##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934


For the Fiscal Year Ended December 31,
2003

Commission file No. 000-32837

United Surgical Partners
International, Inc.

(Exact name of Registrant as specified in its
charter)


|                                                                                                |  |                                     
|----------------------------------------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                                                        |  | 75-2749762                          
|(State of Incorporation)                                                                        |  | (I.R.S. Employer Identification No.)
|                                                                                               
|15305 Dallas Parkway, Suite 1600
    Addison, Texas(Address of principal executive
    offices) |  | 75001(Zip Code)                     

(972) 713-3500

(Registrants telephone number, including
area code)


Securities Registered Pursuant to
Section 12(b) of the Act: None

Securities Registered Pursuant to
Section 12(g) of the Act:

|                                                     |  |                                          
|---------------------------------------------------- |  | -----------------------------------------
|Title of Each Class                                  |  | Name of Each Exchange on Which Registered
|                                                     |  |                                          
|Common Stock, par value $.01 per share               |  | The Nasdaq Stock Market                  
|Rights to Purchase Series A Junior
    Participating |  | The Nasdaq Stock Market                  
|Preferred Stock, par value $.01 per share            |  |                                          

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 þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Parts I, II, III, and IV of this
Form 10-K or any amendment to this
Form 10-K. o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes þ          No o

|                                                                                                                         |  |   |             | 
|------------------------------------------------------------------------------------------------------------------------ |  | - | ----------- | 
|Aggregate market value of outstanding Common
    Stock held by non-affiliates of the Registrant, as of
    June 30, 2003 |  | $ | 509,098,964 | 
|                                                                                                                         |  |   |             | 
|Number of shares of Common Stock outstanding
    as of March 8, 2004                                                     |  |   | 28,024,942  | 
|                                                                                                                         |  |   |             | 

DOCUMENTS INCORPORATED BY REFERENCE

Part III  Portions of the
registrants definitive proxy statement to be filed
pursuant to Regulation 14A for the Annual Meeting of
Stockholders to be held April 28, 2004.



---






---










UNITED SURGICAL PARTNERS INTERNATIONAL,
INC.

2003 ANNUAL REPORT ON FORM 10-K


TABLE OF CONTENTS

|                                                   |  |                                                                                                        |  |      |    | 
|-------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                   |  |                                                                                                        |  | Page
|                                                   |  |                                                                                                        |  |     
|PART I                                            
|Item 1.                                            |  | Business                                                                                               |  |      | 2  | 
|Item 2.                                            |  | Properties                                                                                             |  |      | 36 | 
|Item 3.                                            |  | Legal Proceedings                                                                                      |  |      | 36 | 
|Item 4.                                            |  | Submission of Matters to a
    Vote of Security Holders                                                |  |      | 36 | 
|                                                  
|PART II                                           
|Item 5.                                            |  | Market for Registrants
    Common Equity and Related Stockholder Matters                              |  |      | 37 | 
|Item 6.                                            |  | Selected Consolidated
    Financial Data                                                               |  |      | 38 | 
|Item 7.                                            |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operation               |  |      | 40 | 
|Item 7A.                                           |  | Quantitative and Qualitative
    Disclosures about Market Risk                                         |  |      | 55 | 
|Item 8.                                            |  | Financial Statements and
    Supplementary Data                                                        |  |      | 56 | 
|Item 9.                                            |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |  |      | 56 | 
|Item 9A.                                           |  | Controls and Procedures                                                                                |  |      | 56 | 
|                                                  
|PART III                                          
|Item 10.                                           |  | Directors and Executive
    Officers of the Registrant                                                 |  |      | 57 | 
|Item 11.                                           |  | Executive Compensation                                                                                 |  |      | 57 | 
|Item 12.                                           |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |  |      | 57 | 
|Item 13.                                           |  | Certain Relationships and
    Related Transactions                                                     |  |      | 57 | 
|Item 14.                                           |  | Principal Accounting Fees
    and Services                                                             |  |      | 57 | 
|                                                  
|PART IV                                           
|Item 15.                                           |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                    |  |      | 57 | 
|1st Amendment to Amended/Restated Credit Agreement
|2nd Amendment to Amended/Restated Credit Agreement
|Amendment of Employment Agreement                 
|Employment Agreement - Jonathan R. Bond           
|Employment Agreement - Brett P. Brodnax           
|Employment Agreement - Mark C. Garvin             
|Employment Agreement - Mark A. Kopser             
|List of Company's Subsidiaries                    
|Consent of KPMG LLP                               
|Power of Attorney - Donald E. Steen               
|Power of Attorney - William H. Wilcox             
|Power of Attorney - Mark A. Kopser                
|Power of Attorney - John J. Wellik                
|Power of Attorney - James C. Crews                
|Power of Attorney - D. Scott Mackesy              
|Power of Attorney - Thomas L. Mills               
|Power of Attorney - Boone Powell, Jr.             
|Power of Attorney - Paul B. Queally               
|Power of Attorney - David P. Zarin, M.D.          
|Power of Attorney - John C. Garrett, M.D.         
|Power of Attorney - Jerry P. Widman               
|Power of Attorney - Joel T. Allison               
|Certification of CEO - Section 302                
|Certification of CFO - Section 302                
|Certification of CEO - Section 906                
|Certification of CFO - Section 906                





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|      |                                                                                                                                                                                                                                                                                                                                                      
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note: | The responses to Items 10 through 13 will be
    included in the Companys definitive proxy statement to be
    filed pursuant to Regulation 14A for the Annual Meeting of
    Stockholders to be held April 28, 2004. The required
    information is incorporated into this Form 10-K by
    reference to that document and is not repeated herein.

1



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FORWARD LOOKING STATEMENTS

Certain statements contained in this Annual
Report on Form 10-K, and the document incorporated herein
by reference, including, without limitation, statements
containing the words believes,
anticipates, expects,
continues, will, may,
should, estimates, intends,
plans and similar expressions, and statements
regarding the Companys business strategy and plans,
constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements are based on managements
current expectations and involve known and unknown risks,
uncertainties and other factors, many of which the Company is
unable to predict or control, that may cause the Companys
actual results, performance or achievements to be materially
different from those expressed or implied by such
forward-looking statements. Such factors include, among others,
the following: general economic and business conditions, both
nationally and regionally; foreign currency fluctuations;
demographic changes; changes in, or the failure to comply with,
laws and governmental regulations; the ability to enter into
managed care provider arrangements on acceptable terms; changes
in Medicare, Medicaid and other government funded payments or
reimbursement in the U.S. and Western Europe; liability and
other claims asserted against us; the highly competitive nature
of healthcare; changes in business strategy or development plans
of healthcare systems with which we partner; the ability to
attract and retain qualified personnel, including physicians,
nurses and other health care professionals; our significant
indebtedness; the availability of suitable acquisition and
development opportunities and the length of time it takes to
accomplish acquisitions and developments; our ability to
integrate new businesses with our existing operations; the
availability and terms of capital to fund the expansion of our
business, including the acquisition and development of
additional facilities and certain additional factors, risks and
uncertainties discussed in this Annual Report on Form 10-K
and the document incorporated herein by reference. Given these
uncertainties, investors and prospective investors are cautioned
not to rely on such forward-looking statements. We disclaim any
obligation and make no promise to update any such factors or
forward-looking statements or to publicly announce the results
of any revisions to any such factors or forward-looking
statements, whether as a result of changes in underlying
factors, to reflect new information as a result of the
occurrence of events or developments or otherwise.




PART I






|        |         
|------- | --------
|Item 1. | Business

General

United Surgical Partners International, Inc.
(together with its subsidiaries, we, the
Company or USPI) owns and operates short
stay surgical facilities including surgery centers and private
surgical hospitals in the United States, Spain and the United
Kingdom. We focus on providing high quality surgical facilities
that meet the needs of patients, physicians and payors better
than hospital-based and other outpatient surgical facilities. We
believe that our facilities (1) enhance the quality of care
and the healthcare experience of patients, (2) offer
significant administrative, clinical and economic benefits to
physicians and (3) offer an efficient and low cost
alternative to payors. We acquire and develop our facilities
through the formation of strategic relationships with physicians
and healthcare systems to better access and serve the
communities in our markets. Our operating model is efficient,
scalable and portable and we have adapted it to each of our
national markets. We believe that our acquisition and
development strategy and operating model enable us to continue
to grow by taking advantage of highly-fragmented markets and an
increasing demand for short stay surgery.

Since physicians provide and influence the
direction of healthcare worldwide, we have developed our
operating model to encourage physicians to affiliate with us and
to use our facilities. We operate our facilities, structure our
strategic relationships and adopt staffing, scheduling and
clinical systems and protocols with the goal of increasing
physician productivity. We believe that our focus on physician
satisfaction, combined with providing high quality healthcare in
a friendly and convenient environment for patients, will
continue to increase the number of procedures performed at our
facilities each year.

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Donald E. Steen, our chairman, and Welsh, Carson,
Anderson & Stowe formed USPI in February 1998. We
operate surgery centers and private surgical hospitals in the
United States and Western Europe. As of December 31, 2003,
we operated 74 facilities, consisting of 62 in the United
States, nine in Spain, and three in the United Kingdom. Of the
62 U.S. facilities, 35 are jointly owned with 16 major
not-for-profit healthcare systems. Overall, as of
December 31, 2003, we held ownership interests in 72 of the
facilities and operated the remaining two facilities under
management contracts. Our revenues for 2003 were
$446.3 million, up 30% from $342.4 million for 2002.

Available Information

We file proxy statements and annual, quarterly
and current reports with the Securities and Exchange Commission.
You may read and copy any document that we file at the
SECs public reference room located at 450 Fifth
Street N.W., Washington, D.C. 20549. You may also call the
Securities and Exchange Commission at 1-800-SEC-0330 for
information on the operation of the public reference room. Our
SEC filings are also available to you free of charge at the
SECs web site at http://www.sec.gov. We also
maintain a web site at http://www.unitedsurgical.comthat
includes links to our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K and any amendments to those reports. These reports
are available on our website without charge as soon as
reasonably practicable after such reports are filed with or
furnished to the SEC. We post our audit and compliance
committee, options and compensation committee, nominating and
corporate governance committee charters, our corporate
governance guidelines, and our financial code of ethics
applicable to our chief executive officer, chief financial
officer, chief accounting officer and other senior financial
officers on our web site. These documents are available free of
charge to any stockholder upon request. Information on our web
site is not deemed incorporated by reference into this
Form 10-K.

Industry Background

We believe many physicians prefer surgery centers
and private surgical hospitals to general acute care hospitals.
We believe that this is due to the elective nature of the
procedures performed at our surgery centers and private surgical
hospitals, which allows physicians to schedule their time more
efficiently and therefore increase the number of surgeries they
can perform in a given amount of time. In addition, these
facilities usually provide physicians with greater scheduling
flexibility, more consistent nurse staffing and faster
turnaround time between cases. While surgery centers and private
surgical hospitals generally perform scheduled surgeries,
private acute care hospitals and national health service
facilities generally provide a broad range of services,
including high priority and emergency procedures. Medical
emergencies often demand the unplanned use of operating rooms
and result in the postponement or delay of scheduled surgeries,
disrupting physicians practices and inconveniencing
patients. Surgery centers and private surgical hospitals in the
United States, Spain and the United Kingdom are designed to
improve physician work environments and improve physician
efficiency. In addition, many physicians choose to perform
surgery in facilities like ours because their patients prefer
the comfort of a less institutional atmosphere and the
convenience of simplified admissions and discharge procedures.



| |              
| | -------------
| | United States

According to Verispans 2003 Outpatient
Surgery Center Market Report, the number of outpatient surgery
cases performed in freestanding surgery centers increased 81%
from 4.3 million in 1996 to an estimated 7.8 million
in 2003. Outpatient surgical procedures represented
approximately 20% of all surgical procedures performed in the
United States in 1981 compared to approximately 78% in 2001. New
surgical techniques and technology, as well as advances in
anesthesia, have significantly expanded the types of surgical
procedures that are being performed in surgery centers and have
helped drive the growth in outpatient surgery. Lasers,
arthroscopy, enhanced endoscopic techniques and fiber optics
have reduced the trauma and recovery time associated with many
surgical procedures. Improved anesthesia has shortened recovery
time by minimizing post-operative side effects such as nausea
and drowsiness, thereby avoiding the need for overnight
hospitalization in many cases. In addition, some states in the
United States now

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permit surgery centers to keep a patient for up
to 23 hours. This allows more complex surgeries, previously
only performed in an inpatient setting, to be performed in a
surgery center.


In addition to these technological and other
clinical advancements, a changing payor environment has
contributed to the rapid growth in outpatient surgery in recent
years. Government programs, private insurance companies, managed
care organizations and self-insured employers have implemented
cost containment measures to limit increases in healthcare
expenditures, including procedure reimbursement. These cost
containment measures have greatly contributed to the significant
shift in the delivery of healthcare services away from
traditional inpatient hospitals to more cost-effective alternate
sites, including surgery centers. We believe that surgery
performed at a surgery center is generally less expensive than
hospital-based outpatient surgery because of lower facility
development costs, more efficient staffing and space utilization
and a specialized operating environment focused on cost
containment.

Today, large healthcare systems in the United
States generally offer both inpatient and outpatient surgery on
site. In addition, a number of not-for-profit healthcare systems
have begun to expand their portfolios of facilities and services
by entering into strategic relationships with specialty
operators of surgery centers. These strategic relationships
enable not-for-profit healthcare systems to offer patients,
physicians and payors the cost advantages, convenience and other
benefits of outpatient surgery in a freestanding facility.
Further, these relationships allow the not-for-profit healthcare
systems to focus their attention and resources on their core
business without the challenge of acquiring, developing and
operating these facilities.



| |               
| | --------------
| | Western Europe

Most countries in Western Europe provide their
populations with some level of government-funded healthcare.
Despite the success of these public programs, the practical
limitations of these systems have resulted in delays or
rationing of elective surgeries and certain other procedures. In
many of these countries, funding and capacity constraints of
public healthcare systems have created an opportunity for
private healthcare systems to develop.

While Spains national health service covers
substantially all of the countrys population, a private
healthcare industry has emerged that currently serves the 17% of
Spains population that maintains private insurance and
another growing portion of the population that pays for elective
procedures from personal funds. We believe that these increases
support our view that the number of privately insured citizens,
the amount of private healthcare expenditures and the resulting
demand for private networks such as ours will continue to grow.
We also believe that the growth in Spains private
healthcare industry has been driven in large part by an increase
in the number of employers offering private insurance as a
benefit to their employees. Like their U.S. counterparts,
private insurance companies in Spain typically offer
comprehensive health coverage. Since less than one-third of the
private surgical hospitals in Spain are owned by multi-facility
systems, we believe an opportunity exists to expand our private
hospital network that will enable us to negotiate more
effectively with the countrys large health insurance
companies. Our facilities also supplement the national health
service as public hospitals periodically refer overload cases to
our facilities.

We are able to accept or reject these cases based
on the available capacity of our facilities and the
profitability of the cases. For the year ended December 31,
2003, we derived approximately 72% of our revenues in Spain from
private insurance, approximately 17% from private pay and
approximately 11% from government payors.

The United Kingdom also provides
government-funded healthcare to all of its residents through a
national health service. It, however, is also subject to funding
and capacity limitations. Since the demand for healthcare
services exceeds the public systems capacity, U.K.
residents may encounter waiting lists for elective surgery of up
to 18 months as well as delays in obtaining cancer biopsies
and other diagnostic procedures. The World Health Organization
reports that 25,000 people die unnecessarily of cancer in
Britain each year due to underfinanced and poorly managed cancer
programs. In response to these shortfalls, private healthcare
networks and private insurance companies have developed in the
United

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Kingdom. Approximately 11% of the U.K. population
has private insurance to cover elective surgical procedures, and
another rapidly growing segment of the population pays for
elective procedures from personal funds. For the year ended
December 31, 2003, in the United Kingdom, we derived
approximately 61% of our revenues from private insurance,
approximately 30% from private pay patients and approximately 9%
from government payors.


Our Business Strategy

Our goal is to steadily increase our revenues and
cash flows by becoming a leading operator of surgery centers and
private surgical hospitals in the United States and selected
nations in Western Europe. The key elements of our business
strategy are to:



| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | attract and retain top quality surgeons and other
    physicians;         
|
| |  | pursue strategic relationships with
    not-for-profit healthcare systems;
|
| |  | expand our presence in existing markets;                                  
|
| |  | expand selectively in new markets; and                                    
|
| |  | enhance operating efficiencies.                                           



| |                                                                 
| | ----------------------------------------------------------------
| | Attract and retain top quality surgeons and
    other physicians

Since physicians provide and influence the
direction of healthcare worldwide, we have developed our
operating model to encourage physicians to affiliate with us and
to use our facilities as an extension of their practices. We
believe we attract physicians because we design our facilities,
structure our strategic relationships and adopt staffing,
scheduling and clinical systems and protocols to increase
physician productivity and promote their professional and
financial success. We believe this focus on physicians, combined
with providing high quality healthcare in a friendly and
convenient environment for patients, will continue to increase
case volumes at our facilities. In addition, in the United
States, we generally offer physicians the opportunity to
purchase equity interests in the facilities they use as an
extension of the physicians practices. We believe this
opportunity attracts quality physicians to our facilities and
ownership increases the physicians involvement in facility
operations, enhancing quality of patient care, increasing
productivity and reducing costs.



| |                                                                          
| | -------------------------------------------------------------------------
| | Pursue strategic relationships with
    not-for-profit healthcare systems

Through strategic relationships with us,
not-for-profit healthcare systems can benefit from our operating
expertise and create a new cash flow opportunity with limited
capital expenditures. We believe that these relationships also
allow not-for-profit healthcare systems in particular to attract
and retain physicians and improve their hospital operations by
focusing on their core business. We also believe that strategic
relationships with these healthcare systems help us to develop
more quickly, relationships with physicians, communities,
suppliers and payors. Generally, the healthcare systems with
which we develop relationships have strong local market
positions and excellent reputations that we use in branding our
facilities. In addition, our relationships with not-for-profit
healthcare systems enhance our acquisition and development
efforts by (1) providing opportunities to acquire
facilities the systems may own, (2) providing access to
physicians already affiliated with the systems,
(3) attracting additional physicians to affiliate with
newly developed facilities, and (4) encouraging physicians
who own facilities to consider a strategic relationship with us.



| |                                            
| | -------------------------------------------
| | Expand our presence in existing
    markets

Our primary strategy is to grow selectively in
markets in which we already operate facilities. We believe that
selective acquisitions and development of new facilities in
existing markets allow us to leverage our existing knowledge of
these markets and to improve operating efficiencies. In
particular, our experience

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has been that newly developed facilities in
markets where we already have a presence and a not-for-profit
hospital partner are the best use of the companys invested
capital.




| |                                      
| | -------------------------------------
| | Expand selectively in new
    markets

We may continue to enter targeted markets by
acquiring and developing surgical facilities. In the United
States, we expect to do this primarily in conjunction with a
local healthcare system or hospital. We typically target the
acquisition or development of multi-specialty centers that
perform high volume, non-emergency, lower risk procedures
requiring lower capital and operating costs than hospitals. In
addition, we will also consider the acquisition of
multi-facility companies.

In determining whether to enter a new market, we
examine numerous criteria, including:



| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | the potential to achieve strong increases in
    revenues and cash flows;                                             
|
| |  | whether the physicians, healthcare systems and
    payors in the market are receptive to surgery centers;             
|
| |  | the size of the market;                                                                                               
|
| |  | the number of surgical facilities in the market;                                                                      
|
| |  | the number and nature of outpatient surgical
    procedures performed in the market;                                  
|
| |  | the case mix of the facilities to be acquired;                                                                        
|
| |  | whether the facility is well-positioned to
    negotiate agreements with insurers, other payors and
    suppliers; and
|
| |  | licensing and other regulatory considerations.                                                                        

Upon identifying a target facility, we conduct
financial, legal, operational, technology and systems audits of
the facility and conduct interviews with the facilitys
management, affiliated physicians and staff. Once we acquire or
develop a facility, we focus on upgrading systems and protocols,
including implementing our proprietary methodology of defined
processes and information systems, to increase case volume and
improve operating efficiencies.



| |                                   
| | ----------------------------------
| | Enhance operating
    efficiencies

Once we acquire a new facility in the U.S., we
integrate it into our existing network by implementing a
specific action plan to support the local management team and
incorporate the new facility into our group purchasing
contracts. We also implement our systems and protocols to
improve operating efficiencies and contain costs. Our most
important operational tool is our management system Every
Day Giving Excellence, which we refer to as USPIs
EDGE. This proprietary measurement system allows us to track our
clinical, service and financial performance, best practices and
key indicators in each of our facilities. Our goal is to use
USPIs EDGE to ensure that we provide each of the patients
using our facilities with high quality healthcare, offer
physicians a superior work environment and eliminate
inefficiencies. Using USPIs EDGE, we track and monitor our
performance in clinical care areas such as (1) providing
surgeons the equipment, supplies and surgical support they need,
(2) starting cases on time, (3) minimizing turnover
time between cases, and (4) providing efficient schedules.
USPIs EDGE compiles and organizes the specified
information on a daily basis and is easily accessed over the
Internet by our facilities on a secure basis. The information
provided by USPIs EDGE enables our employees, facility
administrators and management to analyze trends over time and
share processes and best practices among our facilities. In
addition, the information is used as an evaluative tool by our
administrators and as a budgeting and planning tool by our
management. USPIs EDGE is now deployed in all of our
U.S. facilities.

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Operations



| |                                    
| | -----------------------------------
| | Operations in the United
    States

Our operations in the United States consist
primarily of our ownership and management of surgery centers. We
have ownership interests in 55 surgery centers and five private
surgical hospitals and manage or operate, through agreements,
two additional surgery centers. Additionally, we own interests
in and expect to operate three surgery centers and three private
surgical hospitals that are currently under construction. We
also have approximately nine projects under development, all of
which include a hospital partner, and numerous other potential
projects in various stages of consideration, some of which may
result in our adding additional facilities during 2004. Over
3,000 physicians have privileges to use our facilities. Our
surgery centers are licensed outpatient surgery centers; our
private surgical hospitals are licensed as hospitals. Both are
generally equipped and staffed for multiple surgical specialties
and located in freestanding buildings or medical office
buildings. Our average surgery center has approximately
13,000 square feet of space with four or five operating
rooms, as well as ancillary areas for preparation, recovery,
reception and administration. Our surgery center facilities
range from a 4,000 square foot, two operating room facility
to a 20,000 square foot, six operating room facility. Our
surgery centers are normally open weekdays from 7:00 a.m.
to approximately 5:00 p.m. or until the last patient is
discharged. We estimate that a surgery center with four
operating rooms can accommodate up to 6,000 procedures per year.
Our surgical hospitals average 30,000 square feet of
space with six operating rooms, ranging in size from 17,000 to
44,000 square feet and having from 4 to 7 operating
rooms.

Our surgery center support staff typically
consists of registered nurses, operating room technicians, an
administrator who supervises the day-to-day activities of the
surgery center, a receptionist and a small number of office
staff. Each center also has a medical director, who is typically
an anesthesiologist and responsible for and supervises the
quality of medical care provided at the center. Use of our
surgery centers is limited to licensed physicians, podiatrists
and oral surgeons who are also on the medical staff of a local
accredited hospital. Each center maintains a peer review
committee consisting of physicians who use our facilities and
who review the professional credentials of physicians applying
for surgical privileges.

All but our most recently acquired or constructed
surgical facilities are accredited by either the Joint
Commission on Accreditation of Healthcare Organizations or by
the Accreditation Association for Ambulatory Healthcare. We
believe that accreditation is the quality benchmark for managed
care organizations. Many managed care organizations will not
contract with a facility until it is accredited. We believe that
our historical performance in the accreditation process reflects
our commitment to providing high quality care in our surgical
facilities.

Generally, our surgical facilities are limited
partnerships, limited liability partnerships or limited
liability companies in which ownership interests are also held
by local physicians who are on the medical staff of the centers.
Our ownership interests in the centers range from 9.5% to 100%.
Our partnership and limited liability company agreements
typically provide for the quarterly pro rata distribution of
cash equal to net revenues from operations, less amounts held in
reserve for expenses and working capital. We also have a
management agreement with each of the facilities under which we
provide day-to-day management services for a management fee that
is typically a percentage of the net revenues of the facility.

Our partnership and limited liability company
agreements typically provide that if various regulatory changes
take place we will be obligated to purchase some or all of the
ownership interests of the physicians in the partnerships or
limited liability companies that own and operate the applicable
surgery centers. The regulatory changes that could trigger such
an obligation include changes that:



| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | make illegal the referral of Medicare and other
    patients to our surgery centers by physicians affiliated with us;                                                  
|
| |  | create the substantial likelihood that cash
    distributions from the partnership or limited liability company
    to the physician owners thereof will be illegal; or
|
| |  | cause physician ownership interests in the
    partnerships or limited liability companies to be illegal.                                                              

7



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Typically, our partnership and limited liability
company agreements allow us to use shares of our common stock as
consideration for the purchase of a physicians interest
should we be required to purchase these interests. In the event
we are required to purchase these interests and our common stock
does not maintain a sufficient valuation, we may be required to
use cash for the acquisition of a physicians interest. As
a result, the triggering of these obligations and the possible
termination of our affiliation with these physicians, which we
do not believe is likely, could have a material adverse effect
on us.

Our business depends upon the efforts and success
of the physicians who provide medical services at our facilities
and the strength of our relationships with these physicians. Our
business could be adversely affected by the loss of our
relationship with, or a reduction in use of our facilities by, a
key physician or group of physicians. The physicians that
affiliate with us and use our facilities are not our employees.
However, we generally offer the physicians the opportunity to
purchase equity interests in the facilities they use.



| |                        
| | -----------------------
| | Strategic Relationships

A key element of our business strategy is to
pursue strategic relationships with not-for-profit healthcare
systems (hospital partners) in selected markets. Of
our 62 U.S. facilities, 35 are jointly-owned with 16
not-for-profit healthcare systems. Our strategy involves
developing these relationships in three primary ways. One way is
by adding new facilities in existing markets with our existing
hospital partners. An example of this is our relationship with
the Baylor Health Care System in Dallas, Texas. The Baylor joint
ventures own a network of 17 operational surgical
facilities that serve the approximately four million people in
the Dallas/ Fort Worth area. These joint ventures have
added new facilities each year since their inception in 1999,
including three during 2003, and have an additional three
facilities under construction. Another example is our
relationship with Ascension Health (Ascension) in
the Nashville, Tennessee market, through Saint Thomas Health
Services (Saint Thomas). We jointly own four
facilities with Saint Thomas, having constructed and opened one
facility in 2002 and another in 2003.

Another way we develop our strategic
relationships with not-for-profit healthcare systems is through
the contribution of our ownership interests in existing
facilities to a joint venture relationship. During 2003, we
contributed our interests in three operational surgical
facilities to a joint venture with the Memorial Hermann
Healthcare System (Memorial) in Houston, Texas and
opened a new facility in joint ownership with Memorial. Also
during 2003, we contributed our interest in one operational
surgery center and one surgical hospital that is expected to
open in 2004 to a joint venture with Catholic Healthcare West
(CHW) in Phoenix, Arizona and added an additional
facility in that market under joint ownership with CHW.

A third way we develop these relationships is
through expansion into new markets, both with existing hospital
partners and with new partners. An example of this strategy is
our expansion into two southern California markets with CHW. We
have two projects under development in that region, and while
there can be no assurance that these projects will result in
operational surgical facilities, significant progress has been
made in identifying sites and securing financing and other
support from physician partners in the local communities. This
would represent our third and fourth markets with CHW, with whom
we already jointly own facilities in Las Vegas, Nevada and
Phoenix, Arizona. In 2003 we added three new hospital partners
in new markets: CHRISTUS Health, through a project currently
under development in San Antonio, Texas; Bon Secours Health
System, through a project currently under development in Newport
News, Virginia; and Providence Health System, through a project
currently in the early stages of development in Mission Hills,
California. While there can be no assurance that existing or
future development projects with these partners will be
satisfactorily completed, the relationships represent the
potential for future expansion into several new markets, given
that each of these three healthcare systems, like Ascension and
CHW, operates in several states.

8



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| |                    
| | -------------------
| | Operations in Spain

We believe our operations in Spain comprise one
of the largest private hospital networks in this highly
fragmented market. We own and operate eight private surgical
hospitals, one surgery center and a diagnostic facility in Spain
and over 1,350 physicians use our facilities. These facilities,
located primarily in Barcelona, Madrid and Seville, range in
size from 19 beds to 133 beds with an average of
97 beds. In this market, we focus primarily on five
specialties: obstetrics/gynecology; orthopedic surgery; general
surgery; internal medicine; and plastic surgery.

In addition, we are developing our brand name,
USPE, in all of our markets in Spain in an effort to
attract top quality physicians and a greater number of patients.
We are developing this brand by leveraging the reputation of our
more prominent physicians and facilities, particularly Instituto
Universitario Dexeus (Dexeus) in Barcelona. Dexeus
is one of only two private teaching hospitals in Spain. We
believe Dexeus affiliation with the University of
Barcelona, which has nationally renowned physicians, makes it
one of Spains most respected private hospitals and greatly
enhances the USPE brand image.



| |                                     
| | ------------------------------------
| | Operations in the United
    Kingdom

We acquired Parkside Hospital in Wimbledon, a
suburb southwest of London, and Holly House Hospital in a suburb
northeast of London near Essex in April 2000. Parkside has
69 registered acute care beds, including four high
dependency beds and four operating theatres, one of which is a
dedicated endoscopy suite. Parkside also has its own on-site
pathology laboratory which provides services to the on-site
cancer treatment center. The imaging department, which has been
extensively upgraded in the past three years, has an MRI
scanner, CT scanner, and two X-ray screening rooms, plus
mammography, dental and ultrasound services available.
Approximately 400 surgeons, anesthesiologists, and
physicians, all of whom have been subject to a strict
credentialing process and continue to participate in annual
appraisal programs which Parkside shares with a local hospital
operated by the United Kingdoms national health service,
have admitting privileges to the hospital. Parksides key
specialties include orthopedics, gynecology, neurosurgery,
ear-nose-throat, endoscopy and general surgery, and the hospital
is currently expanding its day case services in conjunction with
the recent opening of the oncology clinic.

Parkside Oncology Clinic opened in August 2003
and has state of the art equipment designed to provide a wide
range of cancer treatments. The pre-treatment and planning suite
houses a dedicated CT scanner, which, along with the linear
accelerators and virtual simulation software, is linked to the
departments planning system. The clinic also has its own
pharmacy aseptic suite which provides chemotherapy to the day
care unit at the hospital.

Holly House Hospital has been an acute care
hospital for 20 years and has 55 registered acute care
beds, including three high dependency beds. The hospital has
three operating theatres and its own on-site pathology
laboratory and pharmacy. A diagnostic suite houses MRI and CT
scanners, X-ray screening rooms, mammography, ultrasound, and
DEXA scanning as well as Kodak Computer Radiography. Over
340 surgeons, anesthesiologists, and physicians have
admitting privileges at the hospital, and there are
well-established orthopedic, plastic and general surgery
practices. The hospital plans to institute oncology and
chemotherapy services in the coming year.

We acquired Highgate Hospital in 2003. Highgate
is a 32 bed acute care hospital located in the affluent
Hampstead area of London. The hospital has an established
cosmetic surgery business and additional practices, including
orthopedics, endoscopy and general surgery are being developed.

9



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| |         
| | --------
| | Case Mix

The following table sets forth the percentage of
our revenues determined based on internally reported case volume
from our U.S. facilities and internally reported revenue
from our Spain and U.K. facilities for the year ended
December 31, 2003 from each of the following specialties:

|                      |       |      |    |       |   |      |    |     |   |  |    |     |  
|--------------------- | ----- | ---- | -- | ----- | - | ---- | -- | --- | - |  | -- | --- | -
|Specialty             |       | U.S. |    | Spain |   | U.K.
|                      |       |      |    |       |   |     
|Orthopedic            |       |      | 25 | %     |   |      | 20 | %   |   |  | 33 | %  
|Pain management       |       |      | 23 |       |   |      |   |     |   |  | 1  |    
|Obstetrics/gynecology |       |      | 4  | (1)   |   |      | 17 | (2) |   |  | 13 | (3)
|General surgery       |       |      | 5  |       |   |      | 11 |     |   |  | 16 |    
|Ear, nose and throat  |       |      | 6  |       |   |      | 3  |     |   |  | 4  |    
|Gastrointestinal      |       |      | 14 |       |   |      | 9  |     |   |  | 4  |    
|Plastic surgery       |       |      | 5  |       |   |      | 3  |     |   |  | 14 |    
|Ophthalmology         |       |      | 9  |       |   |      | 2  |     |   |  | 4  |    
|Other                 |       |      | 9  |       |   |      | 35 |     |   |  | 11 |    
|                      |       |      |    |       |   |      |    |     |   |  |    |    
|                      | Total |      |    | 100   | % |      |    | 100 | % |  |    | 100 | %
|                      |       |      |    |       |   |      |    |     |   |  |    |    



---



|    |                                                    
|--- | ---------------------------------------------------
|(1) | Includes gynecology only.                          
|   
|(2) | Includes obstetrics and gynecology.                
|   
|(3) | Includes gynecology and in vitro
    fertilization.



| |          
| | ---------
| | Payor Mix

The following table sets forth the percentage of
our revenues determined based on internally reported case volume
from our U.S. surgical facilities and internally reported
revenue from our Spain and U.K. facilities for the year ended
December 31, 2003 from each of the following payors:

|                  |       |      |    |       |   |      |    |     |   |  |    |     |  
|----------------- | ----- | ---- | -- | ----- | - | ---- | -- | --- | - |  | -- | --- | -
|Payor             |       | U.S. |    | Spain |   | U.K.
|                  |       |      |    |       |   |     
|Private insurance |       |      | 69 | %     |   |      | 72 | %   |   |  | 61 | %  
|Self-pay          |       |      | 3  |       |   |      | 17 |     |   |  | 30 |    
|Government        |       |      | 25 | (1)   |   |      | 11 |     |   |  | 9  |    
|Other             |       |      | 3  |       |   |      |   |     |   |  |   |    
|                  |       |      |    |       |   |      |    |     |   |  |    |    
|                  | Total |      |    | 100   | % |      |    | 100 | % |  |    | 100 | %
|                  |       |      |    |       |   |      |    |     |   |  |    |    



---



|    |                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based solely on case volume. Because government
    payors typically pay less than private insurance, the percentage
    of our U.S. revenue attributable to government payors is
    approximately 11% for Medicare and 1% for Medicaid.

10



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The following table sets forth information
relating to the not-for-profit healthcare systems with which we
are affiliated as of December 31, 2003:

|                                        |                                                             |                    |                             |                           |  |          |    |   |  |  |    |  | 
|--------------------------------------- | ----------------------------------------------------------- | ------------------ | --------------------------- | ------------------------- |  | -------- | -- | - |  |  | -- |  | 
|                                        |                                                             |                    |                             | Number                    |  | Number  
|                                        |                                                             |                    |                             | of Facilities             |  | of Joint
|Healthcare System                       |                                                             | Geographical Focus |                             | Operated                  |  | Ventures
|                                        |                                                             |                    |                             |                           |  |         
|Single Market Systems:                  |                                                             |                    |                             |                           |  |          |    |   |  |  |    | 
|Baylor Healthcare System                |                                                             |                    | Dallas/Fort Worth, Texas    |                           |  |          | 17 |   |  |  | 1  | 
|Memorial Hermann Healthcare System      |                                                             |                    | Houston, Texas              |                           |  |          | 4  |   |  |  | 1  | 
|Meridian Health System                  |                                                             |                    | New Jersey                  |                           |  |          | 2  |   |  |  | 1  | 
|Covenant Health:                        |                                                             |                    | Eastern Tennessee           |                           |  |          |    |   |  |  | 1  | 
|                                        | Fort Sanders Parkwest Medical Center                        |                    |                             | Knoxville, Tennessee      |  |          |    | 1 |  |  |    |  | 
|Decatur General Hospital                |                                                             |                    | Decatur, Alabama            |                           |  |          | 1  |   |  |  | 1  | 
|Mountain States Health Alliance:        |                                                             |                    | Northeast Tennessee         |                           |  |          |    |   |  |  | 1  | 
|                                        | Johnson City Medical Center                                 |                    |                             | Johnson City, Tennessee   |  |          |    | 1 |  |  |    |  | 
|Northside Hospital                      |                                                             |                    | Atlanta, Georgia            |                           |  |          | 1  |   |  |  | 1  | 
|Robert Wood Johnson University Hospital |                                                             |                    | East Brunswick, New Jersey  |                           |  |          | 1  |   |  |  | 1  | 
|Multi-Market Systems:                   |                                                             |                    |                             |                           |  |          |    |   |  |  |    | 
|Ascension Health(a):                    |                                                             |                    | 19 states and D.C.(b)       |                           |  |          | 4  |   |  |  | 1  | 
|                                        | Baptist Hospital (2 facilities)                             |                    |                             | Nashville, Tennessee      |  |          |    |   |  |  |    |  | 
|                                        | Middle Tennessee Medical Center (1 facility)                |                    |                             | Murfreesboro, Tennessee   |  |          |    |   |  |  |    |  | 
|                                        | Saint Thomas Health Services (1 facility)                   |                    |                             | Nashville, Tennessee      |  |          |    |   |  |  |    |  | 
|Catholic Healthcare West:               |                                                             |                    | California, Arizona, Nevada |                           |  |          | 3  |   |  |  | 4  | 
|                                        | St. Josephs Hospital and Medical
    Center (2 facilities) |                    |                             | Phoenix, Arizona          |  |          |    |   |  |  |    |  | 
|                                        | St. Rose Dominican Hospital (1 facility)                    |                    |                             | Henderson, Nevada         |  |          |    |   |  |  |    |  | 
|                                        | San Gabriel Valley Medical Center(c)                        |                    |                             | San Gabriel, California   |  |          |    |   |  |  |    |  | 
|                                        | Mercy Southwest Hospital(c)                                 |                    |                             | Bakersfield, California   |  |          |    |   |  |  |    |  | 
|Bon Secours Health System:              |                                                             |                    | Nine eastern states(d)      |                           |  |          |    |   |  |  | 1  | 
|                                        | Mary Immaculate Hospital(c)                                 |                    |                             | Newport News, Virginia    |  |          |    |   |  |  |    |  | 
|CHRISTUS Health                         |                                                             |                    | Five states(e)              |                           |  |          |    |   |  |  | 1  | 
|                                        | South Texas Medical Center(c)                               |                    |                             | San Antonio, Texas        |  |          |    |   |  |  |    |  | 
|Providence Health System:               |                                                             |                    | Four western states(f)      |                           |  |          |    |   |  |  | 1  | 
|                                        | Providence Holy Cross Medical Center (c)                    |                    |                             | Mission Hills, California |  |          |    |   |  |  |    |  | 
|                                        |                                                             |                    |                             |                           |  |          |    |   |  |  |    | 
|Totals                                  |                                                             |                    |                             |                           |  |          | 35 |   |  |  | 16 | 
|                                        |                                                             |                    |                             |                           |  |          |    |   |  |  |    | 



---



|    |  |                                                                                                                                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Through the Saint Thomas Health Services System                                                                                                                                                                                   
|   
|(b) |  | Alabama, Arkansas, Arizona, Connecticut, District
    of Columbia, Florida, Georgia, Idaho, Illinois, Indiana,
    Louisiana, Maryland, Michigan, Missouri, New York,
    Pennsylvania, Tennessee, Texas, Washington and Wisconsin
|   
|(c) |  | A joint venture agreement has been signed and
    projects have been initiated, but no facilities in this joint
    venture are yet operational.                                                                                  
|   
|(d) |  | Florida, Kentucky, Maryland, Michigan, New
    Jersey, New York, Pennsylvania, South Carolina, and Virginia                                                                                                                       
|   
|(e) |  | Arkansas, Louisiana, Missouri, Texas, and Utah                                                                                                                                                                                    
|   
|(f) |  | Alaska, California, Oregon, and Washington                                                                                                                                                                                        

11



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| |           
| | ----------
| | Facilities

The following table sets forth information
relating to the facilities that we operated as of
December 31, 2003:

|  |  |                                                                         |  |             |          |           |  |            |   |  |  |  |    | 
|- |  | ----------------------------------------------------------------------- |  | ----------- | -------- | --------- |  | ---------- | - |  |  |  | -- | 
|  |  |                                                                         |  | Date of     |          | Number    |  |           
|  |  |                                                                         |  | Acquisition |          | of        |  | Percentage
|  |  |                                                                         |  | or          |          | Operating |  | Owned by  
|  |  | Facility                                                                |  | Affiliation |          | Rooms     |  | USPI      
|  |  |                                                                         |  |             |          |           |  |           
|  |  | United States                                                           |  |             |          |           |  |            |   |  |  |  |    | 
|  |  | Atlanta                                                                 |  |             |          |           |  |            |   |  |  |  |    | 
|* |  | Advanced Surgery Center, Canton, Georgia(1)                             |  |             | 3/27/02  |           |  |            | 3 |  |  |  | 26 | 
|  |  | East West Surgery Center, Austell, Georgia                              |  |             | 9/1/00   | (4)       |  |            | 3 |  |  |  | 51 | 
|  |  | Lawrenceville Surgical Center, Lawrenceville,
    Georgia               |  |             | 8/1/01   |           |  |            | 2 |  |  |  | 15 | 
|  |  | Northwest Georgia Orthopaedic Surgery Center,
    Marietta, Georgia     |  |             | 11/1/00  | (4)       |  |            | 2 |  |  |  | 15 | 
|  |  | Orthopaedic South Surgical Center, Morrow, Georgia                      |  |             | 11/28/03 |           |  |            | 2 |  |  |  | 15 | 
|  |  | Resurgens Surgery Center, Atlanta, Georgia                              |  |             | 10/1/98  | (4)       |  |            | 4 |  |  |  | 40 | 
|  |  | Roswell Surgery Center, Roswell, Georgia                                |  |             | 10/1/00  | (4)       |  |            | 2 |  |  |  | 15 | 
|  |  | Dallas/ Fort Worth                                                      |  |             |          |           |  |            |   |  |  |  |    | 
|* |  | Arlington Surgery Center, Arlington, Texas(1)                           |  |             | 2/1/99   |           |  |            | 6 |  |  |  | 44 | 
|* |  | Baylor Surgicare, Garland, Texas(1)                                     |  |             | 6/1/99   |           |  |            | 6 |  |  |  | 21 | 
|* |  | Bellaire Surgery Center, Fort Worth, Texas                              |  |             | 10/15/02 |           |  |            | 4 |  |  |  | 20 | 
|* |  | Denton Surgicare, Denton, Texas(1)                                      |  |             | 2/1/99   |           |  |            | 4 |  |  |  | 21 | 
|* |  | Frisco Surgical Hospital, Frisco, Texas(5)                              |  |             | 9/30/02  |           |  |            | 6 |  |  |  | 20 | 
|* |  | Grapevine Surgery Center, Grapevine, Texas                              |  |             | 2/16/02  |           |  |            | 4 |  |  |  | 11 | 
|* |  | Irving-Coppell Surgical
    Hospital, Irving,Texas(5)                   |  |             | 10/20/03 |           |  |            | 5 |  |  |  | 10 | 
|* |  | Lewisville SurgiCare Partners, Lewisville,
    Texas(1),(3)             |  |             | 9/16/02  |           |  |            | 6 |  |  |  | 0  | 
|* |  | Mary Shiels University Surgical Partners(5)                             |  |             | 4/1/03   |           |  |            | 5 |  |  |  | 21 | 
|* |  | Medical Centre Surgicare, Fort Worth,
    Texas(1)                      |  |             | 12/18/98 |           |  |            | 8 |  |  |  | 46 | 
|* |  | Metroplex Surgery Center, Bedford, Texas(1)                             |  |             | 12/18/98 |           |  |            | 5 |  |  |  | 44 | 
|* |  | North Texas Surgery Center, Dallas, Texas(1)                            |  |             | 12/18/98 |           |  |            | 4 |  |  |  | 45 | 
|* |  | Park Cities Surgery Center, Dallas, Texas                               |  |             | 6/9/03   |           |  |            | 4 |  |  |  | 28 | 
|* |  | Physicians Day Surgery Center, Dallas, Texas                            |  |             | 10/12/00 |           |  |            | 4 |  |  |  | 21 | 
|* |  | Premier Ambulatory Surgery Center of Garland,
    Garland, Texas        |  |             | 2/1/99   |           |  |            | 2 |  |  |  | 45 | 
|* |  | Texas Surgery Center, Dallas, Texas(1)                                  |  |             | 6/1/99   |           |  |            | 4 |  |  |  | 21 | 
|* |  | Valley View Surgery Center, Dallas, Texas                               |  |             | 12/18/98 |           |  |            | 4 |  |  |  | 58 | 
|  |  | Houston                                                                 |  |             |          |           |  |            |   |  |  |  |    | 
|* |  | Doctors Surgery Center (Houston), Pasadena, Texas                       |  |             | 9/1/99   |           |  |            | 5 |  |  |  | 71 | 
|* |  | Sugar Land Surgical Hospital, Sugar Land, Texas(5)                      |  |             | 12/28/02 |           |  |            | 4 |  |  |  | 13 | 
|* |  | TOPS Specialty Hospital, Houston, Texas(5)                              |  |             | 7/1/99   |           |  |            | 7 |  |  |  | 47 | 
|* |  | United Surgery Center  Southeast,
    Houston, Texas(1)                |  |             | 9/1/99   |           |  |            | 3 |  |  |  | 83 | 
|  |  | Los Angeles                                                             |  |             |          |           |  |            |   |  |  |  |    | 
|  |  | Coast Surgery Center of South Bay, Inc.,
    Torrance, California(1)    |  |             | 12/18/01 |           |  |            | 3 |  |  |  | 63 | 
|  |  | Pacific Endo-Surgical Center , Torrance,
    California                 |  |             | 8/1/03   |           |  |            | 1 |  |  |  | 27 | 
|  |  | San Gabriel Valley Surgical Center, West
    Covina, California         |  |             | 11/16/01 |           |  |            | 4 |  |  |  | 68 | 
|  |  | The Center for Ambulatory Surgical Treatment                            |  |             | 11/14/02 |           |  |            | 4 |  |  |  | 10 | 
|  |  | Nashville                                                               |  |             |          |           |  |            |   |  |  |  |    | 
|* |  | Baptist Ambulatory Surgery Center, Nashville,
    Tennessee             |  |             | 3/1/98   | (4)       |  |            | 6 |  |  |  | 22 | 
|* |  | Baptist Plaza Surgicare, Nashville, Tennessee                           |  |             | 12/3/03  |           |  |            | 7 |  |  |  | 27 | 
|* |  | Middle Tennessee Ambulatory Surgery Center,
    Murfreesboro, Tennessee |  |             | 7/29/98  |           |  |            | 4 |  |  |  | 42 | 
|  |  | Physicians Pavilion Surgery Center, Nashville,
    Tennessee            |  |             | 7/29/98  |           |  |            | 4 |  |  |  | 77 | 
|* |  | Saint Thomas Campus SurgiCare, Nashville,
    Tennessee                 |  |             | 7/15/02  |           |  |            | 5 |  |  |  | 22 | 
|  |  | New Jersey                                                              |  |             |          |           |  |            |   |  |  |  |    | 
|* |  | Shrewsbury Ambulatory Surgery Center, Shrewsbury,
    New Jersey        |  |             | 4/1/99   |           |  |            | 4 |  |  |  | 27 | 
|* |  | Toms River Surgery Center, Toms River, New Jersey                       |  |             | 3/15/02  |           |  |            | 4 |  |  |  | 26 | 
|  |  | Phoenix                                                                 |  |             |          |           |  |            |   |  |  |  |    | 
|* |  | St. Josephs Outpatient Surgery Center,
    Phoenix, Arizona            |  |             | 9/2/03   |           |  |            | 9 |  |  |  | 49 | 
|* |  | Warner Park Surgical Center, Phoenix, Arizona                           |  |             | 7/1/99   |           |  |            | 4 |  |  |  | 38 | 

12



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##### Table of Contents



|                          |  |                                                                               |  |             |          |           |  |            |    |  |  |  |     | 
|------------------------- |  | ----------------------------------------------------------------------------- |  | ----------- | -------- | --------- |  | ---------- | -- |  |  |  | --- | 
|                          |  |                                                                               |  | Date of     |          | Number    |  |           
|                          |  |                                                                               |  | Acquisition |          | of        |  | Percentage
|                          |  |                                                                               |  | or          |          | Operating |  | Owned by  
|                          |  | Facility                                                                      |  | Affiliation |          | Rooms     |  | USPI      
|                          |  |                                                                               |  |             |          |           |  |           
|United States (continued) |  |                                                                               |  |             |          |           |  |            |    |  |  | 
|                          |  | Additional Markets                                                            |  |             |          |           |  |            |    |  |  |  |     | 
|                          |  | Austintown Ambulatory Surgery Center, Austintown,
    Ohio(1)                 |  |             | 4/12/02  |           |  |            | 5  |  |  |  | 20  | 
|                          |  | Corpus Christi Outpatient Surgery, Corpus
    Christi, Texas(1)               |  |             | 5/1/02   |           |  |            | 5  |  |  |  | 70  | 
|                          |  | Creekwood Surgery Center, Kansas City, Missouri(1)                            |  |             | 7/29/98  |           |  |            | 4  |  |  |  | 68  | 
|                          |  | Day-Op Center of Long Island, Mineola,
    New York(2)                        |  |             | 12/4/98  |           |  |            | 4  |  |  |  | 0   | 
|*                         |  | Decatur Surgery Center, Decatur, Alabama(1)                                   |  |             | 7/29/98  |           |  |            | 2  |  |  |  | 61  | 
|                          |  | Destin Surgery Center, Destin, Florida                                        |  |             | 9/25/02  |           |  |            | 2  |  |  |  | 30  | 
|                          |  | Las Cruces Surgery Center, Las Cruces, New
    Mexico(1)                      |  |             | 2/1/01   |           |  |            | 3  |  |  |  | 50  | 
|*                         |  | Mountain Empire Surgery Center, Johnson City,
    Tennessee                   |  |             | 2/20/00  | (4)       |  |            | 4  |  |  |  | 20  | 
|                          |  | New Mexico Orthopaedic Surgery Center,
    Albuquerque, New Mexico            |  |             | 2/29/00  | (4)       |  |            | 4  |  |  |  | 51  | 
|                          |  | Oklahoma City North Ambulatory Surgery Center,
    Oklahoma City, Oklahoma(1) |  |             | 3/27/02  |           |  |            | 4  |  |  |  | 55  | 
|*                         |  | Parkway Surgery Center, Henderson, Nevada                                     |  |             | 8/3/98   |           |  |            | 5  |  |  |  | 48  | 
|*                         |  | Parkwest Surgery Center, Knoxville, Tennessee                                 |  |             | 7/26/01  |           |  |            | 5  |  |  |  | 22  | 
|*                         |  | Robert Wood Johnson Surgery Center, East
    Brunswick, New Jersey            |  |             | 6/26/02  |           |  |            | 5  |  |  |  | 45  | 
|                          |  | Surgery Center in Middleburg Heights, Middleburg
    Heights, Ohio(1)         |  |             | 6/19/02  |           |  |            | 7  |  |  |  | 60  | 
|                          |  | Surgery Center of Sarasota, Sarasota, Florida                                 |  |             | 10/12/01 |           |  |            | 4  |  |  |  | 68  | 
|                          |  | Surgi-Center of Central Virginia, Fredericksburg,
    Virginia                |  |             | 11/29/01 |           |  |            | 4  |  |  |  | 79  | 
|                          |  | Teton Outpatient Services, Jackson, Wyoming                                   |  |             | 8/1/98   | (4)       |  |            | 2  |  |  |  | 52  | 
|                          |  | Texan Ambulatory Surgery Center, Austin, Texas                                |  |             | 6/1/03   |           |  |            | 3  |  |  |  | 65  | 
|                          |  | United Surgical Associates, Cottonwood, Arizona                               |  |             | 7/14/03  |           |  |            | 2  |  |  |  | 25  | 
|                          |  | University Surgical Center, Winter Park, Florida                              |  |             | 10/15/98 |           |  |            | 3  |  |  |  | 40  | 
|                          |  | Zeeba Surgery Center, Lyndhurst, Ohio(1)                                      |  |             | 10/11/02 |           |  |            | 5  |  |  |  | 58  | 
|                          |  | Western Europe                                                                |  |             |          |           |  |            |    |  |  |  |     | 
|                          |  | Spain                                                                         |  |             |          |           |  |            |    |  |  |  |     | 
|                          |  | Insituto Universitatio Dexeus, Barcelona                                      |  |             | 04/30/98 |           |  |            | 12 |  |  |  | 79  | 
|                          |  | Hospital Santa Teresa, La Coruna                                              |  |             | 11/5/98  |           |  |            | 5  |  |  |  | 96  | 
|                          |  | Hospital Sagrado Corazon, Seville                                             |  |             | 10/16/98 |           |  |            | 9  |  |  |  | 100 | 
|                          |  | Clinica Nuestra Senora de la Esperanza, Vitoria                               |  |             | 10/5/98  |           |  |            | 3  |  |  |  | 100 | 
|                          |  | Clinica San Camilo, Madrid                                                    |  |             | 3/15/00  |           |  |            | 8  |  |  |  | 93  | 
|                          |  | Clinica San Jose, Madrid                                                      |  |             | 11/1/00  |           |  |            | 7  |  |  |  | 93  | 
|                          |  | USP Hospital San Carlos, Murcia                                               |  |             | 2/1/02   |           |  |            | 6  |  |  |  | 100 | 
|                          |  | United Surgical Partners Hospital de Marbella,
    S.L., Marbella             |  |             | 3/4/03   |           |  |            | 3  |  |  |  | 100 | 
|                          |  | Centro de Cirugia Ambulatario, Barcelona                                      |  |             | 3/1/99   |           |  |            | 3  |  |  |  | 79  | 
|                          |  | United Kingdom                                                                |  |             |          |           |  |            |    |  |  |  |     | 
|                          |  | Parkside Hospital, Wimbledon                                                  |  |             | 4/6/00   |           |  |            | 4  |  |  |  | 100 | 
|                          |  | Holly House Hospital, Essex                                                   |  |             | 4/6/00   |           |  |            | 3  |  |  |  | 100 | 
|                          |  | Highgate Private Clinic, Hampstead                                            |  |             | 4/29/03  |           |  |            | 3  |  |  |  | 100 | 



---



|  |                                                                   
|- | ------------------------------------------------------------------
|* | Facilities jointly owned with not-for-profit
    hospital systems.



|    |                                                                                           
|--- | ------------------------------------------------------------------------------------------
|(1) | Certain of our surgery centers are licensed and
    equipped to accommodate 23-hour stays.
|   
|(2) | Operated through a consulting and administrative
    agreement.                           
|   
|(3) | Management agreement only.                                                                
|   
|(4) | Indicates date of acquisition by OrthoLink. We
    acquired OrthoLink in February 2001.   
|   
|(5) | Surgical hospitals, all of which are licensed and
    equipped for overnight stays.       

In addition, the Company provides management
services to two facilities in Columbus, Ohio and two facilities
in Oklahoma City, Oklahoma under short-term contracts scheduled
to terminate during 2004, and a facility in Tyler, Texas under a
contract currently scheduled to terminate in 2006. The Company
holds no ownership in these facilities.

We lease the majority of the facilities where our
various surgery centers and private surgical hospitals conduct
their operations. Our leases have initial terms ranging from one
to twenty years and most of the leases contain options to extend
the lease period for up to ten additional years.

Our corporate headquarters is located in Dallas,
Texas. We currently lease approximately 40,000 square feet
of space at 15305 Dallas Parkway, Addison, Texas. This lease
will expire in April 2011.

Our office in the United Kingdom is located in
London. We currently lease 1,900 square feet. The lease
expired in February 2004 and we are currently negotiating terms
of an extension.

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Our Spanish offices are located in Madrid and
Barcelona. We currently lease 3,333 square feet of space in
Madrid. The lease expires in December 2008. Additionally, we
lease 3,100 square feet of space in Barcelona. The lease
expires in December 2007.

We also lease 10,408 square feet of space in
Brentwood, Tennessee, which was the former OrthoLink
headquarters and currently serves as a regional office. The
lease expires in February 2008.

Development

The following table sets forth information
relating to facilities that are currently under construction:

|                        |  |          |        |      |  |          |                   |                     |  |  |      |  |  |  |                 | 
|----------------------- |  | -------- | ------ | ---- |  | -------- | ----------------- | ------------------- |  |  | ---- |  |  |  | --------------- | 
|                        |  |          |        |      |  | Expected |                   |                    
|                        |  | Hospital |        |      |  | Opening  |                   | Number of Operating
|Facility Location       |  | Partner  |        | Type |  | Date     |                   | Rooms/Beds         
|                        |  |          |        |      |  |          |                   |                    
|Chandler, Arizona       |  |          | CHW    |      |  |          | Surgical Hospital |                     |  |  | 1Q04 |  |  |  | 6 ORs, 16 beds | 
|San Gabriel, California |  |          | CHW    |      |  |          | Surgery Center    |                     |  |  | 3Q04 |  |  |  | 3 ORs          | 
|Baton Rouge, Louisiana  |  |          | None   |      |  |          | Surgical Hospital |                     |  |  | 1Q05 |  |  |  | 4 ORs, 11 beds | 
|Fort Worth, Texas       |  |          | Baylor |      |  |          | Surgery Center    |                     |  |  | 3Q04 |  |  |  | 4 ORs          | 
|Rockwall, Texas         |  |          | Baylor |      |  |          | Surgery Center    |                     |  |  | 4Q04 |  |  |  | 3 ORs          | 
|Trophy Club, Texas      |  |          | Baylor |      |  |          | Surgical Hospital |                     |  |  | 2Q04 |  |  |  | 6 ORs, 20 beds | 

We also have nine additional projects under
development, all of which involve a hospital partner. It is
possible that some of these projects, as well as other projects
which are in various stages of negotiation with both current and
prospective joint venture partners, will result in our operating
additional facilities sometime in 2004. While our history
suggests that many of these projects will culminate with the
opening of a profitable surgical facility, we cannot assure you
that any of these projects will reach that stage or will be
successful thereafter.

Marketing

Our sales and marketing efforts are directed
primarily at physicians, which are principally responsible for
referring patients to our facilities. We market our facilities
to physicians by emphasizing (1) the high level of patient
satisfaction with our surgery centers, which is based on patient
surveys we take concerning our facilities, (2) the quality
and responsiveness of our services, and (3) the practice
efficiencies provided by our facilities. We also directly
negotiate agreements with third-party payors, which generally
focus on the pricing, number of facilities in the market and
affiliation with physician groups in a particular market.
Maintaining access to physicians and patients through
third-party payor contracting is essential for the economic
viability of most of our facilities.

Competition

In all of our markets, we compete with other
providers, including major acute care hospitals. Hospitals have
various competitive advantages over us, including their
established managed care contracts, community position,
physician loyalty and geographical convenience for
physicians in-patient and out-patient practices. However,
we believe that, in comparison to hospitals with which we
compete for managed care contracts, our surgery centers and
private surgical hospitals compete favorably on the basis of
cost, quality, efficiency and responsiveness to physician needs
in a more comfortable environment for the patient.

We compete with other providers in each of our
markets for patients and for contracts with insurers or managed
care payors. Competition for managed care contracts with other
providers is focused on the pricing, number of facilities in the
market and affiliation with key physician groups in a particular
market. We also encounter competition with other companies for
acquisition and development of facilities and in the United
States for strategic relationships with not-for-profit
healthcare systems and physicians.

There are several large, publicly-held companies,
or divisions or subsidiaries of large publicly-held companies,
that acquire and develop freestanding multi-specialty surgery
centers and private surgical hospitals. Some of these
competitors have greater resources than we do. The principal
competitive factors

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that affect our ability and the ability of our
competitors to acquire surgery centers and private surgical
hospitals are price, experience, reputation and access to
capital. Further, in the United States some physician groups
develop surgery centers without a corporate partner. It is
generally difficult, however, for a single practice to create
effectively the efficient operations and marketing programs
necessary to compete with other provider networks and companies.
As a result, and also due to the financial investment necessary
to develop surgery centers and private surgical hospitals, many
healthcare systems and physician groups are attracted to
corporate partners such as us.


In the United Kingdom, we face competition from
both the national health service and other privately operated
hospitals. Across the United Kingdom, a large number of private
hospitals are owned by the four largest hospital operators. In
addition, the two largest payors account for over half of the
privately insured market. We believe our hospitals can
effectively compete in this market due to location and specialty
mix of our facilities. Our hospitals also have a higher portion
of self pay business than the overall market. Self pay business
is not influenced by the private insurers.

In Spain, we face competition from several
privately held independent hospitals and a few networks of
hospitals that are owned by insurance companies. Insurance
companies that own hospitals have the benefit of a captured
market of their insured, including hospitals owned by Adesla,
our primary competitor in Spain. These insurance companies
compete with us in acquisitions of strategically placed
hospitals in major cities. Other hospital networks are
attempting to replicate our model and have begun to compete with
us in the acquisition of hospitals. In our experience, sellers
are typically the physicians that have built the hospitals, and
most physicians prefer an independent position in a market
rather than becoming a provider for an insurance company. We
focus our efforts on partnering with physicians and assisting
them in growing their business and medical practices by
encouraging group rather than individual practices.

Our hospitals compete with other providers in the
Spanish market, including other private hospitals and hospitals
operated by Spains national health service. The national
health coverage makes the hospitals operated by Spains
national health service accessible to the entire Spanish
population. In contrast, private hospitals such as ours must
negotiate agreements with third-party payors, which focus on
services available to their members as well as pricing. We
believe that the size of our operations in Spain has given us
the ability to negotiate effectively with insurance companies.

Employees

As of December 31, 2003, we employed
approximately 4,350 persons, 3,650 of whom are full-time
employees and 700 of whom are part-time employees. Of these
employees, we employ approximately 2,200 in the United States,
750 in the United Kingdom and 1,400 in Spain. The physicians
that affiliate with us and use our facilities are not our
employees. However, we generally offer the physicians the
opportunity to purchase equity interests in the facilities they
use.

Professional and General Liability
Insurance

In the United States, we maintain professional
liability insurance that provides coverage on a claims made
basis of $1.0 million per incident and $5.0 million in
annual aggregate amount per location with retroactive provisions
upon policy renewal. We also maintain general liability
insurance coverage of $1.0 million per occurrence and
$5.0 million in annual aggregate amount per location, as
well as business interruption insurance and property damage
insurance. In addition, we maintain umbrella liability insurance
in the aggregate amount of $20.0 million. The governing
documents of each of our surgical facilities require physicians
who conduct surgical procedures at those facilities to maintain
stated amounts of insurance. In the United Kingdom, we maintain
general public insurance in the amount of
£5.0 million, malpractice insurance in the amount of
£3.0 million and property and business interruption
insurance. In Spain, we maintain general liability insurance
coverage of
600,000 per
accident and victim per year, per facility
and 3.0 million
at the group level and property and business interruption
insurance. Our insurance policies are generally subject to
annual renewals. We believe that we will be able to renew
current policies or otherwise obtain comparable insurance
coverage at reasonable rates. However, we have no control over

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the insurance markets and can provide no
assurance that we will economically be able to maintain
insurance similar to our current policies.


Government Regulation



| |              
| | -------------
| | United States

The healthcare industry is subject to extensive
regulation by federal, state and local governments. Government
regulation affects our business by controlling growth, requiring
licensing or certification of facilities, regulating how
facilities are used, and controlling payment for services
provided. Further, the regulatory environment in which we
operate may change significantly in the future. While we believe
we have structured our agreements and operations in material
compliance with applicable law, there can be no assurance that
we will be able to successfully address changes in the
regulatory environment.

Every state imposes licensing and other
requirements on healthcare facilities. In addition, many states
require regulatory approval, including certificates of need,
before establishing or expanding various types of healthcare
facilities, including surgery centers and private surgical
hospitals, offering services or making capital expenditures in
excess of statutory thresholds for healthcare equipment,
facilities or programs. We may become subject to additional
burdensome regulations as we expand our existing operations and
enter new markets.

In addition to extensive existing government
healthcare regulation, there have been numerous initiatives on
the federal and state levels for comprehensive reforms affecting
the payment for and availability of healthcare services. We
believe that these healthcare reform initiatives will continue
during the foreseeable future. If adopted, some aspects of
previously proposed reforms, such as further reductions in
Medicare or Medicaid payments, or additional prohibitions on
physicians financial relationships with facilities to
which they refer patients, could adversely affect us.

We believe that our business operations
materially comply with applicable law. However, we have not
received a legal opinion from counsel or from any federal or
state judicial or regulatory authority to this effect, and many
aspects of our business operations have not been the subject of
state or federal regulatory scrutiny or interpretation. Some of
the laws applicable to us are subject to limited or evolving
interpretations; therefore, a review of our operations by a
court or law enforcement or regulatory authority might result in
a determination that could have a material adverse effect on us.
Furthermore, the laws applicable to us may be amended or
interpreted in a manner that could have a material adverse
effect on us. Our ability to conduct our business and to operate
profitably will depend in part upon obtaining and maintaining
all necessary licenses, certificates of need and other
approvals, and complying with applicable healthcare laws and
regulations.



| |                                                  
| | -------------------------------------------------
| | Licensure and certificate-of-need
    regulations

Capital expenditures for the construction of new
facilities, the addition of beds or the acquisition of existing
facilities may be reviewable by state regulators under statutory
schemes that are sometimes referred to as certificate of need
laws. States with certificate of need laws place limits on the
construction and acquisition of healthcare facilities and the
expansion of existing facilities and services. In these states,
approvals are required for capital expenditures exceeding
certain specified amounts and that involve certain facilities or
services, including surgery centers and private surgical
hospitals.

State certificate of need laws generally provide
that, prior to the addition of new beds, the construction of new
facilities or the introduction of new services, a designated
state health planning agency must determine that a need exists
for those beds, facilities or services. The certificate of need
process is intended to promote comprehensive healthcare
planning, assist in providing high quality healthcare at the
lowest possible cost and avoid unnecessary duplication by
ensuring that only those healthcare facilities that are needed
will be built.

Typically, the provider of services submits an
application to the appropriate agency with information
concerning the area and population to be served, the anticipated
demand for the facility or service to be

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provided, the amount of capital expenditure, the
estimated annual operating costs, the relationship of the
proposed facility or service to the overall state health plan
and the cost per patient day for the type of care contemplated.
The issuance of a certificate of need is based upon a finding of
need by the agency in accordance with criteria set forth in
certificate of need laws and state and regional health
facilities plans. If the proposed facility or service is found
to be necessary and the applicant to be the appropriate
provider, the agency will issue a certificate of need containing
a maximum amount of expenditure and a specific time period for
the holder of the certificate of need to implement the approved
project.


Our healthcare facilities are also subject to
state and local licensing regulations ranging from the adequacy
of medical care to compliance with building codes and
environmental protection laws. To assure continued compliance
with these regulations, governmental and other authorities
periodically inspect our facilities. The failure to comply with
these regulations could result in the suspension or revocation
of a healthcare facilitys license.

Our healthcare facilities receive accreditation
from the Joint Commission on Accreditation of Healthcare
Organizations or the Accreditation Association for Ambulatory
Health Care, Inc., nationwide commissions which establish
standards relating to the physical plant, administration,
quality of patient care and operation of medical staffs of
various types of healthcare facilities. Generally, our
healthcare facilities must be in operation for at least six
months before they are eligible for accreditation. As of
December 31, 2003, all but our most recently opened or
acquired healthcare facilities had been accredited by either the
Joint Commission on Accreditation of Healthcare Organizations or
the Accreditation Association for Ambulatory Health
Care, Inc. Many managed care companies and third-party
payors require our facilities to be accredited in order to be
considered a participating provider under their health plans.



| |                                                           
| | ----------------------------------------------------------
| | Medicare and Medicaid Participation in
    Surgery Centers

Medicare is a federally funded and administered
health insurance program, primarily for individuals entitled to
social security benefits who are 65 or older or who are
disabled. Medicaid is a health insurance program jointly funded
by state and federal governments that provides medical
assistance to qualifying low income persons. Each state Medicaid
program has the option to provide payment for surgery center
services. All of the states in which we currently operate cover
Medicaid surgery center services; however, these states may not
continue to cover surgery center services and states into which
we expand our operations may not cover or continue to cover
surgery center services.

Medicare payments for procedures performed at
surgery centers are not based on costs or reasonable charges.
Instead, Medicare prospectively determines fixed payment amounts
for procedures performed at surgery centers. These amounts are
adjusted for regional wage variations. The various state
Medicaid programs also pay us a fixed payment for our services,
which amount varies from state to state. A portion of our
revenues are attributable to payments received from the Medicare
and Medicaid programs. For the years ended December 31,
2001, 2002, and 2003 21%, 23% and 25%, respectively, of our
domestic case volumes were attributable to Medicare and Medicaid
payments, although the percentage of our overall revenues these
cases represent is significantly less because government payors
typically pay less than private insurers. For example,
approximately 11% and 1% of our 2003 domestic patient service
revenues were contributed by Medicare and Medicaid,
respectively, despite those cases representing a total of 25% of
our domestic case volume.

To participate in the Medicare program and
receive Medicare payment, our facilities must comply with
regulations promulgated by the Department of Health and Human
Services. Among other things, these regulations, known as
conditions of participation, relate to the type of
facility, its equipment, its personnel and its standards of
medical care, as well as compliance with state and local laws
and regulations. Our surgery centers must also satisfy the
conditions of participation in order to be eligible to
participate in the Medicaid program. All of our surgery centers
and private surgical hospitals in the United States are
certified or, with respect to newly acquired or developed
surgery centers and private surgical hospitals, awaiting
certification to participate in the Medicare program. These
facilities are subject to annual on-site surveys to maintain
their certification. Failure to comply with Medicares
conditions of

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participation may result in loss of program
payment or other governmental sanctions. We have established
ongoing quality assurance activities to monitor and ensure our
facilities compliance with these conditions of
participation.


The Department of Health and Human Services and
the states in which we perform surgical procedures for Medicaid
patients may revise the Medicare and Medicaid payments methods
or rates in the future. Any such changes could have a negative
impact on the reimbursements we receive for our surgical
services from the Medicare program and the state Medicaid
programs. We do not know at this time when or to what extent
revisions to such payment methodologies will be implemented.

As with most government programs, the Medicare
and Medicaid programs are subject to statutory and regulatory
changes, possible retroactive and prospective rate adjustments,
administrative rulings, freezes and funding reductions, all of
which may adversely affect the level of payments to our surgery
centers. Reductions or changes in Medicare or Medicaid funding
could significantly affect our results of operations. We cannot
predict at this time whether additional healthcare reform
initiatives will be implemented or whether there will be other
changes in the administration of government healthcare programs
or the interpretation of government policies that would
adversely affect our business.



| |                          
| | -------------------------
| | Federal Anti-Kickback Law

State and federal laws regulate relationships
among providers of healthcare services, including employment or
service contracts and investment relationships. These
restrictions include a federal criminal law, referred to herein
as the Anti-Kickback Statute, that prohibits offering, paying,
soliciting, or receiving any form of remuneration in return for:



| |   |                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | referring patients for services or items payable
    under a federal healthcare program, including Medicare or
    Medicaid, or                                                                                                       
|
| |  | purchasing, leasing, or ordering, or arranging
    for or recommending purchasing, leasing, or ordering any good,
    facility, service or item for which payment may be made in whole
    or in part by a federal healthcare program.

A violation of the Anti-Kickback Statute
constitutes a felony. Potential sanctions include imprisonment
of up to five years, criminal fines of up to $25,000, civil
money penalties of up to $50,000 per act plus three times
the remuneration offered or three times the amount claimed and
exclusion from all federally funded healthcare programs,
including the Medicare and Medicaid programs. The applicability
of these provisions to many business transactions in the
healthcare industry has not yet been subject to judicial or
regulatory interpretation.

Pursuant to the Anti-Kickback Statute, and in an
effort to reduce potential fraud and abuse relating to federal
healthcare programs, the federal government has announced a
policy of increased scrutiny of joint ventures and other
transactions among healthcare providers. The Office of the
Inspector General of the Department of Health and Human Services
closely scrutinizes healthcare joint ventures involving
physicians and other referral sources. In 1989, the Office of
the Inspector General published a fraud alert that outlined
questionable features of suspect joint ventures, and
the Office of the Inspector General has continued to rely on
fraud alerts in later pronouncements. The Office of the
Inspector General has also published regulations containing
numerous safe harbors that exempt some practices
from enforcement under the Anti-Kickback Statute. These safe
harbor regulations, if fully complied with, assure participants
in particular types of arrangements that the Office of the
Inspector General will not treat their participation as a
violation of the Anti-Kickback Statute. The safe harbor
regulations do not expand the scope of activities that the
Anti-Kickback Statute prohibits, nor do they provide that
failure to satisfy the terms of a safe harbor constitutes a
violation of the Anti-Kickback Statute. The Office of the
Inspector General has, however, indicated that failure to
satisfy the terms of a safe harbor may subject an arrangement to
increased scrutiny.

Our partnerships and limited liability companies
that are providers of services under the Medicare and Medicaid
programs, and their respective limited partners and members, are
subject to the Anti-Kickback

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Statute. A number of the relationships that we
have established with physicians and other healthcare providers
do not fit within any of the safe harbor regulations issued by
the Office of the Inspector General. All of the 60 surgical
facilities in the United States in which we hold an ownership
interest are owned by partnerships, limited liability
partnerships or limited liability companies, which include as
partners or members physicians who perform surgical or other
procedures at the facilities.


On November 19, 1999, the Office of the
Inspector General promulgated rules setting forth additional
safe harbors under the Anti-Kickback Statute. The new safe
harbors include a safe harbor applicable to surgery centers,
referred to as the surgery center safe harbor. The
surgery center safe harbor generally protects ownership or
investment interests in a center by physicians who are in a
position to refer patients directly to the center and perform
procedures at the center on referred patients, if certain
conditions are met. More specifically, the surgery center safe
harbor protects any payment that is a return on an ownership or
investment interest to an investor if certain standards are met
in one of four categories of ambulatory surgery centers
(1) surgeon-owned surgery centers,
(2) single-specialty surgery centers,
(3) multi-specialty surgery centers, and
(4) hospital/physician surgery centers.

For multi-specialty ambulatory surgery centers,
for example, the following standards, among others, apply:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) all of the investors must either be
    physicians who are in a position to refer patients directly to
    the center and perform procedures on the referred patients,
    group practices composed exclusively of those physicians, or
    investors who are not employed by the entity or by any of its
    investors, are not in a position to provide items or services to
    the entity or any of its investors, and are not in a position to
    make or influence referrals directly or indirectly to the entity
    or any of its investors;
|
| | (2) at least one-third of each physician
    investors medical practice income from all sources for the
    previous fiscal year or twelve-month period must be derived from
    performing outpatient procedures that require a surgery center
    or private specialty hospital setting in accordance with
    Medicare reimbursement rules; and                                                                                                                                                                                                      
|
| | (3) at least one third of the
    Medicare-eligible outpatient surgery procedures performed by
    each physician investor for the previous fiscal year or previous
    twelve-month period must be performed at the surgery center in
    which the investment is made.                                                                                                                                                                                                                                                                                 

Similar standards apply to each of the remaining
three categories of surgery centers set forth in the
regulations. In particular, each of the four categories includes
a requirement that no ownership interests be held by a
non-physician or non-hospital investor if that investor is
(a) employed by the center or another investor, (b) in
a position to provide items or services to the center or any of
its other investors, or (c) in a position to make or
influence referrals directly or indirectly to the center or any
of its investors.

Since one of our subsidiaries is an investor in
each partnership or limited liability company that owns one of
our surgery centers, and since this subsidiary provides
management and other services to the surgery center, our
arrangements with physician investors do not fit within the
specific terms of the surgery center safe harbor or any other
safe harbor.

In addition, because we do not control the
medical practices of our physician investors or control where
they perform surgical procedures, it is possible that the
quantitative tests described above will not be met, or that
other conditions of the surgery center safe harbor will not be
met. Accordingly, while the surgery center safe harbor is
helpful in establishing that a physicians investment in a
surgery center should be considered an extension of the
physicians practice and not as a prohibited financial
relationship, we can give you no assurances that these ownership
interests will not be challenged under the Anti-Kickback
Statute. However, we believe that our arrangements involving
physician ownership interests in our surgery centers should not
fall within the activities prohibited by the Anti-Kickback
Statute.

In addition, with regard to our surgical
hospitals, the Office of Inspector General has not adopted any
safe harbor regulations under the Anti-Kickback Statute for
physician investments in surgical hospitals. Each of our
surgical hospitals is held in partnership with physicians who
are in a position to refer patients

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to the hospital. There can be no assurances that
these relationships will not be found to violate the
Anti-Kickback Statute or that there will not be regulatory or
legislative changes that prohibit physician ownership of
surgical hospitals.


While several federal court decisions have
aggressively applied the restrictions of the Anti-Kickback
Statute, they provide little guidance regarding the application
of the Anti-Kickback Statute to our partnerships and limited
liability companies. We believe that our operations do not
violate the Anti-Kickback Statute. However, a federal agency
charged with enforcement of the Anti-Kickback Statute might
assert a contrary position. Further, new federal laws, or new
interpretations of existing laws, might adversely affect
relationships we have established with physicians or other
healthcare providers or result in the imposition of penalties on
us or some of our facilities. Even the assertion of a violation
could have a material adverse effect upon us.



| |                                        
| | ---------------------------------------
| | Federal Physician Self-Referral
    Law

Section 1877 of the Social Security Act,
commonly known as the Stark Law, prohibits
physicians, subject to the exceptions described below, from
referring Medicare or Medicaid patients to any entity providing
designated health services in which the physician or
an immediate family member has an ownership or investment
interest or with which the physician or an immediate family
member has entered into a compensation arrangement. These
prohibitions, contained in the Omnibus Budget Reconciliation Act
of 1993, commonly known as Stark II, amended
prior federal physician self-referral legislation known as
Stark I by expanding the list of designated
health services to a total of eleven categories of health
services. Persons who violate the Stark Law are subject to
potential civil money penalties of up to $15,000 for each bill
or claim submitted in violation of the Stark Law and up to
$100,000 for each circumvention scheme they are
found to have entered into, and potential exclusion from the
Medicare and Medicaid programs. In addition, the Stark Law
requires the denial (or, refund, as the case may be) of any
Medicare and Medicaid payments received for designated health
services that resulted from a prohibited referral.

Ambulatory surgery is not specifically enumerated
as a health service subject to this prohibition; however, some
of the eleven designated health services under the Stark Law are
among the specific services furnished by our surgery facilities.
Final regulations interpreting Stark I, often referred to
as the Stark I regulations, were issued on
August 14, 1995. On January 4, 2001 the Department of
Health and Human Services published Phase I of
the final regulations interpreting Stark II and modifying
the Stark I regulations. The Department of Health and Human
Services anticipates publishing Phase II of the
regulations in the near future. The Phase I regulations,
which in general took effect on January 4, 2002, address
some of the ownership and investment interest exceptions and
compensation arrangement exceptions found in the Stark Law.
Under the Stark I regulations, clinical laboratory services
provided by a surgery center are excepted from the Stark
Laws self-referral prohibition, if these services are
included in the surgery centers composite Medicare payment
rate. The Phase I regulations take a different approach and
exclude from the definition of designated health
services any designated health services provided by a
surgery center, if the services are included in the surgery
centers composite Medicare payment rate. Therefore, under
the Phase I regulations, the Stark Laws self-referral
prohibition does not apply to designated health services
provided by a surgery center, unless the surgery center
separately bills Medicare for the services. We believe that our
operations do not violate the Stark Law, as currently
interpreted. However, the Department of Health and Human
Services has indicated that it will further address the
exception relating to services provided by a surgery center in
Phase II of the regulations. Therefore, we cannot assure
you that future regulatory changes will not result in us
becoming subject to the Stark Laws self-referral
prohibition.

Five of our U.S. facilities, and three
additional facilities currently under construction, are surgical
hospitals rather than outpatient surgery centers. The Stark Law
includes an exception for physician investments in hospitals if
the physicians investment is in the entire hospital and
not just a department of the hospital. We believe that the
physician investments in our surgical hospitals fall within the
exception and are therefore permitted under the Stark Law.
However, recently enacted legislation temporarily

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changes the way the hospital exception applies to
physician investments in specialty hospitals, as
defined by the legislation. This legislation, the Medicare
Prescription Drug, Improvement, and Modernization Act of
2003 (the Modernization Act), was enacted in
December 2003, and created an 18-month moratorium, beginning on
the date of enactment, during which physicians may not refer
Medicare or Medicaid patients to specialty hospitals
in which they have an ownership interest. The legislation
defines specialty hospitals as hospitals that are
primarily or exclusively engaged in the care and treatment of
(1) patients with a cardiac condition, (2) patients
with an orthopedic condition, (3) patients receiving a
surgical procedure or (4) any other specialized category of
services that the Secretary of the Department of Health and
Human Services designates as inconsistent with the purpose of
the hospital ownership exception. The moratorium does not apply
to hospitals that were in operation prior to, or under
development as of, November 18, 2003, as long as the
hospital (a) does not increase the number of physician
investors beyond the number it had on November 18, 2003,
(b) does not change the type of categories of services it
provides from the type it provided as of November 18, 2003,
(c) does not increase its bed size except on its main
campus, and then only by 50% or five beds, whichever is greater,
and (d) meets other requirements that may be specified by
the Secretary of the Department of Health and Human Services.


The Modernization Act includes general guidelines
for determining whether a hospital is a specialty
hospital, and for determining whether a hospital was
under development as of November 18, 2003. It
vests the Secretary of the Department of Health and Human
Services with substantial discretion to interpret these
guidelines. Thus far, neither the Secretary, nor the Centers for
Medicare and Medicaid Services, the agency that will be
primarily responsible for implementing the moratorium, has
issued any official guidance interpreting the legislation. As a
result, we cannot state with certainty how the legislation will
apply to our operations. However, the moratorium may reduce or
eliminate our ability to add physician investors to, add beds
to, or change the types of specialties of our existing hospital
facilities, or to further develop the facility in development in
the manner we had planned, or to develop additional hospitals
with physician investors, for at least the 18-month time period
covered by the moratorium.



| |                                    
| | -----------------------------------
| | False and Other Improper
    Claims

The federal government is authorized to impose
criminal, civil and administrative penalties on any person or
entity that files a false claim for payment from the Medicare or
Medicaid programs. Claims filed with private insurers can also
lead to criminal and civil penalties, including, but not limited
to, penalties relating to violations of federal mail and wire
fraud statutes. While the criminal statutes are generally
reserved for instances of fraudulent intent, the government is
applying its criminal, civil and administrative penalty statutes
in an ever-expanding range of circumstances. For example, the
government has taken the position that a pattern of claiming
reimbursement for unnecessary services violates these statutes
if the claimant merely should have known the services were
unnecessary, even if the government cannot demonstrate actual
knowledge. The government has also taken the position that
claiming payment for low-quality services is a violation of
these statutes if the claimant should have known that the care
was substandard.

Over the past several years, the government has
accused an increasing number of healthcare providers of
violating the federal False Claims Act. The False Claims Act
prohibits a person from knowingly presenting, or causing to be
presented, a false or fraudulent claim to the United States
government. The statute defines knowingly to include
not only actual knowledge of a claims falsity, but also
reckless disregard for or intentional ignorance of the truth or
falsity of a claim. Because our facilities perform hundreds of
similar procedures a year for which they are paid by Medicare,
and there is a relatively long statute of limitations, a billing
error or cost reporting error could result in significant
penalties.

Under the qui tam, or whistleblower,
provisions of the False Claims Act, private parties may bring
actions on behalf of the federal government. Such private
parties, often referred to as relators, are entitled to share in
any amounts recovered by the government through trial or
settlement. Both direct enforcement activity by the government
and whistleblower lawsuits have increased significantly in
recent years and have increased the risk that a healthcare
company, like us, will have to defend a false claims action, pay
fines or

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be excluded from the Medicare and Medicaid
programs as a result of an investigation resulting from a
whistleblower case. Although we believe that our operations
materially comply with both federal and state laws, they may
nevertheless be the subject of a whistleblower lawsuit, or may
otherwise be challenged or scrutinized by governmental
authorities. A determination that we have violated these laws
could have a material adverse effect on us.




| |                                                         
| | --------------------------------------------------------
| | State Anti-Kickback and Physician
    Self-Referral Laws

Many states, including those in which we do or
expect to do business, have laws that prohibit payment of
kickbacks or other remuneration in return for the referral of
patients. Some of these laws apply only to services reimbursable
under state Medicaid programs. However, a number of these laws
apply to all healthcare services in the state, regardless of the
source of payment for the service. Based on court and
administrative interpretations of the federal Anti-Kickback
Statute, we believe that the Anti-Kickback Statute prohibits
payments only if they are intended to induce referrals. However,
the laws in most states regarding kickbacks have been subjected
to more limited judicial and regulatory interpretation than
federal law. Therefore, we can give you no assurances that our
activities will be found to be in compliance with these laws.
Noncompliance with these laws could subject us to penalties and
sanctions and have a material adverse effect on us.

A number of states, including those in which we
do or expect to do business, have enacted physician
self-referral laws that are similar in purpose to the Stark Law
but which impose different restrictions. Some states, for
example, only prohibit referrals when the physicians
financial relationship with a healthcare provider is based upon
an investment interest. Other state laws apply only to a limited
number of designated health services. Some states do not
prohibit referrals, but require that a patient be informed of
the financial relationship before the referral is made. We
believe that our operations are in material compliance with the
physician self-referral laws of the states in which our
facilities are located.



| |                                                      
| | -----------------------------------------------------
| | Health Information Security and Privacy
    Practices

The Health Insurance Portability and
Accountability Act of 1996 contains, among other measures,
provisions that require many organizations, including us, to
employ systems and procedures designed to protect each
patients individual healthcare information. The Health
Insurance Portability and Accountability Act of 1996 requires
the Department of Health and Human Services to issue rules to
define and implement patient privacy and security standards.
Among the standards that the Department of Health and Human
Services has adopted and will adopt pursuant to the Health
Insurance Portability and Accountability Act of 1996 are
standards for the following:



| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | electronic transactions and code sets;                                        
|
| |  | unique identifiers for providers, employers,
    health plans and individuals;
|
| |  | security and electronic signatures;                                           
|
| |  | privacy; and                                                                  
|
| |  | enforcement.                                                                  

On August 17, 2000, the Department of Health
and Human Services finalized the transaction standards. We were
required to comply with these standards by October 16,
2003. We submitted a compliance plan by October 16, 2002.
The transaction standards will require us to use standard code
sets established by the rule when transmitting health
information in connection with some transactions, including
health claims and health payment and remittance advices.

On February 20, 2003, the Department of
Health and Human Services issued a final rule that establishes,
in part, standards for the security of health information by
health plans, healthcare clearinghouses and healthcare providers
that maintain or transmit any health information in electronic
form, regardless of format. We are an affected entity under the
rule. These security standards require affected entities to
establish and maintain reasonable and appropriate
administrative, technical and physical

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safeguards to ensure integrity, confidentiality
and the availability of the information. The security standards
were designed to protect the health information against
reasonably anticipated threats or hazards to the security or
integrity of the information and to protect the information
against unauthorized use or disclosure. Although the security
standards do not reference or advocate a specific technology,
and affected entities have the flexibility to choose their own
technical solutions, we expect that the security standards will
require us to implement significant systems and protocols. The
compliance date for the initial implementation of the standards
set forth in the security rule is April 20, 2005.


Compliance with these standards will require
significant commitment and action by us. We have appointed
members of our management team to direct our compliance with
these standards. Although we and other covered entities
generally are not required to be in compliance with these
standards until April 20, 2005, implementation will require
us to conduct extensive preparation and make significant
expenditures. Although we estimate the total costs of
implementing these regulations to be $200,000, because the
security rule is quite new, we cannot yet predict the total
financial impact of the regulations on our operations.

On December 28, 2000, the Department of
Health and Human Services published a final rule establishing
standards for the privacy of individually identifiable health
information. This rule was amended May 31, 2002 and
August 14, 2002. These privacy standards apply to all
health plans, all healthcare clearinghouses and many healthcare
providers, including healthcare providers that transmit health
information in an electronic form in connection with certain
standard transactions. We are a covered entity under the final
rule. The privacy standards protect individually identifiable
health information held or disclosed by a covered entity in any
form, whether communicated electronically, on paper or orally.
These standards not only require our compliance with rules
governing the use and disclosure of protected health
information, but they also require us to impose those rules, by
contract, on any business associate to whom such information is
disclosed. A violation of the privacy standards could result in
civil money penalties of $100 per incident, up to a maximum
of $25,000 per person per year per standard. The final rule
also provides for criminal penalties of up to $50,000 and one
year in prison for knowingly and improperly obtaining or
disclosing protected health information, up to $100,000 and five
years in prison for obtaining protected health information under
false pretenses, and up to $250,000 and ten years in prison for
obtaining or disclosing protected health information with the
intent to sell, transfer or use such information for commercial
advantage, personal gain or malicious harm. The compliance date
for the privacy rule was April 14, 2003.

European Union

The European Commissions Directive on Data
Privacy went into effect in October 1998 and prohibits the
transfer of personal data to non-European Union countries that
do not meet the European adequacy standard for
privacy protection. The European Union privacy legislation
requires, among other things, the creation of government data
protection agencies, registration of databases with those
agencies, and in some instances prior approval before personal
data processing may begin.

The U.S. Department of Commerce, in
consultation with the European Commission, recently developed a
safe harbor framework to protect data transferred in
trans Atlantic businesses like ours. The safe harbor provides a
way for us to avoid experiencing interruptions in our business
dealings in the European Union. It also provides a way to avoid
prosecution by European authorities under European privacy laws.
By certifying to the safe harbor, we will notify the European
Union organizations that we provide adequate privacy
protection, as defined by European privacy laws. To certify to
the safe harbor, we must adhere to seven principles. These
principles relate to notice, choice, onward transfer or
transfers to third parties, access, security, data integrity and
enforcement.

We intend to formulate and execute programs that
will satisfy the requirements of the safe harbor. Even if we are
able to formulate programs that attempt to meet these
objectives, we may not be able to execute them successfully,
which could have a material adverse effect on our revenues,
profits or results of operations.

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| |      
| | -----
| | Spain

Under the Spanish General Health Act and related
regulations, private hospitals must report periodically to the
applicable health authorities. These reports, which describe a
hospitals activities, provide a method to identify and
control epidemics. Private hospitals in Spain must obtain a
number of licenses, permits and authorizations, including those
required to begin operating the facility and to dispense drugs.
In addition, private hospitals are subject to regular
inspections by the health and administrative authorities to
ensure compliance with applicable regulations. Private hospitals
must register their personal databases with the Data Protection
Agency. The Law of Personal Data Protection provides specific
protection for the health information portion of this personal
data. Private hospitals must adopt the necessary measures to
ensure the safety of the personal data. Violations of these
regulations could subject the hospital to administrative fines
and civil and criminal liability. Administrative fines range
from £3,000 (approximately $3,800) to £600,000
(approximately $750,000), or five times the value of the
products and services that are the subject of the violation,
depending on the seriousness of the violation. Health and
administrative authorities may also close a private hospital for
up to five years for serious violations. A violation that
endangers the public health is a criminal offense. We believe
that our operations in Spain are in material compliance with the
laws referred to in this paragraph.



| |               
| | --------------
| | United Kingdom

While there is no specific anti kickback
legislation in the United Kingdom that is unique to the medical
profession, general criminal legislation prohibits bribery and
corruption. Our private surgical hospitals in the United Kingdom
do not pay commissions to or share profits with referring
physicians, who invoice patients or insurers directly for fees
relating to the provision of their services. Private surgical
hospitals in the United Kingdom are required to register with
the local Social Services Authority pursuant to the Care
Standards Act of 2000, which provides for regular inspections of
the facility by the registering authority. The operation of a
private surgical hospital without registration is a criminal
offense. Under the Misuse of Drugs Act 1971, the supply,
possession or production of controlled drugs without a license
from the Secretary of State is a criminal offense. The Data
Protection Act 1998 requires private surgical hospitals to
register as data controllers. The processing of
personal data, such as patient information and medical records,
without prior registration is a criminal offense. We believe
that our operations in the United Kingdom are in material
compliance with the laws referred to in this paragraph.

Risk Factors

An investment in United Surgical Partners
International, Inc. involves certain risks. You should
carefully read the risks and uncertainties described below and
the other information included or incorporated by reference in
this report.



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on payments from third party
    payors, including government healthcare programs. If these
    payments are reduced, our revenue will decrease.

We are dependent upon private and governmental
third party sources of payment for the services provided to
patients in our surgery centers and private surgical hospitals.
The amount of payment a surgery center or private surgical
hospital receives for its services may be adversely affected by
market and cost factors as well as other factors over which we
have no control, including Medicare and Medicaid regulations and
the cost containment and utilization decisions of third party
payors. In the United Kingdom and Spain, a significant portion
of our revenues result from referrals of patients to our
hospitals by the national health system. We have no control over
the number of patients that are referred to the private sector
annually. Fixed fee schedules, capitation payment arrangements,
exclusion from participation in managed care programs or other
factors affecting payments for healthcare services over which we
have no control could also cause a reduction in our revenues.

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| |                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to acquire and develop
    additional surgery centers or private surgical hospitals on
    favorable terms, we may be unable to execute our acquisition and
    development strategy, which could limit our future
    growth.

Our strategy is to increase our revenues and
earnings by continuing to acquire surgical facility companies,
groups of surgical facilities and individual surgical facilities
and to develop additional surgical facilities. Our efforts to
execute our acquisition and development strategy may be affected
by our ability to identify suitable candidates and negotiate and
close acquisition and development transactions. We are currently
evaluating potential acquisitions and development projects and
expect to continue to evaluate acquisitions and development
projects in the foreseeable future. The surgical facilities we
develop typically incur losses in their early months of
operation and, until their case loads grow, they generally
experience lower total revenues and operating margins than
established surgical facilities, and we expect this to continue
to be the case. Historically, each of our newly developed
facilities has generated positive cash flow within the first
12 months of operations. We may not be successful in
acquiring other companies or additional surgical facilities,
developing surgical facilities or achieving satisfactory
operating results at acquired or newly developed facilities.
Further, the companies or assets we acquire in the future may
not ultimately produce returns that justify our related
investment. If we are not able to execute our acquisition and
development strategy, our ability to increase revenues and
earnings through future growth would be impaired.



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we incur material liabilities as a
    result of acquiring companies or surgical facilities, our
    operating results could be adversely affected.

Although we seek indemnification from prospective
sellers covering unknown or contingent liabilities, we may
acquire companies and surgical facilities that have material
liabilities for failure to comply with healthcare laws and
regulations or other past activities. Although we maintain
professional and general liability insurance, we do not
currently maintain insurance specifically covering any unknown
or contingent liabilities that may have occurred prior to the
acquisition of companies and surgical facilities. If we incur
these liabilities and are not indemnified or insured for them,
our operating results and financial condition could be adversely
affected.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | If we are unable to manage growth, we may
    be unable to achieve our growth strategy.

We have acquired interests in or developed all of
our surgery centers and private surgical hospitals since
February 1998. We expect to continue to expand our operations in
the future. As a young company, our rapid growth has placed, and
will continue to place, increased demands on our management,
operational and financial information systems and other
resources. Further expansion of our operations will require
substantial financial resources and management attention. To
accommodate our past and anticipated future growth, and to
compete effectively, we will need to continue to implement and
improve our management, operational and financial information
systems and to expand, train, manage and motivate our workforce.
Our personnel, systems, procedures or controls may not be
adequate to support our operations in the future. Further,
focusing our financial resources and management attention on the
expansion of our operations may negatively impact our financial
results. Any failure to implement and improve our management,
operational and financial information systems, or to expand,
train, manage or motivate our workforce, could reduce or prevent
our growth.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on our relationships with
    not-for-profit healthcare systems and their ability to
    successfully negotiate managed care contracts on behalf of the
    surgical facilities that we jointly own with healthcare systems.
    If we are not able to maintain our strategic alliances with
    these not-for-profit healthcare systems, or enter into new
    alliances, we may be unable to implement our business strategies
    successfully.

Our domestic business depends in part upon the
efforts and success of the not-for-profit healthcare systems
with which we have strategic alliances and the strength of our
alliances with those healthcare systems. Our business could be
adversely affected by any damage to those healthcare
systems reputations or to our alliances with them. In
addition, our financial results could be adversely affected if,
for any

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reason, our not-for-profit healthcare system
partners are not able to successfully negotiate managed care
contracts on behalf of our surgical facilities owned in
partnership with the healthcare systems. We may not be able to
maintain our existing alliance agreements on terms and
conditions favorable to us or enter into alliances with
additional not-for-profit healthcare systems. If we are unable
to maintain our existing strategic alliances on terms favorable
to us or enter into alliances with additional not-for-profit
healthcare systems, we may be unable to implement our business
strategies successfully.




| |                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on our relationships with the
    physicians who use our facilities. Our ability to provide
    medical services at our facilities would be impaired and our
    revenues reduced if we are not able to maintain these
    relationships.

Our business depends upon the efforts and success
of the physicians who provide medical services at our facilities
and the strength of our relationships with these physicians. Our
revenues would be reduced if we lost our relationship with one
or more key physicians or group of physicians or such physicians
or groups reduce their use of our facilities. In addition, any
failure of these physicians to maintain the quality of medical
care provided or to otherwise adhere to professional guidelines
at our surgical facilities or any damage to the reputation of a
key physician or group of physicians could damage our
reputation, subject us to liability and significantly reduce our
revenues.



| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | Our European operations are subject to
    unique risks, any of which, if they actually occur, could
    adversely affect our results.

Our international operations are located in Spain
and the United Kingdom. We expect that revenue from our European
operations will continue to account for a significant percentage
of our total revenue. Further, we may pursue additional
acquisitions in the United Kingdom, which would require
substantial financial resources and management attention. This
focus of financial resources and management attention could have
an adverse effect on our financial results. Our European
operations are subject, and as they continue to develop may
become increasingly subject, to risks such as:



| |   |                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | competition with government sponsored healthcare
    systems;                                                                                                                                                                                               
|
| |  | unforeseen changes in foreign regulatory
    requirements or domestic regulatory requirements affecting our
    foreign operations;                                                                                                                         
|
| |  | identifying, attracting, retaining and working
    successfully with qualified local management;                                                                                                                                                            
|
| |  | difficulties in staffing and managing
    geographically and culturally diverse, multinational
    operations; and                                                                                                                                          
|
| |  | the possibility of an economic downturn in the
    Western European countries in which we operate, which could
    adversely affect the ability or willingness of employers and
    individuals in these countries to purchase private health
    insurance.

These or other factors could have a material
adverse effect on our ability to successfully operate in Europe
and our financial condition and operations.



| |                                                              
| | -------------------------------------------------------------
| | Our significant indebtedness could limit
    our flexibility.

We are significantly leveraged and will continue
to have significant indebtedness in the future. Our acquisition
and development program requires substantial capital resources,
estimated to range from $40.0 million to $60.0 million
per year over the next three years, although the range could be
exceeded if attractive multi-facility acquisition opportunities
are identified. The operations of our existing surgical
facilities also require ongoing capital expenditures.

We currently have a $115.0 million revolving
credit facility and $28.5 million in cash. Based solely on
historical reported consolidated financial results,
approximately $36.6 million was available for borrowing at
December 31, 2003. Maximum availability under the facility
is based upon pro forma EBITDA including EBITDA from acquired
entities. Assuming historical purchase multiples of EBITDA of
potential

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acquisition targets approximately
$68.3 million would be available for borrowing as of
December 31, 2003. We will need to incur additional
indebtedness to fund future acquisitions, developments and
capital expenditures. However, we may be unable to obtain
sufficient financing on terms satisfactory to us, or at all. As
a result, our acquisition and development activities would have
to be curtailed or eliminated and our financial results would be
adversely affected.


The degree to which we are leveraged could have
other important consequences to you, including the following:



| |   |                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we must dedicate a substantial portion of our
    cash flows from operations to the payment of principal and
    interest on our indebtedness, reducing the funds available for
    our operations;                    
|
| |  | a portion of our borrowings are at variable rates
    of interest, making us vulnerable to increases in interest rates;                                                                                                
|
| |  | we may be more highly leveraged than some of our
    competitors, which could place us at a competitive disadvantage;                                                                                                  
|
| |  | our degree of leverage may make us more
    vulnerable to a downturn in our business or the economy
    generally; and                                                                                                 
|
| |  | the terms of our existing credit arrangements
    contain numerous financial and other restrictive covenants,
    including restrictions on paying dividends, incurring additional
    indebtedness and selling assets.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Our revenues may be reduced by changes in
    payment methods or rates under the Medicare or Medicaid
    programs.

The Department of Health and Human Services and
the states in which we perform surgical procedures for Medicaid
patients may revise the Medicare and Medicaid payment methods or
rates in the future. Any such changes could have a negative
impact on the reimbursements we receive for our surgical
services from the Medicare program and the state Medicaid
programs. We do not know at this time when or to what extent
revisions to such payment methodologies will be implemented.



| |                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we and our not-for-profit healthcare
    system partners are unable to successfully negotiate contracts
    and maintain satisfactory relationships with managed care
    organizations or other third party payors, our revenues may
    decrease.

Our competitive position has been, and will
continue to be, affected by initiatives undertaken during the
past several years by major domestic purchasers of healthcare
services, including federal and state governments, insurance
companies and employers, to revise payment methods and monitor
healthcare expenditures in an effort to contain healthcare
costs. As a result of these initiatives, managed care companies
such as health maintenance and preferred provider organizations,
which offer prepaid and discounted medical service packages,
represent a growing segment of healthcare payors, the effect of
which has been to reduce the growth of domestic healthcare
facility margins and revenue. Similarly, in the United Kingdom,
most patients at private surgical hospitals have private
healthcare insurance, either paid for by the patient or received
as part of their employment compensation. Our private surgical
hospitals in the United Kingdom contract with healthcare
insurers on an annual basis to provide services to insured
patients.

Our private surgical hospitals in Spain contract
with healthcare insurers on an annual basis to provide services
to insured patients. As the majority of our revenues in Spain
are derived from private insurance companies, the annual
negotiation of price increases is very important to the
profitability of our hospitals in that country. In addition, our
Spanish hospitals contract with the Spanish public healthcare
system, which awards contracts based on a hospitals
satisfaction of specified criteria. The Spanish public
healthcare system has the right to give priority to hospitals
owned by non-profit entities if the efficiency, quality and cost
conditions of these entities are comparable to those of for
profit hospitals. Our contracts with the

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Spanish public healthcare system typically have a
term of less than one year and are renewable at the sole
discretion of the Spanish public healthcare system. Any
termination of an existing third party contract could result in
a significant loss of revenues and could have a material adverse
effect on us.


As an increasing percentage of domestic patients
become subject to healthcare coverage arrangements with managed
care payors, we believe that our success will continue to depend
upon our and our not-for-profit healthcare system partners
ability to negotiate favorable contracts on behalf of our
facilities with managed care organizations, employer groups and
other private third party payors. If we are unable to enter into
these arrangements on satisfactory terms in the future we could
be adversely affected. Many of these payors already have
existing provider structures in place and may not be able or
willing to change their provider networks. Similarly, if we fail
to negotiate contracts with healthcare insurers in the United
Kingdom and Spain on favorable terms, or if we fail to remain on
insurers networks of approved hospitals, such failure
could have a material adverse effect on us. We could also
experience a material adverse effect to our operating results
and financial condition as a result of the termination of
existing third party payor contracts.



| |                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Efforts to regulate the construction,
    acquisition or expansion of healthcare facilities could prevent
    us from acquiring additional surgery centers or private surgical
    hospitals, renovating our existing facilities or expanding the
    breadth of services we offer.

Many states in the United States require prior
approval for the construction, acquisition or expansion of
healthcare facilities or expansion of the services they offer.
When considering whether to approve such projects, these states
take into account the need for additional or expanded healthcare
facilities or services. In a number of states in which we
operate, including Alabama, Georgia, Florida, Tennessee and
New York, we are required to obtain certificates of need
for capital expenditures exceeding a prescribed amount, changes
in bed capacity or services offered and under various other
circumstances. Following a period of decline, the number of
states requiring certificates of need is once again on the rise
as state legislators are looking at this process as one way to
control rising healthcare costs. Other states in which we now or
may in the future operate may adopt certificate of need
legislation or regulatory provisions. Our costs of obtaining a
certificate of need have ranged up to $500,000. Spain also
requires prior approval for the construction or expansion of
healthcare facilities. In addition, private surgical hospitals
in Spain must obtain a number of licenses, including a license
to operate a pharmacy or to perform tests using radioactive
materials. Although we have not previously been denied a
certificate of need, we may not be able to obtain the
certificates of need or other required approvals for additional
or expanded facilities or services in the future. In addition,
at the time we acquire a facility, we may agree to replace or
expand the acquired facility. If we are unable to obtain the
required approvals, we may not be able to acquire additional
surgery centers or private surgical hospitals, expand the
healthcare services provided at these facilities or replace or
expand acquired facilities.



| |                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | New federal and state legislative and
    regulatory initiatives relating to patient privacy and
    electronic data security could require us to expend substantial
    sums acquiring and implementing new information and transaction
    systems, which could negatively impact our financial
    results.

There are currently numerous legislative and
regulatory initiatives at the U.S. state and federal levels
addressing patient privacy concerns and standards for the
exchange of electronic health information. These provisions are
intended to enhance patient privacy and the effectiveness and
efficiency of healthcare claims and payment transactions. In
particular, the Administrative Simplification Provisions of the
Health Insurance Portability and Accountability Act of 1996 may
require us to acquire and implement expensive new computer
systems and to adopt business procedures designed to protect the
privacy of each of our patients individual health
information.

On August 17, 2000, the Department of Health
and Human Services issued final regulations establishing
electronic data transmission standards that healthcare providers
must use when submitting or receiving certain healthcare data
electronically. We were required to and did comply with these
regulations by October 16, 2003.

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On February 20, 2003, the Department of
Health and Human Services issued final regulations to protect
the security of health-related information. These security
standards will require healthcare providers to implement
organizational and technical practices to protect the security
of patient information.

On December 28, 2000, the Department of
Health and Human Services released final regulations regarding
the privacy of healthcare information. The deadline for
complying with the privacy regulations was April 14, 2003.
The privacy regulations extensively regulate the use and
disclosure of individually identifiable healthcare information,
whether communicated electronically, on paper or verbally. The
regulations also provide patients with significant new rights
related to understanding and controlling how their health
information is used or disclosed. We believe that we are in
compliance with the policies and procedures set forth in the
privacy regulations.

These regulations are expected to have a
financial impact on the healthcare industry because they impose
extensive new requirements and restrictions on the use and
disclosure of identifiable patient information. We estimate the
total cost of these systems and procedures to be $200,000.
However, because of the proposed nature of the security
regulations, we cannot predict the total financial or other
impact of these regulations on our business and compliance with
these regulations could require us to spend substantial sums,
which could negatively impact our financial results. We believe
that we are in material compliance with existing state and
federal regulations relating to patient privacy. However, if we
fail to comply with the federal privacy regulations, we could
incur civil penalties up to $25,000 per calendar year for
each violation and criminal penalties with fines up to
$250,000 per violation.



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to comply with applicable laws
    and regulations, we could suffer penalties or be required to
    make significant changes to our operations.

We are subject to many laws and regulations at
the federal, state and local government levels in the domestic
and European jurisdictions in which we operate. These laws and
regulations require that our healthcare facilities meet various
licensing, certification and other requirements, including those
relating to:



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | physician ownership of our domestic facilities;                                           
|
| |  | the adequacy of medical care, equipment,
    personnel, operating policies and procedures;
|
| |  | building codes;                                                                           
|
| |  | licensure, certification and accreditation;                                               
|
| |  | billing for services;                                                                     
|
| |  | maintenance and protection of records; and                                                
|
| |  | environmental protection.                                                                 

We believe that we are in material compliance
with applicable laws and regulations. However, if we fail or
have failed to comply with applicable laws and regulations, we
could suffer civil or criminal penalties, including the loss of
our licenses to operate and our ability to participate in
Medicare, Medicaid and other government sponsored healthcare
programs. A number of initiatives have been proposed during the
past several years to reform various aspects of the healthcare
system, both domestically and in the European jurisdictions in
which we operate. In the future, different interpretations or
enforcement of existing or new laws and regulations could
subject our current practices to allegations of impropriety or
illegality, or could require us to make changes in our
facilities, equipment, personnel, services, capital expenditure
programs and operating expenses. Current or future legislative
initiatives or government regulation may have a material adverse
effect on our operations or reduce the demand for our services.

In pursuing our growth strategy, we may expand
our presence into new geographic markets, including additional
foreign countries. In entering a new geographic market, we will
be required to comply with laws and regulations of jurisdictions
that may differ from those applicable to our current operations.
If we are unable to comply with these legal requirements in a
cost-effective manner, we may be unable to enter new geographic
markets.

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| |                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If a federal or state agency asserts a
    different position or enacts new laws or regulations regarding
    illegal remuneration under the Medicare or Medicaid programs, we
    may be subject to civil and criminal penalties, experience a
    significant reduction in our revenues or be excluded from
    participation in the Medicare and Medicaid
    programs.

The federal Anti-Kickback Statute prohibits the
offer, payment, solicitation or receipt of any form of
remuneration in return for referring items or services payable
by Medicare, Medicaid, or any other federally funded healthcare
program. Additionally, the Anti-Kickback Statute prohibits any
form of remuneration in return for purchasing, leasing, or
ordering or arranging for or recommending the purchasing,
leasing or ordering of items or services payable by Medicare,
Medicaid or any other federally funded healthcare program. The
Anti-Kickback Statute is very broad in scope and many of its
provisions have not been uniformly or definitively interpreted
by existing case law or regulations. Violations of the
Anti-Kickback Statute may result in substantial civil or
criminal penalties, including criminal fines of up to $25,000
and civil penalties of up to $50,000 for each violation, plus
three times the remuneration involved or the amount claimed and
exclusion from participation in the Medicare and Medicaid
programs. The exclusion, if applied to our surgery centers or
private surgical hospitals, could result in significant
reductions in our revenues, which could have a material adverse
effect on our business.

In July 1991, the Department of Health and Human
Services issued final regulations defining various safe
harbors. Two of the safe harbors issued in 1991 apply to
business arrangements similar to those used in connection with
our surgery centers and private surgical hospitals: the
investment interest safe harbor and the
personal services and management contracts safe
harbor. However, the structure of the limited partnerships and
limited liability companies operating our surgery centers and
private surgical hospitals, as well as our various business
arrangements involving physician group practices, do not satisfy
all of the requirements of either safe harbor. Therefore, our
business arrangements with our surgery centers, private surgical
hospitals and physician groups did not and do not qualify for
safe harbor protection from government review or
prosecution under the Anti-Kickback Statute. Since there is no
legal requirement that transactions with referral sources fit
within a safe harbor, a business arrangement that does not
substantially comply with the relevant safe harbor is not
necessarily illegal under the Anti-Kickback Statute.

On November 19, 1999, the Department of
Health and Human Services promulgated final regulations creating
additional safe harbor provisions, including a safe harbor that
applies to physician ownership of or investment interests in
surgery centers. The surgery center safe harbor protects four
types of investment arrangements: (1) surgeon owned surgery
centers; (2) single specialty surgery centers;
(3) multi-specialty surgery centers; and
(4) hospital/physician surgery centers. Each category has
its own requirements with regard to what type of physician may
be an investor in the surgery center. In addition to the
physician investor, the categories permit an
unrelated investor, who is a person or entity that
is not in a position to provide items or services related to the
surgery center or its investors. Our business arrangements with
our surgery centers typically consist of one of our subsidiaries
being an investor in each limited partnership or limited
liability company that owns the surgery center, in addition to
providing management and other services to the surgery center.
As a result, these business arrangements do not comply with all
the requirements of the surgery center safe harbor, and,
therefore, are not immune from government review or prosecution.

Although we believe that our business
arrangements do not violate the Anti-Kickback Statute, a
government agency or a private party may assert a contrary
position. Additionally, new domestic federal or state laws may
be enacted that would cause our relationships with the physician
investors to become illegal or result in the imposition of
penalties against us or our facilities. If any of our business
arrangements with physician investors were deemed to violate the
Anti-Kickback Statute or similar laws, or if new domestic
federal or state laws were enacted rendering these arrangements
illegal, our business could be adversely affected.

Also, most of the states in which we operate have
adopted anti-kickback laws, many of which apply more broadly to
all third-party payors, not just to federal healthcare programs.
Many of the state laws do

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not have regulatory safe harbors comparable to
the federal provisions and have only rarely been interpreted by
the courts or other governmental agencies. We believe that our
business arrangements do not violate these state laws.
Nonetheless, if our arrangements were found to violate any of
these anti-kickback laws, we could be subject to significant
civil and criminal penalties that could adversely affect our
business.




| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If physician self-referral laws are
    interpreted differently or if other legislative restrictions are
    issued, we could incur significant sanctions and loss of
    reimbursement revenues.

The U.S. federal physician self-referral
law, commonly referred to as the Stark Law, prohibits a
physician from making a referral for a designated health service
to an entity if the physician or a member of the
physicians immediate family has a financial relationship
with the entity, unless an exception applies. The original Stark
Law, commonly known as Stark I, only addressed referrals
involving clinical laboratory services. However, in 1995
additional legislation, commonly known as Stark II,
expanded the ban on self-referrals by adding the following
services to the definition of designated health
services: physical therapy services; occupational therapy
services; radiology services; radiation therapy services and
supplies; durable medical equipment and supplies; parenteral and
enteral nutrients, equipment and supplies; prosthetics,
orthotics, and prosthetic devices and supplies; home health
services; outpatient prescription drugs; and inpatient and
outpatient hospital services.

The Department of Health and Human Services
issued a portion of the Stark II final rule, which it called
Phase I, on January 4, 2001. The
Phase I regulations, which generally took effect on
January 4, 2002, address some of the ownership and
investment interest exceptions and compensation arrangement
exceptions found in the Stark Law. Phase II of the final
rule will address, among other things, any comments made in
response to the Phase I final rule, the remaining ownership
and investment interest exceptions and compensation arrangement
exceptions, the reporting requirements, sanctions and the Stark
Laws application to the Medicaid program. It is not known
when the Phase II final rule will be issued. Under current
regulations interpreting Stark I and under the Phase I
regulations, services that would otherwise constitute designated
health services, but that are paid by Medicare as part of the
surgery center payment rate, are not designated health services
for purposes of the Stark Law.

In addition, we believe that physician ownership
of surgery centers is not prohibited by similar self-referral
statutes enacted at the state level. However, the Stark Law and
similar state statutes are subject to different interpretations
with respect to many important provisions. Violations of these
self-referral laws may result in substantial civil or criminal
penalties, including large civil monetary penalties and
exclusion from participation in the Medicare and Medicaid
programs. Exclusion of our surgery centers or private surgical
hospitals from these programs through future judicial or agency
interpretation of existing laws or additional legislative
restrictions on physician ownership or investments in healthcare
entities could result in significant loss of reimbursement
revenues.

In Spain, there is legislation that prohibits
physicians who have contracted with the Spanish public
healthcare system on an exclusive basis from rendering services
in a private hospital. Spanish legislation also prohibits
physicians rendering services within the Spanish public
healthcare system on a non-exclusive basis from rendering
services to Spanish public healthcare system patients in private
hospitals such as ours. Violations of these laws could result in
administrative fines and termination of our alliance with the
Spanish public healthcare system. If the physicians who use our
Spanish facilities violate these regulations and their or our
contracts are terminated with the Spanish public healthcare
system, preventing them from continuing to use our facilities,
we could experience a significant loss of revenues in Spain.



| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Companies within the healthcare industry
    continue to be the subject of federal and state investigations,
    which increases the risk that we may become subject to
    investigations in the future.

Both federal and state government agencies, as
well as private payors, have heightened and coordinated civil
and criminal enforcement efforts as part of numerous ongoing
investigations of healthcare organizations. These investigations
relate to a wide variety of topics, including the following:



| |   |                                      
| | - | -------------------------------------
| |  | cost reporting and billing practices;

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| |   |                                                       
| | - | ------------------------------------------------------
| |  | quality of care;                                      
|
| |  | financial relationships with referral
    sources; and
|
| |  | medical necessity of services provided.               

In addition, the Office of the Inspector General
of the Department of Health and Human Services and the
Department of Justice have, from time to time, undertaken
national enforcement initiatives that focus on specific billing
practices or other suspected areas of abuse. Moreover, another
trend impacting healthcare providers is the increased use of the
federal False Claims Act, particularly by individuals who bring
actions under that law. Such qui tam or
whistleblower actions allow private individuals to
bring actions on behalf of the government alleging that a
healthcare provider has defrauded the federal government. If the
government intervenes and prevails in the action, the defendant
may be required to pay three times the actual damages sustained
by the government, plus mandatory civil monetary penalties of
between $5,500 and $11,000 for each false claim submitted to the
government. As part of the resolution of a qui tam case, the
party filing the initial complaint may share in a portion of any
settlement or judgment. If the government does not intervene in
the action, the qui tam plaintiff may pursue the action
independently. Additionally, some states have adopted similar
whistleblower and false claims provisions. Although companies in
the healthcare industry have been, and may continue to be,
subject to qui tam actions, we are unable to predict the impact
of such actions on our business, financial position or results
of operations.



| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If laws governing the corporate practice of
    medicine change, we may be required to restructure some of our
    domestic relationships which may result in significant costs to
    us and divert other resources.

The laws of various domestic jurisdictions in
which we operate or may operate in the future do not permit
business corporations to practice medicine, exercise control
over physicians who practice medicine or engage in various
business practices, such as fee-splitting with physicians. The
interpretation and enforcement of these laws vary significantly
from state to state. We are not required to obtain a license to
practice medicine in any jurisdiction in which we own or operate
a surgery center or private surgical hospital because our
facilities are not engaged in the practice of medicine. The
physicians who utilize our facilities are individually licensed
to practice medicine. In most instances, the physicians and
physician group practices performing medical services at our
facilities do not have investment or business relationships with
us other than through the physicians ownership interests
in the partnerships or limited liability companies that own and
operate our facilities and the service agreements we have with
some of those physicians.

As a result of our acquisition of OrthoLink, we
provide management services to a number of physicians and
physician group practices affiliated with OrthoLink. Although we
believe that our arrangements with these and other physicians
and physician group practices comply with applicable laws, a
government agency charged with enforcement of these laws, or a
private party, might assert a contrary position. If our
arrangements with these physicians and physician group practices
were deemed to violate state corporate practice of medicine,
fee-splitting or similar laws, or if new laws are enacted
rendering our arrangements illegal, we may be required to
restructure these arrangements, which may result in significant
costs to us and divert other resources.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | If domestic regulations change, we may be
    obligated to purchase some or all of the ownership interests of
    the physicians affiliated with us.

Upon the occurrence of various fundamental
regulatory changes, we will be obligated to purchase some or all
of the ownership interests of the physicians affiliated with us
in the limited partnerships or limited liability companies that
own and operate our surgery centers and private surgical
hospitals. The regulatory changes that could create this
obligation include changes that:



| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | make illegal the referral of Medicare or other
    patients to our surgical facilities by physicians affiliated
    with us;

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| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | create the substantial likelihood that cash
    distributions from the limited partnerships or limited liability
    companies through which we operate our surgical facilities to
    physicians affiliated with us would be illegal; or
|
| |  | make illegal the ownership by the physicians
    affiliated with us of interests in the partnerships or limited
    liability companies through which we own and operate our
    surgical facilities.                                    

At this time, we are not aware of any regulatory
amendments or proposed changes that would trigger this
obligation. Some of our limited partnership and limited
liability company agreements allow us to use shares of our
common stock as consideration for the purchase of a
physicians ownership interest. The use of shares of our
common stock for that purpose would dilute the ownership
interests of our common stockholders. In the event that we are
required to purchase all of the physicians ownership
interests and our common stock does not maintain a sufficient
valuation, we could be required to use our cash resources for
the acquisitions, the total cost of which we estimate to be up
to $130.0 million. The creation of these obligations and
the possible termination of our affiliation with these
physicians could have a material adverse effect on us.



| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The recently adopted Medicare Prescription
    Drug, Improvement, and Modernization Act of 2003 could restrict
    our ability to operate our facilities licensed as hospitals and
    could adversely impact our reimbursement revenues.

The Stark Law includes an exception that permits
physicians to refer Medicare and Medicaid patients to hospitals
in which they have an ownership interest under certain
circumstances. However, the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003, signed
into law on December 8, 2003, created an 18-month
moratorium, beginning on the date of enactment, during which
physicians may not refer Medicare or Medicaid patients to
specialty hospitals in which they have an ownership
interest. The Medicare Prescription Drug Act defines
specialty hospitals as hospitals that are primarily
or exclusively engaged in the care and treatment of
(1) patients with a cardiac condition, (2) patients
with an orthopedic condition, (3) patients receiving a
surgical procedure or (4) any other specialized category of
services that the Secretary of the Department of Health and
Human Services designates as inconsistent with the purpose of
the hospital ownership exception. The moratorium does not apply
to hospitals that were in operation prior to, or under
development as of, November 18, 2003, as long as the
hospital (a) does not increase the number of physician
investors beyond the number it had on November 18, 2003,
(b) does not change the type of categories of services it
provides from the type it provided as of November 18, 2003,
(c) does not increase its bed size except on its main
campus, and then only by 50% or five beds, whichever is greater,
and (d) meets other requirements that may be specified by
the Secretary of the Department of Health and Human Services.

The Medicare Prescription Drug Act includes
general guidelines for determining whether a hospital is a
specialty hospital, and for determining whether a
hospital was under development as of
November 18, 2003. It vests the Secretary of the Department
of Health and Human Services with substantial discretion to
interpret these guidelines. Thus far, neither the Secretary, nor
the Centers for Medicare and Medicaid Services, the agency that
will be primarily responsible for implementing the moratorium,
has issued any official guidance interpreting the legislation.
As a result, we cannot state with certainty how the legislation
will apply to our operations.

The Medicare Prescription Drug Act also directs
the Department of Health and Human Services and the Medicare
Payment Advisory Commission (MedPAC) to conduct studies of
specialty hospitals by February 2005, and to prepare reports to
Congress recommending any needed legislative or administrative
changes in the Stark laws exception for physician
ownership in hospitals.

Five of our facilities are currently licensed as
hospitals and three facilities that will be licensed as
hospitals are currently under construction. Depending upon how
the Secretary implements the language of the Medicare
Prescription Drug Act, some or all of these facilities may fit
within the Medicare Prescription Drug Acts definition of
specialty hospital. If so, we may not be able to
increase the number of physician investors, significantly
increase the number of licensed beds or change the type of
specialty

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services that we provide in any of our surgical
hospitals. These legal constraints on the operation of these
facilities could have an adverse financial effect on these
facilities. Moreover, the studies and recommendations by MedPAC
and the Department of Health and Human Services may not be
favorable to specialty hospitals. If future legislation is
enacted that prohibits all physician referrals to specialty
hospitals in which the physicians own an interest, even if those
facilities already exist, our specialty hospitals could be
materially adversely affected.


The Medicare Prescription Drug Act also limits
increases in Medicare reimbursement rates for ambulatory surgery
centers. Under the Medicare Prescription Drug Act, the 2%
increase in Medicare reimbursement rates for ambulatory surgery
centers that became effective on October 1, 2003 will be
limited beginning April 1, 2004 to an amount equal to the
increase in the Consumer Price Index for all urban consumers as
estimated by the Secretary of the Department of Health and Human
Services for the 12-month period ended March 31, 2003,
minus 3.0 percentage points. The Medicare Prescription Drug
Act also provides that there will be no increase in these rates
from the beginning of fiscal year 2005 through the end of
calendar year 2009. The Medicare Prescription Drug Act also
directs the General Accounting Office to conduct a study
comparing the cost of procedures in surgery centers to the cost
of procedures performed in hospital outpatient departments. The
General Accounting Office is directed to submit a report on its
study to Congress by no later than January 1, 2005. The
Secretary of the Department of Health and Human Services is
directed to take this report into account in developing a new
ambulatory surgery center payment system so that it is effective
on or after January 1, 2006 and not later than
January 1, 2008. The Medicare Prescription Drug Act
provides that, in the year that the new payment system is
implemented, it must be designed to result in the same aggregate
amount of expenditures for surgical services provided at
ambulatory surgery centers as would be made if the new system
were not adopted. The rate changes mandated by the Medicare
Prescription Drug Act could have an adverse effect on the
revenues of our centers, but we cannot predict at this time the
full effect of the payment rate revisions.



| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | If we become subject to significant legal
    actions, we could be subject to substantial uninsured
    liabilities.

In recent years, physicians, hospitals and other
healthcare providers have become subject to an increasing number
of legal actions alleging malpractice, product liability or
related legal theories. Many of these actions involve large
monetary claims and significant defense costs. We do not employ
any of the physicians who conduct surgical procedures at our
facilities and the governing documents of each of our surgery
centers require physicians who conduct surgical procedures at
our surgery centers to maintain stated amounts of insurance.
Additionally, to protect us from the cost of these claims, we
maintain professional malpractice liability insurance and
general liability insurance coverage in amounts and with
deductibles that we believe to be appropriate for our
operations. If we become subject to claims, however, our
insurance coverage may not cover all claims against us or
continue to be available at a cost allowing us to maintain
adequate levels of insurance. If one or more successful claims
against us were not covered by or exceeded the coverage of our
insurance, we could be adversely affected.



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to effectively compete for
    physicians, strategic relationships, acquisitions and managed
    care contracts, our business could be adversely
    affected.

The healthcare business is highly competitive. We
compete with other healthcare providers, primarily hospitals, in
recruiting physicians and contracting with managed care payors
in each of our markets. In Spain and the United Kingdom, we also
compete with these countries national health systems in
recruiting healthcare professionals. There are major
unaffiliated hospitals in each market in which we operate. These
hospitals have established relationships with physicians and
payors. In addition, other companies either are currently in the
same or similar business of developing, acquiring and operating
surgery centers and private surgical hospitals or may decide to
enter our business. Many of these companies have greater
financial, research, marketing and staff resources than we do.
We may also compete with some of these companies for entry into
strategic relationships with not-for-profit healthcare systems
and healthcare professionals. If we are unable to compete
effectively with any of these entities, we

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may be unable to implement our business
strategies successfully and our business could be adversely
affected.




| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we have a limited operating history
    and our senior management has been key to our growth, we may be
    adversely affected if we lose any member of our senior
    management.

We are highly dependent on our senior management,
including Donald E. Steen and William H. Wilcox.
Mr. Steen is our chairman and chief executive officer
through March 31, 2004 and thereafter will be chairman.
Mr. Wilcox is our president through March 31, 2004 and
thereafter will additionally be our chief executive officer.
Although we have employment agreements with Mr. Steen and
Mr. Wilcox and other senior managers, we do not maintain
key man life insurance policies on any of our
officers. Because our senior management has contributed greatly
to our growth since inception, the loss of key management
personnel or our inability to attract, retain and motivate
sufficient numbers of qualified management personnel could have
a material adverse effect on us.



| |                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may have a special legal responsibility
    to the holders of ownership interests in the entities through
    which we own surgical facilities, and that responsibility may
    prevent us from acting solely in our own best interests or the
    interests of our stockholders.

Our ownership interests in surgery centers and
private surgical hospitals generally are held through limited
partnerships, limited liability partnerships or limited
liability companies. We typically maintain an interest in a
limited partnership, limited liability partnership or limited
liability company in which physicians or physician practice
groups hold limited partnership, limited liability partnership
or membership interests. As general partner or manager of these
entities, we may have a special responsibility, known as a
fiduciary duty, to manage these entities in the best interests
of the other interest holders. We also have a duty to operate
our business for the benefit of our stockholders. As a result,
we may encounter conflicts between our responsibility to the
other interest holders and our responsibility to our
stockholders. For example, we have entered into management
agreements to provide management services to all but one of our
domestic surgery centers in exchange for a fee. Disputes may
arise as to the nature of the services to be provided or the
amount of the fee to be paid. In these cases, we are obligated
to exercise reasonable, good faith judgment to resolve the
disputes and may not be free to act solely in our own best
interests or the interests of our stockholders. Disputes may
also arise between us and our affiliated physicians with respect
to a particular business decision or regarding the
interpretation of the provisions of the applicable limited
partnership agreement or limited liability company agreement. If
we are unable to resolve a dispute on terms favorable or
satisfactory to us, our business may be adversely affected.



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We do not have exclusive control over the
    distribution of revenues from some of our domestic operating
    entities and may be unable to cause all or a portion of the
    revenues of these entities to be distributed.

All of the domestic surgery centers in which we
have ownership interests are limited partnerships, limited
liability partnerships or limited liability companies in which
we own, directly or indirectly, general partnership or managing
member interests. Our limited partnership, limited liability
partnership and limited liability company agreements, which are
typically with the physicians who perform procedures at our
surgery centers, usually provide for the quarterly cash
distribution of net revenues from operations, less amounts to
satisfy obligations such as the entities non-recourse debt
and capitalized lease obligations, operating expenses and
working capital. The creditors of each of these limited
partnerships, limited liability partnerships and limited
liability companies are entitled to payment of the
entities obligations to them, when due and payable, before
ordinary cash distributions or distributions in the event of
liquidation, reorganization or insolvency may be made. We
generally control the entities that function as the general
partner of the limited partnerships or the managing member of
the limited liability companies through which we conduct
operations. However, we do not have exclusive control in some
instances over the amount of net revenues distributed from some
of our operating entities. If we are unable to cause sufficient
revenues to be distributed from one or more of these entities,
our relationships with the physicians who

35



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##### Table of Contents



have an interest in these entities may be damaged
and we could be adversely affected. We may not be able to
resolve favorably any dispute regarding revenue distribution or
other matters with a healthcare system with which we share
control of one of these entities. Further, the failure to
resolve a dispute with these healthcare systems could cause the
entity we jointly control to be dissolved.




| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions of our charter documents,
    Delaware law and our stockholder rights plan could discourage a
    takeover you may consider favorable or the removal of our
    current management.

Some provisions of our certificate of
incorporation and bylaws may discourage, delay or prevent a
merger or acquisition that you may consider favorable or the
removal of our current management. These provisions:



| |   |                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorize the issuance of blank check
    preferred stock;                                                                                                                             
|
| |  | provide for a classified board of directors with
    staggered, three-year terms;                                                                                                        
|
| |  | prohibit cumulative voting in the election of
    directors;                                                                                                                             
|
| |  | prohibit our stockholders from acting by written
    consent without the approval of our board of directors;                                                                             
|
| |  | limit the persons who may call special meetings
    of stockholders; and                                                                                                                 
|
| |  | establish advance notice requirements for
    nominations for election to the board of directors or for
    proposing matters to be approved by stockholders at stockholder
    meetings.

In addition, our certificate of incorporation
prohibits the amendment of many of these provisions in our
certificate of incorporation by our stockholders unless the
amendment is approved by the holders of at least 80% of our
shares of common stock.

Delaware law may also discourage, delay or
prevent someone from acquiring or merging with us. In addition,
purchase rights distributed under our stockholder rights plan
will cause substantial dilution to any person or group
attempting to acquire us without conditioning the offer on our
redemption of the rights. As a result, our stock price may
decrease and you might not receive a change of control premium
over the then-current market price of the common stock.






|        |           
|------- | ----------
|Item 2. | Properties

The response to this item is included in
Item 1.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

From time to time, we may be named as a party to
legal claims and proceedings in the ordinary course of business.
We are not aware of any other claims or proceedings against us
or our subsidiaries that might have a material adverse impact on
us.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

None.

36



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##### Table of Contents






PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Market for Common
Stock.Our common stock has traded on
the Nasdaq National Market under the symbol USPI
since June 8, 2001. As of March 4, 2004, there were
approximately 200 record holders of our common stock. The
following table sets forth for the periods indicated the high
and low sales price per share of our common stock as reported on
the Nasdaq National Market.

|                              |                |      |   |       |  |  |   |       | 
|----------------------------- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|                              |                | High |   | Low  
|                              |                |      |   |      
|Year Ended December 31, 2002: |                |      |   |       |  |  |   |      
|                              | First Quarter  |      | $ | 23.20 |  |  | $ | 16.50 | 
|                              | Second Quarter |      |   | 33.38 |  |  |   | 22.52 | 
|                              | Third Quarter  |      |   | 32.32 |  |  |   | 21.15 | 
|                              | Fourth Quarter |      |   | 24.35 |  |  |   | 13.65 | 
|Year Ended December 31, 2003: |                |      |   |       |  |  |   |      
|                              | First Quarter  |      | $ | 20.21 |  |  | $ | 14.29 | 
|                              | Second Quarter |      |   | 24.62 |  |  |   | 16.70 | 
|                              | Third Quarter  |      |   | 29.35 |  |  |   | 22.37 | 
|                              | Fourth Quarter |      |   | 34.50 |  |  |   | 27.33 | 

We have not declared or paid any dividends on our
common stock and do not anticipate doing so in the foreseeable
future. We currently intend to retain all future earnings to
fund the development and growth of our business. The payment of
any future dividends will be at the discretion of our board of
directors and will depend on:



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | any applicable contractual restrictions limiting
    our ability to pay dividends;
|
| |  | our earnings;                                                                     
|
| |  | our financial condition;                                                          
|
| |  | our ability to fund our capital
    requirements; and                             
|
| |  | other factors our board deems relevant.                                           

Our credit facilities and the indenture governing
the senior subordinated notes of our wholly owned finance
subsidiary, United Surgical Partners Holdings, Inc.,
currently place restrictions on our ability to pay cash
dividends on our common stock.

Recent Sales of Unregistered
Securities.The following information
relates to all securities issued or sold by us in 2003, as
adjusted to reflect our one for three reverse stock split
completed on June 7, 2001, that were not registered under
the Securities Act. Each of the transactions described below was
conducted in reliance upon the exemptions from registration
provided in Section 4(2) of the Securities Act and the
rules and regulations promulgated thereunder.

On March 10, 2003, the Company issued
3,613 shares of common stock to Arthur L.
Raines, Jr. in connection with his execution of an
affiliation agreement with the Company.

On May 5, 2003, the Company issued
2,856 shares of common stock to Gary Rea in connection with
his execution of an affiliation agreement with the Company.

On May 5, 2003, the Company issued
2,639 shares of common stock to Jon L. Hyman in
connection with his execution of an affiliation agreement with
the Company.

On May 5, 2003, the Company issued
2,863 shares of common stock to Terrence M. Philbin in
connection with his execution of an affiliation agreement with
the Company.

37



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##### Table of Contents



On May 5, 2003, the Company issued
3,214 shares of common stock to David Corall in connection
with his execution of an affiliation agreement with the Company.






|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data

The selected consolidated statement of operations
data set forth below for the years ended December 31, 2003,
2002, 2001, 2000 and 1999, and the consolidated balance sheet
data at December 31, 2003, 2002, 2001, 2000 and 1999 are
derived from our consolidated financial statements, which have
been audited by KPMG LLP, our independent auditors.

The historical results presented below are not
necessarily indicative of results to be expected for any future
period. The comparability of the financial and other data
included in the table is affected by our loss on early
retirement of debt in 2001, our impairment of investment
securities in 2002, and our acquisitions of OrthoLink on
February 12, 2001 and of Aspen Healthcare Holdings Limited
on April 6, 2000 as well as other acquisitions completed
since our inception. For a more detailed explanation of this
financial data, see Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the consolidated financial statements and related notes
included elsewhere in this report.

|                                                               |                                     |                          |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |        |  
|-------------------------------------------------------------- | ----------------------------------- | ------------------------ | ------- | ------- | - | ---- | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | - | - | ------ | ------ | -
|                                                               |                                     |                         
|                                                               |                                     | Years Ended December 31,
|                                                               |                                     |                         
|                                                               |                                     | 2003                     |         | 2002    |   | 2001 |         | 2000    |   | 1999
|                                                               |                                     |                          |         |         |   |      |         |         |   |     
|                                                               |                                     |                         
|                                                               |                                     | (In thousands)          
|Consolidated Statement of Operations
    Data:                 |                                     |                          |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Total revenues                                                 |                                     | $                        | 446,269 |         |   | $    | 342,386 |         |   | $    | 244,368 |         |   | $ | 138,408 |         |   | $ | 70,413 |       
|Operating expenses excluding depreciation and
    amortization |                                     |                          | 316,678 |         |   |      | 244,827 |         |   |      | 184,478 |         |   |   | 116,621 |         |   |   | 65,635 |       
|Depreciation and amortization                                  |                                     |                          | 32,187  |         |   |      | 26,530  |         |   |      | 26,116  |         |   |   | 14,138  |         |   |   | 7,875  |       
|                                                               |                                     |                          |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Operating income (loss)                                        |                                     |                          | 97,404  |         |   |      | 71,029  |         |   |      | 33,774  |         |   |   | 7,649   |         |   |   | (3,097 | )     
|Other income (expense):                                        |                                     |                          |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|                                                               | Interest income                     |                          |         | 1,132   |   |      |         | 792     |   |      |         | 852     |   |   |         | 912     |   |   |        | 329    |  
|                                                               | Interest expense                    |                          |         | (28,545 | ) |      |         | (25,721 | ) |      |         | (18,120 | ) |   |         | (12,540 | ) |   |        | (3,145 | )
|                                                               | Loss on early retirement of debt    |                          |         |        |   |      |         |        |   |      |         | (7,466  | ) |   |         |        |   |   |        |       |  
|                                                               | Impairment of investment securities |                          |         |        |   |      |         | (1,057  | ) |      |         |        |   |   |         |        |   |   |        |       |  
|                                                               | Other                               |                          |         | 736     |   |      |         | (151    | ) |      |         | 146     |   |   |         | (782    | ) |   |        | (362   | )
|                                                               |                                     |                          |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Income (loss) before minority interest                         |                                     |                          | 70,727  |         |   |      | 44,892  |         |   |      | 9,186   |         |   |   | (4,761  | )       |   |   | (6,275 | )     
|Minority interests in income of                                |                                     |                          |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|                                                               | consolidated subsidiaries           |                          |         | (24,311 | ) |      |         | (14,846 | ) |      |         | (7,558  | ) |   |         | (2,332  | ) |   |        | (118   | )
|Income tax (expense) benefit                                   |                                     |                          | (16,540 | )       |   |      | (10,446 | )       |   |      | 1,122   |         |   |   | (1,070  | )       |   |   | (451   | )     
|                                                               |                                     |                          |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Net income (loss)                                              |                                     | $                        | 29,876  |         |   | $    | 19,600  |         |   | $    | 2,750   |         |   | $ | (8,163  | )       |   | $ | (6,844 | )     
|                                                               |                                     |                          |         |         |   |      |         |         |   |      |         |         |   |   |         |         |   |   |        |       
|Net income (loss) attributable to common
    stockholders(a)   |                                     | $                        | 29,876  |         |   | $    | 19,600  |         |   | $    | 66      |         |   | $ | (14,134 | )       |   | $ | (8,540 | )     

38



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##### Table of Contents



|                                                           |                                    |                                                    |         |        |  |      |        |        |  |      |        |        |  |   |        |       |   |   |       |       |  
|---------------------------------------------------------- | ---------------------------------- | -------------------------------------------------- | ------- | ------ |  | ---- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ----- | - | - | ----- | ----- | -
|                                                           |                                    |                                                   
|                                                           |                                    | Years Ended December 31,                          
|                                                           |                                    |                                                   
|                                                           |                                    | 2003                                               |         | 2002   |  | 2001 |        | 2000   |  | 1999
|                                                           |                                    |                                                    |         |        |  |      |        |        |  |     
|                                                           |                                    |                                                   
|                                                           |                                    | (In thousands, except per share and facility data)
|Share Data:                                                |                                    |                                                    |         |        |  |      |        |        |  |      |        |        |  |   |        |       |   |   |       |      
|Net income (loss) attributable to common
    stockholders: |                                    |                                                    |         |        |  |      |        |        |  |      |        |        |  |   |        |       |   |   |       |      
|                                                           | Basic earnings (loss) per share:   |                                                    | $       | 1.10   |  |      | $      | 0.79   |  |      |        |       |  |   | $      | (1.80 | ) |   | $     | (1.17 | )
|                                                           | Diluted earnings (loss) per share: |                                                    | $       | 1.06   |  |      | $      | 0.75   |  |      |        |       |  |   | $      | (1.80 | ) |   | $     | (1.17 | )
|Weighted average number of common shares:                  |                                    |                                                    |         |        |  |      |        |        |  |      |        |        |  |   |        |       |   |   |       |      
|                                                           | Basic                              |                                                    |         | 27,133 |  |      |        | 24,925 |  |      |        | 18,380 |  |   |        | 7,850 |   |   |       | 7,308 |  
|                                                           | Diluted                            |                                                    |         | 28,244 |  |      |        | 26,056 |  |      |        | 19,291 |  |   |        | 7,850 |   |   |       | 7,308 |  
|Other Data:                                                |                                    |                                                    |         |        |  |      |        |        |  |      |        |        |  |   |        |       |   |   |       |      
|Number of facilities operated as of the end of
    period  |                                    |                                                    | 74      |        |  |      | 64     |        |  |      | 49     |        |  |   | 33     |       |   |   | 28    |      
|EBITDA(b)                                                  |                                    | $                                                  | 129,591 |        |  | $    | 97,559 |        |  | $    | 59,890 |        |  | $ | 21,787 |       |   | $ | 4,778 |      
|EBITDA less minority interests(b)                          |                                    |                                                    | 105,280 |        |  |      | 82,713 |        |  |      | 52,332 |        |  |   | 19,455 |       |   |   | 4,660 |      
|Cash flows from operating activities                       |                                    |                                                    | 86,832  |        |  |      | 59,205 |        |  |      | 40,857 |        |  |   | 11,002 |       |   |   | 4,190 |      

|                                 |  |                        |         |      |  |      |         |      |  |      |         |  |  |   |         |   |  |   |         | 
|-------------------------------- |  | ---------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | - |  | - | ------- | 
|                                 |  |                       
|                                 |  | As of December 31,    
|                                 |  |                       
|                                 |  | 2003                   |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                 |  |                        |         |      |  |      |         |      |  |     
|                                 |  |                       
|                                 |  | (Dollars in thousands)
|Consolidated Balance Sheet Data: |  |                        |         |      |  |      |         |      |  |      |         |  |  |   |         |   |  |   |         | 
|Working capital                  |  | $                      | 29,957  |      |  | $    | 51,412  |      |  | $    | 40,285  |  |  | $ | (58,213 | ) |  | $ | 10,461  | 
|Cash and cash equivalents        |  |                        | 28,519  |      |  |      | 47,571  |      |  |      | 33,881  |  |  |   | 3,451   |   |  |   | 3,817   | 
|Total assets                     |  |                        | 870,509 |      |  |      | 728,758 |      |  |      | 556,857 |  |  |   | 330,396 |   |  |   | 176,703 | 
|Total debt                       |  |                        | 304,744 |      |  |      | 276,703 |      |  |      | 238,681 |  |  |   | 187,767 |   |  |   | 72,684  | 
|Redeemable preferred stock       |  |                        |        |      |  |      |        |      |  |      |        |  |  |   | 32,819  |   |  |   | 36,040  | 
|Total stockholders equity       |  |                        | 390,655 |      |  |      | 322,261 |      |  |      | 226,527 |  |  |   | 48,797  |   |  |   | 36,571  | 



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Includes preferred stock dividends of $2,684,
    $5,971, and $1,696 for the years ended December 31, 2001,
    2000, and 1999, respectively. No preferred stock dividends were
    declared in 2003 or 2002. No common stock dividends were
    declared or paid in any period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(b) |  | EBITDA is calculated as operating income plus
    depreciation and amortization. United Surgical Partners
    International uses EBITDA and EBITDA less minority interests as
    analytical indicators for purposes of allocating resources and
    assessing performance. 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 generally accepted accounting principles, and the items
    excluded from EBITDA are significant components in understanding
    and assessing financial performance. Because EBITDA is not a
    measurement determined in accordance with generally accepted
    accounting principles and is thus susceptible to varying
    calculation methods, EBITDA as presented by United Surgical
    Partners International may not be comparable to similarly titled
    measures of other companies. See Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Results of Operations for a
    reconciliation of EBITDA and EBITDA less minority interests to
    net income and net cash provided by operating activities, the
    most directly comparable GAAP financial measures.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operation

The following discussion and analysis of our
financial condition and results of operations should be read in
conjunction with Selected Consolidated Financial
Data and our consolidated financial statements and related
notes included elsewhere in this report.

39



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##### Table of Contents



Overview

We operate surgery centers and private surgical
hospitals in the United States and Western Europe. As of
December 31, 2003, we operated 74 facilities, consisting of
62 in the United States, nine in Spain, and three in the United
Kingdom. Of the 62 U.S. facilities, 35 are jointly owned
with 16 major not-for-profit healthcare systems. Overall, as of
December 31, 2003, we held ownership interests in 72 of the
facilities and operated the remaining two facilities under
management contracts.

We have grown rapidly, as reflected in the
increase of our revenues from $70.4 million for the year
ended December 31, 1999, our first full year in operation,
to $446.3 million for the year ended December 31,
2003. This growth during our initial years of operations was
primarily driven by the acquisition and construction of new
facilities. While we continue to construct new facilities and to
selectively acquire existing facilities, much of our growth in
2003 resulted from increased revenues at our existing
facilities. Approximately 84% of our facilities are located in
the United States, where we partner with surgeons and often with
not-for-profit healthcare systems to operate ambulatory surgery
centers and private surgical hospitals (collectively
short-stay surgical facilities). Due in part to
advancements in medical technology, the number of surgeries
performed in an outpatient, or ambulatory, setting has steadily
increased for more than two decades. Ambulatory surgery centers,
which specialize in these non-emergency surgical cases, are able
to perform more surgeries and at lower cost than acute care
hospitals. These efficiencies make short stay surgical
facilities attractive to physicians, who can perform more
surgeries, and to payors, who can reimburse such facilities at
lower rates than acute care hospitals. We share ownership with
local physicians in all of our U.S. facilities, except for
two where we hold no ownership, and additionally earn a monthly
fee for managing the operations of each facility. Increasingly,
we also share ownership with a not-for-profit healthcare system
(hospital partner), which we believe helps us more
quickly establish relationships with physicians, communities,
suppliers, and payors. Our success thus far with these three-way
partnerships, measured in terms of adding facilities, increasing
revenues, and improving operating margins, has made
relationships with hospital partners an increasingly prominent
part of our strategy. At December 31, 2003, we had 16 such
relationships, a number that has doubled in the past two years,
which now encompass 35 of our 62 U.S. facilities.

In Spain and the United Kingdom we operate
private hospitals. Both countries have government sponsored
health care, but waiting lists resulting from delays to access
diagnostic procedures as well as to have elective surgery at
government sponsored facilities are driving an increasing number
of patients to use our facilities, paying for procedures either
from personal funds or through private insurance, offered by an
increasing number of employers as a benefit to their employees.
Since the demand for health care services exceeds the capacity
of government sponsored facilities, our facilities also
supplement the national health services as public hospitals
periodically refer overload cases to our facilities. We have
expanded selectively in these two countries, having most
recently constructed a cancer treatment facility at one of our
three hospitals in the London area.

Our continued growth and success depends on our
ability to continue to grow volumes at our existing facilities,
to successfully open new facilities we develop, and to maintain
productive relationships with our hospital partners. We have
significant opportunities to operate more facilities with
hospital partners in the future, particularly if we are able to
expand our existing relationships to include more of the
geographic markets in which our partners operate, but also
through the initiation of new relationships with hospital
partners.

Critical Accounting Policies and
Estimates

Our discussion and analysis of our results of
operations and liquidity and capital resources are based on our
consolidated financial statements which have been prepared in
accordance with generally accepted accounting principals. Our
management is required to make certain estimates and assumptions
during the preparation of our consolidated financial statements
in accordance with generally accepted accounting principles.
These estimates and assumptions impact the reported amount of
assets and liabilities and disclosures of contingent assets and
liabilities as of the date of the consolidated financial
statements. They

40



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##### Table of Contents



also impact the reported amount of net earnings
during any period. Estimates are based on information available
as of the date financial statements are prepared and
accordingly, actual results could differ from those estimates.
Critical accounting policies and estimates are defined as those
that are both most important to the portrayal of our financial
condition and operating results and require managements
most subjective judgments. The following critical accounting
policies and estimates have a more significant impact on our
financial statements than others, due to the size of the
underlying financial statement elements.




| |              
| | -------------
| | Consolidation

Generally, we do not wholly own the facilities we
operate. As discussed in Results of Operations, we
operate a majority of our facilities through joint ventures with
physicians. Increasingly, these joint ventures also include a
not-for-profit healthcare system as a partner. We generally have
a leadership role in these facilities through a significant
voting and economic interest and a contract to manage each
facilitys operations, but the degree of control we have
varies from facility to facility. Accordingly we consolidate the
financial results of 40 of the facilities we operate, including
one in which we hold no ownership but control its operations
through a long-term service agreement, and account for the other
33 under the equity method. We hold no ownership in the other
facility, which we currently operate under a management contract
but do not control. In addition, we account for passive
investments, which represent less than 1% of our investment in
unconsolidated affiliates, under the cost method.

Our determination of the appropriate
consolidation method to follow with respect to our investments
in subsidiaries and affiliates is based on the amount of control
we have, combined with our ownership level, in the underlying
entity. Our consolidated financial statements include the
accounts of the Company, its wholly owned subsidiaries, and
other subsidiaries over which we have control. Our investments
in subsidiaries in which we have the ability to exercise
significant influence over operating and financial policies, but
do not control (including subsidiaries where we have less than
20% ownership) are accounted for on the equity method. All of
our other investments are accounted for on the cost method.

Accounting for an investment as consolidated
versus equity method generally has no impact on our net income
or stockholders equity in any accounting period, but does
impact individual income statement and balance sheet balances,
as consolidation effectively grosses up our income statement and
balance sheet. However, if control or influence aspects of an
equity method investment were different, it could result in us
being required to account for an investment by consolidation or
using the cost method. Under the cost method, the investor does
not record its share of income or losses of the investee until
it receives dividends or distributions from the investee.
Conversely, under either consolidation or equity method
accounting, the investor effectively records its share of the
underlying entitys net income or loss based on its
ownership percentage. At December 31, 2003,
$0.1 million of the Companys total investment in
unconsolidated affiliates of $32.1 million relates to
investments that are accounted for using the cost method and the
remaining $32.0 million represents investments in
unconsolidated affiliates accounted for using the equity method.



| |                    
| | -------------------
| | Revenue Recognition

We recognize revenue in accordance with Staff
Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, as updated, which has four basic
criteria that must be met before revenue is recognized:



| |   |                                                                   
| | - | ------------------------------------------------------------------
| |  | Existence of persuasive evidence that an
    arrangement exists;  
|
| |  | Delivery has occurred or services have been
    rendered;         
|
| |  | The sellers price to the buyer is fixed and
    determinable; and
|
| |  | Collectibility is reasonably assured.                             

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Our revenue recognition policies are consistent
with these criteria. Our revenues that are subject to the most
judgment are those patient service revenues that are not
generated under contracted or government mandated fee schedules
or discount arrangements. Approximately 13% of our net revenues
for the year ended December 31, 2003 were generated by
noncontracted and nongovernment payors. The allowances that we
record for these revenues are based on our best estimates of
expected actual reimbursement based primarily on historical
collections for similar transactions. The collection cycle for
patient services revenue is relatively short, typically ranging
from 30 to 60 days depending upon payor and geographic
norms, which allows us to evaluate our estimates frequently. Our
revenues earned under management and other service contracts are
typically based upon objective formulas driven by an
entitys financial performance and are generally earned and
paid monthly.



| |             
| | ------------
| | Income Taxes

We account for income taxes under the asset and
liability method. In assessing the realizability of deferred tax
assets, we consider whether it is more likely than not that some
portion or all of the deferred tax assets will be realized. The
ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income by taxing jurisdiction
during the periods in which those temporary differences become
deductible. If, in our opinion, it is more likely than not that
some or all of the deferred tax assets may not be realized,
deferred tax assets are reduced by a valuation allowance.



| |                  
| | -----------------
| | Intangible Assets

We also consider our accounting policy regarding
intangible assets to be a critical accounting policy given the
significance of intangible assets as compared to our total
assets and the recent changes in accounting for intangible
assets required under Statement of Financial Accounting
Standards No. 142, Accounting for Goodwill and Other
Intangible Assets(SFAS No. 142), which was issued
by the Financial Accounting Standards Board on July 20,
2001 and was adopted by us as of January 1, 2002.
SFAS No. 142 requires the cessation of amortization of
goodwill and identifiable intangible assets with indefinite
useful lives and requires that goodwill and all intangible
assets with indefinite useful lives be tested for impairment at
least annually. We adopted this standard on January 1,
2002, determining that our reporting units are at the operating
segment (country) level, and that the majority of our
intangible assets, which consist primarily of contracts to
manage certain facilities, have indefinite useful lives. Most of
our management contracts have evergreen renewal provisions that
do not contemplate a specific termination date. Some of the
contracts have provisions which make it possible for the
facilitys other owners to terminate them at certain dates
and under certain circumstances. Based on our history with these
contracts, we consider their useful lives to be indefinite and
therefore we do not amortize them unless facts and circumstances
indicate that it is no longer considered likely that a contract
can be renewed without substantial cost. Neither the
transitional impairment tests performed as of January 1,
2002, nor the annual tests for impairment performed in 2002 and
2003, identified any impairment of the carrying value of any
reporting unit or of any indefinite-lived intangible assets. In
addition, we continue to review the carrying values of
amortizable intangible assets whenever facts and circumstances
change in a manner that indicates their carrying values may not
be recoverable.

Acquisitions, Equity Investments and
Development Projects

During 2003, three surgery centers and one
surgical hospital developed by us in the United States opened
and began performing cases.

During June 2003, we acquired a 65% interest in
an ambulatory surgery center in Austin, Texas for
$10.8 million in cash.

During April 2003, we acquired a private surgical
hospital in London, England for approximately
£8.7 million ($13.8 million), of which the
payment of approximately £0.4 million
($0.7 million) remains deferred pending the resolution of
certain contingencies.

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In March 2003, we acquired a private surgical
hospital in Marbella, Spain, for
approximately 8.4 million
($9.0 million) in cash. In addition, we agreed to pay up to
an additional total
of 4.3 million
($5.4 million), depending on the resolution of certain
contingencies over the next four years.

We also engage in investing transactions that are
not business combinations, consisting primarily of purchases and
sales of noncontrolling equity interests in surgical facilities
and the investment of additional cash in surgical facilities
under development. During the year ended December 31, 2003,
these transactions resulted in net cash outflows totaling
$18.3 million, of which $6.1 million was paid to
acquire a noncontrolling interest in a surgery center in
Torrance, California, $4.4 million was paid to acquire a
noncontrolling interest in a recently constructed facility in
Dallas, Texas, and $3.8 million of previously deferred
purchase price was paid to the former owners of a facility in a
suburb of Dallas, Texas based on the financial performance of
that facility. During the year ended December 31, 2002,
these transactions resulted in net cash outflows of
$12.4 million. The most notable 2002 transactions were
acquisitions of noncontrolling interests in surgery centers in
the following markets: Austintown, Ohio; Destin, Florida; East
Brunswick, New Jersey, through a newly formed joint venture with
Robert Wood Johnson University Hospital; and Atlanta, Georgia.

In addition, in December 2003 we made an advance
payment of $9.8 million to the sellers of the Torrance,
California facility that increased our ownership level in that
center from the noncontrolling interest we acquired earlier in
2003 to a controlling interest, effective January 1, 2004.

During 2002, four surgery centers and two private
surgical hospitals developed by us in the United States opened
and began performing cases.

In December 2002, we acquired an additional 29%
of a surgery center in Torrance, California, in which we had
previously been a minority owner, for $9.3 million in cash,
bringing our total ownership in the facility to 63% as of
December 31, 2002 and triggering our consolidation of the
facility in our financial statements.

In October 2002, we acquired an 80% interest in a
surgery center in Lyndhurst, Ohio, for $8.1 million in cash.

In August 2002, with an effective date of
July 1, 2002, we acquired an additional 35% interest in a
surgery center in Arlington, Texas (Arlington) for total
consideration of $8.0 million, consisting of
$6.9 million in cash and $1.1 million of our common
stock, bringing our total ownership interest in the center to
45%. Because we own a majority of a subsidiary that owns a
majority of the surgery center and maintains effective control
through this ownership interest and through our operation of the
center pursuant to a management contract, we consolidated the
results of Arlingtons operations in our financial
statements.

In June 2002, we acquired a 57% interest in a
surgery center in Middleburg Heights, Ohio, a suburb of
Cleveland, for $2.1 million in cash.

In May 2002, we acquired a 67% interest in a
surgery center in Corpus Christi, Texas for $10.8 million
in cash.

In March 2002, we acquired SURGICOE Corporation,
which owned, managed, and developed surgical facilities in
Georgia, Oklahoma, and Texas. We paid the shareholders of
SURGICOE approximately $5.3 million in cash. The terms of
the agreement provide for us to make additional payments in the
future should certain facilities, including some that are
operational and some that are currently under development, meet
specified performance targets.

In February 2002, we acquired a surgical hospital
in Murcia, Spain, for total consideration of approximately
$8.2 million in cash (of which $7.5 million was paid
upon the consummation of the acquisition and $0.7 million
was paid on the first anniversary of the consummation of the
acquisition) and approximately $12.6 million in assumed
capital lease obligations.

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During the fourth quarter of 2001, we acquired
ownership interests in four surgery centers through separate
transactions. In October 2001, we acquired a 66% interest in a
surgical facility in Sarasota, Florida for a total consideration
of approximately $3.4 million in cash and approximately
$1.3 million in assumed debt. During November 2001, we
completed two acquisitions: (1) an 80% interest in a
surgical facility in West Covina, California (Los Angeles area)
for total consideration of approximately $10.8 million in
cash and approximately $1.2 million in assumed debt and
(2) an 83% interest in a surgical facility in
Fredericksburg, Virginia, for total consideration of
approximately $6.3 million in cash, a warrant to acquire
25,000 shares of our common stock at a price equal to
approximately $16.45 per share and approximately $700,000
in assumed debt. In December 2001, we expanded our presence in
the Los Angeles area by acquiring a 35% interest in a surgical
facility in Torrance, California for total consideration of
approximately $11.0 million.

During July 2001, we acquired a controlling
interest in a surgery center in Fort Worth, Texas for
approximately $14.0 million in cash. We had previously
operated this surgery center under a management contract. In
addition, in July and August 2001, we opened newly developed
surgery centers in Knoxville, Tennessee, and Lawrenceville,
Georgia.

On February 12, 2001, we completed a merger
with OrthoLink. The transaction was funded through the issuance
of 3,367,651 shares of our common stock to OrthoLink
stockholders. OrthoLink was incorporated in 1996 and, as of
February 1, 2001, held a direct or indirect ownership
interest in eight surgery centers. We also held an ownership
interest in and managed one of these centers. OrthoLink managed
six of the eight surgery centers in which it held an ownership
interest and managed two additional surgery centers in which it
had no ownership interest. In addition, OrthoLink has service
agreements with physician groups in several states.
OrthoLinks physician practice management operations are
not, and are not expected to be in the future, a material part
of our business.

Sources of Revenue

Revenues primarily include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | net patient service revenue for the facilities
    that we consolidate for financial reporting purposes, which are
    typically those in which we have ownership interests of greater
    than 50% or otherwise maintain effective control;                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | management and administrative services revenue
    earned from management contracts, whereby we manage the
    operations of surgical facilities in which we have varying
    levels of ownership, and from contracts to provide consulting
    and specific administrative services to physicians. Management
    services revenue and expenses earned from and incurred by
    facilities that we consolidate for financial reporting purposes
    are eliminated in consolidation and therefore not included in
    management services revenue or operating expenses in our
    consolidated statements of operations and accordingly have no
    impact on consolidated net income; and
|
| |  | our share of the net income or loss of the
    unconsolidated facilities that we account for under the equity
    method of accounting. These amounts are included in revenues as
    these operations are central to our business strategy. Through
    our contracts to manage these facilities, we have an active role
    in their operations. The level of our corporate resources
    devoted to fulfilling these responsibilities is significant and
    generally equal to that devoted to the operations of the
    facilities we consolidate for financial reporting purposes.                                                                                                    

44



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The following table summarizes our revenues by
type and as a percentage of total revenue for the periods
indicated:

|                                                |  |              |     |      |  |      |     |   |  |  |     |  
|----------------------------------------------- |  | ------------ | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                                |  |             
|                                                |  | Years Ended 
|                                                |  | December 31,
|                                                |  |             
|                                                |  | 2003         |     | 2002 |  | 2001
|                                                |  |              |     |      |  |     
|Net patient service revenue                     |  |              | 88  | %    |  |      | 87  | % |  |  | 86  | %
|Management and administrative services revenue  |  |              | 8   |      |  |      | 9   |   |  |  | 11  |  
|Equity in earnings of unconsolidated affiliates |  |              | 3   |      |  |      | 3   |   |  |  | 2   |  
|Other income                                    |  |              | 1   |      |  |      | 1   |   |  |  | 1   |  
|                                                |  |              |     |      |  |      |     |   |  |  |     |  
|Total revenue                                   |  |              | 100 | %    |  |      | 100 | % |  |  | 100 | %

The percentage of our total revenues attributable
to management and administrative services decreased to 8% and 9%
in 2003 and 2002 from 11% in 2001 primarily as a result of the
additional net patient service revenue resulting from our
acquiring controlling interests in additional surgical
facilities during all three years. Our management and
administrative services revenues are earned from the following
types of activities:

|                                                                              |                                                          |                          |        |        |  |      |        |        |  |   |        |        | 
|----------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------ | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                                              |                                                          |                         
|                                                                              |                                                          | Years Ended December 31,
|                                                                              |                                                          |                         
|                                                                              |                                                          | 2003                     |        | 2002   |  | 2001
|                                                                              |                                                          |                          |        |        |  |     
|Management of surgical facilities                                             |                                                          | $                        | 15,169 |        |  | $    | 9,556  |        |  | $ | 5,594  |       
|Consulting and other services provided to
    physicians and related entities |                                                          |                          | 21,036 |        |  |      | 21,682 |        |  |   | 20,555 |       
|                                                                              |                                                          |                          |        |        |  |      |        |        |  |   |        |       
|                                                                              | Total management and administrative service
    revenues |                          | $      | 36,205 |  |      | $      | 31,238 |  |   | $      | 26,149 | 

The majority of our management and administrative
services revenue earned from providing services to physicians
and related entities resulted from our acquisition of OrthoLink
Physicians Corporation (OrthoLink) on February 12, 2001.
Our results for the year ended December 30, 2001 include
only ten and one-half months of OrthoLink operations.

The following table reflects the summarized
results of the unconsolidated facilities that we account for
under the equity method of accounting (dollars in thousands):

|                                                                                            |  |                          |         |      |  |      |         |   |  |   |        |  
|------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                                                            |  |                         
|                                                                                            |  | Years Ended December 31,
|                                                                                            |  |                         
|                                                                                            |  | 2003                     |         | 2002 |  | 2001
|                                                                                            |  |                          |         |      |  |     
|Total revenues                                                                              |  | $                        | 240,848 |      |  | $    | 141,166 |   |  | $ | 84,278 |  
|Depreciation and amortization                                                               |  |                          | 11,538  |      |  |      | 7,189   |   |  |   | 4,552  |  
|Operating income                                                                            |  |                          | 76,252  |      |  |      | 41,913  |   |  |   | 23,733 |  
|Interest expense, net                                                                       |  |                          | 7,246   |      |  |      | 4,077   |   |  |   | 1,974  |  
|Net income                                                                                  |  |                          | 67,914  |      |  |      | 37,279  |   |  |   | 21,371 |  
|Long-term debt                                                                              |  |                          | 77,899  |      |  |      | 66,596  |   |  |   | 27,264 |  
|USPIs equity in earnings of unconsolidated
    affiliates                                  |  |                          | 15,074  |      |  |      | 9,454   |   |  |   | 5,879  |  
|USPIs implied weighted average ownership
    percentage based on affiliates net income(1) |  |                          | 22.2    | %    |  |      | 25.4    | % |  |   | 27.5   | %
|USPIs implied weighted average ownership
    percentage based on affiliates debt(2)       |  |                          | 23.9    | %    |  |      | 25.6    | % |  |   | 23.2   | %
|Unconsolidated facilities operated at period end                                            |  |                          | 33      |      |  |      | 26      |   |  |   | 17     |  



---



|    |                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our weighted average percentage ownership in our
    unconsolidated affiliates calculated based on USPIs equity
    in earnings of unconsolidated affiliates divided by the total
    net income of the affiliates for each respective year.

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|    |                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Our weighted average percentage ownership in our
    unconsolidated affiliates calculated based on the total debt of
    each affiliate multiplied by the percentage ownership USPI held
    in the affiliate as of the end of each respective year.

The following table summarizes our revenues by
operating segment:

|               |       |              |    |      |   |      |    |     |   |  |    |     |  
|-------------- | ----- | ------------ | -- | ---- | - | ---- | -- | --- | - |  | -- | --- | -
|               |       |             
|               |       | Years Ended 
|               |       | December 31,
|               |       |             
|               |       | 2003         |    | 2002 |   | 2001
|               |       |              |    |      |   |     
|United States  |       |              | 59 | %    |   |      | 60 | %   |   |  | 55 | %  
|Western Europe |       |              | 41 |      |   |      | 40 |     |   |  | 45 |    
|               |       |              |    |      |   |      |    |     |   |  |    |    
|               | Total |              |    | 100  | % |      |    | 100 | % |  |    | 100 | %

The geographic location of our acquisition and
development activities during 2003 and 2002 was the primary
determinant in the changes in proportions of revenue we earned
from each operating segment. From December 31, 2001 to
December 31, 2002, the number of U.S. facilities we
operated increased from 39 to 54, while the number of Western
Europe facilities we operated remained at ten. From
December 31, 2002 to December 31, 2003, we only added
two Western Europe facilities, as compared to eight
U.S. facilities, but both of the Western Europe facilities
are consolidated for financial reporting purposes, which results
in 100% of their revenues being included in our consolidated
revenues. In contrast, only three consolidated
U.S. facilities were added from December 31, 2002 to
December 31, 2003, and U.S. facilities are generally
smaller than our facilities in Western Europe.

Results of Operations

The following table summarizes certain statements
of income items expressed as a percentage of revenues for the
periods indicated:

|                                                                |  |                          |       |      |  |      |       |   |  |  |       |  
|--------------------------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                                                |  |                         
|                                                                |  | Years Ended December 31,
|                                                                |  |                         
|                                                                |  | 2003                     |       | 2002 |  | 2001
|                                                                |  |                          |       |      |  |     
|Total revenues                                                  |  |                          | 100.0 | %    |  |      | 100.0 | % |  |  | 100.0 | %
|Operating expenses, excluding depreciation and
    amortization |  |                          | 71.0  |      |  |      | 71.5  |   |  |  | 75.5  |  
|Depreciation and amortization                                   |  |                          | 7.2   |      |  |      | 7.8   |   |  |  | 10.7  |  
|                                                                |  |                          |       |      |  |      |       |   |  |  |       |  
|Operating income                                                |  |                          | 21.8  |      |  |      | 20.7  |   |  |  | 13.8  |  
|Minority interests in income of consolidated
    subsidiaries   |  |                          | 5.4   |      |  |      | 4.3   |   |  |  | 3.1   |  
|Interest and other expense, net                                 |  |                          | 6.0   |      |  |      | 7.7   |   |  |  | 10.0  |  
|                                                                |  |                          |       |      |  |      |       |   |  |  |       |  
|Income before income taxes                                      |  |                          | 10.4  |      |  |      | 8.8   |   |  |  | 0.7   |  
|Income tax (expense) benefit                                    |  |                          | (3.7  | )    |  |      | (3.1  | ) |  |  | 0.4   |  
|                                                                |  |                          |       |      |  |      |       |   |  |  |       |  
|Net income                                                      |  |                          | 6.7   |      |  |      | 5.7   |   |  |  | 1.1   |  
|                                                                |  |                          |       |      |  |      |       |   |  |  |       |  
|EBITDA less minority interests                                  |  |                          | 23.6  |      |  |      | 24.2  |   |  |  | 21.4  |  

46



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The following table reconciles EBITDA and EBITDA
less minority interests to net income and to net cash provided
by operating activities:

|                                                                                                                                      |  |                          |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                                                      |  |                         
|                                                                                                                                      |  | Years Ended December 31,
|                                                                                                                                      |  |                         
|                                                                                                                                      |  | 2003                     |         | 2002 |  | 2001
|                                                                                                                                      |  |                          |         |      |  |     
|Net income                                                                                                                            |  | $                        | 29,876  |      |  | $    | 19,600  |   |  | $ | 2,750   |  
|Income tax expense (benefit)                                                                                                          |  |                          | 16,540  |      |  |      | 10,446  |   |  |   | (1,122  | )
|Interest and other nonoperating expense                                                                                               |  |                          | 26,677  |      |  |      | 26,137  |   |  |   | 24,588  |  
|Depreciation and amortization                                                                                                         |  |                          | 32,187  |      |  |      | 26,530  |   |  |   | 26,116  |  
|                                                                                                                                      |  |                          |         |      |  |      |         |   |  |   |         |  
|EBITDA less minority interests                                                                                                        |  |                          | 105,280 |      |  |      | 82,713  |   |  |   | 52,332  |  
|Minority interests in income of Consolidated
    subsidiaries                                                                         |  |                          | 24,311  |      |  |      | 14,846  |   |  |   | 7,558   |  
|                                                                                                                                      |  |                          |         |      |  |      |         |   |  |   |         |  
|EBITDA                                                                                                                                |  |                          | 129,591 |      |  |      | 97,559  |   |  |   | 59,890  |  
|Provision for doubtful accounts                                                                                                       |  |                          | 7,772   |      |  |      | 6,330   |   |  |   | 3,517   |  
|Amortization of debt issue costs, discount and
    deferred compensation                                                              |  |                          | 4,784   |      |  |      | 1,747   |   |  |   | 427     |  
|Interest and other nonoperating expense                                                                                               |  |                          | (26,677 | )    |  |      | (26,137 | ) |  |   | (24,588 | )
|Income tax (expense) benefit                                                                                                          |  |                          | (16,540 | )    |  |      | (10,446 | ) |  |   | 1,122   |  
|Equity in earnings of unconsolidated affiliates                                                                                       |  |                          | (15,074 | )    |  |      | (9,454  | ) |  |   | (5,879  | )
|Deferred income taxes                                                                                                                 |  |                          | 9,290   |      |  |      | 8,591   |   |  |   | (3,648  | )
|Loss on early retirement of debt                                                                                                      |  |                          |        |      |  |      |        |   |  |   | 7,466   |  
|Impairment of investment securities                                                                                                   |  |                          |        |      |  |      | 1,057   |   |  |   |        |  
|Increases (decreases) in cash from changes
    in operating assets and liabilities, net of effects of purchases
    of new businesses |  |                          | (6,314  | )    |  |      | (10,042 | ) |  |   | 2,550   |  
|                                                                                                                                      |  |                          |         |      |  |      |         |   |  |   |         |  
|Net cash provided by operating activities                                                                                             |  | $                        | 86,832  |      |  | $    | 59,205  |   |  | $ | 40,857  |  
|                                                                                                                                      |  |                          |         |      |  |      |         |   |  |   |         |  

The key trends in our results of operations in
2003 continued to be increases in revenue, operating margins and
overall profitability. The increases in revenue are driven most
significantly by growth in our existing facilities. Facilities
that we owned in both 2003 and 2002 (same store
facilities) continued the trend from earlier years of
performing more surgical cases than in the prior year, and our
facilities also received higher rates of reimbursement per case,
on average, than in the prior year. In addition, we continued to
add new hospital partners, to construct new facilities, and to
selectively add facilities through acquisition.

Increases in the volume of surgical cases in the
U.S. and of patient admissions for our hospitals in Western
Europe continue to drive increases in our revenues, as does an
increase in the average reimbursement for the surgeries (in all
countries) and other services (in Western Europe) that we
provide. These factors impacted revenue less favorably in 2003
than in the preceding two years, which is primarily a result of
increases in the number of facilities we operate. The increase
in the overall number of facilities

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causes the relatively high growth rates in our
newer facilities to have a less dramatic impact on our overall
same store case volumes, as reflected in the following table.


|                           |                                              |              |  |      |     |      |  |    |    |   |  |    |    |  
|-------------------------- | -------------------------------------------- | ------------ |  | ---- | --- | ---- |  | -- | -- | - |  | -- | -- | -
|                           |                                              |             
|                           |                                              | Years Ended 
|                           |                                              | December 31,
|                           |                                              |             
|                           |                                              | 2003         |  | 2002 |     | 2001
|                           |                                              |              |  |      |     |     
|United States facilities:  |                                              |              |  |      |     |      |  |    |    |   |  |   
|                           | Surgical cases                               |              |  | 9    | %   |      |  | 17 | %  |   |  | 18 | % 
|                           | Net revenue per case                         |              |  | 10   | (2) |      |  | 5  |    |   |  | 5  |   
|                           |                                              |              |  |      |     |      |  |    |    |   |  |   
|                           |                                              | Total        |  |      | 19  | %    |  |    | 22 | % |  |    | 23 | %
|Western Europe facilities: |                                              |              |  |      |     |      |  |    |    |   |  |   
|                           | Net revenue using actual exchange rates      |              |  | 26   | %   |      |  | 17 | %  |   |  | 9  | % 
|                           | Net revenue using constant exchange rates(1) |              |  | 9    | %   |      |  | 11 | %  |   |  | 13 | % 



---



|    |                                                                                           
|--- | ------------------------------------------------------------------------------------------
|(1) | Measures current year using prior year exchange
    rates.                                
|   
|(2) | Of this amount, 7% relates to ambulatory surgery
    centers and 3% to surgical hospitals.

The addition of new facilities continues to be
more heavily weighted to U.S. surgical facilities with a
not-for-profit healthcare system partner (hospital
partner), both as we initiate joint venture agreements
with new systems and as we add facilities to our arrangements
with existing systems. Facilities have been added to hospital
joint ventures both through construction of new facilities
(de novos) and through our contribution of our
equity interests in existing facilities into a hospital joint
venture structure, effectively creating three-way joint ventures
by sharing our ownership in these facilities with a hospital
partner while leaving the existing physician ownership intact.
We also have selectively added facilities in Western Europe
through acquisition and construction. The following table
summarizes our facilities as of December 31, 2001, 2002,
and 2003:

|                             |                             |       |    |      |    |      |    |    |    |  |    |    |  | 
|---------------------------- | --------------------------- | ----- | -- | ---- | -- | ---- | -- | -- | -- |  | -- | -- |  | 
|                             |                             | 2003  |    | 2002 |    | 2001
|                             |                             |       |    |      |    |     
|Hospital partners            |                             |       | 16 |      |    |      | 10 |    |    |  | 8  |   
|United States facilities(1): |                             |       |    |      |    |      |    |    |    |  |    |   
|                             | With a hospital partner     |       |    | 35   |    |      |    | 26 |    |  |    | 19 | 
|                             | Without a hospital partner  |       |    | 27   |    |      |    | 28 |    |  |    | 20 | 
|                             |                             |       |    |      |    |      |    |    |    |  |    |   
|Total U.S. facilities        |                             |       | 62 |      |    |      | 54 |    |    |  | 39 |   
|Western Europe facilities    |                             |       | 12 |      |    |      | 10 |    |    |  | 10 |   
|                             |                             |       |    |      |    |      |    |    |    |  |    |   
|Total facilities operated    |                             |       | 74 |      |    |      | 64 |    |    |  | 49 |   
|                             |                             |       |    |      |    |      |    |    |    |  |    |   
|Change from prior year-end:  |                             |       |    |      |    |      |    |    |    |  |    |   
|                             | De novo (newly constructed) |       |    | 4    |    |      |    | 6  |    |  |    |    | 
|                             | Acquisition                 |       |    | 6    |    |      |    | 9  |    |  |    |    | 
|                             |                             |       |    |      |    |      |    |    |    |  |    |   
|                             |                             | Total |    |      | 10 |      |    |    | 15 |  |    |    |  | 
|                             |                             |       |    |      |    |      |    |    |    |  |    |   



---



|    |                                                                               
|--- | ------------------------------------------------------------------------------
|(1) | At December 31, 2003, physicians own a
    portion of all of these facilities.

Operating expenses have increased at lower rates
than revenue, resulting in improved operating margins. This
relationship results from the double digit percentage growth in
same store revenues exceeding the volume-driven and
inflation-driven increases in most operating expenses, including
the costs of personnel, supplies, and facility costs, and also,
we believe, from our implementing USPIs EDGE in

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newly acquired facilities, which we believe
improves operating efficiencies. The following table summarizes
changes in our same store EBITDA margins (1):


|                          |                            |                          |     |      |     |      |     |     |     |  |     |     |    
|------------------------- | -------------------------- | ------------------------ | --- | ---- | --- | ---- | --- | --- | --- |  | --- | --- | ---
|                          |                            |                         
|                          |                            | Years Ended December 31,
|                          |                            |                         
|                          |                            | 2003                     |     | 2002 |     | 2001
|                          |                            |                          |     |      |     |     
|United States facilities: |                            |                          |     |      |     |      |     |     |     |  |     |    
|                          | With a hospital partner    |                          |     | 311  | bps |      |     | 369 | bps |  |     | 703 | bps
|                          | Without a hospital partner |                          |     | 112  |     |      |     | 83  |     |  |     | 99  |    
|Total U.S. facilities     |                            |                          | 264 |      |     |      | 248 |     |     |  | 494 |    
|Western Europe facilities |                            |                          | 66  | bps  |     |      | 35  | bps |     |  | 84  | bps



---



|    |                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | EBITDA margin is calculated as EBITDA divided by
    total revenues. This table aggregates all of the facilities we
    operate using 100% of their results. This does not represent the
    overall margin for USPIs operations in either the
    U.S. or Western Europe because we have a variety of
    ownership levels in the facilities we operate.

Year Ended December 31, 2003 Compared to
Year Ended December 31, 2002

Revenues increased by $103.9 million, or
30%, to $446.3 million for the year ended December 31,
2003 from $342.4 million for the year ended
December 31, 2002. Of this increase, $41.0 million was
contributed by same store facilities, $38.2 million was
contributed by new facilities, and $24.7 million was due to
exchange rate fluctuations. The same store increase was
primarily driven by a $30.3 million increase in revenue at
U.S. facilities, which performed approximately 9% more
surgical cases and received an average of approximately 10% more
per case in 2003 than in 2002. The revenues of same store
Western Europe facilities, when measured using 2002 exchange
rates for both periods, were $10.7 million higher in 2003
than in 2002. Facilities acquired since December 31, 2001,
and thus not owned for the same number of months in 2003 as
compared to 2002, contributed net additional revenues in 2003 of
$38.2 million. The exchange rate fluctuations reflect the
$24.7 million impact of the U.S. dollar being weaker
relative to the Eurodollar and British pound in 2003 than in
2002.

Operating expenses, excluding depreciation and
amortization, increased by $71.9 million, or 29%, to
$316.7 million for the year ended December 31, 2003
from $244.8 million for the year ended December 31,
2002. Operating expenses, excluding depreciation and
amortization, as a percentage of revenues, decreased to 71.0%
from 71.5%, primarily as a result of increasing revenue base,
operating efficiencies at our facilities and improved economies
of scale as we expanded. Included in operating expenses is
equity based compensation of approximately $3.0 million and
$0.8 million for the years ended December 31, 2003 and
2002, respectively. Without the increase in this amount, which
was driven most significantly by the increase in USPIs
stock price during 2003, operating expenses would have been
70.5% of revenues for the year ended December 31, 2003.

Operating income increased $26.4 million, or
37%, to $97.4 million for the year ended December 31,
2003 from $71.0 million for the year ended
December 31, 2002. Operating income, as a percentage of
revenues, increased to 21.8% for the year ended
December 31, 2003 from 20.7% for the year ended
December 31, 2002, primarily as a result of improved
operating margins at our facilities and the leveraging of our
corporate overhead expenses over the increased revenue being
partially offset by the increase in equity based compensation.

Depreciation and amortization increased
$5.7 million, or 21%, to $32.2 million for the year
ended December 31, 2003 from $26.5 million for the
year ended December 31, 2002. This amount increased due
primarily as a result of depreciation of assets added through
acquisitions and newly opened facilities. Depreciation and
amortization as a percentage of revenues decreased to 7.2% for
the year ended December 31, 2003 from 7.8% for the year
ended December 31, 2002 due to our increased revenue.

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Interest expense, net of interest income,
increased $2.5 million, or 10%, to $27.4 million for
the year ended December 31, 2003 from $24.9 million
for the year ended December 31, 2002, primarily as a result
of our borrowing a portion of the costs of acquiring and
developing facilities.

Other expense, net of other income decreased
$1.9 million, or 161%, to $0.7 million of other income
for the year ended December 31, 2003 from $1.2 million
of other expense for the year ended December 31, 2002,
primarily due to the $1.1 million impairment of investment
securities recorded in 2002.

Minority interests in income of consolidated
subsidiaries increased $9.5 million, or 64%, to
$24.3 million for the year ended December 31, 2003
from $14.8 million for the year ended December 31,
2002, primarily as a result of our hospital joint venture
strategy. During 2003, our hospital partners in three markets
gained additional ownership in certain of our facilities as part
of our development strategy.

Provision for income taxes of $16.5 million,
representing an effective tax rate of 36%, for the year ended
December 31, 2003, compared to $10.4 million,
representing an effective tax rate of 35%, for the year ended
December 31, 2002. We continue to utilize net operating
loss carryforwards to offset current period income in Spain,
which makes our effective tax rate slightly lower than it would
be were we to accrue taxes at statutory rates in all three
countries in which we operate.

Net income was $29.9 million for the year
ended December 31, 2003 compared to $19.6 million for
the year ended December 31, 2002. This $10.3 million
improvement results primarily from the increased revenues and
improved economies of scale related to expenses discussed above.

Year Ended December 31, 2002 Compared to
Year Ended December 31, 2001

Revenues increased by $98.0 million, or 40%,
to $342.4 million for the year ended December 31, 2002
from $244.4 million for the year ended December 31,
2001. Of this increase, $52.8 million was contributed by
facilities acquired or opened since December 31, 2000. The
U.S. dollar was weaker relative to the Eurodollar and the
British pound during the year ended December 31, 2002 as
compared to the same period in the prior year, resulting in a
positive impact of $6.1 million on year over year revenues
for the facilities in Western Europe that we owned in both 2002
and 2001 (same store facilities). Absent this
foreign exchange impact, same store facilities in Western Europe
contributed $11.6 million more to consolidated revenue in
the year ended December 31, 2002 as compared to the same
period in 2001. The remaining increase in revenues was
contributed principally by same store U.S. facilities,
which performed approximately 17% more cases during the year
ended December 31, 2002 as compared to the year ended
December 31, 2001.

Operating expenses, excluding depreciation and
amortization, increased by $60.3 million, or 33%, to
$244.8 million for the year ended December 31, 2002
from $184.5 million for the year ended December 31,
2001. Operating expenses, excluding depreciation and
amortization, as a percentage of revenues, decreased to 71.5%
from 75.5%, primarily as a result of increasing revenue base,
operating efficiencies at our facilities and improved economies
of scale as we expanded.

Operating income increased $37.2 million, or
110%, to $71.0 million for the year ended December 31,
2002 from $33.8 million for the year ended
December 31, 2001. Operating income, as a percentage of
revenues, increased to 20.7% for the year ended
December 31, 2002 from 13.8% for the year ended
December 31, 2001, primarily as a result of improved
operating margins at our facilities and the leveraging of our
corporate overhead expenses over the increased revenue.

Depreciation and amortization increased
$0.4 million, or 2%, to $26.5 million for the year
ended December 31, 2002 from $26.1 million for the
year ended December 31, 2001. This amount remained
virtually constant because the reduction in expense resulting
from the cessation of goodwill amortization required under
SFAS No. 142 largely offset the additional
depreciation on tangible assets acquired through acquisitions.
Depreciation and amortization as a percentage of revenues
decreased to 7.7% for the year ended December 31, 2002 from
10.7% for the year ended December 31, 2001 due to our
increased revenue.

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Interest expense, net of interest income,
increased $7.6 million, or 44%, to $24.9 million for
the year ended December 31, 2002 from $17.3 million
for the year ended December 31, 2001, primarily as a result
of higher levels of outstanding debt during the year ended
December 31, 2002 than during the prior year period. We
used a portion of the proceeds of our two public offerings of
common stock to repay senior and subordinated indebtedness in
June 2001 and have incurred debt to fund a portion of our
acquisition and development program since that time.

Other expense, net of other income decreased
$6.1 million, or 83%, to $1.2 million for the year
ended December 31, 2002 from $7.3 million for the year
ended December 31, 2001, primarily due to the
$7.5 million loss on early retirement of debt recorded in
2001 being so much larger than the $1.1 million impairment
of investment securities recorded in 2002.

Provision for income taxes was a net expense of
$10.4 million, representing an effective tax rate of 35%,
for the year ended December 31, 2002, compared to a net
benefit of $1.1 million, representing a negative effective
tax rate of 69%, for the year ended December 31, 2001. The
increase in our actual provision for income taxes and in our
overall effective tax rate primarily results from our accruing
no net federal tax expense related to U.S. operations prior
to January 1, 2002, at which time we began accruing taxes
at rates approximating statutory rates. We utilized net
operating loss carryforwards (NOLs) to offset current period
income as our U.S. operations achieved profitability for
the first time during 2001, and during the fourth quarter of
2001 we fully recognized the benefit of all U.S. NOLs
generated during our initial years of operations.

Net income was $19.6 million for the year
ended December 31, 2002 compared to $2.8 million for
the year ended December 31, 2001. This $16.8 million
improvement results primarily from the increased revenues and
improved economies of scale related to expenses discussed above.

EBITDA less minority interest increased
$30.4 million, or 58%, to $82.7 million for the year
ended December 31, 2002 from $52.3 million for the
year ended December 31, 2001. Of this increase in EBITDA
less minority interest, $14.9 million was contributed by
facilities acquired or opened since December 31, 2000.
EBITDA less minority interest, as a percentage of revenues,
increased to 24.2% for the year ended December 31, 2002
from 21.4% for the year ended December 31, 2001, primarily
as a result of improved operating margins at our facilities and
the leveraging of our corporate overhead expenses over the
increased revenue.

Liquidity and Capital Resources

During the year ended December 31, 2003, we
generated $86.8 million of cash flows from operations as
compared to $59.2 million during 2002 and
$40.9 million during 2001. Included in the
$86.8 million is a benefit of $11.0 million, which is
not expected to recur, resulting from our modifying contracts
under which we provide certain administrative services to
physicians, eliminating the financing of accounts receivable
from the scope of services we provide. During the year ended
December 31, 2003, our net cash required for investing
activities was $110.7 million, consisting primarily of
$51.9 million for the purchase of businesses and
$41.8 million for the purchase of property and equipment.
The $51.9 million primarily represents purchases of new
businesses, net of cash received, and incremental investments in
unconsolidated affiliates. The most significant of these
transactions were



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | $9.0 million paid to acquire a private
    surgical hospital in Marbella, Spain,                           
|
| |  | $13.8 million paid to acquire a private
    surgical hospital in London, England,                          
|
| |  | $10.8 million paid to acquire a majority
    interest in a surgery center in Austin, Texas,                
|
| |  | $6.1 million paid to acquire a
    noncontrolling interest in a surgery center in Torrance,
    California,

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| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $4.4 million paid to acquire a
    noncontrolling interest in a recently constructed surgery center
    in Dallas, Texas,                                                 
|
| |  | $3.8 million of deferred purchase price paid
    to the former owners of a facility in a suburb of Dallas, Texas,
    based on the financial performance of that facility.

In addition to these transactions, we made an
advance payment in late December 2003 of approximately
$9.8 million to acquire a controlling interest, effective
January 1, 2004, in the Torrance facility we had acquired a
noncontrolling interest in earlier in 2003. Approximately
$21.1 million of the property and equipment purchases
related to ongoing development projects, and the remaining
$20.7 million primarily represents purchases of equipment
at existing facilities. The $110.7 million of cash used in
investing activities was funded primarily with the cash flows
from operations noted above and additionally through a reduction
of cash on hand together with new borrowings. Net cash provided
during the year ended December 31, 2003 by financing
activities totaled $4.5 million and resulted primarily from
our investees financing a portion of their capital expenditures.
Cash and cash equivalents were $28.5 million at
December 31, 2003 as compared to $47.6 million at
December 31, 2002 and net working capital was
$30.0 million at December 31, 2003 as compared to
$51.4 million in the prior year. The decreases in cash and
cash equivalents and in working capital from December 31,
2002 to December 31, 2003 were primarily due to the
proceeds of an October 2002 stock offering being fully deployed
by December 31, 2003.

During November 2002, we entered into a revolving
credit facility with a group of commercial lenders providing us
with the ability to borrow up to $115.0 million for
acquisitions and general corporate purposes in the United States
and Spain or for the funding of any new subsidiary that becomes
a guarantor of the facility. Under the terms of the facility, we
may invest up to a total of $25.0 million in subsidiaries
that are not guarantors, including subsidiaries in the United
Kingdom. Borrowings under our credit facility mature on
November 7, 2005. As of December 31, 2003, no amounts
were outstanding under this facility and $36.6 million was
available for borrowing based on actual reported consolidated
financial results. Maximum availability under the facility is
based upon pro forma EBITDA, including EBITDA from acquired
entities. Assuming historical purchase multiples of annual
EBITDA of potential acquisition targets, approximately
$68.3 million would be available for borrowing to finance
acquisitions as of December 31, 2003, of which none was
drawn at December 31, 2003. Our credit facility agreement
and the indenture governing our Senior Subordinated Notes
contain various restrictive covenants including covenants that
limit our ability and the ability of certain of our subsidiaries
to borrow money or guarantee other indebtedness, grant liens on
our assets, make investments, use assets as security in other
transactions, pay dividends on stock, enter into sale and
leaseback transactions or sell assets or capital stock.

Our credit agreement in the United Kingdom
provides for total borrowings of £52.0 million
(approximately $92.8 million as of December 31, 2003)
under four separate facilities. At December 31, 2003, total
outstanding borrowings under this credit agreement were
approximately $63.9 million which represents total
borrowings net of scheduled repayments of $15.3 million
that have been made under the agreement, and approximately
$13.6 million was available for borrowing, primarily for
capital projects specified in the agreement. Borrowings under
the United Kingdom credit facility bear interest at rates of
1.50% to 2.00% over LIBOR and mature in April 2010. We pledged
the capital stock of our U.K. subsidiaries to secure borrowings
under the United Kingdom credit facility. We were in compliance
with all covenants under our credit agreements as of
December 31, 2003.

In October 2002, we received, after offering
costs of approximately $4.0 million, net proceeds of
approximately $49.1 million from an offering of
2,415,000 shares of our common stock, which included
315,000 shares attributable to the underwriters
exercise of their over-allotment option.

In December 2001, a wholly-owned subsidiary of
the Company issued $150 million in aggregate principal
amount of 10% Senior Subordinated Notes due 2011. We
received net proceeds of $143.5 million after offering
costs of $5.3 million and a discount of $1.2 million.
The notes, which mature on December 15, 2011, accrue
interest at 10% payable semi-annually on June 15 and
December 15 commencing on June 15, 2002 and were issued at
a discount of $1.2 million, resulting in an effective

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interest rate of 10.125%. The Senior Subordinated
Notes are subordinate to all senior indebtedness and are
guaranteed by USPI and USPIs wholly owned subsidiaries
domiciled in the United States.


The Company may redeem all or part of the notes
on or after December 15, 2006 upon not less than 30 nor
more than 60 days notice. The redemption price would be the
following percentages of principal amount, if redeemed during
the 12-month period commencing on December 15 of the years
set forth below:

|       |  |                  |         |  
|------ |  | ---------------- | ------- | -
|Period |  | Redemption Price
|       |  |                 
|2006   |  |                  | 105.000 | %
|2007   |  |                  | 103.333 | %
|2008   |  |                  | 101.667 | %
|2009   |  |                  | 100.000 | %
|2010   |  |                  | 100.000 | %

In addition, before December 15, 2004, if
the Company completes an offering of its stock in an amount of
at least $20 million, the Company may use the proceeds of
the offering to, on one or more occasions, redeem notes in an
aggregate principal amount not to exceed 35% of the total notes
outstanding at a redemption price of 110.000% of principal. The
Company may also redeem the notes at any time prior to
December 15, 2006, by paying the principal amount of all
outstanding notes plus the greater of (a) 1% of the
principal amount or (b) the excess of the present value of
the notes and all interest that would accrue through
December 14, 2006 over the principal amount of the notes.
The Company is obligated to offer to purchase the notes at 101%
of the principal amount upon the occurrence of certain change of
control events. Any redemptions of the notes require payment of
all amounts of accrued but unpaid interest.

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Our contractual cash obligations as of
December 31, 2003 may be summarized as follows:

|                                                             |                                          |                        |         |               |  |              |        |              |  |         |        |        |  |   |        |        |  |   |         |         | 
|------------------------------------------------------------ | ---------------------------------------- | ---------------------- | ------- | ------------- |  | ------------ | ------ | ------------ |  | ------- | ------ | ------ |  | - | ------ | ------ |  | - | ------- | ------- | 
|                                                             |                                          |                       
|                                                             |                                          | Payments Due by Period
|                                                             |                                          |                       
|                                                             |                                          |                        |         | Beyond       
|Contractual Cash Obligations                                 |                                          | Total                  |         | Within 1 year |  | 1 to 3 years |        | 4 to 5 years |  | 5 Years
|                                                             |                                          |                        |         |               |  |              |        |              |  |        
|                                                             |                                          |                       
|                                                             |                                          | (In thousands)        
|Long term debt obligations (principal plus
    interest)(1): |                                          |                        |         |               |  |              |        |              |  |         |        |        |  |   |        |        |  |   |         |        
|                                                             | Senior Subordinated Notes                |                        | $       | 270,000       |  |              | $      | 15,000       |  |         | $      | 30,000 |  |   | $      | 30,000 |  |   | $       | 195,000 | 
|                                                             | U.S. credit facility(2)                  |                        |         | 1,060         |  |              |        | 573          |  |         |        | 487    |  |   |        |       |  |   |         |        | 
|                                                             | U.K. credit facility                     |                        |         | 85,334        |  |              |        | 6,451        |  |         |        | 18,854 |  |   |        | 21,627 |  |   |         | 38,402  | 
|                                                             | Loans from former owners of subsidiaries |                        |         | 635           |  |              |        | 502          |  |         |        | 133    |  |   |        |       |  |   |         |        | 
|                                                             | Other debt at operating subsidiaries     |                        |         | 32,297        |  |              |        | 7,155        |  |         |        | 7,406  |  |   |        | 6,404  |  |   |         | 11,332  | 
|Capitalized lease obligations:                               |                                          |                        |         |               |  |              |        |              |  |         |        |        |  |   |        |        |  |   |         |        
|                                                             | U.S. operating subsidiaries              |                        |         | 43,891        |  |              |        | 7,924        |  |         |        | 9,225  |  |   |        | 3,571  |  |   |         | 23,171  | 
|                                                             | Western Europe operating subsidiaries    |                        |         | 97,328        |  |              |        | 4,898        |  |         |        | 8,819  |  |   |        | 8,437  |  |   |         | 75,174  | 
|Operating lease obligations:                                 |                                          |                        |         |               |  |              |        |              |  |         |        |        |  |   |        |        |  |   |         |        
|                                                             | U.S. operating subsidiaries              |                        |         | 50,372        |  |              |        | 7,499        |  |         |        | 13,397 |  |   |        | 11,594 |  |   |         | 17,882  | 
|                                                             | Western Europe operating subsidiaries    |                        |         | 12,895        |  |              |        | 1,833        |  |         |        | 2,993  |  |   |        | 2,614  |  |   |         | 5,455   | 
|                                                             |                                          |                        |         |               |  |              |        |              |  |         |        |        |  |   |        |        |  |   |         |        
|Total contractual cash obligations                           |                                          | $                      | 593,812 |               |  | $            | 51,835 |              |  | $       | 91,314 |        |  | $ | 84,247 |        |  | $ | 366,416 |        
|                                                             |                                          |                        |         |               |  |              |        |              |  |         |        |        |  |   |        |        |  |   |         |        



---



|    |                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amounts shown for long-term debt obligations and
    capital lease obligations include the associated interest. For
    variable rate debt, the interest is calculated using the
    December 31, 2003 rates applicable to each debt instrument.                                                      
|   
|(2) | The amounts shown for the U.S. credit facility
    are the commitment fees assuming no amounts are drawn under the
    agreement. If we draw amounts under this agreement, the
    commitment fees would be less but we would incur cash
    obligations related to interest and principal repayments.

Our operating subsidiaries, many of which have
minority owners who share in the cash flow of these entities,
have debt consisting primarily of capitalized lease obligations.
This debt is generally non-recourse to USPI, the parent company,
and is generally secured by the assets of those operating
entities. The total amount of these obligations, which was
$91.9 million at December 31, 2003, is included in our
consolidated balance sheet because the borrower or obligated
entity meets the requirements for consolidated financial
reporting. Our average percentage ownership, weighted based on
the individual subsidiarys amount of debt and capitalized
leased obligations, of these consolidated subsidiaries was 86.1%
at December 31, 2003. Additionally, our unconsolidated
affiliates that we account for under the equity method have debt
and capitalized lease obligations that are generally
non-recourse to USPI and are not included in our consolidated
financial statements. At December 31, 2003, the total
obligations of these unconsolidated affiliates under debt and
capital lease obligations was approximately $77.9 million.
Our average percentage ownership, weighted based on the
individual affiliates amount of debt and capitalized lease
obligations, of these unconsolidated affiliates was 23.9% at
December 31, 2003. USPI or one of its wholly owned
subsidiaries had collectively guaranteed $12.6 million of
the $77.9 million in total debt and capital lease
obligations of our unconsolidated affiliates as of
December 31, 2003.

These unconsolidated affiliates are limited
partnerships, limited liability partnerships or limited
liability companies that own operational surgical facilities or
surgical facilities that are under development. None of these
affiliates provide financing, liquidity, or market or credit
risk support for us. They also do not engage in leasing,
hedging, research and development services with us. Moreover, we
do not believe that they expose us to any of their liabilities
that are not otherwise reflected in our consolidated financial
statements.

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We are not obligated to fund losses or otherwise
provide additional funding to these affiliates other than as we
determine to be economically required in order to successfully
implement our development plans.


Currently, USPI and its affiliates have three
surgery centers and three private surgical hospitals under
construction and nine additional surgery centers in the planning
stage in the United States. Costs to develop a short-stay
surgical facility, which include construction, equipment and
initial operating losses, vary depending on the range of
specialties that will be undertaken at the facility. Our
affiliates have budgeted an average of $3.4 million for
development costs for each of the three surgery center projects
and approximately $16.5 million for each of the three
surgical hospital projects. Development costs are typically
funded with approximately 50% debt at the entity level with the
remainder provided as equity from the owners of the entity. We
have made substantially all of the equity contributions to which
we are obligated for these projects, but we may choose to invest
additional funds in these or other projects in 2004.
Additionally, as each of these facilities becomes operational,
each will have obligations associated with debt and capital
lease arrangements.

Our acquisition and development program will
require substantial capital resources, which we estimate to
range from $40.0 million to $60.0 million per year
over the next three years. These activities primarily include
the development of new facilities, buyups of additional
ownership in facilities we already operate, and acquisitions of
additional facilities. These activities also include, in some
cases, payments of additional purchase price to the sellers of
acquired facilities based upon the resolution of certain
contingencies or based upon acquired facilities achieving
certain financial targets. We currently estimate that we will
pay approximately $6.4 million under these arrangements,
primarily as a result of the resolution of certain contingencies
related to our 2003 acquisitions of facilities in Marbella,
Spain and London, England. In addition, the operations of our
existing surgical facilities will require ongoing capital
expenditures. We believe that existing funds, cash flows from
operations, borrowings under our credit facilities, and
borrowings under capital lease arrangements at newly developed
or acquired facilities will provide sufficient liquidity for the
next twelve months. Thereafter, we may require additional debt
or equity financing for our acquisitions and development
projects. There are no assurances that needed capital will be
available on acceptable terms, if at all. If we are unable to
obtain funds when needed or on acceptable terms, we will be
required to curtail our acquisition and development program.

New Accounting Pronouncements

During May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both
Liabilities and Equity (SFAS No. 150). As
the FASB subsequently issued three Staff Positions regarding
this statement, including one dated November 7, 2003 that
indefinitely defers a major portion of SFAS No. 150 pending
reconsideration of certain concepts by the FASB, the
Companys financial statements have not been impacted by
SFAS No. 150.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51(FIN 46). In December
2003, the FASB issued a new version of FIN 46. FIN 46,
in both its original and revised versions, provides a framework
for identifying variable interest entities (VIEs)
and determining when a company should consolidate a VIE for
financial reporting purposes. FIN 46 was initially
effective for VIEs created after January 31, 2003, with the
provisions of the revised FIN 46 effective for periods
ending after December 15, 2003. The adoption of FIN 46
did not have a material impact on our financial position or
results of operations.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    about Market Risk

We have exposure to interest rate risk related to
our financing, investing and cash management activities.
Historically, we have not held or issued derivative financial
instruments other than the use of variable-to-fixed interest
rate swaps for portions of our borrowings under credit
facilities with commercial lenders as required by the credit
agreements. We do not use derivative financial instruments for
speculative purposes. Our financing arrangements with commercial
lenders are based on a spread over LIBOR or

55



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##### Table of Contents



Euribor. At December 31, 2003,
$149.0 million of our total outstanding debt was the Senior
Subordinated Notes, which were issued in December 2001 at a 0.8%
discount and bear interest at a fixed rate of 10%,
$3.8 million was in other fixed rate instruments and the
remaining $86.6 million was in variable rate instruments.
Accordingly, a hypothetical 100 basis point increase in
market interest rates would result in additional annual interest
expense of $0.9 million. The Senior Subordinated Notes,
which represent 98% of our total fixed rate debt at
December 31, 2003 are considered to have a fair value,
based upon recent trading, of $171.0 million, which is
approximately $22.0 million higher than the carrying value
at December 31, 2003.


Our international revenues are a significant
portion of our total revenues. We are exposed to risks
associated with operating internationally, including:



| |   |                                    
| | - | -----------------------------------
| |  | foreign currency exchange risk; and
|
| |  | taxes and regulatory changes.      

Our international operations operate in a natural
hedge to a large extent because all operating expenses and
revenues are denominated in local currency. Additionally, our
borrowings in the United Kingdom are currently denominated in
local currency. Historically, the cash flow generated from our
operations in Spain and the United Kingdom have been utilized
within each of those countries to finance development and
acquisition activity as well as for repayment of debt
denominated in local currency. Accordingly, we have not utilized
financial instruments to hedge our foreign currency exchange
risk.

Inflation and changing prices have not
significantly affected our operating results or the markets in
which we perform services.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

For the financial statements and supplementary
data required by this Item 8, see the Index to Consolidated
Financial Statements included elsewhere in this Form 10-K.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

As of December 31, 2003, the Company carried
out an evaluation under the supervision and with the
participation of our management, including the Chairman and
Chief Executive Officer and Chief Financial Officer of the
Company (its principal executive officer and principal financial
officer, respectively) of the effectiveness of the design and
operation of the Companys disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934, as amended (the Exchange Act).
Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer have concluded that as of
December 31, 2003, the Companys disclosure controls
and procedures are effective. Disclosure controls and procedures
are controls and procedures designed to ensure that information
required to be disclosed in the Companys reports filed or
submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and
include controls and procedures designed to ensure that
information the Company required to disclose in such reports is
accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to
allow timely decisions regarding required disclosure.

There have been no significant changes in the
Companys internal controls over financial reporting that
occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect,
internal controls over financial reporting.

56



---



##### Table of Contents






PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The response to this item will be included in the
Companys Proxy Statement for its Annual Meeting of
Stockholders to be held in 2004 and is incorporated herein by
reference.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The response to this item will be included in the
Companys Proxy Statement for its Annual Meeting of
Stockholders to be held in 2004 and is incorporated herein by
reference.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The response to this item will be included in the
Companys Proxy Statement for its Annual Meeting of
Stockholders to be held in 2004 and is incorporated herein by
reference.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The response to this item will be included in the
Companys Proxy Statement for its Annual Meeting of
Stockholders to be held in 2004 and is incorporated herein by
reference.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The response to this item will be included in the
Companys Proxy Statement for its Annual Meeting of
Stockholders to be held in 2004 and is incorporated herein by
reference.




PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a)(1) Financial Statements

The following financial statements are filed as
part of this Form 10-K:

|                                                                                                                |  |  |     | 
|--------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Independent Auditors Report of KPMG LLP                                                                        |  |  | F-1 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                |  |  | F-2 | 
|Consolidated Statements of Income for the years
    ended December 31, 2003, 2002 and 2001                      |  |  | F-3 | 
|Consolidated Statements of Comprehensive Income
    (Loss) for the years ended December 31, 2003, 2002 and 2001 |  |  | F-4 | 
|Consolidated Statements of Stockholders
    Equity for the years ended December 31, 2003, 2002 and 2001        |  |  | F-5 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001                  |  |  | F-6 | 
|Notes to Consolidated Financial Statements                                                                      |  |  | F-7 | 

57



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors

United Surgical Partners International, Inc.:


We have audited the accompanying consolidated
balance sheets of United Surgical Partners
International, Inc. and subsidiaries as of
December 31, 2003 and 2002, and the related consolidated
statements of income, comprehensive income (loss),
stockholders equity and cash flows for each of the years
in the three year period ended December 31, 2003. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of United Surgical Partners
International, Inc. and subsidiaries as of
December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the
three year period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United
States of America.

As discussed in Note 6 to the consolidated
financial statements, United Surgical Partners
International, Inc. and subsidiaries fully adopted the
provisions of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
in 2002.



| |             
| | ------------
| | /s/ KPMG LLP

Dallas, Texas

February 18, 2004


F-1



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.

AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2002


(In thousands, except per share
amounts)


|                                                                                                   |                                                                                                                                        |      |         |         |   |   |         |         |  
|-------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------- | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                                                                                   |                                                                                                                                        | 2003 |         | 2002   
|                                                                                                   |                                                                                                                                        |      |         |        
|ASSETS                                                                                            
|Cash and cash equivalents                                                                          |                                                                                                                                        | $    | 28,519  |         |   | $ | 47,571  |        
|Patient receivables, net of allowance for
    doubtful accounts of $8,838 and $7,154, respectively |                                                                                                                                        |      | 56,591  |         |   |   | 39,176  |        
|Other receivables (note 4)                                                                         |                                                                                                                                        |      | 20,168  |         |   |   | 36,208  |        
|Inventories of supplies                                                                            |                                                                                                                                        |      | 9,024   |         |   |   | 7,756   |        
|Deferred tax asset, net                                                                            |                                                                                                                                        |      | 6,747   |         |   |   | 5,657   |        
|Prepaids and other current assets                                                                  |                                                                                                                                        |      | 12,548  |         |   |   | 7,001   |        
|                                                                                                   |                                                                                                                                        |      |         |         |   |   |         |        
|                                                                                                   | Total current assets                                                                                                                   |      |         | 133,597 |   |   |         | 143,369 |  
|Property and equipment, net (note 5)                                                               |                                                                                                                                        |      | 348,063 |         |   |   | 270,387 |        
|Investments in affiliates (note 3)                                                                 |                                                                                                                                        |      | 32,104  |         |   |   | 18,696  |        
|Intangible assets, net (note 6)                                                                    |                                                                                                                                        |      | 326,645 |         |   |   | 287,584 |        
|Other assets                                                                                       |                                                                                                                                        |      | 30,100  |         |   |   | 8,722   |        
|                                                                                                   |                                                                                                                                        |      |         |         |   |   |         |        
|                                                                                                   | Total assets                                                                                                                           |      | $       | 870,509 |   |   | $       | 728,758 |  
|                                                                                                   |                                                                                                                                        |      |         |         |   |   |         |        
|                                                                                                  
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                          
|Accounts payable                                                                                   |                                                                                                                                        | $    | 36,453  |         |   | $ | 25,989  |        
|Accrued salaries and benefits                                                                      |                                                                                                                                        |      | 19,609  |         |   |   | 20,322  |        
|Due to affiliates                                                                                  |                                                                                                                                        |      | 5,490   |         |   |   | 8,363   |        
|Accrued interest                                                                                   |                                                                                                                                        |      | 1,739   |         |   |   | 1,650   |        
|Current portion of long-term debt (note 8)                                                         |                                                                                                                                        |      | 16,794  |         |   |   | 13,132  |        
|Other accrued expenses                                                                             |                                                                                                                                        |      | 23,555  |         |   |   | 22,501  |        
|                                                                                                   |                                                                                                                                        |      |         |         |   |   |         |        
|                                                                                                   | Total current liabilities                                                                                                              |      |         | 103,640 |   |   |         | 91,957  |  
|                                                                                                   |                                                                                                                                        |      |         |         |   |   |         |        
|Long-term debt, less current portion (note 8)                                                      |                                                                                                                                        |      | 287,950 |         |   |   | 263,571 |        
|Other long-term liabilities                                                                        |                                                                                                                                        |      | 8,327   |         |   |   | 4,532   |        
|Deferred tax liability, net                                                                        |                                                                                                                                        |      | 33,979  |         |   |   | 19,577  |        
|                                                                                                   |                                                                                                                                        |      |         |         |   |   |         |        
|                                                                                                   | Total liabilities                                                                                                                      |      |         | 433,896 |   |   |         | 379,637 |  
|Minority interests (note 3)                                                                        |                                                                                                                                        |      | 45,958  |         |   |   | 26,860  |        
|Commitments and contingencies (notes 9 and
    17)                                                 |                                                                                                                                        |      |         |         |   |   |         |        
|Stockholders equity (notes 10 and 11):                                                            |                                                                                                                                        |      |         |         |   |   |         |        
|                                                                                                   | Common stock                                                                                                                           |      |         |         |   |   |         |         |  
|                                                                                                   | Other, $0.01 par value; 200,000 shares
    authorized; 27,705 and 27,306 shares issued at
    December 31, 2003 and 2002, respectively |      |         | 277     |   |   |         | 273     |  
|                                                                                                   | Additional paid-in capital                                                                                                             |      |         | 330,519 |   |   |         | 320,750 |  
|                                                                                                   | Treasury stock, at cost, 52 and 202 shares
    at December 31, 2003 and 2002, respectively                                             |      |         | (986    | ) |   |         | (3,733  | )
|                                                                                                   | Deferred compensation                                                                                                                  |      |         | (4,548  | ) |   |         | (1,226  | )
|                                                                                                   | Receivables from sales of common stock                                                                                                 |      |         | (1      | ) |   |         | (191    | )
|                                                                                                   | Accumulated other comprehensive income, net of tax                                                                                     |      |         | 32,852  |   |   |         | 3,290   |  
|                                                                                                   | Retained earnings                                                                                                                      |      |         | 32,542  |   |   |         | 3,098   |  
|                                                                                                   |                                                                                                                                        |      |         |         |   |   |         |        
|                                                                                                   | Total stockholders equity                                                                                                             |      |         | 390,655 |   |   |         | 322,261 |  
|                                                                                                   |                                                                                                                                        |      |         |         |   |   |         |        
|                                                                                                   | Total liabilities and stockholders equity                                                                                             |      | $       | 870,509 |   |   | $       | 728,758 |  
|                                                                                                   |                                                                                                                                        |      |         |         |   |   |         |        

See accompanying notes to consolidated financial
statements.

F-2



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.

AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share
amounts)


|                                                                        |                                                |                          |         |         |   |      |         |         |   |   |         |         |  
|----------------------------------------------------------------------- | ---------------------------------------------- | ------------------------ | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                                                        |                                                |                         
|                                                                        |                                                | Years Ended December 31,
|                                                                        |                                                |                         
|                                                                        |                                                | 2003                     |         | 2002    |   | 2001
|                                                                        |                                                |                          |         |         |   |     
|Net patient service revenue                                             |                                                | $                        | 390,911 |         |   | $    | 298,694 |         |   | $ | 210,261 |        
|Management and administrative services revenue                          |                                                |                          | 36,205  |         |   |      | 31,238  |         |   |   | 26,149  |        
|Equity in earnings of unconsolidated affiliates                         |                                                |                          | 15,074  |         |   |      | 9,454   |         |   |   | 5,879   |        
|Other income                                                            |                                                |                          | 4,079   |         |   |      | 3,000   |         |   |   | 2,079   |        
|                                                                        |                                                |                          |         |         |   |      |         |         |   |   |         |        
|                                                                        | Total revenues                                 |                          |         | 446,269 |   |      |         | 342,386 |   |   |         | 244,368 |  
|                                                                        |                                                |                          |         |         |   |      |         |         |   |   |         |        
|Salaries, benefits and other employee costs                             |                                                |                          | 113,708 |         |   |      | 87,872  |         |   |   | 64,255  |        
|Medical services and supplies                                           |                                                |                          | 85,659  |         |   |      | 66,075  |         |   |   | 48,791  |        
|Other operating expenses                                                |                                                |                          | 79,729  |         |   |      | 60,860  |         |   |   | 45,551  |        
|General and administrative expenses                                     |                                                |                          | 29,810  |         |   |      | 23,690  |         |   |   | 22,364  |        
|Provision for doubtful accounts                                         |                                                |                          | 7,772   |         |   |      | 6,330   |         |   |   | 3,517   |        
|Depreciation and amortization                                           |                                                |                          | 32,187  |         |   |      | 26,530  |         |   |   | 26,116  |        
|                                                                        |                                                |                          |         |         |   |      |         |         |   |   |         |        
|                                                                        | Total operating expenses                       |                          |         | 348,865 |   |      |         | 271,357 |   |   |         | 210,594 |  
|                                                                        |                                                |                          |         |         |   |      |         |         |   |   |         |        
|                                                                        | Operating income                               |                          |         | 97,404  |   |      |         | 71,029  |   |   |         | 33,774  |  
|Interest income                                                         |                                                |                          | 1,132   |         |   |      | 792     |         |   |   | 852     |        
|Interest expense                                                        |                                                |                          | (28,545 | )       |   |      | (25,721 | )       |   |   | (18,120 | )      
|Loss on early retirement of debt (note 8)                               |                                                |                          |        |         |   |      |        |         |   |   | (7,466  | )      
|Impairment of investment securities (note 7)                            |                                                |                          |        |         |   |      | (1,057  | )       |   |   |        |        
|Other                                                                   |                                                |                          | 736     |         |   |      | (151    | )       |   |   | 146     |        
|                                                                        |                                                |                          |         |         |   |      |         |         |   |   |         |        
|                                                                        | Total other expense, net                       |                          |         | (26,677 | ) |      |         | (26,137 | ) |   |         | (24,588 | )
|                                                                        |                                                |                          |         |         |   |      |         |         |   |   |         |        
|                                                                        | Income before minority interests               |                          |         | 70,727  |   |      |         | 44,892  |   |   |         | 9,186   |  
|Minority interests in income of consolidated
    subsidiaries           |                                                |                          | (24,311 | )       |   |      | (14,846 | )       |   |   | (7,558  | )      
|                                                                        |                                                |                          |         |         |   |      |         |         |   |   |         |        
|                                                                        | Income before income taxes                     |                          |         | 46,416  |   |      |         | 30,046  |   |   |         | 1,628   |  
|Income tax (expense) benefit (note 13)                                  |                                                |                          | (16,540 | )       |   |      | (10,446 | )       |   |   | 1,122   |        
|                                                                        |                                                |                          |         |         |   |      |         |         |   |   |         |        
|                                                                        | Net income                                     |                          |         | 29,876  |   |      |         | 19,600  |   |   |         | 2,750   |  
|Preferred stock dividends                                               |                                                |                          |        |         |   |      |        |         |   |   | (2,684  | )      
|                                                                        |                                                |                          |         |         |   |      |         |         |   |   |         |        
|                                                                        | Net income attributable to common stockholders |                          | $       | 29,876  |   |      | $       | 19,600  |   |   | $       | 66      |  
|                                                                        |                                                |                          |         |         |   |      |         |         |   |   |         |        
|Net income per share attributable to common
    stockholders (note 15): |                                                |                          |         |         |   |      |         |         |   |   |         |        
|                                                                        | Basic                                          |                          | $       | 1.10    |   |      | $       | 0.79    |   |   | $       |        |  
|                                                                        | Diluted                                        |                          | $       | 1.06    |   |      | $       | 0.75    |   |   | $       |        |  
|Weighted average number of common shares:                               |                                                |                          |         |         |   |      |         |         |   |   |         |        
|                                                                        | Basic                                          |                          |         | 27,133  |   |      |         | 24,925  |   |   |         | 18,380  |  
|                                                                        | Diluted                                        |                          |         | 28,244  |   |      |         | 26,056  |   |   |         | 19,291  |  

See accompanying notes to consolidated financial
statements.

F-3



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.

AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)

(In thousands)


|                                                 |                                          |                          |        |        |  |      |        |        |   |   |       |        |  
|------------------------------------------------ | ---------------------------------------- | ------------------------ | ------ | ------ |  | ---- | ------ | ------ | - | - | ----- | ------ | -
|                                                 |                                          |                         
|                                                 |                                          | Years Ended December 31,
|                                                 |                                          |                         
|                                                 |                                          | 2003                     |        | 2002   |  | 2001
|                                                 |                                          |                          |        |        |  |     
|Net income                                       |                                          | $                        | 29,876 |        |  | $    | 19,600 |        |   | $ | 2,750 |       
|Other comprehensive income (loss), net of taxes: |                                          |                          |        |        |  |      |        |        |   |   |       |       
|                                                 | Foreign currency translation adjustments |                          |        | 28,964 |  |      |        | 20,364 |   |   |       | (3,566 | )
|                                                 | Minimum pension liability adjustment     |                          |        | 496    |  |      |        | (1,529 | ) |   |       |       |  
|                                                 | Unrealized gains on securities           |                          |        | 102    |  |      |        | 47     |   |   |       |       |  
|                                                 |                                          |                          |        |        |  |      |        |        |   |   |       |       
|                                                 | Other comprehensive income (loss)        |                          |        | 29,562 |  |      |        | 18,882 |   |   |       | (3,566 | )
|                                                 |                                          |                          |        |        |  |      |        |        |   |   |       |       
|                                                 | Comprehensive income (loss)              |                          | $      | 59,438 |  |      | $      | 38,482 |   |   | $     | (816   | )
|                                                 |                                          |                          |        |        |  |      |        |        |   |   |       |       

See accompanying notes to consolidated financial
statements.

F-4



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.

AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

For the Years Ended December 31, 2003,
2002 and 2001


(In thousands)


|                                                           |  |                          |     |              |  |             |         |           |  |         |        |             |  |              |     |        |  |   |         |   |  |   |        |   |  |   |        |   |  |   |        |  
|---------------------------------------------------------- |  | ------------------------ | --- | ------------ |  | ----------- | ------- | --------- |  | ------- | ------ | ----------- |  | ------------ | --- | ------ |  | - | ------- | - |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                           |  |                          |     |              |  |             |         |           |  |         |        | Receivables
|                                                           |  | Series C Preferred Stock |     | Common stock |  |             |         |           |  |         |        | From       
|                                                           |  |                          |     |              |  | Additional  |         |           |  |         |        | Sales of   
|                                                           |  | Outstanding              |     | Liquidation  |  | Outstanding |         |           |  | Paid-in |        | Treasury    |  | Deferred     |     | Common
|                                                           |  | Shares                   |     | Value        |  | Shares      |         | Par Value |  | Capital |        | Stock       |  | Compensation |     | Stock 
|                                                           |  |                          |     |              |  |             |         |           |  |         |        |             |  |              |     |       
|Balance, December 31, 2000                                 |  |                          | 19  |              |  | $           | 19,747  |           |  |         | 8,289  |             |  | $            | 83  |        |  | $ | 63,740  |   |  | $ | (344   | ) |  | $ | (495   | ) |  | $ | (2,973 | )
|Issuance of common stock and exercise of stock
    options |  |                          |    |              |  |             |        |           |  |         | 13,904 |             |  |              | 139 |        |  |   | 180,978 |   |  |   | 1,086  |   |  |   |       |   |  |   | 454    |  
|Accrued dividends on preferred stock                       |  |                          |    |              |  |             | 594     |           |  |         |       |             |  |              |    |        |  |   | (2,684  | ) |  |   |       |   |  |   |       |   |  |   |       |  
|Issuance of warrants                                       |  |                          |    |              |  |             |        |           |  |         |       |             |  |              |    |        |  |   | 169     |   |  |   |       |   |  |   |       |   |  |   |       |  
|Repurchases of common stock                                |  |                          |    |              |  |             |        |           |  |         | (341   | )           |  |              |    |        |  |   |        |   |  |   | (6,651 | ) |  |   |       |   |  |   | 1,345  |  
|Conversion of Series C convertible preferred
    stock     |  |                          | (19 | )            |  |             | (20,341 | )         |  |         | 1,937  |             |  |              | 19  |        |  |   | 20,322  |   |  |   |       |   |  |   |       |   |  |   |       |  
|Conversion of convertible subordinated note                |  |                          |    |              |  |             |        |           |  |         | 313    |             |  |              | 3   |        |  |   | 3,284   |   |  |   |       |   |  |   |       |   |  |   |       |  
|Amortization of deferred compensation                      |  |                          |    |              |  |             |        |           |  |         |       |             |  |              |    |        |  |   |        |   |  |   |       |   |  |   | 126    |   |  |   |       |  
|Net income                                                 |  |                          |    |              |  |             |        |           |  |         |       |             |  |              |    |        |  |   |        |   |  |   |       |   |  |   |       |   |  |   |       |  
|Foreign currency translation adjustments                   |  |                          |    |              |  |             |        |           |  |         |       |             |  |              |    |        |  |   |        |   |  |   |       |   |  |   |       |   |  |   |       |  
|                                                           |  |                          |     |              |  |             |         |           |  |         |        |             |  |              |     |        |  |   |         |   |  |   |        |   |  |   |        |   |  |   |        |  
|Balance, December 31, 2001                                 |  |                          |    |              |  |             |        |           |  |         | 24,102 |             |  |              | 244 |        |  |   | 265,809 |   |  |   | (5,909 | ) |  |   | (369   | ) |  |   | (1,174 | )
|Issuance of common stock and exercise of stock
    options |  |                          |    |              |  |             |        |           |  |         | 3,034  |             |  |              | 29  |        |  |   | 54,667  |   |  |   | 3,035  |   |  |   | (1,230 | ) |  |   | 983    |  
|Repurchases of common stock                                |  |                          |    |              |  |             |        |           |  |         | (32    | )           |  |              |    |        |  |   | 274     |   |  |   | (859   | ) |  |   |       |   |  |   |       |  
|Amortization of deferred compensation                      |  |                          |    |              |  |             |        |           |  |         |       |             |  |              |    |        |  |   |        |   |  |   |       |   |  |   | 373    |   |  |   |       |  
|Net income                                                 |  |                          |    |              |  |             |        |           |  |         |       |             |  |              |    |        |  |   |        |   |  |   |       |   |  |   |       |   |  |   |       |  
|Foreign currency translation adjustments                   |  |                          |    |              |  |             |        |           |  |         |       |             |  |              |    |        |  |   |        |   |  |   |       |   |  |   |       |   |  |   |       |  
|Unrealized gains on securities                             |  |                          |    |              |  |             |        |           |  |         |       |             |  |              |    |        |  |   |        |   |  |   |       |   |  |   |       |   |  |   |       |  
|Minimum pension liability adjustment, net of tax           |  |                          |    |              |  |             |        |           |  |         |       |             |  |              |    |        |  |   |        |   |  |   |       |   |  |   |       |   |  |   |       |  
|                                                           |  |                          |     |              |  |             |         |           |  |         |        |             |  |              |     |        |  |   |         |   |  |   |        |   |  |   |        |   |  |   |        |  
|Balance, December 31, 2002                                 |  |                          |    |              |  |             |        |           |  |         | 27,104 |             |  | $            | 273 |        |  |   | 320,750 |   |  |   | (3,733 | ) |  |   | (1,226 | ) |  |   | (191   | )
|Issuance of common stock and exercise of stock
    options |  |                          |    |              |  |             |        |           |  |         | 552    |             |  |              | 4   |        |  |   | 9,656   |   |  |   | 2,864  |   |  |   | (4,137 | ) |  |   | 190    |  
|Repurchases of common stock                                |  |                          |    |              |  |             |        |           |  |         | (3     | )           |  |              |    |        |  |   | 113     |   |  |   | (117   | ) |  |   |       |   |  |   |       |  
|Amortization of deferred compensation                      |  |                          |    |              |  |             |        |           |  |         |       |             |  |              |    |        |  |   |        |   |  |   |       |   |  |   | 815    |   |  |   |       |  
|Net income                                                 |  |                          |    |              |  |             |        |           |  |         |       |             |  |              |    |        |  |   |        |   |  |   |       |   |  |   |       |   |  |   |       |  
|Foreign currency translation adjustments                   |  |                          |    |              |  |             |        |           |  |         |       |             |  |              |    |        |  |   |        |   |  |   |       |   |  |   |       |   |  |   |       |  
|Unrealized gains on securities                             |  |                          |    |              |  |             |        |           |  |         |       |             |  |              |    |        |  |   |        |   |  |   |       |   |  |   |       |   |  |   |       |  
|Minimum pension liability adjustment, net of tax           |  |                          |    |              |  |             |        |           |  |         |       |             |  |              |    |        |  |   |        |   |  |   |       |   |  |   |       |   |  |   |       |  
|                                                           |  |                          |     |              |  |             |         |           |  |         |        |             |  |              |     |        |  |   |         |   |  |   |        |   |  |   |        |   |  |   |        |  
|Balance, December 31, 2003                                 |  |                          |    |              |  | $           |        |           |  |         | 27,653 |             |  | $            | 277 |        |  | $ | 330,519 |   |  | $ | (986   | ) |  | $ | (4,548 | ) |  | $ | (1     | )
|                                                           |  |                          |     |              |  |             |         |           |  |         |        |             |  |              |     |        |  |   |         |   |  |   |        |   |  |   |        |   |  |   |        |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                           |  |               |         |              |  |       |         |   |  |   |         |  
|---------------------------------------------------------- |  | ------------- | ------- | ------------ |  | ----- | ------- | - |  | - | ------- | -
|                                                           |  | Accumulated   |         |              |  |      
|                                                           |  | Other         |         | Retained     |  |      
|                                                           |  | Comprehensive |         | Earnings     |  |      
|                                                           |  | Income        |         | (Accumulated |  |      
|                                                           |  | (Loss)        |         | Deficit)     |  | Total
|                                                           |  |               |         |              |  |      
|Balance, December 31, 2000                                 |  | $             | (12,026 | )            |  | $     | (18,935 | ) |  | $ | 48,797  |  
|Issuance of common stock and exercise of stock
    options |  |               |        |              |  |       | (297    | ) |  |   | 182,360 |  
|Accrued dividends on preferred stock                       |  |               |        |              |  |       |        |   |  |   | (2,090  | )
|Issuance of warrants                                       |  |               |        |              |  |       |        |   |  |   | 169     |  
|Repurchases of common stock                                |  |               |        |              |  |       |        |   |  |   | (5,306  | )
|Conversion of Series C convertible preferred
    stock     |  |               |        |              |  |       |        |   |  |   |        |  
|Conversion of convertible subordinated note                |  |               |        |              |  |       |        |   |  |   | 3,287   |  
|Amortization of deferred compensation                      |  |               |        |              |  |       |        |   |  |   | 126     |  
|Net income                                                 |  |               |        |              |  |       | 2,750   |   |  |   | 2,750   |  
|Foreign currency translation adjustments                   |  |               | (3,566  | )            |  |       |        |   |  |   | (3,566  | )
|                                                           |  |               |         |              |  |       |         |   |  |   |         |  
|Balance, December 31, 2001                                 |  |               | (15,592 | )            |  |       | (16,482 | ) |  |   | 226,527 |  
|Issuance of common stock and exercise of stock
    options |  |               |        |              |  |       | (20     | ) |  |   | 57,464  |  
|Repurchases of common stock                                |  |               |        |              |  |       |        |   |  |   | (585    | )
|Amortization of deferred compensation                      |  |               |        |              |  |       |        |   |  |   | 373     |  
|Net income                                                 |  |               |        |              |  |       | 19,600  |   |  |   | 19,600  |  
|Foreign currency translation adjustments                   |  |               | 20,364  |              |  |       |        |   |  |   | 20,364  |  
|Unrealized gains on securities                             |  |               | 47      |              |  |       |        |   |  |   | 47      |  
|Minimum pension liability adjustment, net of tax           |  |               | (1,529  | )            |  |       |        |   |  |   | (1,529  | )
|                                                           |  |               |         |              |  |       |         |   |  |   |         |  
|Balance, December 31, 2002                                 |  |               | 3,290   |              |  |       | 3,098   |   |  |   | 322,261 |  
|Issuance of common stock and exercise of stock
    options |  |               |        |              |  |       | (432    | ) |  |   | 8,145   |  
|Repurchases of common stock                                |  |               |        |              |  |       |        |   |  |   | (4      | )
|Amortization of deferred compensation                      |  |               |        |              |  |       |        |   |  |   | 815     |  
|Net income                                                 |  |               |        |              |  |       | 29,876  |   |  |   | 29,876  |  
|Foreign currency translation adjustments                   |  |               | 28,964  |              |  |       |        |   |  |   | 28,964  |  
|Unrealized gains on securities                             |  |               | 102     |              |  |       |        |   |  |   | 102     |  
|Minimum pension liability adjustment, net of tax           |  |               | 496     |              |  |       |        |   |  |   | 496     |  
|                                                           |  |               |         |              |  |       |         |   |  |   |         |  
|Balance, December 31, 2003                                 |  | $             | 32,852  |              |  | $     | 32,542  |   |  | $ | 390,655 |  
|                                                           |  |               |         |              |  |       |         |   |  |   |         |  

See accompanying notes to consolidated financial
statements.

F-5



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.

AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                         |                                                                                |                                                                                                                                          |         |          |   |      |        |         |   |   |        |          |   | 
|-------------------------------------------------------- | ------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------- | ------- | -------- | - | ---- | ------ | ------- | - | - | ------ | -------- | - | 
|                                                         |                                                                                |                                                                                                                                         
|                                                         |                                                                                | Years Ended December 31,                                                                                                                
|                                                         |                                                                                |                                                                                                                                         
|                                                         |                                                                                | 2003                                                                                                                                     |         | 2002     |   | 2001
|                                                         |                                                                                |                                                                                                                                          |         |          |   |     
|Cash flows from operating activities:                    |                                                                                |                                                                                                                                          |         |          |   |      |        |         |   |   |        |         
|                                                         | Net income                                                                     |                                                                                                                                          | $       | 29,876   |   |      | $      | 19,600  |   |   | $      | 2,750    |  
|                                                         |                                                                                | Adjustments to reconcile net income to net cash
    provided by operating activities:                                                    |         |          |   |      |        |         |   |   |        |          |   | 
|                                                         | Provision for doubtful accounts                                                |                                                                                                                                          |         | 7,772    |   |      |        | 6,330   |   |   |        | 3,517    |  
|                                                         | Depreciation and amortization                                                  |                                                                                                                                          |         | 32,187   |   |      |        | 26,530  |   |   |        | 26,116   |  
|                                                         | Amortization of debt issue costs and discount                                  |                                                                                                                                          |         | 1,814    |   |      |        | 1,374   |   |   |        | 301      |  
|                                                         | Deferred income taxes                                                          |                                                                                                                                          |         | 9,290    |   |      |        | 8,591   |   |   |        | (3,648   | )
|                                                         | Gain on equipment disposals                                                    |                                                                                                                                          |         |         |   |      |        | 34      |   |   |        | (188     | )
|                                                         | Impairment of investment securities                                            |                                                                                                                                          |         |         |   |      |        | 1,057   |   |   |        |         |  
|                                                         | Loss on early retirement of debt                                               |                                                                                                                                          |         |         |   |      |        |        |   |   |        | 7,466    |  
|                                                         | Equity in earnings of unconsolidated affiliates                                |                                                                                                                                          |         | (15,074  | ) |      |        | (9,454  | ) |   |        | (5,879   | )
|                                                         | Minority interests in income of consolidated
    subsidiaries                  |                                                                                                                                          |         | 24,311   |   |      |        | 14,846  |   |   |        | 7,558    |  
|                                                         | Equity-based compensation                                                      |                                                                                                                                          |         | 2,970    |   |      |        | 373     |   |   |        | 126      |  
|                                                         |                                                                                | Increases (decreases) in cash from changes
    in operating assets and liabilities, net of effects from
    purchases of new businesses: |         |          |   |      |        |         |   |   |        |          |   | 
|                                                         | Patient receivables                                                            |                                                                                                                                          |         | (18,582  | ) |      |        | (8,904  | ) |   |        | (6,347   | )
|                                                         | Other receivables                                                              |                                                                                                                                          |         | 15,360   |   |      |        | (1,918  | ) |   |        | 5,918    |  
|                                                         | Inventories of supplies, prepaids and other
    current assets                 |                                                                                                                                          |         | (3,336   | ) |      |        | (2,843  | ) |   |        | 2,847    |  
|                                                         | Accounts payable and other current liabilities                                 |                                                                                                                                          |         | (1,277   | ) |      |        | 5,395   |   |   |        | 2,304    |  
|                                                         | Other long-term liabilities                                                    |                                                                                                                                          |         | 1,521    |   |      |        | (1,806  | ) |   |        | (1,984   | )
|                                                         |                                                                                |                                                                                                                                          |         |          |   |      |        |         |   |   |        |         
|                                                         | Net cash provided by operating activities                                      |                                                                                                                                          |         | 86,832   |   |      |        | 59,205  |   |   |        | 40,857   |  
|                                                         |                                                                                |                                                                                                                                          |         |          |   |      |        |         |   |   |        |         
|Cash flows from investing activities:                    |                                                                                |                                                                                                                                          |         |          |   |      |        |         |   |   |        |         
|                                                         | Purchases of new businesses and equity interests,
    net of cash received     |                                                                                                                                          |         | (51,922  | ) |      |        | (62,389 | ) |   |        | (57,388  | )
|                                                         | Purchases of property and equipment                                            |                                                                                                                                          |         | (41,791  | ) |      |        | (30,079 | ) |   |        | (25,777  | )
|                                                         | Sales of property                                                              |                                                                                                                                          |         |         |   |      |        | 789     |   |   |        | 1,042    |  
|                                                         | Increase in deposits and notes receivable                                      |                                                                                                                                          |         | (13,880  | ) |      |        | 180     |   |   |        | (2,102   | )
|                                                         | Cash (placed in) released from escrow                                          |                                                                                                                                          |         | (3,145   | ) |      |        |        |   |   |        | 1,664    |  
|                                                         |                                                                                |                                                                                                                                          |         |          |   |      |        |         |   |   |        |         
|                                                         | Net cash used in investing activities                                          |                                                                                                                                          |         | (110,738 | ) |      |        | (91,499 | ) |   |        | (82,561  | )
|                                                         |                                                                                |                                                                                                                                          |         |          |   |      |        |         |   |   |        |         
|Cash flows from financing activities:                    |                                                                                |                                                                                                                                          |         |          |   |      |        |         |   |   |        |         
|                                                         | Proceeds from long-term debt                                                   |                                                                                                                                          |         | 53,242   |   |      |        | 59,442  |   |   |        | 269,288  |  
|                                                         | Payments on long-term debt                                                     |                                                                                                                                          |         | (45,469  | ) |      |        | (64,388 | ) |   |        | (274,371 | )
|                                                         | Proceeds from issuance of common stock                                         |                                                                                                                                          |         | 4,311    |   |      |        | 53,665  |   |   |        | 132,818  |  
|                                                         | Payments to repurchase common stock                                            |                                                                                                                                          |         | (4       | ) |      |        |        |   |   |        | (104     | )
|                                                         | Payments for the redemption and dividends of
    preferred stock               |                                                                                                                                          |         |         |   |      |        |        |   |   |        | (54,908  | )
|                                                         | Distributions on investments in affiliates                                     |                                                                                                                                          |         | (7,570   | ) |      |        | (3,309  | ) |   |        | (552     | )
|                                                         |                                                                                |                                                                                                                                          |         |          |   |      |        |         |   |   |        |         
|                                                         | Net cash provided by financing activities                                      |                                                                                                                                          |         | 4,510    |   |      |        | 45,410  |   |   |        | 72,171   |  
|                                                         |                                                                                |                                                                                                                                          |         |          |   |      |        |         |   |   |        |         
|Effect of exchange rate changes on cash                  |                                                                                |                                                                                                                                          | 344     |          |   |      | 574    |         |   |   | (37    | )       
|                                                         |                                                                                |                                                                                                                                          |         |          |   |      |        |         |   |   |        |         
|Net increase (decrease) in cash and cash
    equivalents |                                                                                |                                                                                                                                          | (19,052 | )        |   |      | 13,690 |         |   |   | 30,430 |         
|Cash and cash equivalents at beginning of year           |                                                                                |                                                                                                                                          | 47,571  |          |   |      | 33,881 |         |   |   | 3,451  |         
|                                                         |                                                                                |                                                                                                                                          |         |          |   |      |        |         |   |   |        |         
|Cash and cash equivalents at end of year                 |                                                                                | $                                                                                                                                        | 28,519  |          |   | $    | 47,571 |         |   | $ | 33,881 |         
|                                                         |                                                                                |                                                                                                                                          |         |          |   |      |        |         |   |   |        |         
|Supplemental information:                                |                                                                                |                                                                                                                                          |         |          |   |      |        |         |   |   |        |         
|                                                         | Interest paid, net of amounts capitalized                                      |                                                                                                                                          | $       | 26,888   |   |      | $      | 24,779  |   |   | $      | 20,424   |  
|                                                         | Income taxes paid                                                              |                                                                                                                                          |         | 5,889    |   |      |        | 3,090   |   |   |        |         |  
|                                                         |                                                                                | Non-cash transactions:                                                                                                                   |         |          |   |      |        |         |   |   |        |          |   | 
|                                                         | Repurchases of common stock using noncash assets                               |                                                                                                                                          |         |         |   |      |        |        |   |   |        | 70       |  
|                                                         | Issuance of common stock for service contracts                                 |                                                                                                                                          |         | 254      |   |      |        | 1,002   |   |   |        |         |  
|                                                         | Issuance of common stock to employees                                          |                                                                                                                                          |         | 6,291    |   |      |        |        |   |   |        |         |  
|                                                         | Sale of noncontrolling interests for notes
    receivable                      |                                                                                                                                          |         | 2,492    |   |      |        |        |   |   |        |         |  
|                                                         | Sale of common stock for notes receivable from
    employees, net              |                                                                                                                                          |         |         |   |      |        |        |   |   |        | 70       |  
|                                                         | Common stock, options, and warrants issued for
    purchases of new businesses |                                                                                                                                          |         |         |   |      |        | 1,186   |   |   |        | 48,949   |  
|                                                         | Conversion of convertible preferred stock to
    common                        |                                                                                                                                          |         |         |   |      |        |        |   |   |        | 20,341   |  
|                                                         | Assets acquired under capital lease obligations                                |                                                                                                                                          |         | 586      |   |      |        | 2,382   |   |   |        | 7,053    |  
|                                                         | Conversion of subordinated debt to redeemable
    preferred stock              |                                                                                                                                          |         |         |   |      |        |        |   |   |        | 20,000   |  
|                                                         | Conversion of subordinated debt to common stock                                |                                                                                                                                          |         |         |   |      |        |        |   |   |        | 3,287    |  

See accompanying notes to consolidated financial
statements.

F-6



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.

AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and 2002




|    |                                                             
|--- | ------------------------------------------------------------
|(1) | Summary of Significant Accounting Policies and
    Practices



| |                                
| | -------------------------------
| | (a) Description of
    Business

United Surgical Partners
International, Inc., a Delaware Company, and subsidiaries
(USPI or the Company) was formed in February 1998 for the
primary purpose of ownership and operation of surgery centers,
private surgical hospitals and related businesses in the United
States and Europe. At December 31, 2003, USPI,
headquartered in Dallas, Texas, operated 62 surgical
facilities in the United States. Of these 62 facilities,
USPI consolidates the results of 28, owns a minority equity
interest in 33, which are accounted for under the equity method,
and holds no ownership interest in the remaining center which is
operated by USPI under a management contract. In addition,
United Surgical Partners Europe, S.L. (USPE), a company
incorporated in Spain and majority owned by USPI, managed and
owned a majority interest in eight private surgical hospitals
and one surgery center in Spain at December 31, 2003.
Global Healthcare Partners Limited (Global), a company
incorporated in England and majority owned by USPI, managed and
wholly owned three private surgical hospitals in the United
Kingdom at December 31, 2003.

USPI is subject to changes in government
legislation that could impact Medicare, Medicaid and foreign
government reimbursement levels and is also subject to increased
levels of managed care penetration and changes in payor patterns
that may impact the level and timing of payments for services
rendered.

USPI maintains its books and records on the
accrual basis of accounting, and the consolidated financial
statements are prepared in accordance with accounting principles
generally accepted in the United States of America.



|    |                                      
|--- | -------------------------------------
|(b) | Translation of Foreign
    Currencies

The financial statements of foreign subsidiaries
are measured in local currency and then translated into
U.S. dollars. All assets and liabilities have been
translated using the current rate of exchange at the balance
sheet date. Results of operations have been translated using the
average rates prevailing throughout the year. Translation gains
or losses resulting from the changes in the exchange rates are
accumulated in a separate component of stockholders equity.



|    |                            
|--- | ---------------------------
|(c) | Principles of Consolidation

The consolidated financial statements include the
financial statements of USPI and its wholly owned and majority
owned subsidiaries. In addition, the Company consolidates the
accounts of certain surgical facilities of which it does not
technically hold a majority ownership interest because the
Company maintains effective control over the surgical
facilities assets and operations. All significant
intercompany balances and transactions have been eliminated in
consolidation.



|    |                 
|--- | ----------------
|(d) | Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make a number of
estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

F-7



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)




|    |                  
|--- | -----------------
|(e) | Reclassifications

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



|    |                                     
|--- | ------------------------------------
|(f) | Cash Equivalents and
    Investments

For purposes of the statements of cash flows,
USPI considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.

Investments in unconsolidated companies in which
the Company exerts significant influence and owns between 20%
and 50% of the investees are accounted for using the equity
method.

Investments in unconsolidated companies in which
the Company owns less than 20% of an investee but exerts
significant influence through board of director representation
and an agreement to manage the investee are also accounted for
using the equity method.

All investments in companies in which the Company
does not exert significant influence, generally indicated by
ownership less than 20% and the absence of board representation
and a management agreement, are carried at cost.



|    |                        
|--- | -----------------------
|(g) | Inventories of Supplies

Inventories of supplies are stated at cost, which
approximates market.



|    |                       
|--- | ----------------------
|(h) | Property and Equipment

Property and equipment are stated at cost or,
when acquired as part of a business combination, fair value at
date of acquisition. Depreciation is calculated on the
straight-line method over the estimated useful lives of the
assets. Upon retirement or disposal of assets, the asset and
accumulated depreciation accounts are adjusted accordingly, and
any gain or loss is reflected in earnings or loss of the
respective period. Maintenance costs and repairs are expensed as
incurred; significant renewals and betterments are capitalized.
Assets held under capital leases are classified as property and
equipment and amortized using the straight-line method over the
shorter of the useful lives or lease terms, and the related
obligations are recorded as liabilities. Lease amortization is
included in depreciation expense.



|    |                  
|--- | -----------------
|(i) | Intangible Assets

Intangible assets consist of costs in excess of
net assets acquired (goodwill), costs associated with the
purchase of management and administrative service contracts, and
other intangibles, which consist primarily of debt issue costs.
On July 20, 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 142,
Accounting for Goodwill and Other Intangible Assets(SFAS No. 142). The Company adopted
SFAS No. 142, and accordingly did not amortize any
goodwill related to acquisitions consummated subsequent to
June 30, 2001 and ceased amortizing all goodwill and
indefinite-lived intangible assets beginning January 1,
2002. The Company continues to amortize intangible assets with
definite useful lives over their respective useful lives to
their estimated residual values. Goodwill and intangible assets
with indefinite useful lives are no longer amortized and are
instead tested for impairment on an annual basis, with the tests
of goodwill being performed at the reporting unit
(country) level.

F-8



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)




|    |                                    
|--- | -----------------------------------
|(j) | Impairment of Long-lived
    Assets

Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset, or related groups of assets, may
not be fully recoverable from estimated future cash flows. In
the event of impairment, measurement of the amount of impairment
may be based on appraisal, market values of similar assets or
estimates of future discounted cash flows resulting from use and
ultimate disposition of the asset.



|    |                                        
|--- | ---------------------------------------
|(k) | Fair Value of Financial
    Instruments

The carrying amounts of cash and cash
equivalents, short-term investments, accounts receivable,
current portion of long-term debt and accounts payable
approximate fair value because of the short maturity of these
instruments. The carrying amounts of variable rate long-term
debt approximate fair value since the loans bear interest at
floating rates and have terms representative of current market
conditions. The fair values of fixed rate long-term debt are
based on quoted market prices.



|    |                    
|--- | -------------------
|(l) | Revenue Recognition

Revenue consists primarily of net patient service
revenues which are based on the facilities established
billing rates less allowances and discounts, principally for
patients covered under contractual programs with private
insurance companies. USPI derives approximately 76% of its net
patient service revenues from private insurance payers,
approximately 11% from governmental payors and approximately 13%
from self-pay and other payors. The allowances that the Company
records for these revenues, including allowances for bad debts,
are based on the Companys best estimates of expected
actual reimbursement based primarily on historical collections
for similar transactions. In addition, USPI has entered into
agreements with certain surgical facilities, hospitals and
physician practices to provide management services. As
compensation for these services each month, USPI charges the
managed entities management fees which are either fixed in
amount or represent a fixed percentage of each entitys
earnings, typically defined as net revenue less a provision for
doubtful accounts or operating income. Amounts are recognized as
services are provided.



|    |                                                    
|--- | ---------------------------------------------------
|(m) | Equity in Earnings of Unconsolidated
    Affiliates

Equity in earnings of unconsolidated affiliates
consists of USPIs share of the profits or losses generated
from its equity investments in 33 surgical facilities. Because
these operations are central to USPIs business strategy,
equity in earnings of unconsolidated affiliates is classified as
revenue in the accompanying statements of operations. USPI has
contracts to manage these facilities, which results in USPI
having an active role in the operations of these facilities and
devoting a significant portion of its corporate resources to the
fulfillment of these management responsibilities.



|    |             
|--- | ------------
|(n) | Income Taxes

USPI accounts for income taxes under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which these
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date. Deferred tax assets are reduced by a
valuation

F-9



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


allowance when, in the opinion of management, it
is more likely than not that some or all of the deferred tax
assets may not be realized.



|    |                          
|--- | -------------------------
|(o) | Equity-Based Compensation

USPI applies the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees,and related interpretations in accounting for its stock
option grants to employees. Accordingly, USPI generally does not
record compensation expense because USPI generally issues
options for which the option exercise price equals the current
market price of the underlying stock on the date of grant.
SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure, established accounting and
disclosure requirements using a fair value based method of
accounting for stock-based employee compensation plans. As
permitted under SFAS No. 123, the Company has elected
to continue to apply the intrinsic value based method of
accounting described above, and has adopted the disclosure
requirements of SFAS No. 123 and
SFAS No. 148. Had USPI determined compensation cost
based on the fair value at the grant date for its stock options
under SFAS No. 123, USPIs net income (loss)
would have been the pro forma amounts indicated below:

|                                                          |                                                                                                                                     |                          |   |        |   |      |   |        |   |  |   |       |  
|--------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | - | ------ | - | ---- | - | ------ | - |  | - | ----- | -
|                                                          |                                                                                                                                     |                         
|                                                          |                                                                                                                                     | Years Ended December 31,
|                                                          |                                                                                                                                     |                         
|                                                          |                                                                                                                                     | 2003                     |   | 2002   |   | 2001
|                                                          |                                                                                                                                     |                          |   |        |   |     
|Net income (loss) attributable to common
    stockholders |                                                                                                                                     |                          |   |        |   |      |   |        |   |  |   |      
|                                                          | As reported                                                                                                                         |                          | $ | 29,876 |   |      | $ | 19,600 |   |  | $ | 66    |  
|                                                          | Add: Total stock-based employee compensation
    expense included in reported net income, net of taxes                              |                          |   | 1,930  |   |      |   | 534    |   |  |   | 82    |  
|                                                          | Less: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of taxes |                          |   | (6,223 | ) |      |   | (3,947 | ) |  |   | (940  | )
|                                                          |                                                                                                                                     |                          |   |        |   |      |   |        |   |  |   |      
|                                                          | Pro forma                                                                                                                           |                          | $ | 25,583 |   |      | $ | 16,187 |   |  | $ | (792  | )
|                                                          |                                                                                                                                     |                          |   |        |   |      |   |        |   |  |   |      
|Basic earnings (loss) per share                           |                                                                                                                                     |                          |   |        |   |      |   |        |   |  |   |      
|                                                          | As reported                                                                                                                         |                          | $ | 1.10   |   |      | $ | 0.79   |   |  |   |      |  
|                                                          | Pro forma                                                                                                                           |                          |   | 0.94   |   |      |   | 0.65   |   |  |   | (0.04 | )
|Diluted earnings (loss) per share                         |                                                                                                                                     |                          |   |        |   |      |   |        |   |  |   |      
|                                                          | As reported                                                                                                                         |                          | $ | 1.06   |   |      | $ | 0.75   |   |  |   |      |  
|                                                          | Pro forma                                                                                                                           |                          |   | 0.91   |   |      |   | 0.62   |   |  |   | (0.04 | )

The fair market values in the table above were
estimated at the date of grant using the Black-Scholes valuation
model with the following assumptions: risk-free interest rates
ranging from 2.1% to 6.3%, expected dividend yield of zero,
expected volatility of the market price of the Companys
common stock of 40%, and an expected life of the option ranging
from three to five years.

Total stock-based employee compensation expense
included in net income, as reported, primarily consists of
expense related to grants to employees of the Companys
common stock and a December 2000 grant of stock options at a
price lower than the current market price at the date of grant.
The compensation amounts related to these grants are being
amortized into expense over the estimated service periods.

F-10



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


The Company accounts for equity instruments
issued to non-employees in accordance with the provisions of
SFAS No. 123 and Emerging Task Force (EITF) Issue
No. 96-18, Accounting for Equity Instruments that are
issued to other than Employees for Acquiring, or in Conjunction
with Selling Goods or Services.



|    |                              
|--- | -----------------------------
|(p) | Commitments and Contingencies

Liabilities for loss contingencies arising from
claims, assessments, litigation, fines and penalties, and other
sources are recorded when it is probable that a liability has
been incurred and the amount of the assessment can be reasonably
estimated.



|    |                                                            
|--- | -----------------------------------------------------------
|(2) | Offerings of Common Stock and Senior
    Subordinated Notes

In June 2001, the Company received, after
offering costs of $14.2 million, net proceeds of
$130.7 million from an initial public offering
(IPO) of 10,350,000 shares of its common stock, which
included 1,350,000 shares attributable to the
underwriters exercise of their over-allotment option. Net
proceeds of the IPO were used to redeem $33.7 million of
Series A Redeemable Preferred Stock, including accrued
dividends, and to repay $91.3 million of bank indebtedness.
The remaining $5.7 million, together with borrowings under
the Companys primary U.S. credit agreement, was used
to acquire a controlling interest in a surgery center in
Fort Worth, Texas.

In December 2001, a wholly owned subsidiary of
the Company received, after offering costs of $5.3 million
and a discount of $1.2 million, net proceeds of
$143.5 million from an offering of 10% Senior
Subordinated Notes due 2011 (the Debt Offering  see
Note 8). Net proceeds of the Debt Offering were used
(a) to repay the full $41.0 million and
$24.9 million, plus accrued interest, outstanding under the
Companys primary credit facilities in the U.S. and Spain,
respectively; (b) to repay the Companys existing
$36 million senior subordinated note payable; (c) to
redeem $21 million of Series D Redeemable Preferred
Stock, including accrued dividends; and (d) for general
corporate purposes, including the repayment of certain working
capital lines of credit and for acquisitions.

In October 2002, the Company received, after
offering costs of approximately $4.0 million, net proceeds
of approximately $49.1 million from an offering of
2,415,000 shares of its common stock, which included
315,000 shares attributable to the underwriters
exercise of their over-allotment option. Net proceeds were used
as follows:



| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | To repay the $14.2 million balance then
    outstanding under the Companys primary credit agreement.                                                                 
|
| |  | To acquire an 80% interest in a surgery center in
    Lyndhurst, Ohio, for $8.1 million in cash.                                                                      
|
| |  | To acquire an additional 25% interest in surgery
    center in Atlanta, Georgia, in which the Company already held a
    15% interest, for $4.0 million in cash.      
|
| |  | To acquire an additional 29% interest in a
    surgery center in Torrance, California, in which the Company
    already held a 34% interest, for $9.3 million in cash.
|
| |  | The remaining net proceeds were used for other
    acquisitions, development of new facilities and general
    corporate purposes.                                    

F-11



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)




|    |                                    
|--- | -----------------------------------
|(3) | Acquisitions and Equity Investments

In March 2003, the Company acquired 100% of a
private surgical hospital in Marbella, Spain, for
approximately 8.4 million
($9.0 million) in cash. In addition, the Company agreed to
pay up to an additional total
of 4.3 million
($5.4 million) to the sellers, depending on the resolution
of certain contingencies over the next four years, of
which 2.9 million
($3.6 million) has been placed in escrow and is included in
other assets in the Companys balance sheet at
December 31, 2003.

During April 2003, the Company acquired a private
surgical hospital in London, England for approximately
£8.7 million ($13.8 million), of which the
payment of approximately £0.4 million
($0.7 million) has been deferred pending the resolution of
certain contingencies.

During June 2003, the Company acquired a 65%
interest in an ambulatory surgery center in Austin, Texas for
$10.8 million in cash.

The intangible assets created consisted entirely
of goodwill in an aggregate amount of $13.2 million, which
was assigned to the U.S., Spain and the U.K. reporting units in
the amounts of $10.4 million, $0.1 million and
$2.7 million, respectively. The amortization of the
U.S. portion is expected to be fully deductible for tax
purposes.

The terms of certain of USPIs acquisition
agreements provide for additional consideration to be paid to or
received from the sellers based on certain financial targets or
objectives being met for the acquired facilities or based upon
the resolution of certain contingencies. Such additional
consideration, which amounted to net payments by USPI of
approximately $3.8 million, $3.3 million, and
$5.7 million during 2003, 2002, and 2001, respectively, was
recorded as an increase or decrease to goodwill at the time of
the payment or receipt. The Companys management currently
estimates the additional potential consideration that may be
paid in future years to be $6.4 million, including the
$6.1 million of deferred purchase price related to the
Marbella and London facilities we acquired during 2003.

Following are the unaudited pro forma results for
the years ended December 31, 2003 and 2002 as if the
acquisitions occurred on January 1 of each year (in
thousands):

|                           |  |              |         |      |  |   |         | 
|-------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                           |  |             
|                           |  | Years Ended 
|                           |  | December 31,
|                           |  |             
|                           |  | 2003         |         | 2002
|                           |  |              |         |     
|                           |  |             
|                           |  | (Unaudited) 
|Net revenues               |  | $            | 450,840 |      |  | $ | 357,882 | 
|Net income                 |  |              | 30,136  |      |  |   | 22,135  | 
|Diluted earnings per share |  | $            | 1.07    |      |  | $ | 0.85    | 

These unaudited pro forma results have been
prepared for comparative purposes only. The pro forma results do
not purport to be indicative of the results of operations which
would have actually resulted had the acquisitions been in effect
at the beginning of the preceding year, nor are they necessarily
indicative of the results of operations that may be achieved in
the future.

USPI also engages in purchases of equity
interests that are not business combinations. These transactions
consist of acquisitions and sales of noncontrolling equity
interests in surgical facilities, which are recorded as
increases or decreases in investment basis or minority interests
payable, and the investment of additional cash in surgical
facilities under development. During the year ended
December 31, 2003, these transactions resulted in net cash
outflows totaling $14.5 million, of which $6.1 million
was paid to acquire a noncontrolling interest in a surgery
center in Torrance, California and $4.4 million was paid to
acquire a noncontrolling interest in a recently constructed
surgery center in Dallas, Texas.

F-12



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


The Company controls a significant number of its
investees and therefore consolidates their results.
Additionally, the Company invests in a significant number of
facilities in which the Company has significant influence but
does not have control; the Company uses the equity method to
account for these investments. The majority of these investees
are partnerships or limited liability companies, which require
the associated tax benefit or expense to be recorded by the
partners or members. Summarized financial information for the
Companys equity method investees on a combined basis was
as follows (amounts reflect 100% of the investees results
on an aggregated basis and are unaudited):

|                                               |                        |      |    |         |  |      |    |         |  |  |    |        | 
|---------------------------------------------- | ---------------------- | ---- | -- | ------- |  | ---- | -- | ------- |  |  | -- | ------ | 
|                                               |                        | 2003 |    | 2002    |  | 2001
|                                               |                        |      |    |         |  |     
|Unconsolidated facilities operated at year-end |                        |      | 33 |         |  |      | 26 |         |  |  | 17 |       
|Income statement information:                  |                        |      |    |         |  |      |    |         |  |  |    |       
|                                               | Revenues               |      | $  | 240,848 |  |      | $  | 141,166 |  |  | $  | 84,278 | 
|                                               | Operating income       |      |    | 76,252  |  |      |    | 41,913  |  |  |    | 23,733 | 
|                                               | Net income             |      |    | 67,914  |  |      |    | 37,279  |  |  |    | 21,371 | 
|Balance sheet information:                     |                        |      |    |         |  |      |    |         |  |  |    |       
|                                               | Current assets         |      | $  | 69,659  |  |      | $  | 39,125  |  |  | $  | 26,765 | 
|                                               | Noncurrent assets      |      |    | 132,380 |  |      |    | 91,528  |  |  |    | 46,585 | 
|                                               | Current liabilities    |      |    | 38,234  |  |      |    | 22,974  |  |  |    | 12,171 | 
|                                               | Noncurrent liabilities |      |    | 73,414  |  |      |    | 59,301  |  |  |    | 22,064 | 



|    |                  
|--- | -----------------
|(4) | Other Receivables

Other receivables consist primarily of amounts
receivable for services performed and funds advanced under
management and administrative service agreements. During 2003
the Company modified some of the agreements under which the
Company provides certain administrative services to physicians,
eliminating the financing of accounts receivable from the scope
of administrative services provided by the Company. As a result,
the Company collected approximately $20 million of the
outstanding receivables from these physicians.

As discussed in Note 12, some of the
facilities to which the Company provides management and
administrative services are related parties, due to Company
being an equity method investor in those facilities. At
December 31, 2003 and 2002, the amounts receivable from
related parties, which are included in other receivables on the
Companys balance sheet, totaled $9.1 million and
$6.5 million, respectively.

F-13



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)




|    |                       
|--- | ----------------------
|(5) | Property and Equipment

At December 31, property and equipment
consisted of the following (in thousands):

|                                     |                            |              |            |      |  |      |          |         |  |   |          |         | 
|------------------------------------ | -------------------------- | ------------ | ---------- | ---- |  | ---- | -------- | ------- |  | - | -------- | ------- | 
|                                     |                            | Estimated    |            |      |  |     
|                                     |                            | Useful Lives |            | 2003 |  | 2002
|                                     |                            |              |            |      |  |     
|Land and land improvements           |                            |              |           |      |  | $    | 38,817   |         |  | $ | 24,690   |        
|Buildings and leasehold improvements |                            |              | 7-50 years |      |  |      | 246,335  |         |  |   | 164,068  |        
|Equipment                            |                            |              | 3-12 years |      |  |      | 208,443  |         |  |   | 168,534  |        
|Furniture and fixtures               |                            |              | 4-20 years |      |  |      | 17,912   |         |  |   | 13,216   |        
|Construction in progress             |                            |              |            |      |  |      | 13,689   |         |  |   | 22,087   |        
|                                     |                            |              |            |      |  |      |          |         |  |   |          |        
|                                     |                            |              |            |      |  |      | 525,196  |         |  |   | 392,595  |        
|Less accumulated depreciation        |                            |              |            |      |  |      | (177,133 | )       |  |   | (122,208 | )      
|                                     |                            |              |            |      |  |      |          |         |  |   |          |        
|                                     | Net property and equipment |              |            |      |  |      | $        | 348,063 |  |   | $        | 270,387 | 
|                                     |                            |              |            |      |  |      |          |         |  |   |          |        

At December 31, construction in progress
consisted primarily of the cancer center being constructed at
one of the Companys hospitals in London, England and
included $1.3 million of capitalized interest. During the
second quarter of 2003 the project was completed, its cost
basis, including an additional $0.6 million of interest
capitalized during 2003, was reclassified to property and
equipment, and depreciation commenced. At December 31,
2003, construction in progress consisted of several projects to
expand capacity, primarily at the Companys Spanish
facilities.

At December 31, assets recorded under
capital lease arrangements included in property and equipment
consisted of the following (in thousands):

|                              |                                                 |      |         |        |  |   |         |        | 
|----------------------------- | ----------------------------------------------- | ---- | ------- | ------ |  | - | ------- | ------ | 
|                              |                                                 | 2003 |         | 2002  
|                              |                                                 |      |         |       
|Land and buildings            |                                                 | $    | 67,310  |        |  | $ | 58,035  |       
|Equipment and furniture       |                                                 |      | 37,378  |        |  |   | 35,675  |       
|                              |                                                 |      |         |        |  |   |         |       
|                              |                                                 |      | 104,688 |        |  |   | 93,710  |       
|Less accumulated amortization |                                                 |      | (32,906 | )      |  |   | (24,080 | )     
|                              |                                                 |      |         |        |  |   |         |       
|                              | Net property and equipment under capital leases |      | $       | 71,782 |  |   | $       | 69,630 | 
|                              |                                                 |      |         |        |  |   |         |       



|    |                               
|--- | ------------------------------
|(6) | Goodwill and Intangible Assets

On July 20, 2001 the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 142, Accounting for Goodwill
and Other Intangible Assets(SFAS 142).
SFAS No. 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized but
instead be tested for impairment at least annually, with tests
of goodwill occurring at the reporting unit level (defined as an
operating segment or one level below an operating segment).
SFAS No. 142 also requires that intangible assets with
definite useful lives be amortized over their respective useful
lives to their estimated residual values. The Company fully
adopted the provisions of SFAS No. 142 effective
January 1, 2002.

The adoption of SFAS No. 142 required
that the Company perform transitional impairment tests for its
goodwill and certain other intangible assets as of the date of
adoption. The Company determined that its reporting units are at
the operating segment (country) level. The Company
completed the required

F-14



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


transitional and annual impairment tests during
the third quarters of 2002 and 2003. No impairment losses were
identified in any reporting unit or intangible asset as a result
of these tests.

The table below shows the Companys net
income and earnings per share for the years ended
December 31, 2003, 2002, and 2001 on a pro forma basis as
if the cessation of amortization of goodwill and
indefinite-lived intangible assets had occurred January 1,
2001 (in thousands, except per share amounts):

|                                                                                                           |  |                         |        |      |  |      |        |  |  |   |       | 
|---------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ----- | 
|                                                                                                           |  |                        
|                                                                                                           |  | Year Ended December 31,
|                                                                                                           |  |                        
|                                                                                                           |  | 2003                    |        | 2002 |  | 2001
|                                                                                                           |  |                         |        |      |  |     
|Net income attributable to common shareholders,
    as reported                                            |  | $                       | 29,876 |      |  | $    | 19,600 |  |  | $ | 66    | 
|Amortization of goodwill and indefinite-lived
    intangible assets, net of applicable income tax benefits |  |                         |       |      |  |      |       |  |  |   | 4,184 | 
|                                                                                                           |  |                         |        |      |  |      |        |  |  |   |       | 
|Net income attributable to common shareholders,
    as reported                                            |  | $                       | 29,876 |      |  | $    | 19,600 |  |  | $ | 4,250 | 
|                                                                                                           |  |                         |        |      |  |      |        |  |  |   |       | 
|Diluted earnings per share, as reported                                                                    |  | $                       | 1.06   |      |  | $    | 0.75   |  |  | $ |      | 
|Amortization of goodwill and indefinite-lived
    intangible assets, net of applicable income tax benefits |  |                         |       |      |  |      |       |  |  |   | 0.22  | 
|                                                                                                           |  |                         |        |      |  |      |        |  |  |   |       | 
|Pro forma diluted earnings per share                                                                       |  | $                       | 1.06   |      |  | $    | 0.75   |  |  | $ | 0.22  | 
|                                                                                                           |  |                         |        |      |  |      |        |  |  |   |       | 

Intangible assets, net of accumulated
amortization, consisted of the following:

|                        |       |              |         |         |  |   |         |         | 
|----------------------- | ----- | ------------ | ------- | ------- |  | - | ------- | ------- | 
|                        |       |             
|                        |       | December 31,
|                        |       |             
|                        |       | 2003         |         | 2002   
|                        |       |              |         |        
|Goodwill                |       | $            | 255,987 |         |  | $ | 215,498 |        
|Other intangible assets |       |              | 70,658  |         |  |   | 72,086  |        
|                        |       |              |         |         |  |   |         |        
|                        | Total |              | $       | 326,645 |  |   | $       | 287,584 | 
|                        |       |              |         |         |  |   |         |        

The following is a summary of changes in the
carrying amount of goodwill by operating segment and reporting
unit for years ended December 31, 2002 and 2003 (in
thousands):

|                             |  |      |         |                |  |         |        |        |  |       |        |  |  |   |        |  |  |   |         | 
|---------------------------- |  | ---- | ------- | -------------- |  | ------- | ------ | ------ |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                             |  |      |         |                |  |        
|                             |  |      |         | Western Europe |  |        
|                             |  |      |         |                |  |        
|                             |  |      |         |                |  | Western |        |       
|                             |  |      |         |                |  | United  |        | Europe |  |      
|                             |  | U.S. |         | Spain          |  | Kingdom |        | Total  |  | Total
|                             |  |      |         |                |  |         |        |        |  |      
|Balance at December 31, 2001 |  | $    | 106,579 |                |  | $       | 26,914 |        |  | $     | 18,311 |  |  | $ | 45,225 |  |  | $ | 151,804 | 
|Additions                    |  |      | 46,356  |                |  |         | 10,632 |        |  |       |       |  |  |   | 10,632 |  |  |   | 56,988  | 
|Other                        |  |      |        |                |  |         | 4,752  |        |  |       | 1,954  |  |  |   | 6,706  |  |  |   | 6,706   | 
|                             |  |      |         |                |  |         |        |        |  |       |        |  |  |   |        |  |  |   |         | 
|Balance at December 31, 2002 |  |      | 152,935 |                |  |         | 42,298 |        |  |       | 20,265 |  |  |   | 62,563 |  |  |   | 215,498 | 
|Additions                    |  |      | 26,664  |                |  |         | 71     |        |  |       | 2,718  |  |  |   | 2,789  |  |  |   | 29,453  | 
|Other                        |  |      |        |                |  |         | 8,544  |        |  |       | 2,492  |  |  |   | 11,036 |  |  |   | 11,036  | 
|                             |  |      |         |                |  |         |        |        |  |       |        |  |  |   |        |  |  |   |         | 
|Balance at December 31, 2003 |  | $    | 179,599 |                |  | $       | 50,913 |        |  | $     | 25,475 |  |  | $ | 76,388 |  |  | $ | 255,987 | 
|                             |  |      |         |                |  |         |        |        |  |       |        |  |  |   |        |  |  |   |         | 

Goodwill additions during the years ended
December 31, 2003 and 2002 resulted primarily from business
combinations and additionally from purchases of equity
investments accounted for under the equity method, for which the
related goodwill is included in intangible assets. Other changes
to the carrying amount of goodwill were primarily due to foreign
currency translation adjustments.

F-15



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


Intangible assets with definite useful lives are
amortized over their respective estimated useful lives, ranging
from three to fifteen years, to their estimated residual values.
Effective January 1, 2002, intangible assets with
indefinite useful lives are not amortized but instead are tested
for impairment at least annually. The majority of the
Companys management contracts have indefinite useful
lives. Most of these contracts have evergreen renewal provisions
that do not contemplate a specific termination date. Some of the
contracts have provisions which make it possible for the
facilitys other owners to terminate them at certain dates
and under certain circumstances. Based on the Companys
history with these contracts, the Companys management
considers the life of these contracts to be indefinite and
therefore does not amortize them unless facts and circumstances
indicate that it is no longer considered likely that these
contracts can be renewed without substantial cost.

The following is a summary of intangible assets
at December 31, 2003 and December 31, 2002 (in
thousands):

|                        |                         |                   |        |              |  |       |        |         |   |   |        |        | 
|----------------------- | ----------------------- | ----------------- | ------ | ------------ |  | ----- | ------ | ------- | - | - | ------ | ------ | 
|                        |                         |                  
|                        |                         | December 31, 2003
|                        |                         |                  
|                        |                         | Gross             |        |             
|                        |                         | Carrying          |        | Accumulated  |  |      
|                        |                         | Amount            |        | Amortization |  | Total
|                        |                         |                   |        |              |  |      
|Definite Useful Lives   |                         |                   |        |              |  |       |        |         |   |   |        |       
|Management Contracts    |                         | $                 | 27,391 |              |  | $     | (8,828 | )       |   | $ | 18,563 |       
|Other                   |                         |                   | 13,839 |              |  |       | (4,609 | )       |   |   | 9,230  |       
|                        |                         |                   |        |              |  |       |        |         |   |   |        |       
|                        | Total                   |                   | $      | 41,230       |  |       | $      | (13,437 | ) |   |        | 27,793 | 
|                        |                         |                   |        |              |  |       |        |         |   |   |        |       
|Indefinite Useful Lives |                         |                   |        |              |  |       |        |         |   |   |        |       
|Management Contracts    |                         |                   |        |              |  |       |        |         |   |   | 42,245 |       
|Other                   |                         |                   |        |              |  |       |        |         |   |   | 620    |       
|                        |                         |                   |        |              |  |       |        |         |   |   |        |       
|                        | Total                   |                   |        |              |  |       |        |         |   |   |        | 42,865 | 
|                        |                         |                   |        |              |  |       |        |         |   |   |        |       
|                        | Total intangible assets |                   |        |              |  |       |        |         |   |   | $      | 70,658 | 
|                        |                         |                   |        |              |  |       |        |         |   |   |        |       

|                        |                         |                   |        |              |  |       |        |        |   |   |        |        | 
|----------------------- | ----------------------- | ----------------- | ------ | ------------ |  | ----- | ------ | ------ | - | - | ------ | ------ | 
|                        |                         |                  
|                        |                         | December 31, 2002
|                        |                         |                  
|                        |                         | Gross             |        |             
|                        |                         | Carrying          |        | Accumulated  |  |      
|                        |                         | Amount            |        | Amortization |  | Total
|                        |                         |                   |        |              |  |      
|Definite Useful Lives   |                         |                   |        |              |  |       |        |        |   |   |        |       
|Management Contracts    |                         | $                 | 26,190 |              |  | $     | (6,259 | )      |   | $ | 19,931 |       
|Other                   |                         |                   | 11,966 |              |  |       | (2,264 | )      |   |   | 9,702  |       
|                        |                         |                   |        |              |  |       |        |        |   |   |        |       
|                        | Total                   |                   | $      | 38,156       |  |       | $      | (8,523 | ) |   |        | 29,633 | 
|                        |                         |                   |        |              |  |       |        |        |   |   |        |       
|Indefinite Useful Lives |                         |                   |        |              |  |       |        |        |   |   |        |       
|Management Contracts    |                         |                   |        |              |  |       |        |        |   |   | 42,334 |       
|Other                   |                         |                   |        |              |  |       |        |        |   |   | 119    |       
|                        |                         |                   |        |              |  |       |        |        |   |   |        |       
|                        | Total                   |                   |        |              |  |       |        |        |   |   |        | 42,453 | 
|                        |                         |                   |        |              |  |       |        |        |   |   |        |       
|                        | Total intangible assets |                   |        |              |  |       |        |        |   |   | $      | 72,086 | 
|                        |                         |                   |        |              |  |       |        |        |   |   |        |       

Amortization expense related to intangible assets
with definite useful lives was $2.8 million and
$2.7 million for the years ended December 31, 2003 and
2002, respectively. Additionally, accumulated

F-16



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


amortization changed as a result of amortization
of debt issue costs in the amounts of $2.1 million and
$1.3 million during the years ended December 31, 2003
and 2002, respectively, which is reflected in interest expense,
and foreign currency translation adjustments. The weighted
average amortization period for intangible assets with definite
useful lives is 14 years for management contracts,
8 years for other intangible assets, and 12 years
overall. The following table provides estimated amortization
expense related to intangible assets with definite useful lives
for each of the years in the five-year period ending
December 31, 2008:

|     |  |   |       | 
|---- |  | - | ----- | 
|2004 |  | $ | 2,191 | 
|2005 |  |   | 2,125 | 
|2006 |  |   | 1,914 | 
|2007 |  |   | 1,857 | 
|2008 |  |   | 1,857 | 
|     |  |   |       | 
|     |  | $ | 9,944 | 
|     |  |   |       | 



|    |                      
|--- | ---------------------
|(7) | Long-Term Investments

The Company had investments in two mutual funds
at December 31, 2003, both of which are designated as
available for sale under Statement of Financial
Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities(SFAS No. 115) and are included in other
noncurrent assets. One investment, which had a carrying value of
$3.7 million and $3.1 million at December 31,
2003 and 2002, respectively, is a deposit securing the guarantee
the Company obtained from a bank in 2000 of the lease
obligations of a newly acquired Spanish hospital. Beginning in
April 2005 the Company may withdraw any value in the funds in
excess of an amount equal to two years of lease payments,
adjusted for inflation, which at December 31, 2003 was
approximately 2.9 million
($3.7 million). Otherwise, the Company is not permitted to
make any net withdrawals from the amount on deposit until the
end of the lease term in 2020. The Company is permitted to
transfer the funds to other investment funds during this time
and did so in 2003 after incurring a $1.1 impairment charge in
2002 for losses deemed other than temporary on seven
of the eight mutual funds in which the funds were invested. In
2003 all of the funds were transferred into a low risk fund,
with minimal realized gain, and the Company has recorded
unrealized gains totaling $34,000 at December 31, 2003 as a
separate component of stockholders equity.

The other investment consists of escrowed
purchase price for the 2003 acquisition of a private hospital in
Marbella, Spain (as discussed in Note 3). An unrealized
gain on this investment totaling $68,000 was reflected as a
separate component of stockholders equity at
December 31, 2003.

F-17



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)




|    |               
|--- | --------------
|(8) | Long-term Debt

At December 31, long-term debt consisted of
the following (in thousands):

|                                         |                                      |      |         |         |  |   |         |         | 
|---------------------------------------- | ------------------------------------ | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                         |                                      | 2003 |         | 2002   
|                                         |                                      |      |         |        
|Senior credit agreements                 |                                      | $    | 63,876  |         |  | $ | 53,724  |        
|Senior subordinated notes                |                                      |      | 148,989 |         |  |   | 148,910 |        
|Notes payable to financial institutions  |                                      |      | 25,893  |         |  |   | 7,332   |        
|Loans from former owners of subsidiaries |                                      |      | 612     |         |  |   | 1,719   |        
|Capital lease obligations                |                                      |      | 65,374  |         |  |   | 65,018  |        
|                                         |                                      |      |         |         |  |   |         |        
|                                         | Total long-term debt                 |      |         | 304,744 |  |   |         | 276,703 | 
|Less current portion                     |                                      |      | (16,794 | )       |  |   | (13,132 | )      
|                                         |                                      |      |         |         |  |   |         |        
|                                         | Long-term debt, less current portion |      | $       | 287,950 |  |   | $       | 263,571 | 
|                                         |                                      |      |         |         |  |   |         |        



|    |                
|--- | ---------------
|(a) | Lines of Credit

During November 2002, the Company entered into a
second amended and restated credit facility with a group of
commercial lenders providing the Company with the ability to
borrow up to $115.0 million for acquisitions and general
corporate purposes in the United States and Spain or for the
funding of any new subsidiary that becomes a guarantor of the
facility. Under the terms of the facility, the Company may
invest up to a total of $25.0 million in subsidiaries that
are not guarantors, including subsidiaries in the United
Kingdom. Borrowings under the credit facility mature on
November 7, 2005. As of December 31, 2003, no amounts
were outstanding under this facility and $36.6 million was
available for borrowing based on actual reported consolidated
financial results. Maximum availability under the facility is
based upon pro forma EBITDA including EBITDA from acquired
entities. Assuming historical purchase multiples of annual
EBITDA of potential acquisition targets, approximately
$68.3 million would be available for borrowing to finance
acquisitions as of December 31, 2003, of which none was
drawn at December 31, 2003. The credit agreement and the
indenture governing the Companys Senior Subordinated Notes
contain various restrictive covenants, including covenants that
limit the Companys ability and the ability of certain of
the Companys subsidiaries to borrow money or guarantee
other indebtedness, grant liens on the Companys assets,
make investments, use assets as security in other transactions,
pay dividends on stock, enter into sale and leaseback
transactions or sell assets or capital stock.

Global, the Companys majority owned U.K.
subsidiary, has a credit agreement with a commercial lender that
provides for total borrowings of £52.0 million
(approximately $92.8 million at December 31, 2003)
under four separate facilities. At December 31, 2003, total
outstanding borrowings under the agreement were approximately
$63.9 million, which represents total borrowings net of
scheduled repayments of $15.3 million that have been made
under the agreement, and approximately $13.6 million was
available for borrowing, primarily for capital projects
specified in the agreement. Borrowings under this agreement are
secured by certain assets and the capital stock of Global and
its subsidiaries, bear interest ranging from 1.50% to 2.00% over
LIBOR, and mature in April 2010. At December 31, 2003, the
weighted average rate applicable to the outstanding balance was
5.35%.

Fees paid for unused portions of the lines of
credit were approximately $490,080, $548,000, and $592,000, in
2003, 2002 and 2001, respectively.

F-18



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)




|    |                  
|--- | -----------------
|(b) | Subordinated Debt

The Company completed the Debt Offering
(Note 2) in December 2001, issuing $150 million
in Senior Subordinated Notes. The notes, which mature on
December 15, 2011, accrue interest at 10% payable
semi-annually on June 15 and December 15 commencing on
June 15, 2002 and were issued at a discount of
$1.2 million, resulting in an effective interest rate of
10.125%. The Senior Subordinated Notes are subordinate to all
senior indebtedness and are guaranteed by USPI and USPIs
wholly owned subsidiaries domiciled in the United States.

The Company may redeem all or part of the notes
on or after December 15, 2006 upon not less than 30 nor
more than 60 days notice. The redemption price would be the
following percentages of principal amount, if redeemed during
the 12-month period commencing on December 15 of the years set
forth below:

|       |  |            |         |  
|------ |  | ---------- | ------- | -
|       |  | Redemption
|Period |  | Price     
|       |  |           
|2006   |  |            | 105.000 | %
|2007   |  |            | 103.333 | %
|2008   |  |            | 101.667 | %
|2009   |  |            | 100.000 | %
|2010   |  |            | 100.000 | %

In addition, before December 15, 2004, if
the Company completes an offering of its stock in an amount of
at least $20 million, the Company may use the proceeds of
the offering to, on one or more occasions, redeem notes in an
aggregate principal amount not to exceed 35% of the total notes
outstanding at a redemption price of 110.000% of principal. The
Company may also redeem the notes at any time prior to
December 15, 2006, by paying the principal amount of all
outstanding notes plus the greater of (a) 1% of the
principal amount or (b) the excess of the present value of
the notes and all interest that would accrue through
December 14, 2006 over the principal amount of the notes.
The Company is obligated to offer to purchase the notes at 101%
of the principal amount upon the occurrence of certain change of
control events. Any redemptions of the notes require payment of
all amounts of accrued but unpaid interest.

The notes issued in the Debt Offering, carried at
the principal amount of $150 million net of the unamortized
discount of approximately $1.0 million at December 31,
2003, represent the full amount of subordinated debt outstanding
at December 31, 2003 and 2002. At December 31, 2003
and 2002, the notes were considered to have a fair value, based
upon recent trading, of $171.0 million and
$155.4 million, which amounts are approximately
$22.0 million and $6.5 million higher than the
carrying value at December 31, 2003 and 2002, respectively.

In December 2001, the Company used a portion of
the proceeds of the Debt Offering to repay a subordinated note
that had been issued in 2000. The early retirement of this
$36 million of subordinated debt, together with the early
repayment and termination of USPIs agreement with a
commercial bank, resulted in loss on early retirement of debt of
$7.5 million during 2001, representing the write-off of the
costs of initiating the borrowings and the unamortized portion
of the discount at which the subordinated debt had been issued
in 2000. The related tax benefits were $2.6 million.

F-19



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)




|    |                     
|--- | --------------------
|(c) | Other Long-term Debt

The Company and its subsidiaries have notes
payable to financial institutions, former owners of acquired
businesses, and other parties which mature at various date
through 2018 and accrue interest at fixed and variable rates
ranging from 3.75% to 16.19%.

Capital lease obligations in the carrying amount
of $65.4 million are secured by underlying real estate and
equipment and have interest rates ranging from 3.00% to 14.7%.

The aggregate maturities of long-term debt for
each of the five years subsequent to December 31, 2003 are
as follows (in thousands): 2004, $16,794; 2005, $13,909; 2006,
$11,956; 2007, $12,351; 2008, $12,993; thereafter, $237,752.



|    |       
|--- | ------
|(9) | Leases

USPI leases various office equipment and office
space under a number of operating lease agreements, which expire
at various times through the year 2025. Such leases do not
involve contingent rentals, nor do they contain significant
renewal or escalation clauses. Office leases generally require
USPI to pay all executory costs (such as property taxes,
maintenance and insurance).

Minimum future payments under noncancelable
leases, with remaining terms in excess of one year as of
December 31, 2003 are as follows (in thousands):

|                             |                                         |         |         |           |  |   |        |        | 
|---------------------------- | --------------------------------------- | ------- | ------- | --------- |  | - | ------ | ------ | 
|                             |                                         | Capital |         | Operating
|                             |                                         | Leases  |         | Leases   
|                             |                                         |         |         |          
|Year ending December 31,     |                                         |         |         |           |  |   |        |       
|2004                         |                                         | $       | 12,822  |           |  | $ | 9,332  |       
|2005                         |                                         |         | 10,967  |           |  |   | 8,390  |       
|2006                         |                                         |         | 7,077   |           |  |   | 8,000  |       
|2007                         |                                         |         | 6,066   |           |  |   | 7,469  |       
|2008                         |                                         |         | 5,942   |           |  |   | 6,739  |       
|Thereafter                   |                                         |         | 98,345  |           |  |   | 23,337 |       
|                             |                                         |         |         |           |  |   |        |       
|                             | Total minimum lease payments            |         |         | 141,219   |  |   | $      | 63,267 | 
|                             |                                         |         |         |           |  |   |        |       
|Amount representing interest |                                         |         | (75,845 | )         |  |   |        |       
|                             |                                         |         |         |           |  |   |        |       
|                             | Present value of minimum lease payments |         | $       | 65,374    |  |   |        |        | 
|                             |                                         |         |         |           |  |   |        |       

Total rent expense under operating leases was
$10.4 million, $7.9 million, and $6.2 million for
the years ended December 31, 2003, 2002, and 2001,
respectively.

F-20



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)




|     |                
|---- | ---------------
|(10) | Preferred Stock

The Board of Directors, which is authorized to
issue 10,053,916 shares of Preferred Stock, has designated
shares in the following amounts:

|                                                                     |                                            |  |           |            | 
|-------------------------------------------------------------------- | ------------------------------------------ |  | --------- | ---------- | 
|Series A Redeemable Preferred Stock,
    $0.01 par value             |                                            |  | 31,200    |           
|Series B Convertible Redeemable Preferred
    Stock, $0.01 par value |                                            |  | 2,716     |           
|Series C Convertible Preferred Stock,
    $0.01 par value            |                                            |  | 20,000    |           
|Series D Redeemable Preferred Stock,
    $0.01 par value             |                                            |  | 40,000    |           
|Series A Junior Participating Preferred
    Stock, $0.01 par value   |                                            |  | 500,000   |           
|Not designated                                                       |                                            |  | 9,460,000 |           
|                                                                     |                                            |  |           |           
|                                                                     | Total authorized shares of Preferred Stock |  |           | 10,053,916 | 
|                                                                     |                                            |  |           |           

No preferred stock or accrued dividends were
outstanding at December 31, 2003 and 2002.

All authorized shares of Series A Redeemable
Preferred Stock (Series A) and Series B Convertible
Redeemable Preferred Stock (Series B) were issued during
1998. All Series B shares were retired by December 31,
2000 either by redemption for cash or conversion to common
stock. All Series A shares, together with accrued but
unpaid dividends, were redeemed for cash during 2001 using a
portion of the proceeds of USPIs IPO (Note 2).
Redeemed or converted preferred shares are deemed retired.

During 2000, USPI issued 18,750 shares of
Series C Convertible Preferred Stock (Series C), all
of which were converted to common stock in 2001 immediately
prior to the IPO.

The 18,750 shares issued during 2000 were
issued with 266,667 detachable warrants to purchase common
stock, exercisable at $0.03 per warrant. These warrants
were exercised in January 2004. In connection with the
Series C shares and detachable warrants, the $18,750,000 in
proceeds was allocated $15,950,000 to the Series C
Convertible Preferred Stock and $2,800,000 to the warrants,
which expire in June 2009. The $2,800,000 was calculated based
on a Black Scholes valuation model using the following
assumptions: expected life of two years, interest rate 5.12%,
dividend yield 0% and volatility 40%.

At the time of the IPO, USPI issued
20,000 shares of Series D Redeemable Preferred Stock
(Series D) in exchange for $20 million of
7% Senior Subordinated Notes held by USPIs primary
private investors. All 20,000 outstanding Series D shares
were redeemed, together with accrued but unpaid dividends, upon
completion of the Debt Offering in December 2001.

No shares of Series A Junior Participating
Preferred Stock (Series A Participating) had been issued at
December 31, 2003.



|     |                     
|---- | --------------------
|(11) | Stockholders Equity

Receivables from sales of stock, primarily
resulting from purchases of common stock by employees, are
presented in the consolidated balance sheets as a deduction from
stockholders equity. Interest of 7% is due quarterly and
principal payments are due on various dates through February
2004. Payment of the principal shall accelerate in the event of
termination of employment or a change in control of USPI, as
defined.

F-21



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)




|     |                           
|---- | --------------------------
|(12) | Related Party Transactions

USPI has entered into agreements with certain
majority and minority owned surgery centers to provide
management services. As compensation for these services, the
surgery centers are charged management fees which are either
fixed in amount or represent a fixed percentage of each
centers net revenue less bad debt. The percentages range
from 5% to 8%. Amounts recognized under these agreements, after
elimination of amounts from majority-owned, consolidated surgery
centers, totaled approximately $11.9 million,
$7.3 million, and $4.6 million in 2003, 2002 and 2001,
respectively, and are included in management and administrative
services revenue in the accompanying consolidated statements of
income.



|     |             
|---- | ------------
|(13) | Income Taxes

The components of income (loss) before income
taxes were as follows (in thousands):

|         |  |      |        |      |  |      |        |  |  |   |       |  
|-------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ----- | -
|         |  | 2003 |        | 2002 |  | 2001
|         |  |      |        |      |  |     
|Domestic |  | $    | 36,768 |      |  | $    | 24,423 |  |  | $ | 2,219 |  
|Foreign  |  |      | 9,648  |      |  |      | 5,623  |  |  |   | (591  | )
|         |  |      |        |      |  |      |        |  |  |   |       |  
|         |  | $    | 46,416 |      |  | $    | 30,046 |  |  | $ | 1,628 |  
|         |  |      |        |      |  |      |        |  |  |   |       |  

Income tax expense (benefit) attributable to
income consists of (in thousands):

|                              |                        |         |   |          |  |       |   |       |   |  |   |        | 
|----------------------------- | ---------------------- | ------- | - | -------- |  | ----- | - | ----- | - |  | - | ------ | 
|                              |                        | Current |   | Deferred |  | Total
|                              |                        |         |   |          |  |      
|Year ended December 31, 2003: |                        |         |   |          |  |       |   |       |   |  |   |       
|                              | U.S. federal           |         | $ | 3,525    |  |       | $ | 9,196 |   |  | $ | 12,721 | 
|                              | State and local        |         |   | 1,300    |  |       |   | 729   |   |  |   | 2,029  | 
|                              | Foreign                |         |   | 2,425    |  |       |   | (635  | ) |  |   | 1,790  | 
|                              |                        |         |   |          |  |       |   |       |   |  |   |       
|                              | Net income tax expense |         | $ | 7,250    |  |       | $ | 9,290 |   |  | $ | 16,540 | 
|                              |                        |         |   |          |  |       |   |       |   |  |   |       

|                              |                        |         |   |          |  |       |   |       |   |  |   |        | 
|----------------------------- | ---------------------- | ------- | - | -------- |  | ----- | - | ----- | - |  | - | ------ | 
|                              |                        | Current |   | Deferred |  | Total
|                              |                        |         |   |          |  |      
|Year ended December 31, 2002: |                        |         |   |          |  |       |   |       |   |  |   |       
|                              | U.S. federal           |         | $ |         |  |       | $ | 8,503 |   |  | $ | 8,503  | 
|                              | State and local        |         |   | 809      |  |       |   | 460   |   |  |   | 1,269  | 
|                              | Foreign                |         |   | 1,046    |  |       |   | (372  | ) |  |   | 674    | 
|                              |                        |         |   |          |  |       |   |       |   |  |   |       
|                              | Net income tax expense |         | $ | 1,855    |  |       | $ | 8,591 |   |  | $ | 10,446 | 
|                              |                        |         |   |          |  |       |   |       |   |  |   |       

|                              |                           |         |   |          |  |       |   |        |   |  |   |        |  
|----------------------------- | ------------------------- | ------- | - | -------- |  | ----- | - | ------ | - |  | - | ------ | -
|                              |                           | Current |   | Deferred |  | Total
|                              |                           |         |   |          |  |      
|Year ended December 31, 2001: |                           |         |   |          |  |       |   |        |   |  |   |       
|                              | U.S. federal              |         | $ | 20       |  |       | $ | (2,923 | ) |  | $ | (2,903 | )
|                              | State and local           |         |   | 767      |  |       |   |       |   |  |   | 767    |  
|                              | Foreign                   |         |   | 1,739    |  |       |   | (725   | ) |  |   | 1,014  |  
|                              |                           |         |   |          |  |       |   |        |   |  |   |       
|                              | Net tax expense (benefit) |         | $ | 2,526    |  |       | $ | (3,648 | ) |  | $ | (1,122 | )
|                              |                           |         |   |          |  |       |   |        |   |  |   |       

F-22



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


Income tax expense (benefit) differed from the
amount computed by applying the U.S. federal income tax
rate of 35% in 2003 and 2002 and 34% in 2001 to pretax income in
fiscal years ended December 31, 2003, 2002 and 2001 as
follows (in thousands):

|                                                         |                                                                                  |                          |        |        |   |      |        |        |   |   |     |        |  
|-------------------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------ | ------ | ------ | - | ---- | ------ | ------ | - | - | --- | ------ | -
|                                                         |                                                                                  |                         
|                                                         |                                                                                  | Years Ended December 31,
|                                                         |                                                                                  |                         
|                                                         |                                                                                  | 2003                     |        | 2002   |   | 2001
|                                                         |                                                                                  |                          |        |        |   |     
|Computed expected tax expense                          |                                                                                  | $                        | 16,246 |        |   | $    | 10,516 |        |   | $ | 554 |       
|Increase (reduction) in income taxes
    resulting from: |                                                                                  |                          |        |        |   |      |        |        |   |   |     |       
|                                                         | Net operating loss carryforwards                                                 |                          |        | 160    |   |      |        | 348    |   |   |     | 904    |  
|                                                         | Differences between U.S. financial reporting
    and foreign statutory reporting |                          |        | 122    |   |      |        | 3,362  |   |   |     | 452    |  
|                                                         | State tax expense                                                                |                          |        | 1,614  |   |      |        | 998    |   |   |     | 767    |  
|                                                         | Removal of foreign tax rate differential                                         |                          |        | (481   | ) |      |        | (216   | ) |   |     | (160   | )
|                                                         | Goodwill                                                                         |                          |        | 165    |   |      |        | 296    |   |   |     | 1,193  |  
|                                                         | Change in valuation allowance                                                    |                          |        | (1,407 | ) |      |        | (4,888 | ) |   |     | (4,398 | )
|                                                         | Other                                                                            |                          |        | 121    |   |      |        | 30     |   |   |     | (434   | )
|                                                         |                                                                                  |                          |        |        |   |      |        |        |   |   |     |       
|                                                         | Total                                                                            |                          | $      | 16,540 |   |      | $      | 10,446 |   |   | $   | (1,122 | )
|                                                         |                                                                                  |                          |        |        |   |      |        |        |   |   |     |       

The tax effects of temporary differences that
give rise to significant portions of deferred tax assets and
deferred tax liabilities at December 31, 2003 and 2002 are
presented below (in thousands).

|                          |                                            |              |        |        |  |  |        |        | 
|------------------------- | ------------------------------------------ | ------------ | ------ | ------ |  |  | ------ | ------ | 
|                          |                                            |             
|                          |                                            | December 31,
|                          |                                            |             
|                          |                                            | 2003         |        | 2002  
|                          |                                            |              |        |       
|Deferred tax assets:      |                                            |              |        |        |  |  |        |       
|                          | Net operating loss carryforwards           |              | $      | 10,271 |  |  | $      | 14,744 | 
|                          | Accrued expenses                           |              |        | 3,289  |  |  |        | 3,412  | 
|                          | Bad debts                                  |              |        | 2,745  |  |  |        | 2,125  | 
|                          | Basis difference of property and equipment |              |        | 1,250  |  |  |        | 1,908  | 
|                          | Tax credits                                |              |        | 764    |  |  |        | 1,403  | 
|                          | Capitalized costs and other                |              |        | 1,610  |  |  |        | 701    | 
|                          |                                            |              |        |        |  |  |        |       
|                          | Total deferred tax assets                  |              |        | 19,929 |  |  |        | 24,293 | 
|Less valuation allowance  |                                            |              | (4,948 | )      |  |  | (5,652 | )     
|                          |                                            |              |        |        |  |  |        |       
|                          | Net deferred tax assets                    |              | $      | 14,981 |  |  | $      | 18,641 | 
|                          |                                            |              |        |        |  |  |        |       
|Deferred tax liabilities: |                                            |              |        |        |  |  |        |       
|                          | Basis difference of acquisitions           |              | $      | 32,158 |  |  | $      | 24,636 | 
|                          | Accelerated depreciation                   |              |        | 9,443  |  |  |        | 6,149  | 
|                          | Capitalized interest and other             |              |        | 612    |  |  |        | 820    | 
|                          | Prepaid expenses                           |              |        |       |  |  |        | 956    | 
|                          |                                            |              |        |        |  |  |        |       
|                          | Total deferred tax liabilities             |              | $      | 42,213 |  |  | $      | 32,561 | 
|                          |                                            |              |        |        |  |  |        |       

In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which

F-23



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning
strategies in making this assessment. At December 31, 2003,
USPI had net operating loss carryforwards for U.S. federal
income tax purposes of $7.7 million, all of which were
added through acquisitions and have restrictions as to
utilization. The Companys ability to offset future federal
taxable income with these carryforwards would begin to be
forfeited in 2022, if unused. At December 31, 2003, the
Companys foreign net operating loss carryforwards
of 16.6 million
($20.9 million) entirely relate to its operations in Spain.
The Company has established a valuation allowance for the tax
benefit
on 11.2 million
($14.1 million) of its net operating loss carryforwards
based on limitations on utilization and projections of future
taxable income.

The Company reduced its valuation allowance by
$1.4 million and $4.9 million in 2003 and 2002,
respectively, the effect of which is reflected in net income tax
expense, to recognize the benefit of a portion of its foreign
net operating loss carryforwards based on current and future
expected taxable income. During 2001, the Company reduced its
valuation allowance by $4.4 million due to the historical
and projected profitability in the United States.



|     |                          
|---- | -------------------------
|(14) | Equity-Based Compensation

On April 30, 1998, USPI adopted a stock
option plan pursuant to which USPIs Board of Directors
granted, at various dates through February 12, 2001,
non-qualified or incentive stock options to selected employees,
officers, and directors of USPI. USPI adopted a 2001
Equity-Based Compensation Plan (the Plan) on February 13,
2001. At any given time, the number of shares of common stock
issued under the Plan plus the number of shares of common stock
issuable upon the exercise of all outstanding awards under the
Plan may not exceed the lesser of 300,000,000 shares or
12.5% of the total number of shares of common stock then
outstanding, assuming the exercise of all outstanding warrants
and options under the Plan. The Plan provides for grants of
incentive stock options, within the meaning of Section 422
of the Internal Revenue Code, to USPI employees, including
officers and employee-directors, and for grants of nonqualified
stock options, restricted stock awards, stock appreciation
rights, phantom stock awards and annual incentive awards to USPI
employees, consultants and nonemployee directors. The Board of
Directors or a designated committee shall have the sole
authority to determine which individuals receive grants, the
type of grant to be received, vesting period and all other
option terms. Incentive stock options granted generally have an
option price no less than 100% of the fair market value of the
common stock on the date of grant with the term not to exceed
ten years.

The Companys net income, as reported,
includes approximately $1,930,000, $534,000, and $82,000 of
expense, net of related tax effects, arising from stock-based
employee compensation during 2003, 2002 and 2001, respectively.
These amounts primarily consist of compensation expense under
the Companys Deferred Compensation Plan (DCP), grants of
restricted stock to employees, and continued amortization of
333,333 options granted in December 2000 at a price below the
current market value of the underlying stock. Under the DCP,
eligible employees elect prior to the start of the year to defer
the receipt of a specified portion of any bonus they earn that
year until a specified future date, at which time the bonus will
be paid in shares of common stock determined using a discounted
market value per share. The Company records compensation expense
related to the value of the shares expected to be issued under
the DCP.

During 2003 and 2002, the Company granted
restricted stock awards (RSAs) totaling 178,000 and
62,500 shares, respectively, for which the weighted
averages of the fair values on the grant dates were $23.24 and
$18.96, respectively. The Company is amortizing the expense
related to RSAs and the below market option grants into expense
on a straight-line basis over the estimated service period and
carried

F-24



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


deferred compensation balances of approximately
$4,548,000 and $1,226,000 on its balance sheets at
December 31, 2003 and 2002, respectively.

At December 31, 2003, there were
1,534,843 shares available for grant under the Plan. The
per share weighted-average fair values at date of grant for
stock options granted during 2003, 2002, and 2001 were $5.97,
$10.25, and $7.40, respectively, and were estimated based on a
Black Scholes valuation model, using the following assumptions:

|                               |  |              |      |      |  |      |      |   |  |  |      |  
|------------------------------ |  | ------------ | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                               |  |             
|                               |  | Years Ended 
|                               |  | December 31,
|                               |  |             
|                               |  | 2003         |      | 2002 |  | 2001
|                               |  |              |      |      |  |     
|Expected life in years         |  |              | 3.0  |      |  |      | 5.0  |   |  |  | 5.0  |  
|Weighted average interest rate |  |              | 2.8  | %    |  |      | 4.0  | % |  |  | 4.6  | %
|Dividend yield                 |  |              | 0.0  | %    |  |      | 0.0  | % |  |  | 0.0  | %
|Volatility                     |  |              | 40.0 | %    |  |      | 40.0 | % |  |  | 40.0 | %

Stock option activity during 2003, 2002 and 2001
was as follows:

|                                        |           |           |           |           |   |   |       |       | 
|--------------------------------------- | --------- | --------- | --------- | --------- | - | - | ----- | ----- | 
|                                        |           |           |           | Weighted 
|                                        |           |           |           | Average  
|                                        |           | Number    |           | Exercise 
|                                        |           | of Shares |           | Price    
|                                        |           |           |           |          
|Balance at December 31, 2000            |           |           | 1,329,766 |           |   | $ | 10.47 |      
|                                        | Granted   |           |           | 1,676,474 |   |   |       | 15.73 | 
|                                        | Exercised |           |           | (114,205  | ) |   |       | 5.57  | 
|                                        | Forfeited |           |           | (33,071   | ) |   |       | 14.04 | 
|                                        | Expired   |           |           |          |   |   |       |      | 
|                                        |           |           |           |           |   |   |       |      
|Balance at December 31, 2001            |           |           | 2,858,964 |           |   | $ | 13.62 |      
|                                        | Granted   |           |           | 888,233   |   |   |       | 24.84 | 
|                                        | Exercised |           |           | (372,121  | ) |   |       | 7.13  | 
|                                        | Forfeited |           |           | (131,486  | ) |   |       | 18.34 | 
|                                        | Expired   |           |           |          |   |   |       |      | 
|                                        |           |           |           |           |   |   |       |      
|Balance at December 31, 2002            |           |           | 3,243,590 |           |   | $ | 17.24 |      
|                                        |           |           |           |           |   |   |       |      
|                                        | Granted   |           |           | 389,000   |   |   |       | 19.72 | 
|                                        | Exercised |           |           | (215,657  | ) |   |       | 14.31 | 
|                                        | Forfeited |           |           | (99,247   | ) |   |       | 21.52 | 
|                                        | Expired   |           |           |          |   |   |       |      | 
|                                        |           |           |           |           |   |   |       |      
|Balance at December 31, 2003            |           |           | 3,317,686 |           |   | $ | 17.60 |      
|                                        |           |           |           |           |   |   |       |      
|Shares exercisable at December 31, 2001 |           |           | 942,369   |           |   | $ | 9.33  |      
|Shares exercisable at December 31, 2002 |           |           | 1,199,493 |           |   | $ | 12.36 |      
|Shares exercisable at December 31, 2003 |           |           | 1,618,877 |           |   | $ | 14.64 |      

F-25



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


Exercise prices for options outstanding as of
December 31, 2003, ranged from $2.55 to $28.15. The
following table provides certain information with respect to
stock options outstanding at December 31, 2003:

|                         |  |             |           |          |  |              |       |  |  |  |      | 
|------------------------ |  | ----------- | --------- | -------- |  | ------------ | ----- |  |  |  | ---- | 
|                         |  |             |           |          |  | Weighted    
|                         |  |             |           | Weighted |  | Average     
|                         |  | Stock       |           | Average  |  | Remaining   
|                         |  | Options     |           | Exercise |  | Contractual 
|Range of Exercise Prices |  | Outstanding |           | Price    |  | Life (Years)
|                         |  |             |           |          |  |             
|$2.55-$13.50             |  |             | 1,198,736 |          |  | $            | 10.89 |  |  |  | 5.77 | 
|$14.00-$20.65            |  |             | 1,175,989 |          |  |              | 18.13 |  |  |  | 6.68 | 
|$20.76-$28.15            |  |             | 942,961   |          |  |              | 25.48 |  |  |  | 7.61 | 
|                         |  |             |           |          |  |              |       |  |  |  |      | 
|                         |  |             | 3,317,686 |          |  | $            | 17.60 |  |  |  | 6.61 | 
|                         |  |             |           |          |  |              |       |  |  |  |      | 

The following table provides certain information
with respect to stock options exercisable at December 31,
2003:

|                         |  |               |           |                  |  |   |       | 
|------------------------ |  | ------------- | --------- | ---------------- |  | - | ----- | 
|                         |  | Stock Options |           | Weighted Average
|Range of Exercise Prices |  | Exercisable   |           | Exercise Price  
|                         |  |               |           |                 
|$2.55-$13.50             |  |               | 982,832   |                  |  | $ | 10.39 | 
|$14.00-$20.65            |  |               | 404,574   |                  |  |   | 18.63 | 
|$20.76-$28.15            |  |               | 231,471   |                  |  |   | 25.66 | 
|                         |  |               |           |                  |  |   |       | 
|                         |  |               | 1,618,877 |                  |  | $ | 14.64 | 
|                         |  |               |           |                  |  |   |       | 



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

USPI adopted an Employee Stock Purchase Plan on
February 13, 2001. The plan provides for the grant of stock
options to selected eligible employees. Any eligible employee
may elect to participate in the plan by authorizing USPIs
options and compensation committee to make payroll deductions to
pay the exercise price of an option at the time and in the
manner prescribed by USPIs options and compensation
committee. This payroll deduction may be a specific amount or a
designated percentage to be determined by the employee, but the
specific amount may not be less than an amount established by
the Company and the designated percentage may not exceed an
amount of eligible compensation established by the Company from
which the deduction is made. The Company has reserved
500,000 shares of common stock for this plan of which
73,897, 69,183, and 61,377 were issued during 2003, 2002, and
2001, respectively.



|     |                   
|---- | ------------------
|(15) | Earnings Per Share

Basic earnings per share is computed on the basis
of the weighted average number of common shares outstanding.
Diluted earnings per share is computed on the basis of the
weighted average number of common shares outstanding plus the
effect of convertible preferred stock, convertible debt, and
outstanding options, warrants, and restricted stock except where
such effect would be antidilutive. The following table

F-26



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


sets forth the computation of basis and diluted
earnings per share for years ended December 31, 2003, 2002
and 2001 (in thousands, except per share amounts):

|                                               |                                      |                          |        |      |   |      |        |     |   |   |        |     |  
|---------------------------------------------- | ------------------------------------ | ------------------------ | ------ | ---- | - | ---- | ------ | --- | - | - | ------ | --- | -
|                                               |                                      |                         
|                                               |                                      | Years Ended December 31,
|                                               |                                      |                         
|                                               |                                      | 2003                     |        | 2002 |   | 2001
|                                               |                                      |                          |        |      |   |     
|Net income attributable to common stockholders |                                      | $                        | 29,876 |      |   | $    | 19,600 |     |   | $ | 66     |    
|Weighted average common shares outstanding     |                                      |                          | 27,133 |      |   |      | 24,925 |     |   |   | 18,380 |    
|Effect of dilutive securities:                 |                                      |                          |        |      |   |      |        |     |   |   |        |    
|                                               | Stock options                        |                          |        | 803  |   |      |        | 841 |   |   |        | 634 |  
|                                               | Warrants and restricted stock        |                          |        | 308  |   |      |        | 290 |   |   |        | 277 |  
|                                               | Convertible subordinated debt        |                          |        | (B   | ) |      |        | (B  | ) |   |        | (A  | )
|                                               | Series C convertible preferred stock |                          |        | (B   | ) |      |        | (B  | ) |   |        | (A  | )
|                                               |                                      |                          |        |      |   |      |        |     |   |   |        |    
|Shares used for diluted earnings per share     |                                      |                          | 28,244 |      |   |      | 26,056 |     |   |   | 19,291 |    
|                                               |                                      |                          |        |      |   |      |        |     |   |   |        |    
|Basic earnings per share                       |                                      | $                        | 1.10   |      |   | $    | 0.79   |     |   | $ |       |    
|Diluted earnings per share                     |                                      | $                        | 1.06   |      |   | $    | 0.75   |     |   | $ |       |    



---

(A) No incremental shares are included
because the effect would be antidilutive.

(B) No securities of this type were
outstanding during this period.

The convertible subordinated debt and
Series C convertible preferred stock, which were excluded
from the computation of 2001 earnings per share because their
effect would be antidilutive, were converted to common stock
during 2001.



|     |                    
|---- | -------------------
|(16) | Segment Disclosures

USPI has adopted Statement of Financial
Accounting Standards No. 131, Disclosures About Segments
of an Enterprise and Related Information(SFAS 131).
SFAS 131 establishes standards for reporting information
about operating segments in annual financial statements.
USPIs business is the operation of surgery centers,
private surgical hospitals and related businesses in the United
States and Western Europe. USPIs chief operating decision
maker, as that term is defined in the accounting standard,
regularly reviews financial information about its surgery
centers and private surgical hospitals for assessing performance
and allocating resources both domestically and abroad.
Accordingly, USPIs reportable segments consist of
(1) U.S. based facilities, including all of the
Companys equity method

F-27



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


investments, and (2) Western Europe based
facilities, including facilities in Spain and the United Kingdom.

|                              |                |      |         |                |  |         |         |         |  |       |         |        |  |   |         |         |  |   |         |         | 
|----------------------------- | -------------- | ---- | ------- | -------------- |  | ------- | ------- | ------- |  | ----- | ------- | ------ |  | - | ------- | ------- |  | - | ------- | ------- | 
|                              |                |      |         |                |  |        
|                              |                |      |         | Western Europe |  |        
|                              |                |      |         |                |  |        
|                              |                |      |         |                |  | Western |         |        
|                              |                |      |         |                |  | United  |         | Europe  |  |      
|2003 (in thousands)           |                | U.S. |         | Spain          |  | Kingdom |         | Total   |  | Total
|                              |                |      |         |                |  |         |         |         |  |      
|Net patient service revenue   |                | $    | 212,176 |                |  | $       | 117,959 |         |  | $     | 60,776  |        |  | $ | 178,735 |         |  | $ | 390,911 |        
|Other revenue                 |                |      | 52,686  |                |  |         | 2,672   |         |  |       |        |        |  |   | 2,672   |         |  |   | 55,358  |        
|                              |                |      |         |                |  |         |         |         |  |       |         |        |  |   |         |         |  |   |         |        
|                              | Total revenues |      | $       | 264,862        |  |         | $       | 120,631 |  |       | $       | 60,776 |  |   | $       | 181,407 |  |   | $       | 446,269 | 
|                              |                |      |         |                |  |         |         |         |  |       |         |        |  |   |         |         |  |   |         |        
|Depreciation and amortization |                | $    | 17,697  |                |  | $       | 9,487   |         |  | $     | 5,003   |        |  | $ | 14,490  |         |  | $ | 32,187  |        
|Operating income              |                |      | 76,786  |                |  |         | 10,679  |         |  |       | 9,939   |        |  |   | 20,618  |         |  |   | 97,404  |        
|Net interest expense          |                |      | (20,883 | )              |  |         | (3,565  | )       |  |       | (2,965  | )      |  |   | (6,530  | )       |  |   | (27,413 | )      
|Income tax expense            |                |      | (14,749 | )              |  |         |        |         |  |       | (1,791  | )      |  |   | (1,791  | )       |  |   | (16,540 | )      
|Total assets                  |                |      | 468,326 |                |  |         | 238,918 |         |  |       | 163,265 |        |  |   | 402,183 |         |  |   | 870,509 |        
|Capital expenditures          |                |      | 11,226  |                |  |         | 19,517  |         |  |       | 11,634  |        |  |   | 31,151  |         |  |   | 42,377  |        

|                              |                |      |         |                |  |         |         |        |  |       |         |        |  |   |         |         |  |   |         |         | 
|----------------------------- | -------------- | ---- | ------- | -------------- |  | ------- | ------- | ------ |  | ----- | ------- | ------ |  | - | ------- | ------- |  | - | ------- | ------- | 
|                              |                |      |         |                |  |        
|                              |                |      |         | Western Europe |  |        
|                              |                |      |         |                |  |        
|                              |                |      |         |                |  | Western |         |       
|                              |                |      |         |                |  | United  |         | Europe |  |      
|2002 (in thousands)           |                | U.S. |         | Spain          |  | Kingdom |         | Total  |  | Total
|                              |                |      |         |                |  |         |         |        |  |      
|Net patient service revenue   |                | $    | 164,770 |                |  | $       | 86,490  |        |  | $     | 47,434  |        |  | $ | 133,924 |         |  | $ | 298,694 |        
|Other revenue                 |                |      | 41,065  |                |  |         | 2,627   |        |  |       |        |        |  |   | 2,627   |         |  |   | 43,692  |        
|                              |                |      |         |                |  |         |         |        |  |       |         |        |  |   |         |         |  |   |         |        
|                              | Total revenues |      | $       | 205,835        |  |         | $       | 89,117 |  |       | $       | 47,434 |  |   | $       | 136,551 |  |   | $       | 342,386 | 
|                              |                |      |         |                |  |         |         |        |  |       |         |        |  |   |         |         |  |   |         |        
|Depreciation and amortization |                | $    | 15,427  |                |  | $       | 7,407   |        |  | $     | 3,696   |        |  | $ | 11,103  |         |  | $ | 26,530  |        
|Operating income              |                |      | 55,221  |                |  |         | 7,078   |        |  |       | 8,730   |        |  |   | 15,808  |         |  |   | 71,029  |        
|Net interest expense          |                |      | (20,060 | )              |  |         | (2,397  | )      |  |       | (2,472  | )      |  |   | (4,869  | )       |  |   | (24,929 | )      
|Income tax benefit (expense)  |                |      | (9,961  | )              |  |         | 878     |        |  |       | (1,363  | )      |  |   | (485    | )       |  |   | (10,446 | )      
|Total assets                  |                |      | 438,824 |                |  |         | 168,604 |        |  |       | 121,330 |        |  |   | 289,934 |         |  |   | 728,758 |        
|Capital expenditures          |                |      | 11,663  |                |  |         | 7,468   |        |  |       | 13,330  |        |  |   | 20,798  |         |  |   | 32,461  |        

|                              |                |      |         |                |  |         |         |        |  |       |        |        |  |   |         |         |  |   |         |         | 
|----------------------------- | -------------- | ---- | ------- | -------------- |  | ------- | ------- | ------ |  | ----- | ------ | ------ |  | - | ------- | ------- |  | - | ------- | ------- | 
|                              |                |      |         |                |  |        
|                              |                |      |         | Western Europe |  |        
|                              |                |      |         |                |  |        
|                              |                |      |         |                |  | Western |         |       
|                              |                |      |         |                |  | United  |         | Europe |  |      
|2001 (in thousands)           |                | U.S. |         | Spain          |  | Kingdom |         | Total  |  | Total
|                              |                |      |         |                |  |         |         |        |  |      
|Net patient service revenue   |                | $    | 101,694 |                |  | $       | 69,583  |        |  | $     | 38,984 |        |  | $ | 108,567 |         |  | $ | 210,261 |        
|Other revenue                 |                |      | 32,245  |                |  |         | 1,862   |        |  |       |       |        |  |   | 1,862   |         |  |   | 34,107  |        
|                              |                |      |         |                |  |         |         |        |  |       |        |        |  |   |         |         |  |   |         |        
|                              | Total revenues |      | $       | 133,939        |  |         | $       | 71,445 |  |       | $      | 38,984 |  |   | $       | 110,429 |  |   | $       | 244,368 | 
|                              |                |      |         |                |  |         |         |        |  |       |        |        |  |   |         |         |  |   |         |        
|Depreciation and amortization |                | $    | 14,598  |                |  | $       | 7,976   |        |  | $     | 3,542  |        |  | $ | 11,518  |         |  | $ | 26,116  |        
|Operating income              |                |      | 25,634  |                |  |         | 2,021   |        |  |       | 6,119  |        |  |   | 8,140   |         |  |   | 33,774  |        
|Net interest expense          |                |      | (10,993 | )              |  |         | (3,244  | )      |  |       | (3,031 | )      |  |   | (6,275  | )       |  |   | (17,268 | )      
|Income tax benefit (expense)  |                |      | 1,962   |                |  |         | 186     |        |  |       | (1,026 | )      |  |   | (840    | )       |  |   | 1,122   |        
|Total assets                  |                |      | 356,226 |                |  |         | 116,500 |        |  |       | 84,131 |        |  |   | 200,631 |         |  |   | 556,857 |        
|Capital expenditures          |                |      | 20,598  |                |  |         | 5,283   |        |  |       | 6,949  |        |  |   | 12,232  |         |  |   | 32,830  |        

F-28



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)




|     |                              
|---- | -----------------------------
|(17) | Commitments and Contingencies



|    |                     
|--- | --------------------
|(a) | Financial Guarantees

As of December 31, 2003, the Company had
issued guarantees of the indebtedness of its investees to third
parties which could potentially require the Company to make
maximum aggregate payments totaling approximately
$37.8 million. Of the total, $25.2 million relates to
the debt of consolidated subsidiaries, whose debt is included in
the Companys consolidated balance sheet, and the remaining
$12.6 million relates to the debt of unconsolidated
affiliated companies, whose debt is not included in the
Companys consolidated balance sheet. In accordance with
Financial Accounting Standards Board (FASB)
Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others(FIN 45), the Company has recorded
long-term liabilities totaling approximately $0.1 million
related to the guarantees the Company has issued to
unconsolidated affiliates after December 31, 2002, and has
not recorded any liabilities related to guarantees issued prior
to January 1, 2003. Generally, these arrangements
(a) consist of guarantees of real estate and equipment
financing, (b) are secured by the related property and
equipment, (c) require payments by the Company, when the
collateral is insufficient, in the event of a default by the
investee primarily obligated under the financing,
(d) expire as the underlying debt matures at various dates
through 2022, and (e) provide no recourse for the Company
to recover any amounts from third parties.



|    |                                                 
|--- | ------------------------------------------------
|(b) | Litigation and Professional Liability
    Claims

In its normal course of business, USPI is subject
to claims and lawsuits relating to patient treatment. USPI
believes that its liability for damages resulting from such
claims and lawsuits is adequately covered by insurance or is
adequately provided for in its consolidated financial statements.



|    |               
|--- | --------------
|(c) | Self Insurance

The Company is self-insured for healthcare for
its U.S. employees up to predetermined amounts above which
third party insurance applies. The Company believes that the
accruals established at December 31, 2003, which were
estimated based on actual employee health claim patterns,
adequately provide for its exposure under this arrangement.
Additionally, in the U.S. the Company maintains
professional liability insurance that provides coverage on a
claims made basis of $1.0 million per incident and
$5.0 million in annual aggregate amount per location with
retroactive provisions upon policy renewal. Certain of the
Companys insurance policies have deductibles and
contingent premium arrangements. The Company believes that the
accruals established at December 31, 2003, which were
estimated based on historical claims, adequately provide for its
exposure under these arrangements.



|    |                       
|--- | ----------------------
|(d) | Employee Benefit Plans

The Companys eligible U.S. employees
may choose to participate in the United Surgical Partners
International, Inc. 401(k) Plan under which the Company may
elect to make contributions that match from zero to 100% of
participants contributions. Charges to expense under this
plan in 2003 and 2002 were $0.8 million and
$0.5 million, respectively.

One of the Companys U.K. subsidiaries,
which the Company acquired in 2000, has obligations remaining
under a defined benefit pension plan that originated in 1991 and
was closed to new participants at the end of the 1998. At
December 31, 2003, the plan had approximately 105
participants, plan assets of £3.8 million
($6.7 million), and an accumulated pension benefit
obligation of £5.0 million ($8.9 million). At
December 31, 2002, the plan had approximately
105 participants, plan assets of £3.0 million

F-29



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


($4.9 million), and an accumulated pension
benefit obligation of £4.8 million
($7.6 million). Pension expense was approximately
£0.5 million ($0.8 million) and
£0.3 million ($0.4 million) for the years ended
December 31, 2003 and 2002, respectively. During 2002 the
Company recorded an after-tax charge of £1.0 million
($1.5 million), included in other comprehensive income, as
a result of the actuarially estimated benefit obligation
exceeding plan assets, primarily as a result of declines in
investment values and other changes in market conditions
affecting the projected liabilities of the plan. During 2003,
the actuarially estimated benefit obligation was again compared
to plan assets, this time resulting in an after tax credit to
other comprehensive income of approximately
£0.3 million ($0.5 million).



|    |                      
|--- | ---------------------
|(e) | Employment Agreements

The Company entered into employment agreements
dated November 15, 2002 with Donald E. Steen and
William H. Wilcox. The agreement with Mr. Steen, who
serves as the Companys Chairman and, through
March 31, 2004, as its Chief Executive Officer, provides,
through March 31, 2004, for annual base compensation of
$525,000, subject to increases approved by the board of
directors, with eligibility for a performance bonus of up to
100% of his annual salary, and continued employment through
November 14, 2011. Effective April 1, 2004, the
agreement, as amended February 18, 2004, provides for
Mr. Steen to serve only as Chairman, the duties of which
are estimated to require approximately 50% of his business time,
for annual base compensation of $262,500. The agreement
continues to provide for a performance bonus of up to 100% of
Mr. Steens annual salary and his continued employment
through November 14, 2011.

The agreement with Mr. Wilcox, the
Companys President and, effective April 1, 2004, also
its Chief Executive Officer, provides for annual base
compensation of $415,000, subject to increases approved by the
board of directors, and Mr. Wilcox is eligible for a
performance bonus of up to 100% of his annual salary. The
agreement has an initial term of two years and renews
automatically for two-year terms unless terminated by either
party.

In addition, on August 1, 2003 the Company
entered into employment agreements with four other senior
managers which provide for the employment of each individual
through July 31, 2005. The total annual base compensation
under the August 1 agreements is $1 million, subject
to increases approved by the board of directors, and performance
bonuses of up to a total of $750,000 per year.



|     |                  
|---- | -----------------
|(18) | Subsequent Events

The Company has entered into letters of intent
with various entities regarding possible joint venture,
development or other transactions. These possible joint
ventures, developments or other transactions are in various
stages of negotiation.



|     |                                                 
|---- | ------------------------------------------------
|(19) | Condensed Consolidating Financial
    Statements

The following information is presented as
required by regulations of the Securities and Exchange
Commission in connection with the Companys publicly traded
Senior Subordinated Notes. This information is not routinely
prepared for use by management. The operating and investing
activities of the separate legal entities included in the
consolidated financial statements are fully interdependent and
integrated. Accordingly, the operating results of the separate
legal entities are not representative of what the operating
results would be on a stand-alone basis. Revenues and operating
expenses of the separate legal entities include intercompany
charges for management and other services.

F-30



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


The $150 million 10% Senior
Subordinated Notes due 2011, were issued in a private offering
on December 19, 2001 and subsequently registered as
publicly traded securities through a Form S-4 effective
January 15, 2002, by USPIs wholly owned finance
subsidiary, United Surgical Partners Holdings, Inc. (USPH),
which was formed in 2001. The notes are guaranteed by USPI,
which does not have independent assets or operations, and
USPIs wholly owned subsidiaries domiciled in the United
States. USPIs investees in Spain and the United Kingdom
are not guarantors of the obligation. USPIs investees in
the United States in which USPI owns less than 100% are not
guarantors of the obligation. The financial positions and
results of operations (below, in thousands) of the respective
guarantors are based upon the guarantor relationship as of the
end of the year.

Condensed Consolidating Balance
Sheets:

|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |         | 
|---------------------------------------- | ------------------------------------------ | ---------- | ------- | ----------------- |  | ------------- | ------- | ------------ |  | - | -------- | -------- | - | - | ------- | ------- | 
|                                         |                                            |            |         | Non-Participating |  | Consolidation |         | Consolidated
|As of December 31, 2003                  |                                            | Guarantors |         | Investees         |  | Adjustments   |         | Total       
|                                         |                                            |            |         |                   |  |               |         |             
|Assets:                                  |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|Current assets:                          |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|Cash and cash equivalents                |                                            | $          | 15,147  |                   |  | $             | 13,372  |              |  | $ |         |          |   | $ | 28,519  |        
|Accounts receivable, net                 |                                            |            | 127     |                   |  |               | 56,464  |              |  |   |         |          |   |   | 56,591  |        
|Other receivables                        |                                            |            | 37,980  |                   |  |               | 21,183  |              |  |   | (38,995  | )        |   |   | 20,168  |        
|Inventories                              |                                            |            | 279     |                   |  |               | 8,745   |              |  |   |         |          |   |   | 9,024   |        
|Other                                    |                                            |            | 11,781  |                   |  |               | 7,514   |              |  |   |         |          |   |   | 19,295  |        
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|                                         | Total current assets                       |            |         | 65,314            |  |               |         | 107,278      |  |   |          | (38,995  | ) |   |         | 133,597 | 
|Property and equipment, net              |                                            |            | 36,044  |                   |  |               | 312,587 |              |  |   | (568     | )        |   |   | 348,063 |        
|Investments in affiliates                |                                            |            | 175,504 |                   |  |               | 14,344  |              |  |   | (157,744 | )        |   |   | 32,104  |        
|Intangible assets, net                   |                                            |            | 184,314 |                   |  |               | 158,378 |              |  |   | (16,047  | )        |   |   | 326,645 |        
|Other                                    |                                            |            | 120,142 |                   |  |               | 11,521  |              |  |   | (101,563 | )        |   |   | 30,100  |        
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|                                         | Total assets                               |            | $       | 581,318           |  |               | $       | 604,108      |  |   | $        | (314,917 | ) |   | $       | 870,509 | 
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|                                        
|Liabilities and Stockholders
    Equity |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|Current liabilities:                     |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|Accounts payable                         |                                            | $          | 1,396   |                   |  | $             | 35,994  |              |  | $ | (937     | )        |   | $ | 36,453  |        
|Accrued expenses                         |                                            |            | 27,138  |                   |  |               | 24,500  |              |  |   | (1,245   | )        |   |   | 50,393  |        
|Current portion of long-term debt        |                                            |            | 1,763   |                   |  |               | 16,146  |              |  |   | (1,115   | )        |   |   | 16,794  |        
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|                                         | Total current liabilities                  |            |         | 30,297            |  |               |         | 76,640       |  |   |          | (3,297   | ) |   |         | 103,640 | 
|Long-term debt                           |                                            |            | 156,963 |                   |  |               | 264,020 |              |  |   | (133,033 | )        |   |   | 287,950 |        
|Other liabilities                        |                                            |            | 18,998  |                   |  |               | 23,308  |              |  |   |         |          |   |   | 42,306  |        
|Minority interests                       |                                            |            |        |                   |  |               | 11,403  |              |  |   | 34,555   |          |   |   | 45,958  |        
|Stockholders equity                     |                                            |            | 375,060 |                   |  |               | 228,737 |              |  |   | (213,142 | )        |   |   | 390,655 |        
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|                                         | Total liabilities and stockholders equity |            | $       | 581,318           |  |               | $       | 604,108      |  |   | $        | (314,917 | ) |   | $       | 870,509 | 
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        

F-31



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |         | 
|---------------------------------------- | ------------------------------------------ | ---------- | ------- | ----------------- |  | ------------- | ------- | ------------ |  | - | -------- | -------- | - | - | ------- | ------- | 
|                                         |                                            |            |         | Non-Participating |  | Consolidation |         | Consolidated
|As of December 31, 2002                  |                                            | Guarantors |         | Investees         |  | Adjustments   |         | Total       
|                                         |                                            |            |         |                   |  |               |         |             
|Assets:                                  |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|Current assets:                          |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|Cash and cash equivalents                |                                            | $          | 24,712  |                   |  | $             | 22,859  |              |  | $ |         |          |   | $ | 47,571  |        
|Accounts receivable, net                 |                                            |            | 90      |                   |  |               | 39,086  |              |  |   |         |          |   |   | 39,176  |        
|Other receivables                        |                                            |            | 48,456  |                   |  |               | 9,281   |              |  |   | (21,529  | )        |   |   | 36,208  |        
|Inventories                              |                                            |            | 280     |                   |  |               | 7,476   |              |  |   |         |          |   |   | 7,756   |        
|Other                                    |                                            |            | 10,235  |                   |  |               | 2,423   |              |  |   |         |          |   |   | 12,658  |        
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|                                         | Total current assets                       |            |         | 83,773            |  |               |         | 81,125       |  |   |          | (21,529  | ) |   |         | 143,369 | 
|Property and equipment, net              |                                            |            | 39,236  |                   |  |               | 231,743 |              |  |   | (592     | )        |   |   | 270,387 |        
|Investments in affiliates                |                                            |            | 172,050 |                   |  |               | 375     |              |  |   | (153,729 | )        |   |   | 18,696  |        
|Intangible assets, net                   |                                            |            | 166,036 |                   |  |               | 122,685 |              |  |   | (1,137   | )        |   |   | 287,584 |        
|Other                                    |                                            |            | 98,647  |                   |  |               | 5,204   |              |  |   | (95,129  | )        |   |   | 8,722   |        
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|                                         | Total assets                               |            | $       | 559,742           |  |               | $       | 441,132      |  |   | $        | (272,116 | ) |   | $       | 728,758 | 
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|                                        
|Liabilities and Stockholders
    Equity |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|Current liabilities:                     |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|Accounts payable                         |                                            | $          | 1,357   |                   |  | $             | 24,619  |              |  | $ | 13       |          |   | $ | 25,989  |        
|Accrued expenses                         |                                            |            | 30,016  |                   |  |               | 22,769  |              |  |   | 51       |          |   |   | 52,836  |        
|Current portion of long-term debt        |                                            |            | 2,453   |                   |  |               | 11,937  |              |  |   | (1,258   | )        |   |   | 13,132  |        
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|                                         | Total current liabilities                  |            |         | 33,826            |  |               |         | 59,325       |  |   |          | (1,194   | ) |   |         | 91,957  | 
|Long-term debt                           |                                            |            | 158,199 |                   |  |               | 216,621 |              |  |   | (111,249 | )        |   |   | 263,571 |        
|Other liabilities                        |                                            |            | 7,936   |                   |  |               | 16,173  |              |  |   |         |          |   |   | 24,109  |        
|Minority interests                       |                                            |            |        |                   |  |               | 7,387   |              |  |   | 19,473   |          |   |   | 26,860  |        
|Stockholders equity                     |                                            |            | 359,781 |                   |  |               | 141,626 |              |  |   | (179,146 | )        |   |   | 322,261 |        
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        
|                                         | Total liabilities and stockholders equity |            | $       | 559,742           |  |               | $       | 441,132      |  |   | $        | (272,116 | ) |   | $       | 728,758 | 
|                                         |                                            |            |         |                   |  |               |         |              |  |   |          |          |   |   |         |        

F-32



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


Condensed Consolidating Statements of
Income:

|                                                                |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ---------- | ------- | ----------------- |  | ------------- | ------- | ------------ |  | - | ------- | - |  | - | ------- | -
|                                                                |  |            |         | Non-Participating |  | Consolidation |         | Consolidated
|Year Ended December 31, 2003                                    |  | Guarantors |         | Investees         |  | Adjustments   |         | Total       
|                                                                |  |            |         |                   |  |               |         |             
|Revenues                                                        |  | $          | 84,152  |                   |  | $             | 377,627 |              |  | $ | (15,510 | ) |  | $ | 446,269 |  
|Operating expenses, excluding depreciation and
    amortization |  |            | 54,107  |                   |  |               | 278,390 |              |  |   | (15,819 | ) |  |   | 316,678 |  
|Depreciation and amortization                                   |  |            | 10,369  |                   |  |               | 21,842  |              |  |   | (24     | ) |  |   | 32,187  |  
|                                                                |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  
|Operating income                                                |  |            | 19,676  |                   |  |               | 77,395  |              |  |   | 333     |   |  |   | 97,404  |  
|Interest expense, net                                           |  |            | (11,696 | )                 |  |               | (15,717 | )            |  |   |        |   |  |   | (27,413 | )
|Other expense                                                   |  |            | 316     |                   |  |               | 729     |              |  |   | (309    | ) |  |   | 736     |  
|                                                                |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  
|Income before minority interests                                |  |            | 8,296   |                   |  |               | 62,407  |              |  |   | 24      |   |  |   | 70,727  |  
|Minority interests in income of consolidated
    subsidiaries   |  |            |        |                   |  |               | (10,952 | )            |  |   | (13,359 | ) |  |   | (24,311 | )
|                                                                |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  
|Income (loss) before income taxes                               |  |            | 8,296   |                   |  |               | 51,455  |              |  |   | (13,335 | ) |  |   | 46,416  |  
|Income tax (expense) benefit                                    |  |            | (14,440 | )                 |  |               | (2,087  | )            |  |   | (13     | ) |  |   | (16,540 | )
|                                                                |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  
|Net income (loss)                                               |  | $          | (6,144  | )                 |  | $             | 49,368  |              |  | $ | (13,348 | ) |  | $ | 29,876  |  
|                                                                |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  

|                                                                |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ---------- | ------- | ----------------- |  | ------------- | ------- | ------------ |  | - | ------- | - |  | - | ------- | -
|                                                                |  |            |         | Non-Participating |  | Consolidation |         | Consolidated
|Year Ended December 31, 2002                                    |  | Guarantors |         | Investees         |  | Adjustments   |         | Total       
|                                                                |  |            |         |                   |  |               |         |             
|Revenues                                                        |  | $          | 69,932  |                   |  | $             | 283,558 |              |  | $ | (11,104 | ) |  | $ | 342,386 |  
|Operating expenses, excluding depreciation and
    amortization |  |            | 45,352  |                   |  |               | 210,847 |              |  |   | (11,372 | ) |  |   | 244,827 |  
|Depreciation and amortization                                   |  |            | 9,726   |                   |  |               | 16,828  |              |  |   | (24     | ) |  |   | 26,530  |  
|                                                                |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  
|Operating income                                                |  |            | 14,854  |                   |  |               | 55,883  |              |  |   | 292     |   |  |   | 71,029  |  
|Interest expense, net                                           |  |            | (12,039 | )                 |  |               | (12,890 | )            |  |   |        |   |  |   | (24,929 | )
|Other expense                                                   |  |            | 292     |                   |  |               | (1,208  | )            |  |   | (292    | ) |  |   | (1,208  | )
|                                                                |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  
|Income before minority interests                                |  |            | 3,107   |                   |  |               | 41,785  |              |  |   |        |   |  |   | 44,892  |  
|Minority interests in income of consolidated
    subsidiaries   |  |            |        |                   |  |               | (7,148  | )            |  |   | (7,698  | ) |  |   | (14,846 | )
|                                                                |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  
|Income (loss) before income taxes                               |  |            | 3,107   |                   |  |               | 34,637  |              |  |   | (7,698  | ) |  |   | 30,046  |  
|Income tax (expense) benefit                                    |  |            | (9,441  | )                 |  |               | (1,005  | )            |  |   |        |   |  |   | (10,446 | )
|                                                                |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  
|Net income (loss)                                               |  | $          | (6,334  | )                 |  | $             | 33,632  |              |  | $ | (7,698  | ) |  | $ | 19,600  |  
|                                                                |  |            |         |                   |  |               |         |              |  |   |         |   |  |   |         |  

F-33



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


|                                                                |  |            |        |                   |  |               |         |              |  |   |        |   |  |   |         |  
|--------------------------------------------------------------- |  | ---------- | ------ | ----------------- |  | ------------- | ------- | ------------ |  | - | ------ | - |  | - | ------- | -
|                                                                |  |            |        | Non-Participating |  | Consolidation |         | Consolidated
|Year Ended December 31, 2001                                    |  | Guarantors |        | Investees         |  | Adjustments   |         | Total       
|                                                                |  |            |        |                   |  |               |         |             
|Revenues                                                        |  | $          | 55,537 |                   |  | $             | 194,611 |              |  | $ | (5,780 | ) |  | $ | 244,368 |  
|Operating expenses, excluding depreciation and
    amortization |  |            | 39,478 |                   |  |               | 150,814 |              |  |   | (5,814 | ) |  |   | 184,478 |  
|Depreciation and amortization                                   |  |            | 9,782  |                   |  |               | 16,592  |              |  |   | (258   | ) |  |   | 26,116  |  
|                                                                |  |            |        |                   |  |               |         |              |  |   |        |   |  |   |         |  
|Operating income                                                |  |            | 6,277  |                   |  |               | 27,205  |              |  |   | 292    |   |  |   | 33,774  |  
|Interest income (expense), net                                  |  |            | (6,353 | )                 |  |               | (10,928 | )            |  |   | 13     |   |  |   | (17,268 | )
|Other expense                                                   |  |            | (4,899 | )                 |  |               | (2,181  | )            |  |   | (240   | ) |  |   | (7,320  | )
|                                                                |  |            |        |                   |  |               |         |              |  |   |        |   |  |   |         |  
|Income (loss) before minority interests                         |  |            | (4,975 | )                 |  |               | 14,096  |              |  |   | 65     |   |  |   | 9,186   |  
|Minority interests in income of consolidated
    subsidiaries   |  |            |       |                   |  |               | (4,058  | )            |  |   | (3,500 | ) |  |   | (7,558  | )
|                                                                |  |            |        |                   |  |               |         |              |  |   |        |   |  |   |         |  
|Income (loss) before income taxes                               |  |            | (4,975 | )                 |  |               | 10,038  |              |  |   | (3,435 | ) |  |   | 1,628   |  
|Income tax (expense) benefit                                    |  |            | 2,056  |                   |  |               | (934    | )            |  |   |       |   |  |   | 1,122   |  
|                                                                |  |            |        |                   |  |               |         |              |  |   |        |   |  |   |         |  
|Net income (loss)                                               |  | $          | (2,919 | )                 |  | $             | 9,104   |              |  | $ | (3,435 | ) |  | $ | 2,750   |  
|                                                                |  |            |        |                   |  |               |         |              |  |   |        |   |  |   |         |  

F-34



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##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


Condensed Consolidating Statements of Cash
Flows:

|                                                                                                        |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |          |  
|------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------- | ------- | ----------------- | - | ------------- | ------- | ------------ | - | - | ------- | ------- | - | - | ------- | -------- | -
|                                                                                                        |                                                         |            |         | Non-Participating |   | Consolidation |         | Consolidated
|Year Ended December 31, 2003                                                                            |                                                         | Guarantors |         | Investees         |   | Adjustments   |         | Total       
|                                                                                                        |                                                         |            |         |                   |   |               |         |             
|Cash flows from operating activities:                                                                   |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |         
|Net income (loss)                                                                                       |                                                         | $          | (6,144  | )                 |   | $             | 49,368  |              |   | $ | (13,348 | )       |   | $ | 29,876  |         
|Changes in operating and intercompany assets and
    liabilities and noncash items included in net loss |                                                         |            | 50,733  |                   |   |               | (29,770 | )            |   |   | 35,993  |         |   |   | 56,956  |         
|                                                                                                        |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |         
|Net cash provided by operating activities                                                               |                                                         |            | 44,589  |                   |   |               | 19,598  |              |   |   | 22,645  |         |   |   | 86,832  |         
|Cash flows from investing activities:                                                                   |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |         
|Purchases of property and equipment, net                                                                |                                                         |            | (4,586  | )                 |   |               | (37,205 | )            |   |   |        |         |   |   | (41,791 | )       
|Purchases of new businesses                                                                             |                                                         |            | (30,038 | )                 |   |               | (21,884 | )            |   |   |        |         |   |   | (51,922 | )       
|Other items                                                                                             |                                                         |            | (13,937 | )                 |   |               | (3,088  | )            |   |   |        |         |   |   | (17,025 | )       
|                                                                                                        |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |         
|                                                                                                        | Net cash used in investing activities                   |            |         | (48,561           | ) |               |         | (62,177      | ) |   |         |        |   |   |         | (110,738 | )
|Cash flows from financing activities:                                                                   |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |         
|Long-term borrowings, net                                                                               |                                                         |            | (2,330  | )                 |   |               | 32,748  |              |   |   | (22,645 | )       |   |   | 7,773   |         
|Proceeds from issuance of common stock                                                                  |                                                         |            | 4,307   |                   |   |               |        |              |   |   |        |         |   |   | 4,307   |         
|Other items                                                                                             |                                                         |            | (7,570  | )                 |   |               |        |              |   |   |        |         |   |   | (7,570  | )       
|                                                                                                        |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |         
|                                                                                                        | Net cash provided by (used in) financing
    activities |            |         | (5,593            | ) |               |         | 32,748       |   |   |         | (22,645 | ) |   |         | 4,510    |  
|Effect of exchange rate changes on cash                                                                 |                                                         |            |        |                   |   |               | 344     |              |   |   |        |         |   |   | 344     |         
|Net decrease in cash                                                                                    |                                                         |            | (9,565  | )                 |   |               | (9,487  | )            |   |   |        |         |   |   | (19,052 | )       
|Cash at the beginning of the year                                                                       |                                                         |            | 24,712  |                   |   |               | 22,859  |              |   |   |        |         |   |   | 47,571  |         
|                                                                                                        |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |         
|Cash at the end of the year                                                                             |                                                         | $          | 15,147  |                   |   | $             | 13,372  |              |   | $ |        |         |   | $ | 28,519  |         
|                                                                                                        |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |         

|                                                                                                        |                                       |            |         |                   |   |               |         |              |   |   |         |   |  |   |         |         |  
|------------------------------------------------------------------------------------------------------- | ------------------------------------- | ---------- | ------- | ----------------- | - | ------------- | ------- | ------------ | - | - | ------- | - |  | - | ------- | ------- | -
|                                                                                                        |                                       |            |         | Non-Participating |   | Consolidation |         | Consolidated
|Year Ended December 31, 2002                                                                            |                                       | Guarantors |         | Investees         |   | Adjustments   |         | Total       
|                                                                                                        |                                       |            |         |                   |   |               |         |             
|Cash flows from operating activities:                                                                   |                                       |            |         |                   |   |               |         |              |   |   |         |   |  |   |         |        
|Net income (loss)                                                                                       |                                       | $          | (6,333  | )                 |   | $             | 33,632  |              |   | $ | (7,699  | ) |  | $ | 19,600  |        
|Changes in operating and intercompany assets and
    liabilities and noncash items included in net loss |                                       |            | 23,378  |                   |   |               | (96,840 | )            |   |   | 113,067 |   |  |   | 39,605  |        
|                                                                                                        |                                       |            |         |                   |   |               |         |              |   |   |         |   |  |   |         |        
|Net cash provided by (used in) operating
    activities                                                 |                                       |            | 17,045  |                   |   |               | (63,208 | )            |   |   | 105,368 |   |  |   | 59,205  |        
|Cash flows from investing activities:                                                                   |                                       |            |         |                   |   |               |         |              |   |   |         |   |  |   |         |        
|Purchases of property and equipment, net                                                                |                                       |            | (4,661  | )                 |   |               | (25,418 | )            |   |   |        |   |  |   | (30,079 | )      
|Purchases of new businesses                                                                             |                                       |            | (54,809 | )                 |   |               | (7,580  | )            |   |   |        |   |  |   | (62,389 | )      
|Other items                                                                                             |                                       |            | (517    | )                 |   |               | 1,486   |              |   |   |        |   |  |   | 969     |        
|                                                                                                        |                                       |            |         |                   |   |               |         |              |   |   |         |   |  |   |         |        
|                                                                                                        | Net cash used in investing activities |            |         | (59,987           | ) |               |         | (31,512      | ) |   |         |  |  |   |         | (91,499 | )

F-35



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)


|                                        |                                                         |            |        |                   |  |               |        |              |  |   |         |          |   |   |        |        | 
|--------------------------------------- | ------------------------------------------------------- | ---------- | ------ | ----------------- |  | ------------- | ------ | ------------ |  | - | ------- | -------- | - | - | ------ | ------ | 
|                                        |                                                         |            |        | Non-Participating |  | Consolidation |        | Consolidated
|Year Ended December 31, 2002            |                                                         | Guarantors |        | Investees         |  | Adjustments   |        | Total       
|                                        |                                                         |            |        |                   |  |               |        |             
|Cash flows from financing activities:   |                                                         |            |        |                   |  |               |        |              |  |   |         |          |   |   |        |       
|Long-term borrowings, net               |                                                         |            | (3,097 | )                 |  |               | (1,849 | )            |  |   |        |          |   |   | (4,946 | )     
|Proceeds from issuance of common stock  |                                                         |            | 53,665 |                   |  |               | 32,716 |              |  |   | (32,716 | )        |   |   | 53,665 |       
|Other items                             |                                                         |            | (3,309 | )                 |  |               | 72,110 |              |  |   | (72,110 | )        |   |   | (3,309 | )     
|                                        |                                                         |            |        |                   |  |               |        |              |  |   |         |          |   |   |        |       
|                                        | Net cash provided by (used in) financing
    activities |            |        | 47,259            |  |               |        | 102,977      |  |   |         | (104,826 | ) |   |        | 45,410 | 
|Effect of exchange rate changes on cash |                                                         |            |       |                   |  |               | 1,116  |              |  |   | (542    | )        |   |   | 574    |       
|Net increase in cash                    |                                                         |            | 4,317  |                   |  |               | 9,373  |              |  |   |        |          |   |   | 13,690 |       
|Cash at the beginning of the year       |                                                         |            | 20,396 |                   |  |               | 13,485 |              |  |   |        |          |   |   | 33,881 |       
|                                        |                                                         |            |        |                   |  |               |        |              |  |   |         |          |   |   |        |       
|Cash at the end of the year             |                                                         | $          | 24,713 |                   |  | $             | 22,858 |              |  | $ |        |          |   | $ | 47,571 |       
|                                        |                                                         |            |        |                   |  |               |        |              |  |   |         |          |   |   |        |       

|                                                                                                        |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |         |  
|------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------- | ------- | ----------------- | - | ------------- | ------- | ------------ | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                                                        |                                                         |            |         | Non-Participating |   | Consolidation |         | Consolidated
|Year Ended December 31, 2001                                                                            |                                                         | Guarantors |         | Investees         |   | Adjustments   |         | Total       
|                                                                                                        |                                                         |            |         |                   |   |               |         |             
|Cash flows from operating activities:                                                                   |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|Net income (loss)                                                                                       |                                                         | $          | (2,919  | )                 |   | $             | 9,121   |              |   | $ | (3,452  | )       |   | $ | 2,750   |        
|Changes in operating and intercompany assets and
    liabilities and noncash items included in net loss |                                                         |            | 2,636   |                   |   |               | 31,906  |              |   |   | 3,565   |         |   |   | 38,107  |        
|                                                                                                        |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|Net cash provided by (used in) operating
    activities                                                 |                                                         |            | (283    | )                 |   |               | 41,027  |              |   |   | 113     |         |   |   | 40,857  |        
|Cash flows from investing activities:                                                                   |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|Purchases of property and equipment, net                                                                |                                                         |            | (7,130  | )                 |   |               | (18,647 | )            |   |   |        |         |   |   | (25,777 | )      
|Purchases of new businesses                                                                             |                                                         |            | (57,099 | )                 |   |               | (415    | )            |   |   | 126     |         |   |   | (57,388 | )      
|Other items                                                                                             |                                                         |            | (27,953 | )                 |   |               | (852    | )            |   |   | 29,409  |         |   |   | 604     |        
|                                                                                                        |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|                                                                                                        | Net cash provided by (used in) investing
    activities |            |         | (92,182           | ) |               |         | (19,914      | ) |   |         | 29,535  |   |   |         | (82,561 | )
|Cash flows from financing activities:                                                                   |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|Long-term borrowings, net                                                                               |                                                         |            | 34,842  |                   |   |               | (10,516 | )            |   |   | (29,409 | )       |   |   | (5,083  | )      
|Proceeds from issuance of common stock                                                                  |                                                         |            | 132,818 |                   |   |               | 239     |              |   |   | (239    | )       |   |   | 132,818 |        
|Other items                                                                                             |                                                         |            | (55,564 | )                 |   |               |        |              |   |   |        |         |   |   | (55,564 | )      
|                                                                                                        |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|                                                                                                        | Net cash provided by (used in) financing
    activities |            |         | 112,096           |   |               |         | (10,277      | ) |   |         | (29,648 | ) |   |         | 72,171  |  
|Effect of exchange rate changes on cash                                                                 |                                                         |            |        |                   |   |               | (37     | )            |   |   |        |         |   |   | (37     | )      
|Net increase in cash                                                                                    |                                                         |            | 19,631  |                   |   |               | 10,799  |              |   |   |        |         |   |   | 30,430  |        
|Cash at inception                                                                                       |                                                         |            | 765     |                   |   |               | 2,686   |              |   |   |        |         |   |   | 3,451   |        
|                                                                                                        |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        
|Cash at the end of the year                                                                             |                                                         | $          | 20,396  |                   |   | $             | 13,485  |              |   | $ |        |         |   | $ | 33,881  |        
|                                                                                                        |                                                         |            |         |                   |   |               |         |              |   |   |         |         |   |   |         |        

F-36



---



##### Table of Contents



UNITED SURGICAL PARTNERS
INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and
2002   (Continued)




|     |                              
|---- | -----------------------------
|(20) | New Accounting Pronouncements

As discussed in Note 17, the Company adopted
the disclosure provisions of FIN 45 effective
December 31, 2002 and the fair value liability recognition
provisions of FIN 45 for guarantees issued after that date.

During May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both
Liabilities and Equity(SFAS No. 150).
As the FASB subsequently issued three Staff Positions regarding
this statement, including one dated November 7, 2003 that
indefinitely defers a major portion of SFAS No. 150
pending reconsideration of certain concepts by the FASB, the
Companys financial statements have not been impacted by
SFAS No. 150.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 (FIN 46). In December
2003, the FASB issued a new version of FIN 46. FIN 46,
in both its original and revised versions, provides a framework
for identifying variable interest entities (VIEs)
and determining when a company should consolidate a VIE for
financial reporting purposes. FIN 46 was initially
effective for VIEs created after January 31, 2003, with the
provisions of the revised FIN 46 effective for periods
ending after December 15, 2003. The adoption of FIN 46
did not have a material impact on the Companys financial
position or results of operations.



|     |                                                  
|---- | -------------------------------------------------
|(21) | Selected Quarterly Financial Data
    (Unaudited)

|                           |  |                                          |        |               |  |       |        |        |  |       |        |        |  |       |        |        |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 
|-------------------------- |  | ---------------------------------------- | ------ | ------------- |  | ----- | ------ | ------ |  | ----- | ------ | ------ |  | ----- | ------ | ------ |  | - | ------- |  |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                           |  |                                          |        |              
|                           |  | 2002 Quarters                            |        | 2003 Quarters
|                           |  |                                          |        |              
|                           |  | First                                    |        | Second        |  | Third |        | Fourth |  | First |        | Second |  | Third |        | Fourth
|                           |  |                                          |        |               |  |       |        |        |  |       |        |        |  |       |        |       
|                           |  |                                         
|                           |  | (In thousands, except per share amounts)
|Net revenues               |  | $                                        | 75,078 |               |  | $     | 85,841 |        |  | $     | 85,831 |        |  | $     | 95,636 |        |  | $ | 102,059 |  |  | $ | 111,544 |  |  | $ | 108,820 |  |  | $ | 123,846 | 
|Net income                 |  |                                          | 4,703  |               |  |       | 6,114  |        |  |       | 3,040  |        |  |       | 5,743  |        |  |   | 7,122   |  |  |   | 8,173   |  |  |   | 5,576   |  |  |   | 9,005   | 
|Basic earnings per share   |  | $                                        | 0.20   |               |  | $     | 0.25   |        |  | $     | 0.12   |        |  | $     | 0.21   |        |  | $ | 0.26    |  |  | $ | 0.30    |  |  | $ | 0.21    |  |  | $ | 0.33    | 
|Diluted earnings per share |  | $                                        | 0.19   |               |  | $     | 0.24   |        |  | $     | 0.12   |        |  | $     | 0.21   |        |  | $ | 0.26    |  |  | $ | 0.29    |  |  | $ | 0.20    |  |  | $ | 0.31    | 

Quarterly operating results are not necessarily
representative of operations for a full year for various
reasons, including case volumes, interest rates, acquisitions,
changes in contracts, the timing of price changes, and financing
activities. For example, the fourth quarter of 2002 includes
impairment of investment securities of $1.1 million, and
the third quarter of each year is essentially a breakeven
quarter for the Companys Western European operations due
to significantly reduced volumes in the Companys Spanish
facilities, where the month of August is traditionally greatly
impacted by physician vacations. In addition, USPIs
capital structure was significantly altered by the
Companys issuance of equity securities during 2002, and
USPI has completed acquisitions and opened new facilities
throughout 2002 and 2003, all of which significantly affect the
comparability of net income and earnings per share from quarter
to quarter.

F-37



---



##### Table of Contents





|    |                              
|--- | -----------------------------
|(2) | Financial Statement Schedules

The following financial statement schedule is
filed as part of this Form 10-K:

|                                                    |  |  |     | 
|--------------------------------------------------- |  |  | --- | 
|Schedule II  Valuation and
    Qualifying Accounts |  |  | S-1 | 

SCHEDULE II:     VALUATION
AND QUALIFYING ACCOUNTS

For the Years Ended December 31, 2001,
2002 and 2003


(In thousands)


Allowance for Doubtful Accounts

|     |  |              |       |                       |  |          |       |               |  |            |   |           |  |   |        |   |  |   |       |  |  |   |       | 
|---- |  | ------------ | ----- | --------------------- |  | -------- | ----- | ------------- |  | ---------- | - | --------- |  | - | ------ | - |  | - | ----- |  |  | - | ----- | 
|     |  |              |       |                       |  |          |       |               |  |           
|     |  |              |       | Additions Charged to: |  |          |       |               |  |           
|     |  | Balance at   |       |                       |  |          |       |               |  | Balance at
|     |  | Beginning of |       | Costs and             |  | Other    |       |               |  | Other      |   | End      
|     |  | Period       |       | Expenses              |  | Accounts |       | Deductions(1) |  | Items(2)   |   | of Period
|     |  |              |       |                       |  |          |       |               |  |            |   |          
|2001 |  | $            | 3,666 |                       |  | $        | 3,517 |               |  |            |  |           |  | $ | (3,445 | ) |  | $ | 988   |  |  | $ | 4,726 | 
|2002 |  |              | 4,726 |                       |  |          | 6,330 |               |  |            |  |           |  |   | (7,404 | ) |  |   | 3,502 |  |  |   | 7,154 | 
|2003 |  |              | 7,154 |                       |  |          | 7,772 |               |  |            |  |           |  |   | (7,222 | ) |  |   | 1,134 |  |  |   | 8,838 | 



---



|    |                                                           
|--- | ----------------------------------------------------------
|(1) | Accounts written off.                                     
|   
|(2) | Primarily beginning balances for purchased
    businesses.

All other schedules are omitted because they are
not applicable or not required or because the required
information is included in the financial statements or notes
thereto.

S-1



---



##### Table of Contents



(3) Exhibits:

|        |   |       |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|------- | - | ----- |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |       |  |            
|Number  |   |       |  | Description
|        |   |       |  |            
|        | 2 | .1   |  |            |  | Agreement and Plan of Merger, dated as of
    December 6, 2000, among the Company, OPC Acquisition
    Corporation and OrthoLink Physicians Corporation (previously
    filed as Exhibit 2.1 to the Companys Registration
    Statement on Form S-1 (No. 333-55442) and incorporated
    herein by reference)                                                                                              
|        | 2 | .2   |  |            |  | Agreement for the Sale and Purchase of Shares and
    Loan Notes in Aspen Healthcare Holdings Limited, dated
    April 6, 2000, between Electra Private Equity Partners 1995
    and others and Global Healthcare Partners Limited (previously
    filed as Exhibit 2.2 to Amendment No. 1 to the
    Companys Registration Statement on Form S-1
    (No. 333-55442) and incorporated herein by reference)
|        | 2 | .3   |  |            |  | Agreement and Plan of Reorganization, dated as of
    March 26, 2002, by and among the Company, USP Acquisition
    Corporation, Surgicoe Corporation and each of the shareholders
    of Surgicoe named in the agreement (previously filed as
    Exhibit 2.1 to the Companys Current Report on
    Form 8-K filed with the Commission on April 16, 2002
    and incorporated herein by reference)        
|        | 3 | .1   |  |            |  | Second Amended and Restated Certificate of
    Incorporation (previously filed as Exhibit 3.1 to Amendment
    No. 4 to the Companys Registration Statement on
    Form S-1 (No. 333-55442) and incorporated herein by
    reference)                                                                                                                                                                      
|        | 3 | .2   |  |            |  | Amended and Restated Bylaws (previously filed as
    Exhibit 3.2 to the Companys Registration Statement on
    Form S-3 (No. 333-99309) and incorporated herein by
    reference)                                                                                                                                                                                                                          
|        | 4 | .1   |  |            |  | Form of Common Stock Certificate (previously
    filed as Exhibit 4.1 to Amendment No. 4 to the
    Companys Registration Statement on Form S-1
    (No. 333-55442) and incorporated herein by reference)                                                                                                                                                                                                  
|        | 4 | .2   |  |            |  | Indenture, dated as of December 19, 2001,
    among United Surgical Partners Holdings, Inc., the
    guarantor parties thereto and U.S. Trust Company of Texas,
    N.A. (previously filed as Exhibit 4.2 to the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 2001 and incorporated herein by reference)                                                                    
|        | 4 | .3   |  |            |  | Global Security, dated as of December 19,
    2001, governing United Surgical Partners
    Holdings, Inc.s outstanding 10% Senior
    Subordinated Notes due 2011 (previously filed as
    Exhibit 4.3 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001 and
    incorporated herein by reference)                                                                      
|        | 4 | .4   |  |            |  | Third Amended and Restated Stockholders
    Agreement, dated March 27, 2000, by and among the Company
    and the security holders named therein (previously filed as
    Exhibit 4.2 to the Companys Registration Statement on
    Form S-1 (No. 333-55442) and incorporated herein by
    reference)                                                                                                    
|        | 4 | .5.1 |  |            |  | Amended and Restated Registration Rights
    Agreement, dated April 30, 1998, by and among the Company
    and the security holders named therein (the Registration
    Rights Agreement) (previously filed as Exhibit 4.3.1
    to the Companys Registration Statement on Form S-1
    (No. 333-55442) and incorporated herein by reference)                                                            
|        | 4 | .5.2 |  |            |  | Amendment No. 1 to the Registration Rights
    Agreement, dated as of June 26, 1998, by and among the
    Company and the security holders named therein (previously filed
    as Exhibit 4.3.2 to the Companys Registration
    Statement on Form S-1 (No. 333-55442) and incorporated
    herein by reference)                                                                                           
|        | 4 | .5.3 |  |            |  | Amendment No. 2 to the Registration Rights
    Agreement, dated as of July 31, 1998, by and among the
    Company and the security holders named therein (previously filed
    as Exhibit 4.3.3 to the Companys Registration
    Statement on Form S-1 (No. 333-55442) and incorporated
    herein by reference)                                                                                           

II-1



---



##### Table of Contents



|        |    |       |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | -- | ----- |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |            
|Number  |    |       |  | Description
|        |    |       |  |            
|        | 4  | .5.4 |  |            |  | Amendment No. 3 to the Registration Rights
    Agreement, dated as of October 26, 1998, by and among the
    Company and the security holders named therein (previously filed
    as Exhibit 4.3.4 to the Companys Registration
    Statement on Form S-1 (No. 333-55442) and incorporated
    herein by reference)                                                                                                                                      
|        | 4  | .5.5 |  |            |  | Amendment No. 4 to the Registration Rights
    Agreement, dated as of December 22, 1998, by and among the
    Company and the security holders named therein (previously filed
    as Exhibit 4.3.5 to the Companys Registration
    Statement on Form S-1 (No. 333-55442) and incorporated
    herein by reference)                                                                                                                                     
|        | 4  | .5.6 |  |            |  | Amendment No. 5 to the Registration Rights
    Agreement, dated as of June 1, 1999, by and among the
    Company and the security holders named therein (previously filed
    as Exhibit 4.3.6 to the Companys Registration
    Statement on Form S-1 (No. 333-55442) and incorporated
    herein by reference)                                                                                                                                          
|        | 4  | .5.7 |  |            |  | Amendment No. 6 to the Registration Rights
    Agreement, dated as of March 27, 2000, by and among the
    Company and the security holders named therein (previously filed
    as Exhibit 4.3.7 to the Companys Registration
    Statement on Form S-1 (No. 333-55442) and incorporated
    herein by reference)                                                                                                                                        
|        | 4  | .5.8 |  |            |  | Amendment No. 7 to the Registration Rights
    Agreement, dated as of February 12, 2001, by and among the
    Company and the security holders named therein (previously filed
    as Exhibit 4.3.8 to Amendment No. 1 to the
    Companys Registration Statement on Form S-1
    (No. 333-55442) and incorporated herein by reference)                                                                                                                  
|        | 4  | .6   |  |            |  | Rights Agreement between the Company and First
    Union National Bank as Rights Agent dated June 13, 2001
    (previously filed as Exhibit 4.1 to the Companys
    Form 8-A filed with the Commission on June 13, 2001
    and incorporated herein by reference)                                                                                                                                                                                        
|        | 10 | .1   |  |            |  | Credit Agreement, dated April 6, 2000, by
    and among Global Healthcare Partners Limited and the Governor
    and Company of the Bank of Scotland (previously filed as
    Exhibit 10.3 to the Companys Registration Statement
    on Form S-1 (No. 333-55442) and incorporated herein by
    reference)                                                                                                                                               
|        | 10 | .2   |  |            |  | Second Amended and Restated Credit Agreement,
    dated as of November 7, 2002, among USP Domestic
    Holdings, Inc., USPE Holdings Limited, various financial
    institutions from time to time parties thereto as the lenders
    and Sun Trust Bank, as Administrative Agent (previously filed as
    Exhibit 10.1 to the Companys Annual Report on
    Form 10-Q for the quarter ended September 30, 2002 and
    incorporated herein by reference)
|        | 10 | .2.1* |  |            |  | First Amendment to Second Amended and Restated
    Credit Agreement, dated as of June 3, 2003                                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .2.2* |  |            |  | Second Amendment to Second Amended and Restated
    Credit Agreement, dated as of August 1, 2003                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .3   |  |            |  | Contribution and Purchase Agreement, dated as of
    May 11, 1999, by and among USP North Texas, Inc.,
    Baylor Health Services, Texas Health Ventures Group LLC and
    THVG/Health First L.L.C. (previously filed as Exhibit 10.11
    to Amendment No. 2 to the Companys Registration
    Statement on Form S-1 (No. 333-55442) and incorporated
    herein by reference)                                                                           
|        | 10 | .4   |  |            |  | Common Stock Purchase Warrant, dated June 1,
    1999 (previously filed as Exhibit 10.15 to the
    Companys Registration Statement on Form S-1
    (No. 333-55442) and incorporated herein by reference)                                                                                                                                                                                                                                                
|        | 10 | .5   |  |            |  | Stock Purchase Warrant, dated March 27, 2000
    (previously filed as Exhibit 10.16 to the Companys
    Registration Statement on Form S-1 (No. 333-55442) and
    incorporated herein by reference)                                                                                                                                                                                                                                                     
|        | 10 | .6   |  |            |  | Employment Agreement, dated as of
    November 15, 2002, by and between the Company and Donald E.
    Steen                                                                                                                                                                                                                                                                                                                                               

II-2



---



##### Table of Contents



|        |    |       |  |             |  |                                                                                                                                                                                                                                                                     
|------- | -- | ----- |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |            
|Number  |    |       |  | Description
|        |    |       |  |            
|        | 10 | .6.1* |  |            |  | Amendment of Employment Agreement, dated as of
    February 18, 2004                                                                                                                                                                                                
|        | 10 | .7   |  |            |  | Employment Agreement, dated as of
    November 15, 2002, by and between the Company and William
    H. Wilcox                                                                                                                                                       
|        | 10 | .8   |  |            |  | Stock Option and Restricted Stock Purchase Plan
    (previously filed as Exhibit 10.19 to the Companys
    Registration Statement on Form S-1 (No. 333-55442) and
    incorporated herein by reference)                                                            
|        | 10 | .9   |  |            |  | 2001 Equity-Based Compensation Plan (previously
    filed as Exhibit 10.20 to Amendment No. 1 to the
    Companys Registration Statement on Form S-1
    (No. 333-55442) and incorporated herein by reference)                                                     
|        | 10 | .10  |  |            |  | Employee Stock Purchase Plan (previously filed as
    Exhibit 10.21 to Amendment No. 1 to the Companys
    Registration Statement on Form S-1 (No. 333- 55442)
    and incorporated herein by reference)                                                           
|        | 10 | .11  |  |            |  | Deferred Compensation Plan, effective as of
    February 12, 2002 (previously filed as Exhibit 10.1 to
    the Companys Quarterly Report on Form 10-Q for the
    quarterly period ended March 31, 2002 and incorporated
    herein by reference)                  
|        | 10 | .12  |  |            |  | Supplemental Retirement Plan, effective as of
    February 12, 2002 (previously filed as Exhibit 10.1 to
    the Companys Quarterly Report on Form 10-Q for the
    quarterly period ended June 30, 2002 and incorporated
    herein by reference)                 
|        | 10 | .13  |  |            |  | Form of Indemnification Agreement between the
    Company and its directors and officers (previously filed as
    Exhibit 10.22 to Amendment No. 1 to the Companys
    Registration Statement on Form S-1 (No. 333-55442) and
    incorporated herein by reference)
|        | 10 | .14*  |  |            |  | Employment Agreement, dated as of August 1,
    2003, by and between the Company and Jonathan R. Bond                                                                                                                                                               
|        | 10 | .15*  |  |            |  | Employment Agreement, dated as of August 1,
    2003, by and between the Company and Brett P. Brodnax                                                                                                                                                               
|        | 10 | .16*  |  |            |  | Employment Agreement, dated as of August 1,
    2003, by and between the Company and Mark C. Garvin                                                                                                                                                                 
|        | 10 | .17*  |  |            |  | Employment Agreement, dated as of August 1,
    2003, by and between the Company and Mark A. Kopser                                                                                                                                                                 
|        | 10 | .18  |  |            |  | First Amendment to the Companys Deferred
    Compensation Plan (previously filed as Exhibit 10.1 to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003 and incorporated herein by
    reference)                         
|        | 21 | .1*   |  |            |  | List of the Companys subsidiaries                                                                                                                                                                                                                                  
|        | 23 | .1*   |  |            |  | Consent of KPMG LLP for United Surgical Partners
    International, Inc.                                                                                                                                                                                            
|        | 24 | .1*   |  |            |  | Power of Attorney  Donald E. Steen                                                                                                                                                                                                                                 
|        | 24 | .2*   |  |            |  | Power of Attorney  William H. Wilcox                                                                                                                                                                                                                               
|        | 24 | .3*   |  |            |  | Power of Attorney  Mark A. Kopser                                                                                                                                                                                                                                  
|        | 24 | .4*   |  |            |  | Power of Attorney  John J. Wellik                                                                                                                                                                                                                                  
|        | 24 | .5*   |  |            |  | Power of Attorney  James C. Crews                                                                                                                                                                                                                                  
|        | 24 | .6*   |  |            |  | Power of Attorney  D. Scott Mackesy                                                                                                                                                                                                                                
|        | 24 | .7*   |  |            |  | Power of Attorney  Thomas L. Mills                                                                                                                                                                                                                                 
|        | 24 | .8*   |  |            |  | Power of Attorney  Boone
    Powell, Jr.                                                                                                                                                                                                                           
|        | 24 | .9*   |  |            |  | Power of Attorney  Paul B. Queally                                                                                                                                                                                                                                 
|        | 24 | .10*  |  |            |  | Power of Attorney  David P.
    Zarin, M.D.                                                                                                                                                                                                                        
|        | 24 | .11*  |  |            |  | Power of Attorney  John C.
    Garrett, M.D.                                                                                                                                                                                                                       
|        | 24 | .12*  |  |            |  | Power of Attorney  Jerry P. Widman                                                                                                                                                                                                                                 
|        | 24 | .13*  |  |            |  | Power of Attorney  Joel T. Allison                                                                                                                                                                                                                                 

II-3



---



##### Table of Contents



|        |    |     |  |             |  |                                                                                                                             
|------- | -- | --- |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |            
|Number  |    |     |  | Description
|        |    |     |  |            
|        | 31 | .1* |  |            |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. § 1350
|        | 31 | .2* |  |            |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. § 1350
|        | 32 | .1* |  |            |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. § 1350
|        | 32 | .2* |  |            |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. § 1350



---



|  |                
|- | ---------------
|* | Filed herewith.



|  |                  
|- | -----------------
| | Previously filed.

(b) Reports on Form 8-K

The Company furnished a report on Form 8-K
dated November 3, 2003, pursuant to Item 12 of
Form 8-K, a news release describing the Companys
results of operations for the quarter and nine months ended
September 30, 2003.

The Company furnished a report on Form 8-K
dated November 7, 2003, pursuant to Item 9 of
Form 8-K, a news release announcing the Companys
initiation of a joint venture with CHRISTUS Santa Rosa Health
Care.

The Company filed a report on Form 8-K dated
November 10, 2003 and filed on November 13, 2003 as
amended and restated by Amendment No. 1 to Form 8-K
dated November 10, 2003 and filed on November 14, 2003
to file, pursuant to Item 5 of Form 8-K, a press
release regarding the Companys dismissal from a lawsuit in
which the Company was named as a defendant.

The Company filed a report on Form 8-K dated
November 13, 2003 to furnish, pursuant to Item 9 of
Form 8-K, a copy of materials dated November 2003 and
prepared with respect to presentations to investors and others
that may be made by senior officers of the Company.

II-4



---



##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) 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.



| |                                             
| | --------------------------------------------
| | UNITED SURGICAL PARTNERS INTERNATIONAL, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ DONALD E. STEEN

| |                            
| | ---------------------------
| |                            
| | Donald E. Steen            
| | Chief Executive Officer and
| | Chairman of the Board      

Date: March 11, 2004

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in capacities
and on the dates indicated.

|                                       |  |                                                                                                  |  |                |  | 
|-------------------------------------- |  | ------------------------------------------------------------------------------------------------ |  | -------------- |  | 
|                                       |  |                                                                                                  |  |               
|Signature                              |  | Title                                                                                            |  | Date          
|                                       |  |                                                                                                  |  |               
|                                      
|/s/ DONALD E. STEENDonald E. Steen     |  | Chairman of the Board and Chief Executive Officer
    (Principal Executive Officer)              |  | March 11, 2004
|                                      
|/s/ WILLIAM H. WILCOXWilliam H. Wilcox |  | President and Director                                                                           |  | March 11, 2004
|                                      
|/s/ MARK A. KOPSERMark A. Kopser       |  | Senior Vice President and Chief Financial Officer
    (Principal Financial Officer)              |  | March 11, 2004
|                                      
|/s/ JOHN J. WELLIKJohn J. Wellik       |  | Senior Vice President, Chief Accounting Officer
    and Secretary (Principal Accounting Officer) |  | March 11, 2004
|                                      
|*James C. Crews                        |  | Director                                                                                         |  | March 11, 2004
|                                      
|*D. Scott Mackesy                      |  | Director                                                                                         |  | March 11, 2004
|                                      
|*Thomas L. Mills                       |  | Director                                                                                         |  | March 11, 2004
|                                      
|*Boone Powell, Jr.                     |  | Director                                                                                         |  | March 11, 2004
|                                      
|*Paul B. Queally                       |  | Director                                                                                         |  | March 11, 2004

II-5



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##### Table of Contents



|                       |  |          |  |                |  | 
|---------------------- |  | -------- |  | -------------- |  | 
|                       |  |          |  |               
|Signature              |  | Title    |  | Date          
|                       |  |          |  |               
|                      
|*David P. Zarin, M.D.  |  | Director |  | March 11, 2004
|                      
|*John C. Garrett, M.D. |  | Director |  | March 11, 2004
|                      
|*Jerry P. Widman       |  | Director |  | March 11, 2004
|                      
|*Joel T. Allison       |  | Director |  | March 11, 2004

John J. Wellik, by signing his name hereto,
does hereby sign this Annual Report on Form 10-K on behalf
of each of the above-named directors and officers of the Company
on the date indicated below, pursuant to powers of attorney
executed by each of such directors and officers and
contemporaneously filed herewith with the Commission.



| |     |                   
| | --- | ------------------
| | By: | /s/ JOHN J. WELLIK

| |                 
| | ----------------
| |                 
| | Attorney-in-fact

March 11, 2004

II-6



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##### Table of Contents



INDEX TO EXHIBITS

|        |   |       |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|------- | - | ----- |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |       |  |            
|Number  |   |       |  | Description
|        |   |       |  |            
|        | 2 | .1   |  |            |  | Agreement and Plan of Merger, dated as of
    December 6, 2000, among the Company, OPC Acquisition
    Corporation and OrthoLink Physicians Corporation (previously
    filed as Exhibit 2.1 to the Companys Registration
    Statement on Form S-1 (No. 333-55442) and incorporated
    herein by reference)                                                                                              
|        | 2 | .2   |  |            |  | Agreement for the Sale and Purchase of Shares and
    Loan Notes in Aspen Healthcare Holdings Limited, dated
    April 6, 2000, between Electra Private Equity Partners 1995
    and others and Global Healthcare Partners Limited (previously
    filed as Exhibit 2.2 to Amendment No. 1 to the
    Companys Registration Statement on Form S-1
    (No. 333-55442) and incorporated herein by reference)
|        | 2 | .3   |  |            |  | Agreement and Plan of Reorganization, dated as of
    March 26, 2002, by and among the Company, USP Acquisition
    Corporation, Surgicoe Corporation and each of the shareholders
    of Surgicoe named in the agreement (previously filed as
    Exhibit 2.1 to the Companys Current Report on
    Form 8-K filed with the Commission on April 16, 2002
    and incorporated herein by reference)        
|        | 3 | .1   |  |            |  | Second Amended and Restated Certificate of
    Incorporation (previously filed as Exhibit 3.1 to Amendment
    No. 4 to the Companys Registration Statement on
    Form S-1 (No. 333-55442) and incorporated herein by
    reference)                                                                                                                                                                      
|        | 3 | .2   |  |            |  | Amended and Restated Bylaws (previously filed as
    Exhibit 3.2 to the Companys Registration Statement on
    Form S-3 (No. 333-99309) and incorporated herein by
    reference)                                                                                                                                                                                                                          
|        | 4 | .1   |  |            |  | Form of Common Stock Certificate (previously
    filed as Exhibit 4.1 to Amendment No. 4 to the
    Companys Registration Statement on Form S-1
    (No. 333-55442) and incorporated herein by reference)                                                                                                                                                                                                  
|        | 4 | .2   |  |            |  | Indenture, dated as of December 19, 2001,
    among United Surgical Partners Holdings, Inc., the
    guarantor parties thereto and U.S. Trust Company of Texas,
    N.A. (previously filed as Exhibit 4.2 to the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 2001 and incorporated herein by reference)                                                                    
|        | 4 | .3   |  |            |  | Global Security, dated as of December 19,
    2001, governing United Surgical Partners
    Holdings, Inc.s outstanding 10% Senior
    Subordinated Notes due 2011 (previously filed as
    Exhibit 4.3 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 2001 and
    incorporated herein by reference)                                                                      
|        | 4 | .4   |  |            |  | Third Amended and Restated Stockholders
    Agreement, dated March 27, 2000, by and among the Company
    and the security holders named therein (previously filed as
    Exhibit 4.2 to the Companys Registration Statement on
    Form S-1 (No. 333-55442) and incorporated herein by
    reference)                                                                                                    
|        | 4 | .5.1 |  |            |  | Amended and Restated Registration Rights
    Agreement, dated April 30, 1998, by and among the Company
    and the security holders named therein (the Registration
    Rights Agreement) (previously filed as Exhibit 4.3.1
    to the Companys Registration Statement on Form S-1
    (No. 333-55442) and incorporated herein by reference)                                                            
|        | 4 | .5.2 |  |            |  | Amendment No. 1 to the Registration Rights
    Agreement, dated as of June 26, 1998, by and among the
    Company and the security holders named therein (previously filed
    as Exhibit 4.3.2 to the Companys Registration
    Statement on Form S-1 (No. 333-55442) and incorporated
    herein by reference)                                                                                           
|        | 4 | .5.3 |  |            |  | Amendment No. 2 to the Registration Rights
    Agreement, dated as of July 31, 1998, by and among the
    Company and the security holders named therein (previously filed
    as Exhibit 4.3.3 to the Companys Registration
    Statement on Form S-1 (No. 333-55442) and incorporated
    herein by reference)                                                                                           
|        | 4 | .5.4 |  |            |  | Amendment No. 3 to the Registration Rights
    Agreement, dated as of October 26, 1998, by and among the
    Company and the security holders named therein (previously filed
    as Exhibit 4.3.4 to the Companys Registration
    Statement on Form S-1 (No. 333-55442) and incorporated
    herein by reference)                                                                                        
|        | 4 | .5.5 |  |            |  | Amendment No. 4 to the Registration Rights
    Agreement, dated as of December 22, 1998, by and among the
    Company and the security holders named therein (previously filed
    as Exhibit 4.3.5 to the Companys Registration
    Statement on Form S-1 (No. 333-55442) and incorporated
    herein by reference)                                                                                       



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##### Table of Contents



|        |    |       |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | -- | ----- |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |       |  |            
|Number  |    |       |  | Description
|        |    |       |  |            
|        | 4  | .5.6 |  |            |  | Amendment No. 5 to the Registration Rights
    Agreement, dated as of June 1, 1999, by and among the
    Company and the security holders named therein (previously filed
    as Exhibit 4.3.6 to the Companys Registration
    Statement on Form S-1 (No. 333-55442) and incorporated
    herein by reference)                                                                                                                                          
|        | 4  | .5.7 |  |            |  | Amendment No. 6 to the Registration Rights
    Agreement, dated as of March 27, 2000, by and among the
    Company and the security holders named therein (previously filed
    as Exhibit 4.3.7 to the Companys Registration
    Statement on Form S-1 (No. 333-55442) and incorporated
    herein by reference)                                                                                                                                        
|        | 4  | .5.8 |  |            |  | Amendment No. 7 to the Registration Rights
    Agreement, dated as of February 12, 2001, by and among the
    Company and the security holders named therein (previously filed
    as Exhibit 4.3.8 to Amendment No. 1 to the
    Companys Registration Statement on Form S-1
    (No. 333-55442) and incorporated herein by reference)                                                                                                                  
|        | 4  | .6   |  |            |  | Rights Agreement between the Company and First
    Union National Bank as Rights Agent dated June 13, 2001
    (previously filed as Exhibit 4.1 to the Companys
    Form 8-A filed with the Commission on June 13, 2001
    and incorporated herein by reference)                                                                                                                                                                                        
|        | 10 | .1   |  |            |  | Credit Agreement, dated April 6, 2000, by
    and among Global Healthcare Partners Limited and the Governor
    and Company of the Bank of Scotland (previously filed as
    Exhibit 10.3 to the Companys Registration Statement
    on Form S-1 (No. 333-55442) and incorporated herein by
    reference)                                                                                                                                               
|        | 10 | .2   |  |            |  | Second Amended and Restated Credit Agreement,
    dated as of November 7, 2002, among USP Domestic
    Holdings, Inc., USPE Holdings Limited, various financial
    institutions from time to time parties thereto as the lenders
    and Sun Trust Bank, as Administrative Agent (previously filed as
    Exhibit 10.1 to the Companys Annual Report on
    Form 10-Q for the quarter ended September 30, 2002 and
    incorporated herein by reference)
|        | 10 | .2.1* |  |            |  | First Amendment to Second Amended and Restated
    Credit Agreement, dated as of June 3, 2003                                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .2.2* |  |            |  | Second Amendment to Second Amended and Restated
    Credit Agreement, dated as of August 1, 2003                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .3   |  |            |  | Contribution and Purchase Agreement, dated as of
    May 11, 1999, by and among USP North Texas, Inc.,
    Baylor Health Services, Texas Health Ventures Group LLC and
    THVG/Health First L.L.C. (previously filed as Exhibit 10.11
    to Amendment No. 2 to the Companys Registration
    Statement on Form S-1 (No. 333-55442) and incorporated
    herein by reference)                                                                           
|        | 10 | .4   |  |            |  | Common Stock Purchase Warrant, dated June 1,
    1999 (previously filed as Exhibit 10.15 to the
    Companys Registration Statement on Form S-1
    (No. 333-55442) and incorporated herein by reference)                                                                                                                                                                                                                                                
|        | 10 | .5   |  |            |  | Stock Purchase Warrant, dated March 27, 2000
    (previously filed as Exhibit 10.16 to the Companys
    Registration Statement on Form S-1 (No. 333-55442) and
    incorporated herein by reference)                                                                                                                                                                                                                                                     
|        | 10 | .6   |  |            |  | Employment Agreement, dated as of
    November 15, 2002, by and between the Company and Donald E.
    Steen                                                                                                                                                                                                                                                                                                                                               
|        | 10 | .6.1* |  |            |  | Amendment of Employment Agreement, dated as of
    February 18, 2004                                                                                                                                                                                                                                                                                                                                                                                      
|        | 10 | .7   |  |            |  | Employment Agreement, dated as of
    November 15, 2002, by and between the Company and William
    H. Wilcox                                                                                                                                                                                                                                                                                                                                             
|        | 10 | .8   |  |            |  | Stock Option and Restricted Stock Purchase Plan
    (previously filed as Exhibit 10.19 to the Companys
    Registration Statement on Form S-1 (No. 333-55442) and
    incorporated herein by reference)                                                                                                                                                                                                                                                  
|        | 10 | .9   |  |            |  | 2001 Equity-Based Compensation Plan (previously
    filed as Exhibit 10.20 to Amendment No. 1 to the
    Companys Registration Statement on Form S-1
    (No. 333-55442) and incorporated herein by reference)                                                                                                                                                                                                                                           
|        | 10 | .10  |  |            |  | Employee Stock Purchase Plan (previously filed as
    Exhibit 10.21 to Amendment No. 1 to the Companys
    Registration Statement on Form S-1 (No. 333- 55442)
    and incorporated herein by reference)                                                                                                                                                                                                                                                 
|        | 10 | .11  |  |            |  | Deferred Compensation Plan, effective as of
    February 12, 2002 (previously filed as Exhibit 10.1 to
    the Companys Quarterly Report on Form 10-Q for the
    quarterly period ended March 31, 2002 and incorporated
    herein by reference)                                                                                                                                                                                                        



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##### Table of Contents



|        |    |      |  |             |  |                                                                                                                                                                                                                                                                     
|------- | -- | ---- |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |            
|Number  |    |      |  | Description
|        |    |      |  |            
|        | 10 | .12 |  |            |  | Supplemental Retirement Plan, effective as of
    February 12, 2002 (previously filed as Exhibit 10.1 to
    the Companys Quarterly Report on Form 10-Q for the
    quarterly period ended June 30, 2002 and incorporated
    herein by reference)                 
|        | 10 | .13 |  |            |  | Form of Indemnification Agreement between the
    Company and its directors and officers (previously filed as
    Exhibit 10.22 to Amendment No. 1 to the Companys
    Registration Statement on Form S-1 (No. 333-55442) and
    incorporated herein by reference)
|        | 10 | .14* |  |            |  | Employment Agreement, dated as of August 1,
    2003, by and between the Company and Jonathan R. Bond                                                                                                                                                               
|        | 10 | .15* |  |            |  | Employment Agreement, dated as of August 1,
    2003, by and between the Company and Brett P. Brodnax                                                                                                                                                               
|        | 10 | .16* |  |            |  | Employment Agreement, dated as of August 1,
    2003, by and between the Company and Mark C. Garvin                                                                                                                                                                 
|        | 10 | .17* |  |            |  | Employment Agreement, dated as of August 1,
    2003, by and between the Company and Mark A. Kopser                                                                                                                                                                 
|        | 10 | .18 |  |            |  | First Amendment to the Companys Deferred
    Compensation Plan (previously filed as Exhibit 10.1 to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003 and incorporated herein by
    reference)                         
|        | 21 | .1*  |  |            |  | List of the Companys subsidiaries                                                                                                                                                                                                                                  
|        | 23 | .1*  |  |            |  | Consent of KPMG LLP for United Surgical Partners
    International, Inc.                                                                                                                                                                                            
|        | 24 | .1*  |  |            |  | Power of Attorney  Donald E. Steen                                                                                                                                                                                                                                 
|        | 24 | .2*  |  |            |  | Power of Attorney  William H. Wilcox                                                                                                                                                                                                                               
|        | 24 | .3*  |  |            |  | Power of Attorney  Mark A. Kopser                                                                                                                                                                                                                                  
|        | 24 | .4*  |  |            |  | Power of Attorney  John J. Wellik                                                                                                                                                                                                                                  
|        | 24 | .5*  |  |            |  | Power of Attorney  James C. Crews                                                                                                                                                                                                                                  
|        | 24 | .6*  |  |            |  | Power of Attorney  D. Scott Mackesy                                                                                                                                                                                                                                
|        | 24 | .7*  |  |            |  | Power of Attorney  Thomas L. Mills                                                                                                                                                                                                                                 
|        | 24 | .8*  |  |            |  | Power of Attorney  Boone
    Powell, Jr.                                                                                                                                                                                                                           
|        | 24 | .9*  |  |            |  | Power of Attorney  Paul B. Queally                                                                                                                                                                                                                                 
|        | 24 | .10* |  |            |  | Power of Attorney  David P.
    Zarin, M.D.                                                                                                                                                                                                                        
|        | 24 | .11* |  |            |  | Power of Attorney  John C.
    Garrett, M.D.                                                                                                                                                                                                                       
|        | 24 | .12* |  |            |  | Power of Attorney  Jerry P. Widman                                                                                                                                                                                                                                 
|        | 24 | .13* |  |            |  | Power of Attorney  Joel T. Allison                                                                                                                                                                                                                                 
|        | 31 | .1*  |  |            |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. § 1350                                                                                                                                        
|        | 31 | .2*  |  |            |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. § 1350                                                                                                                                        
|        | 32 | .1*  |  |            |  | Certification of Chief Executive Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. § 1350                                                                                                                                        
|        | 32 | .2*  |  |            |  | Certification of Chief Financial Officer pursuant
    to Section 906 of the Sarbanes-Oxley Act of 2002,
    18 U.S.C. § 1350                                                                                                                                        



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|  |                
|- | ---------------
|* | Filed herewith.



|  |                  
|- | -----------------
| | Previously filed.