##### Table of Contents



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

|                                                  |  |                                                                                         
|------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|x                                                 |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                                  |  |                                                                                         
|For the quarterly period ended September 30, 2002
|                                                  |  |                                                                                         
|OR                                               
|                                                  |  |                                                                                         
|o                                                 |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to ___________________

Commission file number 0-29818

LifePoint Hospitals, Inc.
(Exact name of registrant as specified in its charter)

|                                         |  |                                  
|---------------------------------------- |  | ---------------------------------
|Delaware                                 |  | 52-2165845                       
|(State or other jurisdiction             |  | (IRS Employer Identification No.)
|of incorporation or organization)        |  |                                  
|                                        
|103 Powell Court                         |  | 37027                            
|Brentwood, Tennessee                     |  | (Zip Code)                       
|(Address of principal executive offices) |  |                                  

(615) 372-8500
(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 mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES   x
NO o

As of October 25, 2002, the number of outstanding shares of Common Stock
of LifePoint Hospitals, Inc. was 39,502,684.

1



---

TABLE OF CONTENTS



|                                                     |  |  |  |  |  |  |  | 
|---------------------------------------------------- |  |  |  |  |  |  |  | 
|Part I  Financial Information                      
|CONDENSED CONSOLIDATED STATEMENTS OF INCOME         
|CONDENSED CONSOLIDATED BALANCE SHEETS               
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|Part II - Other Information                         
|SIGNATURES                                          
|CERTIFICATIONS                                      
|EXHIBIT INDEX                                       



---



##### Table of Contents






Part I  Financial Information

Item 1.   Financial
Statements.

LIFEPOINT HOSPITALS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF INCOME

UNAUDITED
(Dollars in millions, except per share amounts)


|                                                                            |                                                |   |                    |        |                   |   |       |        |      |   |       |        |   |   |       |        |  
|--------------------------------------------------------------------------- | ---------------------------------------------- | - | ------------------ | ------ | ----------------- | - | ----- | ------ | ---- | - | ----- | ------ | - | - | ----- | ------ | -
|                                                                            |                                                |   | THREE MONTHS ENDED |        | NINE MONTHS ENDED
|                                                                            |                                                |   | SEPTEMBER 30,      |        | SEPTEMBER 30,    
|                                                                            |                                                |   |                    |        |                  
|                                                                            |                                                |   | 2002               |        | 2001              |   | 2002  |        | 2001
|                                                                            |                                                |   |                    |        |                   |   |       |        |     
|Revenues                                                                    |                                                | $ | 182.2              |        |                   | $ | 149.2 |        |      | $ | 541.7 |        |   | $ | 455.1 |       
|                                                                           
|Salaries and benefits                                                       |                                                |   | 71.0               |        |                   |   | 59.3  |        |      |   | 212.6 |        |   |   | 179.0 |       
|Supplies                                                                    |                                                |   | 22.6               |        |                   |   | 19.0  |        |      |   | 67.4  |        |   |   | 57.4  |       
|Other operating expenses                                                    |                                                |   | 35.6               |        |                   |   | 29.1  |        |      |   | 101.1 |        |   |   | 88.5  |       
|Provision for doubtful accounts                                             |                                                |   | 12.5               |        |                   |   | 11.5  |        |      |   | 38.8  |        |   |   | 34.1  |       
|Depreciation and amortization                                               |                                                |   | 8.9                |        |                   |   | 8.2   |        |      |   | 28.0  |        |   |   | 24.8  |       
|Interest expense, net                                                       |                                                |   | 3.0                |        |                   |   | 4.0   |        |      |   | 9.9   |        |   |   | 14.2  |       
|ESOP expense                                                                |                                                |   | 2.2                |        |                   |   | 3.0   |        |      |   | 7.4   |        |   |   | 8.0   |       
|Gain on previously impaired assets                                          |                                                |   |                   |        |                   |   |      |        |      |   |      |        |   |   | (0.5  | )     
|                                                                            |                                                |   |                    |        |                   |   |       |        |      |   |       |        |   |   |       |       
|                                                                            |                                                |   | 155.8              |        |                   |   | 134.1 |        |      |   | 465.2 |        |   |   | 405.5 |       
|                                                                            |                                                |   |                    |        |                   |   |       |        |      |   |       |        |   |   |       |       
|Income before minority interests, income taxes
and extraordinary item       |                                                |   | 26.4               |        |                   |   | 15.1  |        |      |   | 76.5  |        |   |   | 49.6  |       
|Minority interests in earnings of consolidated entity                       |                                                |   | 0.7                |        |                   |   | 0.6   |        |      |   | 2.2   |        |   |   | 1.9   |       
|                                                                            |                                                |   |                    |        |                   |   |       |        |      |   |       |        |   |   |       |       
|Income before income taxes and extraordinary item                           |                                                |   | 25.7               |        |                   |   | 14.5  |        |      |   | 74.3  |        |   |   | 47.7  |       
|Provision for income taxes                                                  |                                                |   | 10.5               |        |                   |   | 7.0   |        |      |   | 31.5  |        |   |   | 23.1  |       
|                                                                            |                                                |   |                    |        |                   |   |       |        |      |   |       |        |   |   |       |       
|Income before extraordinary item                                            |                                                |   | 15.2               |        |                   |   | 7.5   |        |      |   | 42.8  |        |   |   | 24.6  |       
|Extraordinary loss on early retirement of debt, net of
taxes                |                                                |   | 2.5                |        |                   |   |      |        |      |   | 18.9  |        |   |   | 1.6   |       
|                                                                            |                                                |   |                    |        |                   |   |       |        |      |   |       |        |   |   |       |       
|                                                                            | Net income                                     |   | $                  | 12.7   |                   |   | $     | 7.5    |      |   | $     | 23.9   |   |   | $     | 23.0   |  
|                                                                            |                                                |   |                    |        |                   |   |       |        |      |   |       |        |   |   |       |       
|Basic earnings per share:                                                   |                                                |   |                    |        |                   |   |       |        |      |   |       |        |   |   |       |       
|                                                                            | Income before extraordinary item               |   | $                  | 0.40   |                   |   | $     | 0.20   |      |   | $     | 1.14   |   |   | $     | 0.70   |  
|                                                                            | Extraordinary loss on early retirement of debt |   |                    | (0.06  | )                 |   |       |       |      |   |       | (0.50  | ) |   |       | (0.05  | )
|                                                                            |                                                |   |                    |        |                   |   |       |        |      |   |       |        |   |   |       |       
|                                                                            | Net income                                     |   | $                  | 0.34   |                   |   | $     | 0.20   |      |   | $     | 0.64   |   |   | $     | 0.65   |  
|                                                                            |                                                |   |                    |        |                   |   |       |        |      |   |       |        |   |   |       |       
|Diluted earnings per share:                                                 |                                                |   |                    |        |                   |   |       |        |      |   |       |        |   |   |       |       
|                                                                            | Income before extraordinary item               |   | $                  | 0.39   |                   |   | $     | 0.20   |      |   | $     | 1.11   |   |   | $     | 0.67   |  
|                                                                            | Extraordinary loss on early retirement of debt |   |                    | (0.06  | )                 |   |       |       |      |   |       | (0.46  | ) |   |       | (0.04  | )
|                                                                            |                                                |   |                    |        |                   |   |       |        |      |   |       |        |   |   |       |       
|                                                                            | Net income                                     |   | $                  | 0.33   |                   |   | $     | 0.20   |      |   | $     | 0.65   |   |   | $     | 0.63   |  
|                                                                            |                                                |   |                    |        |                   |   |       |        |      |   |       |        |   |   |       |       
|Weighted average shares and dilutive securities
outstanding (in thousands): |                                                |   |                    |        |                   |   |       |        |      |   |       |        |   |   |       |       
|                                                                            | Basic                                          |   |                    | 37,616 |                   |   |       | 36,783 |      |   |       | 37,469 |   |   |       | 35,216 |  
|                                                                            |                                                |   |                    |        |                   |   |       |        |      |   |       |        |   |   |       |       
|                                                                            | Diluted                                        |   |                    | 43,899 |                   |   |       | 38,230 |      |   |       | 41,134 |   |   |       | 36,740 |  
|                                                                            |                                                |   |                    |        |                   |   |       |        |      |   |       |        |   |   |       |       

See accompanying notes.

2



---



##### Table of Contents



LIFEPOINT HOSPITALS, INC.




CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions, except per share amounts)


|                                                    |                                                                                                                                                                                       |   |       |               |   |              |       |        |   | 
|--------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----- | ------------- | - | ------------ | ----- | ------ | - | 
|                                                    |                                                                                                                                                                                       |   |       | SEPTEMBER 30, |   | DECEMBER 31,
|                                                    |                                                                                                                                                                                       |   |       | 2002          |   | 2001        
|                                                    |                                                                                                                                                                                       |   |       |               |   |             
|                                                    |                                                                                                                                                                                       |   |       | (unaudited)   |   | (1)         
|ASSETS                                              |                                                                                                                                                                                       |   |       |               |   |              |       |       
|Current assets:                                     |                                                                                                                                                                                       |   |       |               |   |              |       |       
|                                                    | Cash and cash equivalents                                                                                                                                                             |   | $     | 183.8         |   |              | $     | 57.2   |  
|                                                    | Accounts receivable, less allowances for doubtful accounts of $63.5 at September
30, 2002 and $59.0 at December 31, 2001                                                              |   |       | 71.5          |   |              |       | 56.7   |  
|                                                    | Inventories                                                                                                                                                                           |   |       | 17.0          |   |              |       | 16.3   |  
|                                                    | Deferred income taxes and other current assets                                                                                                                                        |   |       | 20.1          |   |              |       | 18.7   |  
|                                                    |                                                                                                                                                                                       |   |       |               |   |              |       |       
|                                                    |                                                                                                                                                                                       |   | 292.4 |               |   |              | 148.9 |       
|Property and equipment:                             |                                                                                                                                                                                       |   |       |               |   |              |       |       
|                                                    | Land                                                                                                                                                                                  |   |       | 10.7          |   |              |       | 10.7   |  
|                                                    | Buildings and improvements                                                                                                                                                            |   |       | 270.0         |   |              |       | 262.0  |  
|                                                    | Equipment                                                                                                                                                                             |   |       | 281.6         |   |              |       | 263.4  |  
|                                                    | Construction in progress (estimated cost to complete and equip after September,
30, 2002 - $49.4)                                                                                     |   |       | 22.4          |   |              |       | 7.2    |  
|                                                    |                                                                                                                                                                                       |   |       |               |   |              |       |       
|                                                    |                                                                                                                                                                                       |   | 584.7 |               |   |              | 543.3 |       
|                                                    | Accumulated depreciation                                                                                                                                                              |   |       | (231.0        | ) |              |       | (204.9 | )
|                                                    |                                                                                                                                                                                       |   |       |               |   |              |       |       
|                                                    |                                                                                                                                                                                       |   | 353.7 |               |   |              | 338.4 |       
|                                                   
|Deferred loan costs, net                            |                                                                                                                                                                                       |   | 9.1   |               |   |              | 7.1   |       
|Goodwill                                            |                                                                                                                                                                                       |   | 47.9  |               |   |              | 47.1  |       
|Other                                               |                                                                                                                                                                                       |   | 12.6  |               |   |              | 12.8  |       
|                                                    |                                                                                                                                                                                       |   |       |               |   |              |       |       
|                                                    |                                                                                                                                                                                       | $ | 715.7 |               |   | $            | 554.3 |       
|                                                    |                                                                                                                                                                                       |   |       |               |   |              |       |       
|LIABILITIES AND EQUITY                              |                                                                                                                                                                                       |   |       |               |   |              |       |       
|Current liabilities:                                |                                                                                                                                                                                       |   |       |               |   |              |       |       
|                                                    | Accounts payable                                                                                                                                                                      |   | $     | 20.8          |   |              | $     | 19.0   |  
|                                                    | Accrued salaries                                                                                                                                                                      |   |       | 20.9          |   |              |       | 18.6   |  
|                                                    | Other current liabilities                                                                                                                                                             |   |       | 19.6          |   |              |       | 10.7   |  
|                                                    | Estimated third-party payor settlements                                                                                                                                               |   |       | 15.3          |   |              |       | 17.9   |  
|                                                    |                                                                                                                                                                                       |   |       |               |   |              |       |       
|                                                    |                                                                                                                                                                                       |   | 76.6  |               |   |              | 66.2  |       
|                                                   
|Long-term debt                                      |                                                                                                                                                                                       |   | 252.9 |               |   |              | 150.0 |       
|Deferred income taxes                               |                                                                                                                                                                                       |   | 22.2  |               |   |              | 21.0  |       
|Professional liability risks and other liabilities  |                                                                                                                                                                                       |   | 23.8  |               |   |              | 16.9  |       
|                                                   
|Minority interests in equity of consolidated entity |                                                                                                                                                                                       |   | 4.7   |               |   |              | 5.2   |       
|                                                   
|Stockholders equity:                               |                                                                                                                                                                                       |   |       |               |   |              |       |       
|                                                    | Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued                                                                                                      |   |       |              |   |              |       |       |  
|                                                    | Common stock, $0.01 par value; 90,000,000 shares authorized; 39,495,363 shares
and 39,276,745 shares issued and outstanding at September 30, 2002 and
December 31, 2001, respectively |   |       | 0.4           |   |              |       | 0.4    |  
|                                                    | Capital in excess of par value                                                                                                                                                        |   |       | 294.0         |   |              |       | 285.0  |  
|                                                    | Unearned ESOP compensation                                                                                                                                                            |   |       | (20.1         | ) |              |       | (22.5  | )
|                                                    | Notes receivable for shares sold to employees                                                                                                                                         |   |       | (0.5          | ) |              |       | (5.7   | )
|                                                    | Retained earnings                                                                                                                                                                     |   |       | 61.7          |   |              |       | 37.8   |  
|                                                    |                                                                                                                                                                                       |   |       |               |   |              |       |       
|                                                    |                                                                                                                                                                                       |   | 335.5 |               |   |              | 295.0 |       
|                                                    |                                                                                                                                                                                       |   |       |               |   |              |       |       
|                                                    |                                                                                                                                                                                       | $ | 715.7 |               |   | $            | 554.3 |       
|                                                    |                                                                                                                                                                                       |   |       |               |   |              |       |       

---

(1)  Derived from audited financial statements.

See accompanying notes.

3



---



##### Table of Contents



LIFEPOINT HOSPITALS, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED
(In millions)


|                                                 |                                                                                                    |                                         |                                                     |                                                     |      |                    |      |                   |      |      |       |        |       |      |       |        |      |       |       |  
|------------------------------------------------ | -------------------------------------------------------------------------------------------------- | --------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | ---- | ------------------ | ---- | ----------------- | ---- | ---- | ----- | ------ | ----- | ---- | ----- | ------ | ---- | ----- | ----- | -
|                                                 |                                                                                                    |                                         |                                                     |                                                     |      | THREE MONTHS ENDED |      | NINE MONTHS ENDED
|                                                 |                                                                                                    |                                         |                                                     |                                                     |      | SEPTEMBER 30,      |      | SEPTEMBER 30,    
|                                                 |                                                                                                    |                                         |                                                     |                                                     |      |                    |      |                  
|                                                 |                                                                                                    |                                         |                                                     |                                                     |      | 2002               |      | 2001              |      | 2002 |       | 2001  
|                                                 |                                                                                                    |                                         |                                                     |                                                     |      |                    |      |                   |      |      |       |       
|Cash flows from operating activities:            |                                                                                                    |                                         |                                                     |                                                     |      |                    |      |                   |      |      |       |        |       |      |       |       
|                                                 | Net income                                                                                         |                                         | $                                                   | 12.7                                                |      |                    | $    | 7.5               |      |      | $     | 23.9   |       |      | $     | 23.0   |     
|                                                 | Adjustments to reconcile net income to net cash
provided by operating activities:                  |                                         |                                                     |                                                     |      |                    |      |                   |      |      |       |        |       |      |       |        |     
|                                                 | Depreciation and amortization                                                                      |                                         |                                                     | 8.9                                                 |      |                    |      | 8.2               |      |      |       | 28.0   |       |      |       | 24.8   |     
|                                                 | ESOP expense                                                                                       |                                         |                                                     | 2.2                                                 |      |                    |      | 3.0               |      |      |       | 7.4    |       |      |       | 8.0    |     
|                                                 | Minority interests in earnings of consolidated entity                                              |                                         |                                                     | 0.7                                                 |      |                    |      | 0.6               |      |      |       | 2.2    |       |      |       | 1.9    |     
|                                                 | Deferred income taxes                                                                              |                                         |                                                     | 1.4                                                 |      |                    |      | 1.3               |      |      |       | 0.6    |       |      |       | 0.6    |     
|                                                 | Reserve for professional liability risks, net                                                      |                                         |                                                     | 2.4                                                 |      |                    |      | 2.2               |      |      |       | 7.5    |       |      |       | 6.3    |     
|                                                 | Extraordinary loss on early retirement of debt                                                     |                                         |                                                     | 4.2                                                 |      |                    |      |                  |      |      |       | 30.5   |       |      |       | 2.6    |     
|                                                 | Gain on previously impaired assets                                                                 |                                         |                                                     |                                                    |      |                    |      |                  |      |      |       |       |       |      |       | (0.5   | )   
|                                                 | Tax benefit from stock option exercises                                                            |                                         |                                                     | 0.3                                                 |      |                    |      | 7.4               |      |      |       | 1.3    |       |      |       | 8.1    |     
|                                                 | Increase (decrease) in cash from operating assets and
liabilities, net of effects of acquisitions: |                                         |                                                     |                                                     |      |                    |      |                   |      |      |       |        |       |      |       |        |     
|                                                 |                                                                                                    | Accounts receivable                     |                                                     |                                                     | 3.4  |                    |      |                   | 0.7  |      |       |        | (14.8 | )    |       |        | (8.8 | )    
|                                                 |                                                                                                    | Inventories and other current assets    |                                                     |                                                     | 1.7  |                    |      |                   | (0.2 | )    |       |        | (1.4  | )    |       |        |     |      
|                                                 |                                                                                                    | Accounts payable and accrued expenses   |                                                     |                                                     | 7.5  |                    |      |                   | 11.6 |      |       |        | 11.6  |      |       |        | 14.4 |      
|                                                 |                                                                                                    | Income taxes payable                    |                                                     |                                                     | 2.4  |                    |      |                   | (1.9 | )    |       |        | (0.1  | )    |       |        | 1.2  |      
|                                                 |                                                                                                    | Estimated third-party payor settlements |                                                     |                                                     | (7.0 | )                  |      |                   | (0.2 | )    |       |        | (2.6  | )    |       |        | 8.7  |      
|                                                 | Other                                                                                              |                                         |                                                     | 0.5                                                 |      |                    |      | 0.8               |      |      |       | (0.2   | )     |      |       | 1.3    |     
|                                                 |                                                                                                    |                                         |                                                     |                                                     |      |                    |      |                   |      |      |       |        |       |      |       |       
|                                                 |                                                                                                    |                                         |                                                     | Net cash provided by operating activities           |      |                    | 41.3 |                   |      |      | 41.0  |        |       |      | 93.9  |        |      |       | 91.6  |  
|Cash flows from investing activities:            |                                                                                                    |                                         |                                                     |                                                     |      |                    |      |                   |      |      |       |        |       |      |       |       
|                                                 | Purchases of property and equipment, net                                                           |                                         |                                                     | (15.4                                               | )    |                    |      | (5.9              | )    |      |       | (42.2  | )     |      |       | (28.5  | )   
|                                                 | Purchase of facility                                                                               |                                         |                                                     |                                                    |      |                    |      | (0.1              | )    |      |       |       |       |      |       | (5.8   | )   
|                                                 | Maturities of short-term investments                                                               |                                         |                                                     | 21.5                                                |      |                    |      |                  |      |      |       |       |       |      |       |       |     
|                                                 | Other                                                                                              |                                         |                                                     | (0.9                                                | )    |                    |      | (0.5              | )    |      |       | (2.2   | )     |      |       | 4.3    |     
|                                                 |                                                                                                    |                                         |                                                     |                                                     |      |                    |      |                   |      |      |       |        |       |      |       |       
|                                                 |                                                                                                    |                                         |                                                     | Net cash provided by (used in) investing activities |      |                    | 5.2  |                   |      |      | (6.5  | )      |       |      | (44.4 | )      |      |       | (30.0 | )
|Cash flows from financing activities:            |                                                                                                    |                                         |                                                     |                                                     |      |                    |      |                   |      |      |       |        |       |      |       |       
|                                                 | Proceeds from stock offering, net                                                                  |                                         |                                                     |                                                    |      |                    |      |                  |      |      |       |       |       |      |       | 100.4  |     
|                                                 | Repayments of bank debt                                                                            |                                         |                                                     |                                                    |      |                    |      |                  |      |      |       |       |       |      |       | (139.3 | )   
|                                                 | Repurchases of senior subordinated notes                                                           |                                         |                                                     | (22.8                                               | )    |                    |      |                  |      |      |       | (173.1 | )     |      |       |       |     
|                                                 | Proceeds from issuance of convertible notes, net                                                   |                                         |                                                     | (0.2                                                | )    |                    |      |                  |      |      |       | 242.5  |       |      |       |       |     
|                                                 | Proceeds from employee loans                                                                       |                                         |                                                     | 5.2                                                 |      |                    |      |                  |      |      |       | 5.2    |       |      |       |       |     
|                                                 | Proceeds from exercise of stock options                                                            |                                         |                                                     | 0.2                                                 |      |                    |      | 10.5              |      |      |       | 2.4    |       |      |       | 12.0   |     
|                                                 | Other                                                                                              |                                         |                                                     | (0.2                                                | )    |                    |      | (1.0              | )    |      |       | 0.1    |       |      |       | (0.9   | )   
|                                                 |                                                                                                    |                                         |                                                     |                                                     |      |                    |      |                   |      |      |       |        |       |      |       |       
|                                                 |                                                                                                    |                                         | Net cash (used in) provided by financing activities |                                                     |      | (17.8              | )    |                   |      | 9.5  |       |        |       | 77.1 |       |        |      | (27.8 | )    
|Change in cash and cash equivalents              |                                                                                                    |                                         | 28.7                                                |                                                     |      |                    | 44.0 |                   |      |      | 126.6 |        |       |      | 33.8  |       
|Cash and cash equivalents at beginning of period |                                                                                                    |                                         | 155.1                                               |                                                     |      |                    | 29.5 |                   |      |      | 57.2  |        |       |      | 39.7  |       
|                                                 |                                                                                                    |                                         |                                                     |                                                     |      |                    |      |                   |      |      |       |        |       |      |       |       
|Cash and cash equivalents at end of period       |                                                                                                    | $                                       | 183.8                                               |                                                     |      | $                  | 73.5 |                   |      | $    | 183.8 |        |       | $    | 73.5  |       
|                                                 |                                                                                                    |                                         |                                                     |                                                     |      |                    |      |                   |      |      |       |        |       |      |       |       
|Interest payments, net                           |                                                                                                    | $                                       | 0.6                                                 |                                                     |      | $                  |     |                   |      | $    | 9.0   |        |       | $    | 12.2  |       
|Income taxes paid, net                           |                                                                                                    | $                                       | 5.0                                                 |                                                     |      | $                  | 0.2  |                   |      | $    | 18.2  |        |       | $    | 12.0  |       

See accompanying notes.

4



---



##### Table of Contents



LIFEPOINT HOSPITALS, INC.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2002
(UNAUDITED)


NOTE 1  ORGANIZATION AND BASIS OF PRESENTATION

At September 30, 2002, the Company was comprised of 23 general, acute care
hospitals and related health care entities located in non-urban areas in the
states of Alabama, Florida, Kansas, Kentucky, Louisiana, Tennessee, Utah and
Wyoming.

The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three months and nine months ended September 30, 2002
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. 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 year ended December 31, 2001.

Certain prior year amounts have been reclassified to conform to the
current year presentation.

NOTE 2  EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share for income before extraordinary item (income in millions and
shares in thousands):

|                                                                              |                        |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |       | 
|----------------------------------------------------------------------------- | ---------------------- | - | ------------------ | ----- | ----------------- | - | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                                                              |                        |   | Three months ended |       | Nine months ended
|                                                                              |                        |   | September 30,      |       | September 30,    
|                                                                              |                        |   |                    |       |                  
|                                                                              |                        |   | 2002               |       | 2001              |   | 2002   |       | 2001
|                                                                              |                        |   |                    |       |                   |   |        |       |     
|Numerator:                                                                    |                        |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|Numerator for basic earnings per share-Income before
extraordinary item       |                        | $ | 15.2               |       |                   | $ | 7.5    |       |      | $ | 42.8   |       |  | $ | 24.6   |      
|Effect of convertible notes                                                   |                        |   | 1.9                |       |                   |   |       |       |      |   | 2.8    |       |  |   |       |      
|                                                                              |                        |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|Numerator for diluted earnings per share  Income before
extraordinary item   |                        | $ | 17.1               |       |                   | $ | 7.5    |       |      | $ | 45.6   |       |  | $ | 24.6   |      
|                                                                              |                        |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|Denominator:                                                                  |                        |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|Denominator for basic earnings per share  Weighted
average shares            |                        |   | 37,616             |       |                   |   | 36,783 |       |      |   | 37,469 |       |  |   | 35,216 |      
|Effect of dilutive securities:                                                |                        |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|                                                                              | Employee stock options |   |                    | 920   |                   |   |        | 1,351 |      |   |        | 1,026 |  |   |        | 1,420 | 
|                                                                              | Other                  |   |                    | 84    |                   |   |        | 96    |      |   |        | 87    |  |   |        | 104   | 
|                                                                              | Convertible notes      |   |                    | 5,279 |                   |   |        |      |      |   |        | 2,552 |  |   |        |      | 
|                                                                              |                        |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|Denominator for diluted earnings per share  Adjusted
weighted average shares |                        |   | 43,899             |       |                   |   | 38,230 |       |      |   | 41,134 |       |  |   | 36,740 |      
|                                                                              |                        |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|Basic income before extraordinary item per share                              |                        | $ | 0.40               |       |                   | $ | 0.20   |       |      | $ | 1.14   |       |  | $ | 0.70   |      
|                                                                              |                        |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      
|Diluted income before extraordinary item per share                            |                        | $ | 0.39               |       |                   | $ | 0.20   |       |      | $ | 1.11   |       |  | $ | 0.67   |      
|                                                                              |                        |   |                    |       |                   |   |        |       |      |   |        |       |  |   |        |      

5



---



##### Table of Contents



NOTE 3  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2001, the
Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS
142, Goodwill and Other Intangible Assets, (the Statements). These Statements
made significant changes to the accounting for business combinations, goodwill
and intangible assets.

SFAS 141 eliminates the pooling-of-interests method of accounting for
business combinations. In addition, it further clarifies the criteria for
recognition of intangible assets separately from goodwill. SFAS 141 was
effective for transactions completed subsequent to June 30, 2001. The
application of SFAS 141 did not have a material effect on the Companys results
of operations or financial position.

Under SFAS 142, goodwill and intangible assets with indefinite lives are
no longer amortized but are reviewed at least annually for impairment. The
amortization provisions of SFAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company adopted SFAS 142 effective January
1, 2002. Pursuant to SFAS 142, the Company completed its transition impairment
tests of goodwill during the second quarter of 2002 and did not incur an
impairment charge. The Company also performed its initial annual impairment
test as of October 1, 2002 and did not incur an impairment charge.

The table below shows
the Companys income before extraordinary item and
net income for the three months and nine months ended September 30, 2002 and
2001 adjusted for the cessation of goodwill amortization required by the new
standard as if it had occurred as of January 1, 2001 (dollars in millions
except per share amounts):

|                                                             |  |                    |      |                   |  |      |      |      |  |   |      |  |  |   |      | 
|------------------------------------------------------------ |  | ------------------ | ---- | ----------------- |  | ---- | ---- | ---- |  | - | ---- |  |  | - | ---- | 
|                                                             |  | Three months ended |      | Nine months ended
|                                                             |  | September 30,      |      | September 30,    
|                                                             |  |                    |      |                  
|                                                             |  | 2002               |      | 2001              |  | 2002 |      | 2001
|                                                             |  |                    |      |                   |  |      |      |     
|Income
before extraordinary item, as reported                |  | $                  | 15.2 |                   |  | $    | 7.5  |      |  | $ | 42.8 |  |  | $ | 24.6 | 
|Goodwill amortization, net of applicable income tax benefits |  |                    |     |                   |  |      | 0.3  |      |  |   |     |  |  |   | 0.9  | 
|                                                             |  |                    |      |                   |  |      |      |      |  |   |      |  |  |   |      | 
|Adjusted
income before extraordinary item                    |  | $                  | 15.2 |                   |  | $    | 7.8  |      |  | $ | 42.8 |  |  | $ | 25.5 | 
|                                                             |  |                    |      |                   |  |      |      |      |  |   |      |  |  |   |      | 
|Net income, as reported                                      |  | $                  | 12.7 |                   |  | $    | 7.5  |      |  | $ | 23.9 |  |  | $ | 23.0 | 
|Goodwill amortization, net of applicable income tax benefits |  |                    |     |                   |  |      | 0.3  |      |  |   |     |  |  |   | 0.9  | 
|                                                             |  |                    |      |                   |  |      |      |      |  |   |      |  |  |   |      | 
|Adjusted net income                                          |  | $                  | 12.7 |                   |  | $    | 7.8  |      |  | $ | 23.9 |  |  | $ | 23.9 | 
|                                                             |  |                    |      |                   |  |      |      |      |  |   |      |  |  |   |      | 
|Diluted earnings per share:                                  |  |                    |      |                   |  |      |      |      |  |   |      |  |  |   |      | 
|Income
before extraordinary item, as reported                |  | $                  | 0.39 |                   |  | $    | 0.20 |      |  | $ | 1.11 |  |  | $ | 0.67 | 
|Goodwill amortization, net of applicable income tax benefits |  |                    |     |                   |  |      |     |      |  |   |     |  |  |   | 0.02 | 
|                                                             |  |                    |      |                   |  |      |      |      |  |   |      |  |  |   |      | 
|Adjusted
income before extraordinary item                    |  | $                  | 0.39 |                   |  | $    | 0.20 |      |  | $ | 1.11 |  |  |   | 0.69 | 
|                                                             |  |                    |      |                   |  |      |      |      |  |   |      |  |  |   |      | 
|Diluted earnings per share:                                  |  |                    |      |                   |  |      |      |      |  |   |      |  |  |   |      | 
|Net income, as reported                                      |  | $                  | 0.33 |                   |  | $    | 0.20 |      |  | $ | 0.65 |  |  | $ | 0.63 | 
|Goodwill amortization, net of applicable income tax benefits |  |                    |     |                   |  |      |     |      |  |   |     |  |  |   | 0.02 | 
|                                                             |  |                    |      |                   |  |      |      |      |  |   |      |  |  |   |      | 
|Adjusted net income                                          |  | $                  | 0.33 |                   |  | $    | 0.20 |      |  | $ | 0.65 |  |  | $ | 0.65 | 
|                                                             |  |                    |      |                   |  |      |      |      |  |   |      |  |  |   |      | 

In August 2001, the FASB issued
 SFAS No. 143, Accounting for
Asset Retirement Obligations. SFAS 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002, but earlier application
is encouraged. SFAS 143 establishes accounting standards for recognition and
measurement of a liability for an asset retirement obligation and the
associated retirement costs. SFAS 143 applies to all entities and to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and (or) the normal operation
of a long-lived asset, except for certain obligations of lessees. The Company
does not expect SFAS 143 to have a material effect on its results of operations
or financial position.

In August 2001, the FASB also issued SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS
144 removes goodwill from its scope and clarifies other implementation issues
related to SFAS 121. SFAS 144 also provides a single framework for evaluating
long-lived assets to be disposed of by sale. The provisions of SFAS 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years and,
generally, are to be applied prospectively. SFAS 144 did not have a material
effect on the Companys results of operations or financial position.

6



---



##### Table of Contents



In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Under certain provisions of SFAS 145, gains and losses related to the
extinguishment of debt should no longer be segregated on the income statement
as extraordinary items net of the effects of income taxes. Instead, those gains
and losses should be included as a component of income before income taxes. The
provisions of SFAS 145 are effective for fiscal years beginning after May 15,
2002 with early adoption encouraged. Any gain or loss on extinguishment of debt
that was classified as an extraordinary item in prior periods presented that
does not meet the criteria in Accounting Principles Board Opinion No. 30 for
classification as an extraordinary item should be reclassified upon adoption.
Had the Company adopted SFAS 145 in the first quarter of fiscal year 2001, the
extraordinary loss on early retirement of debt of $4.2 million and $30.5
million, before the $1.7 million and $11.6 million effect of income taxes, for
the three months and nine months ended September 30, 2002, respectively, would
have been reflected in income before income taxes. In addition, the
extraordinary loss on early retirement of debt of $2.6 million, before the $1.0
million effect of income taxes for the nine months ended September 30, 2001,
would also have been reflected in income before income taxes. There would be no
resulting change in net income.

Because of the nature of the earnings per share calculation regarding
antidilution of the convertible securities and the effect of applying SFAS 145,
the computation of basic and diluted earnings per share would have been as
follows if the Company had adopted SFAS 145 on January 1, 2001 (income in
millions and shares in thousands):

|                                                                              |                        |   |                    |     |                   |   |        |       |      |   |        |       |  |   |        |       | 
|----------------------------------------------------------------------------- | ---------------------- | - | ------------------ | --- | ----------------- | - | ------ | ----- | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                                                                              |                        |   | Three months ended |     | Nine months ended
|                                                                              |                        |   | September 30       |     | September 30     
|                                                                              |                        |   |                    |     |                  
|                                                                              |                        |   | 2002a              |     | 2001              |   | 2002b  |       | 2001
|                                                                              |                        |   |                    |     |                   |   |        |       |     
|Numerator:                                                                    |                        |   |                    |     |                   |   |        |       |      |   |        |       |  |   |        |      
|Numerator for basic earnings per share  Net income                           |                        | $ | 12.7               |     |                   | $ | 7.5    |       |      | $ | 23.9   |       |  | $ | 23.0   |      
|Effect of convertible notes                                                   |                        |   |                   |     |                   |   |       |       |      |   |       |       |  |   |       |      
|                                                                              |                        |   |                    |     |                   |   |        |       |      |   |        |       |  |   |        |      
|Numerator for diluted earnings per share                                      |                        | $ | 12.7               |     |                   | $ | 7.5    |       |      | $ | 23.9   |       |  | $ | 23.0   |      
|                                                                              |                        |   |                    |     |                   |   |        |       |      |   |        |       |  |   |        |      
|Denominator:                                                                  |                        |   |                    |     |                   |   |        |       |      |   |        |       |  |   |        |      
|Denominator for basic earnings per share  Weighted
average shares            |                        |   | 37,616             |     |                   |   | 36,783 |       |      |   | 37,469 |       |  |   | 35,216 |      
|Effect of dilutive securities:                                                |                        |   |                    |     |                   |   |        |       |      |   |        |       |  |   |        |      
|                                                                              | Employee stock options |   |                    | 920 |                   |   |        | 1,351 |      |   |        | 1,026 |  |   |        | 1,420 | 
|                                                                              | Other                  |   |                    | 84  |                   |   |        | 96    |      |   |        | 87    |  |   |        | 104   | 
|                                                                              | Convertible notes      |   |                    |    |                   |   |        |      |      |   |        |      |  |   |        |      | 
|                                                                              |                        |   |                    |     |                   |   |        |       |      |   |        |       |  |   |        |      
|Denominator for diluted earnings per share  Adjusted
weighted average shares |                        |   | 38,620             |     |                   |   | 38,230 |       |      |   | 38,582 |       |  |   | 36,740 |      
|                                                                              |                        |   |                    |     |                   |   |        |       |      |   |        |       |  |   |        |      
|Basic earnings per share                                                      |                        | $ | 0.34               |     |                   | $ | 0.20   |       |      | $ | 0.64   |       |  | $ | 0.65   |      
|                                                                              |                        |   |                    |     |                   |   |        |       |      |   |        |       |  |   |        |      
|Diluted earnings per share                                                    |                        | $ | 0.33               |     |                   | $ | 0.20   |       |      | $ | 0.62   |       |  | $ | 0.63   |      
|                                                                              |                        |   |                    |     |                   |   |        |       |      |   |        |       |  |   |        |      



---

|a |  | The effect of the convertible notes to
purchase 5,279 shares of common stock and related interest expense was not included in the
computation of diluted earnings per share because the effect would
have been anti-dilutive.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|b |  | The effect of the convertible notes to
purchase 2,552 shares of common stock and related interest expense was not included in the
computation of diluted earnings per share because the effect would
have been anti-dilutive.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. The
provisions of this Statement are effective for exit or disposal activities
initiated after December 31, 2002. The Company does not anticipate the adoption
of this standard to materially impact its results of operations.

7



---



##### Table of Contents



NOTE 4  ISSUANCE OF CONVERTIBLE NOTES

Effective May 22, 2002, the Company sold $250 million of Convertible
Subordinated Notes due June 1, 2009 (the Convertible Notes). The net proceeds
were approximately $242.5 million and will be used for general corporate
purposes, which may include capital improvements on the Companys existing
facilities, repurchases of the Companys 10 3/4% Senior Subordinated Notes and
working capital. The Convertible Notes bear interest at the rate of 4 1/2% per
year, payable semi-annually on June 1 and December 1, beginning on December 1,
2002. The Convertible Notes are convertible at the option of the holder at any
time on or prior to maturity into shares of the Companys common stock at a
conversion price of $47.36 per share. The conversion price is subject to
adjustment. The Company may redeem all or a portion of the Convertible Notes on
or after June 3, 2005, at the then current redemption prices, plus accrued and
unpaid interest. Convertible Notes holders may require the Company to
repurchase all of the holders Convertible Notes at 100% of their principal
amount plus accrued and unpaid interest in some circumstances involving a
change of control. The Convertible Notes are unsecured and subordinated to the
Companys existing and future senior indebtedness and senior subordinated
indebtedness. The Convertible Notes rank junior to the Companys subsidiary
liabilities. The indenture does not contain any financial covenants. A total of
5,278,825 shares of common stock have been reserved for issuance upon
conversion of the Convertible Notes.

Interest expense of $1.9 million and $2.8 million (net of income tax
benefits) related to the Convertible Notes was added to income before
extraordinary item to compute diluted income before extraordinary item per
share for the three months and nine months ended September 30, 2002,
respectively. The interest expense of $2.8 million for the nine months ended
September 30, 2002 was calculated for the period of May 22, 2002 through
September 30, 2002.

NOTE 5  REPURCHASE OF SENIOR SUBORDINATED NOTES

During the nine months ended September 30, 2002, the Company repurchased
$147.1 million of its $150.0 million 10 3/4% Senior Subordinated Notes due 2009 (the Notes)
and paid $26.0 million in premiums, commissions and fees on these repurchases. In connection with these
repurchases, the Company recorded an extraordinary charge on the early retirement
of debt in the amount of $18.9 million, net of tax benefits of $11.6 million.

Subsequent to
September 30, 2002 and after the Companys earnings release
date of October 21, 2002, the Company repurchased the remaining $2.9 million
of the Notes and paid $0.6 million in premiums, commissions and
fees related to these additional
repurchases. The Company will incur an additional extraordinary charge to
income of $0.4 million, net of tax benefits of $0.2 million, during the three
months ended December 31, 2002 as a result of these additional repurchases.

NOTE 6  CONTINGENCIES

HCA Investigations, Litigation and Indemnification Rights

HCA, Inc. is currently the subject of various federal and state
investigations, qui tam actions, shareholder derivative and class action suits,
patient/payor actions and general liability claims. HCA is also the subject of
a formal order of investigation by the SEC. Based on the Companys review of
HCAs public filings, the Company understands that the SECs investigation of
HCA includes the anti-fraud, insider trading, periodic reporting and internal
accounting control provisions of the federal securities laws. These
investigations, actions and claims relate to HCA and its subsidiaries,
including subsidiaries that, before the Companys formation as an independent
company, owned certain of the facilities the Company now owns.

HCA is a defendant in
several qui tam actions (actions brought by
private parties, known as relators, on behalf of the United States of
America)
which have been unsealed and served on HCA. The actions allege, in general,
that HCA and certain subsidiaries and/or affiliated partnerships violated the
False Clams Act, 31 U.S.C. ss. 3729 et seq., for improper claims submitted to
the government for reimbursement. The lawsuits generally seek three times the
amount of damages caused to the United States by the submission of any Medicare
or Medicaid false claims presented by the defendants to the federal government,
civil penalties of not less than $5,500 nor more than $11,000 for each such
Medicare or Medicaid claim, attorneys fees and costs. HCA has disclosed that,
on March 15, 2001,

8



---



##### Table of Contents



the Department of Justice filed a status report setting
forth the governments decisions regarding intervention in existing qui tam
actions against HCA and filed formal complaints for those suits in which the
government has intervened. HCA stated that, of the original 30 qui tam actions,
the Department of Justice remains active and has elected to intervene in eight
actions. HCA has also disclosed that it is aware of additional qui tam actions
that remain under seal and believes that there may be other sealed qui tam
cases of which it is unaware.

Based on the Companys review of HCAs public filings, the Company
understands that, in December 2000, HCA entered into a Plea Agreement with the
Criminal Division of the Department of Justice and various U.S. Attorneys
Offices (the Plea Agreement) and a Civil and
Administrative Settlement Agreement with the Civil Division of the Department
of Justice (the Civil Agreement). Based on
the Companys review of HCAs public filings, the Company understands that the
agreements resolve all Federal criminal issues outstanding against HCA and
certain issues involving Federal civil claims by or on behalf of the government
against HCA relating to diagnosis related group (DRG), coding, outpatient
laboratory billing and home health issues. Pursuant to the Plea Agreement, HCA
paid the government $95 million during the first quarter of 2001. The Civil
Agreement was approved by the Federal District Court of the District of
Columbia in August 2001. Pursuant to the Civil Agreement, HCA agreed to pay the
government $745 million plus interest, which was paid in the third quarter of
2001. Based on the Companys review of HCAs public filings, the Company
understands that certain civil issues are not covered by the Civil Agreement
and remain outstanding, including claims related to costs reports and physician
relations issues. The Plea Agreement and the Civil Agreement announced in
December 2000 relate only to conduct that was the subject of the federal
investigations resolved in the agreements and do not resolve various qui tam
actions filed by private parties against HCA, or pending state actions.

On March 28, 2002, HCA announced that it reached an understanding with the
Centers for Medicare and Medicaid Services (CMS), to resolve all Medicare
cost report, home office cost statement, and appeal issues between HCA and CMS.
The understanding provides that HCA would pay CMS $250 million with respect to
these matters. The resolution is subject to approval by the Department of
Justice and execution of a definitive written agreement.

HCA has agreed to indemnify the Company for any losses, other than
consequential damages, arising from the pending governmental investigations of
HCAs business practices prior to the date of the distribution and losses
arising from legal proceedings, present or future, related to the investigation
or actions engaged in before the distribution that relate to the investigation.
HCA has also agreed that, in the event that any hospital owned by the Company
at the time of the spin-off is permanently excluded from participation in the
Medicare and Medicaid programs as a result of the proceedings described above,
then HCA will make a cash payment to the Company, in an amount (if positive)
equal to five times the excluded hospitals 1998 income from continuing
operations before depreciation and amortization, interest expense, management
fees, minority interests and income taxes, as set forth on a schedule to the
distribution agreement, less the net proceeds of the sale or other disposition
of the excluded hospital. However, the Company could be held responsible for
any claims that are not covered by the agreements reached with the Federal
government or for which HCA is not required to, or fails to, indemnify the
Company. If indemnified matters were asserted successfully against the Company
or any of the Companys facilities, and HCA failed to meet its indemnification
obligations, then this event could have a material adverse effect on the
Companys business, financial condition, results of operations or prospects.

The extent to which the Company may or may not continue to be affected by
the ongoing investigations of HCA and the initiation of additional
investigations, if any, cannot be predicted with accuracy. These matters could have a
material adverse effect on the Companys business, financial condition, results
of operations or prospects in future periods.

Americans with Disabilities Act Claim

On January 12, 2001, Access Now, Inc., a disability rights organization,
filed a class action lawsuit against each of the Companys hospitals alleging
non-compliance with the accessibility guidelines under the Americans with
Disabilities Act (the ADA). The lawsuit, filed in the United States District
Court for the Eastern District of Tennessee, seeks injunctive relief requiring
facility modification, where necessary, to meet the ADA guidelines, along with
attorneys fees and costs. In January 2002, the District Court certified the
class action and issued a scheduling order that requires the parties to
complete discovery and inspection for approximately six facilities per year.
The Company intends to vigorously defend the lawsuit, recognizing the Companys
obligation to correct any deficiencies in order to comply with the ADA.

9



---



##### Table of Contents



Corporate Integrity Agreement

In December 2000, the Company entered into a corporate integrity agreement
with the Office of Inspector General and agreed to maintain its compliance
program in accordance with the corporate integrity agreement. This agreement
was amended in May 2002. Complying with the compliance measures and reporting
and auditing requirements of the corporate integrity agreement will require
additional efforts and costs. Failure to comply with the terms of the corporate
integrity agreement could subject the Company to significant monetary
penalties.

General Liability Claims

The Company is, from time to time, subject to claims and suits arising in
the ordinary course of business, including claims for damages for personal
injuries, breach of management contracts, wrongful restriction of or
interference with physician staff privileges and employment related claims.
In certain of these actions, plaintiffs request punitive or other damages
against the Company, which may not be covered by insurance. The Company is
currently not a party to any proceeding which, in managements opinion, would
have a material adverse effect on the Companys business, financial condition
or results of operations.

Physician Commitments

The Company has committed to provide certain financial assistance pursuant
to recruiting agreements with various physicians practicing in the communities
the Company serves. In consideration for a physician relocating to
one of the Companys
communities and agreeing to engage in private practice for the benefit of the
respective community, the Company may loan certain amounts of money to a
physician, normally over a period of one year, to assist in establishing his or
her practice. The Company has committed to advance amounts of approximately
$16.2 million at September 30, 2002. The actual amount of such commitments to
be subsequently advanced to physicians often depends upon the financial results
of a physicians private practice during the guaranteed period. Generally,
amounts advanced under the recruiting agreements may be forgiven pro rata over
a period of 48 months contingent upon the physician continuing to practice in
the respective community.

Prior Period Cost Report Settlements

Hospitals participating in the Medicare and some Medicaid programs,
whether paid on a reasonable cost basis or under a Prospective
Payment System (PPS),
are required to meet certain financial reporting requirements. Federal and,
where applicable, state regulations require submission of annual cost reports
identifying medical costs and expenses associated with the services provided by
each hospital to Medicare beneficiaries and Medicaid recipients. Since
implementation of outpatient PPS in August 2000, the due dates of all Medicare
cost reports have been extended due to a delay in receiving certain government
reports. The Company anticipates filing substantially all delayed cost reports
with extended due dates during the fourth quarter of 2002.

Net adjustments to estimated third-party payor settlements resulted in an
increase to net revenues of $5.8 million and $1.1 million for the three months
ended September 30, 2002 and 2001, respectively and $7.9 million and $1.9
million for the nine months ended September 30, 2002 and 2001, respectively.
Net adjustments of $5.0 million out of the $5.8 million and $7.9 million
mentioned above relate to the favorable settlement of a Kentucky Medicaid rate
appeal that covered several fiscal years. The remaining $0.8 million and $2.9
million primarily relates to outpatient PPS revenues. The adjustments had a
favorable earnings per share effect of $0.07 and $0.01 for the three months
ended September 30, 2002 and 2001, respectively and $0.10 and $0.03 for the
nine months ended September 30, 2002 and 2001, respectively. The Company still
has 11 cost reports to file which include outpatient PPS revenues.

10



---



##### Table of Contents



Acquisitions

The Company has
acquired and expects to continue to acquire businesses with
prior operating histories. Acquired companies may have unknown or contingent
liabilities, including liabilities for failure to comply with health care laws
and regulations, such as billing and reimbursement, fraud and abuse and similar
anti-referral laws. Although the Company institutes policies designed to
conform practices to its standards following completion of acquisitions, there
can be no assurance that the Company will not become liable for past activities
that may later be asserted to be improper by private plaintiffs or government
agencies. Although the Company generally seeks 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.

NOTE 7  RELATED PARTY TRANSACTIONS

As part of an officers relocation package, the Company purchased
a house for approximately $0.6 million in the second quarter of 2002
and subsequently sold it in the fourth quarter of 2002.

The Company loaned
certain Company officers 100% of the purchase price
of the Companys common stock at the fair market value based on the date of
purchase during 1999. The loans are reflected as notes receivable for shares
sold to employees in the Companys Condensed Consolidated Balance Sheets.
During the third quarter of 2002, Company executive officers repaid $5.2 million of such
loans. Other Company officers repaid the remaining $0.5 million during the fourth
quarter of 2002.

NOTE 8  SUBSEQUENT EVENTS

Effective
October 3, 2002, the Company acquired the 100-bed Russellville
Hospital in Russellville, Alabama from The Healthcare Authority of Lauderdale
County and the City of Florence, Alabama, for approximately $20.4 million,
including the cost of inventory and assumption of certain liabilities such as
accrued paid time-off obligations to hospital employees.

The Company purchased the remaining 30% interest in Dodge City Healthcare
Group, L.P., the joint venture that owns and operates 110-bed Western Plains
Regional Hospital in Dodge City, Kansas, for $25 million in October 2002. In
March 1995, prior to the Companys spin-off from HCA, HCA had acquired a 70%
equity interest in the consolidated joint venture. Under the terms of the
purchase agreement, the limited partners have agreed not to compete with the
hospital for five years. The non-compete agreements will be valued by an
independent third party; such amount is estimated to be approximately $5 to $6
million and will be amortized over the life of the agreement.

On October 7, 2002, the Company entered into a definitive agreement to
purchase the 99-bed Carraway Burdick West Medical Center, located in Haleyville,
Alabama, and the 71-bed Carraway Northwest Medical Center, located in Winfield,
Alabama, from Carraway Methodist Health Systems, a not-for-profit company based
in Birmingham, Alabama. The transaction is expected to close during the fourth
quarter of 2002.

11



---



##### Table of Contents



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

You should read this discussion together with our unaudited condensed
consolidated financial statements and related notes included elsewhere in this
report.

Overview

At September 30, 2002, we operated 23 general, acute care hospitals in the
states of Alabama, Florida, Kansas, Kentucky, Louisiana, Tennessee, Utah and
Wyoming.

Forward-Looking Statements

This report and other materials we have filed or may file with the
Securities and Exchange Commission, as well as information included in oral
statements or other written statements made, or to be made, by us, contain, or
will contain, disclosures which are forward-looking statements.
Forward-looking statements include all statements that do not relate solely to
historical or current facts and can be identified by the use of words such as
may, believe, will, expect, project, estimate, anticipate, plan
or continue. These forward-looking statements are based on the current plans
and expectations of our management and are subject to a number of uncertainties
and risks that could significantly affect our current plans and expectations
and future financial condition and results. These factors include, but are not
limited to:



| |  |  | the highly competitive nature
of the healthcare business, including
the competition to recruit general and specialized physicians;                               
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the efforts of insurers, healthcare providers and others to contain
healthcare costs;                                                                            
|
| |  |  | possible changes in the Medicare and Medicaid programs that may
further limit reimbursements to healthcare providers and insurers;                               
|
| |  |  | the ability to attract and retain qualified management and personnel,
including physicians, nurses and technicians, consistent with our
expectations and targets;
|
| |  |  | inflationary pressures;                                                                                                                                          
|
| |  |  | changes in federal, state or local regulation affecting the healthcare industry;                                                                                 
|
| |  |  | the possible enactment of federal or state healthcare reform;                                                                                                    
|
| |  |  | our ability to acquire hospitals on favorable terms and to
successfully complete budgeted capital improvements of our existing
facilities;                       
|
| |  |  | liabilities and other claims asserted against us;                                                                                                                
|
| |  |  | uncertainty associated with the HIPAA regulations;                                                                                                               
|
| |  |  | the ability to enter into, renegotiate and renew payor arrangements on acceptable terms;                                                                         
|
| |  |  | the availability and terms of capital to fund our business strategy;                                                                                             
|
| |  |  | the availability, cost and terms of insurance coverage for our
hospitals and physicians who practice at our hospitals;                                           

12



---



##### Table of Contents





| |  |  | implementation of our business strategy and development plans;                                                                                                                                                                                                                                                                                                                                                                                                              
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ongoing efforts to monitor, maintain and comply with applicable
laws, regulations, policies and procedures, including those required by
the corporate integrity agreement that we entered into with the
government in December 2000 (as amended in May 2002) and those that, if
violated, could result in monetary damages or cause any of our facilities to lose its state license or
its ability to receive payments under the Medicare, Medicaid or TRICARE
programs;
|
| |  |  | the ability to increase patient volumes and control the costs of providing services and supply costs;                                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | the financial viability of third-party payors;                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | claims and legal actions relating to professional liabilities and other matters;                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | state laws as they relate to medical malpractice insurance;                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | successful development (or license) of software and management
information systems used for effective claims processing;                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | volatility in the market value of our common stock and resulting costs to us to administer our ESOP;                                                                                                                                                                                                                                                                                                                                                                        
|
| |  |  | changes in accounting practices;                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | changes in general economic conditions in the markets where our facilities are located; and                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | other risk factors described in this report.                                                                                                                                                                                                                                                                                                                                                                                                                                

As a consequence, current plans, anticipated actions and future financial
conditions and results may differ from those expressed in any forward-looking
statements made by or on behalf of our company. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. You are cautioned not to place
undue reliance on such forward-looking statements when evaluating the
information presented in this report.

Results of Operations

Revenue/Volume Trends

We anticipate our patient volumes and related revenues to continue to
increase as a result of the following factors:



| |  |  | Expanding Service Offerings. We believe our efforts to improve the
quality and broaden the scope of healthcare services available at our
facilities will lead to increased patient volumes. Recruiting and
retaining both general practitioners and specialists for our non-urban
communities is a key to the success of these efforts. Between January 1,
1998 and September 30, 2002, we recruited 323 physicians, of which 243
have been retained by us. Adding new physicians should help increase
both inpatient and outpatient volumes which, in turn, should increase
revenues. Approximately 57% of our retained physicians are specialists.
Continuing to add specialists should also allow us to grow by offering
new services. In addition, increases in capital expenditures in our
hospitals should increase local market share and help persuade patients
to obtain healthcare services within their communities.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Aging U.S. Population. In general, the population of the United
States and of the communities that we serve is aging. At the end of
2001, approximately 13% of the U.S. population was 65 years old or older
compared to 11% of the population at the end of 1980. This aging trend
is projected to continue so that by 2025, approximately 18% of the U.S.
population is expected to be older than 65. Generally, the older
population tends to use healthcare services more frequently than the
younger population.                                                                                                                                                                                                                                                                                                                                                                                                          

13



---



##### Table of Contents





| |  |  | Medicare Rate Increases. The Medicare, Medicaid and SCHIP Benefit
Improvement and Protection Act of 2000 (BIPA) was enacted in December
2000. Under BIPA, we have experienced Medicare rate increases that began
in April 2001.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Although we anticipate our patient volumes to increase, the resulting
revenues will likely be impacted in part by the following factors:



| |  |  | Revenues from Medicare, Medicaid and managed care plans. We derive a
significant portion of our business from Medicare, Medicaid and managed
care plans. Admissions related to Medicare, Medicaid and managed care
plan patients were 92.2% and 91.2% of total admissions for the nine
months ended September 30, 2002 and 2001, respectively. These payors
receive significant discounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our revenue is heavily concentrated in Kentucky and Tennessee, which
makes us particularly sensitive to regulatory and economic changes in
those states. As of September 30, 2002, we operated 23 hospitals, with
seven located in the Commonwealth of Kentucky and seven located in the
State of Tennessee. Based on those 23 hospitals, we generated 38.5% of
our revenue from our Kentucky hospitals (including 4.1% from
state-sponsored Medicaid programs) and 24.1% from our Tennessee
hospitals (including 3.4% from state-sponsored TennCare programs) for
the nine months ended September 30, 2002. Some managed care
organizations that participate in the Medicaid programs of Tennessee and
Kentucky have been placed in receivership or encountered other financial
difficulties in the past. Other managed care organizations in these
or other states in which we operate may encounter similar difficulties in paying claims in the
future.
|
| |  |  | Efforts to Reduce Payments. Other third-party payors also negotiate
discounted fees rather than paying standard prices. In addition, an
increasing proportion of our services are reimbursed under predetermined
payment amounts regardless of the cost incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | Growth in Outpatient Services. We anticipate that the growth trend in
outpatient services will continue. A number of procedures once performed
only on an inpatient basis have been, and will likely continue to be,
converted to outpatient procedures. This conversion has occurred through
continuing advances in pharmaceutical and medical technologies and as a
result of efforts made by payors to control costs. Generally, the
payments we receive for outpatient procedures are less than those for
similar procedures performed in an inpatient setting. Net outpatient
revenues as a percentage of total revenues were 50.1% and 47.6% for the
nine months ended September 30, 2002 and 2001, respectively. On a same
facility basis, net outpatient revenues as a percentage of total
revenues was 49.0% and 47.6% for the nine months ended September 30,
2002 and 2001, respectively.                                                       

Cost Containment

We seek to control costs by, among other things, reducing labor costs by
improving labor productivity and decreasing the use of contracted labor,
controlling supply expenses through the use of a group purchasing organization
and reducing uncollectible revenues. We have implemented cost control
initiatives including adjusting staffing levels according to patient volumes,
modifying supply purchases according to usage patterns and providing training
to hospital staff in more efficient billing and collection processes. For the
nine months ended September 30, 2002 compared to the nine months ended
September 30, 2001, total operating expenses decreased as a percentage of
revenue to 77.5% from 78.9%. We believe that as our company grows, we will
likely benefit from our ability to spread fixed administrative costs over a
larger base of operations.

While we were able to control our costs during the nine months ended
September 30, 2002, there is no guarantee that we can contain certain costs in
the future. As a result of the general shortage of nurses and technicians in
the industry, we may experience an increase in salaries and benefits expense as
we may be forced to hire additional contract health professionals.

In addition, the healthcare industry has experienced an increase in the
cost of all insurance lines, especially professional and general liability
insurance. We have mitigated a portion of these increases for fiscal 2002 by
increasing our self-insured retention levels for professional and general
liabilities. We currently have no information that would lead us to believe
that this trend is only temporary in nature and thus there is no assurance that
these costs will not have a material adverse affect on our future operating
results.

14



---



##### Table of Contents



Pressure on payment levels, the increase in outpatient services and the
large number of our patients who participate in managed care plans will present
ongoing challenges for us. These challenges are exacerbated by our inability to
control these trends and the associated risks. To maintain or improve operating
margins in the future, we must, among other things, increase patient volumes
while controlling the costs of providing services.

Impact of Acquisitions

Because of the relatively small number of hospitals we own, each hospital
acquisition can materially affect our overall operating margin. We typically
take a number of steps to lower operating costs when we acquire a hospital. The
impact of our actions may be offset by other cost increases to expand services,
strengthen medical staff and attract additional patients to our facilities. The
benefits of our investments and of other activities to improve operating
margins generally do not occur immediately. Consequently, the financial
performance of a newly acquired hospital may adversely affect our overall
operating margins in the short term. As we acquire additional hospitals, this
effect should be mitigated by the expanded financial base of our existing
hospitals and the allocation of corporate overhead among a larger number of
hospitals.

15



---



##### Table of Contents



Operating Results Summary

The following is a summary of results of operations for the three months
and nine months ended September 30, 2002 and 2001 (dollars in millions except
for revenues per equivalent admission):

|                                                                      |  |   |                                  |  |          |  |        |   |          |   |       |  |      |  |       |   | 
|--------------------------------------------------------------------- |  | - | -------------------------------- |  | -------- |  | ------ | - | -------- | - | ----- |  | ---- |  | ----- | - | 
|                                                                      |  |   | THREE MONTHS ENDED SEPTEMBER 30,
|                                                                      |  |   |                                 
|                                                                      |  |   | 2002                             |  | 2001    
|                                                                      |  |   |                                  |  |         
|                                                                      |  |   |                                  |  |          |  | % OF   |   |          |   |       |  | % OF
|                                                                      |  |   | AMOUNTS                          |  | REVENUES |  | AMOUNT |   | REVENUES
|                                                                      |  |   |                                  |  |          |  |        |   |         
|Revenues                                                              |  | $ | 182.2                            |  |          |  | 100.0  | % |          | $ | 149.2 |  |      |  | 100.0 | %
|                                                                     
|Salaries and benefits (a)                                             |  |   | 71.0                             |  |          |  | 39.0   |   |          |   | 59.3  |  |      |  | 39.7  |  
|Supplies (b)                                                          |  |   | 22.6                             |  |          |  | 12.4   |   |          |   | 19.0  |  |      |  | 12.7  |  
|Other operating expenses (c)                                          |  |   | 35.6                             |  |          |  | 19.5   |   |          |   | 29.1  |  |      |  | 19.6  |  
|Provision for doubtful accounts                                       |  |   | 12.5                             |  |          |  | 6.9    |   |          |   | 11.5  |  |      |  | 7.7   |  
|                                                                      |  |   |                                  |  |          |  |        |   |          |   |       |  |      |  |       |  
|                                                                      |  |   | 141.7                            |  |          |  | 77.8   |   |          |   | 118.9 |  |      |  | 79.7  |  
|                                                                      |  |   |                                  |  |          |  |        |   |          |   |       |  |      |  |       |  
|EBITDA (d)                                                            |  |   | 40.5                             |  |          |  | 22.2   |   |          |   | 30.3  |  |      |  | 20.3  |  
|                                                                     
|Depreciation and amortization                                         |  |   | 8.9                              |  |          |  | 4.8    |   |          |   | 8.2   |  |      |  | 5.5   |  
|Interest expense, net                                                 |  |   | 3.0                              |  |          |  | 1.7    |   |          |   | 4.0   |  |      |  | 2.7   |  
|ESOP expense                                                          |  |   | 2.2                              |  |          |  | 1.2    |   |          |   | 3.0   |  |      |  | 2.0   |  
|                                                                      |  |   |                                  |  |          |  |        |   |          |   |       |  |      |  |       |  
|Income before minority interests, income taxes
and extraordinary item |  |   | 26.4                             |  |          |  | 14.5   |   |          |   | 15.1  |  |      |  | 10.1  |  
|Minority interests in earnings of consolidated
entity                 |  |   | 0.7                              |  |          |  | 0.4    |   |          |   | 0.6   |  |      |  | 0.4   |  
|                                                                      |  |   |                                  |  |          |  |        |   |          |   |       |  |      |  |       |  
|Income before income taxes and extraordinary item                     |  |   | 25.7                             |  |          |  | 14.1   |   |          |   | 14.5  |  |      |  | 9.7   |  
|Provision for income taxes                                            |  |   | 10.5                             |  |          |  | 5.8    |   |          |   | 7.0   |  |      |  | 4.7   |  
|                                                                      |  |   |                                  |  |          |  |        |   |          |   |       |  |      |  |       |  
|Income before extraordinary item                                      |  |   | 15.2                             |  |          |  | 8.3    |   |          |   | 7.5   |  |      |  | 5.0   |  
|Extraordinary loss on early retirement of
debt, net                   |  |   | 2.5                              |  |          |  | 1.3    |   |          |   |      |  |      |  | 0.0   |  
|                                                                      |  |   |                                  |  |          |  |        |   |          |   |       |  |      |  |       |  
|Net income                                                            |  | $ | 12.7                             |  |          |  | 7.0    | % |          | $ | 7.5   |  |      |  | 5.0   | %
|                                                                      |  |   |                                  |  |          |  |        |   |          |   |       |  |      |  |       |  

|                                                        |  |                                  |        |        |  |                 |        |   |  |  |      |  
|------------------------------------------------------- |  | -------------------------------- | ------ | ------ |  | --------------- | ------ | - |  |  | ---- | -
|                                                        |  | THREE MONTHS ENDED SEPTEMBER 30,
|                                                        |  |                                 
|                                                        |  | 2002                             |        | 2001   |  | % CHANGE       
|                                                        |  | AMOUNT                           |        | AMOUNT |  | FROM PRIOR YEAR
|                                                        |  |                                  |        |        |  |                
|Consolidated:                                           |  |                                  |        |        |  |                 |        |   |  |  |      |  
|Revenues                                                |  | $                                | 182.2  |        |  | $               | 149.2  |   |  |  | 22.2 | %
|Admissions(e)                                           |  |                                  | 18,297 |        |  |                 | 16,875 |   |  |  | 8.4  |  
|Equivalent admissions(f)                                |  |                                  | 36,097 |        |  |                 | 31,248 |   |  |  | 15.5 |  
|Revenues per equivalent admission                       |  | $                                | 5,049  |        |  | $               | 4,774  |   |  |  | 5.8  |  
|Outpatient factor (f)                                   |  |                                  | 1.97   |        |  |                 | 1.85   |   |  |  | 6.6  |  
|Emergency room visits (g)                               |  |                                  | 89,841 |        |  |                 | 79,145 |   |  |  | 13.5 |  
|Inpatient surgeries                                     |  |                                  | 5,513  |        |  |                 | 4,832  |   |  |  | 14.1 |  
|Outpatient surgeries (h)                                |  |                                  | 16,233 |        |  |                 | 14,387 |   |  |  | 12.8 |  
|Total surgeries                                         |  |                                  | 21,746 |        |  |                 | 19,219 |   |  |  | 13.1 |  
|Number of hospitals at end of period                    |  |                                  | 23     |        |  |                 | 21     |   |  |  | 9.5  |  
|Licensed beds at end of period                          |  |                                  | 2,196  |        |  |                 | 1,963  |   |  |  | 11.9 |  
|Weighted average licensed beds                          |  |                                  | 2,191  |        |  |                 | 1,963  |   |  |  | 11.6 |  
|Average daily census                                    |  |                                  | 799    |        |  |                 | 740    |   |  |  | 8.0  |  
|Average length of stay (days) (i)                       |  |                                  | 4.0    |        |  |                 | 4.0    |   |  |  |     |  
|Net outpatient revenues as a percentage of net
revenues |  |                                  | 51.4   | %      |  |                 | 49.4   | % |  |  |      |  
|                                                       
|Same hospital(j):                                       |  |                                  |        |        |  |                 |        |   |  |  |      |  
|Revenues                                                |  | $                                | 169.7  |        |  | $               | 149.3  |   |  |  | 13.7 | %
|Admissions (e)                                          |  |                                  | 16,930 |        |  |                 | 16,875 |   |  |  | 0.3  |  
|Equivalent admissions(f)                                |  |                                  | 32,795 |        |  |                 | 31,248 |   |  |  | 5.0  |  
|Revenues per equivalent admission                       |  | $                                | 5,175  |        |  | $               | 4,776  |   |  |  | 8.4  |  
|Outpatient factor (f)                                   |  |                                  | 1.94   |        |  |                 | 1.85   |   |  |  | 4.6  |  
|Emergency room visits (g)                               |  |                                  | 80,997 |        |  |                 | 79,145 |   |  |  | 2.3  |  
|Inpatient surgeries                                     |  |                                  | 5,128  |        |  |                 | 4,832  |   |  |  | 6.1  |  
|Outpatient surgeries (h)                                |  |                                  | 15,332 |        |  |                 | 14,387 |   |  |  | 6.6  |  
|Total surgeries                                         |  |                                  | 20,460 |        |  |                 | 19,219 |   |  |  | 6.5  |  
|Number of hospitals at end of period                    |  |                                  | 21     |        |  |                 | 21     |   |  |  |     |  
|Licensed beds at end of period                          |  |                                  | 1,962  |        |  |                 | 1,963  |   |  |  | (0.1 | )
|Weighted average licensed beds                          |  |                                  | 1,962  |        |  |                 | 1,963  |   |  |  | (0.1 | )
|Average daily census                                    |  |                                  | 738    |        |  |                 | 740    |   |  |  | (0.3 | )
|Average length of stay (days) (i)                       |  |                                  | 4.0    |        |  |                 | 4.0    |   |  |  |     |  
|Net outpatient revenues as a percentage of net
revenues |  |                                  | 49.9   | %      |  |                 | 49.5   | % |  |  |      |  

16



---



##### Table of Contents



|                                                                      |  |                                 |       |          |  |        |       |          |  |   |       |      |  |  |       |  
|--------------------------------------------------------------------- |  | ------------------------------- | ----- | -------- |  | ------ | ----- | -------- |  | - | ----- | ---- |  |  | ----- | -
|                                                                      |  | NINE MONTHS ENDED SEPTEMBER 30,
|                                                                      |  |                                
|                                                                      |  | 2002                            |       | 2001    
|                                                                      |  |                                 |       |         
|                                                                      |  |                                 |       |          |  | % OF   |       |          |  |   |       | % OF
|                                                                      |  | AMOUNTS                         |       | REVENUES |  | AMOUNT |       | REVENUES
|                                                                      |  |                                 |       |          |  |        |       |         
|Revenues                                                              |  | $                               | 541.7 |          |  |        | 100.0 | %        |  | $ | 455.1 |      |  |  | 100.0 | %
|                                                                     
|Salaries and benefits (a)                                             |  |                                 | 212.6 |          |  |        | 39.3  |          |  |   | 179.0 |      |  |  | 39.3  |  
|Supplies (b)                                                          |  |                                 | 67.4  |          |  |        | 12.4  |          |  |   | 57.4  |      |  |  | 12.6  |  
|Other operating expenses (c)                                          |  |                                 | 101.1 |          |  |        | 18.6  |          |  |   | 88.5  |      |  |  | 19.5  |  
|Provision for doubtful accounts                                       |  |                                 | 38.8  |          |  |        | 7.2   |          |  |   | 34.1  |      |  |  | 7.5   |  
|                                                                      |  |                                 |       |          |  |        |       |          |  |   |       |      |  |  |       |  
|                                                                      |  |                                 | 419.9 |          |  |        | 77.5  |          |  |   | 359.0 |      |  |  | 78.9  |  
|                                                                      |  |                                 |       |          |  |        |       |          |  |   |       |      |  |  |       |  
|EBITDA (d)                                                            |  |                                 | 121.8 |          |  |        | 22.5  |          |  |   | 96.1  |      |  |  | 21.1  |  
|                                                                     
|Depreciation and amortization                                         |  |                                 | 28.0  |          |  |        | 5.2   |          |  |   | 24.8  |      |  |  | 5.4   |  
|Interest expense, net                                                 |  |                                 | 9.9   |          |  |        | 1.8   |          |  |   | 14.2  |      |  |  | 3.1   |  
|Gain on previously impaired assets                                    |  |                                 |      |          |  |        | 0.0   |          |  |   | (0.5  | )    |  |  | (0.1  | )
|ESOP expense                                                          |  |                                 | 7.4   |          |  |        | 1.4   |          |  |   | 8.0   |      |  |  | 1.8   |  
|                                                                      |  |                                 |       |          |  |        |       |          |  |   |       |      |  |  |       |  
|Income before minority interests, income taxes and
extraordinary item |  |                                 | 76.5  |          |  |        | 14.1  |          |  |   | 49.6  |      |  |  | 10.9  |  
|Minority interests in earnings of consolidated entity                 |  |                                 | 2.2   |          |  |        | 0.4   |          |  |   | 1.9   |      |  |  | 0.4   |  
|                                                                      |  |                                 |       |          |  |        |       |          |  |   |       |      |  |  |       |  
|Income before income taxes and extraordinary item                     |  |                                 | 74.3  |          |  |        | 13.7  |          |  |   | 47.7  |      |  |  | 10.5  |  
|Provision for income taxes                                            |  |                                 | 31.5  |          |  |        | 5.8   |          |  |   | 23.1  |      |  |  | 5.1   |  
|                                                                      |  |                                 |       |          |  |        |       |          |  |   |       |      |  |  |       |  
|Income before extraordinary item                                      |  |                                 | 42.8  |          |  |        | 7.9   |          |  |   | 24.6  |      |  |  | 5.4   |  
|Extraordinary loss on early retirement of debt, net                   |  |                                 | 18.9  |          |  |        | 3.5   |          |  |   | 1.6   |      |  |  | 0.3   |  
|                                                                      |  |                                 |       |          |  |        |       |          |  |   |       |      |  |  |       |  
|Net income                                                            |  | $                               | 23.9  |          |  |        | 4.4   | %        |  | $ | 23.0  |      |  |  | 5.1   | %
|                                                                      |  |                                 |       |          |  |        |       |          |  |   |       |      |  |  |       |  

|                                                        |  |                                 |         |        |  |                 |         |   |  |  |      |  
|------------------------------------------------------- |  | ------------------------------- | ------- | ------ |  | --------------- | ------- | - |  |  | ---- | -
|                                                        |  | NINE MONTHS ENDED SEPTEMBER 30,
|                                                        |  |                                
|                                                        |  | 2002                            |         | 2001   |  | % CHANGE       
|                                                        |  | AMOUNT                          |         | AMOUNT |  | FROM PRIOR YEAR
|                                                        |  |                                 |         |        |  |                
|Consolidated:                                           |  |                                 |         |        |  |                 |         |   |  |  |      |  
|Revenues                                                |  | $                               | 541.7   |        |  | $               | 455.1   |   |  |  | 19.0 | %
|Admissions(e)                                           |  |                                 | 57,396  |        |  |                 | 52,903  |   |  |  | 8.5  |  
|Equivalent admissions(f)                                |  |                                 | 109,799 |        |  |                 | 95,702  |   |  |  | 14.7 |  
|Revenues per equivalent admission                       |  | $                               | 4,934   |        |  | $               | 4,756   |   |  |  | 3.7  |  
|Outpatient factor (f)                                   |  |                                 | 1.91    |        |  |                 | 1.81    |   |  |  | 5.7  |  
|Emergency room visits (g)                               |  |                                 | 262,931 |        |  |                 | 232,919 |   |  |  | 12.9 |  
|Inpatient surgeries                                     |  |                                 | 16,897  |        |  |                 | 14,733  |   |  |  | 14.7 |  
|Outpatient surgeries (h)                                |  |                                 | 48,478  |        |  |                 | 42,192  |   |  |  | 14.9 |  
|Total surgeries                                         |  |                                 | 65,375  |        |  |                 | 56,925  |   |  |  | 14.8 |  
|Number of hospitals at end of period                    |  |                                 | 23      |        |  |                 | 21      |   |  |  | 9.5  |  
|Licensed beds at end of period                          |  |                                 | 2,196   |        |  |                 | 1,963   |   |  |  | 11.9 |  
|Weighted average licensed beds                          |  |                                 | 2,195   |        |  |                 | 1,974   |   |  |  | 11.2 |  
|Average daily census                                    |  |                                 | 853     |        |  |                 | 783     |   |  |  | 8.9  |  
|Average length of stay (days) (i)                       |  |                                 | 4.1     |        |  |                 | 4.0     |   |  |  | 2.5  |  
|Net outpatient revenues as a percentage of net revenues |  |                                 | 50.1    | %      |  |                 | 47.6    | % |  |  |      |  
|                                                       
|Same hospital(j):                                       |  |                                 |         |        |  |                 |         |   |  |  |      |  
|Revenues                                                |  | $                               | 499.2   |        |  | $               | 455.0   |   |  |  | 9.7  | %
|Admissions (e)                                          |  |                                 | 52,796  |        |  |                 | 52,903  |   |  |  | (0.2 | )
|Equivalent admissions(f)                                |  |                                 | 99,362  |        |  |                 | 95,702  |   |  |  | 3.8  |  
|Revenues per equivalent admission                       |  | $                               | 5,024   |        |  | $               | 4,754   |   |  |  | 5.7  |  
|Outpatient factor (f)                                   |  |                                 | 1.88    |        |  |                 | 1.81    |   |  |  | 4.0  |  
|Emergency room visits (g)                               |  |                                 | 237,673 |        |  |                 | 232,919 |   |  |  | 2.0  |  
|Inpatient surgeries                                     |  |                                 | 15,613  |        |  |                 | 14,733  |   |  |  | 6.0  |  
|Outpatient surgeries (h)                                |  |                                 | 45,439  |        |  |                 | 42,192  |   |  |  | 7.7  |  
|Total surgeries                                         |  |                                 | 61,052  |        |  |                 | 56,925  |   |  |  | 7.2  |  
|Number of hospitals at end of period                    |  |                                 | 21      |        |  |                 | 21      |   |  |  |     |  
|Licensed beds at end of period                          |  |                                 | 1,962   |        |  |                 | 1,963   |   |  |  | (0.1 | )
|Weighted average licensed beds                          |  |                                 | 1,961   |        |  |                 | 1,974   |   |  |  | (0.7 | )
|Average daily census                                    |  |                                 | 783     |        |  |                 | 783     |   |  |  |     |  
|Average length of stay (days) (i)                       |  |                                 | 4.0     |        |  |                 | 4.0     |   |  |  |     |  
|Net outpatient revenues as a percentage of net revenues |  |                                 | 49.0    | %      |  |                 | 47.6    | % |  |  |      |  

17



---



##### Table of Contents





---

|(a) |  | Represents our cost of salaries and benefits, including employee health
benefits and workers compensation insurance, for all hospital and
corporate employees and contract labor.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Includes our hospitals costs for pharmaceuticals, blood, surgical
instruments and all general supply items, including the cost of freight.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(c) |  | Consists primarily of contract services, physician recruitment,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance, marketing and non-income taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(d) |  | EBITDA is defined as income before depreciation and amortization,
interest expense, gain on previously impaired assets, ESOP expense,
minority interests in earnings of consolidated entity, extraordinary items
and income taxes. EBITDA is commonly used as an analytical indicator
within the health care industry and also serves as a measure of leverage
capacity and debt service ability. EBITDA should not be considered as a
measure of financial performance under accounting principles generally
accepted in the United States and the items excluded from EBITDA are
significant components in understanding and assessing financial
performance. 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
condensed consolidated financial statements as an indicator of financial
performance or liquidity. Because EBITDA is not a measurement determined
in accordance with accounting principles generally accepted in the United
States and is susceptible to varying calculations, EBITDA as presented may
not be comparable to other similarly titled measures of other companies.
|   
|(e) |  | Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to our hospitals and is used by management
and investors as a general measure of inpatient volume.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(f) |  | Management and investors use equivalent admissions as a general measure
of combined inpatient and outpatient volume. We compute equivalent
admissions by multiplying admissions (inpatient volume) by the outpatient
factor (the sum of gross inpatient revenue and gross outpatient revenue
and then dividing the resulting amount by gross inpatient revenue). The
equivalent admissions computation equates outpatient revenue to the
volume measure (admissions) used to measure inpatient volume resulting in
a general measure of combined inpatient and outpatient volume.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(g) |  | Represents the total number of hospital-based emergency room visits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(h) |  | Outpatient surgeries are those surgeries that do not require admission to
our hospitals.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(i) |  | Represents the average number of days an admitted patient stays in our
hospitals.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(j) |  | Same hospital information excludes the operations of hospitals which we
either acquired or divested during the periods presented. The costs of
corporate overhead are included in same hospital information.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

For the Three Months Ended September 30, 2002 and 2001

Revenues increased 22.2% to $182.2 million for the three months ended
September 30, 2002 compared to $149.2 million for the three months ended
September 30, 2001 primarily as a result of our two acquisitions during the
fourth quarter of 2001 and a 13.7% increase in same hospital revenues. The 2001
acquisitions increased our revenues by $12.6 million while
same hospital revenues increased by $20.4 million. The 13.7% increase in same
hospital revenues resulted primarily from a 5.0% increase in same hospital
equivalent admissions and an 8.4% increase in same hospital revenues per
equivalent admission. In addition, total surgeries, inpatient surgeries and
outpatient surgeries increased 6.5%, 6.1% and 6.6%, respectively, on a same
hospital basis for the three months ended September 30, 2002 over the same
period last year. The growth in outpatient surgeries increased our revenue;
however, these outpatient revenues lower our growth in revenues per equivalent
admission as revenues from outpatient services are generally lower than
inpatient services.

18



---



##### Table of Contents



Our breakdown of revenues for the three months ended September 30, 2002
was 33.6% Medicare, 19.2% Medicaid, 37.4% discounted and commercial, and 9.8%
other. Our breakdown of revenues for the three months ended September 30, 2001
was 34.1% Medicare, 13.7% Medicaid, 39.9% discounted and commercial,
and 12.3%
other.

Net adjustments to estimated third-party payor settlements resulted in an
increase to net revenues of $5.8 million for the three months ended September
30, 2002 compared to $1.1 million for the same period last year. Net
adjustments of $5.0 million out of the $5.8 million mentioned above relate to
the favorable settlement of a Kentucky Medicaid rate appeal that covered
several fiscal years. The remaining $0.8 million primarily relates to
outpatient PPS revenues. The third-party payor settlements had a favorable EPS
effect of $0.07 and $0.01 for the three months ended September 30, 2002 and
2001, respectively. We still have 11 cost reports to file that include
outpatient PPS revenues.

Excluding the effect
of the changes in estimates related to third-party payor settlements of $5.8 million
and $1.1 million for the
three months ended September 30, 2002 and 2001, respectively, revenues would
have increased 19.1% and revenues per equivalent admission would have increased
3.1%. Excluding the adjustments, same hospital revenues would have increased
10.6% and same hospital revenues per equivalent admission would have increased
5.4%.

Our total costs did not increase at the same rate as our revenues. The
increase in volumes, revenues per equivalent admission and net adjustments to
estimated third-party payor settlements described above contributed to the
reduction of our total operating expenses as a percentage of revenues because
we were able to spread our operating costs over an increased base of revenues.

Salaries and benefits decreased as a percentage of revenues to 39.0% for
the three months ended September 30, 2002 from 39.7% for the three months ended
September 30, 2001. Excluding the effect of the third-party payor settlements
mentioned above, salaries and benefits increased as a percentage of revenues to
40.3% for the three months ended September 30, 2002 from 40.0% over the same
period last year primarily as a result of a 7.1% increase in salaries and
benefits per man-hour offset by a 3.1% decrease in man-hours per equivalent
admission. Our largest area of increase was employee benefits, which increased
by $1.8 million over the same period last year. On a same hospital basis,
salaries and benefits decreased as a percentage of revenues to 38.0% for the
three months ended September 30, 2002 from 39.7% over the same period last
year. Excluding the adjustments, salaries and benefits on a same hospital
basis decreased as a percentage of revenues to 39.3% for the three months ended
September 30, 2002 from 40.0% over the same period last year.

Supply costs decreased as a percentage of revenues to 12.4% for the three
months ended September 30, 2002 from 12.7% for the three months ended September
30, 2001. Excluding the effect of the third-party payor settlements, supply
costs as a percentage of revenues remained constant at 12.8% for the three
months ended September 30, 2002 and 2001. However, the cost of supplies per
equivalent admission increased 3.0% primarily as a result of increases in the
number of surgeries performed by us during the three months ended September 30,
2002, compared to the three months ended September 30, 2001. Supply costs
incurred in connection with surgeries are higher than supply costs incurred for
other procedures. Total surgeries increased 13.1% over the same period last
year. On a same hospital basis, supply costs decreased as a percentage of
revenues to 12.1% for the three months ended September 30, 2002 from 12.7% over
the same period last year. Excluding the adjustments, supply costs on a same
hospital basis decreased to 12.5% for the three months ended September 30, 2002
from 12.8% over the same period last year primarily as a result of the benefit
from group purchasing and an increase in our revenues per equivalent admission.

Other operating expenses decreased slightly as a percentage of revenues to
19.5% for the three months ended September 30, 2002 from 19.6% for the three
months ended September 30, 2001. Included in other operating expenses for the
three months ended September 30, 2002 are expenses of $0.9 million relating to
the third-party payor settlements. Excluding the effect of the third-party
payor settlements, including the related expenses that are included in other
operating expenses, other operating expenses remained constant at 19.7% for the
three months ended September 30, 2002 and 2001. On a same hospital basis,
other operating expenses decreased as a percentage of revenues to 19.2% for the
three months ended September 30, 2002 from 19.6% over the same period last
year. Excluding the adjustments, other operating expenses on a same hospital
basis decreased slightly to 19.6% for the three months ended September 30, 2002
from 19.7% over the same period last year.

19



---



##### Table of Contents



Provision for doubtful accounts decreased as a percentage of revenues to
6.9% for the three months ended September 30, 2002 from 7.7% for the three
months ended September 30, 2001. Excluding the effect of the third-party payor
settlements, the provision for doubtful accounts decreased to 7.1% for the
three months ended September 30, 2002 from 7.8% over the same
period last year,
in part due to a decrease in our self-pay revenues as a percentage of
total revenues. On a same hospital
basis, the provision for doubtful accounts decreased as a percentage of
revenues to 6.9% for the three months ended September 30, 2002 from 7.8% over
the same period last year. Excluding the adjustments, the provision for
doubtful accounts on a same hospital basis decreased to 7.1% for the three
months ended September 30, 2002 from 7.9% over the same period last year.

Depreciation and amortization expense increased to $8.9 million for the
three months ended September 30, 2002 compared to $8.2 million for the three
months ended September 30, 2001, primarily as a result of our two acquisitions
during the fourth quarter of 2001 and our increase in capital expenditures
during the past year. This was partially offset by the cessation of goodwill
amortization required by SFAS 142, which was effective January 1, 2002.
Goodwill amortization during the three months ended September 30, 2001 was $0.4
million.

Net interest expense decreased to $3.0 million for the three months ended
September 30, 2002 from $4.0 million for the three months ended September 30,
2001. This decrease was primarily the result of our repurchase of $147.1
million of our 10 3/4% Senior Subordinated Notes during the nine months ended
September 30, 2002.

ESOP expense decreased to $2.2 million for the three months ended
September 30, 2002 from $3.0 million for the three months ended September 30,
2001. This decrease was primarily because of a lower average fair market value
of our common stock for the three months ended September 30, 2002 compared to
the same period last year. We recognize ESOP expense based on the average fair
market value of the shares committed to be released during the period.

Minority interests in earnings of consolidated entity increased slightly
to $0.7 million for the three months ended September 30, 2002 compared to $0.6
million for the three months ended September 30, 2001. We purchased the remaining 30% interest in Dodge
City Healthcare Group,
L.P., the joint venture that owns and operates the 110-bed Western Plains Regional
Hospital and affiliated surgery center in Dodge City, Kansas, for $25 million
in October 2002. Minority interests in earnings of consolidated entity relates
to this joint venture.

The provision for income taxes increased to $10.5 million for the three
months ended September 30, 2002 compared to $7.0 million for the three months
ended September 30, 2001. These provisions reflect effective income tax rates
of 40.9% for the three months ended September 30, 2002 compared to 48.4% for
the three months ended September 30, 2001. The effective tax rate decreased
primarily due to the decline in the permanent differences between book and
taxable income as a percentage of pre-tax income. The effective tax rate was
reduced in the third quarter to reflect the appropriate
year-to-date rate of 42.4%.

During the three months ended September 30, 2002, we repurchased $19.1
million of our $150.0 million 10 3/4% Senior Subordinated Notes due 2009. In connection with
these repurchases, we recorded an extraordinary charge on the the early
retirement of debt in the amount of $2.5 million, net of tax benefits of $1.7
million. The gross extraordinary charge of $4.2 million consists of $3.6
million in premiums, commissions and fees paid for the repurchases and $0.6
million in non-cash net deferred loan cost write-offs.

We had net income of $12.7 million for the three months ended September
30, 2002 compared to net income of $7.5 million for the three months ended
September 30, 2001, for the reasons described above.

For the Nine Months Ended September 30, 2002 and 2001

Revenues increased 19.0% to $541.7 million for the nine months ended
September 30, 2002 compared to $455.1 million for the nine months ended
September 30, 2001, primarily as a result of our two acquisitions during the
fourth quarter of 2001 and a 9.7% increase in same hospital revenues. The 2001
acquisitions increased our revenues by $42.5 million while
same hospital revenues increased by $44.2 million. The 9.7% increase in

20



---



##### Table of Contents



same
hospital revenues resulted primarily from a 3.8% increase in same hospital
equivalent admissions and a 5.7% increase in same hospital revenues per
equivalent admission. In addition, total surgeries, inpatient surgeries and
outpatient surgeries increased 7.2%, 6.0% and 7.7%, respectively, on a same
hospital basis for the nine months ended September 30, 2002 over the same
period last year. The growth in outpatient surgeries increased our revenue;
however, these outpatient revenues lower our growth in revenues per equivalent
admission as revenues from outpatient services are generally lower than
inpatient services.

Our breakdown of revenues for the nine months ended September 30, 2002 was
34.3% Medicare, 16.9% Medicaid, 38.2% discounted and commercial and 10.6%
other. Our breakdown of revenues for the nine months ended September 30, 2001
was 34.7% Medicare, 13.8% Medicaid, 40.5% discounted commercial, and 11.0%
other.

Net adjustments to estimated third-party payor settlements resulted in an
increase to net revenues of $7.9 million for the nine months ended September
30, 2002 compared to $1.9 million for the same period last year. Net
adjustments of $5.0 million out of the $7.9 million mentioned above relate to
the favorable settlement of a Kentucky Medicaid rate appeal that covered
several fiscal years. The remaining $2.9 million primarily relates to
outpatient PPS revenues. The third-party payor settlements had a favorable
EPS effect of $0.10 and $0.03 for the nine months ended September 30, 2002 and
2001, respectively. We still have 11 cost reports to file that include
outpatient PPS revenues.

Excluding the effect
of the changes in estimates related to third-party payor settlements of $7.9 million
and $1.9 million for the
nine months ended September 30, 2002 and 2001, respectively, revenues would
have increased 17.8% and revenues per equivalent admission would have increased
2.7%. Excluding the adjustments, same hospital revenues would have increased
8.4% and same hospital revenues per equivalent admission would have increased
4.4 %.

Our total costs did not increase at the same rate as our revenues. The
increase in volumes, revenues per equivalent admission and net adjustments to
estimated third-party payor settlements described above contributed to the
reduction of our total operating expenses as a percentage of revenues because
we were able to spread our operating costs over an increased base of revenues.

Salaries and benefits were 39.3% for both the nine months ended September
30, 2002 and 2001. Excluding the effect of the third-party payor settlements
mentioned above, salaries and benefits increased as a percentage of revenues to
39.8% for the nine months ended September 30, 2002 from 39.5% over the same
period last year, primarily as a result of a 6.0% increase in salaries and
benefits per man-hour offset by a 2.3% decrease in man-hours per equivalent
admission. Our largest area of increase was employee benefits, which increased
by $7.3 million over the same period last year. On a same hospital basis,
salaries and benefits decreased as a percentage of revenues to 38.6% for the
nine months ended September 30, 2002 from 39.3% over the same period last year.
Excluding the adjustments, salaries and benefits on a same hospital basis
decreased as a percentage of revenues to 39.2% for the nine months ended
September 30, 2002 from 39.5% over the same period last year.

Supply costs as a percentage of revenues decreased as a percentage of
revenues to 12.4% for the nine months ended September 30, 2002 from 12.6% for
the nine months ended September 30, 2001. Excluding the effect of the
third-party payor settlements, supply costs as a percentage of revenues
decreased slightly to 12.6% for the nine months ended September 30, 2002 from
12.7% over the same period last year. However, the cost of supplies per
equivalent admission increased 2.5% primarily as a result of increases in the
number of surgeries performed by us during the nine months ended September 30,
2002 compared to the nine months ended September 30, 2001. Supply costs
incurred in connection with surgeries are higher than supply costs incurred for
other procedures. Total surgeries increased 14.8% over the same period last
year. On a same hospital basis, supply costs decreased as a percentage of
revenues to 12.2% for the nine months ended September 30, 2002 from 12.6% over
the same period last year. Excluding the adjustments, supply costs on a same
hospital basis decreased to 12.4% for the nine months ended September 30, 2002
from 12.7% over the same period last year primarily as a result of the benefit
from group purchasing and an increase in our revenues per equivalent admission.

Other operating expenses decreased as a percentage of revenues to 18.6%
for the nine months ended September 30, 2002 from 19.5% for the nine months
ended September 30, 2001. Included in other operating expenses for the nine
months ended September 30, 2002 are expenses of $0.9 million relating to the
third-party payor settlements. Excluding the effect of the third-party payor
settlements, including the related expenses included in other operating

21



---



##### Table of Contents



expenses, other operating expenses decreased to 18.8% for the nine months ended
September 30, 2002 from 19.5% over the same period last year. The decrease was
primarily the result of a decrease in physician recruiting expense as a
percentage of revenues; however, the amount of physician recruiting expense
increased to $4.5 million for the nine months ended September 30, 2002 from
$4.4 million for the same period last year. On a same hospital basis, other
operating expenses decreased as a percentage of revenues to 18.7% for the nine
months ended September 30, 2002 from 19.5% over the same period last year.
Excluding the adjustments, other operating expenses on a same hospital basis
decreased to 18.8% for the nine months ended September 30, 2002 from 19.5% over
the same period last year.

Provision for doubtful accounts decreased as a percentage of revenues to
7.2% for the nine months ended September 30, 2002 from 7.5% for the nine months
ended September 30, 2001. Excluding the effect of the third-party payor
settlements, the provision for doubtful accounts decreased to 7.3% for the nine
months ended September 30, 2002 from 7.5% over the same period last year
primarily as a result of an improvement in same hospital collections
from all payor sources. On a same
hospital basis, provision for doubtful accounts decreased as a percentage of
revenues to 7.0% for the nine months ended September 30, 2002 from 7.6% over
the same period last year. Excluding the adjustments, the provision for
doubtful accounts on a same hospital basis decreased to 7.2% for the nine
months ended September 30, 2002 from 7.6% over the same period last year.

Depreciation and amortization expense increased to $28.0 million for the
nine months ended September 30, 2002 compared to $24.8 million for the nine
months ended September 30, 2001 primarily as a result of our two acquisitions
during the fourth quarter of 2001 and our increase in capital expenditures
during the past year. In addition, we accelerated depreciation expense by $0.5
million during the nine months ended September 30, 2002 as a result of
replacing certain equipment with new equipment purchased in a $10 million bulk
purchase during June 2002. This was partially offset by the cessation of
goodwill amortization required by SFAS 142, which was effective January 1,
2002. Goodwill amortization during the nine months ended September 30, 2001 was
$1.1 million.

Net interest expense decreased to $9.9 million for the nine months ended
September 30, 2002 from $14.2 million for the nine months ended September 30,
2001. This decrease was primarily the result of our repurchase of $147.1
million of our 10 3/4% senior subordinated notes during the nine months ended
September 30, 2002.

ESOP expense decreased to $7.4 million for the nine months ended September
30, 2002 from $8.0 million for the nine months ended September 30, 2001. This
decrease was primarily because of a lower average fair market value of our
common stock for the nine months ended September 30, 2002 compared to the same
period last year. We recognize ESOP expense based on the average fair market
value of the shares committed to be released during the period.

During the nine months ended September 30, 2001, we recorded a $0.5
million pre-tax gain related to the favorable settlement of the sale of a
facility for which we previously recorded an impairment charge.

Minority interests in earnings of consolidated entity increased to $2.2
million for the nine months ended September 30, 2002 compared to $1.9 million
for the nine months ended September 30, 2001 primarily because of an increase
in the pre-tax income of our non-wholly owned hospital and affiliated surgery
center. We purchased the remaining 30% interest in Dodge City Healthcare Group,
L.P., the joint venture that owns and operates the 110-bed Western Plains Regional
Hospital and affiliated surgery center in Dodge City, Kansas, for $25 million
in October 2002. Minority interests in earnings of consolidated entity relates
to this joint venture.

The provision for income taxes increased to $31.5 million for the nine
months ended September 30, 2002 compared to $23.1 million for the nine months
ended September 30, 2001. These provisions reflect effective income tax rates
of 42.4% for the nine months ended September 30, 2002 compared to 48.4% for the
nine months ended September 30, 2001. The effective tax rate decreased
primarily due to the decline in the permanent differences between book and
taxable income as a percentage of pre-tax income.

22



---



##### Table of Contents



During the nine months ended September 30, 2002, we repurchased $147.1
million of our $150.0 million 10-3/4% Senior Subordinated Notes due 2009. In connection with
these repurchases, we recorded an extraordinary charge from the early
retirement of debt in the amount of $18.9 million, net of tax benefits of $11.6
million. The gross extraordinary charge of $30.5 million consists of $26.0
million in premiums, commissions and fees paid for the repurchases and $4.5
million in non-cash net deferred loan cost write-offs.

In June 2001, we completed a $200 million, five-year amended and restated
credit agreement with a syndicate of banks, which increased our available
credit under our revolving credit agreement from $65 million to $200 million.
Upon consummation of this amended and restated agreement, we wrote off $2.6
million of deferred loan costs related to our original credit agreement, which
resulted in an extraordinary charge of $1.6 million, net of a tax benefit of
$1.0 million.

Net income increased to $23.9 million for the nine months ended September
30, 2002 compared to $23.0 million for the nine months ended September 30, 2001
for the reasons described above.

Liquidity and Capital Resources

Our cash and cash equivalents increased to $183.8 million at September 30,
2002, from $57.2 million at December 31, 2001. The increase is primarily from
$93.9 million provided by operating activities and $77.1 million provided by
financing activities offset in part by $44.4 million used in investing
activities.

Our working capital increased to $215.8 million at September 30, 2002
compared to $82.7 million at December 31, 2001, and our cash provided by
operating activities increased to $93.9 million in the nine months ended
September 30, 2002 from $91.6 million in the same period last year. The
increase in working capital was primarily the result of our net issuance of
$242.5 million of 4 1/2% Convertible Subordinated Notes due 2009 partially offset
by $173.1 million (including $26.0 million in premiums, commissions and fees)
in repurchases of our 10 3/4% Senior Subordinated Notes due 2009. The increase
in cash provided by operating activities was primarily the result of improved
income before extraordinary items offset by the larger increase in accounts
receivable resulting from higher revenues during the nine months ended
September 30, 2002 compared to the same period last year.

Cash used in investing activities increased to $44.4 million in the nine
months ended September 30, 2002 from $30.0 million in the same period last year
primarily as a result of an increase in capital expenditures. Capital
expenditures increased to $42.2 million during the nine months ended September
30, 2002 compared to $28.5 million during the same period last year. Our
routine capital expenditures were $15.6 million for the nine months ended
September 30, 2002. In addition, we entered into a bulk purchase agreement in
June 2002 to purchase $10 million in new equipment, of which we paid $6.9
million as of September 30, 2002. We have some large projects in process at a
number of our facilities. We are reconfiguring some of our hospitals to
accommodate more effectively inpatient and outpatient services and
restructuring existing surgical capacity in some of our hospitals to permit
additional patient volume and a greater variety of services. At September 30,
2002, we had projects under construction that had an estimated additional cost
to complete and equip of approximately $49.4 million. We anticipate that these
projects will be completed over the next thirty-six months. We anticipate total
capital expenditures in 2002 of approximately $65 million, excluding
acquisitions. We anticipate funding these expenditures through cash provided by
operating activities, available cash and borrowings under our revolving credit
facility.

Cash provided by financing activities was $77.1 million during the nine
months ended September 30, 2002 compared to cash used in financing activities
of $27.8 million during the same period last year. We raised a net $242.5
million in an offering of 4 1/2% Convertible Subordinated Notes due 2009 during
May 2002. This was offset by our repurchase of $173.1 million (including $26.0
million in premiums, commissions and fees) in our 10 3/4% Senior Subordinated
Notes due 2009 during the nine months ended September 30, 2002. In addition,
we received $5.2 million from certain of our executives in payment of loans
that were issued to these executives to purchase our common stock at the fair
market value on the date of purchase during 1999. During the nine months
ended September 30, 2001 we received $100.4 million from our public offering of
common stock and repaid $139.3 million of bank debt.

Subsequent to
September 30, 2002 and after our earnings release date of
October 21, 2002, we repurchased the remaining $2.9 million of our 10 3/4%
Senior Subordinated Notes and paid $0.6 million in premiums, commissions and
fees related to these additional repurchases.

23



---



##### Table of Contents



Effective
October 3, 2002, we acquired the 100-bed Russellville Hospital in
Russellville, Alabama for approximately $20.4 million, using our available cash
to finance the cost of this transaction.

We purchased the remaining 30% interest in Dodge City Healthcare Group,
L.P., the joint venture that owns and operates 110-bed Western Plains Regional
Hospital and affiliated surgery center in Dodge City, Kansas, for $25 million
in October 2002. We used our available cash to finance the cost of this
transaction.

On October 7, 2002, we entered into a definitive agreement to purchase
the 99-bed Carraway Burdick West Medical Center, located in Haleyville, Alabama,
and the 71-bed Carraway Northwest Medical Center, located in Winfield, Alabama.
The transaction is expected to close during the fourth quarter of
2002, and we
anticipate using our available cash to finance the cost of this transaction.

As of November 4, 2002, we had a $24.4 million letter of credit, which
reduced the amount available under our $200 million revolving credit facility
by that amount to $175.6 million.

The following table reflects a summary of our obligations and commitments
outstanding at September 30, 2002:

PAYMENTS DUE BY PERIOD

|                                           |                                   |       |               |        |  |           |           |           |  |               |     |      |  |   |     |     |  |   |       |       | 
|------------------------------------------ | --------------------------------- | ----- | ------------- | ------ |  | --------- | --------- | --------- |  | ------------- | --- | ---- |  | - | --- | --- |  | - | ----- | ----- | 
|                                           |                                   |       |               |        |  |           | LESS THAN |           |  |               |     |      |  |   |     |     |  |   |      
|CONTRACTUAL CASH OBLIGATIONS               |                                   | TOTAL |               | 1 YEAR |  | 13 YEARS |           | 45 YEARS |  | AFTER 5 YEARS
|                                           |                                   |       |               |        |  |           |           |           |  |              
|                                           |                                   |       | (in millions)
|Long-term
debt(a)                          |                                   | $     | 252.9         |        |  | $         |          |           |  | $             |    |      |  | $ |    |     |  | $ | 252.9 |      
|Lease obligations(b)                       |                                   |       | 13.7          |        |  |           | 4.1       |           |  |               | 4.8 |      |  |   | 2.5 |     |  |   | 2.3   |      
|Other long-term obligations                |                                   |       | 0.1           |        |  |           |          |           |  |               | 0.1 |      |  |   |    |     |  |   |      |      
|                                           |                                   |       |               |        |  |           |           |           |  |               |     |      |  |   |     |     |  |   |       |      
|                                           | Subtotal                          |       | $             | 266.7  |  |           | $         | 4.1       |  |               | $   | 4.9  |  |   | $   | 2.5 |  |   | $     | 255.2 | 
|                                           |                                   |       |               |        |  |           |           |           |  |               |     |      |  |   |     |     |  |   |       |      
|                                          
|AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
|                                          
|                                           |                                   |       |               |        |  |           | LESS THAN |           |  |               |     |      |  |   |     |     |  |   |      
|OTHER COMMERCIAL COMMITMENTS               |                                   | TOTAL |               | 1 YEAR |  | 13 YEARS |           | 45 YEARS |  | AFTER 5 YEARS
|                                           |                                   |       |               |        |  |           |           |           |  |              
|                                           |                                   |       | (in millions)
|Guarantees of surety bonds                 |                                   | $     | 0.4           |        |  | $         | 0.4       |           |  | $             |    |      |  | $ |    |     |  | $ |      |      
|Letters of credit                          |                                   |       | 24.4          |        |  |           | 24.4      |           |  |               |    |      |  |   |    |     |  |   |      |      
|Capital expenditure commitments            |                                   |       | 11.4          |        |  |           | 4.6       |           |  |               | 6.8 |      |  |   |    |     |  |   |      |      
|Physician commitments                      |                                   |       | 16.2          |        |  |           | 11.4      |           |  |               | 3.5 |      |  |   | 1.3 |     |  |   |      |      
|                                           |                                   |       |               |        |  |           |           |           |  |               |     |      |  |   |     |     |  |   |       |      
|                                           | Subtotal                          |       | $             | 52.4   |  |           | $         | 40.8      |  |               | $   | 10.3 |  |   | $   | 1.3 |  |   | $     |      | 
|                                           |                                   |       |               |        |  |           |           |           |  |               |     |      |  |   |     |     |  |   |       |      
|                                           | Total obligations and commitments |       | $             | 319.1  |  |           | $         | 44.9      |  |               | $   | 15.2 |  |   | $   | 3.8 |  |   | $     | 255.2 | 
|                                           |                                   |       |               |        |  |           |           |           |  |               |     |      |  |   |     |     |  |   |       |      



---

|(a) |  | Includes principal amount only.                                                              
|--- |  | ---------------------------------------------------------------------------------------------
|(b) |  | Includes capital and operating lease obligations; capital lease
obligations are not material.

We are in compliance with all covenants or other requirements set forth in
our credit agreements or indentures. Further, these agreements do not contain
provisions that would accelerate the maturity dates of our debt upon a
downgrade in our credit rating. However, a downgrade in our credit rating could
adversely affect our ability to renew existing credit facilities or obtain access to new credit
facilities in the future and could increase the cost of such facilities. We do
not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As such, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.

We do not consider the sale of any assets to be necessary to repay our
indebtedness or to provide working capital. However, for other reasons, we may
sell facilities in the future from time to time. Our management anticipates
that operations and amounts available under our revolving credit facility will
provide sufficient liquidity for the next twelve months.

24



---



##### Table of Contents



Our business plan contemplates the acquisition of additional hospitals and
we continuously review potential acquisitions. These acquisitions may, however,
require additional financing. We continually evaluate opportunities to sell
additional equity or debt securities, obtain credit facilities from lenders, or
restructure our long-term debt for strategic reasons or to further strengthen
our financial position. The sale of additional equity or convertible debt
securities could result in additional dilution to our stockholders.

We do not expect to pay dividends on our common stock in the foreseeable
future.

Impact of Recently Issued Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS 142, Goodwill and Other Intangible Assets, (the
Statements). These Statements make significant changes to the accounting for
business combinations, goodwill and intangible assets.

SFAS 141 eliminates the pooling-of-interests method of accounting for
business combinations. In addition, it further clarifies the criteria for
recognition of intangible assets separately from goodwill. SFAS 141 was
effective for transactions completed subsequent to June 30, 2001. The
application of SFAS 141 did not have a material effect on our results of
operations or financial position.

Under SFAS 142, goodwill and intangible assets with indefinite lives are
no longer amortized but are reviewed at least annually for impairment. The
amortization provisions of SFAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, we adopted SFAS 142 effective January 1, 2002.
Application of the non-amortization provisions of SFAS 142 for goodwill would
have resulted in an increase in income before extraordinary items and net
income of approximately $0.4 million and $1.1 million ($0.3 million and $0.9
million, after-tax) for the three months and nine months ended September 30,
2001, respectively. There was no EPS impact for the three months ended
September 30, 2001 and a favorable EPS impact of $0.02 for the nine months
ended September 30, 2001. Pursuant to SFAS 142, we completed our transition
impairment tests of goodwill during the second quarter of 2002 and did not
incur an impairment charge. We also performed our initial annual impairment
test as of October 1, 2002 and did not incur an impairment charge.

SFAS 143, Accounting for Asset Retirement Obligations, was issued in
August 2001 by the FASB and is effective for financial statements issued for
fiscal years beginning after June 15, 2002. Earlier application is encouraged.
SFAS 143 establishes accounting standards for recognition and measurement of a
liability for an asset retirement obligation and the associated retirement
costs. SFAS 143 applies to all entities and to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and (or) the normal operation of a long-lived asset,
except for certain obligations of lessees. We do not expect SFAS 143 to have a
material effect on our results of operations or financial position.

In August 2001, the FASB also issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS
144 removes goodwill from its scope and clarifies other implementation issues
related to SFAS 121. SFAS 144 also provides a single framework for evaluating
long-lived assets to be disposed of by sale. The provisions of SFAS 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years and,
generally, are to be applied prospectively. SFAS 144 did not have a material
effect on our results of operations or financial position.

25



---



##### Table of Contents



In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Under certain provisions of SFAS 145, gains and losses related to the
extinguishment of debt should no longer be segregated on the income statement
as extraordinary items net of the effects of income taxes. Instead, those gains
and losses should be included as a component of income before income taxes. The
provisions of SFAS 145 are effective for fiscal years beginning after May 15,
2002 with early adoption encouraged. Any gain or loss on extinguishment of debt
that was classified as an extraordinary item in prior periods presented that
does not meet the criteria in Accounting Principles Board Opinion No. 30 for
classification as an extraordinary item should be reclassified upon adoption.
Had we adopted SFAS 145 in the first quarter of fiscal year 2001, the
extraordinary loss on early retirement of debt of $4.2 million and $30.5
million, before the $1.7 million and $11.6 million effect of income taxes, for
the three months and nine months ended September 30, 2002, respectively, would
have been reflected in income before income taxes. In addition, the
extraordinary loss on early retirement of debt of $2.6 million, before the $1.0
million effect of income taxes for the nine months ended September 30, 2001,
would also have been reflected in income before income taxes. There would be no
resulting change in net income.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. The
provisions of this Statement are effective for exit or disposal activities
initiated after December 31, 2002. We do not anticipate the adoption of this
standard to materially impact our results of operations.

Contingencies

HCA Investigations, Litigation and Indemnification Rights

HCA is currently the subject of various federal and state investigations,
qui tam actions, shareholder derivative and class action suits, patient/payor
actions and general liability claims. HCA is also the subject of a formal order
of investigation by the SEC. Based on our review of HCAs public filings, we
understand that the SECs investigation of HCA includes the anti-fraud, insider
trading, periodic reporting and internal accounting control provisions of the
federal securities laws. These investigations, actions and claims relate to HCA
and its subsidiaries, including subsidiaries that, before our formation as an
independent company, owned certain of the facilities that we now own.

HCA is a defendant in several qui tam actions
(actions brought by
private parties, known as relators, on behalf of the United States of
America)
which have been unsealed and served on HCA. The actions allege, in general,
that HCA and certain subsidiaries and/or affiliated partnerships violated the
False Clams Act, 31 U.S.C. ss. 3729 et seq., for improper claims submitted to
the government for reimbursement. The lawsuits generally seek three times the
amount of damages caused to the United States by the submission of any Medicare
or Medicaid false claims presented by the defendants to the federal government,
civil penalties of not less than $5,500 nor more than $11,000 for each such
Medicare or Medicaid claim, attorneys fees and costs. HCA has disclosed that,
on March 15, 2001, the Department of Justice filed a status report setting
forth the governments decisions regarding intervention in existing qui tam
actions against HCA and filed formal complaints for those suits in which the
government has intervened. HCA stated that, of the original 30 qui tam actions,
the Department of Justice remains active and has elected to intervene in eight
actions. HCA has also disclosed that it is aware of additional qui tam actions
that remain under seal and believes that there may be other sealed qui tam
cases of which it is unaware.

Based on our review of HCAs public filings, we understand that, in
December 2000, HCA entered into a Plea Agreement with the Criminal Division of
the Department of Justice and various U.S. Attorneys Offices
(the Plea Agreement) and a Civil and Administrative Settlement
Agreement with the Civil Division of the Department of Justice (the
Civil Agreement). Based on our review of HCAs public filings,
we understand that the agreements resolve all Federal criminal issues
outstanding against HCA and certain issues involving Federal civil claims by or
on behalf of the government against HCA relating to diagnosis related
group (DRG) coding, outpatient
laboratory billing and home health issues. Pursuant to the Plea Agreement, HCA
paid the government $95 million during the first quarter of
2001. The Civil
Agreement was approved by the Federal District Court of the District of
Columbia in August 2001. Pursuant to the Civil Agreement, HCA agreed to pay the
government $745 million plus interest, which was paid in the third quarter of
2001. Based on our review of HCAs public filings, we understand that certain
civil issues are not covered by the Civil Agreement and remain outstanding,
including claims related to cost reports and physician relations issues. The
Plea Agreement and the Civil Agreement announced in December 2000 relate only to conduct that was the
subject of the federal investigations resolved in the agreements and do not
resolve various qui tam actions filed by private parties against HCA, or
pending state actions.

26



---



##### Table of Contents



On March 28, 2002, HCA announced that it reached an understanding with CMS
to resolve all Medicare cost report, home office cost statement, and appeal
issues between HCA and CMS. The understanding provides that HCA would pay CMS
$250 million with respect to these matters. The resolution is subject to
approval by the Department of Justice and execution of a definitive written
agreement.

HCA has agreed to indemnify us for any losses, other than consequential
damages, arising from the pending governmental investigations of HCAs business
practices prior to the date of the distribution and losses arising from legal
proceedings, present or future, related to the investigation or actions engaged
in before the distribution that relate to the investigation. HCA has also
agreed that, in the event that any hospital owned by us at the time of the
spin-off is permanently excluded from participation in the Medicare and
Medicaid programs as a result of the proceedings described above, then HCA will
make a cash payment to us, in an amount (if positive) equal to five times the
excluded hospitals 1998 income from continuing operations before depreciation
and amortization, interest expense, management fees, minority interests and
income taxes, as set forth on a schedule to the distribution agreement, less
the net proceeds of the sale or other disposition of the excluded hospital.
However, we could be held responsible for any claims that are not covered by
the agreements reached with the Federal government or for which HCA is not
required to, or fails to, indemnify us. In addition, should HCA be unable to
fulfill its obligations with the Federal government, the Company could
ultimately be held responsible specifically for any settlement related to the
former HCA hospitals operated by the Company. If indemnified matters were
asserted successfully against us or any of our facilities, and HCA failed to
meet its indemnification obligations, then this event could have a material
adverse effect on our business, financial condition, results of operations or
prospects.

The extent to which we may or may not continue to be affected by the
ongoing investigations of HCA and the initiation of additional investigations,
if any, cannot be predicted with accuracy. These matters could have a material adverse effect
on our business, financial condition, results of operations or prospects in
future periods.

Americans with Disabilities Act Claim

On January 12, 2001, Access Now, Inc., a disability rights organization,
filed a class action lawsuit against each of our hospitals alleging
non-compliance with the accessibility guidelines under the Americans with
Disabilities Act. The lawsuit, filed in the United States District Court for
the Eastern District of Tennessee does not seek any monetary damages but,
instead, seeks only injunctive relief requiring facility modification, where
necessary, to meet the ADA guidelines, along with attorneys fees and costs. In
January 2002, the District Court certified the class action and issued a
scheduling order that requires the parties to complete discovery and inspection
for approximately six facilities per year. We intend to vigorously defend the
lawsuit, recognizing our obligation to correct any deficiencies in order to
comply with the ADA.

General Liability Claims

We are, from time to time, subject to claims and suits arising in the
ordinary course of business, including claims for damages for personal
injuries, breach of management contracts, wrongful restriction of or
interference with physician staff privileges and employment related claims.
In certain of these actions, plaintiffs request punitive or other damages
against us that may not be covered by insurance. We are currently not a party
to any proceeding which, in managements opinion, would have a material adverse
effect on our business, financial condition or results of operations.

Corporate Integrity Agreement

In December 2000, we entered into a corporate integrity agreement with the
Office of Inspector General and agreed to maintain its compliance program in
accordance with the corporate integrity agreement. This agreement was amended
in May 2002. Complying with the compliance measures and reporting and auditing
requirements of the corporate integrity agreement will require additional
efforts and costs. Failure to comply with the terms of the corporate integrity
agreement could subject us to significant monetary penalties.

27



---



##### Table of Contents



Physician Commitments

We have committed to provide certain financial assistance pursuant to
recruiting agreements with various physicians practicing in the communities in
which we serve. In consideration for a physician relocating to one of
our
communities and agreeing to engage in private practice for the benefit of the
respective community, we may loan certain amounts of money to a physician,
normally over a period of one year, to assist in establishing his or her
practice. We have committed to advance amounts of approximately $16.2 million
at September 30, 2002. The actual amount of such commitments to be subsequently
advanced to physicians often depends upon the financial results of a
physicians private practice during the guaranteed period. Generally, amounts
advanced under the recruiting agreements may be forgiven prorata over a period
of 48 months contingent upon the physician continuing to practice in the
respective community.

Acquisitions

We have acquired and
expect to continue to acquire businesses with prior
operating histories. Acquired companies may have unknown or contingent
liabilities, including liabilities for failure to comply with health care laws
and regulations, such as billing and reimbursement, fraud and abuse and similar
anti-referral laws. Although we institute policies designed to conform
practices to our standards following completion of acquisitions, there can be
no assurance that we will not become liable for past activities that may later
be asserted to be improper by private plaintiffs or government agencies.
Although we generally 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.

Inflation

The healthcare industry is labor intensive. Wages and other expenses
increase during periods of inflation and when shortages in marketplaces occur.
In addition, suppliers and insurers pass along rising costs to us in the form
of higher prices. Our ability to pass on these increased costs is limited
because of increasing regulatory and competitive pressures as discussed above.
In the event we experience inflationary pressures, results of operations may be
materially affected.

Healthcare Reform

In recent years, an increasing number of legislative proposals have been
introduced or proposed to Congress and in some state legislatures. While we are
unable to predict accurately which, if any, proposals for healthcare reform will be
adopted, there can be no assurance that proposals adverse to our business will
not be adopted.

Prior Period Cost Report Settlements

Hospitals participating in the Medicare and some Medicaid programs,
whether paid on a reasonable cost basis or under a Prospective Payment System,
are required to meet certain financial reporting requirements. Federal and,
where applicable, state regulations require submission of annual cost reports
identifying medical costs and expenses associated with the services provided by
each hospital to Medicare beneficiaries and Medicaid recipients. Since
implementation of outpatient PPS in August 2000, the due dates of all Medicare
cost reports have been extended due to a delay in receiving certain government
reports. We anticipate filing substantially all delayed cost reports with
extended due dates during the fourth quarter of 2002.

Net adjustments to estimated third-party payor settlements resulted in an
increase to net revenues of $5.8 million and $1.1 million for the three months
ended September 30, 2002 and 2001, respectively, and $7.9 million and $1.9
million for the nine months ended September 30, 2002 and 2001, respectively.
Net adjustments of $5.0 million out of the $5.8 million and $7.9 million
mentioned above relate to the favorable settlement of a Kentucky Medicaid rate
appeal that covered several fiscal years. The remaining $0.8 million and $2.9
million primarily relates to outpatient PPS revenues. The adjustments had a
favorable earnings per share effect of $0.07 and $0.01 for the three months
ended September 30, 2002 and 2001, respectively, and $0.10 and $0.03 for the
nine months ended September 30, 2002 and 2001, respectively. The Company still
has 11 cost reports to file which include outpatient PPS revenues.

28



---



##### Table of Contents



Related Party Transactions

As part of an officers relocation package, we purchased
a house for approximately $0.6 million in the second quarter of 2002 and
subsequently sold it in the fourth quarter of 2002.

We loaned certain of
our officers 100% of the purchase price of our
common stock at the fair market value based on the date of purchase during
1999. The loans are reflected as notes receivable for shares sold to employees
in our Condensed Consolidated Balance Sheets. During the third quarter of
2002, our executive officers repaid $5.2 million of such loans.
Our other officers repaid the
remaining $0.5 million during the fourth quarter of 2002

Item 3. Quantitative and
Qualitative Disclosures about Market Risk.

During the nine months ended September 30, 2002 there were no material
changes in the quantitative and qualitative disclosures about market risks
presented in our Annual Report on Form 10-K for the year ended December 31,
2001.

Item 4. Controls and Procedures.

Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in our periodic SEC filings. There have
been no significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation.

29



---



##### Table of Contents






Part II - Other Information

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

(a)  List of Exhibits:

|        |  |                                                                                                                                                                                                                                                                                                     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                                                                                     
|NUMBER  |  | DESCRIPTION                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                     
|2.1     |  | Distribution Agreement dated May 11, 1999 by and among Columbia/HCA, Triad Hospitals,
Inc. and LifePoint Hospitals, Inc. (i)                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                     
|3.1     |  | Certificate of Incorporation of LifePoint Hospitals, Inc. (i)                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                     
|3.2     |  | Bylaws of LifePoint Hospitals, Inc. (i)                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                     
|4.1     |  | Form of Specimen Certificate for LifePoint Hospitals Common Stock (ii)                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                     
|4.8     |  | Rights Agreement dated as of May 11, 1999 between the Company and National City Bank as
Rights Agent (i)                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                     
|4.9     |  | Indenture, dated as of May 22, 2002, between LifePoint Hospitals, Inc. and National
City Bank, as trustee, relating to the 4 1/2% Convertible Subordinated Notes due 2009
(iii)                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                     
|4.10    |  | Registration Rights Agreement, dated as of May 22, 2002, among LifePoint Hospitals,
Inc., UBS Warburg LLC, Credit Suisse First Boston Corporation, Deutsche Bank
Securities, Inc., Lehman Brothers Inc., Salomon Smith Barney Inc., Banc of America
Securities LLC, and Fleet Securities, Inc. (iii)
|        |  |                                                                                                                                                                                                                                                                                                     
|4.11    |  | Form of 4 1/2% Convertible Subordinated Note due 2009 of LifePoint Hospitals, Inc. (iii)                                                                                                                                                                                                            



---

|(i)   |  | Incorporated by reference from the LifePoint Hospitals, Inc. Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.                                           
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(ii)  |  | Incorporated by reference from
the exhibits to LifePoint Hospitals
Registration Statement on Form 10 under the Securities Exchange Act of
1934, as amended.               
|     
|(iii) |  | Incorporated by reference from the exhibits to LifePoint Hospitals
Registration Statement on Form S-3 under the Securities Act of 1933, as
amended, File Number 333-90536.

(b)  Reports on Form 8-K filed during the three months ended September 30,
2002:

On July 23, we furnished pursuant to Item 9 of Form 8-K a copy of our
press release issued on July 22 containing our second quarter 2002 earnings
results.

On August 12, we furnished pursuant to Item 9 of Form 8-K a copy of our
press release issued on August 12 announcing that we signed a definitive
agreement to acquire Russellville Hospital in Russellville, Alabama.




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.

|                       |  |                                                                                                                                       
|---------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|Date: November 4, 2002 |  | LifePoint Hospitals, Inc.                                                                                                             
|                      
|                       |  |                                                                                                                                       
|                      
|                       |  | /s/Michael J. CulottaMichael J. Culotta
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

30



---



##### Table of Contents






CERTIFICATIONS

I, Kenneth C. Donahey, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of LifePoint
Hospitals, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



|                                                                                                                                                                                                                                                                                                        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|a)      designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
|                                                                                                                                                                                                                                                                                                       
|b)      
evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                 
|                                                                                                                                                                                                                                                                                                       
|c)      presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



|                                                                                                                                                                                                                                                                                                       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|a)      all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
|                                                                                                                                                                                                                                                                                                      
|b)      any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                       |  |                                                                                        
|---------------------- |  | ---------------------------------------------------------------------------------------
|Date: November 4, 2002 |  | /s/Kenneth C. DonaheyKenneth C. Donahey
Chairman, Chief Executive Officer and President

I, Michael J. Culotta, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of LifePoint
Hospitals, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

31



---



##### Table of Contents





|                                                                                                                                                                                                                                                                                                        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|a)      designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
|                                                                                                                                                                                                                                                                                                       
|b)      evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and                                                                                                  
|                                                                                                                                                                                                                                                                                                       
|c)      presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



|                                                                                                                                                                                                                                                                                                       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|a)      all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
|                                                                                                                                                                                                                                                                                                      
|b)      any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                       |  |                                                                                          
|---------------------- |  | -----------------------------------------------------------------------------------------
|Date: November 4, 2002 |  | /s/Michael J. CulottaMichael J. Culotta
Senior Vice President and Chief Financial Officer

In connection with the Report of LifePoint Hospitals, Inc. (the Company) on
Form 10-Q for the quarter ended September 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the Report), I,
Kenneth C. Donahey, Chairman, Chief Executive Officer and President of the
Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec.
906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the
requirements of Sections
13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  Information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.

|                       |  |                                                                                          
|---------------------- |  | -----------------------------------------------------------------------------------------
|Date: November 4, 2002 |  | /s/ Kenneth C. DonaheyKenneth C. Donahey,
Chairman, Chief Executive Officer and President

In connection with the Report of LifePoint Hospitals, Inc. (the Company) on
Form 10-Q for the quarter ended September 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the Report), I,
Michael J. Culotta, Senior Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec.
906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the
requirements of Sections
13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  Information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.

|                       |  |                                                                                            
|---------------------- |  | -------------------------------------------------------------------------------------------
|Date: November 4, 2002 |  | /s/ Michael J. CulottaMichael J. Culotta,
Senior Vice President and Chief Financial Officer

32



---



##### Table of Contents






EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                                     
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                                                                                     
|NUMBER  |  | DESCRIPTION                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                     
|2.1     |  | Distribution Agreement dated May 11, 1999 by and among Columbia/HCA, Triad Hospitals,
Inc. and LifePoint Hospitals, Inc. (i)                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                     
|3.1     |  | Certificate of Incorporation of LifePoint Hospitals, Inc. (i)                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                     
|3.2     |  | Bylaws of LifePoint Hospitals, Inc. (i)                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                     
|4.1     |  | Form of Specimen Certificate for LifePoint Hospitals Common Stock (iii)                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                     
|4.8     |  | Rights Agreement dated as of May 11, 1999 between the Company and National City Bank as
Rights Agent (i)                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                     
|4.9     |  | Indenture, dated as of May 22, 2002, between LifePoint Hospitals, Inc. and National
City Bank, as trustee, relating to the 4 1/2% Convertible Subordinated Notes due 2009
(iii)                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                     
|4.10    |  | Registration Rights Agreement, dated as of May 22, 2002, among LifePoint Hospitals,
Inc., UBS Warburg LLC, Credit Suisse First Boston Corporation, Deutsche Bank
Securities, Inc., Lehman Brothers Inc., Salomon Smith Barney Inc., Banc of America
Securities LLC, and Fleet Securities, Inc. (iii)
|        |  |                                                                                                                                                                                                                                                                                                     
|4.11    |  | Form of 4 1/2% Convertible Subordinated Note due 2009 of LifePoint Hospitals, Inc. (iii)                                                                                                                                                                                                            



---

|(i)   |  | Incorporated by reference from the LifePoint Hospitals, Inc. Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.                                           
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(ii)  |  | Incorporated by reference from exhibits to LifePoint Hospitals
Registration Statement on Form 10 under the Securities Exchange Act of
1934, as amended.                   
|     
|(iii) |  | Incorporated by reference from the exhibits to LifePoint Hospitals
Registration Statement on Form S-3 under the Securities Act of 1933, as
amended, File Number 333-90536.