                                                       |  | $                   | 8,218 |              |  | $ | 7,492 |  
|Less: stock-based compensation expense
determined under fair value based method |  |                     | (375  | )            |  |   | (372  | )
|                                                                                |  |                     |       |              |  |   |       |  
|Pro forma net earnings                                                          |  | $                   | 7,843 |              |  | $ | 7,120 |  
|                                                                                |  |                     |       |              |  |   |       |  

The effect of applying SFAS No. 123 for providing pro forma disclosure is not
likely to be representative of the effect on reported net earnings for future
years.

5. Contingencies

Net Revenue

The calculation of appropriate payments from the Medicare and Medicaid
programs as well as terms governing agreements with other third party payors
are complex and subject to interpretation. Final determination of amounts
earned under the Medicare and Medicaid programs often occurs subsequent to the
year in which services are rendered because of audits by the programs, rights
of appeal and the application of numerous technical provisions. As a result,
there is at least a reasonable possibility that recorded estimates will change
by a material amount in the near term. In the opinion of management, adequate
provision has been made for adjustments that may result from such routine
audits and appeals.

7



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

Professional, General and Workers Compensation Liability Risks

The Company is subject to claims and legal actions in the ordinary course
of business, including claims relating to patient treatment and personal
injuries. To cover these types of claims, the Company maintains general
liability and professional liability insurance in excess of self-insured
retentions through a commercial insurance carrier in amounts that the Company
believes to be sufficient for its operations, although, potentially, some
claims may exceed the scope of coverage in effect. Plaintiffs in these matters
may request punitive or other damages that may not be covered by insurance.
The Company is currently not a party to any such proceedings that, in the
Companys opinion, would have a material adverse effect on the Companys
business, financial condition or results of operations. The Company expenses
an estimate of the costs it expects to incur under the self-insured retention
exposure for general and professional liability claims using historical claims
data, demographic factors, severity factors, current incident logs and other
actuarial analysis. As of December 31, 2003 and September 30, 2003, the
Companys professional and general liability accrual for asserted and
unasserted claims was approximately $23.8 million and $24.3 million,
respectively, which is included within other long-term liabilities in the
accompanying condensed consolidated balance sheets.

The Company is subject to claims and legal actions in the ordinary course
of business relative to workers compensation and other labor and employment
matters. To cover these types of claims, the Company maintains workers
compensation insurance coverage with a self-insured retention. The Company
accrues costs of workers compensation claims based upon estimates derived from
its claims experience.

Health Choice

Health Choice has entered into a capitated contract whereby the Plan
provides healthcare services in exchange for fixed periodic and supplemental
payments from AHCCCS. These services are provided regardless of the actual
costs incurred to provide these services. The Company receives reinsurance and
other supplemental payments from AHCCCS to cover certain costs of healthcare
services that exceed certain thresholds. The Company believes the capitated
payments, together with reinsurance and other supplemental payments are
sufficient to pay for the services Health Choice is obligated to deliver. As
of December 31, 2003, the Company has provided a performance guaranty in the
form of a letter of credit in the amount of $20.6 million for the benefit of
AHCCCS to support its obligations under the Health Choice contract to provide
and pay for the healthcare services. Additionally, Health Choice maintains a
cash balance of $5 million and an intercompany demand note with the
Company. The amount of the performance guaranty is based upon the membership in
the plan and the related capitation revenue paid to us.

Capital Expenditure Commitments

The Company is expanding and renovating some of its facilities to permit
additional patient volume and to provide a greater variety of services. At
December 31, 2003, the Company had various projects under construction with an
estimated additional cost to complete and equip of approximately $109.8
million.

Tax Sharing Agreement

The Company and some of its subsidiaries are included in JLL Healthcare,
LLCs consolidated group for U.S. federal income tax purposes as well as in
some consolidated, combined or unitary groups which include JLL Healthcare, LLC
for state, local and foreign income tax purposes. The Company and JLL
Healthcare, LLC entered into a tax sharing agreement in connection with the
capitalization of the Company. The tax sharing agreement requires the Company
to make payments to JLL Healthcare, LLC such that, with respect to tax returns
for any taxable period in which the Company or any of its subsidiaries is
included in JLL Healthcare, LLCs consolidated group or any combined group,
including JLL Healthcare, LLC, the amount of taxes to be paid by the Company
will be determined, subject to some adjustments, as if the Company and each of
its subsidiaries included in JLL Healthcare, LLCs consolidated group or a
combined group including JLL Healthcare, LLC filed their own consolidated,
combined or unitary tax return.

8



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

Each member of a consolidated group for U.S. federal income tax purposes
is jointly and severally liable for the federal income tax liability of each
other member of the consolidated group. Accordingly, although the tax sharing
agreement allocates tax liabilities between the Company and JLL Healthcare,
LLC, for any period in which the Company is included in JLL Healthcare, LLCs
consolidated group, the Company could be liable in the event that any federal
tax liability was incurred, but not discharged, by any other member of JLL
Healthcare, LLCs consolidated group.

Acquisitions

The Company may choose to acquire businesses with prior operating
histories. If acquired, such companies may have unknown or contingent
liabilities, including liabilities for failure to comply with healthcare laws
and regulations, such as billing and reimbursement, fraud and abuse and similar
anti-referral laws. Although the Company has policies designed to conform
business practices to its policies following the completion of any
acquisitions, there can be no assurance that the Company will not become liable
for previous activities of prior owners that may later be asserted to be
improper by private plaintiffs or government agencies. Although the Company
generally would seek to obtain indemnification from prospective sellers
covering such matters, there can be no assurance that any such matter will be
covered by indemnification, or if covered, that such indemnification will be
adequate to cover potential losses and fines.

Other

The Company has been advised that its hospital in San Antonio, Texas,
Southwest General Hospital, is a subject of an investigation relating to the
provision of hyperbaric oxygen therapy services. In a letter dated February
11, 2003, the U.S. Attorney for the Western District of Texas stated that the
investigation relates to certain billing practices for these services since
1998. The Company is cooperating with the U.S. Attorneys office with respect
to this investigation. Based on information currently available, the Company
believes the investigation relates primarily to the period when Tenet
Healthcare Corporation (Tenet) owned the hospital. Although the Company is
unable to predict the outcome of this investigation, management does not
currently believe it will have a material adverse effect on the Companys
business, financial condition or results of operations.

Tenet and its affiliates are defendants in a civil action brought on
January 9, 2003 in the U.S. District Court for the Central District of
California by the United States for the improper assignment of diagnostic codes
and submitting false claims to Medicare. The litigation stems from an
investigation by the U.S. Department of Justice, in conjunction with the Office
of Inspector General, of certain hospital billings to Medicare for inpatient
stays reimbursed pursuant to diagnosis related groups 79 (pneumonia), 415
(operating room procedure for infectious and parasitic diseases), 416
(septicemia) and 475 (respiratory system diagnosis with mechanical ventilator).
Although hospitals that the Company acquired from Tenet are referenced in the
complaint, all of the actions complained of occurred prior to December 31, l998
and thus before the hospitals acquisition by the Company. The Company has
informed Tenet that the Company has no obligation or liability for any of the
matters described in the complaint and that the Company is entitled to
indemnification if any damages or relief were to be sought against IASIS in
connection with the proceeding. Tenet has accepted service of process on behalf
of these hospitals and has agreed to indemnify the Company.

The Company believes it is in material compliance with all applicable laws
and regulations and is not aware of any pending or threatened investigations
involving allegations of potential wrongdoing that it believes would have a
material effect on its financial statements. Compliance with such laws and
regulations can be subject to future government review and interpretation as
well as significant regulatory action, including fines, penalties and exclusion
from the Medicare and Medicaid programs.

6. Segment and Geographic Information

The Companys acute care hospitals and related healthcare businesses are
similar in their activities and the economic environments in which they operate
(i.e., urban and suburban markets). Accordingly, the Companys reportable
operating segments consist of (1) acute care hospitals and related healthcare
businesses, collectively, and

9



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

(2)  its Medicaid managed health plan, Health Choice and a related entity
(collectively referred to as Health Choice).The following is a financial
summary by business segment for the periods indicated:

10



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

|                                                                     |                              |   |                                              |         |               |   |              |        |              |   |        |        |   |   |           |         | 
|-------------------------------------------------------------------- | ---------------------------- | - | -------------------------------------------- | ------- | ------------- | - | ------------ | ------ | ------------ | - | ------ | ------ | - | - | --------- | ------- | 
|                                                                     |                              |   | For the Three Months Ended December 31, 2003
|                                                                     |                              |   |                                             
|                                                                     |                              |   | Acute Care                                   |         | Health Choice |   | Eliminations |        | Consolidated
|                                                                     |                              |   |                                              |         |               |   |              |        |             
|Net acute care revenue                                               |                              | $ | 249,390                                      |         |               | $ |             |        |              | $ |       |        |   | $ | 249,390   |        
|Premium revenue                                                      |                              |   |                                             |         |               |   | 68,714       |        |              |   |       |        |   |   | 68,714    |        
|Revenue between segments                                             |                              |   | 2,979                                        |         |               |   |             |        |              |   | (2,979 | )      |   |   |          |        
|                                                                     |                              |   |                                              |         |               |   |              |        |              |   |        |        |   |   |           |        
|                                                                     | Net revenue                  |   |                                              | 252,369 |               |   |              | 68,714 |              |   |        | (2,979 | ) |   |           | 318,104 | 
|Salaries and benefits                                                |                              |   | 97,243                                       |         |               |   | 2,173        |        |              |   |       |        |   |   | 99,416    |        
|Supplies                                                             |                              |   | 40,237                                       |         |               |   | 42           |        |              |   |       |        |   |   | 40,279    |        
|Medical claims                                                       |                              |   |                                             |         |               |   | 60,750       |        |              |   | (2,979 | )      |   |   | 57,771    |        
|Other operating expenses                                             |                              |   | 53,143                                       |         |               |   | 2,684        |        |              |   |       |        |   |   | 55,827    |        
|Provision for bad debts                                              |                              |   | 25,099                                       |         |               |   |             |        |              |   |       |        |   |   | 25,099    |        
|                                                                     |                              |   |                                              |         |               |   |              |        |              |   |        |        |   |   |           |        
|                                                                     | Adjusted
EBITDA(1)           |   |                                              | 36,647  |               |   |              | 3,065  |              |   |        |       |   |   |           | 39,712  | 
|Interest expense, net                                                |                              |   | 13,891                                       |         |               |   |             |        |              |   |       |        |   |   | 13,891    |        
|Depreciation and amortization                                        |                              |   | 16,690                                       |         |               |   | 41           |        |              |   |       |        |   |   | 16,731    |        
|                                                                     |                              |   |                                              |         |               |   |              |        |              |   |        |        |   |   |           |        
|Earnings before gain on sale of
assets, minority interests and
taxes |                              |   | 6,066                                        |         |               |   | 3,024        |        |              |   |       |        |   |   | 9,090     |        
|Gain on sale of assets, net                                          |                              |   | (151                                         | )       |               |   |             |        |              |   |       |        |   |   | (151      | )      
|Minority interests                                                   |                              |   | 991                                          |         |               |   |             |        |              |   |       |        |   |   | 991       |        
|                                                                     |                              |   |                                              |         |               |   |              |        |              |   |        |        |   |   |           |        
|                                                                     | Earnings before income taxes |   | $                                            | 5,226   |               |   | $            | 3,024  |              |   | $      |       |   |   | $         | 8,250   | 
|                                                                     |                              |   |                                              |         |               |   |              |        |              |   |        |        |   |   |           |        
|Segment assets                                                       |                              | $ | 1,026,504                                    |         |               | $ | 6,693        |        |              |   |        |        |   | $ | 1,033,197 |        
|                                                                     |                              |   |                                              |         |               |   |              |        |              |   |        |        |   |   |           |        

|                                                                     |                              |   |                                              |         |               |   |              |        |              |   |        |        |   |   |         |         | 
|-------------------------------------------------------------------- | ---------------------------- | - | -------------------------------------------- | ------- | ------------- | - | ------------ | ------ | ------------ | - | ------ | ------ | - | - | ------- | ------- | 
|                                                                     |                              |   | For the Three Months Ended December 31, 2002
|                                                                     |                              |   |                                             
|                                                                     |                              |   | Acute Care                                   |         | Health Choice |   | Eliminations |        | Consolidated
|                                                                     |                              |   |                                              |         |               |   |              |        |             
|Net acute care revenue                                               |                              | $ | 217,817                                      |         |               | $ |             |        |              | $ |       |        |   | $ | 217,817 |        
|Premium revenue                                                      |                              |   |                                             |         |               |   | 36,948       |        |              |   |       |        |   |   | 36,948  |        
|Revenue between segments                                             |                              |   | 1,908                                        |         |               |   |             |        |              |   | (1,908 | )      |   |   |        |        
|                                                                     |                              |   |                                              |         |               |   |              |        |              |   |        |        |   |   |         |        
|                                                                     | Net revenue                  |   |                                              | 219,725 |               |   |              | 36,948 |              |   |        | (1,908 | ) |   |         | 254,765 | 
|Salaries and benefits                                                |                              |   | 87,243                                       |         |               |   | 1,556        |        |              |   |       |        |   |   | 88,799  |        
|Supplies                                                             |                              |   | 35,561                                       |         |               |   | 122          |        |              |   |       |        |   |   | 35,683  |        
|Medical claims                                                       |                              |   |                                             |         |               |   | 32,809       |        |              |   | (1,908 | )      |   |   | 30,901  |        
|Other operating expenses                                             |                              |   | 45,883                                       |         |               |   | 630          |        |              |   |       |        |   |   | 46,513  |        
|Provision for bad debts                                              |                              |   | 19,711                                       |         |               |   |             |        |              |   |       |        |   |   | 19,711  |        
|                                                                     |                              |   |                                              |         |               |   |              |        |              |   |        |        |   |   |         |        
|                                                                     | Adjusted EBITDA(1)           |   |                                              | 31,327  |               |   |              | 1,831  |              |   |        |       |   |   |         | 33,158  | 
|Interest expense, net                                                |                              |   | 13,317                                       |         |               |   |             |        |              |   |       |        |   |   | 13,317  |        
|Depreciation and amortization                                        |                              |   | 12,818                                       |         |               |   | 33           |        |              |   |       |        |   |   | 12,851  |        
|                                                                     |                              |   |                                              |         |               |   |              |        |              |   |        |        |   |   |         |        
|Earnings before gain on sale of
assets, minority interests and
taxes |                              |   | 5,192                                        |         |               |   | 1,798        |        |              |   |       |        |   |   | 6,990   |        
|Gain on sale of assets, net                                          |                              |   | (780                                         | )       |               |   |             |        |              |   |       |        |   |   | (780    | )      
|Minority interests                                                   |                              |   | 278                                          |         |               |   |             |        |              |   |       |        |   |   | 278     |        
|                                                                     |                              |   |                                              |         |               |   |              |        |              |   |        |        |   |   |         |        
|                                                                     | Earnings before income taxes |   | $                                            | 5,694   |               |   | $            | 1,798  |              |   | $      |       |   |   | $       | 7,492   | 
|                                                                     |                              |   |                                              |         |               |   |              |        |              |   |        |        |   |   |         |        
|Segment assets                                                       |                              | $ | 900,221                                      |         |               | $ | 2,450        |        |              |   |        |        |   | $ | 902,671 |        
|                                                                     |                              |   |                                              |         |               |   |              |        |              |   |        |        |   |   |         |        



|(1) |  | Adjusted EBITDA represents net earnings before interest expense, gain on
sale of assets, minority interests, income taxes, and depreciation and
amortization. Management routinely calculates and communicates Adjusted
EBITDA and believes that it is useful to investors because it is commonly
used as an analytical indicator within the healthcare industry to evaluate
hospital performance, allocate resources and measure leverage capacity and
debt service ability. In addition, the Company uses Adjusted EBITDA as a
measure of performance for its business segments and for incentive
compensation purposes. Adjusted EBITDA should not be considered as a
measure of financial performance under generally accepted accounting
principles (GAAP), and the items excluded from Adjusted EBITDA are
significant components in understanding and assessing financial
performance. Adjusted EBITDA should not be considered in isolation or as
an alternative to net income, cash flows generated by operating,
investing, or financing activities or other financial statement data
presented in the consolidated financial statements as an indicator of
financial performance or liquidity. Adjusted EBITDA, as presented, may not
be comparable to similarly titled measures of other companies.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

7. Supplemental Condensed Consolidating Financial Information

The 1999 Notes described in Note 3 are fully and unconditionally
guaranteed on a joint and several basis by all of the Companys material
subsidiaries. The 2003 Notes described in Note 3 are fully and unconditionally
guaranteed on a joint and several basis by all of the Companys material
subsidiaries except Health Choice.

A summarized condensed consolidating balance sheet at December 31, 2003
and September 30, 2003 and condensed consolidating statement of operations and
statement of cash flows for the three months ended December 31, 2003 and 2002
for the Company, segregating the parent company issuer, the combined 100% owned
subsidiary guarantors, the non-100% owned subsidiary guarantors and
eliminations, are found below. Separate unaudited condensed financial
statements of the non-100% owned subsidiary guarantors, Odessa Regional
Hospital, LP (Odessa), Jordan Valley Hospital, LP (Jordan Valley), The
Medical Center of Southeast Texas, LP (Southeast Texas) and Davis Hospital &
Medical Center, LP (Davis) are included as Exhibits 99.1, 99.2, 99.3, and
99.4, respectively, to this report on Form 10-Q. During the year ended
September 30, 2001, Odessa sold limited partner units, which diluted the
Companys ownership to 88.8%. On April 1, 2003, Jordan Valley sold limited
partner units, which diluted the Companys ownership to 97.4%. On August 1,
2003, Southeast Texas sold limited partner units, which diluted the Companys
ownership to 88.8%. On October 1, 2003, Davis sold limited partner units, which
diluted the Companys ownership to 97.5%. However, each of Odessa, Jordan
Valley, Southeast Texas and Davis continues to fully and unconditionally
guarantee the 1999 Notes and 2003 Notes. Prior to these transactions, all of
the Companys subsidiary guarantors were 100% owned.

12



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

IASIS Healthcare Corporation

Condensed Consolidating Balance Sheet (unaudited)
December 31, 2003(in thousands)

|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |         |              |         |              |        |           |        |  |          |        |          |   |         |         |           | 
|------------------------------------ | ---------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------ | ------- | ------ | ------- | ----- | ------- | --------------------- | ------- | ---------- | ------- | ------------ | ------- | ------------ | ------ | --------- | ------ |  | -------- | ------ | -------- | - | ------- | ------- | --------- | 
|                                     |                                                |                                                                 |                                            |         |        |         |       |         | Subsidiary Guarantors |         |            |         |              |         |              |        |           |        |  |          |       
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |         |              |         |              |        |           |        |  |          |       
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |         |              |         |              |        | Health    |        |  |          |        |          |   |         |        
|                                     |                                                |                                                                 |                                            |         | Parent |         | 100%  |         | non-100%              |         | Choice     |         |              |         |              |        | Condensed
|                                     |                                                |                                                                 |                                            |         | Issuer |         | owned |         | owned (1)             |         | 100% owned |         | Eliminations |         | Consolidated
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |         |              |         |             
|Assets                               |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |         |              |         |              |        |           |        |  |          |        |          |   |        
|                                     | Current assets:                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |         |              |         |              |        |           |        |  |          |        |          |   |         |        
|                                     |                                                | Cash and cash equivalents                                       |                                            | $       |       |         |       | $       | 92,540                |         |            | $       | 560          |         |              | $      | 1,870     |        |  | $        |       |          |   | $       | 94,970  |          
|                                     |                                                | Accounts receivable, net                                        |                                            |         |       |         |       |         | 117,733               |         |            |         | 43,780       |         |              |        |          |        |  |          |       |          |   |         | 161,513 |          
|                                     |                                                | Inventories                                                     |                                            |         |       |         |       |         | 16,489                |         |            |         | 7,472        |         |              |        |          |        |  |          |       |          |   |         | 23,961  |          
|                                     |                                                | Prepaid expenses and other current assets                       |                                            |         |       |         |       |         | 8,952                 |         |            |         | 2,482        |         |              |        | 4,156     |        |  |          |       |          |   |         | 15,590  |          
|                                     |                                                | Assets held for sale                                            |                                            |         |       |         |       |         | 11,070                |         |            |         |             |         |              |        |          |        |  |          |       |          |   |         | 11,070  |          
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |         |              |         |              |        |           |        |  |          |        |          |   |         |         |          
|                                     |                                                |                                                                 | Total current assets                       |         |        |        |       |         |                       | 246,784 |            |         |              | 54,294  |              |        |           | 6,026  |  |          |        |         |   |         |         | 307,104   | 
|                                     | Property and equipment, net                    |                                                                 |                                            |        |        |         |       | 304,056 |                       |         |            | 132,379 |              |         |              | 656    |           |        |  |         |        |          |   | 437,091 |        
|                                     | Intercompany                                   |                                                                 |                                            |         |        |         |       | (88,987 | )                     |         |            | 38,795  |              |         |              | 50,192 |           |        |  |         |        |          |   |        |        
|                                     | Net investment in and advances to subsidiaries |                                                                 |                                            | 936,204 |        |         |       |        |                       |         |            |        |              |         |              |       |           |        |  | (936,204 | )      |          |   |        |        
|                                     | Goodwill                                       |                                                                 |                                            |        |        |         |       | 208,150 |                       |         |            | 44,054  |              |         |              |       |           |        |  |         |        |          |   | 252,204 |        
|                                     | Other assets                                   |                                                                 |                                            | 24,153  |        |         |       | 9,430   |                       |         |            | 3,204   |              |         |              | 11     |           |        |  |         |        |          |   | 36,798  |        
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |         |              |         |              |        |           |        |  |          |        |          |   |         |         |          
|                                     |                                                |                                                                 | Total assets                               |         | $      | 960,357 |       |         | $                     | 679,433 |            |         | $            | 272,726 |              |        | $         | 56,885 |  |          | $      | (936,204 | ) |         | $       | 1,033,197 | 
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |         |              |         |              |        |           |        |  |          |        |          |   |        
|Liabilities and stockholders equity |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |         |              |         |              |        |           |        |  |          |        |          |   |        
|                                     | Current liabilities:                           |                                                                 |                                            |         |        |         |       |         |                       |         |            |         |              |         |              |        |           |        |  |          |        |          |   |         |        
|                                     |                                                | Accounts payable                                                |                                            | $       |       |         |       | $       | 35,126                |         |            | $       | 10,332       |         |              | $      | 879       |        |  | $        |       |          |   | $       | 46,337  |          
|                                     |                                                | Salaries and benefits payable                                   |                                            |         |       |         |       |         | 19,422                |         |            |         | 6,476        |         |              |        |          |        |  |          |       |          |   |         | 25,898  |          
|                                     |                                                | Accrued interest payable                                        |                                            |         | 12,617 |         |       |         |                      |         |            |         |             |         |              |        |          |        |  |          |       |          |   |         | 12,617  |          
|                                     |                                                | Medical claims payable                                          |                                            |         |       |         |       |         |                      |         |            |         |             |         |              |        | 41,290    |        |  |          |       |          |   |         | 41,290  |          
|                                     |                                                | Accrued expenses and other current
liabilities                  |                                            |         |       |         |       |         | 17,297                |         |            |         | 2,618        |         |              |        | 736       |        |  |          |       |          |   |         | 20,651  |          
|                                     |                                                | Current portion of long-term debt and
capital lease obligations |                                            |         | 3,500  |         |       |         | 1,432                 |         |            |         | 3,861        |         |              |        |          |        |  |          | (2,720 | )        |   |         | 6,073   |          
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |         |              |         |              |        |           |        |  |          |        |          |   |         |         |          
|                                     |                                                |                                                                 | Total current liabilities                  |         |        | 16,117  |       |         |                       | 73,277  |            |         |              | 23,287  |              |        |           | 42,905 |  |          |        | (2,720   | ) |         |         | 152,866   | 
|                                     | Long-term debt and capital lease obligations   |                                                                 |                                            | 648,500 |        |         |       | 4,908   |                       |         |            | 135,717 |              |         |              |       |           |        |  | (132,267 | )      |          |   | 656,858 |        
|                                     | Other long-term liabilities                    |                                                                 |                                            |        |        |         |       | 27,149  |                       |         |            |        |              |         |              |       |           |        |  |         |        |          |   | 27,149  |        
|                                     | Minority interest                              |                                                                 |                                            |        |        |         |       | 12,007  |                       |         |            |        |              |         |              |       |           |        |  |         |        |          |   | 12,007  |        
|                                     | Stockholders equity                           |                                                                 |                                            | 295,740 |        |         |       | 562,092 |                       |         |            | 113,722 |              |         |              | 13,980 |           |        |  | (801,217 | )      |          |   | 184,317 |        
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |         |              |         |              |        |           |        |  |          |        |          |   |         |         |          
|                                     |                                                |                                                                 | Total liabilities and stockholders equity |         | $      | 960,357 |       |         | $                     | 679,433 |            |         | $            | 272,726 |              |        | $         | 56,885 |  |          | $      | (936,204 | ) |         | $       | 1,033,197 | 
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |         |              |         |              |        |           |        |  |          |        |          |   |         |         |          



|(1)  A Supplemental Condensed Balance Sheet which presents information for the
individual non-100% owned subsidiary guarantors is presented
below.
|--------------------------------------------------------------------------------------------------------------------------------------------------

13



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

IASIS Healthcare Corporation

Non-100% Owned
Subsidiary Guarantors

Supplemental Condensed Balance Sheet (unaudited)
December 31, 2003(in thousands)

|                       |                                              |                                                                 |                              |        |          |        |               |        |       |        |           |        |            |        |  |        |                  |        |  |         |                |         | 
|---------------------- | -------------------------------------------- | --------------------------------------------------------------- | ---------------------------- | ------ | -------- | ------ | ------------- | ------ | ----- | ------ | --------- | ------ | ---------- | ------ |  | ------ | ---------------- | ------ |  | ------- | -------------- | ------- | 
|                       |                                              |                                                                 |                              |        |          |        |               |        |       |        |           |        |            |        |  |        |                  |        |  |         | Total Non-100%
|                       |                                              |                                                                 |                              |        | Odessa   |        |               |        |       |        | Southeast |        |            |        |  |        | Owned Subsidiary
|                       |                                              |                                                                 |                              |        | Regional |        | Jordan Valley |        | Texas |        | Davis     |        | Guarantors
|                       |                                              |                                                                 |                              |        |          |        |               |        |       |        |           |        |           
|Assets                 |                                              |                                                                 |                              |        |          |        |               |        |       |        |           |        |            |        |  |        |                  |        |  |        
|                       | Current assets:                              |                                                                 |                              |        |          |        |               |        |       |        |           |        |            |        |  |        |                  |        |  |         |               
|                       |                                              | Cash and cash equivalents                                       |                              | $      |         |        |               | $      |      |        |           | $      |           |        |  | $      | 560              |        |  | $       | 560            |        
|                       |                                              | Accounts receivable, net                                        |                              |        | 8,793    |        |               |        | 8,103 |        |           |        | 15,546     |        |  |        | 11,338           |        |  |         | 43,780         |        
|                       |                                              | Inventories                                                     |                              |        | 1,288    |        |               |        | 1,220 |        |           |        | 3,531      |        |  |        | 1,433            |        |  |         | 7,472          |        
|                       |                                              | Prepaid expenses and other current assets                       |                              |        | 161      |        |               |        | 257   |        |           |        | 1,445      |        |  |        | 619              |        |  |         | 2,482          |        
|                       |                                              |                                                                 |                              |        |          |        |               |        |       |        |           |        |            |        |  |        |                  |        |  |         |                |        
|                       |                                              |                                                                 | Total current assets         |        |          | 10,242 |               |        |       | 9,580  |           |        |            | 20,522 |  |        |                  | 13,950 |  |         |                | 54,294  | 
|                       | Property and equipment, net                  |                                                                 |                              | 24,069 |          |        |               | 39,599 |       |        |           | 26,151 |            |        |  | 42,560 |                  |        |  | 132,379 |               
|                       | Intercompany                                 |                                                                 |                              | 6,897  |          |        |               | 368    |       |        |           | 23,650 |            |        |  | 7,880  |                  |        |  | 38,795  |               
|                       | Goodwill                                     |                                                                 |                              | 28,827 |          |        |               | 8,925  |       |        |           |       |            |        |  | 6,302  |                  |        |  | 44,054  |               
|                       | Other assets                                 |                                                                 |                              | 838    |          |        |               | 1,308  |       |        |           | 715    |            |        |  | 343    |                  |        |  | 3,204   |               
|                       |                                              |                                                                 |                              |        |          |        |               |        |       |        |           |        |            |        |  |        |                  |        |  |         |                |        
|                       |                                              |                                                                 | Total assets                 |        | $        | 70,873 |               |        | $     | 59,780 |           |        | $          | 71,038 |  |        | $                | 71,035 |  |         | $              | 272,726 | 
|                       |                                              |                                                                 |                              |        |          |        |               |        |       |        |           |        |            |        |  |        |                  |        |  |         |                |        
|Liabilities and equity |                                              |                                                                 |                              |        |          |        |               |        |       |        |           |        |            |        |  |        |                  |        |  |        
|                       | Current liabilities:                         |                                                                 |                              |        |          |        |               |        |       |        |           |        |            |        |  |        |                  |        |  |         |               
|                       |                                              | Accounts payable                                                |                              | $      | 2,177    |        |               | $      | 2,948 |        |           | $      | 2,473      |        |  | $      | 2,734            |        |  | $       | 10,332         |        
|                       |                                              | Salaries and benefits payable                                   |                              |        | 1,402    |        |               |        | 1,252 |        |           |        | 2,297      |        |  |        | 1,525            |        |  |         | 6,476          |        
|                       |                                              | Accrued expenses and other current
liabilities                  |                              |        | 532      |        |               |        | 98    |        |           |        | 1,901      |        |  |        | 87               |        |  |         | 2,618          |        
|                       |                                              | Current portion of long-term debt and
capital lease obligations |                              |        | 1,077    |        |               |        | 977   |        |           |        | 739        |        |  |        | 1,068            |        |  |         | 3,861          |        
|                       |                                              |                                                                 |                              |        |          |        |               |        |       |        |           |        |            |        |  |        |                  |        |  |         |                |        
|                       |                                              | Total current liabilities                                       |                              |        | 5,188    |        |               |        | 5,275 |        |           |        | 7,410      |        |  |        | 5,414            |        |  |         | 23,287         |        
|                       | Long-term debt and capital lease obligations |                                                                 |                              | 40,040 |          |        |               | 32,175 |       |        |           | 23,469 |            |        |  | 40,033 |                  |        |  | 135,717 |               
|                       | Equity                                       |                                                                 |                              | 25,645 |          |        |               | 22,330 |       |        |           | 40,159 |            |        |  | 25,588 |                  |        |  | 113,722 |               
|                       |                                              |                                                                 |                              |        |          |        |               |        |       |        |           |        |            |        |  |        |                  |        |  |         |                |        
|                       |                                              |                                                                 | Total liabilities and equity |        | $        | 70,873 |               |        | $     | 59,780 |           |        | $          | 71,038 |  |        | $                | 71,035 |  |         | $              | 272,726 | 
|                       |                                              |                                                                 |                              |        |          |        |               |        |       |        |           |        |            |        |  |        |                  |        |  |         |                |        

14



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

IASIS Healthcare Corporation

Condensed Consolidating Balance Sheet
September 30, 2003
(in thousands)

|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |        |              |         |              |        |           |        |  |          |        |          |   |         |         |           | 
|------------------------------------ | ---------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------ | ------- | ------ | ------- | ----- | ------- | --------------------- | ------- | ---------- | ------ | ------------ | ------- | ------------ | ------ | --------- | ------ |  | -------- | ------ | -------- | - | ------- | ------- | --------- | 
|                                     |                                                |                                                                 |                                            |         |        |         |       |         | Subsidiary Guarantors |         |            |        |              |         |              |        |           |        |  |          |       
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |        |              |         |              |        |           |        |  |          |       
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |        |              |         |              |        | Health    |        |  |          |        |          |   |         |        
|                                     |                                                |                                                                 |                                            |         | Parent |         | 100%  |         | non-100%              |         | Choice     |        |              |         |              |        | Condensed
|                                     |                                                |                                                                 |                                            |         | Issuer |         | owned |         | owned(1)              |         | 100% owned |        | Eliminations |         | Consolidated
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |        |              |         |             
|Assets                               |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |        |              |         |              |        |           |        |  |          |        |          |   |        
|                                     | Current assets:                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |        |              |         |              |        |           |        |  |          |        |          |   |         |        
|                                     |                                                | Cash and cash equivalents                                       |                                            | $       |       |         |       | $       | 100,881               |         |            | $      | 189          |         |              | $      |          |        |  | $        |       |          |   | $       | 101,070 |          
|                                     |                                                | Accounts receivable, net                                        |                                            |         |       |         |       |         | 124,884               |         |            |        | 28,299       |         |              |        |          |        |  |          |       |          |   |         | 153,183 |          
|                                     |                                                | Inventories                                                     |                                            |         |       |         |       |         | 17,774                |         |            |        | 6,068        |         |              |        |          |        |  |          |       |          |   |         | 23,842  |          
|                                     |                                                | Prepaid expenses and other current assets                       |                                            |         |       |         |       |         | 10,230                |         |            |        | 2,008        |         |              |        | 4,078     |        |  |          |       |          |   |         | 16,316  |          
|                                     |                                                | Assets held for sale                                            |                                            |         |       |         |       |         | 11,070                |         |            |        |             |         |              |        |          |        |  |          |       |          |   |         | 11,070  |          
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |        |              |         |              |        |           |        |  |          |        |          |   |        
|                                     |                                                |                                                                 | Total current assets                       |         |        |        |       |         |                       | 264,839 |            |        |              | 36,564  |              |        |           | 4,078  |  |          |        |         |   |         |         | 305,481   | 
|                                     | Property and equipment, net                    |                                                                 |                                            |        |        |         |       | 348,968 |                       |         |            | 85,841 |              |         |              | 668    |           |        |  |         |        |          |   | 435,477 |        
|                                     | Intercompany                                   |                                                                 |                                            |        |        |         |       | (84,741 | )                     |         |            | 44,801 |              |         |              | 39,940 |           |        |  |         |        |          |   |        |        
|                                     | Net investment in and advances to subsidiaries |                                                                 |                                            | 948,121 |        |         |       |        |                       |         |            |       |              |         |              |       |           |        |  | (948,121 | )      |          |   |        |        
|                                     | Goodwill                                       |                                                                 |                                            |        |        |         |       | 214,452 |                       |         |            | 37,752 |              |         |              |       |           |        |  |         |        |          |   | 252,204 |        
|                                     | Other assets                                   |                                                                 |                                            | 21,472  |        |         |       | 12,311  |                       |         |            | 3,054  |              |         |              |       |           |        |  |         |        |          |   | 36,837  |        
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |        |              |         |              |        |           |        |  |          |        |          |   |        
|                                     |                                                |                                                                 | Total assets                               |         | $      | 969,593 |       |         | $                     | 755,829 |            |        | $            | 208,012 |              |        | $         | 44,686 |  |          | $      | (948,121 | ) |         | $       | 1,029,999 | 
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |        |              |         |              |        |           |        |  |          |        |          |   |         |         |          
|Liabilities and stockholders equity |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |        |              |         |              |        |           |        |  |          |        |          |   |        
|                                     | Current liabilities:                           |                                                                 |                                            |         |        |         |       |         |                       |         |            |        |              |         |              |        |           |        |  |          |        |          |   |         |        
|                                     |                                                | Accounts payable                                                |                                            | $       |       |         |       | $       | 44,718                |         |            | $      | 8,521        |         |              | $      | 933       |        |  | $        |       |          |   | $       | 54,172  |          
|                                     |                                                | Salaries and benefits payable                                   |                                            |         |       |         |       |         | 24,036                |         |            |        | 5,806        |         |              |        |          |        |  |          |       |          |   |         | 29,842  |          
|                                     |                                                | Accrued interest payable                                        |                                            |         | 20,978 |         |       |         |                      |         |            |        |             |         |              |        |          |        |  |          |       |          |   |         | 20,978  |          
|                                     |                                                | Medical claims payable                                          |                                            |         |       |         |       |         |                      |         |            |        |             |         |              |        | 25,767    |        |  |          |       |          |   |         | 25,767  |          
|                                     |                                                | Accrued expenses and other current liabilities                  |                                            |         |       |         |       |         | 18,317                |         |            |        | 2,212        |         |              |        |          |        |  |          |       |          |   |         | 20,529  |          
|                                     |                                                | Current portion of long-term debt and capital
lease obligations |                                            |         | 3,500  |         |       |         | 1,714                 |         |            |        | 2,675        |         |              |        |          |        |  |          | (1,986 | )        |   |         | 5,903   |          
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |        |              |         |              |        |           |        |  |          |        |          |   |        
|                                     |                                                |                                                                 | Total current liabilities                  |         |        | 24,478  |       |         |                       | 88,785  |            |        |              | 19,214  |              |        |           | 26,700 |  |          |        | (1,986   | ) |         |         | 157,191   | 
|                                     | Long-term debt and capital lease obligations   |                                                                 |                                            | 649,375 |        |         |       | 6,005   |                       |         |            | 96,494 |              |         |              |        |           |        |  | (93,343  | )      |          |   | 658,531 |        
|                                     | Other long-term liabilities                    |                                                                 |                                            |        |        |         |       | 27,795  |                       |         |            |       |              |         |              |       |           |        |  |         |        |          |   | 27,795  |        
|                                     | Minority interest                              |                                                                 |                                            |        |        |         |       | 10,383  |                       |         |            |       |              |         |              |       |           |        |  |         |        |          |   | 10,383  |        
|                                     | Stockholders equity                           |                                                                 |                                            | 295,740 |        |         |       | 622,861 |                       |         |            | 92,304 |              |         |              | 17,986 |           |        |  | (852,792 | )      |          |   | 176,099 |        
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |        |              |         |              |        |           |        |  |          |        |          |   |        
|                                     |                                                |                                                                 | Total liabilities and stockholders equity |         | $      | 969,593 |       |         | $                     | 755,829 |            |        | $            | 208,012 |              |        | $         | 44,686 |  |          | $      | (948,121 | ) |         | $       | 1,029,999 | 
|                                     |                                                |                                                                 |                                            |         |        |         |       |         |                       |         |            |        |              |         |              |        |           |        |  |          |        |          |   |         |         |          



|(1) |  | A Supplemental Condensed Balance Sheet which presents information for the
individual non-100% owned subsidiary guarantors is presented below.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

15



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

IASIS Healthcare Corporation

Non-100% Owned
Subsidiary Guarantors

Supplemental Condensed Balance Sheet
September 30, 2003(in thousands)

|                       |                                              |                                                                 |                              |        |                 |        |               |        |                 |        |            |        |        |        |  |        |                  |         | 
|---------------------- | -------------------------------------------- | --------------------------------------------------------------- | ---------------------------- | ------ | --------------- | ------ | ------------- | ------ | --------------- | ------ | ---------- | ------ | ------ | ------ |  | ------ | ---------------- | ------- | 
|                       |                                              |                                                                 |                              |        |                 |        |               |        |                 |        |            |        |        |        |  |        | Total Non-100%  
|                       |                                              |                                                                 |                              |        |                 |        |               |        |                 |        |            |        |        |        |  |        | Owned Subsidiary
|                       |                                              |                                                                 |                              |        | Odessa Regional |        | Jordan Valley |        | Southeast Texas |        | Guarantors
|                       |                                              |                                                                 |                              |        |                 |        |               |        |                 |        |           
|Assets                 |                                              |                                                                 |                              |        |                 |        |               |        |                 |        |            |        |        |        |  |       
|                       | Current assets:                              |                                                                 |                              |        |                 |        |               |        |                 |        |            |        |        |        |  |        |                 
|                       |                                              | Cash and cash equivalents                                       |                              | $      |                |        |               | $      | 189             |        |            | $      |       |        |  | $      | 189              |        
|                       |                                              | Accounts receivable, net                                        |                              |        | 7,365           |        |               |        | 6,938           |        |            |        | 13,996 |        |  |        | 28,299           |        
|                       |                                              | Inventories                                                     |                              |        | 1,299           |        |               |        | 1,210           |        |            |        | 3,559  |        |  |        | 6,068            |        
|                       |                                              | Prepaid expenses and other current assets                       |                              |        | 249             |        |               |        | 429             |        |            |        | 1,330  |        |  |        | 2,008            |        
|                       |                                              |                                                                 |                              |        |                 |        |               |        |                 |        |            |        |        |        |  |       
|                       |                                              |                                                                 | Total current assets         |        |                 | 8,913  |               |        |                 | 8,766  |            |        |        | 18,885 |  |        |                  | 36,564  | 
|                       | Property and equipment, net                  |                                                                 |                              | 23,991 |                 |        |               | 36,670 |                 |        |            | 25,180 |        |        |  | 85,841 |                 
|                       | Intercompany                                 |                                                                 |                              | 14,107 |                 |        |               | 4,396  |                 |        |            | 26,298 |        |        |  | 44,801 |                 
|                       | Goodwill                                     |                                                                 |                              | 28,827 |                 |        |               | 8,925  |                 |        |            |       |        |        |  | 37,752 |                 
|                       | Other assets                                 |                                                                 |                              | 864    |                 |        |               | 1,165  |                 |        |            | 1,025  |        |        |  | 3,054  |                 
|                       |                                              |                                                                 |                              |        |                 |        |               |        |                 |        |            |        |        |        |  |       
|                       |                                              |                                                                 | Total assets                 |        | $               | 76,702 |               |        | $               | 59,922 |            |        | $      | 71,388 |  |        | $                | 208,012 | 
|                       |                                              |                                                                 |                              |        |                 |        |               |        |                 |        |            |        |        |        |  |        |                  |        
|Liabilities and equity |                                              |                                                                 |                              |        |                 |        |               |        |                 |        |            |        |        |        |  |       
|                       | Current liabilities:                         |                                                                 |                              |        |                 |        |               |        |                 |        |            |        |        |        |  |        |                 
|                       |                                              | Accounts payable                                                |                              | $      | 2,501           |        |               | $      | 2,431           |        |            | $      | 3,589  |        |  | $      | 8,521            |        
|                       |                                              | Salaries and benefits payable                                   |                              |        | 1,489           |        |               |        | 1,496           |        |            |        | 2,821  |        |  |        | 5,806            |        
|                       |                                              | Accrued expenses and other current liabilities                  |                              |        | 405             |        |               |        | 242             |        |            |        | 1,565  |        |  |        | 2,212            |        
|                       |                                              | Current portion of long-term debt and capital
lease obligations |                              |        | 1,142           |        |               |        | 957             |        |            |        | 576    |        |  |        | 2,675            |        
|                       |                                              |                                                                 |                              |        |                 |        |               |        |                 |        |            |        |        |        |  |       
|                       |                                              |                                                                 | Total current liabilities    |        |                 | 5,537  |               |        |                 | 5,126  |            |        |        | 8,551  |  |        |                  | 19,214  | 
|                       | Long-term debt and capital lease obligations |                                                                 |                              | 40,253 |                 |        |               | 32,435 |                 |        |            | 23,806 |        |        |  | 96,494 |                 
|                       | Equity                                       |                                                                 |                              | 30,912 |                 |        |               | 22,361 |                 |        |            | 39,031 |        |        |  | 92,304 |                 
|                       |                                              |                                                                 |                              |        |                 |        |               |        |                 |        |            |        |        |        |  |       
|                       |                                              |                                                                 | Total liabilities and equity |        | $               | 76,702 |               |        | $               | 59,922 |            |        | $      | 71,388 |  |        | $                | 208,012 | 
|                       |                                              |                                                                 |                              |        |                 |        |               |        |                 |        |            |        |        |        |  |        |                  |        

16



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

IASIS Healthcare Corporation

Condensed Consolidating Statement of Operations
for the Three Months Ended December 31, 2003 (unaudited)(in thousands)

|                                                                            |                                  |                          |       |         |        |       |      |                       |         |            |        |              |        |              |       |           |        |   |         |        |        |   |       |         |         | 
|--------------------------------------------------------------------------- | -------------------------------- | ------------------------ | ----- | ------- | ------ | ----- | ---- | --------------------- | ------- | ---------- | ------ | ------------ | ------ | ------------ | ----- | --------- | ------ | - | ------- | ------ | ------ | - | ----- | ------- | ------- | 
|                                                                            |                                  |                          |       |         |        |       |      | Subsidiary Guarantors |         |            |        |              |        |              |       |           |        |   |         |       
|                                                                            |                                  |                          |       |         |        |       |      |                       |         | Health     |        |              |        |              |       |           |        |  
|                                                                            |                                  |                          |       | Parent  |        | 100%  |      | non-100%              |         | Choice     |        |              |        |              |       | Condensed
|                                                                            |                                  |                          |       | Issuer  |        | owned |      | owned (1)             |         | 100% owned |        | Eliminations |        | Consolidated
|                                                                            |                                  |                          |       |         |        |       |      |                       |         |            |        |              |        |             
|Net revenue:                                                                |                                  |                          |       |         |        |       |      |                       |         |            |        |              |        |              |       |           |        |   |         |        |        |   |       |        
|                                                                            | Net acute care revenue           |                          | $     |        |        |       | $    | 170,303               |         |            | $      | 79,087       |        |              | $     |          |        |   | $       |       |        |   | $     | 249,390 |        
|                                                                            | Premium revenue                  |                          |       |        |        |       |      | 2,979                 |         |            |        |             |        |              |       | 68,714    |        |   |         | (2,979 | )      |   |       | 68,714  |        
|                                                                            |                                  |                          |       |         |        |       |      |                       |         |            |        |              |        |              |       |           |        |   |         |        |        |   |       |        
|                                                                            |                                  | Total net revenue        |       |         |       |       |      |                       | 173,282 |            |        |              | 79,087 |              |       |           | 68,714 |   |         |        | (2,979 | ) |       |         | 318,104 | 
|Costs and expenses:                                                         |                                  |                          |       |         |        |       |      |                       |         |            |        |              |        |              |       |           |        |   |         |        |        |   |       |        
|                                                                            | Salaries and benefits            |                          |       |        |        |       |      | 71,262                |         |            |        | 25,981       |        |              |       | 2,173     |        |   |         |       |        |   |       | 99,416  |        
|                                                                            | Supplies                         |                          |       |        |        |       |      | 30,369                |         |            |        | 9,868        |        |              |       | 42        |        |   |         |       |        |   |       | 40,279  |        
|                                                                            | Medical claims                   |                          |       |        |        |       |      |                      |         |            |        |             |        |              |       | 60,750    |        |   |         | (2,979 | )      |   |       | 57,771  |        
|                                                                            | Other operating expenses         |                          |       |        |        |       |      | 39,853                |         |            |        | 13,291       |        |              |       | 2,684     |        |   |         |       |        |   |       | 55,828  |        
|                                                                            | Provision for bad debts          |                          |       |        |        |       |      | 18,651                |         |            |        | 6,447        |        |              |       |          |        |   |         |       |        |   |       | 25,098  |        
|                                                                            | Interest, net                    |                          |       | 14,578  |        |       |      | (687                  | )       |            |        | 2,906        |        |              |       |          |        |   |         | (2,906 | )      |   |       | 13,891  |        
|                                                                            | Depreciation and amortization    |                          |       | 984     |        |       |      | 12,930                |         |            |        | 2,776        |        |              |       | 41        |        |   |         |       |        |   |       | 16,731  |        
|                                                                            | Management fees                  |                          |       | (1,643  | )      |       |      |                      |         |            |        | 1,643        |        |              |       |          |        |   |         |       |        |   |       |        |        
|                                                                            | Equity in earnings of affiliates |                          |       | (19,231 | )      |       |      |                      |         |            |        |             |        |              |       |          |        |   |         | 19,231 |        |   |       |        |        
|                                                                            |                                  |                          |       |         |        |       |      |                       |         |            |        |              |        |              |       |           |        |   |         |        |        |   |       |        
|                                                                            |                                  | Total costs and expenses |       |         | (5,312 | )     |      |                       | 172,378 |            |        |              | 62,912 |              |       |           | 65,690 |   |         |        | 13,346 |   |       |         | 309,014 | 
|Earnings before gain on sale of
assets, minority interest, and
income taxes |                                  |                          | 5,312 |         |        |       | 904  |                       |         |            | 16,175 |              |        |              | 3,024 |           |        |   | (16,325 | )      |        |   | 9,090 |        
|Gain on sale of assets, net                                                 |                                  |                          |      |         |        |       | 151  |                       |         |            |       |              |        |              |      |           |        |   |        |        |        |   | 151   |        
|Minority interests                                                          |                                  |                          |      |         |        |       | (991 | )                     |         |            |       |              |        |              |      |           |        |   |        |        |        |   | (991  | )      
|                                                                            |                                  |                          |       |         |        |       |      |                       |         |            |        |              |        |              |       |           |        |   |         |        |        |   |       |        
|Earnings before income taxes                                                |                                  |                          | 5,312 |         |        |       | 64   |                       |         |            | 16,175 |              |        |              | 3,024 |           |        |   | (16,325 | )      |        |   | 8,250 |        
|Income tax expense                                                          |                                  |                          |      |         |        |       | 32   |                       |         |            |       |              |        |              |      |           |        |   |        |        |        |   | 32    |        
|                                                                            |                                  |                          |       |         |        |       |      |                       |         |            |        |              |        |              |       |           |        |   |         |        |        |   |       |        
|Net earnings (loss)                                                         |                                  | $                        | 5,312 |         |        | $     | 32   |                       |         | $          | 16,175 |              |        | $            | 3,024 |           |        | $ | (16,325 | )      |        | $ | 8,218 |        
|                                                                            |                                  |                          |       |         |        |       |      |                       |         |            |        |              |        |              |       |           |        |   |         |        |        |   |       |        



| | (1) |  | A Supplemental Condensed Statement of Operations which presents
information for the individual non-100% owned subsidiary guarantors is
presented below.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

17



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

IASIS Healthcare Corporation
Non-100% Owned Subsidiary Guarantors

Supplemental Condensed Statement of Operations (unaudited)
for the Three Months Ended December 31, 2003(in thousands)

|                             |                               |                          |       |          |        |        |       |           |        |       |       |            |        |            |       |        |        |   |        |                |        | 
|---------------------------- | ----------------------------- | ------------------------ | ----- | -------- | ------ | ------ | ----- | --------- | ------ | ----- | ----- | ---------- | ------ | ---------- | ----- | ------ | ------ | - | ------ | -------------- | ------ | 
|                             |                               |                          |       |          |        |        |       |           |        |       |       |            |        |            |       |        |        |   |        | Total Non-100%
|                             |                               |                          |       |          |        |        |       |           |        |       |       |            |        |            |       |        |        |   |        | Owned         
|                             |                               |                          |       | Odessa   |        | Jordan |       | Southeast |        |       |       |            |        | Subsidiary
|                             |                               |                          |       | Regional |        | Valley |       | Texas     |        | Davis |       | Guarantors
|                             |                               |                          |       |          |        |        |       |           |        |       |       |           
|Net revenue:                 |                               |                          |       |          |        |        |       |           |        |       |       |            |        |            |       |        |        |   |        |               
|                             | Net acute care revenue        |                          | $     | 15,590   |        |        | $     | 14,914    |        |       | $     | 27,958     |        |            | $     | 20,625 |        |   | $      | 79,087         |       
|                             |                               |                          |       |          |        |        |       |           |        |       |       |            |        |            |       |        |        |   |        |               
|                             |                               | Total net revenue        |       |          | 15,590 |        |       |           | 14,914 |       |       |            | 27,958 |            |       |        | 20,625 |   |        |                | 79,087 | 
|Costs and expenses:          |                               |                          |       |          |        |        |       |           |        |       |       |            |        |            |       |        |        |   |        |               
|                             | Salaries and benefits         |                          |       | 5,311    |        |        |       | 4,716     |        |       |       | 9,706      |        |            |       | 6,248  |        |   |        | 25,981         |       
|                             | Supplies                      |                          |       | 1,539    |        |        |       | 1,534     |        |       |       | 4,151      |        |            |       | 2,644  |        |   |        | 9,868          |       
|                             | Other operating expenses      |                          |       | 2,071    |        |        |       | 2,303     |        |       |       | 5,779      |        |            |       | 3,138  |        |   |        | 13,291         |       
|                             | Provision for bad debts       |                          |       | 1,292    |        |        |       | 1,306     |        |       |       | 2,953      |        |            |       | 896    |        |   |        | 6,447          |       
|                             | Interest, net                 |                          |       | 947      |        |        |       | 624       |        |       |       | 763        |        |            |       | 572    |        |   |        | 2,906          |       
|                             | Depreciation and amortization |                          |       | 591      |        |        |       | 602       |        |       |       | 892        |        |            |       | 691    |        |   |        | 2,776          |       
|                             | Management fees               |                          |       | 304      |        |        |       | 298       |        |       |       | 629        |        |            |       | 412    |        |   |        | 1,643          |       
|                             |                               |                          |       |          |        |        |       |           |        |       |       |            |        |            |       |        |        |   |        |               
|                             |                               | Total costs and expenses |       |          | 12,055 |        |       |           | 11,383 |       |       |            | 24,873 |            |       |        | 14,601 |   |        |                | 62,912 | 
|                             |                               |                          |       |          |        |        |       |           |        |       |       |            |        |            |       |        |        |   |        |               
|Earnings before income taxes |                               |                          | 3,535 |          |        |        | 3,531 |           |        |       | 3,085 |            |        |            | 6,024 |        |        |   | 16,175 |               
|Income tax expense           |                               |                          |      |          |        |        |      |           |        |       |      |            |        |            |      |        |        |   |       |               
|                             |                               |                          |       |          |        |        |       |           |        |       |       |            |        |            |       |        |        |   |        |               
|Net earnings                 |                               | $                        | 3,535 |          |        | $      | 3,531 |           |        | $     | 3,085 |            |        | $          | 6,024 |        |        | $ | 16,175 |               
|                             |                               |                          |       |          |        |        |       |           |        |       |       |            |        |            |       |        |        |   |        |                |       

18



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

IASIS Health Corporation

Condensed Consolidating Statement of Operations
for the Three Months Ended December 31, 2002 (unaudited)(in thousands)

|                                                                            |                          |                   |         |               |   |            |        |                       |         |              |       |              |        |   |         |        |        |           |        |         |         | 
|--------------------------------------------------------------------------- | ------------------------ | ----------------- | ------- | ------------- | - | ---------- | ------ | --------------------- | ------- | ------------ | ----- | ------------ | ------ | - | ------- | ------ | ------ | --------- | ------ | ------- | ------- | 
|                                                                            |                          |                   |         |               |   |            |        | Subsidiary Guarantors |         |              |       |              |        |   |         |       
|                                                                            |                          |                   |         |               |   |            |        |                       |         |              |       |              |        |   |         |       
|                                                                            |                          |                   |         |               |   |            |        |                       |         |              |       | Non-100%     |        |   |         |        |        | Condensed
|                                                                            |                          |                   |         | Parent Issuer |   | 100% Owned |        | Owned                 |         | Eliminations |       | Consolidated
|                                                                            |                          |                   |         |               |   |            |        |                       |         |              |       |             
|Net revenue:                                                                |                          |                   |         |               |   |            |        |                       |         |              |       |              |        |   |         |        |        |           |        |        
|                                                                            | Net acute care revenue   |                   | $       |              |   |            | $      | 203,820               |         |              | $     | 16,220       |        |   | $       | (2,223 | )      |           | $      | 217,817 |        
|                                                                            | Premium revenue          |                   |         |              |   |            |        | 36,948                |         |              |       |             |        |   |         |       |        |           |        | 36,948  |        
|                                                                            |                          |                   |         |               |   |            |        |                       |         |              |       |              |        |   |         |        |        |           |        |        
|                                                                            |                          | Total net revenue |         |               |  |            |        |                       | 240,768 |              |       |              | 16,220 |   |         |        | (2,223 | )         |        |         | 254,765 | 
|Costs and expenses:                                                         |                          |                   |         |               |   |            |        |                       |         |              |       |              |        |   |         |        |        |           |        |        
|Salaries and benefits                                                       |                          |                   |        |               |   |            | 83,484 |                       |         |              | 5,315 |              |        |   |        |        |        |           | 88,799 |        
|Supplies                                                                    |                          |                   |        |               |   |            | 33,254 |                       |         |              | 2,429 |              |        |   |        |        |        |           | 35,683 |        
|Medical claims                                                              |                          |                   |         |               |   |            | 32,809 |                       |         |              |      |              |        |   | (1,908  | )      |        |           | 30,901 |        
|Other operating expenses                                                    |                          |                   |        |               |   |            | 43,966 |                       |         |              | 2,547 |              |        |   |        |        |        |           | 46,513 |        
|Provision for bad debts                                                     |                          |                   |        |               |   |            | 18,286 |                       |         |              | 1,425 |              |        |   |        |        |        |           | 19,711 |        
|Interest, net                                                               |                          |                   | 13,246  |               |   |            | 71     |                       |         |              | 1,255 |              |        |   | (1,255  | )      |        |           | 13,317 |        
|Depreciation and amortization                                               |                          |                   | 1,114   |               |   |            | 11,230 |                       |         |              | 507   |              |        |   |        |        |        |           | 12,851 |        
|Management fees                                                             |                          |                   |        |               |   |            |       |                       |         |              | 315   |              |        |   | (315    | )      |        |           |       |        
|Equity in earnings of affiliates                                            |                          |                   | (20,597 | )             |   |            |       |                       |         |              |      |              |        |   | 20,597  |        |        |           |       |        
|                                                                            |                          |                   |         |               |   |            |        |                       |         |              |       |              |        |   |         |        |        |           |        |        
|                                                                            | Total costs and expenses |                   |         | (6,237        | ) |            |        | 223,100               |         |              |       | 13,793       |        |   |         | 17,119 |        |           |        | 247,775 |        
|Earnings before gain on sale of
assets, minority interests and
income taxes |                          |                   | 6,237   |               |   |            | 17,668 |                       |         |              | 2,427 |              |        |   | (19,342 | )      |        |           | 6,990  |        
|Gain on sale of assets, net                                                 |                          |                   |        |               |   |            | 780    |                       |         |              |      |              |        |   |        |        |        |           | 780    |        
|Minority interests                                                          |                          |                   |        |               |   |            | 278    |                       |         |              |      |              |        |   |        |        |        |           | (278   | )      
|                                                                            |                          |                   |         |               |   |            |        |                       |         |              |       |              |        |   |         |        |        |           |        |        
|Earnings before income taxes                                                |                          |                   | 6,237   |               |   |            | 18,170 |                       |         |              | 2,427 |              |        |   | (19,342 | )      |        |           | 7,492  |        
|Income tax expense                                                          |                          |                   |        |               |   |            |       |                       |         |              |      |              |        |   |        |        |        |           |       |        
|                                                                            |                          |                   |         |               |   |            |        |                       |         |              |       |              |        |   |         |        |        |           |        |        
|Net earnings (loss)                                                         |                          | $                 | 6,237   |               |   | $          | 18,170 |                       |         | $            | 2,427 |              |        | $ | (19,342 | )      |        | $         | 7,492  |        
|                                                                            |                          |                   |         |               |   |            |        |                       |         |              |       |              |        |   |         |        |        |           |        |        

19



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

IASIS Healthcare Corporation

Condensed Consolidating Statement of Cash Flows (unaudited)
for the Three Months Ended December 31, 2003(in thousands)

|                                     |                                                                                                          |                                                        |   |         |        |            |   |                       |         |            |   |               |        |              |   |         |         |           |   |         |        |   |   |         |        |  
|------------------------------------ | -------------------------------------------------------------------------------------------------------- | ------------------------------------------------------ | - | ------- | ------ | ---------- | - | --------------------- | ------- | ---------- | - | ------------- | ------ | ------------ | - | ------- | ------- | --------- | - | ------- | ------ | - | - | ------- | ------ | -
|                                     |                                                                                                          |                                                        |   |         |        |            |   | Subsidiary Guarantors |         |            |   |               |        |              |   |         |         |           |   |        
|                                     |                                                                                                          |                                                        |   |         |        |            |   |                       |         |            |   |               |        |              |   |         |         |           |   |        
|                                     |                                                                                                          |                                                        |   | Parent  |        |            |   |                       |         | non-100%   |   | Health Choice |        |              |   |         |         | Condensed
|                                     |                                                                                                          |                                                        |   | Issuer  |        | 100% owned |   | owned(1)              |         | 100% owned |   | Eliminations  |        | Consolidated
|                                     |                                                                                                          |                                                        |   |         |        |            |   |                       |         |            |   |               |        |             
|Cash flows from operating activities |                                                                                                          |                                                        |   |         |        |            |   |                       |         |            |   |               |        |              |   |         |         |           |   |         |        |   |   |        
|                                     | Net earnings (loss)                                                                                      |                                                        | $ | 5,312   |        |            | $ | 32                    |         |            | $ | 16,175        |        |              | $ | 3,024   |         |           | $ | (16,325 | )      |   | $ | 8,218   |       
|                                     | Adjustments used to reconcile net
earnings (loss) to net cash provided
by (used in) operating activities |                                                        |   |         |        |            |   |                       |         |            |   |               |        |              |   |         |         |           |   |         |        |   |   |         |       
|                                     | Depreciation and amortization                                                                            |                                                        |   | 984     |        |            |   | 12,930                |         |            |   | 2,776         |        |              |   | 41      |         |           |   |        |        |   |   | 16,731  |       
|                                     | Minority interests                                                                                       |                                                        |   |        |        |            |   | 991                   |         |            |   |              |        |              |   |        |         |           |   |        |        |   |   | 991     |       
|                                     | Gain on sale of assets, net                                                                              |                                                        |   |        |        |            |   | (151                  | )       |            |   |              |        |              |   |        |         |           |   |        |        |   |   | (151    | )     
|                                     | Equity in earnings of affiliates                                                                         |                                                        |   | (19,231 | )      |            |   |                      |         |            |   |              |        |              |   |        |         |           |   | 19,231  |        |   |   |        |       
|                                     | Changes in operating assets and
liabilities:                                                             |                                                        |   |         |        |            |   |                       |         |            |   |               |        |              |   |         |         |           |   |         |        |   |   |         |       
|                                     |                                                                                                          | Accounts receivable                                    |   |         |       |            |   |                       | (4,117  | )          |   |               | (4,213 | )            |   |         |        |           |   |         |       |   |   |         | (8,330 | )
|                                     |                                                                                                          | Inventories, prepaid expenses and
other current assets |   |         |       |            |   |                       | (451    | )          |   |               | 398    |              |   |         | 660     |           |   |         |       |   |   |         | 607    |  
|                                     |                                                                                                          | Accounts payable and other
accrued liabilities         |   |         | (8,361 | )          |   |                       | (10,457 | )          |   |               | (1,775 | )            |   |         | 15,455  |           |   |         |       |   |   |         | (5,138 | )
|                                     |                                                                                                          |                                                        |   |         |        |            |   |                       |         |            |   |               |        |              |   |         |         |           |   |         |        |   |   |        
|                                     | Net cash provided by (used in)
operating activities                                                      |                                                        |   | (21,296 | )      |            |   | (1,223                | )       |            |   | 13,361        |        |              |   | 19,180  |         |           |   | 2,906   |        |   |   | 12,928  |       
|                                     |                                                                                                          |                                                        |   |         |        |            |   |                       |         |            |   |               |        |              |   |         |         |           |   |         |        |   |   |        
|Cash flows from investing activities |                                                                                                          |                                                        |   |         |        |            |   |                       |         |            |   |               |        |              |   |         |         |           |   |         |        |   |   |        
|                                     | Purchase of property and equipment                                                                       |                                                        |   |        |        |            |   | (9,020                | )       |            |   | (8,313        | )      |              |   | (29     | )       |           |   |        |        |   |   | (17,362 | )     
|                                     | Proceeds from sale of property and
equipment                                                             |                                                        |   |        |        |            |   | 151                   |         |            |   |              |        |              |   |        |         |           |   |        |        |   |   | 151     |       
|                                     | Change in other assets                                                                                   |                                                        |   |        |        |            |   | (1,936                | )       |            |   | 990           |        |              |   |        |         |           |   |        |        |   |   | (946    | )     
|                                     |                                                                                                          |                                                        |   |         |        |            |   |                       |         |            |   |               |        |              |   |         |         |           |   |         |        |   |   |        
|                                     | Net cash used in investing activities                                                                    |                                                        |   |        |        |            |   | (10,805               | )       |            |   | (7,323        | )      |              |   | (29     | )       |           |   |        |        |   |   | (18,157 | )     
|                                     |                                                                                                          |                                                        |   |         |        |            |   |                       |         |            |   |               |        |              |   |         |         |           |   |         |        |   |   |        
|Cash flows from financing activities |                                                                                                          |                                                        |   |         |        |            |   |                       |         |            |   |               |        |              |   |         |         |           |   |         |        |   |   |        
|                                     | Payment of debt and capital leases                                                                       |                                                        |   |        |        |            |   | (966                  | )       |            |   | (538          | )      |              |   |        |         |           |   |        |        |   |   | (1,504  | )     
|                                     | Proceeds from hospital syndication                                                                       |                                                        |   |        |        |            |   |                      |         |            |   | 1,976         |        |              |   |        |         |           |   |        |        |   |   | 1,976   |       
|                                     | Change in intercompany balances with
affiliates, net                                                     |                                                        |   | 21,296  |        |            |   | 4,464                 |         |            |   | (5,859        | )      |              |   | (17,281 | )       |           |   | (2,620  | )      |   |   |        |       
|                                     | Distribution of minority interests                                                                       |                                                        |   |        |        |            |   |                      |         |            |   | (1,343        | )      |              |   |        |         |           |   |        |        |   |   | (1,343  | )     
|                                     |                                                                                                          |                                                        |   |         |        |            |   |                       |         |            |   |               |        |              |   |         |         |           |   |         |        |   |   |        
|                                     |                                                                                                          | Net cash provided by (used in)
financing activities    |   |         | 21,296 |            |   |                       | 3,498   |            |   |               | (5,764 | )            |   |         | (17,281 | )         |   |         | (2,620 | ) |   |         | (871   | )
|                                     |                                                                                                          |                                                        |   |         |        |            |   |                       |         |            |   |               |        |              |   |         |         |           |   |         |        |   |   |        
|                                     | Net increase (decrease) in cash and
cash equivalents                                                     |                                                        |   |        |        |            |   | (8,530                | )       |            |   | 274           |        |              |   | 1,870   |         |           |   | 286     |        |   |   | (6,100  | )     
|                                     | Cash and cash equivalents at
beginning of period                                                         |                                                        |   |        |        |            |   | 101,070               |         |            |   | 286           |        |              |   |        |         |           |   | (286    | )      |   |   | 101,070 |       
|                                     |                                                                                                          |                                                        |   |         |        |            |   |                       |         |            |   |               |        |              |   |         |         |           |   |         |        |   |   |        
|                                     | Cash and cash equivalents at end of
period                                                               |                                                        | $ |        |        |            | $ | 92,540                |         |            | $ | 560           |        |              | $ | 1,870   |         |           | $ |        |        |   | $ | 94,970  |       
|                                     |                                                                                                          |                                                        |   |         |        |            |   |                       |         |            |   |               |        |              |   |         |         |           |   |         |        |   |   |        



| | (1) |  | A Supplemental Condensed Statement of Cash Flows which presents
information for the individual non-100% owned subsidiary guarantors is
presented below.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

20



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

IASIS Healthcare Corporation

Supplemental Condensed Consolidating Statement of Cash Flows (unaudited)
for the Three Months Ended December 31, 2003(in thousands)

|                                     |                                                                                            |                                                     |   |                                                        |        |          |        |        |        |           |        |        |        |            |        |                  |        |   |      |        |        |                |        |  
|------------------------------------ | ------------------------------------------------------------------------------------------ | --------------------------------------------------- | - | ------------------------------------------------------ | ------ | -------- | ------ | ------ | ------ | --------- | ------ | ------ | ------ | ---------- | ------ | ---------------- | ------ | - | ---- | ------ | ------ | -------------- | ------ | -
|                                     |                                                                                            |                                                     |   |                                                        |        |          |        |        |        |           |        |        |        |            |        |                  |        |   |      |        |        | Total Non-100%
|                                     |                                                                                            |                                                     |   |                                                        |        | Odessa   |        | Jordan |        | Southeast |        |        |        |            |        | Owned Subsidiary
|                                     |                                                                                            |                                                     |   |                                                        |        | Regional |        | Valley |        | Texas     |        | Davis  |        | Guarantors
|                                     |                                                                                            |                                                     |   |                                                        |        |          |        |        |        |           |        |        |        |           
|Cash flows from operating activities |                                                                                            |                                                     |   |                                                        |        |          |        |        |        |           |        |        |        |            |        |                  |        |   |      |       
|                                     | Net earnings                                                                               |                                                     | $ | 3,535                                                  |        |          | $      | 3,531  |        |           | $      | 3,085  |        |            | $      | 6,024            |        |   | $    | 16,175 |       
|                                     | Adjustments: to reconcile net earnings (loss) to net cash
provided by operating activities |                                                     |   |                                                        |        |          |        |        |        |           |        |        |        |            |        |                  |        |   |      |        |       
|                                     |                                                                                            | Depreciation and amortization                       |   |                                                        | 591    |          |        |        | 602    |           |        |        | 892    |            |        |                  | 691    |   |      |        | 2,776  |               
|                                     |                                                                                            | Changes in operating assets and liabilities:        |   |                                                        |        |          |        |        |        |           |        |        |        |            |        |                  |        |   |      |        |        |               
|                                     |                                                                                            |                                                     |   | Accounts receivable                                    |        |          | (1,428 | )      |        |           | (1,165 | )      |        |            | (1,550 | )                |        |   | (70  | )      |        |                | (4,213 | )
|                                     |                                                                                            |                                                     |   | Inventories, prepaid expenses and other current assets |        |          | 99     |        |        |           | 162    |        |        |            | (87    | )                |        |   | 224  |        |        |                | 398    |  
|                                     |                                                                                            |                                                     |   | Accounts payable and other accrued liabilities         |        |          | (284   | )      |        |           | 129    |        |        |            | (1,304 | )                |        |   | (316 | )      |        |                | (1,775 | )
|                                     |                                                                                            |                                                     |   | Accrued loss on discontinued operations                |        |          |       |        |        |           |       |        |        |            |       |                  |        |   |     |        |        |                |       |  
|                                     |                                                                                            |                                                     |   |                                                        |        |          |        |        |        |           |        |        |        |            |        |                  |        |   |      |       
|                                     |                                                                                            | Net cash provided by operating activities           |   |                                                        | 2,513  |          |        |        | 3,259  |           |        |        | 1,036  |            |        |                  | 6,553  |   |      |        | 13,361 |               
|                                     |                                                                                            |                                                     |   |                                                        |        |          |        |        |        |           |        |        |        |            |        |                  |        |   |      |       
|Cash flows from investing activities |                                                                                            |                                                     |   |                                                        |        |          |        |        |        |           |        |        |        |            |        |                  |        |   |      |       
|                                     | Purchase of property and equipment                                                         |                                                     |   | (657                                                   | )      |          |        | (3,530 | )      |           |        | (1,864 | )      |            |        | (2,262           | )      |   |      | (8,313 | )     
|                                     | Change in other assets                                                                     |                                                     |   | 27                                                     |        |          |        | (143   | )      |           |        | 311    |        |            |        | 795              |        |   |      | 990    |       
|                                     |                                                                                            |                                                     |   |                                                        |        |          |        |        |        |           |        |        |        |            |        |                  |        |   |      |       
|                                     |                                                                                            | Net cash used in investing activities               |   |                                                        | (630   | )        |        |        | (3,673 | )         |        |        | (1,553 | )          |        |                  | (1,467 | ) |      |        | (7,323 | )             
|                                     |                                                                                            |                                                     |   |                                                        |        |          |        |        |        |           |        |        |        |            |        |                  |        |   |      |       
|Cash flows from financing activities |                                                                                            |                                                     |   |                                                        |        |          |        |        |        |           |        |        |        |            |        |                  |        |   |      |       
|                                     | Payment of debt and capital leases                                                         |                                                     |   | (44                                                    | )      |          |        | (240   | )      |           |        | (173   | )      |            |        | (81              | )      |   |      | (538   | )     
|                                     | Proceeds from hospital syndication                                                         |                                                     |   |                                                       |        |          |        |       |        |           |        |       |        |            |        | 1,976            |        |   |      | 1,976  |       
|                                     | Change in intercompany balances with affiliates, net                                       |                                                     |   | (851                                                   | )      |          |        | 576    |        |           |        | 934    |        |            |        | (6,518           | )      |   |      | (5,859 | )     
|                                     | Distribution of minority interests                                                         |                                                     |   | (988                                                   | )      |          |        | (111   | )      |           |        | (244   | )      |            |        |                 |        |   |      | (1,343 | )     
|                                     |                                                                                            |                                                     |   |                                                        |        |          |        |        |        |           |        |        |        |            |        |                  |        |   |      |       
|                                     |                                                                                            | Net cash provided by (used in) financing activities |   |                                                        | (1,883 | )        |        |        | 225    |           |        |        | 517    |            |        |                  | (4,623 | ) |      |        | (5,764 | )             
|                                     |                                                                                            |                                                     |   |                                                        |        |          |        |        |        |           |        |        |        |            |        |                  |        |   |      |       
|                                     | Net increase (decrease) in cash and cash equivalents                                       |                                                     |   |                                                       |        |          |        | (189   | )      |           |        |       |        |            |        | 463              |        |   |      | 274    |       
|                                     | Cash and cash equivalents at beginning of period                                           |                                                     |   |                                                       |        |          |        | 189    |        |           |        |       |        |            |        | 97               |        |   |      | 286    |       
|                                     |                                                                                            |                                                     |   |                                                        |        |          |        |        |        |           |        |        |        |            |        |                  |        |   |      |       
|                                     | Cash and cash equivalents at end of period                                                 |                                                     | $ |                                                       |        |          | $      |       |        |           | $      |       |        |            | $      | 560              |        |   | $    | 560    |       
|                                     |                                                                                            |                                                     |   |                                                        |        |          |        |        |        |           |        |        |        |            |        |                  |        |   |      |       

21



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

IASIS Health Corporation

Condensed Consolidating Statement of Cash Flows (unaudited)
for the Three Months Ended December 31, 2002(in thousands)

|                                     |                                                                                           |                                                                                 |                                                        |         |               |        |       |         |                       |        |              |        |              |        |   |         |           |   |        |         |         |        |  
|------------------------------------ | ----------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------ | ------- | ------------- | ------ | ----- | ------- | --------------------- | ------ | ------------ | ------ | ------------ | ------ | - | ------- | --------- | - | ------ | ------- | ------- | ------ | -
|                                     |                                                                                           |                                                                                 |                                                        |         |               |        |       |         | Subsidiary Guarantors |        |              |        |              |        |   |         |          
|                                     |                                                                                           |                                                                                 |                                                        |         |               |        |       |         |                       |        |              |        |              |        |   |         |          
|                                     |                                                                                           |                                                                                 |                                                        |         |               |        |       |         | 100%                  |        | Non-100%     |        |              |        |   |         | Condensed
|                                     |                                                                                           |                                                                                 |                                                        |         | Parent Issuer |        | Owned |         | Owned                 |        | Eliminations |        | Consolidated
|                                     |                                                                                           |                                                                                 |                                                        |         |               |        |       |         |                       |        |              |        |             
|Cash flows from operating activities |                                                                                           |                                                                                 |                                                        |         |               |        |       |         |                       |        |              |        |              |        |   |         |           |   |        |        
|                                     | Net earnings (loss)                                                                       |                                                                                 | $                                                      | 6,237   |               |        | $     | 18,170  |                       |        | $            | 2,427  |              |        | $ | (19,342 | )         |   | $      | 7,492   |        
|                                     | Adjustments to reconcile net earnings(loss) to net cash
provided by operating activities: |                                                                                 |                                                        |         |               |        |       |         |                       |        |              |        |              |        |   |         |           |   |        |         |        
|                                     |                                                                                           | Depreciation and amortization                                                   |                                                        |         | 1,114         |        |       |         | 11,230                |        |              |        | 507          |        |   |         |          |   |        |         | 12,851  |       
|                                     |                                                                                           | Minority interests                                                              |                                                        |         |              |        |       |         | 278                   |        |              |        |             |        |   |         |          |   |        |         | 278     |       
|                                     |                                                                                           | Gain on sale of assets, net                                                     |                                                        |         |              |        |       |         | (780                  | )      |              |        |             |        |   |         |          |   |        |         | (780    | )     
|                                     |                                                                                           | Equity in earnings of affiliates                                                |                                                        |         | (20,597       | )      |       |         |                      |        |              |        |             |        |   |         | 20,597    |   |        |         |        |       
|                                     |                                                                                           | Changes in operating assets and liabilities, net of the
effect of dispositions: |                                                        |         |               |        |       |         |                       |        |              |        |              |        |   |         |           |   |        |         |         |       
|                                     |                                                                                           |                                                                                 | Accounts receivable                                    |         |               |       |       |         |                       | 903    |              |        |              | (1,972 | ) |         |           |  |        |         |         | (1,069 | )
|                                     |                                                                                           |                                                                                 | Inventories, prepaid expenses and other current assets |         |               |       |       |         |                       | (1,472 | )            |        |              | 431    |   |         |           |  |        |         |         | (1,041 | )
|                                     |                                                                                           |                                                                                 | Accounts payable and other accrued liabilities         |         |               | (5,346 | )     |         |                       | (5,047 | )            |        |              | 922    |   |         |           |  |        |         |         | (9,471 | )
|                                     |                                                                                           |                                                                                 |                                                        |         |               |        |       |         |                       |        |              |        |              |        |   |         |           |   |        |        
|                                     |                                                                                           | Net cash provided by (used in) operating activities                             |                                                        |         | (18,592       | )      |       |         | 23,282                |        |              |        | 2,315        |        |   |         | 1,255     |   |        |         | 8,260   |       
|                                     |                                                                                           |                                                                                 |                                                        |         |               |        |       |         |                       |        |              |        |              |        |   |         |           |   |        |        
|Cash flows from investing activities |                                                                                           |                                                                                 |                                                        |         |               |        |       |         |                       |        |              |        |              |        |   |         |           |   |        |        
|                                     | Purchase of property and equipment                                                        |                                                                                 |                                                        |        |               |        |       | (14,038 | )                     |        |              | (377   | )            |        |   |        |           |   |        | (14,415 | )      
|                                     | Proceeds from sale of property and equipment                                              |                                                                                 |                                                        |        |               |        |       | 2,463   |                       |        |              |       |              |        |   |        |           |   |        | 2,463   |        
|                                     | Change in other assets                                                                    |                                                                                 |                                                        |        |               |        |       | (735    | )                     |        |              | (126   | )            |        |   |        |           |   |        | (861    | )      
|                                     |                                                                                           |                                                                                 |                                                        |         |               |        |       |         |                       |        |              |        |              |        |   |         |           |   |        |        
|                                     |                                                                                           | Net cash used in investing activities                                           |                                                        |         |              |        |       |         | (12,310               | )      |              |        | (503         | )      |   |         |          |   |        |         | (12,813 | )     
|                                     |                                                                                           |                                                                                 |                                                        |         |               |        |       |         |                       |        |              |        |              |        |   |         |           |   |        |        
|Cash flows from financing activities |                                                                                           |                                                                                 |                                                        |         |               |        |       |         |                       |        |              |        |              |        |   |         |           |   |        |        
|Proceeds from debt borrowings        |                                                                                           |                                                                                 | 62,200                                                 |         |               |        |      |         |                       |        |             |        |              |        |  |         |           |   | 62,200 |        
|                                     | Payment of debt and capital leases                                                        |                                                                                 |                                                        | (57,027 | )             |        |       | (320    | )                     |        |              |       |              |        |   |        |           |   |        | (57,347 | )      
|                                     | Change in intercompany balances with affiliates, net                                      |                                                                                 |                                                        | 13,419  |               |        |       | (10,642 | )                     |        |              | (1,522 | )            |        |   | (1,255  | )         |   |        |        |        
|                                     | Distribution of minority interests                                                        |                                                                                 |                                                        |        |               |        |       | (10     | )                     |        |              | (290   | )            |        |   |        |           |   |        | (300    | )      
|                                     |                                                                                           |                                                                                 |                                                        |         |               |        |       |         |                       |        |              |        |              |        |   |         |           |   |        |        
|                                     |                                                                                           | Net cash provided by (used in) financing activities                             |                                                        |         | 18,592        |        |       |         | (10,972               | )      |              |        | (1,812       | )      |   |         | (1,255    | ) |        |         | 4,553   |       
|                                     |                                                                                           |                                                                                 |                                                        |         |               |        |       |         |                       |        |              |        |              |        |   |         |           |   |        |        
|                                     | Change in cash and cash equivalents                                                       |                                                                                 |                                                        |        |               |        |       |        |                       |        |              |       |              |        |   |        |           |   |        |        |        
|                                     | Cash and cash equivalents at beginning of period                                          |                                                                                 |                                                        |        |               |        |       |        |                       |        |              |       |              |        |   |        |           |   |        |        |        
|                                     |                                                                                           |                                                                                 |                                                        |         |               |        |       |         |                       |        |              |        |              |        |   |         |           |   |        |        
|                                     | Cash and cash equivalents at end of period                                                |                                                                                 | $                                                      |        |               |        | $     |        |                       |        | $            |       |              |        | $ |        |           |   | $      |        |        
|                                     |                                                                                           |                                                                                 |                                                        |         |               |        |       |         |                       |        |              |        |              |        |   |         |           |   |        |        

22



---



##### Table of Contents



10. Subsequent Events

Sale of Rocky Mountain Medical Center property

On February 13, 2004, the Company closed the sale of its Rocky Mountain
Medical Center property in Salt Lake City, Utah. The approximately 23.5-acre
property, as well as certain associated equipment, fixtures and other personal
property, were acquired by the Board of Education of the Granite School
District (of Salt Lake City) for approximately $15.2 million. Rocky Mountain
Medical Center was a hospital owned by the Company that ceased operations in
June 2001. The Company expects to record a gain on sale of the property in the
second quarter of fiscal 2004 of approximately $2.0 million to $3.0 million.

Acquisition of Lake Mead Hospital Medical Center

Effective February 1, 2004, the Company, through a wholly-owned
subsidiary, completed the acquisition of Lake Mead Hospital Medical Center in
Las Vegas, Nevada. The 198-bed hospital was acquired from a subsidiary of
Tenet for approximately $25.0 million, consisting of approximately $22.5
million in cash and $2.5 million in assumed liabilities. The Tenet subsidiary
retained the accounts receivable related to the operation of the hospital. The
final purchase price is subject to net working capital and other purchase price
adjustments.

23



---



##### Table of Contents






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

The following discussion and analysis of financial condition and results
of operations should be read in conjunction with our unaudited condensed and
consolidated financial statements, the notes to our unaudited condensed and
consolidated financial statements and the other financial information appearing
elsewhere in this report. Data for the three months ended December 31, 2003
and 2002 has been derived from our unaudited condensed and consolidated
financial statements.

Forward Looking Statements

Some of the statements we make in this report are forward-looking within
the meaning of the federal securities laws, which are intended to be covered by
the safe harbors created thereby. Those forward-looking statements include all
statements that are not historical statements of fact and those regarding our
intent, belief or expectations including, but not limited to, the discussions
of our operating and growth strategy (including possible acquisitions and
dispositions), financing needs, projections of revenue, income or loss, capital
expenditures and future operations. Forward-looking statements involve known
and unknown risks and uncertainties that may cause actual results in future
periods to differ materially from those anticipated in the forward-looking
statements. Those risks and uncertainties include, among others, the risks and
uncertainties discussed under the caption Risk Factors in our Annual Report
on Form 10-K for the fiscal year ended September 30, 2003. Although we believe
that the assumptions underlying the forward-looking statements contained in
this report are reasonable, any of these assumptions could prove to be
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
in this report, you should not regard the inclusion of such information as a
representation by us or any other person that our objectives and plans will be
achieved. We undertake no obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events and circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.

General

We are a leading owner and operator of acute care hospitals that develops
and operates networks of medium-sized hospitals in high-growth urban and
suburban markets. We operate our hospitals with a strong community focus by
offering and developing healthcare services to meet the needs of the markets we
serve, promoting strong relationships with physicians and working with local
managed care plans. At December 31, 2003, we owned or leased 14 hospitals,
with a total of 2,024 beds in service, located in four regions:



| | - |  | Salt Lake City, Utah;                       
| | - |  | --------------------------------------------
|
| | - |  | Phoenix, Arizona;                           
|
| | - |  | Tampa-St. Petersburg, Florida; and          
|
| | - |  | four cities in Texas, including San Antonio.

We also own and operate a behavioral health center in Phoenix and have an
ownership interest in three ambulatory surgery centers. In addition, we own
and operate a Medicaid managed health plan in Phoenix called Health Choice
Arizona, Inc., that serves over 90,000 members. As more fully described in note
10 to our unaudited condensed and consolidated financial statements, we
acquired Lake Mead Hospital Medical Center in Las Vegas, Nevada on February 1,
2004.

Net revenue is comprised of acute care and premium revenue. Net acute care
revenue is comprised of net patient service revenue and other revenue. Net
patient service revenue is reported net of contractual adjustments. The
adjustments principally result from differences between the hospitals
established charges and payment rates under Medicare, Medicaid and various
managed care plans. The calculation of appropriate payments from the Medicare
and Medicaid programs as well as terms governing agreements with other
third-party payors are complex and subject to interpretation. As a result,
there is at least a reasonable possibility that recorded estimates will change
by a material amount. Premium revenue consists of revenue from Health Choice,
while other revenue includes medical office building rental income and other
miscellaneous revenue.

24



---



##### Table of Contents



A large percentage of our hospitals net patient service revenue consists
of fixed payment, discounted sources including Medicare, Medicaid and managed
care organizations. Fixed payment amounts for Medicare and Medicaid services
are often based upon a diagnosis regardless of the cost incurred or the level
of services provided. We expect patient volumes from Medicare to increase over
the long term due to the general aging of the population.

Like others in the hospital industry, we have experienced an increase in
our provision for bad debts as a percentage of net revenue. This increase is
due to a growth in self-pay revenue resulting primarily from an increase in the
number of uninsured patients, along with an increase in the amount of co-pays
and deductibles passed on by employers to employees. We continue to seek ways
of improving upfront collection efforts and implementing appropriate payment
plans with our patients. However, we anticipate that if we continue to
experience growth in self-pay revenue, our provision for bad debts will
continue to increase and our results of operations could be adversely affected.

Inpatient care is expanding to include sub-acute care when a
less-intensive, lower cost level of care is appropriate. We have been
proactive in the development of a variety of sub-acute inpatient services to
utilize a portion of our available capacity. By offering cost-effective
sub-acute services in appropriate circumstances, we are able to provide a
continuum of care when the demand for such services exists. We have identified
opportunities to expand existing physical rehabilitation units and develop
other post-acute services such as long term acute care arrangements within our
facilities. The results of our product line analyses confirm that the
development and use of such units is economically beneficial.

We currently record revenue deductions for patient accounts that meet our
guidelines for charity care. Other hospital companies have recently proposed
changes to their charity care policies to provide discounts from gross charges
to certain patients without qualifying insurance. The Centers for Medicare and
Medicaid Services has granted preliminary approval to at least one of these
proposals pending final approval from federal regulators. If final approval is
received, we expect to enact similar changes to our charity care policies.

Some of the states in which we operate have experienced budget constraints
as a result of increased costs and lower than expected tax collections. Health
and human services programs, including Medicaid and similar programs, represent
a significant portion of state spending. As a response to these budgetary
concerns, some states have proposed and other states may propose decreased
funding for these programs. If such funding decreases are approved by the
states in which we operate, our operating results and cash flows could be
materially reduced.

Health Choice derives substantially all of its revenue through a contract
with the Arizona Health Care Cost Containment System to provide specified
health services to qualified Medicaid enrollees through contracts with
providers. The contract requires us to provide healthcare services in exchange
for fixed periodic payments and supplemental payments from the Arizona Health
Care Cost Containment System. Our previous contract with the Arizona Health
Care Cost Containment System expired by its terms on September 30, 2003. Heath
Choice entered into a new three-year contract with the Arizona Health Care Cost
Containment System effective October 1, 2003. As a result of our new contract,
our membership at Health Choice has increased from approximately 70,000
enrollees as of September 30, 2003 to over 90,000 enrollees as of December 31,
2003. The new contract provides the Arizona Health Care Cost Containment System
with two one-year renewal options following the initial term. In the event our
contract was to be discontinued, our net revenue would be reduced and our
profitability would be adversely affected.

Consistent with 2003, our fiscal 2004 self-insured retention for
professional and general liability coverage is $5.0 million per claim and $45.0
million in the aggregate. Additionally, the maximum coverage under our
insurance policies is unchanged at $75.0 million. The rising cost of
professional liability insurance coverage and, in some cases, the lack of
availability of such insurance coverage, for physicians with privileges at our
hospitals increases our risk of vicarious liability in cases where both our
hospital and the uninsured or underinsured physician are named as
co-defendants. The cost of insurance has negatively affected operating results
and cash flows throughout the healthcare industry due to pricing pressures on
insurers and fewer carriers willing to underwrite professional and general
liability insurance. We currently have no information that would lead us to
believe that this current trend is temporary in nature, and thus there is no
assurance that continued increases in insurance costs will not have a material
adverse effect on our future operating results and cash flows.

25



---



##### Table of Contents



The hospital industry continues to experience a shortage of nurses. Like
other providers in the Phoenix, Arizona region, we have experienced difficulty
in retaining and recruiting nurses in that market. This shortage is forecasted
to continue. We have begun a comprehensive recruiting and retention plan for
nurses that focuses on competitive salaries and benefits as well as employee
satisfaction, best practices, tuition assistance, effective training programs
and workplace environment. Additionally, we are actively developing programs
to recruit qualified nurses from countries outside of the United States.
However, should we be unsuccessful in our attempts to maintain nursing coverage
adequate for our present and future needs, our future operating results could
be adversely affected.

The IRS is in the process of conducting examinations of our federal income
tax returns for the fiscal years ended September 30, 2000 and 2001.

Critical Accounting Policies

A summary of significant accounting policies is disclosed in Note 1 to the
Consolidated Financial Statements included in the Annual Report on Form 10-K
for the year ended September 30, 2003. Our critical accounting policies are
further described under the caption Critical Accounting Policies in
Managements Discussion and Analysis of Financial Condition and Results of
Operations in the Annual Report on Form 10-K for the year ended September 30,
2003. There have been no changes in the nature of our critical accounting
policies or the application of those policies since September 30, 2003.

Selected Operating Data

The following table sets forth certain unaudited operating data for each
of the periods presented.

|                                                            |  |                    |         |                    |  |  |         |  
|----------------------------------------------------------- |  | ------------------ | ------- | ------------------ |  |  | ------- | -
|                                                            |  | Three Months Ended |         | Three Months Ended
|                                                            |  | December 31, 2003  |         | December 31, 2002 
|                                                            |  |                    |         |                   
|Number of hospitals at end of period                        |  |                    | 14      |                    |  |  | 14      |  
|Beds in service at end of period                            |  |                    | 2,024   |                    |  |  | 2,022   |  
|Average length of stay (days) (1)                           |  |                    | 4.30    |                    |  |  | 4.40    |  
|Occupancy rates (average beds in service)                   |  |                    | 48.7    | %                  |  |  | 47.4    | %
|Admissions(2)                                               |  |                    | 21,069  |                    |  |  | 20,034  |  
|Adjusted admissions(3)                                      |  |                    | 34,727  |                    |  |  | 34,098  |  
|Patient days(4)                                             |  |                    | 90,611  |                    |  |  | 88,148  |  
|Adjusted patient days(3)                                    |  |                    | 143,592 |                    |  |  | 143,302 |  
|Outpatient revenue as a percentage of
gross patient revenue |  |                    | 35.8    | %                  |  |  | 38.1    | %



---

|(1) |  | Represents the average number of days that a patient stayed in our
hospitals.                                                                                                                                                                                                        
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Represents the total number of patients admitted to our hospitals
inpatient units. Management and investors use this number as a general
measure of inpatient volume.                                                                                                               
|   
|(3) |  | Adjusted admissions and adjusted patient days are general measures of
combined inpatient and outpatient volume. We compute adjusted
admissions/patient days by multiplying admissions/patient days by gross
patient revenue and then dividing that number by gross inpatient
revenue.
|   
|(4) |  | Represents the number of days our beds were occupied over the period.                                                                                                                                                                                                                

26



---



##### Table of Contents



Results of Operations

The following table presents, for the periods indicated, information
expressed as a percentage of net revenue. Such information has been derived
from our unaudited condensed and consolidated statements of operations. The
results of operations include Health Choice. See Note 6 to our unaudited
condensed and consolidated financial statements for disclosure of our results
of operations by segment.

|                              |  |                    |       |                    |  |  |       |  
|----------------------------- |  | ------------------ | ----- | ------------------ |  |  | ----- | -
|                              |  | Three Months Ended |       | Three Months Ended
|                              |  | December 31, 2003  |       | December 31, 2002 
|                              |  |                    |       |                   
|Net revenue                   |  |                    | 100.0 | %                  |  |  | 100.0 | %
|Salaries and benefits         |  |                    | 31.2  |                    |  |  | 34.9  |  
|Supplies                      |  |                    | 12.7  |                    |  |  | 14.0  |  
|Medical claims                |  |                    | 18.2  |                    |  |  | 12.1  |  
|Other operating expenses      |  |                    | 17.5  |                    |  |  | 18.3  |  
|Provision for bad debts       |  |                    | 7.9   |                    |  |  | 7.7   |  
|Depreciation and amortization |  |                    | 5.2   |                    |  |  | 5.1   |  
|Interest, net                 |  |                    | 4.4   |                    |  |  | 5.2   |  
|Gain on sale of assets, net   |  |                    |      |                    |  |  | (0.3  | )
|Minority interests            |  |                    | 0.3   |                    |  |  | 0.1   |  
|                              |  |                    |       |                    |  |  |       |  
|Earnings before income taxes  |  |                    | 2.6   |                    |  |  | 2.9   |  
|Income tax expense            |  |                    |      |                    |  |  |      |  
|                              |  |                    |       |                    |  |  |       |  
|Net earnings                  |  |                    | 2.6   | %                  |  |  | 2.9   | %
|                              |  |                    |       |                    |  |  |       |  

Three Months Ended December 31, 2003 Compared to Three Months Ended December 31, 2002

Net
revenue -Net revenue for the three months ended December 31, 2003 was
$318.1 million, an increase of $63.3 million, or 24.8%, from $254.8 million for
same period in 2002. The increase in net revenue was due to a combination of
an increase of $31.6 million in net revenue from hospital operations, which we
refer to as our acute care service segment in our financial statements, and an
increase of $31.7 million in net revenue from Health Choice.

Before eliminations, net revenue from our hospital operations for the
three months ended December 31, 2003 was $252.4 million, up $32.7 million, or
14.9%, from $219.7 million for the same period in 2002. For the three months
ended December 31, 2003 and 2002, approximately $3.0 million and $1.9 million,
respectively, of net revenue received from Health Choice by hospitals and other
healthcare entities owned by us was eliminated in consolidation. Net patient
revenue per adjusted admission increased 13.0% for the three months ended
December 31, 2003, compared to the same period in 2002, due to a combination of
increased acuity and price increases in our hospital operations.

Admissions increased 5.2% to 21,069 for the three months ended December
31, 2003 from 20,034 for the same period in 2002, and patient days increased
2.8% to 90,611 for the three months ended December 31, 2003 from 88,148 for the
same period in 2002. Adjusted admissions increased 1.8% to 34,727 for the
three months ended December 31, 2003 from 34,098 for the same period in 2002,
and adjusted patient days increased 0.2% to 143,592 for the three months ended
December 31, 2003, from 143,302 for the same period in 2002. The increase in
volume was due in part to a combination of population growth in our markets,
introduction of new and expanded services at our hospitals and results of our
physician recruiting efforts. The average length of stay resulting from
admissions and patient days decreased 2.3% from 4.40 days for the three months
ended December 31, 2002, to 4.30 days for the same period in 2003. This
decrease in the average length of stay was attributable to improved case
management, closure of a skilled nursing facility and growth in services such
as obstetrics with shorter lengths of stay.

Net revenue from Health Choice was $68.7 million for the three months
ended December 31, 2003, an increase of $31.8 million, or 86.2%, from $36.9
million for the same period in 2002. Covered lives under this prepaid Medicaid
plan have increased 51.8% to 90,451 at December 31, 2003 from 60,242 at
December 31, 2002.

27



---



##### Table of Contents



The increase in covered lives has positively impacted Health Choices net
revenue for the three months ended December 31, 2003 compared to the same
period in 2002. Our growth in covered lives is due primarily to a new
three-year contract between Health Choice and Arizona Health Care Cost
Containment System effective October 1, 2003 and the resulting expansion of
coverage in five new counties.

Salaries and benefits Salaries and benefits expense from our hospital
operations for the quarter ended December 31, 2003 was $97.3, million or 38.5%,
of acute care net revenue, compared to $87.2 million, or 39.7%, for the quarter
ended December 31, 2002. The 1.2% decrease as a percentage of acute care net
revenue resulted from the leveraging of growth in volume and net revenue during
the current period, as well as a reduction in contract labor utilization.
Contract labor, a component of salaries and benefits expense, decreased 0.3% as
a percentage of acute care net revenue, for the quarter ended December 31, 2003
compared to the quarter ended December 31, 2002 as a result of our operational
focus on managing the utilization of contract nursing services. Nevertheless,
we continue to experience a high level of contract labor utilization in our
Arizona market as a result of continued volume growth and increases in acuity
levels. Benefits expense from our hospital operations increased by
approximately $2.5 million, or 0.1% as a percent of acute care net revenue, for
the quarter ended December 31, 2003 compared to the same period in 2002 due
primarily to the increased cost and utilization of healthcare benefits for
employees. We implemented changes to our employee healthcare benefit program
effective January 1, 2004 in response to the increase in the cost of healthcare
benefits in fiscal 2003.

Supplies Supplies expense from our hospital operations for the quarter
ended December 31, 2003 was $40.2 million, or 15.9% of acute care net revenue,
compared to $35.6 million, or 16.2%, for the quarter ended December 31, 2002.
The 0.3% decrease as a percentage of acute care net revenue was due in part to
leveraging the growth in volume and net revenue and continuing our focus on
compliance with our group purchasing contract. During the fourth quarter of
2003, we entered into a new contract for the distribution of pharmaceutical and
medical supplies for certain of our facilities. The change in distributor was
made to achieve better service and price savings on such supplies.

Medical claims Medical claims before eliminations for Health Choice
increased $27.9 million to $60.7 million for the quarter ended December 31,
2003 compared to $32.8 million for the quarter ended December 31, 2002.
Medical claims as a percentage of premium revenue were 88.4% for the three
months ended December 31, 2003 and 88.8% for the same period last year. The
increase in medical claims expense is the result of an increase in enrollment
from 60,242 members at December 31, 2002 to 90,451 members at December 31,
2003. As discussed above, the enrollment increase is primarily the result of a
new three-year contract between Health Choice and Arizona Health Care Cost
Containment System effective October 1, 2003. For the quarters ended December
31, 2003 and 2002, approximately $3.0 million and $1.9 million, respectively,
of medical claims paid to our hospitals was eliminated in consolidation.
Medical claims represents the amounts paid by Health Choice for healthcare
services provided to its members.

Other operating expenses Other operating expenses from our hospital
operations for the quarter ended December 31, 2003 was $53.2 million, or 21.1%
of acute care net revenue, compared to $45.9 million, or 20.9%, for the quarter
ended December 31, 2002. The 0.2% increase as a percentage of acute care net
revenue was primarily a result of increases in insurance expense, marketing and
physician recruiting costs offset by decreases in purchased services, rent
expense and utilities as a percentage of acute care net revenue. Insurance
expense increased by approximately $1.5 million for the quarter ended December
31, 2003 compared to the prior fiscal quarter. We expect our other operating
expenses to continue to be negatively impacted for the near term by these
insurance expense increases as a result of continued cost pressures on the
professional liability insurance market. Additionally, physician recruiting
expense and marketing expense increased by $1.1 million and $885,000,
respectively, for the quarter ended December 31, 2003 compared to the prior
fiscal quarter. The $2.1 million increase in other operating expenses for our
Health Choice segment from $630,000 at December 31, 2002 to $2.7 million at
December 31, 2003 was primarily the result of a new premium tax which was
implemented by the Arizona Health Care Cost Containment System effective
October 1, 2003. The premium tax for the current quarter equaled $1.4 million
and is offset by a corresponding increase in the premium revenue paid by the
Arizona Health Care Cost Containment System to Health Choice.

Provision for bad debts- Provision for bad debts for our hospital
operations for the quarter ended December 31, 2003 was $25.1 million, or 9.9%
of acute care net revenue, compared to $19.7 million, or 9.0%, for

28



---



##### Table of Contents



the quarter ended December 31, 2002. The 0.9% increase as a percentage of
acute care net revenue was due primarily to growth in self-pay revenue
resulting from an increase in the number of uninsured patients. Additionally,
the provision for bad debts has been negatively affected by an increase in the
amount of co-pays and deductibles passed on by employers to employees.

Depreciation and amortization- The $3.9 million increase in depreciation
and amortization expense from $12.8 million for the quarter ended December 31,
2002 to $16.7 million for the same period in 2003 was primarily the result of
the acceleration of depreciation on two of our facilities in anticipation of
consolidating these hospitals operations into a new hospital in the Port
Arthur, Texas area by mid-2005. This resulted in $3.2 million of additional
depreciation in the quarter ended December 31, 2003 as compared to same quarter
in the prior year. The remaining change in depreciation expense for the 2003
quarter is the result of incremental depreciation expense on additions to
property and equipment during fiscal 2003. These additions are the result of
the implementation of our operating strategy, pursuant to which we have made
substantial investments in our existing facilities.

Interest, net- The $574,000 increase in interest expense, net of interest
income, from $13.3 million for the quarter ended December 31, 2002 to $13.9
million for the same period in 2003 was due to additional interest expense
incurred on our 81⁄2% senior subordinated notes issued in June 2003, offset
by a decline in interest rates. Borrowings under our bank credit facility bear
interest at variable rates. The weighted average interest rate of outstanding
borrowings under the bank credit facility was approximately 5.4% for the
quarter ended December 31, 2003 compared to 5.9% for the quarter ended December
31, 2002.

Minority interests Minority interests increased $713,000 to $1.0 million
in for the quarter ended December 31, 2003 compared to $278,000 for the same
prior year period. Minority interests represent the third party portion of
earnings of our non-wholly owned subsidiaries included in our consolidated
statements of operations. The increase in minority interests relates primarily
to our successful syndication of four of our hospital subsidiaries during
fiscal 2003 and the first quarter of fiscal 2004, pursuant to which each
subsidiary sold limited partnership units to third party investors.

Income tax expense- We recorded a provision for state income taxes for
the quarter ended December 31, 2003 of $32,000. We recorded no provision for
federal income taxes for the quarter ended December 31, 2003, and no provision
for federal or state income taxes for the same period in 2002 due to the use of
deferred tax assets that were previously reserved with a valuation allowance.

Net earnings Net earnings increased from $7.5 million for the quarter
ended December 31, 2002 to $8.2 million for the quarter ended December 31,
2003.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow provided by our operations,
available cash on hand and our revolving credit facility. At December 31,
2003, we had $154.2 million in net working capital, compared to $148.3 million
at September 30, 2003, an increase of $5.9 million. We generated cash from
operating activities of $12.9 million during the three months ended December
31, 2003, compared to $8.3 million during the three months ended December 31,
2002. Net accounts receivable increased $8.3 million from $153.2 million at
September 30, 2003 to $161.5 million at December 31, 2003. Excluding
third-party settlement receivables, our days of net revenue outstanding at
December 31, 2003 were 58 compared to 56 at September 30, 2003.

Investing activities used $18.2 million during the three months ended
December 31, 2003. Capital expenditures for the three months ended December
31, 2003, were approximately $17.4 million. Our growth strategy requires
significant capital expenditures during the year ending September 30, 2004 and
future years. We expect our capital expenditures for fiscal 2004 to be
approximately $155.0 million to $165.0 million, including $50.0 million to
$55.0 million of construction and other project-related costs for our new Port
Arthur, Texas hospital, $37.0 million for the renovation and expansion of
certain of our other existing facilities, $45.0 million to $50.0 million for
new equipment at our facilities and $7.0 million to $10.0 million for our
recently acquired hospital in Las Vegas, Nevada, Lake Mead Hospital Medical
Center. On November 20, 2002, we announced plans to build a new hospital in
Jefferson County, Texas to consolidate our operations at Mid-Jefferson Hospital
in Nederland, Texas and Park Place Medical Center in Port Arthur, Texas. We
purchased the land for the new hospital in July 2003 and

29



---



##### Table of Contents



commenced construction in the fourth quarter of fiscal 2003. We plan to
open the new facility by mid-2005. The total cost to build the new hospital is
currently estimated to be approximately $90.0 million. At December 31, 2003,
we had projects under construction with an estimated cost to complete and equip
of approximately $109.8 million. We anticipate that these projects will be
completed over the next two years. We plan to finance our proposed capital
expenditures, including the construction of the new hospital, with net proceeds
from the issuance of our 81⁄2% senior subordinated notes, cash generated from
operations, borrowings under our revolving credit facility, real estate
financing and other capital sources that become available.

Financing activities used net cash of $871,000 during the three months
ended December 31, 2003. During the three months ended December 31, 2003, we
repaid $875,000 pursuant to the terms of our revolving credit facility and
repaid capital lease obligations of $621,000. During the next twelve months,
we are required to repay $3.5 million in principal under our bank credit
facility and $2.5 million under our capital lease obligations.

On February 7, 2003, we completed the refinancing of our bank credit
facility to provide for a $475.0 million credit facility in the form of a
$350.0 million, six-year term B loan and $125.0 million, five-year revolving
credit facility. Proceeds from the credit facility were used to refinance
amounts outstanding under the previous credit facility and to fund closing and
other transaction related costs of $10.6 million incurred in connection with
the refinancing. The $125.0 million revolving credit facility is available for
working capital and other general corporate purposes. The credit facility is
guaranteed by our subsidiaries and these guaranties are secured by a pledge of
substantially all of the subsidiaries assets. Loans under the credit facility
accrue interest at variable rates at specified margins above either the agent
banks alternate base rate or its Eurodollar rate. Principal payments on the
term B loan are due in quarterly installments of $875,000 until maturity. The
credit facility is also subject to mandatory prepayment under specific
circumstances including a portion of excess cash flow and the net proceeds from
an initial public offering, asset sales, debt issuances and specified casualty
events, each subject to various exceptions. The credit facility included a 1%
prepayment penalty on voluntary prepayments under the term loan, which lapsed
on February 7, 2004.

The credit facility was amended on June 6, 2003 to allow for the issuance
of our 81⁄2% senior subordinated notes. On February 9, 2004, the credit
facility was further amended to, among other things, reduce the applicable
margin on the term loans by 150 basis points and increase the annual capital
expenditure limitations beginning in fiscal year 2005.

As amended effective February 9, 2004, the credit facility generally
provides for the following annual capital expenditure limitations:

|                   |  |                 |             | 
|------------------ |  | --------------- | ----------- | 
|                   |  | Maximum Capital
|Fiscal Year Ending |  | Expenditures   
|                   |  |                
|September 30, 2004 |  | $               | 165,000,000 | 
|September 30, 2005 |  | $               | 95,000,000  | 
|September 30, 2006 |  | $               | 90,000,000  | 
|September 30, 2007 |  | $               | 85,000,000  | 
|September 30, 2008 |  | $               | 85,000,000  | 
|September 30, 2009 |  | $               | 85,000,000  | 

The credit facility requires that we comply with various other financial
ratios and tests and contains covenants limiting our ability to, among other
things, incur debt, engage in acquisitions or mergers, sell assets, make
investments or capital expenditures, make distributions or stock repurchases
and pay dividends. Covenants under the credit facility include the following
ratios:

30



---



##### Table of Contents



|                                |  |              |      | 
|------------------------------- |  | ------------ | ---- | 
|                                |  | December 31,
|                                |  | 2003        
|                                |  |             
|Actual Total Leverage Ratio     |  |              | 3.69 | 
|Maximum Total Leverage Ratio    |  |              | 5.00 | 
|                               
|Actual Senior Total Leverage    |  |              | 1.55 | 
|Maximum Senior Leverage Ratio   |  |              | 3.25 | 
|                               
|Actual Interest Coverage Ratio  |  |              | 2.68 | 
|Minimum Interest Coverage Ratio |  |              | 2.00 | 

Failure to comply with these ratios would constitute an event of default
under the credit facility, thereby accelerating all amounts outstanding under
the term B loan and revolving credit facility, including all accrued interest
thereon, as due and payable upon demand by the lenders. In addition, the
occurrence of an event of default under the credit facility would constitute an
event of default under the indentures governing our 13% and 81⁄2% senior
subordinated notes. Such an event would have material adverse effect on our
liquidity and financial condition.

At December 31, 2003, $322.0 million was outstanding under our term B loan
and no amounts were outstanding under our revolving credit facility. The
revolving credit facility includes a $75.0 million sub-limit for letters of
credit that may be issued by us and, at December 31, 2003, we had issued $40.3
million in letters of credit. We also pay a commitment fee equal to 0.5% of
the average daily amount available under the new revolving credit facility. At
February 17, 2004, we had no amounts under our new revolving credit facility
and had issued $36.7 million in letters of credit, resulting in remaining
availability under the revolving credit facility of $88.3 million.

On October 13, 1999, we issued $230.0 million of 13% senior subordinated
notes due 2009. On May 25, 2000, we exchanged all of our outstanding 13% senior
subordinated notes due 2009 for 13% senior subordinated notes due 2009 that
have been registered under the Securities Act of 1933, as amended. On June 6,
2003, we issued $100.0 million of 81⁄2% senior subordinated notes due 2009.
On August 14, 2003, we exchanged all of our outstanding 81⁄2% senior
subordinated notes due 2009 for 81⁄2% senior subordinated notes due 2009 that
have been registered under the Securities Act.

Interest on the 13% and 81⁄2% senior subordinated notes is payable
semi-annually on April 15 and October 15. The 13% and 81⁄2% senior
subordinated notes are unsecured obligations and are subordinated in right of
payment to all of our existing and future senior indebtedness. If a change in
control occurs, as defined in the indentures, each holder of the 13% and
81⁄2% senior subordinated notes will have the right to require us to
repurchase all or any part of that holders notes in cash at 101% of the
aggregate principal amount of notes repurchased plus accrued and unpaid
interest to the date of purchase. Except with respect to a change of control,
we are not required to make mandatory redemption or sinking fund payments with
respect to the notes. All of our material subsidiaries have fully and
unconditionally guaranteed the notes on a joint and several basis, with the
exception of Health Choice Arizona, Inc., which is not a guarantor of the
81⁄2% senior subordinated notes. The indentures for the notes contain
certain covenants, including but not limited to, restrictions on new
indebtedness, asset sales, capital expenditures, dividends and our ability to
merge or consolidate. The following table summarizes our credit ratings as of
December 31, 2003, which are unchanged from September 30, 2003:

|                                  |  |         |     |        |  |  |    | 
|--------------------------------- |  | ------- | --- | ------ |  |  | -- | 
|Rating agency                     |  | Moodys |     | S&P   
|                                  |  |         |     |       
|Corporate Credit Rating           |  |         | n/a |        |  |  | B+ | 
|$475 million bank credit facility |  |         | B1  |        |  |  | B+ | 
|13% Senior Subordinated Notes     |  |         | B3  |        |  |  | B | 
|81⁄2% Senior Subordinated Notes     |  |         | B3  |        |  |  | B | 
|Outlook                           |  | Stable  |     | Stable

31



---



##### Table of Contents



On August 18, 2000, our subsidiary, Rocky Mountain Medical Center, Inc.,
filed a Complaint and Motion for Preliminary Injunction in the Third Judicial
District Court for Salt Lake County, State of Utah against St. Marks Hospital.
St. Marks Hospital is owned by HCA Inc. The complaint alleges certain state
law violations by St. Marks Hospital, including exclusionary contracting
practices and other conduct constitute, among other things, a group boycott
under the Utah Antitrust Act, and seeks unspecified monetary and punitive
damages. Both parties filed Motions for Summary Judgment in this case and
consolidated oral arguments regarding both parties motions were held on
October 29, 2001. On December 14, 2001, the court denied both parties
motions. On June 25, 2002, the court granted our motion to add HCA Inc. and
one of its subsidiaries as defendants. On July 22, 2002, Rocky Mountain
Medical Center filed an amended complaint. The amended complaint alleges the
same causes of actions as the original complaint and names HCA Inc. and Ogden
Regional Medical Center, Inc. as defendants. On February 3, 2003, the action
was reassigned to a new judge and, on March 11, 2003, he held a status
conference in which he ordered Rocky Mountain Medical Center to certify the
case ready for trial no later than September 15, 2003. The parties have
completed principal discovery and Rocky Mountain Medical Center certified
readiness for trial on a timely basis consistent with the court order. On
November 10, 2003, HCA filed a Motion for Summary Judgment and Rocky Mountain
Medical Center filed its Response with the court on December 17, 2003. The
hearing on the Motion for Summary Judgment occurred on January 26, 2004 and the
court granted summary judgment in favor of the defendants on January 27, 2004.
Rocky Mountain Medical Center intends to vigorously appeal this ruling. We
expect to incur additional fees and costs related to this civil action during
the appeals process and, if successful on appeal, in connection with the
eventual jury trial.

As of December 31, 2003, we provided a performance guaranty in the form of
a letter of credit in the amount of $20.6 million for the benefit of the
Arizona Health Care Cost Containment System to support our obligations under
the Health Choice contract to provide and pay for healthcare services.
Additionally, Health Choice maintains a cash balance of $5 million and
an intercompany demand note with the Company. The amount of the performance
guaranty is based upon the membership in the plan and the related capitation
revenue paid to us.

Effective February 1, 2004, we acquired Lake Mead Hospital Medical Center,
a 198-bed hospital in Las Vegas, Nevada, from a subsidiary of Tenet Healthcare
Corporation for approximately $25.0 million, consisting of approximately $22.5
million in cash and $2.5 million in assumed liabilities, subject to certain net
working capital and other purchase price adjustments to be determined
post-closing. The Tenet subsidiary retained the accounts receivable related to
the operation of the hospital prior to February 1, 2004. We financed the
acquisition using available cash and expect to invest approximately $15.0
million in working capital at the hospital.

Based upon our current level of operations and anticipated growth, we
believe that cash generated from operations, cash on hand and amounts available
under the revolving credit facility will be adequate to meet our anticipated
debt service requirements, capital expenditures and working capital needs for
the next 12 months. We cannot assure you, however, that our business will
generate sufficient cash flow from operations or that future borrowings will be
available under our bank credit facility, or otherwise, to enable us to grow
our business, service our indebtedness, including the bank credit facility and
our senior subordinated exchange notes, or make anticipated capital
expenditures. One element of our business strategy is expansion through the
acquisition of hospitals in existing and new markets. The completion of
acquisitions may result in the incurrence of, or assumption by us, of
additional indebtedness. We continually assess our capital needs and may seek
additional financing; including debt or equity as considered necessary to fund
capital expenditures and potential acquisitions or for other corporate
purposes. Our future operating performance, ability to service or refinance
the 13% and 81⁄2% senior subordinated notes and ability to service and extend
or refinance the bank credit facility will be subject to future economic
conditions and to financial, business and other factors, many of which are
beyond our control.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the three months ended December 31, 2003, there were no material
changes to our quantitative and qualitative disclosures about the market risk
associated with financial instruments as described in our Annual Report on Form
10-K for the year ended September 30, 2003. At December 31, 2003, the fair
market value of our outstanding 13% and 81⁄2% senior subordinated notes was
$362.5 million, based upon quoted market prices as of that date.

32



---



##### Table of Contents






Item 4. Controls and Procedures

Under the supervision and with the participation of our management team,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended, as of December 31, 2003. Based on this
evaluation, the principal executive officer and principal accounting officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
reports.

There were no changes in our internal control over financial reporting
that occurred during the period covered by this report that materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.




PART II

OTHER INFORMATION





Item 1. Legal Proceedings.

On August 18, 2000, our subsidiary, Rocky Mountain Medical Center, Inc.,
filed a Complaint and Motion for Preliminary Injunction in the Third Judicial
District Court for Salt Lake County, State of Utah against St. Marks Hospital.
St. Marks Hospital is owned by HCA Inc. The complaint alleges certain state
law violations by St. Marks Hospital, including exclusionary contracting
practices and other conduct constitute, among other things, a group boycott
under the Utah Antitrust Act, and seeks unspecified monetary and punitive
damages. Both parties filed Motions for Summary Judgment in this case and
consolidated oral arguments regarding both parties motions were held on
October 29, 2001. On December 14, 2001, the court denied both parties
motions. On June 25, 2002, the court granted our motion to add HCA Inc. and
one of its subsidiaries as defendants. On July 22, 2002, Rocky Mountain
Medical Center filed an amended complaint. The amended complaint alleges the
same causes of actions as the original complaint and names HCA Inc. and Ogden
Regional Medical Center, Inc. as defendants. On February 3, 2003, the action
was reassigned to a new judge and, on March 11, 2003, he held a status
conference in which he ordered Rocky Mountain Medical Center to certify the
case ready for trial no later than September 15, 2003. The parties have
completed principal discovery and Rocky Mountain Medical Center certified
readiness for trial on a timely basis consistent with the court order. On
November 10, 2003, HCA filed a Motion for Summary Judgment and Rocky Mountain
Medical Center filed its Response with the court on December 17, 2003. The
hearing on the Motion for Summary Judgment occurred on January 26, 2004 and the
court granted summary judgment in favor of the defendants on January 27, 2004.
Rocky Mountain Medical Center intends to vigorously appeal this ruling. We
expect to incur additional fees and costs related to this civil action during
the appeals process and, if successful on appeal, in connection with the
eventual jury trial.




Item 6. Exhibits and Reports on Form 8-K

|    |  |                  
|--- |  | -----------------
|(a) |  | List of Exhibits:

| |  |  |      |  |  |                                                                                                                                                                        
| |  |  | ---- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 10.1 |  |  | Purchase and Sale Agreement dated as of December 15, 2003, by
and between Rocky Mountain Medical Center, Inc. and Board of
Education of the Granite School District    
| |  |  |      |  |  |                                                                                                                                                                        
| |  |  | 10.2 |  |  | Letter Agreement dated as of January 26, 2004 by and among
Rocky Mountain Medical Center, Inc., Board of Education of
Granite School District and Merrill Title Company
| |  |  |      |  |  |                                                                                                                                                                        
| |  |  | 10.3 |  |  | Asset Sale Agreement dated as of January 16, 2004, by and
between NLVH, Inc. and IASIS Healthcare Corporation*                                                         
| |  |  |      |  |  |                                                                                                                                                                        
| |  |  | 10.4 |  |  | Assignment and Assumption of Asset Sale Agreement dated as of
January 16, 2004, by and between IASIS Healthcare Corporation
and Lake Mead Hospital, Inc.*              

33



---



##### Table of Contents



| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |  | ---- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 10.5 |  |  | Guaranty of Payment and Performance dated as of January 16,
2004, executed by IASIS Healthcare Corporation in favor of
NLVH, Inc.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |  | 10.6 |  |  | Second Amendment, dated February 9, 2004, to that Amended and
Restated Credit Agreement dated as of February 7, 2003, among
IASIS Healthcare Corporation, as Borrower, Certain
Subsidiaries of the Borrower, as Guarantors, Various Lenders,
CitiCorp North America, Inc. and UBS AG, Stamford Branch, as
Co-Syndication Agents, General Electric Capital Corporation
and Residential Funding Corporation dba GMAC-RFC Health
Capital, as Co-Documentation Agents, Bank of America, N.A.,
as Administrative Agent, and Banc of America Securities, LLC
and Salomon Smith Barney Inc., as Joint Lead Arrangers and
Joint Book Managers**
| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |  | 31.1 |  |  | Certification of Principal Executive Officer Pursuant to Rule
15d14(a) under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |  | 31.2 |  |  | Certification of Principal Financial Officer pursuant to Rule
15d-14(a) under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |  | 99.1 |  |  | Odessa Regional Hospital, LP Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |  | 99.2 |  |  | Jordan Valley Hospital, LP Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |  | 99.3 |  |  | The Medical Center of Southeast Texas, LP Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |  |      |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  |  | 99.4 |  |  | Davis Hospital & Medical Center, LP Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



---

|*  |  | Incorporated by reference to the Companys
Current Report on Form 8-K filed on February 2, 2004.
|-- |  | ------------------------------------------------------------------------------------------------
|  
|** |  | Incorporated by reference to the Companys Current Report on Form
8-K filed on February 9, 2004.



|(b) |  | Reports on Form 8-K:                                                                                                                                                                                      
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On November 13, 2003, the Company filed a Current Report on Form 8-K
to report that it had issued a press release announcing its earnings
for the fourth quarter and fiscal year ended September 30, 2003.

34



---



##### Table of Contents






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.

|                        |  |                              |  |                                                                                                            |  | 
|----------------------- |  | ---------------------------- |  | ---------------------------------------------------------------------------------------------------------- |  | 
|                        |  | IASIS HEALTHCARE CORPORATION
|                        |  |                             
|Date: February 17, 2004 |  | By:                          |  | /s/ W. Carl Whitmer

W. Carl Whitmer, Chief Financial Officer
(Principal Financial and Accounting Officer) |  | 

35



---



##### Table of Contents






EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.1        |  | Purchase and Sale Agreement dated as of December 15, 2003, by
and between Rocky Mountain Medical Center, Inc. and Board of
Education of the Granite School District                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.2        |  | Letter Agreement dated as of January 26, 2004 by and among
Rocky Mountain Medical Center, Inc., Board of Education of
Granite School District and Merrill Title Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.3        |  | Asset Sale Agreement dated as of January 16, 2004, by and
between NLVH, Inc. and IASIS Healthcare Corporation*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.4        |  | Assignment and Assumption of Asset Sale Agreement dated as of
January 16, 2004, by and between IASIS Healthcare Corporation
and Lake Mead Hospital, Inc.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.5        |  | Guaranty of Payment and Performance dated as of January 16,
2004, executed by IASIS Healthcare Corporation in favor of
NLVH, Inc.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.6        |  | Second Amendment, dated February 9, 2004, to that Amended and
Restated Credit Agreement dated as of February 7, 2003, among
IASIS Healthcare Corporation, as Borrower, Certain
Subsidiaries of the Borrower, as Guarantors, Various Lenders,
CitiCorp North America, Inc. and UBS AG, Stamford Branch, as
Co-Syndication Agents, General Electric Capital Corporation
and Residential Funding Corporation dba GMAC-RFC Health
Capital, as Co-Documentation Agents, Bank of America, N.A., as
Administrative Agent, and Banc of America Securities, LLC and
Salomon Smith Barney Inc., as Joint Lead Arrangers and Joint
Book Managers**
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|31.1        |  | Certification of Principal Executive Officer Pursuant to Rule
15d14(a) under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|31.2        |  | Certification of Principal Financial Officer pursuant to Rule
15d-14(a) under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|99.1        |  | Odessa Regional Hospital, LP Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|99.2        |  | Jordan Valley Hospital, LP Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|99.3        |  | The Medical Center of Southeast Texas, LP Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|99.4        |  | Davis Hospital & Medical Center, LP Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



---

|*  |  | Incorporated by reference to the Companys Current Report on Form 8-K filed
on February 2, 2004.
|-- |  | ------------------------------------------------------------------------------------------------
|  
|** |  | Incorporated by reference to the Companys Current Report on Form 8-K filed
on February 9, 2004.

36