<PAGE>

               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                                  FORM 10-K/A

(Mark One)
[X]  Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
     Act of 1934 for the Fiscal Year Ended December 31, 2000 or

[ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 for the transition period  from __________ to
     __________

                        Commission File Number: 0-17969

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

<TABLE>

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

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

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

Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.01
 par value
Securities registered pursuant to Section 12(g) of the Act: None

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

On March 1, 2001, the aggregate market value of voting common stock held by non-
affiliates of the registrant was $27,910,252  based on the closing price of the
registrant's common stock as reported on The Nasdaq Stock Market on such date.
For purposes of the preceding sentence only, all directors and executive
officers of the registrant are assumed to be affiliates.

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

The Company's Annual Report on Form 10-K for the Fiscal Year ended December 31,
2000, which was filed on March 16, 2001, is amended to (1) add the information
required by Part III, (2) reflect an amendment to a related party lease, (3)
reflect an adjustment to the terms of certain outstanding warrants, and (4)
reflect changes in portions of the Financial Statements resulting from the
adjustment to the warrants.

                      DOCUMENTS INCORPORATED BY REFERENCE

Indicate by check mark if disclosure of delinquent filers to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]

Reference is made to the listing beginning on page 46 of all exhibits filed as a
part of this report.

<PAGE>

                               TABLE OF CONTENTS
                               -----------------
<TABLE>
<CAPTION>

  PART I                                                                           Page
                                                                                   ----
<S>           <C>                                                                  <C>
  Item 1.     Business.............................................................   3
  Item 2.     Properties...........................................................   6
  Item 3.     Legal Proceedings....................................................   6
  Item 4.     Submission of Matters to a Vote of Security Holders..................   6

PART II

  Item 5.     Market for Registrant's Common Equity and Related Shareholder Matters   7
  Item 6.     Selected Financial Data..............................................   8
  Item 7.     Management's Discussion and Analysis of Financial Condition
                and Results of Operations..........................................   9
  Item 7A.    Quantitative and Qualitative Disclosure About Market Risk............  14
  Item 8.     Financial Statements and Supplementary Data..........................  15
  Item 9.     Changes in and Disagreements with Accountants on Accounting
                and Financial Disclosure...........................................  33

PART III

  Item 10.    Directors and Executive Officers of the Registrant...................  34
  Item 11.    Executive Compensation...............................................  38
  Item 12.    Security Ownership of Certain Beneficial Owners and Management.......  43
  Item 13.    Certain Relationships and Related Transactions.......................  44

PART IV

  Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K......  46
</TABLE>

<PAGE>

                                   PART I

ITEM 1.  BUSINESS

NextHealth, Inc.

     NextHealth, Inc. (the "Company") is a leading provider of alternative
health care services which focus on prevention and self care. For over 15 years,
the Company has provided effective programs and services which address
individual wellness and quality-of-life issues through a whole person, mind-body
approach. The Company's two subsidiaries, Sierra Tucson, an addictions and
behavioral healthcare center, and Miraval, a luxury health  resort and spa, are
acknowledged leaders in their respective fields and together define an important
market niche in the healthcare industry.

     NextHealth, Inc., formerly Sierra Tucson Companies, Inc., was incorporated
in Delaware in August 1989 and, as the result of a merger effective in September
1989, is the successor to an Arizona corporation which was originally formed in
1983.  In September 1995, the Company changed its name to NextHealth, Inc., to
reflect an expanded scope of operations as well as to establish separate
identities for the parent company and each of its subsidiaries. The Company
currently operates therapeutic treatment programs as well as lifestyle
management and self-awareness programs pursuant to a business strategy which
concentrates on identifying emerging revenue and growth opportunities.

     The Company operates in two distinct business segments which are located at
separate facilities in the foothills of the Santa Catalina Mountains northwest
of Tucson, Arizona.  The Treatment segment, Sierra Tucson, LLC, a Delaware
limited liability company ("ST, LLC"), owns Sierra Tucson(TM) ("Sierra Tucson"),
an inpatient, state licensed, special psychiatric hospital and behavioral health
care center providing treatment for substance abuse and a broad range of mental
health and behavioral disorders. The Health and Leisure segment, Sierra Health-
Styles, Inc., a Delaware corporation ("Healthstyles, Inc."), owns MiravalTM
("Miraval"), a luxury health resort and spa which provides a unique vacation
experience blending mindfulness, personal growth and self-awareness programs
with a full range of personal services and recreational activities.

     In October 1989, the Company and certain officers of the Company offered
2.5 million shares of common stock in an initial public offering.  In June 1991,
the Company and certain of its officers offered 2.45 million shares of common
stock in a secondary public offering.  The Company's common stock trades on The
Nasdaq Stock Market under the symbol "NEXT".   The Company's principal offices
are located at 16600 N. Lago del Oro Parkway, Tucson, Arizona 85739, and its
telephone number is 520-818-5800.

     A special committee of the Board of Directors was appointed in January 2001
to consider strategic options that may be available to the Company, including a
possible sale of the Company.  A proposal to acquire the Company was received on
January 24, 2001, from a group that includes the Chief Executive Officer and a
director, and later received expressions of interest from other parties to
purchase all or certain parts of the Company.  Such proposals and indications of
interest are all subject to customary due diligence. The due diligence process
is currently ongoing.

Sierra Tucson

     Sierra Tucson is licensed by the State of Arizona as a 79-bed inpatient,
special psychiatric hospital and behavioral health care center engaged in the
treatment of addictions and mental health disorders.  Sierra Tucson provides
medical services and programs that reach beyond standard alcohol and drug
addiction treatments.  These programs include the treatment of dual diagnosis,
eating disorders, major depression, post-traumatic stress disorder, and
treatment for gambling addictions, sexual disorders, obsessive compulsive
disorder and anxiety disorders.

     Sierra Tucson offers a safe, individualized treatment experience based on
the Sierra Model(TM), which was conceived and designed to treat the whole person
utilizing a bio-psycho-social-spiritual approach.  The Sierra Model integrates
philosophies and practices from the medical and therapeutic communities, family
systems theory and the

                                       1
<PAGE>

Twelve Steps philosophy. Sierra Tucson's individualized treatment plans are
developed and maintained by experienced, clinical professionals. Every program
at Sierra Tucson is shaped by the philosophy of the Sierra Model, addressing
both causes and symptoms, thereby assuring the greatest possible chance for
long-term recovery. Since its inception, over 14,000 patients and nearly 37,000
family members have participated in Sierra Tucson programs. Sierra Tucson is
licensed by the Arizona Department of Health Services and accredited with
commendation by the Joint Commission on Accreditation of Healthcare
Organizations.

     In order to facilitate its operations and strengthen its identity as a
separate and distinct business operation, on November 13, 1996, the business and
assets of Sierra Tucson, Inc. ("STI") were sold to ST, LLC, a subsidiary of the
Company. The purchase is evidenced by ST, LLC's non-negotiable promissory note
which is secured by a security interest in the assets of Sierra Tucson.  The
Company is the manager of and owns a 98% interest in ST, LLC; the remaining 2%
is owned by AP NH, LLC (a Delaware limited liability company), the holder of the
Company's Series A preferred stock as described below in the Stockholders'
Equity section of Notes to the Consolidated Financial Statements.

Miraval

     Miraval, a luxury health resort and spa, combines elements of mindfulness,
personal growth, and self-awareness programs with a full range of personal
services and recreational activities.  By incorporating educational programs
such as mind/body and lifestyle management, Miraval provides an innovative
approach to managing the pressures of everyday life.  Services and amenities are
designed to provide guests with unique skills to enhance wellness and to learn
enjoyable approaches for creating a sense of well being.  Guests are provided
with the opportunity to create a custom-tailored program designed to meet their
goals for stress prevention, relaxation, health and fitness.  Programs offer
both group and individual participation with expert facilitators.  Miraval
presently has 106 guest rooms.

     In August, 1998, as part of the debt refinancing loan agreement with Lehman
Brothers Holdings Inc., the business and assets of Miraval were transferred to
Healthstyles, Inc., a wholly-owned subsidiary of the Company.

     The Company owns approximately 30 acres of land and buildings north of
Miraval ("North Campus"). The North Campus facilities, which are currently
vacant,  include nine separate buildings (approximately 41,700 square feet) that
contain 30 casita-style rooms, group rooms, a kitchen, dining room and other
support facilities which, until mid-1998, had been the site of Sierra Tucson.

Sources of Revenue

     The Company's revenue depends upon occupancy levels.  At Sierra Tucson, an
inclusive daily rate for services is charged, ranging from $895 to $1,150 per
day.  Patient revenue is derived from private insurance reimbursement,
contracts, and patient payments, none of which, individually, represents a
significant portion of revenue.   Most commercial insurance plans reimburse
their subscribers or make direct payment to Sierra Tucson. No revenue is derived
from Medicare or Medicaid.

  During 2000, 53% of patient revenue was derived from retail payments and the
remaining 47% from insurance, contracts and other third party payors. In 1999,
54% of patient revenue came from insurance, contracts and other third party
payors.

     Miraval guest rates vary depending on season and market segment.  Peak
season rates (October - Mid-June) start at $420 per person/per day.  Off season
(Mid-June - September) rates begin at $295 per person/per day.  Group rates are
available and vary depending on the number of rooms and the season.  All rates
are inclusive packages consisting of luxury guest room, three gourmet meals, use
of the resort's amenities, participation in all group programs and activities,
one personal service per day, and Tucson Airport transfers.  Average stays range
from 3 to 7 nights.  Miraval currently generates all of its revenue from guest
bookings, group bookings and retail sales of goods and services.

                                       2
<PAGE>

Set forth below are the Company's total revenues by segment (000s):

<TABLE>
<CAPTION>


                                            Year Ended December 31,
                              ------------------------------------------------
                                2000     %      1999      %      1998     %
                              -------  -----   -------  -----   -------  -----
<S>                           <C>      <C>     <C>      <C>     <C>      <C>
Treatment Segment...........  $21,970   53.2   $16,842   55.5   $13,904   52.9
Health and Leisure Segment..   19,277   46.7    13,464   44.4    12,194   46.4
Other, net..................       45     .1        44     .1       186     .7
                              -------  -----   -------  -----   -------  -----
Total Revenue                 $41,292  100.0   $30,350  100.0   $26,284  100.0
                              =======  =====   =======  =====   =======  =====
</TABLE>

Employees

     On December 31, 2000, the Company and its subsidiaries employed
approximately 380 full time equivalent employees. The Company's businesses have
not experienced material difficulty in recruiting and retaining employees. The
Company considers relations with employees to be excellent.

Competition

     Sierra Tucson competes with psychiatric and behavioral health hospitals as
well as with other specialty residential facilities.  Non-profit or government-
owned competitors may have certain financial advantages such as endowments,
charitable contributions and tax-exempt financing not available to Sierra
Tucson.  The Company believes that the competitive position of Sierra Tucson is,
to a significant degree, dependent upon its reputation, historical success in
treating the patient, and price.  The Company also believes that the competitive
position of Sierra Tucson is dependent upon the breadth of services offered by
the facility and the ability to implement programs best suited to the needs of
patients and payors in the marketplace.

     Miraval competes for national and international consumers' discretionary
income typically expended upon luxury hotel and resort spas, holistic health and
other related upscale vacation experiences.  While management believes that
Miraval occupies a unique market niche, it nevertheless competes with a broad
spectrum of vacation alternatives.  It has been categorized as a destination
spa, creating competition with a relatively small number of well-known spas
whose clients are very loyal.  It also competes with full-service resorts for
group business.  The criteria for competition is based on price, amenities,
program offerings and location.

Insurance

     The Company maintains professional malpractice liability coverage for the
professionals it employs in addition to coverage for the customary risks
inherent in the operation of health care and resort facilities and business in
general.  While the Company believes its insurance policies are adequate in
amount and coverage for its current operations, there is no assurance that
coverage will continue to be available in adequate amounts or at a reasonable
cost.

Licensing and Regulation

     The activities of Sierra Tucson are regulated by federal and state
governments.  Sierra Tucson holds a behavioral health residential license from
the State of Arizona to operate a mental health and substance abuse facility and
a special hospital/psychiatric license from the State of Arizona to operate a
psychiatric hospital.

     Sierra Tucson is also accredited by the Joint Commission on Accreditation
of Healthcare Organizations (JCAHO), a voluntary national accrediting
organization responsible for accrediting health care providers.  JCAHO
accreditation is important to the Sierra Tucson operation as most insurance
companies require such accreditation in order for the treatment of patients to
qualify for insurance payment or reimbursement.  In 1999, Sierra Tucson was
reaccredited with commendation by the JCAHO for a three-year period, the longest
accreditation period available. The next scheduled survey for Sierra Tucson by
JCAHO is in May, 2002.

                                       3
<PAGE>

     Both of the businesses operated by the Company are subject to extensive
state and local regulations and, on a periodic basis, must obtain various
licenses and permits.  Management believes that the Company has obtained all
required licenses and permits and its businesses are conducted in substantial
compliance with applicable laws.

ITEM 2.    PROPERTIES

     The Company's primary facilities are located on approximately 400 acres of
owned or leased land northwest of Tucson, Arizona, in the foothills of the Santa
Catalina Mountains.

     The Sierra Tucson facilities are located on approximately 160 acres of land
leased from the State of Arizona and in buildings ("Buildings") leased from a
related party, ODE, L.L.C.  In October 1998, the Company entered into a 50-year
Commercial Land Lease Agreement ("State Land Lease") with the Arizona State Land
Department, which replaced a 10-year lease that would have expired in 2001. The
Company amended its lease ("Building Lease") with ODE for the Buildings to
provide for a lease term which, when combined with successive 10-year option
renewals ("Renewal Options"), will coincide with the State Land Lease. The rent
for each Renewal Option is subject to increase to the fair market rental of the
Buildings. The first Renewal Option commenced in March, 2001 and the annual rent
increased to an agreed upon fair market rental of $500,000 plus an annual
increase based on the Consumer Price Index, not to exceed 3% per annum. The
annual rent for the Buildings is subject to an increase for the term of each
subsequent Renewal Option (if exercised) based upon or determined by independent
appraisal. The facility also has fitness and recreation areas, riding stables
and other administrative and support offices.  In 1999, the Company expanded the
Sierra Tucson facilities through the addition of space for sixteen beds and
additional administrative offices.  In 2000, construction was completed on a
4,220 square foot wing named Desert Oasis.  The new area houses group rooms and
medical records as well as staff offices.  In addition, Sierra Tucson also
renovated and updated its fitness center in 2000.

     The Miraval facility was reconstructed from existing Company facilities and
is located on a separate Company-owned 130-acre parcel of property.  The 30-acre
parcel previously occupied by Sierra Tucson, which is located just north of the
Miraval property, is currently vacant.  The remaining property, located to the
south and east of the Miraval facility, is unimproved open space, some of which
is unbuildable either because of its terrain or its location in the flood plain.
Zoning for the property currently occupied by Miraval and the adjacent 30-acre
vacant parcel to the north permits a total of 356 resort hotel rooms and up to
226 residential units.

     The Company's obligations under the debt refinancing loan agreement with
Lehman Brothers Holdings Inc., are secured by a first lien against all real and
personal property of Miraval and Sierra Tucson.

ITEM 3.    LEGAL PROCEEDINGS

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

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

     The Company did not submit any matters to a vote of security holders in the
fourth quarter of the fiscal year ending December 31, 2000.

                                       4
<PAGE>

                                   PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

     The Company's common stock has been traded in the over-the-counter market
and quoted on The Nasdaq Stock Market since October 19, 1989.  Stock is traded
under the symbol "NEXT".  As of March 1, 2001, there were approximately 204
shareholders of record and approximately 1,490 beneficial holders of the
Company's common stock. The high and low sales price information set forth
below, derived from data prepared by The Nasdaq Stock Market, represents
quotations by dealers and may not reflect applicable markups, markdowns or
commissions, and do not necessarily represent actual transactions.

<TABLE>
<CAPTION>


                      2000           1999
                  --------------  --------------
                   High    Low     High    Low
                  ------  ------  ------  ------
<S>               <C>     <C>     <C>     <C>
First Quarter     $4.688  $1.250  $1.500  $1.000
Second Quarter    $3.500  $2.000  $1.438  $0.719
Third Quarter     $5.438  $2.281  $1.250  $0.906
Fourth Quarter    $4.688  $2.375  $2.500  $0.938
</TABLE>

     On March 1, 2001 the closing bid price on The Nasdaq Stock Market was
$5.188 per share.

     The Company did not pay a cash dividend on its common stock in 2000 or 1999
and does not intend to pay any in the foreseeable future.  Any future
declaration and payment of dividends will be determined by the Board of
Directors based upon the conditions existing at the time, including the
Company's earnings, financial condition, capital requirements, applicable legal
restrictions and other factors.  So long as any shares of preferred stock remain
outstanding, the Company may not declare or pay any cash dividend or make any
other distributions with respect to the common stock.

                                       5
<PAGE>

ITEM 6.    SELECTED FINANCIAL DATA

     The following table sets forth selected consolidated financial and
operating data for the Company.  Certain prior year amounts have been
reclassified to conform to the presentation used in 2000.  The data for the
three years ended December 31, 2000, should be read in conjunction with the
Company's Consolidated Financial Statements included elsewhere in this document.
The selected consolidated financial and operating data for the two years ended
December 31, 1997, is derived from the Company's historical Consolidated
Financial Statements.  See Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations.  (000s, except per share amounts
and operating data.)

<TABLE>
<CAPTION>

                                                                   Year Ended December 31,
                                           2000          1999             1998           1997           1996
                                         --------      --------         --------       --------       --------
<S>                                      <C>           <C>              <C>            <C>            <C>
Statement of Operations Data
Total revenue..............              $ 41,292       $30,350          $26,284       $ 20,652      $  18,458
Income (loss) before
  extraordinary item.......                 6,666         1,151             (712)        (4,624)       (14,693)
Extraordinary item.........                    --            --             (264)            --             --
                                         --------       -------          -------       --------      ---------
Net income (loss) before
  income taxes.............                 6,666         1,151             (976)        (4,624)       (14,693)
Provision for income tax...                   145            --               --             --             --
                                         --------       -------          -------       --------      ---------
Net income (loss)..........                 6,521         1,151             (976)        (4,624)       (14,693)
Basic net income (loss)
 per share:
  Before extraordinary item                  0.76          0.13            (0.08)         (0.54)         (1.72)
  Extraordinary item.......                    --            --            (0.03)            --             --
                                         --------       -------          -------       --------      ---------
  Net income (loss)........                  0.76          0.13            (0.11)         (0.54)         (1.72)

Diluted net income (loss)
 per share:
  Before extraordinary item                  0.46          0.09            (0.08)         (0.54)         (1.72)
  Extraordinary item.......                    --            --            (0.03)            --             --
                                         --------       -------          -------       --------      ---------
  Net income (loss)........                  0.46          0.09            (0.11)         (0.54)         (1.72)

Cash Flow Data
Net cash provided by (used in)
  operating activities.....                10,344         4,515              523          (2,096)        (9,246)
Capital expenditures.......                 1,412         1,415              862             948          1,124

Balance Sheet Data
Total Assets...............                48,784        39,831           37,815          39,011         41,666
Long-term Debt.............                12,587        12,724           12,815           9,730          8,359
Stockholders' Equity.......                28,650        21,995           20,829          21,805         22,179

Operating Data
Patient Days-Sierra Tucson.                23,302        20,618           19,618          17,445         15,683
Average Daily Census.......                    64            57               54              48             43
Guest Days-Miraval(1)......                37,961        29,828           30,361          23,851         17,665
Room Occupancy - Miraval(1)                  65.3%         52.6%            53.7%           42.9%          33.6%
Participant Days-Onsite(2).                    --            --               --              --          7,073
Average Daily Census(2)....                    --            --               --              --             21
Participant Days-HHHI(3)...                    --            --               --              --          7,077
Average Daily Census(3)....                    --            --               --              --             33

Financial Statistics
Current Ratio..............                2.23:1        1.27:1            .64:1           .35:1          .52:1
Days Outstanding in Accounts
  Receivable...............                    15            17               20              27             44
 </TABLE>

                                       6
<PAGE>

(1)  Miraval was closed for two weeks in July, 1997 and for three weeks in July,
     1998 due to seasonal occupancy fluctuation and to make needed improvements
     to the facility.
(2)  Onsite was acquired by the Company on January 2, 1995, and was divested on
     November 30, 1996.
(3)  Hilton Head Health Institute was acquired on March 1, 1996 and divested on
     October 1, 1996.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

     The following discussion and analysis relates to factors which have
affected the consolidated financial condition and results of operations of the
Company for the three years ended December 31, 2000.  Certain prior year amounts
have been reclassified to conform to the presentation used in 2000.  Reference
should also be made to the Company's Consolidated Financial Statements and
related notes thereto and the Selected Financial Data included elsewhere in this
document.

General
-------

     NextHealth, Inc. is a leading provider of a broad range of alternative
health care services which focus on prevention and self care. For over 15 years,
the Company has provided effective programs and services which address
individual wellness and quality-of-life issues through a whole person, mind-body
approach.

     The Company believes that it has positioned itself to capitalize on the
emerging health and leisure segment of the health care services industry through
the development of Miraval, a luxury health resort and spa which provides a
unique vacation experience blending mindfulness, personal growth and self-
awareness programs with a full range of personal services and recreational
activities. The Company is also seeking additional opportunities to increase
market share for its existing Treatment segment, an inpatient, state licensed,
special psychiatric hospital and behavioral health care center providing
treatment for substance abuse and a broad range of mental health and behavioral
disorders.  In 1999, the Company expanded the Sierra Tucson facilities through
the addition of space for sixteen beds and additional administrative offices.
For the year ended December 31, 2000, the Treatment segment accounted for
approximately 53.2% of the Company's operating revenues and approximately 39.8%
of expenses, while the Health and Leisure segment accounted for approximately
46.7% of the Company's operating revenue and approximately 52.6% of operating
expenses.

Results of Operations
---------------------

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

  The significant changes in results of operations and net cash provided by
operating activities for the year ended December 31, 2000, compared to the same
period in 1999 are discussed below.  Unless otherwise stated, all comparisons
are for the same period.

  For the year ended December 31, 2000, net income increased to $6.5 million,
compared to $1.2 million in 1999; a $5.4 million improvement.  Net cash provided
by operating activities increased $5.8 million to $10.3 million; a more than
129% improvement over the previous year. The improvement in cash flow was
primarily related to funds from operations and advance deposit increases at
Miraval.

  Total revenue increased $10.9 million to $41.3 million, an increase of 36.1%
when compared to 1999. The results reflect a 30.6% net revenue improvement at
Sierra Tucson and a 43.2% net revenue improvement at Miraval. The growth in
revenue was attributable to increased census and rate at Sierra Tucson and
increased occupancy and rate at Miraval.

  Salaries and related benefits decreased 4.3% as a percentage of revenue during
2000.  Salaries and related benefits increased 23.1% to $16.7 million when
compared to the same period in 1999.  The increase was attributable to staffing
adjustments related to increased census at Sierra Tucson and higher occupancy at
Miraval.

                                       7
<PAGE>

  General and administrative expense decreased 5.2% as a percentage of revenue
during 2000. General and administrative expense increased $2.1 million to $13.8
million when compared to the previous year. The increase was related to
professional expenses incurred related to evaluation of strategic alternatives
for the Company as well as variable costs related to the increase in census and
occupancy.

  Interest expense increased 63.3% to $2.0 million compared to $1.2 million for
1999. The increase reflects a $642,000 interest expense charge for tentative
settlement of a 1994 IRS audit.

  Depreciation and amortization expense decreased 20.6% to $2.1 million compared
to $2.7 million in 1999. The decrease was primarily related to certain equipment
that became fully depreciated at Miraval.

  The Company recognized pre-tax income of $6.7 million for the year ended
December 31, 2000.  A $145,000 provision for income taxes was recorded during
this period due to the existence of Alternative Minimum Tax (AMT) requirements.
The Company continues to fully reserve for the deferred tax assets of $10.7
million, which are comprised primarily of net operating loss carryforwards, as
of December 31, 2000.  The Company intends to recognize the benefits of deferred
tax assets as the net operating loss carryforwards are utilized.  However,
management will continue to evaluate the necessity of maintaining the valuation
allowance in light of the Company's profitability results for 2000 and
expectations for 2001 and 2002.  The continuation of such positive trends in
profitability could allow management to appropriately reduce the valuation
allowance significantly and result in the recognition of deferred tax assets on
the balance sheet perhaps in the latter part of 2001.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

  The significant changes in results of operations and net cash provided by
operating activities for the year ended December 31, 1999, compared to the same
period in 1998 are discussed below.  Unless otherwise stated, all comparisons
are for the same period.

  For the year ended December 31, 1999, net income increased to $1.2 million,
compared to a net loss of $976,000 in 1998; a $2.1 million improvement.  Net
cash provided by operating activities increased $4.0 million to $4.5 million; a
more than 700% improvement over the previous year.  The improvement in cash flow
was related to the reduction in the net loss and favorable changes in current
liabilities related to payables and advance deposits.

  Total revenue increased $4.1 million to $30.4 million, an increase of 15.5%
when compared to 1998.  The results reflect a 21.3% net revenue improvement at
Sierra Tucson and a 10.4% net revenue improvement at Miraval. The growth in
revenue was attributable to increased package rates and a-la-carte utilization
rates at Miraval and increased census revenue at Sierra Tucson.

  Salaries and related benefits decreased 3.0% as a percentage of revenue during
1999.  Salaries and related benefits increased 8.2% to $13.6 million when
compared to the same period in 1998.  The increase was attributable to Miraval's
remaining open during the entire month of July 1999, and to the increased
facility size and increased census at Sierra Tucson.

  General and administrative expense decreased 1.4% as a percentage of revenue
during 1999.  General and administrative expense increased $1.2 million to $11.7
million when compared to the previous year.  The increase was related to an
increase in the allowance for doubtful accounts for commercial insurance
receivables as well as variable costs related to the increase in revenues.

  Interest expense decreased $138,000 to $1.2 million or 10.2% when compared to
the previous year.  The decrease reflects the lower rate on the loan outstanding
in 1999 compared to the rate charged on the loan outstanding in 1998.

  The Company recognized pre-tax income of $1.2 million for the year ended
December 31, 1999.  There was no provision for income tax recognized in 1999, as
the Company's taxable income was fully offset by net operating loss
carryforwards not previously benefitted.

                                       8
<PAGE>

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

     In the last five years, the Company's primary sources of liquidity and
capital resources have been net cash provided by the operating activities of
both the Treatment and Health and Leisure segments, funds generated from the
sale of investments, proceeds from private equity offerings, and long-term and
short-term borrowings. Historically, these sources have been sufficient to meet
the needs and finance the operations and growth of the Company's business.

     Net cash provided by the Treatment segment's operating activities is
primarily affected by census levels and net revenue per patient day. This
segment contributed positive cash flow to the Company's operations in 2000.  In
2000,  53% of the Treatment segment's patient revenue was derived from retail
payments and the remaining 47% from insurance, contracts and other third party
payors. In 1999, 54% of patient revenue was derived from insurance, contracts
and other third party payors.  Based on current census levels and operating
expenses, Sierra Tucson believes that it will generate adequate cash flows to
sustain the Treatment segment's ongoing operational requirements and to fund
anticipated capital projects.

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

     The Company's cash flow improved to net cash provided by operating
activities in 2000 of $10.3 million versus $4.5 million in 1999.  In addition,
the Company had net capital expenditures in 2000 of approximately $1.4 million
which were all funded from cash flow.

     Results in the Health and Leisure segment are primarily affected by room
occupancy and average daily rate in addition to expense management.  In 2000,
Miraval's room occupancy rate was approximately 65.3%. Management believes that
as marketplace demand for the Miraval product continues to increase, the Health
and Leisure segment will ultimately make a significant contribution to the
Company's financial condition.  This segment contributed positive cash flow to
the Company's operations in 2000.

     On August 11, 1998, the Company's principal subsidiaries, Healthstyles,
Inc., and ST, LLC, completed a debt refinancing loan agreement with Lehman
Brothers Holdings Inc.  The amount available under the agreement was $14
million, of which $2.0 million was reserved for working capital ($1.0 million)
and for capital improvements ($1.0 million). $700,000 of the working capital
portion was available in 1998 and $300,000 in 1999.  As of December 31, 2000,
$292,000 had been drawn from the capital improvements reserve and $0 from the
working capital reserve. The unused portion of the working capital reserve
rolled over to the capital improvements reserve at January 1, 2000.

     Proceeds from the Lehman transaction were primarily used to extinguish
existing mortgage debt with AP LOM, LLC, an affiliate of AP NH, LLC ("APNH"),
the holder of the Company's outstanding Series A Preferred Stock. The loan
matures in September 2001.  A one-year extension is available upon payment of a
2% fee, and therefore, this loan continues to be classified as long term.  It is
management's intent at the present time to extend the loan for an additional
year.  The loan bears interest at the rate of 4% over the 30-day London
Interbank Offered Rate (LIBOR), adjusted monthly, and is payable interest-only
through maturity.  The LIBOR rate at the date of closing was 5.65%.  The Company
purchased a rate cap to protect against extreme upward movement in the LIBOR
rate which limits the maximum rate to be paid by the Company to 10.5%.

     The loan is secured by a first lien against all real and personal property
of Miraval and Sierra Tucson.  It is also partially guaranteed (to the extent of
liability arising by reason of certain exclusions to the non-recourse

                                       9
<PAGE>

provisions of the loan) by the Company and to a more limited extent by Apollo
Real Estate Investment Fund II, L.P. ("Apollo"). Apollo, an affiliate of APNH,
received a fee in the amount of $140,000 in consideration of its guarantee.

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

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

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

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

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

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

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

  Miraval's affiliations with American Express Platinum and Virtuoso have proved
to be very successful and the relationships will continue in 2001.  In addition,
Miraval has established itself with top corporate meeting planners and incentive
houses, and advanced group bookings continue to improve.  Miraval's advertising
campaign has remained solid and benefits have been realized from sending a
consistent message to the public. In addition to

                                       10
<PAGE>

developing relationships with online travel companies, Miraval has launched its
new web site which was developed to maximize and enhance their presence on the
world-wide web.

     In 2001, Miraval will continue to focus on improving visibility in the
local market by attending charitable, convention and Chamber of Commerce events.
In addition, specialty programs will be evaluated in an effort to improve
occupancy during summer and shoulder seasons.

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

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

     Management's Discussion and Analysis of Financial Condition and Results of
Operations (particularly as it relates to the growth of the Health and Leisure
segment) contains forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve a number of risks and
uncertainties.  While management believes that such forward looking statements
are accurate as of the date hereof, the actual results and conditions could
differ materially from the statements contained herein.  The information below
should be read in conjunction with the Company's consolidated financial
statements and related notes thereto included elsewhere and in other portions of
this document.

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

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

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

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

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

     While management believes that Miraval occupies a unique market niche, it
nevertheless competes in the resort hotel/spa industry. Currently, its
competitors have greater name recognition as well as long-standing relationships
with travel agents and meeting planners.  Market share must be obtained from
competitors and from

                                       11
<PAGE>

introducing new customers to the benefits of the Miraval product. Longevity in
the marketplace plays a key role in attaining credibility in this highly
competitive field. Management cannot anticipate what impact this will have on
future occupancy levels.

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

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

  The Company is subject to interest rate risk as it relates to the loan from
Lehman Brothers Holdings Inc., which bears interest at 4% over the 30-day London
Interbank Offered Rate (LIBOR), adjusted monthly.  To limit its exposure under
this variable-rate agreement, the Company purchased a rate cap to protect
against an extreme upward movement in the LIBOR rate during the scheduled three-
year term of the loan.  The rate cap limits the maximum rate to be paid by the
Company to 10.5%.  The effective rate for the Company at December 31, 2000 was
10.500%.  A 100 basis point change in the LIBOR rate in 2001 would result in a
$120,000 change in interest expense incurred by the Company in that year.

                                       12
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  Index to Consolidated Financial Statements

NextHealth, Inc.'s Consolidated Financial Statements as of December 31, 2000 and
1999 and for the three years ended December 31, 2000.

<TABLE>
<CAPTION>

                                                                   Page
                                                                   ----
<S>                                                                <C>

     Report of Management........................................    14

     Report of Independent Auditors..............................    15

     Consolidated Balance Sheets.................................    16

     Consolidated Statements of Operations.......................    17

     Consolidated Statements of Cash Flows.......................    18

     Consolidated Statements of Changes in Stockholders' Equity..    19

     Notes to Consolidated Financial Statements..................    20
</TABLE>

                                       13
<PAGE>

                             REPORT OF MANAGEMENT


The financial statements and other financial information included in this Annual
Report on Form 10-K are the responsibility of management.  The financial
statements have been prepared in conformity with generally accepted accounting
principles appropriate in the circumstances and include amounts that are based
on management's informed judgments and estimates.

Management relies on the Company's system of internal accounting controls to
provide reasonable assurance that assets are safeguarded and that transactions
are properly recorded and executed in accordance with management's
authorization.  The concept of reasonable assurance is based on the recognition
that there are inherent limitations in all systems of internal accounting
control and that the cost of such systems should not exceed the benefits to be
derived.  The internal accounting controls in place during the periods presented
are considered adequate to provide such assurance.

The Company's financial statements are audited by Ernst & Young LLP, independent
auditors.  Their report states that they have conducted their audit in
accordance with auditing standards generally accepted in the United States.
These standards include an evaluation of the system of internal accounting
controls for the purpose of establishing the scope of audit testing necessary to
allow them to render an independent professional opinion on the fairness of the
Company's financial statements.

The Audit Committee of the Board of Directors, composed solely of directors who
are not employees of the Company, reviews the Company's financial reporting and
accounting practices.  The Audit Committee meets periodically with the
independent auditors and management to review the work of each and to ensure
that each is properly discharging its responsibilities.



 /s/ William T. O'Donnell, Jr.
----------------------------------------------
William T. O'Donnell, Jr.
President and Chief Executive Officer



 /s/ Loree Thompson
----------------------------------------------
Loree Thompson
Chief Financial Officer

                                       14
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS


Board of Directors and Stockholders
NextHealth, Inc.


We have audited the accompanying consolidated balance sheets of NextHealth, Inc.
and subsidiaries, as of December 31, 2000 and 1999, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000.  Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States.  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 consolidated financial position of
NextHealth, Inc. and subsidiaries, at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.  Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information therein.



                                      /s/ Ernst & Young LLP
                                      -----------------------------------------
                                      ERNST & YOUNG LLP

Tucson, Arizona
January 26, 2001

                                       15
<PAGE>

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

<TABLE>
<CAPTION>

                                                                     December 31,
                                                                  -----------------
                                                                    2000      1999
                                                                  --------   -------
<S>                                                               <C>        <C>
Assets
------
Current Assets:
  Cash and equivalents..........................................  $ 12,737   $  3,803
  Accounts receivable, less allowance for doubtful accounts of
   $368 and $337, respectively..................................     1,467      1,174
 Prepaid expenses...............................................       701        438
 Other current assets...........................................       708        573
                                                                  --------   --------

   Total current assets.........................................    15,613      5,988

Property and equipment, net.....................................    32,871     33,327
Long-term receivables, less allowance for doubtful accounts of
   $21 and $21, respectively....................................        64         64
Intangible assets, less amortization of $527 and $310,
   respectively.................................................       214        431
Other assets....................................................        22         21
                                                                  --------   --------

   Total assets.................................................  $ 48,784   $ 39,831
                                                                  ========   ========

<CAPTION>

Liabilities and Stockholders' Equity
------------------------------------
<S>                                                              <C>         <C>
Current Liabilities:
 Accounts payable, trade........................................  $  1,192   $    888
 Accrued expenses and other liabilities.........................     5,808      3,835
                                                                  --------   --------

   Total current liabilities....................................     7,000      4,723

Long-term debt and financing obligation.........................    12,587     12,724
                                                                  --------   --------
   Total liabilities............................................    19,587     17,447

Minority Interest...............................................       547        389

Stockholders' Equity:
 Preferred stock - undesignated, $.01 par value, 3,924,979
   shares authorized; no shares outstanding.....................        --         --
 Preferred stock - Series A, $.01 par value, 46,065 shares
   authorized; 46,065 shares outstanding at December 31, 2000
   and 1999.....................................................        --         --
 Common stock, $.01 par value, 16,000,000 shares authorized;
   8,623,513 shares outstanding at December 31, 2000, and
   8,554,938 shares outstanding at December 31, 1999............        86         86
 Additional paid-in capital.....................................    48,146     48,012
 Accumulated deficit............................................   (19,582)   (26,103)
                                                                  --------   --------

   Total stockholders' equity...................................    28,650     21,995
                                                                  --------   --------

   Total liabilities and stockholders' equity...................  $ 48,784   $ 39,831
                                                                  ========   ========

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

                                       16
<PAGE>

                       NEXTHEALTH, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  (000s, except share and per share amounts)
<TABLE>
<CAPTION>


                                                   Year Ended December 31,
                                           ------------------------------------
                                                2000        1999         1998
                                           -----------  -----------  -----------
<S>                                        <C>          <C>         <C>
Revenue:
 Net operating revenue...................  $    40,834  $    30,229  $   26,058
 Investment income.......................          433           80          75
 Other revenue...........................           25           41         151
                                           -----------  -----------  ----------

   Total revenue.........................       41,292       30,350      26,284

Operating expenses:
 Salaries and related benefits...........       16,707       13,573      12,550
 General and administrative..............       13,800       11,719      10,505
 Interest................................        1,978        1,211       1,349
 Depreciation and amortization...........        2,141        2,696       2,592
                                           -----------  -----------  ----------

   Total operating expenses..............       34,626       29,199      26,996
                                           -----------  -----------  ----------

Income (loss) before extraordinary item..        6,666        1,151        (712)
Extraordinary item.......................           --           --        (264)
                                           -----------  -----------  ----------

Income (loss) before income taxes........        6,666        1,151        (976)

Provision for income taxes...............          145           --          --
                                           -----------  -----------  ----------

Net income (loss)........................  $     6,521  $     1,151  $     (976)
                                           ===========  ===========  ==========

Basic income (loss) per share:
  Before extraordinary item..............  $      0.76  $      0.13  $    (0.08)
  Extraordinary item.....................           --           --       (0.03)
                                           -----------  -----------  ----------
  Net income (loss)......................  $      0.76  $      0.13  $    (0.11)
                                           ===========  ===========  ==========

Diluted income (loss) per share:
  Before extraordinary item..............  $      0.46  $      0.09  $    (0.08)
  Extraordinary item.....................           --           --       (0.03)
                                           -----------  -----------  ----------
  Net income (loss)......................  $      0.46  $      0.09  $    (0.11)
                                           ===========  ===========  ==========

Shares used in basic per
 share calculation.......................    8,623,513    8,554,938   8,554,938
                                           ===========  ===========  ==========

Shares used in diluted per
  share calculation......................   14,167,378   13,187,119   8,554,938
                                           ===========  ===========  ==========
</TABLE>

  The accompanying notes are an integral part of these financial statements.

                                       17
<PAGE>

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

<TABLE>
<CAPTION>

                                                              Year Ended December 31,
                                                        ------------------------------------
                                                          2000           1999         1998
                                                        --------       --------     --------
<S>                                                     <C>             <C>         <C>
Cash flows from operating activities:
   Net income (loss)..............................      $  6,521        $  1,151     $    (976)
   Adjustments to reconcile net income (loss) to
    net cash provided by operating activities:
      Depreciation and amortization...............         2,141           2,696         2,657
      Loss on early extinguishment of debt........            --              --           264
      Charge for non-employee options.............             4              15            --
      Provision for deferred income taxes.........            (5)             --            --
      Provision for bad debts.....................           139             370           159
      Minority interest...........................           158              87            54
      Interest expense............................           642              --            --
Changes in operating assets and liabilities
  net of effects from acquisitions:
    Increase in assets:
      Accounts receivable.........................          (432)           (518)         (110)
      Other assets................................          (407)           (145)         (676)
    Increase (decrease) in liabilities:
      Accounts payable, accrued expenses and
      other liabilities...........................         1,583             859          (849)
                                                        --------        --------     ---------
Net cash provided by
 operating activities.............................        10,344           4,515           523

Cash flows from investing activities:
 Purchase of property and equipment...............        (1,412)         (1,405)         (862)
                                                        --------        --------     ---------
Net cash used in investing activities.............        (1,412)         (1,405)         (862)

Cash flows from financing activities:
 Proceeds from long-term borrowing................            --              --        12,292
 Proceeds from sale of stock......................           130              --            --
 Reduction of long-term debt and
    financing obligation..........................          (128)           (150)      (11,939)
                                                        --------        --------     ---------
Net cash provided by (used in) financing
 activities.......................................             2            (150)          353
                                                        --------        --------     ---------

Net increase in cash and equivalents..............         8,934           2,960            14

Cash and equivalents, beginning of year...........         3,803             843           829
                                                        --------        --------     ---------

Cash and equivalents, end of year.................      $ 12,737        $  3,803     $     843
                                                        ========        ========     =========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       18
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                                Total
                                              Common Stock         Additional                   Stock-
                                         ------------------------   Paid-in     (Accumulated    holders'
                                            Cost        Shares      Capital       Deficit)      Equity
                                         ----------    ----------  --------      -----------  -----------
<S>                                      <C>            <C>        <C>           <C>          <C>
Balance at January 1, 1998                    $  86     8,554,938   $47,997         $(26,278)    $21,805

Net loss for the year                            --            --        --             (976)       (976)
                                              -----  ------------   -------         --------     -------

Balance at December 31, 1998                     86     8,554,938    47,997          (27,254)     20,829

Net income for the year                          --            --        --            1,151       1,151

Issuance of non-employee
 vested options                                  --            --        15              --           15
                                              -----  ------------   -------         --------     -------

Balance at December 31, 1999                     86     8,554,938    48,012          (26,103)     21,995

Net income for the year                          --            --        --            6,521       6,521

Sale of Common Stock                             --        68,575       130               --         130

Issuance of non-employee
 vested options                                  --            --         4               --           4
                                              -----  ------------   -------         --------     -------

Balance at December 31, 2000                    $86     8,623,513   $48,146         $(19,582)    $28,650
                                              =====  ============   =======         ========    ========
</TABLE>


  The accompanying notes are an integral part of these financial statements.

                                       19
<PAGE>

                       NEXTHEALTH, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (000s, except share and per share amounts)
                               December 31, 2000

ORGANIZATION

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation

The consolidated financial statements include the accounts of NextHealth, Inc.
and its subsidiaries, all but one of which is wholly owned.  All intercompany
accounts and transactions have been eliminated in consolidation.

     Use of Estimates

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

     Cash and Equivalents

Cash and equivalents includes all cash balances and highly liquid investments
with an original maturity of three months or less.  Cash and equivalents are
stated at cost which approximates market value.

     Advertising Expense

The cost of advertising is expensed as incurred.  The Company incurred
approximately $1,150, $885, and $833 in advertising costs during 2000, 1999 and
1998, respectively.

     Intangible Assets

Intangible assets  include capitalized loan fees which are being amortized over
the life of the loan and ground water rights which are being amortized over a
period of 15 years.  Intangible assets of $142 were written off in 1998 as a
result of the Lehman refinancing (see note entitled Long-term Debt and Financing
Obligation) and included in the 1998 extraordinary charge.

     Property and Equipment

Property and equipment are stated at cost.  Interest incurred during the
construction of facilities is capitalized and amortized over the life of the
asset. Costs of improvements are capitalized. Costs of normal repairs and
maintenance are charged to expense as incurred.  Upon the sale or retirement of
property and equipment, the cost and related accumulated depreciation are
removed from the respective accounts, and the resulting gain or loss, if any, is
included in income.  Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets. The service lives of the Company's
property and equipment ranges from 3 to 39 years.

                                       20
<PAGE>

                       NEXTHEALTH, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (000s, except share and per share amounts)
                               December 31, 2000

     Income Taxes

The company accounts for income taxes using the liability method in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes.

     Revenue Recognition

Revenue, net of any applicable contractual allowances or discounts, is
recognized in the period services are rendered.

     Net Operating Revenue

Net operating revenue consists of revenue derived from guests and patients,
based on the billing rates established for each business segment, less any
applicable discounts or contractual allowances.

     Stock Based Compensation

The Company grants employee stock options for a fixed number of shares with an
exercise price equal to or greater than the fair value of the shares at the date
of grant.  The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related
Interpretations because the Company believes the alternative fair value
accounting provided for under FASB Statement No. 123, Accounting for Stock-Based
Compensation, requires the use of option valuation models that were not
developed for use in valuing employee stock options.  Under APB 25, because the
exercise price of the valuing employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.  Options granted to non-employees are recorded at fair
value on the date of grant.

     Net Income (Loss) Per Share

The following table sets forth the components of the share figure used in the
computation of basic and diluted earnings per share:


                                               2000        1999       1998
                                            ----------  ----------  ---------
          Basic:
            Weighted average shares.......   8,623,513   8,554,938  8,554,938

          Effect of dilutive securities:
            Stock options.................     328,345      25,681         --
            Preferred stock...............   4,606,500   4,606,500         --
            Warrants......................     609,020          --         --
                                            ----------  ----------  ---------
          Diluted Shares..................  14,167,378  13,187,119  8,554,938
                                            ==========  ==========  =========

Diluted earnings per share are equal to basic earnings per share for the period
ending December 31, 1998, as the effect of all applicable securities is anti-
dilutive (decrease the loss per share amount).

     Credit Risk

A significant portion of the Company's accounts receivable are due from
individuals (self-pay), insurance companies, other entities which provided
health care benefits, and credit card companies. Management performs credit
evaluations and believes its allowance for doubtful accounts is adequate.

                                       21
<PAGE>

                       NEXTHEALTH, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (000s, except share and per share amounts)
                               December 31, 2000

  New Accounting Standards

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities."  This statement provides a comprehensive
and consistent standard for the recognition and measurement of derivatives and
hedging activities. In July 1999, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 137, which deferred the
effective date of FAS 133 for one year.  In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 138, (FAS
138), "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment to FASB Statement No. 133."  This statement amended
certain provisions of FAS 133.  Accordingly, the Company will adopt FAS 133, as
amended by FAS 138, effective the first quarter of fiscal 2001.  Management is
evaluating what effect this statement may have on the Company's financial
statements.

  Reclassifications

The consolidated financial statements for prior years reflect certain
reclassifications to conform with the classifications adopted in 2000.

PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>

                                               2000     1999
                                             -------  -------
<S>                                          <C>       <C>
Land and improvements......................  $ 3,413  $ 2,930
Buildings and improvements.................   35,871   36,210
Furniture and equipment....................   11,211   10,127
                                             -------  -------

Total property and equipment...............   50,495   49,267

Less: accumulated depreciation
 and amortization..........................   17,624   15,940
                                             -------  -------
Total property and
 equipment, net............................  $32,871  $33,327
                                             =======  =======
</TABLE>

ACCRUED EXPENSES AND OTHER LIABILITIES

At December 31, 2000 and 1999, accrued expenses and other liabilities were
comprised of the following:

<TABLE>
<CAPTION>
                                              2000     1999
                                             -------  -------
<S>                                          <C>       <C>
Payroll and related taxes..................  $   905  $   734
Professional fees..........................      314       60
Deposits and patient refunds...............    2,362    1,580
Reimbursement liability....................    1,573    1,018
Current portion of financing obligation....      108       99
Other......................................      546      344
                                             -------  -------
Total accrued expenses and
  other liabilities........................  $ 5,808  $ 3,835
                                             =======  =======
</TABLE>

                                       22
<PAGE>

                       NEXTHEALTH, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (000s, except share and per share amounts)
                               December 31, 2000

LONG-TERM DEBT AND FINANCING OBLIGATION

Long-term debt and financing obligation at December 31, 2000 and 1999 are as
follows:

                                                2000     1999
                                               -------  -------
Secured debt, interest rate of 30-day LIBOR
 + 4%, matures September 1, 2001.............  $12,292  $12,292
Financing obligation.........................      380      495
Other........................................       23       36
                                               -------  -------
                                                12,695   12,823
Less: current portion........................      108       99
                                               -------  -------
Total long-term debt and financing
  obligation.................................  $12,587  $12,724
                                               =======  =======

In August 1998, the Company's principal subsidiaries, Miraval and Sierra Tucson,
completed a debt refinancing loan agreement with Lehman Brothers Holdings Inc.
The amount of the three-year loan was $14,000, of which $2,000 was reserved for
working capital ($1,000) and for capital improvements ($1,000).  $700 of the
working capital portion was available in 1998 and $300 in 1999. As of December
31, 2000, $292 had been drawn from the capital improvements reserve and $0 from
the working capital reserve. The unused portion of the working capital reserve
rolled over to the capital improvements reserve at January 1, 2000.  Proceeds
from the transaction were also used to extinguish existing mortgage debt with AP
LOM, LLC, an affiliate of AP NH, LLC ("APNH"), the holder of the Company's
outstanding Series A Preferred Stock. The loan bears interest at the rate of 4%
over the 30-day London Interbank Offered Rate (LIBOR), adjusted monthly, and is
payable interest-only through maturity.  The maturity date may be extended by
one year upon payment of a 2% fee, and therefore, this loan continues to be
classified as long term. It is management's intent at the present time to extend
the loan for an additional year. The fair value of the debt financing loan
agreement approximates its carrying value given it bears interest at a variable
rate and matures in the near term.  The Company purchased a rate cap to protect
against extreme upward movement in the LIBOR rate; the maximum rate to be paid
by the Company is 10.5%, while the rate at December 31, 2000 was 10.625%. The
loan agreement contains various operational and financial restrictions including
restrictions on additional debt without the lender's approval.  At December 31,
2000, the Company was in compliance with all such operational and financial
restrictions.

The debt refinancing loan agreement is secured by a first lien against all real
and personal property of Miraval and Sierra Tucson.  It is also partially
guaranteed (to the extent of liability arising by reason of certain exclusions
to the non-recourse provisions of the loan) by the Company and to a more limited
extent by Apollo Real Estate Investment Fund II, L.P. ("Apollo").  Apollo, an
affiliate of APNH, received a fee in the amount of $140 in consideration of its
guarantee.

In November 1996, the Company entered into a secured loan agreement with AP LOM,
LLC an affiliate of Apollo Real Estate Advisors, L.P. in the amount of $13,090
contemporaneously with the issuance of preferred stock to this entity. The
above-mentioned debt refinancing loan agreement extinguished the debt portion of
the Apollo loan; however, Apollo retained its equity position. In 1998, an
extraordinary charge to earnings of $264 occurred due to the early
extinguishment of this long-term debt as a result of the Lehman debt refinancing
arrangement.

In December 1994, the Company sold a facility for $1,000 (the facility's
appraised value) to ODE, L.L.C., an entity controlled by the Chairman of the
Company's Board of Directors.  The Company simultaneously leased this facility
for a term of seven years, at an annual cost of $150, payable in quarterly
installments. This transaction has been accounted for as a financing as a result
of the Company's continuing involvement with the facility. The Company amended
its lease ("Building Lease") with ODE for the Buildings to provide for a lease
term which, when combined

                                       23
<PAGE>

                       NEXTHEALTH, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (000s, except share and per share amounts)
                               December 31, 2000

with successive 10-year option renewals ("Renewal Options"), will coincide with
the State Land Lease. The rent for each Renewal Option is subject to increase to
the fair market rental of the Buildings. The first Renewal Option commenced in
March, 2001 and the annual rent increased to an agreed upon fair market rental
of $500 plus an annual increase based on the Consumer Price Index, not to exceed
3% per annum. The annual rent for the Buildings is subject to an increase for
the term of each subsequent Renewal Option (if exercised) based upon or
determined by independent appraisal.

Future maturities of long-term debt and financing obligation at December 31,
2000 are as follows:

2001............................  $   108
2002............................   12,432
2003............................      155
                                  -------
                                  $12,695
                                 ========

For years ended December 31, 2000, 1999 and 1998, interest paid was $1,978,
$1,211 and $1,471,  respectively. The amount recorded in 2000 includes a charge
of $642 for tentative settlement of a 1994 IRS audit.

BUSINESS SEGMENT AND OTHER OPERATING DATA

The Company's business is organized on a services basis, and the Company's Chief
Operating Decision Maker (the Company's Chairman, President and Chief Executive
Officer) assesses performance and allocates resources on this basis.  The
information provided in the following section is representative of the
information used by the Chief Operating Decision Maker in deciding how to
allocate resources and in assessing performance.

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

The Company's Chief Operating Decision Maker evaluates performance and allocates
resources based on pretax income (loss).  The accounting policies of the
Segments are the same as those described in the Summary of Significant
Accounting Policies.  There are no material sales between the Segments, although
fixed assets are occasionally transferred between Segments at net book value on
the transfer date.  Corporate activity benefiting the Company as a whole is
separately identified below.  No single customer accounted for more than 10% of
either Segment's revenue in 2000, 1999 or 1998.

                                       24
<PAGE>

                       NEXTHEALTH, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (000s, except share and per share amounts)
                               December 31, 2000

Information about the Company's operations in different business segments for
the years ended December 31, 2000, 1999 and 1998 is as follows:

<TABLE>
<CAPTION>
                                                             Corporate
                                                Health &       and
2000                              Treatment     Leisure     Other Items   Consolidated
-------------------------------  ----------  ------------  ------------- --------------
<S>                              <C>         <C>           <C>            <C>
Total revenue..................   $ 21,970      $ 19,277       $     45      $41,292
Income (loss) before
 income tax benefit............      8,200         1,058         (2,592)       6,666
Identifiable assets............     14,166        32,896          1,722       48,784
Capital expenditures and
 intersegment transfers, net...        860           560             (8)       1,412
Depreciation & amortization
 expense.......................        377         1,748             16        2,141
Interest expense...............        852           483            643        1,978

1999
-------------------------------
Total revenue..................   $ 16,842      $ 13,464       $     44      $30,350
Income (loss) before
 income tax benefit............      4,924        (2,604)        (1,169)       1,151
Identifiable assets............      7,372        30,646          1,813       39,831
Capital expenditures and
 intersegment transfers, net...      1,053           380            (28)       1,405
Depreciation & amortization
 expense.......................        334         2,344             18        2,696
Interest expense...............        772           435              4        1,211

1998
-------------------------------
Total revenue..................   $ 13,904      $ 12,194       $    186      $26,284
Income (loss) before
 extraordinary item............      3,801        (2,541)        (1,972)        (712)
Extraordinary item.............         --            --           (264)        (264)
Net income (loss)..............      3,801        (2,541)        (2,236)        (976)
Identifiable assets............      4,111        32,129          1,575       37,815
Capital expenditures and
  intersegment transfers, net..     (1,878)        4,370         (1,630)         862
Depreciation & amortization
 expense.......................        325         2,092            175        2,592
Interest expense...............        308           165            876        1,349
</TABLE>

                                       25
<PAGE>

                       NEXTHEALTH, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (000s, except share and per share amounts)
                               December 31, 2000

STOCKHOLDERS' EQUITY

Preferred Stock

In November 1996, the Company's Board of Directors created two series of
Preferred Stock ("Series A" and "Series B").  The Company authorized 46,065
shares of Series A stock and 28,956 shares of Series B stock.  At December 31,
1996, 17,109 shares of Series A and 28,956 shares of Series B were outstanding
and classified as mandatorily redeemable preferred stock in the balance sheet.
The Series B Preferred Stock was converted into Series A Preferred Stock on
January 29, 1997.  The mandatory redemption provisions applicable to the
outstanding preferred stock were extinguished as a result of this conversion,
therefore, the amounts received from the sale of such stock are classified as
equity in the accompanying consolidated balance sheets.  At December 31, 2000
and 1999, 46,065 shares of Series A are outstanding.  A total of approximately
5,200,000 shares of common stock have been reserved for conversion of preferred
stock and exercise of warrants held by the preferred shareholder.  Significant
terms and conditions of the Preferred Stock are described in the following
paragraphs.

The holders of Series A stock are not entitled to receive dividends except upon
an event of default, in which event the dividend rate on the Series A Preferred
Stock will be 18% per annum.  So long as any shares of Preferred Stock remain
outstanding, the Company may not declare or pay any cash dividend or make any
other distributions with respect to the Common Stock.

In the event of any liquidation, dissolution or winding-up of the Company, the
holders of Preferred Stock shall be entitled to a liquidation preference over
the holders of Common Stock in the amount of any accrued but unpaid dividends.
There are no other liquidation preferences.

The holders of Series A stock are entitled to vote on all matters presented to
the Company's stockholders for a vote and, except with respect to the election
of Directors, each share of Series A stock entitles the holder thereof to such
number of votes per share as equals the number of shares of the Common Stock
into which such shares of Series A stock is then convertible.  Initially, each
share of Series A stock is convertible into 100 shares of Common Stock. In
addition, the holders of Series A stock are entitled to vote separately as a
separate class on all matters other than the election of directors.  This means
that matters submitted for a vote of the stockholders of the Company must
receive the approval of the requisite percentage of the holders of Common Stock
(with the holders of Series A stock being entitled to vote on an "as converted"
basis) as well as of the holders of the Series A stock.  In addition, the
holders of Series A stock, as a class, are entitled to elect three directors to
the Company's Board of Directors ("Preferred Directors").  In the event of a
default, the holders of Series A stock become entitled to elect a majority of
the Company's Board of Directors.  The Preferred Stock became redeemable at any
time after January 1, 2001, at $92.26 per share (issuance price).

As part of the transactions surrounding the Apollo Loan and the issuance of the
Series A Preferred Stock to APNH, APNH and Apollo were issued warrants to
purchase 100,000 shares and 500,000 shares, respectively, at an exercise price
of $1.50 per share (the "Warrants").  Pursuant to their terms, the exercise
price of the Warrants was recently reduced to $1.00 per share and the number of
shares of Common Stock issuable on exercise of the Warrants increased to 150,000
and 750,000, respectively.  These warrants are exercisable through November 13,
2006.  The fair value of the warrants at issuance date was credited to
additional paid-in capital.

Stock Option Plans

At December 31, 2000, 1,993,000 shares of common stock were reserved for the
exercise of options under the Company's 1992 and 1990 stock option plans.  The
1990 employee stock option plan expired in October 2000. No additional option
shares may be issued from this plan. Options to purchase shares of common stock
are granted with an exercise price equal to or greater than the fair market
value on the dates of grant, and are exercisable over periods ranging from three
to ten years.  Options may be exercised in installments generally commencing one
year

                                       26
<PAGE>

                       NEXTHEALTH, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (000s, except share and per share amounts)


December 31, 2000 after the dates of grant. All options become fully vested upon
the acquisition of the Company or a merger in which the Company is not the
surviving entity.

In 1993, the Company established a Non-Employee Director Stock Option Plan (the
"DSO Plan"), which provides for the automatic granting of fully vested options
to purchase shares of common stock to members of the Board of Directors who are
not employees of the Company.  At December 31, 2000, 600,000 shares of common
stock were reserved for issuance under the DSO Plan.

The fair value of these options was estimated at the dates of grant using a
Black-Scholes option pricing model with the following assumptions for 2000, 1999
and 1998, respectively: risk-free interest rates ranging from 5.94% to 6.64%,
4.73% to 6.01%, and 4.52% to 5.69%, respectively; dividend yields of 0.0%;
volatility factor of the expected market price of the Company's common stock of
 .753 for 2000 and .639 for 1999 and 1998; and an expected life of an option of 5
years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable.  In addition, option valuation models require the use of highly
subjective assumptions including the expected stock price volatility.  Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

SFAS No. 123 requires the Company to present pro forma disclosure for options
granted subsequent to 1995.  These disclosures are not indicative of future
amounts, as options granted prior to 1996 have not been included as provided by
SFAS No. 123.  For purposes of pro forma disclosures, the estimated fair value
of stock options was amortized to expense over the vesting period.  Pro forma
net income (loss) and income (loss) per share are as follows:

                           2000     1999       1998
                          ------   ------     ------
Net Income (loss):
  As reported..........   $6,521   $1,151     $  (976)
  Pro forma............    6,416      918      (1,142)

Basic income (loss)
 per share:
  As reported..........   $ 0.76   $ 0.13     $ (0.11)
  Pro forma............     0.74     0.11       (0.13)

Diluted income (loss)
 per share:
  As reported..........   $ 0.46   $ 0.09     $ (0.11)
  Pro forma............     0.46     0.07       (0.13)

                                       27
<PAGE>

                       NEXTHEALTH, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (000s, except share and per share amounts)
                               December 31, 2000


The following table summarizes the cumulative activity under the Company's stock
option plans:

<TABLE>
<CAPTION>

                                   Options            Fully           Option Price       Weighted Avg.
                                  Outstanding     Vested Options    Range (Per Share)    Exercise Price
                                ---------------  -----------------  -----------------    --------------
<S>                             <C>              <C>                <C>                  <C>
Balance at January 1, 1998           1,154,709            936,812      $1.25  -   $6.00        $3.57
Granted                                238,300                          1.00  -   2.00          1.31
Canceled                              (309,584)                         1.25  -   6.00          3.29
Exercised                                   --                                      --            --
                                     ---------         ----------       --------------         -----

Balance at December 31, 1998         1,083,425            898,972       1.00  -   6.00          3.15
Granted                                326,250                          1.00  -   1.50          1.38
Canceled                               (61,350)                         1.00  -   5.75          2.77
Exercised                                   --                                -                   --
                                     ---------         ----------       --------------         -----

Balance at December 31, 1999         1,348,325          1,069,303       1.00  -   6.00          2.74
Granted                                 92,500                          1.34  -   3.75          2.03
Canceled                              (139,950)                         1.00  -   4.88          3.47
Exercised                              (68,575)                         1.00  -   3.25          1.91
                                     ---------         ----------       --------------         -----

Balance at December 31, 2000         1,232,300          1,078,890       $1.00 -  $6.00         $2.65
                                     =========          =========       ==============         =====
</TABLE>

In 2000, 15,000 shares were granted with an exercise price above market price on
the date of grant. The weighted average fair value of options granted with an
exercise price above market price on the date of grant during 2000 was $1.45.
No options were granted in 1999 or 1998 with an exercise price above market
price on the dates of grant. The weighted average fair value of options granted
with an exercise price equal to market price on the dates of grant during 2000,
1999 and 1998 was $1.13, $.81, and $.77, respectively.  The remaining average
contractual life for options outstanding as of December 31, 2000, was 5.90
years.  The weighted average exercise price for exercisable options was $2.87,
$3.04, and $3.35, at December 31, 2000, 1999 and 1998, respectively.

                                       28
<PAGE>

                       NEXTHEALTH, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (000s, except share and per share amounts)
                               December 31, 2000

INCOME TAXES

Deferred income tax assets and liabilities are determined based upon differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

The components of the income tax provision are as follows:


                      Years ended December 31,
                        2000    1999    1998
                       -----  ------  ------
    Current:
         Federal       $ 125  $ --    $ --
         State            20    --      --

    Deferred           $  --  $ --    $ --
                       -----  ------  ------
                       $ 145  $ --    $ --
                       =====  ======  ======

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.  The components of the
deferred tax assets, all noncurrent, at December 31, 2000 and 1999 are as
follows:

<TABLE>
<CAPTION>


                                             2000       1999
                                           --------   --------
<S>                                        <C>        <C>
Capitalized business expansion costs.....  $     38   $    547
Tax basis of fixed assets in excess of
 book basis..............................     1,553      1,726
Non-deductible reserves..................       408        551
Accrued interest.........................       257         --
State net operating loss carryforward....     1,090      1,439
Federal net operating loss carryforward..     6,992      8,192
Minimum tax credit.......................       383        258
Other, net...............................        --         45
                                           --------   --------
Total deferred tax assets................    10,721     12,758
Valuation allowance......................   (10,721)   (12,758)
                                           --------   --------

Net deferred tax assets..................  $     --   $     --
                                           ========   ========
</TABLE>

The valuation allowance decreased by $2,037 during the year primarily as a
result of the Company utilizing certain net operating losses.

At December 31, 2000, the Company had approximately $20,500 and $18,000 of
federal and state net operating loss carryforwards, respectively, which expire
for federal purposes during the years 2011 through 2018 and for state purposes
during the years 2000 through 2005.  In addition, at December 31, 2000, the
Company has approximately $383 in Alternative Minimum Tax Credits for federal
tax purposes which do not expire.

                                       29
<PAGE>

                       NEXTHEALTH, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (000s, except share and per share amounts)
                               December 31, 2000

The differences between the income tax benefit at the statutory rate and the
actual income tax benefit is as follows:

                                              2000       1999     1998
                                             ------     ------   ------
Federal tax expense at the statutory rate..   34.0 %    34.0 %    (34.0)%
State taxes................................    0.4        --         --
AMT........................................    1.9        --         --
Utilization of net operating losses........  (34.0)    (34.0)      34.0
                                             -----     ------    ------

 Effective income tax rate.................    2.3  %   0.0 %      0.0 %
                                             =====     =====     ======

Federal income tax payments of $120 and $30 were made during the years ending
December 31, 2000 and 1999, respectively.  No payments were made in the year
ending December 31, 1998.

OPERATING LEASES

The Company leases land, vehicles and equipment under operating leases.  Future
annual minimum lease payments under noncancelable operating leases at December
31, 2000, are as follows:

     2001          $   287
     2002              284
     2003              278
     2004              294
     2005              290
     Thereafter     13,768
                   -------
                   $15,201
                   =======

Future payments under the land lease increase as the number of beds operated by
Sierra Tucson increases in accordance with the levels specified in the agreement
and by a fixed percentage (10%) every five years.  Total rental expense
recognized under operating leases for 2000, 1999 and 1998, was $423, $374, and
$355, respectively.

EMPLOYEE RETIREMENT PLAN

The Company has a defined contribution plan that provides for discretionary
employer contributions and for optional employee contributions which are matched
by the Company at a maximum rate of 50% of the employees' contributions up to
amounts prescribed by law.  All employees who meet minimum age and service
requirements are eligible to participate in the plan.  It is the Company's
policy to fund plan contributions as accrued. For 2000, 1999 and 1998, employer
matching and discretionary contributions to the plan were approximately  $174,
$160, and $143, respectively.

RELATED PARTY TRANSACTIONS

A member of the Company's Board of Directors is a member of an asset management
firm that provided management and financial services to the Company in 1999 and
1998.  Fees paid for services in 1999 and 1998 were $60, and $84, respectively.
Management believes such fees are reasonable and comparable to those of other
institutions providing similar services.

The Company leases a facility from an entity controlled by the President and CEO
of the Company and Chairman of the Company's Board of Directors. See note
entitled Long-Term Debt and Financing Obligation for additional information.

                                       30
<PAGE>

                       NEXTHEALTH, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  (000s, except share and per share amounts)
                               December 31, 2000

An entity controlled by the President and CEO of the Company and Chairman of the
Company's Board of Directors provided consulting services to the Company; in
2000 and 1999 total fees of $262, and $267,  respectively, were paid to that
entity.  Of the $262 paid in 2000, $200 was a Compensation Committee approved
bonus.  Of the $267 paid in 1999, $100 was a Compensation Committee approved
bonus for 1997 and 1998, and $100 was a Compensation Committee approved bonus
for 1999.

A member of the Company's Board of Directors is a member of a law firm which
represents the Company on real estate and transactional issues; total fees of
$119 and $51 were paid to that firm in 2000 and 1999, respectively.

Effective October 1, 1996, the Company sold HHHI to the former President and CEO
of the Company for an amount which equaled the Company's purchase price plus
advances to that subsidiary from the purchase through disposition date.  The
Company agreed to indemnify the related party for up to $130 upon resale of the
HHHI real property to an unaffiliated third party. The Company will receive up
to $130, after agreed upon deductions, in the event of a gain on the sale of the
property.

CONTINGENCIES

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

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table summarizes certain quarterly financial data:

<TABLE>
<CAPTION>

                                               Income
                                                (Loss)                Net Income (loss)
                                                Before       Net        Per Share of
                        Total    Operating     Income       Income      Common Stock
                       Revenue   Expenses        Tax        (Loss)     Basic   Diluted
                       --------  ---------  -------------  ---------  -------  --------
<S>                    <C>       <C>        <C>            <C>        <C>      <C>
2000 Quarter ended:
    March 31.........  $10,770      $8,176        $2,594     $2,594   $ 0.30   $  0.18
    June 30..........   10,518       8,266         2,252      2,155     0.25      0.15
    September 30.....    9,403       8,499           904        886     0.10      0.06
    December 31......   10,601       9,685           916        886     0.10      0.06

1999 Quarter ended:
    March 31.........  $ 8,137      $7,161        $  976     $  976   $ 0.11   $  0.07
    June 30..........    7,627       7,226           401        401     0.05      0.03
    September 30.....    6,650       7,079          (429)      (429)   (0.05)    (0.05)
    December 31......    7,936       7,733           203        203     0.02      0.02
</TABLE>

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE

  None.

                                       31
<PAGE>

                                   PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Board of Directors of the company currently consists of four persons elected
by the holders of Common Stock (including the holder of the Series A Preferred
Stock voting on as "as converted" basis) ("Common Directors") and three persons
elected by the holder of the Series A Preferred Stock ("Preferred Directors").

Common Directors of the Company are:

William T. O'Donnell, Jr.
Director Since:  1984
Term Expires:  2001
Age:  52

Mr. O'Donnell is Chairman of the Board and Chief Executive Officer of the
Company.  He has been the Chairman of the Board since 1984 and was, until year-
end 1994, also the Company's Chief Executive Officer. He became Chief Executive
Officer again in November 1996. From February 1984 until February 1993, Mr.
O'Donnell held and he currently holds the title of President. Mr. O'Donnell is
the Managing Director of ODE, LLC, of Chicago, Illinois an investment and
development company.  Previously, Mr. O'Donnell was employed by Bally
Manufacturing Corporation from 1971 to 1983 in various marketing and corporate
positions.  He served as President of two major divisions and was a corporate
Vice President of Bally.  Mr. O'Donnell is a member of the Committee to Advance
the Center for Alcohol and Addiction Studies at Brown University.  He is an
honorary board member of the National Association of Children of Alcoholics
(NACOA).  Mr. O'Donnell received his Bachelor of Arts degree from Brown
University in 1971 and a Master of Management degree from the Kellogg Graduate
School of Management at Northwestern University in 1978.

Stephen L. Berger, Esq.
Director Since:  1996
Term Expires:  2001
Age:  56

Mr. Berger is a partner with the Chicago law firm of Neal, Gerber & Eisenberg.
From 1985 to 1989, Mr. Berger was a Senior Vice President in the hotel group at
VMS Realty Partners, a Chicago investment firm. During such time, he was
actively engaged in the acquisition and operation of hotel and resort
properties. Mr. Berger specializes in real estate matters and, in particular,
hotels and resorts.  Prior to 1985, Mr. Berger was a partner in the Chicago law
firm of Friedman & Koven in the real estate practice area.  Mr. Berger received
a B.A. in history from the University of Illinois and a JD from Chicago Kent
College of Law.

George L. Ruff
Director Since:  1996
Term Expires:  2002
Age:  51

Mr. Ruff is the Chief Executive Officer of Trinity Investment Trust, L.L.C., a
company which he co-founded in 1995 to invest in real estate opportunities in
Japan, Hawaii and the hospitality industry.  Mr. Ruff is also Chairman and Chief
Executive Officer of Fall Creek Partners, Inc., of Chicago, Illinois, a company
founded by him in 1993 to provide investment advisory and asset management
services to the hospitality industry. Prior to 1993, Mr. Ruff's investment
activities included the acquisition and reorganization of Amtrade International
Bank. During the period from 1990-1992, Mr. Ruff was a Partner and Executive
Vice President-Real Estate for the Ritz Carlton Hotel Company, during which time
he was responsible for determining and implementing Ritz's national and
international expansion strategy. During his tenure, Ritz grew from 14 to 25
hotels. In 1987, Mr. Ruff co-founded Ruff, Callaghan & Hemmeter Company, a
Chicago based partnership formed to acquire, develop, finance, renovate, asset
manage and dispose of major hotel properties in the United States and abroad. In
1983, Mr. Ruff co-founded the VMS Hotel Division, an autonomous partnership
within VMS which acquired some 54 hotels and resorts prior to his founding

                                       32
<PAGE>

Ruff, Callaghan & Hemmeter in 1987. Prior to 1983, Mr. Ruff had been Executive
Vice President and Director of Operations for Seymour N. Logan Associates, Inc.
During his 10 years with the firm, he oversaw its portfolio of commercial and
hotel real estate. Mr. Ruff is a cum laude graduate of DePaul University, and is
a Certified Public Accountant.

Neil E. Jenkins, Esq.
Director Since:  1994
Term Expires:  2003
Age:  51

Mr. Jenkins currently serves as Corporate Secretary and Corporate Counsel to
Lawson Products, Inc., located in Des Plaines, Illinois, which is a publicly
traded corporation listed on Nasdaq. Prior to joining Lawson Products, Mr.
Jenkins was a business consultant and operator of a golf tour and travel
business in Chicago. From 1993 to 1996, Mr. Jenkins was Executive Vice President
and Secretary and a member of the Board of Bally Gaming International, Inc.  Mr.
Jenkins served as Vice President, Secretary and General Counsel of Bally
Manufacturing Corporation from 1985 through 1992.  Mr. Jenkins graduated from
Brown University and the Loyola University School of Law in 1971 and 1980,
respectively.

Preferred Directors

The holders of Series A Preferred Stock, as a class, are entitled to elect three
directors to the Company's Board of Directors who serve at the will of the
holder of Series A Preferred Stock.  The Series A Preferred Stock is currently
held by an affiliate of Apollo Real Estate Advisors.  The following are the
Preferred Directors of the Company:

Lee S. Neibart
Director Since:  1996
Age:  50

Mr. Neibart has been a partner with Apollo since 1994. Apollo acts as managing
general partner of the Apollo Real Estate Investment Fund ("Apollo Real Estate")
and the Apollo Investment Fund ("Apollo Investment"), three private investment
funds with investment parameters ranging from direct and indirect real property
interests, to public and private debt securities and bank and mortgage debt and
to public and private equity investments.  Prior to 1993, Mr. Neibart was
Executive Vice President and Chief Operating Officer of the Robert Martin
Company, a private real estate development/management firm based in Westchester
County, New York.  Mr. Neibart is a director of Roland International, Inc., and
Koger Equity, Inc.  Mr. Neibart holds a BA in Real Estate from the University of
Wisconsin and an MBA from New York University.  He is also the past President of
the New York Chapter of the NAIOP.

Michael L. Ashner
Director Since:  1997
Age:  48

Since 1995, Mr. Ashner has been President and CEO of Winthrop Financial
Associates, a real estate investment banking firm affiliated with Apollo Real
Estate.  From 1984 to 1995, Mr. Ashner was President and a Principal of National
Property Investors, a real estate investment banking firm also affiliated with
Apollo Real Estate.  Mr. Ashner is a director of NBTY, Inc., Interstate Hotel
Corporation, Greate Bay Hotel & Casino Co., Inc., and Burnham Pacific
Properties, Inc.  Mr. Ashner has an AB in philosophy and government from Cornell
University and a JD from the University of Miami School of Law.

Alfred C. Trivilino
Director Since:  1996
Age:  37

Mr. Trivilino has been associated with Apollo since 1995, currently with
responsibilities for new investments and investment management and initially as
a Vice President of Winthrop Financial Associates, L.P., a subsidiary of the
Apollo Real Estate Investment Funds.  Prior to 1995, Mr. Trivilino specialized
in mergers and acquisitions at Victor Capital Group, a New York based real
estate merchant banking firm.  From 1988 to 1993, Mr. Trivilino was Manager

                                       33
<PAGE>

of Treasury Services at Pearson, Inc., a multi-national holding company. Mr.
Trivilino began his career at Lazard Freres & Co., a leading New York based
investment bank, where he was involved in corporate finance and mergers and
acquisitions. Mr. Trivilino is a director of American Property Management Inc.,
an owner and operator of three and four star hospitality properties, and Divine
Tower International Corporation, a leading wireless infrastructure provisioning
company. Mr. Trivilino holds a BS in Finance from St. Johns University and has
completed graduate work at Fordham University.

Officers and Principal Executives

Listed below are the names and ages of each of the officers and principal
executives of the Company together with the principal positions and offices with
the Company (or its subsidiaries) held by each:

<TABLE>
<CAPTION>

NAME                            AGE  POSITION
----                            ---  --------
<S>                             <C>  <C>
William T. O'Donnell, Jr.        52  Chairman of the Board, President and Chief
                                       Executive Officer*
Joseph A. DeNucci                48  Executive Vice President of NextHealth, Inc. and
                                       General Manager of Miraval
Loree Thompson                   37  Chief Financial Officer
Bertha B. Kenny                  52  Corporate Secretary
Keith P. Arnold                  38  Director of Corporate Marketing
                                       and Communications
James W. Griffis                 56  Executive Director of Sierra Tucson
</TABLE>

*Mr. O'Donnell is serving as the Company's Chief Executive Officer on a part
time basis pursuant to a Consulting Agreement with ODE, LLC, an Illinois limited
liability company controlled by Mr. O'Donnell.

William T. O'Donnell, Jr.  See Directors' biographical material above.

Joseph A. DeNucci.   Mr. DeNucci was named Executive Vice President of
NextHealth, Inc. in June 2000. In this capacity, he oversees operations for
NextHealth and its subsidiary companies, Sierra Tucson and Miraval. Mr. DeNucci
first joined the Company as General Manager of Miraval in February 1999, and he
continues to serve in that capacity. Prior to joining the Company, and since
January 1995, Mr. DeNucci was owner and President of DeNucci & Associates, a
behavioral health and integrative medicine healthcare consulting firm located in
Florida. In addition, during the same time frame, Mr. DeNucci served as Chief
Operating Officer of ProCare Health Management, Inc., a company specializing in
contract management and program implementation arrangements with behavioral and
med-surge companies. From 1992 to 1995, Mr. DeNucci served as Senior Vice
President of Operations for Comprehensive Addiction Programs (CAP), a behavioral
health and nursing home company on the east coast. Mr. DeNucci received his
Bachelor's degree from Sienna College in Albany, New York.

Loree Thompson.  Ms. Thompson is currently the Chief Financial Officer of the
Company and has been serving in that capacity since November 1996.  Ms. Thompson
first joined the Company in October 1992 and held various positions including
Controller and Director of MIS.  Prior to joining the Company she was employed
by Community Care Network in various financial and systems management roles.
Previously, Ms. Thompson worked for Ernst & Young in Phoenix, Arizona.  Ms.
Thompson is a Certified Public Accountant and received her Bachelor of Science
degree as a cum laude graduate in Accounting and Management Information Systems
in 1987 from the University of Arizona.

Bertha B. Kenny.  Ms. Kenny has been the Corporate Secretary of the Company
since May 1996.  In addition to her Corporate Secretary duties, Ms. Kenny also
serves as Director of Administration.  She joined the Company in December 1990
and has held various positions including Assistant to the President. Before
joining the Company, Ms. Kenny was part of the start-up team for the Greater
Tucson Economic Council.  Prior to that, she was employed as an Administration
Analyst for the IBM Corporation in Tucson.  She attended Pima Community College
and Northern Arizona University.

                                       34
<PAGE>

Keith P. Arnold.  Mr. Arnold was named Director of Corporate Marketing and
Communications in June 2000. In this capacity, he oversees marketing, investor
relations and internet strategies for NextHealth, Inc. and its subsidiary
companies, Sierra Tucson and Miraval. Mr. Arnold continues to serve as Director
of Marketing for Sierra Tucson, a position he has held since 1995. Prior to
joining the Company, Mr. Arnold served as Director of Client Services for
ExecuTrak Systems, an international management consulting firm focusing on
organizational dynamics/realignments, corporate culture change, merger and
acquisition integration, team building, strategic planning and marketing. Mr.
Arnold received a Bachelor's degree in Psychology from Rollins College, Winter
Park, Florida in 1985 with post-graduate work at Boston College.

James W. Griffis.  Mr. Griffis was named Executive Director of Sierra Tucson in
December 2000. Prior to joining the Company and from February 1996, Mr. Griffis
was a certified psychology teacher with the Duval County School Board in
Jacksonville, Florida.  Prior to that, he served as Executive Director of Twelve
Oaks Hospital in Navarre, Florida, and from 1991 to 1993 he served as Executive
Director of Bradford Treatment Center in Madison, Alabama.  As a career Navy
man, he was heavily involved in the Alcohol Treatment Program in San Diego,
California.  Upon retirement from the Navy in 1986, he was an Employee
Assistance Professional with Crowley Maritime Corporation in Jacksonville,
Florida.  Mr. Griffis received both his Bachelors degree in Behavioral Science
and his Masters degree in Human Behavior from National University, San Diego,
CA.

Involvement in Certain Legal Proceedings

Not applicable


Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten-percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and The Nasdaq Stock Market. Officers, directors and greater than ten-percent
stockholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.

The Company has adopted procedures to assist its officers and directors in
complying with Section 16(a) of the Exchange Act, which includes assisting the
officer or director in preparing forms for filing.  Based solely on its review
of the copies of such forms received by the Company, or written representations
from certain reporting persons that no Form 5's were required for those persons,
the Company believes that all filing requirements applicable to its officers,
directors, and greater than ten-percent beneficial owners were complied with for
the 2000 fiscal year.

                                       35
<PAGE>

ITEM 11.   EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth information concerning the annual and long term
compensation for services rendered in all capacities to the Company during the
three fiscal years ended December 31, 2000 of (i) the Chief Executive Officer,
Mr. O'Donnell, and (ii) the other Executive Officers of the Company whose total
compensation exceeded $100,000 (collectively, the "Named Executive Officers"):

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

                                                                                    Long Term
                                                                                  Compensation
                                                        Annual Compensation       -------------
                                                     ----------------------------  Securities
                                                                   Other           Underlying
                                                                   Annual            Option      All Other
                                 Fiscal    Salary       Bonus     Compensation(1)    Awards     Compensation
Name and Principal Position       Year       ($)         ($)          ($)             (#)           ($)
-------------------------------  ------  ----------  -----------  ---------------  ----------  -------------
<S>                              <C>     <C>         <C>          <C>              <C>         <C>
William T. O'Donnell, Jr.,(2)      2000        -0-          -0-              -0-       8,500         262,000
President & Chief                  1999        -0-          -0-              -0-       8,500         167,000
Executive Officer                  1998        -0-          -0-              -0-       8,500         120,500

Joseph A. DeNucci(3)               2000    146,717      175,000              -0-         -0-             932
Exec. Vice President &             1999    113,313       35,000              -0-     165,000             688
Miraval General Manager

Loree Thompson(4)                  2000     79,332       50,000              -0-         -0-          53,190
Chief Financial Officer

Keith P. Arnold(5)                 2000    107,539       15,500              -0-      30,000           4,528
Director of Corp.
Marketing & Communications
</TABLE>

(1)  This column includes information relating to other annual compensation not
     included under the columns labeled "Salary" and "Bonus" to the extent that
     it exceeds $50,000 or 10% of the sum of such columns.
(2)  Mr. O'Donnell is not an employee of the Company.  He became the Chief
     Executive Officer in November 1996, pursuant to a Consulting Agreement
     between the Company and ODE, LLC, an Illinois limited liability company
     ("ODE") controlled by Mr. O'Donnell.  Mr. O'Donnell had been the Chief
     Executive Officer of the Company from the formation of the Company until
     January 1, 1995. In December 1998, the Board of Directors authorized a
     bonus of $100,000 to ODE for Mr. O'Donnell's services in 1997 and 1998. In
     November 1999, the Board of Directors authorized a bonus of $100,000 to ODE
     for Mr. O'Donnell's services in 1999.  In December 2000, the Board of
     Directors authorized a bonus of $200,000 to ODE for Mr. O'Donnell's
     services in 2000.  Amounts shown in the "All Other Compensation" column
     include the consulting fees and bonuses paid to ODE, but do not include the
     Director fees paid to Mr. O'Donnell.
(3)  Mr. DeNucci became General Manager of Miraval in February 1999.  In June
     2000, he was appointed Executive Vice President of NextHealth, Inc.  The
     Company paid an annual premium of $688 on a term life insurance policy for
     Mr. DeNucci in 1999 and $932 in 2000.
(4)  Ms. Thompson became Chief Financial Officer of NextHealth, Inc. on a full-
     time employee basis in May 2000. Amounts shown in the "All Other
     Compensation" column include fees paid to Ms. Thompson in 2000 for her
     consulting role as acting Chief Financial Officer of the Company.  The
     Company paid a premium of $121 on a term life insurance policy and $3,125
     in 401(k) matching funds on behalf of Ms. Thompson in 2000.
(5)  Mr. Arnold became Director of Corporate Marketing and Communications in
     June 2000. The Company paid an annual premium of $691 on a term life
     insurance policy and $3,837 in 401(k) matching funds on behalf of Mr.
     Arnold in 2000.

                                       36
<PAGE>

Option Grants

The following table provides information on option grants in 2000 to the Named
Executive Officers.

<TABLE>
<CAPTION>

                                                                                      Potential Realizable
                                             Individual                                  Value at Assumed
                                               Grants                                  Annual Rates of Stock
                                           Percentage of      Present                    Price Appreciation
                                Options    Total Options     Exercise                    for Option Term(4)
          Name                  Granted      Granted in        Price       Expiration
                                  (#)       Fiscal Year(3)   ($/Share)        Date         5%          10%
                                                                              ($)         ($)          ($)
------------------------------  -------    ---------------   ---------     ----------  ---------   ---------
<S>                             <C>         <C>              <C>           <C>          <C>         <C>
William T. O'Donnell, Jr.(1)      8,500           18.68%       $1.34           (1)    $ 7,163     $ 18,153

Keith P. Arnold(2)               30,000           65.93%          (2)          (2)    $28,417     $100,781
</TABLE>

(1)  Mr. O'Donnell received options on January 3, 2000, pursuant to the
     Company's Non-Employee Directors Stock Option Plan.  Under the terms of
     that plan, such options are fully vested at the time of grant and expire
     one year following the date on which Mr. O'Donnell ceases to be a Director.
(2)  Mr. Arnold was granted 15,000 options on June 30, 2000 priced at $2.50 per
     share.  These options vest over a four-year period.  On June 30, 2000, he
     was granted an additional 15,000 options priced at $3.75 per share.  These
     options were fully vested at the date of grant.  All such options expire 10
     years from the date of grant or 30 days after Mr. Arnold ceases to be an
     employee of the Company, whichever comes first.
(3)  The Company granted options representing 45,500 shares to employees and
     Named Executive Officers in fiscal 2000.
(4)  The assumed rates of appreciation in this table were set by the SEC and are
     not intended to predict appreciation of the Company's common stock prices.
     If the stock price does not increase above the exercise price, the options
     will be valueless.

Aggregated Option Exercises and Fiscal Year-end Option Value Table

The following table provides information on the value of the Named Executive
Officers' unexercised options at December 31, 2000.  There were no option
exercises by such officers in 2000.

<TABLE>
<CAPTION>

                                  Number of Unexercised        Value of Unexercised
                                         Options               In-the-Money Options
                                At Fiscal Year End (#)(1)     At Fiscal Year End(2)
           Name                 Exercisable  Unexercisable  Exercisable  Unexercisable
------------------------------  -----------  -------------  -----------  -------------
<S>                             <C>          <C>            <C>          <C>
William T. O'Donnell, Jr.(3)        127,000            -0-     $100,265            -0-

Joseph A. DeNucci                    53,750        111,250     $106,781       $220,594

Loree Thompson                       83,500            -0-     $106,485            -0-

Keith Arnold                         26,375         20,625     $  7,516       $ 23,922
</TABLE>

(1)  The numbers reflect options accumulated since October 1989.
(2)  Fiscal year ended December 31, 2000.  The closing price of the Company's
     common stock on that day on The Nasdaq Stock Market was $3.375.
(3)  At December 31, 2000, Mr. O'Donnell held 52,000 options granted to him
     pursuant to the Company's Non-Employee Directors Stock Option Plan.  Under
     the terms of that plan, such options are fully vested at the time of grant.
     He also held 75,000 options granted to him on January 20, 1995, pursuant to
     the Company's 1992 Stock Option Plan.  Under the terms of that plan, all
     such options were vested and exercisable at December 31, 2000.

                                       37
<PAGE>

Compensation of Directors

Directors (Common and Preferred) who are not employees of the Company ("Outside
Directors"), other than the Chairman, each receive a fee of $12,500 per year and
$1,000 per meeting (Board or Committee) day attended, plus reimbursement of
reasonable expenses.  The Chairman of the Board receives a fee of $20,000 per
year. In addition, a Non-Employee Directors Stock Option Plan (the "Plan")
provides for the automatic granting of options to acquire shares of the
Company's Common Stock to Outside Directors. The Company has reserved 600,000
shares of Common Stock for this purpose.  In 2000, each Outside Director
received, pursuant to this Plan, an option to purchase 7,500 shares of Common
Stock for his service on the Board of Directors plus an additional grant of
options totaling 1,000 multiplied by the number of "Applicable Committees" of
which such Outside Director is the Chairman. The Applicable Committees for
purposes of the Plan in 2000 were the Company's Executive, Audit and
Compensation Committees.

Each Outside Director receives options to purchase a like sum of shares of
Common Stock on the first business day of each fiscal year of the Company.  In
addition, upon an Outside Director's initial election to the Board of Directors,
such Outside Director receives the grant of an option to purchase 10,000 shares
of Common Stock. All options granted pursuant to the Plan are fully vested at
the time of grant and expire one year after a Director leaves office.

Employment Contracts and Termination of Employment and Change-in-control
Arrangements

William T. O'Donnell, Jr., became the Company's Chief Executive Officer on
November 15, 1996.  He is currently serving in that capacity on a part-time
basis pursuant to a Consulting Agreement between the Company and ODE, LLC, an
Illinois limited liability company ("ODE") controlled by Mr. O'Donnell.  ODE
receives $1,000 per day for Mr. O'Donnell's services plus reimbursement of
expenses.  Because he is serving as a consultant on a part-time basis and is not
an employee, Mr. O'Donnell receives compensation as a director and participates
in the Non-Employee Directors Stock Option Plan (See "Compensation of
Directors").  The Agreement is cancellable by either party on thirty days prior
written notice.

Ms. Thompson is employed as the Chief Financial Officer of the Company pursuant
to an Employment Agreement that expires on April 31, 2002.  Pursuant to the
terms of her Employment Agreement, in the event the Company terminates Ms.
Thompson's employment without cause, the Company will pay her a lump sum amount
equal to the greater of (i) total base salary remaining unpaid under the
Agreement through its full term or (ii) the equivalent of six (6) month's Base
Salary.  Additionally, in March 2001, the Compensation Committee approved a
minimum guaranteed bonus for 2001in the amount of $100,000 that will be payable
on the earlier of January 10, 2002, or within 10 days from the occurrence of a
change of control of the Company.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

Decisions relating to compensation of the Company's executive officers are made
by the Compensation Committee of the Board of Directors.  The Compensation
Committee's executive compensation policies are designed to articulate and
define the Board's philosophy with respect to executive compensation (including
the Named Executive Officers).  The Board's objectives are to provide direct
linkage between the total compensation program and the accomplishment of the
Company's business strategies and Company performance.  Furthermore, the
Compensation Committee believes that a compensation program should enable the
Company to attract, retain, and reward executive officers who contribute to the
long-term success of the Company.

Since February 1993, the composition of the Compensation Committee has consisted
entirely of Outside Directors. The Compensation Committee is empowered to
provide oversight, set compensation and help formulate and approve compensation
programs and to administer the Company's 1990 and 1992 Stock Option Plans.

Duties and Responsibilities

The specific responsibilities of the Compensation Committee consist of:

 .  The development and approval of compensation policies and guidelines for the
   Company's executive officers. At this time, the phrase "executive officers"
   does not include the Chief Executive Officer but includes the other

                                       38
<PAGE>

   "executive officers" of the Company as that term is described in the rules of
   the Securities and Exchange Commission.

 .  The formulation and approval of comprehensive compensation programs for the
   executive officers based upon a review of competitive industry practices and
   the Compensation Committee's compensation philosophies and policies.

 .  The review of the performance of the executive officers against specified
   annual corporate and individual objectives and the making of any annual base
   salary adjustments or annual or long-term incentive awards. Overall, the
   intent is to have more emphasis on variable compensation components. The
   Committee believes this philosophy and program structure are in the best
   interests of the stockholders.

Compensation Philosophies

The Compensation Committee has attempted in the past to develop policies,
guidelines, and programs relating to executive compensation which align the
specific incentive components of compensation with measurable indicators of
Company financial and strategically oriented performance indicators including
earnings per share, gross revenues and attainment of budget projections. Other
factors considered in making compensation decisions include individual
performance and position accountabilities. In establishing total executive
compensation, the Compensation Committee seeks to be competitive with other
companies in the Company's industry peer group.

While the Compensation Committee believes that the Company's specific
performance for 2000 represents a substantial improvement, it did not implement
a formal incentive compensation plan for any Named Executive Officer; although
it did acknowledge that improvement by awarding cash bonuses to senior
management personnel. The Board of Directors awarded ODE a $200,000 cash bonus
in recognition of Mr. O'Donnell's substantial contribution to the Company's
improved performance.  In making these awards, the Compensation Committee
considered increased revenues, improved earnings and expense control efforts at
Sierra Tucson and Miraval.

Components of Compensation

The Company's executive payment compensation program has generally consisted of
three components:  base salary, an annual incentive (bonus) payment, and long-
term incentives (which consist of stock options). Executives (other than Mr.
O'Donnell) also participate in various other benefit plans, including medical
and 401(k) plans generally available to all employees of the Company. The
Compensation Committee anticipates that it will return to a more formal
executive compensation program as the operations of the Company become more
established.

Base Salaries/Annual Cash Compensation

Historically, executive officer base salaries have been reviewed and set
annually by the Compensation Committee based on such factors as the individual
officer's level of responsibility, comparisons to similar companies in the
industry, and the performance of the Company and individual executives.

Annual Incentive Compensation

In the past, the Compensation Committee has developed an annual incentive
compensation plan for senior executives that was based upon the accomplishment
of specific qualitative criteria and the achievement of established performance
goals. Incentive Compensation based on the achievement of certain measurable
performance goals are incorporated into Mr. DeNucci's Employment Agreement and
Mr. Griffis' Employment Agreement. These goals are based upon the achievement of
the budgeted gross operating profit for Miraval and Sierra Tucson, respectively.

For the reason discussed above, no executive incentive compensation program was
established for 2000. Because the Company has been in transition in the
development of its new line of business, no structured plan has existed due to
the difficulty in establishing performance criteria. The Compensation Committee
believes that operations have stabilized and will consider the establishment of
a formalized performance-based plan for future years.

                                       39
<PAGE>

As discussed above, the Compensation Committee believes that the Company's
performance for 2000 justified the payment of cash bonuses on a selective basis
based on individual performance.

                             Compensation Committee
                             ----------------------
                           Neil E. Jenkins, Chairman
                           William T. O'Donnell, Jr.
                                Alfred Trivilino


Long-Term Incentives

The Company's long-term incentive compensation has typically taken the form of
stock option grants. The Compensation Committee's position is that stock
ownership by senior management is beneficial in aligning management's and
stockholders' interests in the enhancement of share value.

Chief Executive Officer

Because Mr. O'Donnell is serving as Chief Executive Officer pursuant to a
consulting agreement with ODE, LLC, the Compensation Committee has not
considered or structured long or short-term incentive compensation plans for the
position of Chief Executive Officer.

Section 162(m) of the Internal Revenue Code of 1986 as amended (the "Code"),
adopted as part of the Revenue Reconciliation Act of 1993, generally limits to
$1,000,000 the deduction that can be claimed by any publicly-held corporation
for compensation paid to any "covered employee" in any taxable year beginning
after December 31, 1993. Performance-based compensation is outside the scope of
the $1,000,000 limitation and, hence, generally can be deducted by a publicly-
held corporation without regard to amount; provided that, among other
requirements, stockholder approval is obtained. The Compensation Committee
believes that at the present time the compensation paid to any Named Executive
Officers in a taxable year which is subject to the deduction limit will not
exceed $1,000,000.

In general, it is the intent of the Compensation Committee to assure the
deductibility to the Company of executive compensation whenever possible and
consistent with operational policies.

                    COMPARISON CUMULATIVE PERFORMANCE GRAPH

Set forth below is a line graph comparing the cumulative total stockholder
return on the Company's Common Stock, based on the market price of the Common
Stock with the total return index of The Nasdaq Stock Market and the total
return index of Nasdaq Health Services Companies.

                          TOTAL RETURN TO STOCKHOLDERS
                     (Assumes $100 investment on 12/31/95)

MEASUREMENT PERIOD                                         NASDAQ
(FISCAL YEAR COVERED)    NEXTHEALTH  HEALTH SERVICES  COMPOSITE (U.S.)
-----------------------  ----------  ---------------  ----------------
  12/29/95                   100.00           100.00           100.00
  12/31/96                    86.02            99.86           123.04
  12/31/97                    32.00           102.46           150.69
  12/31/98                    38.02            86.85           212.51
  12/31/99                    50.02            69.88           394.92
  12/29/00                   108.00            95.80           237.62

                                       40
<PAGE>

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of April 20, 2001, certain information with
respect to the beneficial ownership of the Company's voting securities by (i)
each person known by the Company to be the beneficial owner of more than five
percent (5%) of the Company's outstanding voting securities; (ii) each director
of the Company; (iii) the Named Executive Officers; and (iv) all directors and
executive officers of the Company as a group:

<TABLE>
<CAPTION>

                                                   Amount and Nature of             Percent of
           Name                                    Beneficial Ownership                Class
           ----                                    --------------------                -----

                         Common Stock
                         ------------
<S>                                                <C>                                 <C>
AP NH LLC(1)                                                  6,077,075                 42.97%
Anam LLC(2)                                                   3,047,554                 22.73 +
William T. O'Donnell, Jr.(3)                                  2,821,417                 21.09 +
Steven M. Kolow(4)                                            1,057,100                  7.98 +
Joseph A. DeNucci(5)                                            153,750                  1.15 +
Loree Thompson(6)                                                83,500                    *
Neil E. Jenkins(7)                                               72,500                    *
George L. Ruff(8)                                                52,500                    *
Stephen L. Berger(9)                                             47,500                    *
Lee S. Neibart(10)                                               47,500                    *
Alfred C. Trivilino(10)                                          47,500                    *
Michael L. Ashner(10)                                            40,000                    *
Keith P. Arnold(11)                                              27,000                    *
Bertha Kenny(12)                                                 11,375                    *
All Executive Officers and
Directors as a Group(13)                                      3,404,542                 24.39

                       Series A Preferred Stock
                       ------------------------

AP NH LLC                                                        46,065                   100%
</TABLE>

+Percentage calculations assume conversion of preferred stock.
*Represents less than one percent (1%) of the Company's outstanding voting
 stock.

(1)  Includes shares issuable upon the conversion of Series A Preferred Stock
     into Common Stock in accordance with the Preferred Stock Series Designation
     (4,606,500) and upon exercise of warrants held by AP NH and an affiliate to
     purchase 900,000 shares of Common Stock. Apollo's address is  c/o Apollo
     Real Estate Advisors, L.P., 1301 Avenue of the Americas, 38th Floor, New
     York, New York 10019.
(2)  This "group" inlcudes Messrs. O'Donnell and Ruff. This information is based
     upon Amendment No. 1 to Anam's Schedule 13D dated April 19, 2001. Anam's
     address is c/o William T. O'Donnell, Jr., 144 Green Bay Road, Winnetka, IL
     60093.
(3)  Does not include 195,637 shares held in a trust, for the benefit of Mr.
     O'Donnell's children, and as to which Mr. O'Donnell disclaims any
     beneficial interest.  Includes 500,000 shares held in the name of Mr.
     O'Donnell as voting trustee for the benefit of Beth O'Donnell as to which
     Mr. O'Donnell disclaims any beneficial interest.  The shares of the BTM
     Trust and Beth O'Donnell are included in Anam's share ownership total.
     Includes options, which are exercisable within the next sixty (60) days, to
     purchase 75,000 shares granted pursuant to the Company's 1992 Stock Option
     Plan and 60,500 shares granted pursuant to the Company's 1993 Non-Employee
     Directors Stock Option Plan. Mr. O'Donnell is a member of Anam LLC, but
     these figures do not include security ownership of other members of Anam.
     Mr. O'Donnell's address is c/o ODE, LLC, 144 Green Bay, Winnetka, Illinois
     60093.
(4)  As of August 31, 2000, the address for Mr. Kolow was 5 Essex Drive,
     Wayland, Massachusetts 01778. This information is based on a Schedule 13G/A
     filing with the Securities and Exchange Commission dated August 31, 2000.

                                       41
<PAGE>

(5)   Includes options, which are exercisable within the next sixty (60) days,
      to purchase 153,750 shares granted to Mr. DeNucci pursuant to the
      Company's 1990 and 1992 Stock Option Plan.
(6)   Includes options, which are exercisable in the next sixty (60) days, to
      purchase 83,500 shares granted to Ms. Thompson pursuant to the Company's
      1990 and 1992 Stock Option Plans.
(7)   Includes options, which are exercisable in the next sixty (60) days, to
      purchase 68,500 shares granted to Mr. Jenkins pursuant to the Company's
      1993 Non-Employee Directors Stock Option Plan.
(8)   Includes options, which are exercisable in the next sixty (60) days, to
      purchase 52,500 shares granted to Mr. Ruff pursuant to the Company's 1993
      Non-Employee Directors Stock Option Plan. Mr. Ruff is a member of ANAM
      LLC, but these figures do not include security ownership of other members
      of ANAM.
(9)   Includes options, which are exercisable in the next sixty (60) days, to
      purchase 47,500 shares granted to Mr. Berger pursuant to the Company's
      1993 Non-Employee Directors Stock Option Plan.
(10)  Includes options, which are exercisable in the next sixty (60) days, to
      purchase 47,500 shares granted to Messrs. Neibart and Trivilino and 40,000
      shares granted to Mr. Ashner pursuant to the Company's 1993 Non-Employee
      Directors Stock Option Plan. Does not include 4,606,500 shares of Common
      Stock represented by the 46,065 shares of Series A Preferred Stock held by
      AP NH or the 900,000 shares of Common Stock represented by warrants held
      by AP NH, as to which each of them disclaims any beneficial interest.
(11)  Includes options, which are exercisable in the next sixty (60) days, to
      purchase 27,000 shares granted to Mr. Arnold pursuant to the Company's
      1990 and 1992 Stock Option Plans.
(12)  Includes options, which are exercisable in the next sixty (60) days, to
      purchase 11,375 shares granted to Ms. Kenny pursuant to the Company's 1990
      and 1992 Stock Option Plans.
(13)  Includes options, which are exercisable within the next sixty (60) days,
      to purchase 714,625 shares granted to members of this group pursuant to
      the Company's 1990 and 1992 and Non-Employee Directors Stock Option Plans.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In December 1994 the Company engaged in a business transaction with ODE, LLC, a
Limited Liability Company (the "Related LLC") owned by the Chairman of the
Company's Board of Directors, then Chief Executive Officer and more than five
percent (5%) stockholder, Mr. O'Donnell.  The Company sold to and leased back
from the Related LLC its closed Adolescent Center, which is located on
approximately 160 acres of land leased from the State of Arizona ("State Land
Lease").  Under these agreements, the Company sold its Adolescent Center to the
Related LLC for the then appraised value of $1 million and simultaneously leased
the buildings back from the Related LLC for seven years at an annual cost of
$150,000 payable in quarterly installments. The lease granted the Company the
option to repurchase the buildings or to renew the lease for an additional ten-
year period.

The term of the Building Lease (with the renewal option) originally coincided
with the term of the State Land Lease. In 1998, the State Land Lease was
replaced with a land lease ("New Land Lease") having a 50-year term, and the
operations of Sierra Tucson were moved into the facilities of the Adolescent
Center. So as to provide continuity, the Company amended its lease for the
buildings (the "Building Lease") with the Related LLC to provide for a lease
term which, combined with successive 10-year option renewals ("Renewal
Options"), coincides with the New Land Lease. The rent for each Renewal Option
is subject to increase to the fair market rental of the buildings.  The first
Renewal Option commenced in March 2001, and the annual rent increased to an
agreed upon fair market rental of $500,000 plus an annual increase based on the
Consumer Price Index, not to exceed 3% per annum.  The annual rent for the
buildings is subject to an increase for the term of each subsequent Renewal
Option (if exercised) based upon or determined by independent appraisal.

In accordance with the series designation for the Series A Preferred Stock  (as
amended by agreement between the Company and the holder of the Series A
Preferred Stock), the Preferred Directors (Messrs. Neibart, Ashner and
Trivilino) are elected by AP NH, LLC, a Delaware limited liability company
("APNH") as the holder of the outstanding Series A Preferred Stock.  APNH is
affiliated with AP LOM, LLC, a Delaware limited liability company ("Apollo
Lender") which, on November 15, 1996, loaned the Company $8,090,000 ("Apollo
Loan") at the same time as and as part of the related transaction by which APNH
acquired its Series A Preferred Stock.  In addition, the Company received a
$5,000,000 standby commitment from the Apollo Lender subject to the Apollo
Lender's good faith discretion and certain other conditions.

                                       42
<PAGE>

As part of the transactions surrounding the Apollo Loan and the issuance of the
Series A Preferred Stock to APNH, APNH and Apollo were issued warrants to
purchase 100,000 shares and 500,000 shares, respectively, at an exercise price
of $1.50 per share (the "Warrants").  Pursuant to their terms, the exercise
price of the Warrants was recently reduced to $1.00 per share and the number of
shares of Common Stock issuable on exercise of the Warrants increased to 150,000
and 750,000, respectively.

On August 11, 1998, the Apollo loan was repaid as part of a $14 million debt
refinancing loan agreement with Lehman Brothers Holdings Inc. ("Lehman Loan").
The Lehman Loan was made to the Company's two principal subsidiary entities and
is partially guaranteed (to the extent of liability arising by reason of certain
exclusions to the non-recourse provisions of the loan) by the Company and to a
more limited extent by Apollo Real Estate Investment Fund II, L.P. ("Apollo").
Apollo, an affiliate of APNH, received a fee in the amount of $140,000 in
consideration of its guarantee.  The terms of the Apollo Loan and the Lehman
Loan are described in more detail in the Notes to Consolidated Financial
Statements entitled "Long-term Debt and Financing Obligation", included in this
report.

The Company does not engage in any transactions with its officers, directors, or
five percent (5%) stockholders or their affiliates unless the transaction is
approved by a majority of the disinterested and independent directors of the
Company after full disclosure or is on terms no less favorable to the Company
than would be available from an unaffiliated third party.

                                       43
<PAGE>

                                   PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  The following documents are filed as part of this report:

         (1)   Financial Statements:

               Reference is made to the listing on page 15 for a list of all
               financial statements filed as a part of this report.

         (2)   Financial Statement Schedules. The following financial statement
               -----------------------------
               schedules are required by Item 14(d). All other schedules are
               omitted because they are not applicable, or not required, or
               because the required information is included in the consolidated
               financial statements or notes thereto.

               Schedule II.    Valuation and Qualifying Accounts

         (3)   Exhibits.  The following exhibits are incorporated by reference
               --------
               as indicated or are filed as part of this Annual Report on Form
               10-K:
<TABLE>
<CAPTION>
                                                                                                Sequentially
Exhibit                                                                                           Numbered
Number                                        Document                                               Page
------             ---------------------------------------------------------------              ---------------
<S>                <C>                                                                          <C>
  3.1              Certificate of Incorporation                                                            (1)

  3.2              Amended Restated By-Laws                                                                (5)

  4.1              Specimen Common Stock Certificate                                                       (1)

  4.2              Certificate of Designation, Preferences and Rights of the                              (11)
                   Convertible Preferred Stock, Series A and Cumulative Preferred Stock,
                   Series B of NextHealth, Inc.

10.26              Stock Bonus and Repurchase Agreement, dated November 18, 1988,                          (1)
                   between John H. Schmitz and Rita F. Schmitz and Sierra Tucson/Properties,
                   Inc., as amended on August 31, 1989

10.33              1989 Stock Option Plan                                                                  (1)

10.47              1990 Stock Option Plan                                                                  (2)

10.49              Commercial lease dated as of March 15, 1991, between the State                          (3)
                   of Arizona and Sierra Tucson AC, Inc., relating to lease of
                   Adolescent Care facility site

10.51              Form of Indemnity Agreement*                                                            (4)

10.53              1992 Stock Option Plan                                                                  (3)

10.54              Non-Employee Directors Stock Option Plan                                                (5)

10.56              Real Estate Sale Agreement and industrial Building Lease for                            (6)
                   Sierra Tucson AC, Inc. Adolescent Center dated December 28, 1994, and
                   December 29, 1994, respectively.

10.57              Onsite Training and Consulting, Inc. Stock Purchase Agreement                           (6)
                   dated January 13, 1995
</TABLE>

                                       44
<PAGE>

<TABLE>

<S>              <C>                                                                                     <C>
10.58            Severance Agreement, General Release, Covenant Not to Sue                               (6)
                 between the Company and William T. O'Donnell, Jr., dated January 20, 1995

10.59            Elements of compensation - Wayne M. Morrison, Vice President/Chief                      (7)
                 Financial Officer

10.60            Note Payable between NextHealth, Inc. and Sundt Corporation                             (8)
                 dated April 10, 1996 (without exhibits)

10.61            Asset Purchase Agreement by and among NextHealth, Inc. and                              (8)
                 Hilton Head Health Institute, Inc. dated February 29, 1996 (without exhibits)

10.62            Amendment 1 to Note Payable between NextHealth, Inc. and Sundt                          (9)
                 Corporation dated June 28, 1996

10.63            Loan Agreement between NextHealth, Inc. and Mortgages, Ltd.                             (9)
                 dated June 25, 1996 (without exhibits)

10.64            Secured Promissory Note between NextHealth, Inc. and                                    (9)
                 Mortgages, Ltd. dated June 25, 1996

10.65            Deed of Trust, Assignment of Rents and Security Agreement                               (9)
                 between NextHealth, Inc. and Mortgages, Ltd. dated June 25, 1996

10.66            Security Agreement between Sierra Tucson, Inc. and Mortgages,                           (9)
                 Ltd. dated June 25, 1996 (without exhibits)

10.67            Security Agreement between Sierra Healthstyles, Inc. and                                (9)
                 Mortgages, Ltd. dated June 25, 1996 (without exhibits)

10.68            Guaranty between Sierra Tucson, Inc. and Mortgages, Ltd. dated                          (9)
                 June 25, 1996

10.69            Guaranty between Sierra Healthstyles, Inc. and Mortgages, Ltd.                          (9)
                 dated June 25, 1996

10.70            Asset Purchase Agreement between Sierra Tucson, Inc. and                               (10)
                 Soften Realty, LLC

10.71            Operating Agreement of Soften Realty, Inc. between NextHealth,                         (10)
                 Inc. and AP NH, LLC

10.72            Security Agreement between Sierra Tucson, Inc. and Soften                              (10)
                 Realty, LLC

10.73            Non-negotiable Security Promissory Note                                                (10)

10.74            Assumption agreement                                                                   (10)

10.75            Bill of Sale and Assignment between Sierra Tucson, Inc. and                            (10)
                 Soften Realty, LLC

10.76            Preferred Stock and Warrant Purchase Agreement between                                 (10)
                 NextHealth, Inc. and AP LOM LLC

10.77            Registration and Pre-emptive Rights Agreement between                                  (10)
                 NextHealth, Inc. and AP LOM LLC

10.78            Credit Agreement between NextHealth, Inc. and AP LOM LLC                               (10)

10.79            Pledge Agreement between NextHealth, Inc. and AP LOM LLC                               (10)
</TABLE>

                                       45
<PAGE>

<TABLE>

<S>              <C>                                                                                    <C>
10.80            Term Note A between NextHealth, Inc. and AP LOM, LLC                                   (11)

10.81            Term Note B between NextHealth, Inc. and AP LOM, LLC                                   (11)

10.82            Warrant for 500,000 shares of Common Stock                                             (11)

10.83            Deed of Trust for the use and benefit of AP LOM, LLC                                   (11)

10.84            Guaranty made by NextHealth's subsidiaries                                             (11)

10.85            General Security Agreement among NextHealth's subsidiaries and                         (11)
                 AP LOM, LLC

10.86            Loan Agreement made by Sierra Health-Styles, Inc., and Sierra                          (12)
                 Tucson, LLC in favor of Lehman Brothers Holdings Inc.

10.87            Mortgage Note made by Sierra Health-Styles, Inc., and Sierra                           (12)
                 Tucson, LLC in favor of Lehman Brothers Holdings Inc.

10.88            Commercial long-term lease dated October 23, 1998, between the                         (13)
                 State of Arizona State Land Department and Sierra Tucson, L.L.C. relating to
                 the Sierra Tucson site.

10.89            Amended and Restated First Amendment to Lease, dated March 15,                         (14)
                 2000, between ODE, L.L.C and Sierra Tucson, L.L.C. relating to the Sierra
                 Tucson buildings.

21.1             Subsidiaries                                                                            52

23.1             Consent of Ernst & Young LLP, Independent Auditors                                      53

(1)              Incorporated by reference from Company's Form S-1 Registration Statement, File No. 33-31020,
                 declared effective in October 1989.

(2)              Incorporated by reference from the Company's Form 10-K for the year ended
                 December 31, 1990.

(3)              Incorporated by reference from the Company's Form 10-Q for the year ended
                 March 31, 1991.

(4)              Incorporated by reference from the Company's Form S-1 Registration Statement
                 declared effective  on June 20, 1991.

(5)              Incorporated by reference from the Company's Form 10-K for the year ended
                 December 31, 1992.

(6)              Incorporated by reference from the Company's Form 10-K for the year
                 ended December 31, 1994.

(7)              Incorporated by reference from the Company's Form 10-K for the year
                 ended December 31, 1995.

(8)              Incorporated by reference from the Company's Form 10-Q for the quarter
                 ended March 31, 1996.

(9)              Incorporated by reference from the Company's Form 10-Q for the quarter
                 ended June 30, 1996.

(10)             Incorporated by reference from the Company's Form 10-Q/A No. 1 for the
                 quarter ended September 30, 1996.

(11)             Incorporated by reference from the Company's Form 10-Q/A No. 2 for the
                 quarter ended September 30, 1996.
</TABLE>

                                       46
<PAGE>

(12)   Incorporated by reference from the Company's Form 10-Q/A No. 1 for the
       quarter ended June 30, 1998.

(13)   Incorporated by reference from the Company's Form 10-K for the year ended
       December 31, 1998.

(14)   Incorporated by reference from the Company's Form 10-K for the year ended
       December 31, 1999.

*      The Company has entered into indemnification agreements with certain of
       its directors, one of whom is an executive officer, and certain former
       directors. Pursuant to the Instructions accompanying Item 601 of
       Regulation S-K, the Company has not filed each such indemnification
       agreement.

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

(c)    Exhibits Required by Item 601 of Regulation S-K.  See (a)(3) above.
       -----------------------------------------------

                                       47
<PAGE>

                                  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.

                                      NEXTHEALTH, INC.

Dated: April 27, 2001                 BY: /s/ William T. O'Donnell, Jr.
                                        ---------------------------------------
                                        WILLIAM T. O'DONNELL, JR.
                                        President and Chief Executive Officer

         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 the capacities and on the dates indicated.

<TABLE>
<CAPTION>

Signature                                            Capacity                               Date
---------                                            --------                               ----
<S>                                                  <C>                                    <C>
/s/ William T. O'Donnell, Jr.                        Chairman of the Board of Directors     April 27, 2001
---------------------------------------------------  President and Chief Executive Officer
William T. O'Donnell, Jr.                            (Principal Executive Officer)


/s/ Neil E. Jenkins                                  Director                               April 27, 2001
---------------------------------------------------
Neil E. Jenkins


/s/ George L. Ruff                                   Director                               April 27, 2001
-----------------------------------
George L. Ruff


/s/ Stephen L. Berger                               Director                                April 27, 2001
--------------------------------
Stephen L. Berger


/s/ Lee S. Neibart                                  Director                                April 27, 2001
----------------------------------
Lee S. Neibart


/s/ Michael L. Ashner                               Director                                April 27, 2001
-------------------------------
Michael L. Ashner


/s/ Alfred Trivilino                                Director                                April 27, 2001
------------------------------------
Alfred Trivilino


/s/ Loree Thompson                                  (Chief Financial Officer)               April 27, 2001
-----------------------------
Loree Thompson
</TABLE>

                                       48
<PAGE>

                       NEXTHEALTH, INC. AND SUBSIDIARIES
                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                    (000s)


           Column A               Column B     Column C     Column D   Column E
       ----------------         ------------  -----------  ----------  --------
                                               Additions
                                 Balance at   (Charged to             Balance at
                                Beginning of   Costs and                End of
         Description               Period      Expenses)   Deductions   Period
       ----------------         ------------  ----------   ----------  --------
Year ended December 31, 2000:           $358        $139         $108      $389
                                        ====        ====         ====      ====
 Allowance for doubtful
 accounts

Year ended December 31, 1999:
 Allowance for doubtful
 accounts                               $278        $370         $290      $358
                                        ====        ====         ====      ====

Year ended December 31, 1998:
 Allowance for doubtful
 accounts                               $348        $159         $229      $278
                                        ====        ====         ====      ====


                                      51