##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549


Form 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31,
    2003                                             
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission File Number: 333-110117

Ardent Health Services LLC

(Exact Name of Registrant as Specified in its
Charter)


|                                                                                                |  |                                            
|----------------------------------------------------------------------------------------------- |  | -------------------------------------------
|Delaware                                                                                        |  | 62-1862223                                 
|(State or Other Jurisdiction of
    Incorporation or Organization)                              |  | (I.R.S. Employer
    Identification Number)
|                                                                                               
|One Burton Hills Blvd., Suite 250
    Nashville, TN(Address of Principal Executive
    Offices) |  | 37215(Zip Code)                            

Registrants telephone number, including
area code:

(615) 296-3000


Securities registered pursuant to
Section 12(b) of the Act: None

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.     Yes o          No þ

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

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

As of
December 31, 2003, there were 56,998,444 of the
registrants common units outstanding (all of which are
privately owned and are not traded on any public market).



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TABLE OF CONTENTS

|                                                  |  |                                                                                                                      |    |      |    | 
|------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                  |  |                                                                                                                      |    | Page
|                                                  |  |                                                                                                                      |    | No. 
|                                                  |  |                                                                                                                      |    |     
|PART I                                            |  |                                                                                                                      | 1  |     
|Item 1.                                           |  | Business                                                                                                             |    |      | 1  | 
|Item 2.                                           |  | Properties                                                                                                           |    |      | 31 | 
|Item 3.                                           |  | Legal Proceedings                                                                                                    |    |      | 32 | 
|Item 4.                                           |  | Submission of Matters to a
    Vote of Security Holders                                                              |    |      | 32 | 
|                                                 
|PART II                                           |  |                                                                                                                      | 32 |     
|Item 5.                                           |  | Market for Registrants
    Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities |    |      | 32 | 
|Item 6.                                           |  | Selected Financial Data                                                                                              |    |      | 32 | 
|Item 7.                                           |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                            |    |      | 35 | 
|Item 7A.                                          |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                       |    |      | 67 | 
|Item 8.                                           |  | Financial Statements and
    Supplementary Data                                                                      |    |      | 67 | 
|Item 9.                                           |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                             |    |      | 67 | 
|Item 9A.                                          |  | Controls and Procedures                                                                                              |    |      | 67 | 
|                                                 
|PART III                                          |  |                                                                                                                      | 68 |     
|Item 10.                                          |  | Directors and Executive
    Officers of the Registrant                                                               |    |      | 68 | 
|Item 11.                                          |  | Executive Compensation                                                                                               |    |      | 71 | 
|Item 12.                                          |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters               |    |      | 77 | 
|Item 13.                                          |  | Certain Relationships and
    Related Transactions                                                                   |    |      | 79 | 
|Item 14.                                          |  | Principal Accounting Fees
    and Services                                                                           |    |      | 81 | 
|                                                 
|PART IV                                           |  |                                                                                                                      | 82 |     
|Item 15.                                          |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                                 |    |      | 82 | 
|EX-3.3 LIMITED LIABILITY COMPANY AGREEMENT AMEND.
|EX-10.3 AMENDED RESTRICTED UNIT PURCHASE PLAN    
|EX-21 SUBSIDIARIES OF ARDENT HEALTH SERVICES LLC 
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO     
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO     
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO     
|EX-32.2 SECTION 906 CERTIFICATION OF THE CFO     



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ARDENT HEALTH SERVICES LLC



PART I


Forward Looking Statements

This Annual Report on Form 10-K includes
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, which are intended to
be covered by the safe harbors created under that Act. These
statements are based on our current expectations, estimates and
assumptions. Forward-looking statements may include the words
may, will, plans,
estimates, anticipates,
believes, expects, intends
and similar expressions. These forward-looking statements are
subject to various factors, risks and uncertainties that could
cause actual outcomes and results to be materially different
from those projected or assumed. These factors, risks and
uncertainties include, without limitation, possible changes in
the Medicare and Medicaid programs that may limit reimbursement
to healthcare providers and insurers; a possible reduction of
profitability of our health plan caused by lower enrollment; our
failure to maintain satisfactory relationships with providers or
our ability to effectively price our healthcare premiums or
manage medical costs; the geographic concentration of our
operations, particularly in Albuquerque, New Mexico; the
availability, cost and terms of malpractice insurance coverage;
claims and legal actions relating to professional liabilities or
other matters exceeding the scope of our liability coverage; the
highly competitive nature of the healthcare business, including
the competition to recruit and retain physicians and other
healthcare personnel and the ability to retain qualified
management; the potential adverse impact of government
investigations or qui tam lawsuits brought
under the False Claims Act or other whistleblower statutes; our
ability to integrate newly acquired facilities and improve their
operations and realize the anticipated benefits of the
acquisitions; our ability to acquire hospitals that meet our
target criteria; our ability to manage and integrate our
information systems effectively; any reduction in payments to
healthcare providers by government and commercial third-party
payors, as well as cost-containment efforts of insurers and
other payors; uncertainty associated with compliance with HIPAA
and other privacy laws and regulations; the restrictions and
covenants in our credit facility and debt instruments and the
potential lack of adequate alternative financing; changes in, or
violations of, federal, state or local regulation affecting the
healthcare industry; the possible enactment of Federal or state
healthcare reform; changes in general economic conditions and
those factors, risks and uncertainties described in this report
under the caption Risk Factors and from time to time
in our filings with the Securities and Exchange Commission (the
SEC). We can give no assurance that the
forward-looking statements included in this report will prove to
be accurate. In light of the significant uncertainties inherent
in the forward-looking statements included herein, you should
not regard the inclusion of such information as a representation
by us or any other person that our objectives and plans will be
achieved. We undertake no obligation to publicly release any
revisions to any forward-looking statements contained in this
report.






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

Company Overview

We are an owner and operator of acute care
hospitals and free-standing behavioral hospitals, principally
located in urban and suburban markets in the United States.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We own and operate seven acute care hospitals
    (including one inpatient rehabilitation hospital), with a total
    of 1,259 licensed beds, in Albuquerque, New Mexico, Lexington,
    Kentucky and Baton Rouge, Louisiana. In each of these markets,
    our acute care hospitals provide a broad range of services,
    including general surgery, internal medicine, emergency room
    care, orthopedics, neurosurgery, radiology, oncology, diagnostic
    care, coronary care, pediatric services and behavioral health
    services.
|
| |  | Through our subsidiary, Lovelace Sandia Health
    System, Inc. (LSHS), we operate the second
    largest integrated healthcare delivery system in Albuquerque,
    New Mexico, comprised of five of our seven acute care hospitals
    (including one inpatient rehabilitation hospital), with a total
    of 722                                                                                                                                                                                                                         

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | licensed beds, approximately 328 employed
    physicians and 15 primary care clinics. In addition, we own and
    operate a health plan with approximately 168,000 participants
    throughout New Mexico (and approximately 73,000 additional
    participants who we provide network access and medical
    management services through a contract with CIGNA HealthCare).
    Through our wholly-owned subsidiary AHS S.E.D. Medical
    Laboratories, Inc., we also operate a full service
    reference laboratory in Albuquerque.
|
| |  | We are a leading operator of behavioral hospitals
    in the United States with 21 behavioral hospitals, totaling
    2,044 licensed beds, in 11 states. Our behavioral hospitals
    offer a broad array of behavioral healthcare services ranging
    from inpatient hospitalization to residential treatment programs
    and outpatient services.                                                                                                                                                                                  

We seek opportunities to expand our services and
facilities and grow through selective acquisitions. Our
expansion strategy focuses on expanding our existing hospitals
and other healthcare facilities and broadening the range of
services they provide. Key elements of our acquisition strategy
include:



| |   |                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | making selective acquisitions of hospitals and
    other healthcare facilities in our existing markets in order to
    grow our revenue base and enhance our competitive position and
    economies of scale; and                                                                                   
|
| |  | targeting hospitals and other healthcare
    facilities in new markets with favorable population growth
    rates, where we can improve operating performance and
    profitability, either through a network of hospitals and other
    healthcare facilities or a single well-positioned facility.

We are especially interested in acquiring
hospitals currently owned by not-for-profit organizations as we
believe we can improve these hospitals performance through
the application of our business strategy. We also intend to
selectively acquire well-positioned behavioral hospitals.

We were organized as a Delaware limited liability
company in June 2001. In August 2001, the outstanding capital
stock of Behavioral Healthcare Corporation, our predecessor
company (Predecessor Company), was contributed to us
in exchange for our membership units.

Unless the context otherwise requires, references
in this document to we, us,
our, Ardent, or our company
mean Ardent Health Services LLC and its subsidiaries.



| |                         
| | ------------------------
| | Our Acute Care Hospitals

We own and operate seven acute care hospitals
(including one inpatient rehabilitation hospital) with 1,259
licensed beds and related healthcare facilities serving urban
and suburban markets in New Mexico, Kentucky and Louisiana. The
related healthcare facilities include medical office buildings
located on the same campus as, or near, our acute care
hospitals, physician practices and various ancillary healthcare
businesses, including health insurance plans, a full service
reference laboratory, retail pharmacies and home health
agencies. Note 11 of the notes to our consolidated
financial statements includes financial information regarding
our acute care hospital segment.

Our acute care hospitals generally offer
operating and recovery rooms, radiology services, respiratory
therapy services, pharmacies and clinical laboratories,
intensive care, critical care and/or coronary care units,
physical therapy, orthopedic, oncology and outpatient services.
All of our acute care hospitals are fully accredited by the
Joint Commission on Accreditation of Healthcare Organizations
(JCAHO) and are eligible to participate in the
Medicare and Medicaid programs.

As part of the Lovelace Sandia Health System, our
integrated healthcare delivery network in New Mexico, we operate
the oldest Health Maintenance Organization (HMO) in
the State of New Mexico and the third largest based on
membership, serving approximately 168,000 participants
throughout New Mexico, with a significant concentration of
participants in the greater Albuquerque metropolitan area, where
we are one of two market leaders. We offer a portfolio of
managed care products primarily to private and public purchasers
either alone or in connection with our contract with CIGNA
HealthCare, which has approximately an additional 73,000
participants.

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The following table lists the acute care
hospitals we currently own and operate:

|           |  |                                               |  |          |             |          |  |  |     | 
|---------- |  | --------------------------------------------- |  | -------- | ----------- | -------- |  |  | --- | 
|           |  |                                               |  |          |             | Licensed
|State      |  | Facility                                      |  | Location |             | Beds    
|           |  |                                               |  |          |             |         
|New Mexico |  | Lovelace Sandia Health System:                |  |          |             |          |  |  |     | 
|           |  | Albuquerque Regional Medical Center           |  |          | Albuquerque |          |  |  | 254 | 
|           |  | Lovelace Medical Center                       |  |          | Albuquerque |          |  |  | 201 | 
|           |  | Northeast Heights Medical Center              |  |          | Albuquerque |          |  |  | 114 | 
|           |  | The Rehabilitation Hospital of New
    Mexico |  |          | Albuquerque |          |  |  | 62  | 
|           |  | West Mesa Medical Center                      |  |          | Albuquerque |          |  |  | 91  | 
|Louisiana  |  | Summit Hospital                               |  |          | Baton Rouge |          |  |  | 201 | 
|Kentucky   |  | Samaritan Hospital                            |  |          | Lexington   |          |  |  | 336 | 



| |                              
| | -----------------------------
| | Lovelace Sandia Health System

Lovelace Sandia Health System is an integrated
system of facilities delivering a wide range of services to the
Albuquerque, New Mexico market and surrounding areas. The
greater Albuquerque metropolitan area is home to more than
730,000 people, or approximately 42% of the population of New
Mexico. Lovelace Sandia Health System comprises five of our
seven acute care hospitals (including one inpatient
rehabilitation hospital), with a total of 722 licensed beds,
approximately 328 employed physicians and 15 primary care
clinics. In addition, we own and operate a health plan with
approximately 168,000 participants throughout New Mexico (and
approximately an additional 73,000 participants who access our
provider network through a contract with CIGNA HealthCare).
Through our wholly-owned subsidiary AHS S.E.D. Medical
Laboratories, Inc., we also operate a full service
reference laboratory in Albuquerque.

The five acute care hospitals within the Lovelace
Sandia Health System are described below.

Albuquerque Regional Medical Centerhas 254 acute care beds. The
hospitals programs and specialties include oncology,
emergency services, an eye surgery center, non-invasive
cardiology, pulmonary, renal care, hospice and surgical services.

Lovelace Medical Centerhas 185 acute care beds and 16 skilled
nursing beds. The hospital includes a multi-specialty outpatient
center with more than 40 medical specialties. Programs and
specialties include a heart and vascular center, emergency
services, obstetrics, hospice, a hearing center, a cosmetic and
reconstructive surgery center, a continence care center, well
newborn and Level II nurseries, a dialysis center, an
optical shop and a retail pharmacy.

Northeast Heights Medical Centerhas 114 acute care beds centrally
located in the Northeast Heights area of Albuquerque. We are in
the process of a $7.2 million project to transform the
hospital into the first dedicated womens hospital in New
Mexico. The hospitals key programs and services include
womens care, emergency services, cosmetic surgery, labor,
delivery and post partum, intensive care unit,
gastrointestinal/endoscopy, surgical services and videoscopic
surgery.

The Rehabilitation Hospital of New Mexicohas 52 acute care beds and 10 skilled
nursing beds, and is the only rehabilitation hospital in the
state to be level four accredited by the Commission on
Accreditation of Rehabilitation Facilities (CARF).
This distinction means the hospital is accredited in
comprehensive integrated inpatient rehabilitation programs for
adults and children, spinal cord system of care for adults and
children, brain injury programs and outpatient medical
rehabilitation programs for adults and children. Programs and
specialties include aquatics programs, balance lab, hand clinic,
inpatient and outpatient psychology services, interventional
pain clinic, lymphedema program and voice lab.

West Mesa Medical Centerhas 69 acute care beds and 22 skilled
nursing beds. It is the only hospital on Albuquerques
growing west side and recently underwent a $15.0 million
renovation in 2003. Following its renovation, programs and
specialties include emergency services, an intensive care unit,
occupational medicine, expanded operating rooms, skilled nursing
and telemetry.

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Initiatives within the Lovelace Sandia Healthcare
System include enhancing services to increase patient volumes,
increasing access, leveraging the integrated network, expanding
laboratory services to include other facilities that we own and
growing our provider network throughout the state.



| |                
| | ---------------
| | Summit Hospital

Summit Hospital has 171 acute care beds and 30
rehabilitation beds located in Baton Rouge, Louisiana. Baton
Rouge has a population of approximately 608,000 in its
metropolitan area. Summit Hospital is located on the eastern
side of the city, which is the fastest growing suburban region
of Baton Rouge. Key services include cardiopulmonology, a
cardiac catheterization laboratory, oncology, physical therapy,
rehabilitation, emergency services and outpatient surgery.

Key hospital-based initiatives include enlarging
the medical staff, expanding services and focusing on expense
reductions. The hospital has already recruited and is still
recruiting needed physicians to the community, reinstated
long-term acute care services, added an MRI and nuclear medicine
camera and expanded rehabilitation services.



| |                   
| | ------------------
| | Samaritan Hospital

Samaritan Hospital, founded in 1888, has 302
acute care beds and 34 skilled nursing beds located in downtown
Lexington, Kentucky. Lexingtons metropolitan statistical
area has a population of approximately 479,000. Services at the
hospital include orthopedics, urology, outpatient surgery,
emergency services, behavioral health, vascular medicine,
skilled nursing, a sleep center, wound care and pain management.

The hospitals management team has
implemented a bariatric surgery program (weight-loss surgery for
the treatment of morbid obesity) and is focused on initiatives
to enhance revenue through adding new service lines and reducing
costs, especially supply expenses.



| |                         
| | ------------------------
| | Our Behavioral Hospitals

We currently own and operate 21 behavioral
hospitals with 2,044 licensed beds in 11 states. We are a
leading operator of free-standing behavioral hospitals in the
United States. Our behavioral hospitals offer a broad array of
behavioral health services, ranging from inpatient
hospitalization to residential treatment programs and outpatient
services. Note 11 of the notes to our consolidated
financial statements includes financial information regarding
our behavioral hospital segment.

Some of our behavioral hospitals offer
alternative school programs and partial hospitalization
services. To provide the full range of services, our behavioral
hospitals work with mental health professionals, psychiatrists
and other physicians, emergency rooms and community agencies
that interact with individuals who may need treatment for mental
illness or substance abuse. A typical treatment program
integrates physicians and other patient-care professionals. Our
behavioral hospitals provide 24-hour skilled nursing
observation, daily interventions and oversight by psychiatrists,
and intensive, coordinated treatments by psychiatrist-led teams
of mental healthcare professionals. All of our behavioral
hospitals are fully accredited by JCAHO and, with the exception
of Brooke Glen Behavioral Hospital, are eligible to participate
in the Medicare and Medicaid programs. Brooke Glen submitted its
application to participate in the Medicare and Medicaid programs
and is currently waiting for the Center for Medicare and
Medicaid Services (CMS) to survey the facility to
determine that it meets the criteria for participation in these
programs.

More than 50% of our behavioral patients suffer
from major affective disorders, such as depression and bipolar
disorder. Approximately 6% of our behavioral patients suffer
from chemical dependency. The remaining behavioral patients
suffer from various disorders, such as schizophrenia, childhood
disorders, personality disorders and anxiety disorders. An
increasing percentage of our behavioral patient population
consists of children and adolescents, which currently make up
approximately 62% of our behavioral patients.

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As a result of our position as a leader in the
behavioral healthcare industry, we are also able to offer
management services to acute care hospitals owned by us and to
acute care hospitals owned and operated by third parties.
Through management agreements, we develop, organize and manage
behavioral healthcare programs to meet specific community and
hospital requirements. We currently have a management agreement
with a third-party acute care hospital in Illinois.

The following table lists the behavioral
hospitals we currently own and operate:

|             |  |                  |  |                 |  |          |     | 
|------------ |  | ---------------- |  | --------------- |  | -------- | --- | 
|             |  |                  |  |                 |  | Licensed
|State        |  | Facility         |  | Location        |  | Beds    
|             |  |                  |  |                 |  |         
|Arkansas     |  | Pinnacle Pointe  |  | Little Rock     |  |          | 102 | 
|California   |  | BHC Alhambra     |  | Rosemead        |  |          | 85  | 
|             |  | Fremont          |  | Fremont         |  |          | 78  | 
|             |  | Heritage Oaks    |  | Sacramento      |  |          | 76  | 
|             |  | Sierra Vista     |  | Sacramento      |  |          | 72  | 
|Idaho        |  | Intermountain    |  | Boise           |  |          | 125 | 
|Illinois     |  | Streamwood       |  | Chicago         |  |          | 198 | 
|Indiana      |  | Columbus         |  | Columbus        |  |          | 70  | 
|             |  | Meadows          |  | Bloomington     |  |          | 78  | 
|             |  | Northern Indiana |  | Plymouth        |  |          | 80  | 
|             |  | Valle Vista      |  | Greenwood       |  |          | 88  | 
|Nevada       |  | Montevista       |  | Las Vegas       |  |          | 80  | 
|             |  | West Hills       |  | Reno            |  |          | 95  | 
|             |  | Willow Springs   |  | Reno            |  |          | 74  | 
|New Mexico   |  | Mesilla Valley   |  | Las Cruces      |  |          | 114 | 
|Ohio         |  | Belmont Pines    |  | Youngstown      |  |          | 111 | 
|             |  | Fox Run          |  | St. Clairsville |  |          | 74  | 
|             |  | Windsor          |  | Chagrin Falls   |  |          | 47  | 
|Pennsylvania |  | Brooke Glen      |  | Fort Washington |  |          | 146 | 
|Virginia(1)  |  | Cumberland       |  | New Kent        |  |          | 118 | 
|Washington   |  | Fairfax          |  | Kirkland        |  |          | 133 | 



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|    |                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Although Cumberland Hospital is included in our
    behavioral division, the facility is a pediatric rehabilitation
    hospital licensed as a general hospital by the Commonwealth of
    Virginia Department of Health.

Our Operations

Our senior management team has extensive
experience in operating multi-facility hospital networks and
focuses on strategic planning for our facilities. Each of our
hospitals local management teams are generally comprised
of a chief executive officer, chief financial officer and chief
nursing officer or director of nursing, and may, in certain
cases, manage multiple hospitals in the same market. Local
management teams, in consultation with our corporate staff,
develop annual operating plans setting forth revenue growth
strategies through the expansion of offered services, as well as
plans to improve operating efficiencies and reduce costs. We
believe that the ability of the local management team to
identify and meet the needs of our patients, medical staff and
the community as a whole is critical to the success of our
hospitals. We base the compensation for each local management
team in part on its ability to achieve the goals set forth in
the annual operating plan.

Boards of trustees at several hospitals,
consisting of local community leaders, members of the medical
staff and the hospital administrator, advise the local
management teams. Members of each board of trustees are
identified and recommended by our local management teams and
generally serve three-year,

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staggered terms. The boards of trustees approve
and monitor the hospitals medical, professional and
ethical practices, and ensure that they conform to our high
standards. We maintain company-wide compliance and quality
assurance programs and use patient care evaluations and other
assessment methods to support and monitor quality of care
standards and meet accreditation and regulatory requirements.


We also implement systematic policies and
procedures at each hospital we acquire in order to improve its
operating and financial performance. These include ethics,
quality assurance, safety and compliance programs, supply and
equipment purchasing and leasing contracts, managed care
contracting, accounting, financial and clinical systems,
governmental reimbursement, personnel management, resource
management and employee benefits. We provide our local
management with corporate assistance in implementing and
maintaining these policies and procedures. These uniform
policies and procedures are designed to provide us with
consistent management and financial reports for all our
facilities and facilitate the performance evaluation of each
facility.

Hospital revenues depend primarily upon inpatient
occupancy levels, the volume of outpatient procedures and the
charges or negotiated payment rates for the services provided.
Reimbursement rates and charges for routine services vary
significantly depending on the type of services provided, the
payor and the market in which the hospital is located.

We believe that the most important factors
affecting the utilization of a hospital are the quality and
market position of the hospital and the number, quality and
specialties of physicians and medical staff caring for patients
at the facility. Overall, we believe that the attractiveness of
a hospital to patients, physicians and payors depends on its
breadth of services, level of technology, emphasis on quality of
care and convenience for patients and physicians. Other factors
which affect utilization include local demographics and
population growth, local economic conditions and managed care
market penetration.

As part of our integrated healthcare delivery
network in New Mexico, we offer a portfolio of health plan
products, primarily to private and public purchasers. We
currently have approximately 168,000 participants throughout New
Mexico. Under a vendor service agreement, we are also contracted
by CIGNA HealthCare to provide network access and medical
management services to CIGNA HealthCare participants in the
state, which includes approximately an additional 73,000
participants. We believe that our health plan products provide
for an effective and efficient use of healthcare services by
coordinating utilization of care and controlling unit costs
through provider contracts.

Our health plan products include the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We offer a commercial HMO product portfolio under
    the trademark Lovelace Health Plan to employer
    groups of two or more employees. We receive monthly prepaid
    premiums for all commercial HMO participants under contracts
    with these employer groups. This product portfolio includes a
    varied menu of copayments for services provided if the
    participant utilizes the contracted or owned network. We also
    market a commercial HMO point-of-service product that allows
    copayments for services provided through contracted or owned
    providers or PPO-type benefits for services provided through
    non-contracted providers.                                                                                                           
|
| |  | We are one of three managed care organizations to
    have a contract with the State of New Mexico to provide services
    to the States managed Medicaid program, known as Salud!.
    The New Mexico Human Services Department (HSD)
    renewed its contract for the Salud! program with Lovelace Health
    Plan, extending its current agreement with HSD to June 30,
    2005. Lovelace Health Plan has provided services to eligible
    Salud! members under an agreement with HSD since 1997. Lovelace
    Health Plans Salud! membership focuses on the needs of
    women of childbearing age and their children, who comprise a
    significant portion of Medicaid eligible participants in New
    Mexico, but also places a strong emphasis on preventive care.



| |                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Premium rates paid to Lovelace Health Plan under
    the program are negotiated directly with HSD. Lovelace Health
    Plan is paid a fixed per member per month premium to provide all
    covered services to Salud! beneficiaries. The current rates
    expire on June 30, 2004. Management is currently
    negotiating with HSD for the rates to be in effect from
    July 1, 2004 to June 30, 2005.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Salud! agreement may be terminated for
    reasons customarily found in healthcare contracts, including
    mutual agreement of the parties; 180 days prior written
    notice by either party; court order, insufficient federal or
    state funding or changes in federal or state law that would
    adversely affect this agreement; or violations of law, including
    the Stark or Anti-kickback Statutes, by Lovelace Health Plan.
|
| | Revenues attributed to Lovelace Health
    Plans contract with HSD for the year ended
    December 31, 2003 accounted for 17.3% of our total net
    revenue for that period.                                                                                                                                                                                                                                                                 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lovelace Health Plan contracts with CMS to
    provide Medicare HMO coverage for eligible individuals, called
    Medicare+Choice. This contract provides for a fixed per member
    per month premium from CMS, based upon a formula that uses
    geographic, age and gender demographics and is risk adjusted
    based on the health status of the beneficiary. Premium amounts
    are updated annually. Members generally receive additional
    benefits over standard Medicare fee-for-service coverage,
    including prescription drug and vision coverage and pay a fixed
    co-payment for services used. Depending on the plan benefits
    selected, members may be required to pay an additional premium
    to us for their HMO coverage.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The CMS contract has a one-year term, expiring on
    December 31, 2004, and is subject to annual renewal.
    Lovelace Health Plan is obligated to accept new enrollments and
    to comply with all quality of service, grievance, appeal,
    confidentiality requirements and other standard healthcare
    requirements as set forth in federal regulations. This CMS
    agreement may be terminated upon the mutual consent of the
    parties, a breach of CMS terms and conditions as defined
    in the federal regulations, the commission of fraudulent or
    abusive activities by Lovelace Health Plan or financial
    difficulties of Lovelace Health Plan that pose a risk to
    enrollees.
|
| | Revenues attributed to Lovelace Health
    Plans contract with CMS for the year ended
    December 31, 2003 accounted for 9.1% of our total net
    revenue for that period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have a five-year contract with CIGNA
    HealthCare to provide services to all of CIGNA HealthCares
    approximately 73,000 plan participants in New Mexico. Under
    CIGNA HealthCares product portfolio, CIGNA or the plan
    sponsor, which is typically the employer, assumes the risk for
    claim costs incurred, rather than our health plan. Under these
    plans, we provide access to our provider network, quality and
    cost containment services or utilization management programs in
    exchange for a network access or other administrative fee. If a
    product is plan-sponsored, the plan sponsor is responsible for
    self-funding all claims. Many of the services provided to CIGNA
    HealthCares participants are furnished by our delivery
    system, which then submits claims and is paid on a
    fee-for-service basis. In these situations, CIGNA
    HealthCares plans provide revenue to us in three forms,
    network access fees, administrative fees, and direct payment for
    healthcare services furnished in our owned healthcare facilities.

We rely both upon our own staff, as well as on a
network of independent, contracted providers, to furnish
healthcare services to our health plan participants. We also own
the medical facilities where many of our health plan
participants access care, including hospitals, outpatient
clinics, pharmacies, a sleep center, urgent care centers,
hospice and a home care agency in Albuquerque. Our owned
healthcare facilities are also open to patients covered by other
insurers, fee-for-service Medicare and Medicaid beneficiaries,
and self-pay patients.

As of December 31, 2003, our health plan
network included approximately 328 employed physicians who
practice in our owned healthcare facilities and approximately
5,000 contracted physicians who practice in community settings
across the State of New Mexico. Most contracted providers are
paid by us on a discounted fee-for-service or other
service-specific basis, while employed providers are paid on a
salary basis.

7



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| |                  
| | -----------------
| | Supply Purchasing

We are a participant in the HealthTrust
Purchasing Group purchasing organization. This organization uses
its purchasing power, along with its willingness to move vendor
business, to negotiate vendor agreements at favorable rates. The
vendor agreements include medical supplies, pharmaceuticals,
medical implantables, business supplies, major capital equipment
and service agreements. By participating as a member of this
organization, we are able to procure supplies and equipment at
relatively low rates for our facilities.

We also utilize a case management system that
provides caregivers the opportunity to reduce supply costs by
actively managing the diagnosis of each patient and the
resources that are needed. As an example, at Lovelace Medical
Center in Albuquerque, we have supplemented our treatment of
specific diagnoses by integrating certain procedures designed to
reduce overall supply usage.

We analyze our cost data for providing services
and then contract typically with managed care companies for
separate payments on high cost items. These carve
outs typically provide for reimbursements on a
cost-plus basis for these items in addition to the
typical case rate or per diem for that patient. This approach
has reduced our exposure to high-priced supplies such as drug
eluting stents, pacemakers, orthopedic hardware and certain
high-priced pharmaceuticals.



| |            
| | -----------
| | Competition

The hospital industry is highly competitive. We
currently face competition from established, local
not-for-profit healthcare systems, investor-owned hospital
companies, large tertiary care centers and outpatient service
providers. In the future, we expect to encounter increased
competition from companies, like ours, that consolidate
hospitals and healthcare companies in specific geographic
markets. Continued consolidation in the healthcare industry will
be a leading factor contributing to increased competition both
in markets in which we already have a presence and in markets we
may enter in the future. The competition among hospitals and
other healthcare providers for patients has intensified in
recent years.

One of the most important factors in the
competitive position of an acute care hospital is its location,
including its geographic coverage and access to patients. A
location convenient to a large population of potential patients
or a wide geographic coverage area through a hospital network
can make an acute care hospital significantly more competitive.
Another important factor is the scope and quality of services an
acute care hospital offers, whether at a single facility or
through a network, compared to the services offered by its
competitors. An acute care hospital that offers a broad range of
services and has a strong local market presence is more likely
to obtain favorable managed care contracts. We intend to
evaluate changing circumstances in the geographic areas in which
we operate on an ongoing basis to ensure that we offer the
services and have the access to patients necessary to compete in
these managed care markets and, as appropriate, to form our own,
or join with others to form, local hospital networks.

A hospitals competitive position also
depends on the quality and scope of the practices of physicians
associated with the hospital. Physicians refer patients to
hospitals primarily on the basis of the quality and scope of
services provided by the hospital, the quality of the medical
staff and employees affiliated with the hospital, the
hospitals location and the quality and age of the
hospitals equipment and physical plant. Although
physicians may terminate their affiliation with our hospitals,
we seek to retain physicians of varied specialties on our
medical staffs and to recruit other qualified physicians into
the community by maintaining and improving our level of care and
providing quality facilities, equipment, employees and services
for physicians and their patients.

A number of other factors affect our competitive
position, including:



| |   |                                            
| | - | -------------------------------------------
| |  | our reputation;                            
|
| |  | our managed care contracting relationships;

8



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| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | the amounts we charge for our services; and                     
|
| |  | the restrictions of state certificate of need, or
    CON, laws.

The free-standing psychiatric hospital industry
and the psychiatric unit management industry are both highly
competitive and highly fragmented. The industry is subject to
continual changes in the method in which services are provided
and the types of companies providing such services, comprised of
national, regional and local competitors. In addition, some
competitors are owned by governmental agencies and supported by
tax revenues, and others are owned by not-for-profit
corporations and may be supported, to a large extent, by
endowments and charitable contributions. Free-standing
psychiatric facilities and managed psychiatric facilities face
competition from both direct competitors as well as from other
providers of mental healthcare services, including acute care
hospitals, community mental health centers and independent
psychiatrists and psychologists.

Some of the hospitals that compete with our
hospitals are owned by governmental agencies or not-for-profit
corporations supported by endowments and charitable
contributions and can finance capital expenditures and
operations on a tax-exempt basis. Currently, our acute care
hospitals compete directly with some of the largest non-profit
providers in each of their respective states. Our five
facilities in the Albuquerque metropolitan area compete with
Presbyterian Hospital, the largest acute care hospital in New
Mexico, and New Mexicos only private not-for-profit
healthcare system. Summits main competitor is Our Lady of
the Lake Regional Medical Center, a non-profit private
institution and the largest hospital in Louisiana, and Samaritan
directly competes with Central Baptist Hospital, a member of
Baptist Healthcare System which is one of Kentuckys
largest not-for-profit healthcare providers.

Some of our competitors are larger and more
established, have greater geographic coverage, offer a wider
range of services (including extensive research and medical
education programs) or have more capital or other resources than
we do. In Albuquerque, our facilities also compete with the
University of New Mexico Health System. University Hospital is
the primary teaching hospital for the UNM School of Medicine and
is ranked among the top ten academic centers in the nation.
Finally, we also compete with The Heart Hospital of New Mexico
which is specifically dedicated to the treatment of heart
disease.

Most physicians at our hospitals also have
admitting privileges at other hospitals. If we are unable to
provide adequate support personnel or technologically advanced
equipment and facilities that meet the need of physicians, they
may choose to spend more time at our competitors hospitals
which could cause a decline in patient volume.



| |                            
| | ---------------------------
| | Employees and Medical Staff

As of December 31, 2003, we had
approximately 10,100 employees, approximately 108 of whom were
represented by a union. In our markets and throughout the
healthcare industry there is currently a shortage of nurses and
other medical support personnel. We recruit and retain nurses
and medical support personnel by creating desirable,
professional work environments and offering competitive wages,
benefits, and long-term incentives. In addition, we provide
career development and other training programs. In order to
supplement our current employee base, we intend to expand our
relationships with colleges, universities, and other medical
education institutions in our markets and recruit nurses and
other medical support personnel from abroad.

Our hospitals are staffed by licensed physicians
who have been admitted to the medical staff of our individual
hospitals and may be on the medical staff of several hospitals,
including hospitals not owned by us. A physician who is not an
employee can terminate his affiliation with our hospital at any
time. Although we employ a number of physicians, particularly in
Albuquerque, a physician does not have to be an employee of ours
to be a member of the medical staff of one of our hospitals. Any
licensed physician may apply to be admitted to the medical staff
of any of our hospitals, but admission must be approved by that
hospitals medical staff and board of trustees.

9



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| |                   
| | ------------------
| | Compliance Program

In 1996 our Predecessor Company voluntarily
initiated a company-wide compliance program designed to ensure
that it maintained high standards of conduct in the operation of
its business. We have greatly expanded that program and
implemented policies and procedures so that our employees act in
compliance with all applicable laws, regulations and company
policies. The organizational structure of our compliance program
includes oversight by our companys audit and compliance
committee of the board of managers. The board of managers has
responsibility for the effective development and implementation
of our program. Our Vice President of Compliance and Ethics, who
reports jointly to our Senior Vice President and General Counsel
and to the board of managers, serves as Chief Compliance Officer
and has direct responsibility for the development and
implementation of our compliance program. Other features of our
compliance program include initial and periodic training and a
mechanism for employees to report, confidentially if they
choose, any suspected legal or ethical violations.



| |          
| | ---------
| | Insurance

As is typical in the healthcare industry, we are
subject to claims and legal actions by patients and others in
the ordinary course of business. To cover these claims, we
traditionally maintained insurance with third-party commercial
insurance carriers for general liability and professional
liability. Effective October 31, 2003, we established a
wholly-owned captive insurance subsidiary to insure our
professional and general liability risk for claims up to
$2.0 million (subject to a $500,000 deductible per claim).
In addition, effective October 31, 2003, we purchased
excess insurance coverage with independent third-party carriers
for claims totaling up to $75.0 million per occurrence and
in the aggregate. Prior to October 31, 2003, we maintained
primary general and professional liability insurance policies
from a third-party commercial insurance carrier for losses up to
$1.0 million per occurrence with policy limits of
$3.0 million in the aggregate on a claims-made basis. The
coverage included a $500,000 deductible or self insurance
retention per occurrence and was supplemented with an umbrella
policy with coverage up to $50.0 million per occurrence and
in the aggregate.

We expect our professional and general liability
costs to remain relatively unchanged during the policy term
ending October 31, 2004 as compared to the same period in
2003. However, the cost of insurance in the healthcare industry
has generally been increasing significantly due to pricing
pressures on insurers and fewer carriers willing to underwrite
professional and general liability exposures. Absent significant
legislation to curb the size of malpractice judgments in the
states in which we operate, we may experience increased
insurance costs in the future.

We are required to maintain reinsurance coverage
under our contract with the State of New Mexico to provide
services to the States managed Medicaid program, known as
Salud!. This reinsurance coverage relates only to the Medicaid
population and is designed to maintain adequate protections
against financial loss due to outlier (catastrophic) cases
and higher cost members.

Reimbursement and Payment

We derive a significant portion of our revenues
from the Medicare and Medicaid programs. Within the framework of
these programs, there are areas subject to administrative
rulings, interpretations and discretion which may affect
payments made under either or both of such programs, and
reimbursement is subject to audit and review by state
governments as well as fiscal intermediaries and
carriers  organizations that process Medicare claims
for reimbursement.



| |                                                    
| | ---------------------------------------------------
| | Medicare Acute Care Hospital Inpatient
    Services



| |        
| | -------
| | General

Our general acute care hospitals are reimbursed
by Medicare for inpatient services based on a prospective
payment system (PPS). Under the inpatient PPS,
hospitals receive a predetermined payment amount for each
Medicare beneficiary based upon the beneficiarys diagnosis
as it fits into

10



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Medicares diagnosis-related group
(DRG) system. DRGs classify treatments for illnesses
according to the estimated hospital resources necessary to
furnish care for each patients principal diagnosis.
Hospitals are thus at financial risk for providing services to a
patient at an actual cost that may be greater or less than the
applicable DRG payment. Hospitals also receive additional
payments for certain costs, such as new technology and
capital-related costs.


DRG rates are updated and DRG weights are
recalibrated each federal fiscal year, beginning each October 1.
A hospital input price index for operating costs (commonly
referred to as the hospital market basket) is used
to adjust the DRG rates. The market basket measures the
inflation experienced by hospitals in purchasing goods and
services for inpatient care. The Medicare, Medicaid, and SCHIP
Benefits Improvement and Protection Act of 2000
(BIPA), established the DRG payment rate updates for
federal fiscal years 2000 through 2003. In federal fiscal year
2003, the DRG payment rate increased by a market basket of 3.5%,
minus 0.55% (or 2.95%). For federal fiscal year 2004, CMS has
provided a full market basket increase of 3.4%. The percentage
increases in the DRG rates have often been lower than the
percentage increases in the costs and services purchased by
hospitals.

The Medicare Prescription Drug, Improvement
and Modernization Act of 2003 (the MMA) provides
that Medicare shall update payment rates for inpatient services
in fiscal year 2004 and each subsequent year by the full rate of
increase in the hospital market basket. The MMA predicates
payment of the full increase to a hospital in fiscal years 2005
through 2007 on a facilitys participation in CMSs
quality-of-care National Voluntary Hospital Reporting Initiative.



| |                 
| | ----------------
| | Outlier Payments

The weights used to calculate DRG payment amounts
are based upon a statistically normal distribution of severity.
When the cost of treatment for certain patients falls well
outside the normal distribution, hospitals typically receive
additional outlier payments designed to protect the
hospital from large financial losses due to unusually expensive
cases. Federal statutory provisions require that total outlier
payments must be between 5% and 6% of the estimated Medicare
inpatient payments in a federal fiscal year. On
December 20, 2002, CMS announced that it was initiating an
aggressive and immediate compliance strategy to ensure that
Medicare payments for outliers and services paid outside the PPS
system are appropriate. CMS published the outlier payment final
rule on June 9, 2003 as well as a program memorandum
providing further guidance to the final rule. The final rule
materially changes the way CMS intends to regulate outlier
payments. Fiscal intermediaries should now make outlier payments
using more current cost-to-charge ratios (CCRs) and
target facilities for review where (1) 10% of their
Medicare payments are from cost outliers, (2) outlier
payments increased by 20% or more from the periods ending 2001
to 2002 and 2002 to 2003, or (3) the charge per case
increased by 15% or more from the periods ending 2000 to 2001
and 2001 to 2002. Interim payments may also be adjusted to
reflect reasonable CCRs. Finally, fiscal intermediaries have the
authority to retroactively adjust outlier payments if
(1) actual CCRs are within a band of plus or minus
10 percentage points from the interim CCRs and
(2) total outlier payments are greater than $500,000. These
regulations will cause our facilities to monitor more closely
outlier reimbursement, but we do not anticipate a material
impact on our operations resulting from this final rule. Our
outlier payments for the year ended December 31, 2003 were
approximately $865,000.



| |                                                     
| | ----------------------------------------------------
| | Medicare Acute Care Hospital Outpatient
    Services

Effective August 1, 2000, Medicare began
reimbursing hospitals for most outpatient services under an
outpatient PPS basis (OPPS). OPPS groups similar
clinical services into a single classification, known as an
Ambulatory Payment Classification (APC). A payment
rate is established for each APC. Depending on the services
provided, hospitals may be paid for more than one APC per
patient encounter. Hospitals are also eligible to receive
additional payments for certain drugs and devices under
outpatient APCs as well as certain outlier payments. The CMS
final regulation for 2004 increases the overall OPPS payment to
hospitals by an average of 3.4%. We believe, however, that other
changes in the APC system

11



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##### Table of Contents



may preclude hospitals from receiving the full
benefit of the increase. We also provide outpatient services
subject to OPPS at our acute care facilities and some of our
behavioral facilities.




| |                                        
| | ---------------------------------------
| | Medicare Behavioral Health
    Services

Certain behavioral hospitals that qualify as
psychiatric hospitals or psychiatric units are excluded from
inpatient PPS and are reimbursed for inpatient psychiatric
services by the Medicare program based on the reasonable costs
incurred to provide services, subject to a per discharge
ceiling. The ceiling is calculated based on an annual allowable
rate of increase over costs in a specific year. Capital related
costs are exempt from this limitation and are reimbursed
separately. In the Balanced Budget Act of 1997 (BBA of
1997), Congress significantly revised the Medicare payment
provisions for PPS-excluded hospitals, including psychiatric
hospitals. Effective for Medicare cost reporting periods
beginning on or after October 1, 1997, different caps are
applied to psychiatric hospitals allowable rate of
increase depending on whether a hospital was excluded from PPS
before or after that date. For psychiatric hospitals and units
receiving payment before October 1, 1997, this provision
for caps expired effective for cost reporting periods beginning
after September 30, 2002. Congress also revised the
rate-of-increase percentages for PPS-excluded hospitals and
eliminated the new provider exemption for psychiatric hospitals.
The Medicare, Medicaid and SCHIP Balanced Budget Refinement Act
of 1999 (BBRA of 1999) required CMS to develop an
inpatient psychiatric per diem effective for the federal fiscal
year beginning October 1, 2002. On November 19, 2003,
CMS proposed a rule to implement PPS for psychiatric hospitals
and units. This new system will replace the current inpatient
psychiatric payment system described above. The proposed rule
designates that PPS under the new system will be effective for
cost reports beginning on or after April 1, 2004. The plan
will be implemented through a three year transition, ultimately
phasing into 100% PPS (year one: 75% cost/25% PPS; year two: 50%
cost/50% PPS; year three: 25% cost/75% PPS; year four: 100%
PPS). We cannot predict whether or not the rule will actually be
effective by April 1, 2004 or whether the final rule will
mirror provisions of the proposed rule.



| |                                     
| | ------------------------------------
| | Medicare Rehabilitation
    Services

A PPS for inpatient rehabilitation services
provided by qualifying rehabilitation hospitals and
rehabilitation units (rehab PPS) exists for Medicare
cost reporting periods beginning on or after January 1,
2002. Hospitals and units with cost reporting periods beginning
prior to October 1, 2002 could elect to be paid under PPS
or a blend of PPS and the facility-specific payment rates. Cost
reporting periods beginning on or after October 1, 2002 are
paid under rehab PPS. Under rehab PPS, patients are classified
into case mix groups based upon impairment, age, comorbidities
and functional capability. Inpatient rehabilitation facilities
are paid a predetermined amount per discharge based on the
patients case mix group, as adjusted for geographic area
wage levels, low-income patients, rural areas and high-cost
outliers. For federal fiscal year 2003, payment rates were
updated by the inpatient rehabilitation market basket index of
3.0%. For federal fiscal year 2004, CMS provides a payment rate
update based on a market basket index of 3.2%. Payment rates are
updated annually according to that years inpatient
rehabilitation facility market basket. We currently own and
operate one inpatient rehabilitation hospital and one inpatient
rehabilitation unit.



| |                                      
| | -------------------------------------
| | Medicare Skilled Nursing
    Services

Medicare historically reimbursed skilled nursing
facilities on the basis of actual costs subject to certain
limits. The BBA of 1997 required the establishment of a PPS for
Medicare skilled nursing facilities under which facilities are
paid a federal per diemrate for virtually all covered
services. Payment rates are updated annually based on a skilled
nursing facility market basket index. In federal fiscal year
2003, rates increased 2.6% based on a market basket of 3.1%
minus 0.5%. For federal fiscal year 2004, CMS provides a market
basket increase factor of 3.0% plus an additional 3.26% to
reflect the cumulative forecast error since the start of the
skilled nursing facility PPS on July 1, 1998. The skilled
nursing facility PPS was phased in over three cost reporting
periods, starting with cost reporting periods beginning on or
after July 1, 1998. While we historically have owned and
operated four skilled nursing units reimbursed under

12



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the skilled nursing facility PPS, we are
discontinuing operations for our skilled nursing units at
Samaritan Hospital, West Mesa Medical Center, and Lovelace
Medical Center. The skilled nursing unit at the Rehabilitation
Hospital of New Mexico will continue operation.




| |                      
| | ---------------------
| | Medicare Hospice Care

Medicare pays for hospice services on a
prospective payment system basis under which we receive an
established payment rate for each day that we provide hospice
services to a Medicare beneficiary. These rates are subject to
annual adjustments for inflation and may also be adjusted based
upon the geographic location where the services are provided.
Medicare rates of reimbursement for hospice care continue to be
adjusted based on a market basket percentage increase, which for
fiscal year 2004 has already been established at an increase of
3.4%. The rate we receive will vary depending on which of the
following four levels of care is being provided to the
beneficiary: routine home care, continuous home care, inpatient
respite care, and general inpatient care. Medicare will only pay
for hospice services if the hospice medical director and the
patients attending physician certify that the patient has
a life expectancy of six months or less if the illness runs its
normal course. Specifically, the Medicare hospice benefit
provides for two initial 90-day benefit periods followed by an
unlimited number of 60-day periods. Hospices that are
Medicare-certified must offer all services required to palliate
the terminal illness, even if the patient is not covered by
Medicare and does not have the ability to pay.

Medicare payments for hospice services are
subject to two additional limits. These limits are determined on
an annual basis for the period running from November 1
through October 31 of each year. First, under a Medicare
rule known as the 80-20 rule applicable to Medicare
inpatient services, if the number of inpatient care days
furnished by a hospice to Medicare beneficiaries exceeds 20% of
the total days of hospice care furnished by such hospice to
Medicare beneficiaries, Medicare payments to the hospice for
inpatient care days exceeding the inpatient cap are reduced to
the routine home care rate. Second, overall Medicare payments to
a hospice are also subject to a separate cap based on overall
average payments per admission. Any payments exceeding this
overall hospice cap must be refunded by the hospice. This cap
was set at $18,661 per admission through the twelve-month
period ended on October 31, 2003, and is adjusted annually
to account for inflation. We cannot give any assurance that our
hospices will not be subject to future payment reductions or
recoupments as the result of these limits. We currently own and
operate one hospice care unit.



| |                                                    
| | ---------------------------------------------------
| | Medicare Long Term Acute Care Hospital
    Services

Currently there are three long term acute care
hospitals (LTACs) which operate within three of our
facilities as a hospital within a hospital. These
facilities serve as the host hospital in these relationships and
contractually provide various operational services to these
LTACs. Under Medicare, LTACs are a distinct provider type,
separate from short-term acute care hospitals. LTACs are
currently paid under the PPS based on DRGs, which is similar to
the PPS for short-term acute care hospitals, but utilizes
different rates and formulas. Prior to the implementation of the
PPS for LTACs, Medicare paid LTACs under the reasonable cost
methodology subject to limitations on payments. The current LTAC
reimbursement system became effective for cost reporting periods
beginning after October 1, 2002. As an alternative to the
immediate adoption of LTAC PPS, LTACs were allowed to elect to
phase in the new system over five years. We expect that the
change to PPS reimbursement will have a negative effect on
LTACs. Further, because the cost of our services to the LTACs
will no longer be a pass through reimbursement item,
we may face pressure from the LTACs to reduce or contain the
costs of our services in the future.



| |                              
| | -----------------------------
| | Medicare Home Health Agencies

Since October 1, 2000, Medicare has
reimbursed home health agencies under PPS. Under the home health
PPS, home health agencies receive a standard payment (subject to
several adjustments) for each sixty-day episode of care for a
patient. We currently own and operate one home health agency.

13



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| |                            
| | ---------------------------
| | Medicare Physician Services

Medicare reimburses most physician services in
accordance with a fee schedule which is updated annually. The
MMA required CMS to increase Medicare reimbursement to
physicians, which was otherwise scheduled to decrease, by 1.5%
beginning in fiscal year 2004. The MMA also includes various
provisions that affect specific physician specialties (e.g.,
oncologists) which may have a negative reimbursement impact. At
December 31, 2003, we employed approximately 350
physicians. Until the recent fee schedule increase, physicians
had faced continued reductions in Medicare reimbursements. The
physician fee schedule directly affects the reimbursement that
we receive for physicians whom we employ and who reassign their
Medicare benefits for the services that they provide to
patients. If salaries paid to employed physicians are greater
than the amount reimbursed by a payor, our results of operations
will be adversely affected. We currently own and operate
approximately fifteen physician clinics in the Albuquerque
market. The clinics that are associated with the original
Lovelace Health System have been considered
hospital-based for Medicare reimbursement. This
designation provides that the technical component of the clinic
visit is reimbursed under the OPPS (APC) system. The
remaining physician component is reimbursed under the fee
schedule. Due to CMS revisions in the requirements for
hospital-based status, it is possible that some clinics may no
longer qualify for OPPS reimbursement. We believe that we have
good arguments supporting continuing hospital-based status.
However, if some of the clinics lost their hospital-based
status, there would be an adverse impact on clinic
reimbursement. The Sandia clinics are not considered
hospital-based, and utilize the fee schedule as the
basis for 100% of their Medicare reimbursement. Furthermore,
clinic visits that result in an admission to one of our
facilities within three days are reimbursed as part of the
inpatient DRG payment.



| |                         
| | ------------------------
| | Laboratory Reimbursement

Laboratory reimbursement varies depending on
where a test is originated. For hospital patients, the hospital
pays the laboratory directly. For tests originating from a
physician practice, a laboratory bills the Medicare program
directly and must accept the lower of the charges or the
established fee schedule amount as payment in full for most
tests performed on behalf of Medicare beneficiaries. Moreover,
state Medicaid programs are prohibited from paying more (and in
most instances, pay significantly less) than Medicare would pay
under the Medicare fee schedule. AHS S.E.D. Medical
Laboratories, Inc. is part of our New Mexico operations and
conducts over 1.5 million tests annually for patients.



| |         
| | --------
| | Medicaid

Medicaid programs are funded jointly by the
federal government and the states, and are administered by
states under approved plans. Most state Medicaid program
payments are made under a PPS or are based on negotiated payment
levels with individual hospitals. Medicaid reimbursement is
often less than a hospitals cost of services. The federal
government and many states periodically consider altering the
level of Medicaid funding (including upper payment limits) in a
manner that could adversely affect future levels of Medicaid
reimbursement received by our hospitals. As permitted by law,
certain states in which we operate have adopted broad-based
provider taxes to fund their Medicaid programs.

States have great flexibility in setting Medicaid
rates. The BBA of 1997 repealed the Boren Amendment which
required states Medicaid reimbursement rates to be
reasonable and adequate for providers services. With the
repeal of the Boren Amendment, states must meet less stringent
provider payment conditions. In addition, the BBA of 1997
requires minimal procedural standards which, in essence, require
states merely to obtain public input  but not public
or CMS approval  prior to implementing new rates.
Medicaid payment rates do not have to conform to any benchmark
payment standards, and there is no prohibition against basing
rates solely on state budgetary concerns.



| |                    
| | -------------------
| | Annual Cost Reports

All hospitals participating in the Medicare and
Medicaid programs, regardless of how they are paid, must meet
certain financial reporting requirements. Federal and some state
regulations require hospitals to

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submit annual cost reports covering the revenue,
costs and expenses associated with Medicare and Medicaid
services provided by each facility.


Annual cost reports required under the Medicare
and Medicaid programs are subject to routine audits, which may
result in adjustments to the amounts ultimately determined to be
paid to our facilities under these reimbursement programs. These
audits often require several years to reach the final
determination of amounts due to our hospitals under these
programs. Providers also have rights of appeal, and it is common
to contest issues raised in audits of prior years reports.



| |                                                            
| | -----------------------------------------------------------
| | Medicare and Medicaid Quality Improvement
    Organizations

Under Medicare, hospitals are subject to review
by independent entities known as quality improvement
organizations or QIOs (which were previously referred to
as peer review organizations). A QIOs review
of a hospital determines whether healthcare services provided
under Medicare are reasonable and medically necessary, provided
in the most effective and economic setting, and meet
professionally accepted quality standards by considering such
issues as the appropriateness of patient admissions and
discharges, the validity of DRG classifications and the
appropriateness of cases of extraordinary lengths of stay. QIOs
that identify non-compliance with the applicable quality of care
or medical necessity standards must recommend appropriate
corrective or punitive action to the Department of Health and
Human Services (HHS). Such action may include denial
of payment, assessment of fines or exclusion from participation
in the Medicare program. Each Medicare participating hospital is
required to maintain an agreement with the QIO operating in its
local area. We have contracted with QIOs, on behalf of our
hospitals, in each state where our hospitals do business. Under
Medicaid, states must undertake directly, or contract with QIOs
or QIO-like entities to undertake, quality of care and medical
necessity reviews of hospitals.



| |             
| | ------------
| | Managed Care

Managed care providers, including health
maintenance organizations and preferred provider organizations
(collectively MCOs) are organizations that provide
insurance coverage and a network of healthcare providers to
members for a fixed monthly premium. To control costs, these
organizations typically contract with hospitals and other
providers for discounted prices, review medical services to
ensure that no unnecessary services are provided, and channel
patients to providers within their network of contracting
providers. To attract additional patients, most of our hospitals
offer discounts from established charges to large MCOs,
including Blue Cross. We generally receive lower payments for
similar services from managed care payors than from traditional
commercial/indemnity insurers. Managed care contracts are
typically negotiated for one to two year terms although they are
often terminable without cause.



| |                     
| | --------------------
| | Commercial Insurance

Our hospitals provide services to individuals
covered by traditional private healthcare insurance. Private
insurance carriers make direct payments to such hospitals or, in
some cases, reimburse their policyholders based upon the
particular hospitals established charges and the
particular coverage provided in the insurance policy. Commercial
insurers payment arrangements vary from DRG-based payment
systems, per diems, case rates and percentages of billed charges.



| |                         
| | ------------------------
| | Other Federal Regulation

Participation in the Medicare and Medicaid
programs is heavily regulated by statute and regulation. If a
healthcare provider fails to substantially comply with the
numerous conditions of participation in the Medicare and
Medicaid programs or performs certain prohibited acts, such
providers participation in the federal healthcare programs
may be terminated. The provider may also be subject to
termination and/or civil or criminal penalties for violations of
certain provisions of the Social Security Act.

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Regulation and Licensing



| |                      
| | ---------------------
| | Anti-kickback Statute

A provision of the Social Security Act, known as
the Anti-kickback Statute, prohibits providers, HMOs and others
from soliciting, receiving, offering or paying, directly or
indirectly, any remuneration with the intent of generating
referrals or orders for services or items covered by a federal
healthcare program. Courts have interpreted this statute
broadly. Violations of the Anti-kickback Statute may be punished
by a criminal fine of up to $250,000 ($500,000 for
organizations) for each violation or imprisonment, civil money
penalties of up to $50,000 and damages of up to three times the
total amount of the remuneration, and/or exclusion from
participation in federal healthcare programs, including Medicare
and Medicaid.

The Office of Inspector General at HHS
(OIG), among other regulatory agencies, is
responsible for identifying and eliminating fraud, abuse and
waste. The OIG carries out this mission through a nationwide
program of audits, investigations and inspections. As authorized
by Congress, the OIG has published final safe harbor regulations
that outline categories of activities that are deemed protected
from prosecution under the Anti-kickback Statute. Additionally,
in order to provide guidance to healthcare providers, the OIG
has from time to time issued Special Fraud Alerts
that do not have the force of law, but identify features of
arrangements or transactions that may indicate that the
arrangements or transactions violate the Anti-kickback Statute
or other federal healthcare laws. The OIG has encouraged persons
having information about persons involved in the above types of
arrangements to report such information to the OIG.

We have a variety of financial relationships with
physicians who refer patients to our hospitals. While we
endeavor to comply with the applicable safe harbors, certain of
our current arrangements may not qualify for safe harbor
protection. The fact that conduct or a business arrangement does
not fall within a safe harbor does not automatically render the
conduct or business arrangement illegal under the Anti-kickback
Statute. This type of conduct and business arrangement, however,
does risk increased scrutiny by government enforcement
authorities. Although we believe that our arrangements with
physicians have been structured to comply with current law and
available interpretations, regulatory authorities that enforce
these laws may determine that these financial arrangements
violate the Anti-kickback Statute or other applicable laws. This
determination could subject us to liabilities under the
Anti-kickback Statute, including criminal penalties, civil
monetary penalties and exclusion from participation in Medicare,
Medicaid or other federal healthcare programs.

In recent years, there has been an increase in
government oversight of HMO insurance activities that in some
cases have involved allegations that certain of these activities
are implicated under the Anti-kickback Statute. Investigations
have included inquiries into whether the coordination of benefit
activities and classification of Medicare as a secondary payor
might violate the Anti-kickback Statute.



| |          
| | ---------
| | Stark Law

The Social Security Act also includes a provision
commonly known as the Stark Law. This law prohibits
physicians from referring Medicare and Medicaid patients to
entities with which they or any of their immediate family
members have a financial relationship if these entities provide
certain designated health services that are reimbursable by
Medicare, including inpatient and outpatient hospital services.
Sanctions for violating the Stark Law include denial of payment,
refunding amounts received for prohibited relationships, civil
monetary penalties of up to $15,000 per prohibited service
provided and exclusion from the Medicare and Medicaid programs.
There are exceptions to the self-referral prohibition for many
of the customary financial arrangements between physicians and
providers, including employment contracts, leases and
recruitment agreements. On January 4, 2001, CMS issued
final regulations intended to clarify parts of the Stark Law and
some of the exceptions to it. These regulations are considered
the first phase of a two-phase process, with the remaining
regulations to be published at an unknown future date. The phase
one regulations generally became effective January 4, 2002.
However, CMS has delayed the effective date of a portion of the
phase one regulations related to whether percentage-based
compensation is deemed to

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be set in advance for purposes of
exceptions to the Stark Law. We cannot predict the final form
that these regulations will take or the effect that the final
regulations will have on our operations.




| |                                                        
| | -------------------------------------------------------
| | The Federal False Claims Act and Similar
    State Laws

A factor affecting the healthcare industry today
is the use of the Federal False Claims Act and, in particular,
actions brought by individuals on the governments behalf
under the False Claims Acts qui tam, or
whistleblower, provisions. Whistleblower provisions allow
private individuals to bring actions on behalf of the government
alleging that the defendant has defrauded the federal
government. When a defendant is determined by a court of law to
be liable under the False Claims Act, the defendant may be
required to pay three times the actual damages sustained by the
government, plus mandatory civil penalties of between $5,500 and
$11,000 for each separate false claim. Liability arises when an
entity knowingly submits a false claim for reimbursement to the
federal government. The False Claims Act defines the term
knowingly broadly. Thus, although simple negligence
will not give rise to liability under the False Claims Act,
submitting a claim with reckless disregard to its truth or
falsity constitutes knowing submission under the
False Claims Act and, therefore, will qualify for liability. In
some cases, whistleblowers and the federal government have taken
the position that providers who allegedly have violated other
statutes, such as the Anti-kickback Statute and the Stark Law,
have thereby submitted false claims under the False Claims Act.



| |                                                                    
| | -------------------------------------------------------------------
| | The Health Insurance Portability and
    Accountability Act of 1996

The Administrative Simplification Provisions of
the Health Insurance Portability and Accountability Act of 1996
(HIPAA) and its implementing regulations address
mandatory electronic reporting standards, privacy standards, and
security standards.

On August 17, 2000, HHS published final
regulations establishing data transmission standards that all
healthcare providers must use when submitting or receiving
certain healthcare transactions electronically. We were required
to comply with these standards as of October 16, 2003. HHS
published final regulations with respect to privacy standards in
December 2002 and published revisions to the final regulations
in August 2002. Compliance with those regulations was required
as of April 14, 2003. HHS issued final security regulations
on February 20, 2003. The security regulations require
compliance on April 20, 2005 and will require health care
providers to implement administrative, physical and technical
practices to protect the security of individually identifiable
health information that is electronically maintained or
transmitted.

Violations of HIPAA could result in significant
civil penalties (up to $25,000 per type of violation per
calendar year) and criminal penalties (up to $250,000 per
violation). In addition, our facilities remain subject to any
privacy-related federal or state laws that are more restrictive
than the HIPAA privacy regulations.



| |                                                 
| | ------------------------------------------------
| | Regulation of Clinical Laboratory
    Operations

The clinical laboratory industry is subject to
significant federal and state regulation, including inspections
and audits by governmental agencies. Governmental authorities
may impose fines or criminal penalties or take other enforcement
actions to enforce laws and regulations, including revoking a
clinical laboratorys right to conduct business. Changes in
regulation may increase the costs of performing clinical
laboratory tests or increase the administrative requirements of
claims. The Clinical Laboratory Improvement Amendments of 1988,
or CLIA, regulates virtually all clinical laboratories by
requiring they be certified by the federal government to ensure
that all clinical laboratory testing services are uniformly
accurate, reliable and timely. CLIA also permits states to adopt
regulations that are more stringent than federal law. The Drug
Enforcement Administration, or DEA, regulates access to
controlled substances used to perform drug abuse testing, and
laboratories that use controlled substances must be licensed by
the DEA. Clinical laboratories are further subject to federal,
state and local regulations relating to the handling and
disposal of regulated medical waste, hazardous waste and
radioactive materials. Finally,

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transportation of infectious substances such as
clinical laboratory specimens is subject to regulation by the
Department of Transportation, the Public Health Service, the
United States Postal Service and the International Civil
Aviation Organization.




| |                                                     
| | ----------------------------------------------------
| | Emergency Medical Treatment and Active
    Labor Act

All of our hospitals are subject to the Emergency
Medical Treatment and Active Labor Act (EMTALA).
This federal law requires any hospital that participates in the
Medicare program to conduct an appropriate medical screening
examination of every person who presents to a hospitals
dedicated emergency department for treatment and, if the patient
is suffering from an emergency medical condition, to either
stabilize that condition or make an appropriate transfer of the
patient to a facility that can handle the condition. The
obligation to screen and stabilize emergency medical conditions
exists regardless of a patients ability to pay for
treatment. There are severe penalties under EMTALA if a hospital
fails to screen or appropriately stabilize or transfer a patient
or if the hospital delays appropriate treatment in order to
first inquire about the patients ability to pay. Violators
can be assessed civil money penalties of up to $50,000 per
incident and face termination of their Medicare provider
agreement for negligently violating the Act. In addition, an
injured patient, the patients family or a medical facility
that suffers a financial loss as a direct result of another
hospitals violation of the law can bring a civil suit
against the hospital on a strict liability basis.

On September 9, 2003, the CMS published a
final rule clarifying a hospitals obligations under EMTALA
(Final Rule), which became effective
November 10, 2003. The Final Rule clarifies that in
addition to emergency rooms, hospital labor and delivery areas,
hospital psychiatric wards, and urgent care centers operated by
hospitals that hold themselves out as providing
emergency care would likely qualify as dedicated emergency
departments and thus be subject to EMTALA requirements. Such
EMTALA obligations will exist even if an individual presents to
a dedicated emergency department, other than the general
emergency room, with a condition that the dedicated emergency
department is not equipped to handle (e.g., a patient presents
in labor to an emergency psychiatric ward). Additionally, the
Final Rule states that hospital property does not
include physician offices, rural health clinics, skilled nursing
facilities, other entities that participate in Medicare
separately from the hospital, and businesses such as
restaurants, shops and other non-medical concerns.

Under the Final Rule, CMS gives hospitals
discretion to develop their on-call lists in a way that best
meets the needs of their communities. A hospital is not required
to have 24 hour coverage in all specialties if it cannot
reasonably do so. Hospitals must have written policies and
procedures to respond to situations when a particular specialty
is not available or the on-call physician cannot respond due to
circumstances beyond his or her control.

The MMA amended EMTALA with respect to Medicare
participating hospitals with emergency departments.
Specifically, the MMA requires that services furnished to screen
and stabilize patients under EMTALA be evaluated for
Medicares reasonable and necessary requirement. Depending
upon how the new requirement is enforced, it may have either a
positive or a negative effect on hospitals. Additionally, the
MMA requires that the Secretary of HHS seek review by a peer
review organization before making a determination to terminate a
hospitals Medicare participation where delays would not
jeopardize patient health or safety.



| |                 
| | ----------------
| | State Regulation

All hospitals are subject to compliance with
various state and local statutes and regulations and receive
periodic inspection by state licensing agencies to review
standards of medical care, equipment and cleanliness. Our
hospitals must also comply with the conditions of participation
and licensing requirements of state and local health agencies,
as well as the requirements of municipal building codes, health
codes and local fire departments. In granting and renewing
licenses, a department of health considers, among other things,
the physical buildings and equipment, the qualifications of the
administrative personnel and nursing staff, the quality of care
and continuing compliance with the laws and regulations relating
to the

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operation of the facilities. State licensing of
facilities is a prerequisite to certification under the Medicare
and Medicaid programs. Various other licenses and permits are
also required in order to dispense narcotics, operate pharmacies
and operate certain equipment. A substantial amount of our
operating costs are incurred in order to satisfy licensing laws,
standards of JCAHO and quality of care concerns. In addition,
our facility costs are affected by the level of patient acuity,
occupancy rates and local physician practice patterns, including
length of stay judgments and number and type of tests and
procedures ordered. Our ability to control or influence these
factors which affect costs is, in many cases, limited.




| |                     
| | --------------------
| | Certificates of Need

The construction of new facilities, the
acquisition or expansion of existing facilities and the addition
of new services and expensive equipment at our facilities may be
subject to state laws that require prior approval by state
regulatory agencies. These certificate of need laws, commonly
referred to as CON laws, generally require that a
state agency determine the public need and give approval prior
to the construction or acquisition of facilities or the addition
of new services. If we fail to obtain necessary state approval,
we will not be able to expand our facilities, complete
acquisitions or add new services in these states. Violation of
these state laws may result in the imposition of civil
sanctions, denial of reimbursement or the revocation of hospital
licenses. In some states, exceptions to CON laws have been
created permitting physician groups and others to establish
competing facilities and services without complying with the
same requirements that apply to facilities such as ours.



| |                                                  
| | -------------------------------------------------
| | Corporate Practice of Medicine/ Fee
    Splitting

Some of the states in which we operate have laws
that prohibit unlicensed persons or business entities, including
non-professional corporations, from employing physicians or laws
that prohibit certain direct or indirect payments or
fee-splitting arrangements between physicians and unlicensed
persons or business entities. Possible sanctions for violations
of these restrictions could include loss of a physicians
license, civil and criminal penalties and rescission of business
arrangements that may violate these restrictions. These statutes
vary from state to state, are often vague and have seldom been
interpreted by the courts or regulatory agencies.



| |                 
| | ----------------
| | Other State Laws

Many states in which we operate also have laws
that prohibit payments to physicians for patient referrals
similar to the Anti-kickback Statute and self-referral
legislation similar to the Stark Law. The Anti-kickback Statute
and the Stark Law are discussed under Reimbursement and
Payment  Other Federal Regulation above. The
scope of these state laws is broad, since they can often apply
regardless of the source of payment for care, and little
precedent exists for their interpretation or enforcement. These
statutes typically provide for criminal and civil penalties as
well as loss of facility licensure. A number of states in which
we operate have adopted their own false claims provisions,
similar to the Federal False Claims Act previously discussed as
well as their own whistleblower provisions whereby a private
party may file a civil lawsuit in state court.



| |               
| | --------------
| | HMO Regulation

Our health plan is licensed to operate as an HMO
in New Mexico, where it is regulated by the Insurance Division
of the New Mexico Public Regulation Commission. We must
demonstrate to the state that we have an adequate provider
network, that our quality and utilization management processes
comply with state requirements and that we have a procedure in
place for responding to member and provider complaints and
grievances that complies with state regulations. We also must
meet statutory requirements for processing providers
claims in a timely fashion and collect and analyze the
information needed to manage our quality improvement activities.
In addition, we must satisfy the state that we have the
financial resources necessary to pay our anticipated medical
care claim expenses and that we maintain the infrastructure
needed to account for our costs.

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Our HMO is required to report quarterly and
annually on its financial performance to New Mexicos
insurance division. We also undergo periodic examinations by the
state, generally every three or four years and we are currently
undergoing our periodic review. Our HMO must also obtain
approval from the state before declaring dividends in excess of
certain thresholds. In addition, we must maintain a net worth in
an amount determined by statute and/or regulation, and we may
only invest in securities approved by the state. Any acquisition
of another plans members must also be approved by the
state.



| |         
| | --------
| | Medicaid

Our Medicaid activities are regulated by the New
Mexico HSD. HSD requires demonstration of similar capabilities
as those mentioned above and performs periodic audits of our
HMOs quality and performance, usually annually. Our
current Medicaid contract with New Mexico was for an initial
term of two years, ending on June 30, 2003, and has been
extended to June 30, 2005. We are paid a fixed per member
per month premium by the state. Our HMO is subject to periodic
reporting and comprehensive quality assurance evaluations. We
submit periodic utilization reports and other information to the
state. We do not enroll members directly, and are permitted to
market only in accordance with state guidelines.



| |         
| | --------
| | Medicare

Our HMO operates a Medicare+Choice plan pursuant
to a contract with CMS, and this contract is subject to the
applicable federal laws and regulations. Our Medicare+Choice
members receive their Medicare benefits from our HMO rather than
directly from the federal government under the usual Medicare
Part A and Part B programs. CMS has the right to audit HMOs
operating under Medicare contracts to determine their compliance
with CMSs contracts and regulations and the quality of
care being rendered to the HMOs Medicare members.

Presently, payments to Medicare+Choice plans are
based on a monthly per capita payment set at the highest of a
minimum payment rate, a blended rate of a local rate and a
national rate, or a minimum percentage increase, which is
currently two percent. The MMA creates a fourth payment amount,
which is 100% of fee-for-service costs. In addition, the MMA
revises the calculation of the minimum percentage increase. For
2004 and beyond, the minimum percentage increase over the
previous years rates or the previous years payment
increased by a national per capita Medicare Advantage growth
percentage.

More significantly, the MMA will eventually
replace the Medicare+Choice program with the Medicare Advantage
Program, which will allow Medicare beneficiaries to receive all
Medicare benefits through a managed care plan. The Medicare
Advantage Program will initially become operational in 2005, and
will begin in earnest in 2006.



| |      
| | -----
| | HIPAA

All HMOs are subject to HIPAA, the requirements
for which are set forth above.



| |      
| | -----
| | ERISA

The provision of services to certain employee
health benefit plans is subject to ERISA, a complex set of laws
and regulations subject to interpretation and enforcement by the
Department of Labor. ERISA regulates certain aspects of the
relationships between us and employers who maintain employee
benefit plans subject to ERISA. Some of our administrative
services and other activities are subject to regulation under
ERISA. Of particular application are the regulations adopted by
the Department of Labor that revise claims procedures for
employee benefit plans governed by ERISA (insured and
self-insured), effective for claims filed on or after
July 1, 2002.



| |                  
| | -----------------
| | Healthcare Reform

In recent years, various legislative proposals
have been introduced or proposed in Congress and in some state
legislatures that would affect major changes in the healthcare
system, either nationally or at the

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state level. Many states have enacted or are
considering enacting measures designed to reduce their Medicaid
expenditures and change private healthcare insurance. Most
states have applied for and been granted federal waivers from
current Medicaid regulations to allow them to serve some or all
of their Medicaid participants through managed care providers.


The federal government and many states are
considering additional legislation and regulations related to
healthcare plans, including, among other things:



| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increasing the funding levels for Medicare+Choice
    products;                                                                                                                         
|
| |  | requiring coverage of experimental procedures and
    drugs and liberalized definitions of medical necessity;                                                                           
|
| |  | limiting control of the utilization review and
    cost management and cost control initiatives of managed care
    plans;                                                              
|
| |  | requiring that mental health benefits be treated
    the same as medical benefits;                                                                                                      
|
| |  | exempting physicians from the antitrust laws that
    prohibit price fixing, group boycotts and other horizontal
    restraints on competition;                                         
|
| |  | regulating premium rates, including prior
    approval of rate changes by regulatory authorities;                                                                                       
|
| |  | changing the government programs for the
    uninsured or those who need assistance in paying premiums,
    including potential mandates that all HMOs or insurers must
    participate;
|
| |  | implementing a state-run single payor system that
    would partially or largely obviate the current role of private
    health insurers or HMOs; and                                   
|
| |  | restricting or eliminating the use of formularies
    for prescription drugs.                                                                                                           

In addition, Congress is currently considering a
comprehensive package of requirements applicable to managed care
plans called the Patients Bill of Rights
legislation, that could expand our potential exposure to
lawsuits. It could expose us to unlimited economic damages, and
certain punitive damages, for making a determination denying
benefits or for delaying members receipt of benefits as a
result of so-called medical necessity and other
coverage determinations. The House of Representatives and the
Senate still need to resolve their own differences, including
such matters as the amount of allowable lawsuit damages, whether
cases would be governed by federal or state law, and whether
such actions would be brought in federal or state courts. We
cannot predict whether the Patients Bill of Rights will be
enacted or what form such law might take.

The proposed regulatory and legislative changes
described above, if enacted, could increase healthcare costs and
administrative expenses, reduce Medicare reimbursement rates and
otherwise adversely affect our business, financial condition and
results of operations. We cannot predict whether any of this
proposed legislation will be enacted. See Risk
Factors  Risks Relating to Our Business 
Recently enacted or proposed legislation, regulations and
initiatives could materially and adversely affect our business
by increasing our operating costs, reducing our health plan
membership or subjecting us to additional litigation.

Risk Factors



| |                                   
| | ----------------------------------
| | Risks Relating to Our
    Business



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our revenues may decline if federal or state
    programs reduce our Medicare or Medicaid payments or managed
    care companies reduce our reimbursements.

A substantial portion of our total net revenues
is derived from the Medicare and Medicaid programs. The Medicare
program accounted for 44.0% of our acute care patient days and
9.2% of our behavioral patient days for the year ended
December 31, 2003. The Medicaid program accounted for 5.5%
of our acute care patient days and 33.7% of our behavioral
patient days for the year ended December 31, 2003. In
recent years, federal and state governments have made
significant changes in the Medicare and

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Medicaid programs. In addition, due to budget
deficits in many states, significant decreases in state funding
for the Medicaid programs have occurred or are being proposed.
In the last few years, these changes in the Medicare and
Medicaid programs have decreased the amounts of money we receive
for our services to patients who participate in these programs.
However, due to certain positive reimbursement changes in the
MMA, we expect that reimbursement for hospital services may
improve in 2004.


With the MMA, Medicare reimbursement will undergo
substantial changes in virtually every area of health care
delivery. Although initial forecasts indicate that these changes
may be positive for hospitals, such positive changes could be
offset by potential limitations on reimbursement for
pharmaceuticals, and other potentially negative reimbursement
changes. In addition, the MMA calls for the executive branch to
propose, and for the Congress to consider, cuts to Medicare
reimbursement in the event that certain overall Medicare cost
ceilings are hit. Therefore, it is possible that the future
federal legislation and regulations may reduce the payments that
we receive for our services.

A number of states have adopted legislation
designed to reduce their Medicaid expenditures. Some states have
enrolled Medicaid recipients in managed care programs (which
generally tend to reduce the level of hospital utilization) and
have imposed additional taxes on hospitals to help finance or
expand the states Medicaid systems. Some states have also
reduced the scope of Medicaid eligibility and coverage, making
an increasing number of residents unable to pay for their care.
Other states propose to take similar steps.

In addition, insurance and managed care companies
and other third parties from whom we receive payment for our
services increasingly attempt to control healthcare costs by
requiring that hospitals discount their fees in exchange for
exclusive or preferred participation in their benefit plans. We
believe that this trend may continue and may reduce the payments
we receive for our services.



| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A reduction in enrollment in our health plan
    or the failure to maintain satisfactory relationships with
    providers could affect our business and profitability.

Premium revenue from our health plan accounted
for approximately 44.9% of our total net revenues for the year
ended December 31, 2003. A reduction in the number of
members in our health plan could reduce our revenues and
profitability. Factors that could contribute to a reduction in
membership include premium increases, benefit changes and
reductions in workforce by existing customers.

In recent years, the managed care industry has
received considerable negative publicity. This publicity has led
to increased review of industry practices, legislation,
regulation and litigation. These factors may adversely affect
our ability to market our health plan services, require us to
change our health plan procedures or services, and increase the
regulatory burdens under which our health plan operates, further
increasing the costs of doing business and adversely affecting
our operating results.

The profitability of our health plan depends, in
large part, upon its ability to contract favorably with
hospitals, physicians and other healthcare providers in
appropriate numbers and at locations appropriate for the health
plans members in New Mexico. Providers could refuse to
contract, demand higher payments or take other actions that
could result in higher healthcare costs. If any of the key
providers to our health plan refuse or are otherwise unavailable
to contract with our health plan, use their market position to
negotiate more favorable contracts or otherwise place our health
plan at a competitive disadvantage, our operating results could
be adversely affected.

Provider arrangements for our health plan with
contracted primary care physicians, specialists and hospitals in
its network usually have one-year terms and automatically renew
for successive one-year periods. Generally, these contracts may
also be cancelled by either party without cause upon 30 to
90 days prior written notice. Our health plan may be
unable to continue to renew such contracts or enter into new
contracts enabling our health plan to service its members
profitably. If our health plan is unable to retain its current
provider contracts or enter into new provider contracts on a
timely basis or on favorable terms, our results of operations
could be adversely affected.

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| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to effectively price our
    health plan premiums or manage medical costs, our profitability
    will be reduced.

A large amount of our health plan revenues
consists of fixed monthly payments per member. These payments
are fixed by contract, and the health plan is obligated during
the contract period to provide or arrange for the provision of
all healthcare services required by such member. Historically,
medical care costs of our health plan as a percentage of premium
and other operating revenue has fluctuated. If premiums are not
increased and medical care costs rise, the earnings of our
health plan on insured business could decrease. In addition,
actual medical care costs of our health plan may exceed its
estimated costs on insured business. The premiums our health
plan receives under its current insurance contracts may
therefore be inadequate to cover all claims, which may cause our
profits to decline.

Our health plan profitability depends, to a
significant degree, on our ability to predict and effectively
manage medical costs. Historically, there have been fluctuations
in the medical care cost ratio of our health plan. Relatively
small changes in these medical care cost ratios can create
significant changes in our financial results. Changes in
healthcare laws, regulations and practices, utilization of
services, hospital costs, pharmaceutical costs, major epidemics,
terrorism or bioterrorism, new medical technologies and other
external factors, including general economic conditions such as
inflation levels, could reduce our ability to predict and
effectively control the costs of providing healthcare services.
If our medical care costs increase, we must price accordingly or
our profits could be reduced.

Our medical care costs also include estimates of
claims incurred but not reported, or IBNR. We estimate our
medical claims liabilities using standard actuarial methods
based on historical data for payment patterns, cost trends,
product mix, seasonality, utilization of healthcare services and
other relevant factors. The estimation methods and the resulting
accrued liabilities are continually reviewed and updated, and
adjustments, if necessary, are reflected in the period when they
become known. While our IBNR estimates have been adequate in the
past, they may be inadequate in the future, which would
negatively affect our results of operations. Further, our
inability to accurately estimate IBNR may also affect our
ability to take timely corrective actions, further exacerbating
the extent of the negative impact on our results.

We maintain accrued liabilities on our financial
statements in amounts we believe are adequate to provide for
actuarial estimates of medical claims. We also maintain
reinsurance to protect us against certain catastrophic medical
claims by Medicaid beneficiaries who participate in our health
plan. While we believe our reinsurance coverage with respect to
these Medicaid claims is adequate, in the future such
reinsurance coverage may be inadequate or unavailable to us or
the cost of such reinsurance coverage may limit our ability to
obtain other insurance. We do not maintain reinsurance to
protect us against other catastrophic medical claims under our
health plan.



| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Regional concentration of our business may
    subject us to economic downturns in the State of New Mexico and,
    in particular, the Albuquerque metropolitan area.

With five of our acute care hospitals (including
one inpatient rehabilitation hospital), our health maintenance
organization and certain other ancillary services in New Mexico,
the majority of our revenue is generated in New Mexico. For the
year ended December 31, 2003, the Lovelace Sandia Health
System accounted for approximately 71.1% of our total net
revenues. This concentration of business in New Mexico exposes
us to potential losses resulting from a downturn in the economy
of the State of New Mexico and, in particular, Albuquerque. If
economic conditions deteriorate, we may experience a reduction
in existing and new business, which may have an adverse effect
on our business, financial condition and results of operations.

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| |                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The cost of our malpractice insurance and the
    malpractice insurance of physicians who practice at our
    facilities or who participate in our networks continues to rise.
    Successful malpractice or tort claims asserted against us, our
    providers or our employees could adversely affect our financial
    condition and profitability.

In recent years, physicians, hospitals and other
healthcare providers have become subject to an increasing number
of legal actions alleging malpractice or related legal theories.
Many of these actions involve large claims and significant
defense costs. To protect ourselves from the cost of these
claims, we generally maintain professional malpractice liability
insurance and general liability insurance coverage in amounts
and with deductibles that we believe to be appropriate for our
operations. Effective October 31, 2003, we established a
wholly-owned captive insurance subsidiary to insure our
professional and general liability risk for claims up to
$2.0 million (subject to a $500,000 deductible per claim).
In addition, effective October 31, 2003, we purchased
excess insurance coverage with independent third-party carriers
for claims totaling up to $75.0 million per occurrence and
in the aggregate. However, our insurance coverage may not cover
all claims against us or continue to be available at a
reasonable cost for us to maintain adequate levels of insurance.

In addition, physicians malpractice
insurance costs have dramatically increased to the point where
some physicians are either choosing to retire early or leave
certain markets. If physician malpractice costs continue to
escalate in markets in which we operate, some physicians may
choose not to practice at our facilities, which could reduce our
patient volume and thus our revenue.

Our managed care providers involved in medical
care decisions may be exposed to the risk of medical malpractice
claims. Many of our network providers are our employees for
whose acts we may be liable as an employer. In addition, managed
care organizations may be sued directly for various types of
alleged negligence, such as in connection with the credentialing
of network providers or improper denials or delay of care.
Finally, Congress is considering legislation that would permit
managed care organizations to be held liable for negligent
treatment decisions or benefits coverage determinations. If this
or similar legislation were enacted, claims of this nature could
result in substantial damage awards against us and our providers
that could exceed the limits of any applicable medical
malpractice insurance coverage and could have a material adverse
effect on our financial condition.



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our success depends on our ability to attract
    and maintain good relationships with physicians and other
    healthcare professionals at our hospitals.

Because physicians working with acute care
hospitals generally direct the majority of hospital admissions,
our success in operating our acute care hospitals will be, in
part, dependent upon the number and quality of physicians on
these hospitals medical staffs, the admissions practices
of the physicians at these hospitals and our ability to maintain
good relations with our physicians. With the exception of
approximately 328 employed physicians in Albuquerque, our
physicians are generally not employees of the hospitals at which
they practice and most physicians have admitting privileges at
other hospitals in addition to our hospitals. Physicians may
terminate their affiliation with our hospitals at any time. If
we are unable to successfully maintain good relationships with
physicians, our hospitals admissions may decrease and our
results of operations may be adversely affected. In addition,
physicians are increasingly seeking to supplement their income
by building facilities or offering services that compete with
acute care hospitals, such as ambulatory surgery centers,
diagnostic imaging centers, or specialty hospitals. These
facilities and services may attract patients from the more
profitable service lines of an acute care hospital, leaving the
hospital with less profitable or unprofitable service lines,
such as emergency departments, that the hospital may be unable
to close for community relations and other reasons.

We compete with other healthcare providers in
recruiting and retaining qualified management and staff
personnel responsible for the day-to-day operations of each of
our hospitals, including nurses and other non-physician
healthcare professionals. In the healthcare industry generally,
including our markets, the scarcity of nurses and other medical
support personnel has become a significant operating issue. This
shortage may require us to increase wages and benefits to
recruit and retain nurses and other medical

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support personnel, or to hire more expensive
contract or temporary personnel. If our labor costs increase, we
may not be able to raise rates to offset these increased costs.
Because a significant percentage of our revenues are derived
from fixed, prospective payments, our ability to pass along
increased labor costs is constrained. Our failure to recruit and
retain qualified management, nurses and other medical support
personnel, or to control our labor costs, could have an adverse
effect on our business and results of operations.




| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may be subjected to actions brought by
    individuals on the governments behalf under the False
    Claims Acts qui tam or whistleblower
    provisions.

Whistleblower provisions allow private
individuals to bring actions on behalf of the government
alleging that the defendant has defrauded the federal
government. Because these qui tamlawsuits are filed
under seal, we could be named in one or more such lawsuits of
which we are not aware. Behavioral Healthcare Corporation
(BHC), our predecessor company, and several
affiliates of BHC were previously named as defendants in qui
tamsuits. In addition, prior to our ownership, Lovelace
Health Systems, Inc. was named as a defendant in a qui
tamaction. Defendants determined to be liable under the
False Claims Act may be required to pay three times the actual
damages sustained by the government, plus mandatory civil
penalties of between $5,500 and $11,000 for each separate false
claim. Typically, each fraudulent bill submitted by a provider
is considered a separate false claim, and thus the penalties
under a false claim case may be substantial. Liability arises
when an entity knowingly submits a false claim for reimbursement
to the federal government. In some cases, whistleblowers or the
federal government have taken the position that providers who
allegedly have violated other statutes, such as the
Anti-kickback Statute or the Stark Law and have submitted claims
to a governmental payor during the time period they allegedly
violated these other statutes, have thereby submitted false
claims under the False Claims Act. In addition, a number of
states have adopted their own false claims provisions as well as
their own whistleblower provisions allowing a private party to
file a civil lawsuit in state court.



| |                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We conduct business in a heavily regulated
    industry; changes in regulations or violations of regulations
    may result in increased costs or sanctions that could reduce
    revenue and profitability.

Healthcare providers are required to comply with
many laws and regulations at the federal, state and local
government levels. These laws and regulations relate to:
licensing; the conduct of operations; the relationships among
hospitals and their affiliated providers; the ownership of
facilities; the addition of facilities and services;
confidentiality, maintenance and security issues associated with
medical records; billing for services; and prices for services.
If we fail to comply with applicable laws and regulations, we
could suffer civil and criminal penalties, including the loss of
our licenses to operate and our ability to participate in
Medicare, Medicaid, and other federal and state healthcare
programs.

In addition, there are heightened coordinated
civil and criminal enforcement efforts by both federal and state
government agencies relating to the healthcare industry,
including the hospital segment. The ongoing investigations in
this industry relate generally to various referral, cost
reporting and billing and coding practices, laboratory and home
healthcare services, and physician ownership and joint ventures
involving hospitals. In the future, different interpretations or
enforcement of these laws and regulations could subject our
current practices to allegations of impropriety or illegality or
could require us to make changes in our operations.



| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not successfully integrate our recent
    and future acquisitions and may be unable to achieve anticipated
    cost savings and other benefits from these
    acquisitions.

Since August 2001, we have acquired seven acute
care hospitals, including a significant health plan, two
behavioral hospitals and various other ancillary services. These
acquisitions have significantly increased the size and
geographic scope of our operations. In addition, one of our
primary growth strategies for the future is completing
additional acquisitions. The integration of past and future
acquisitions involves a number of risks and presents financial,
managerial and operational challenges. For example, at one of
our acquired hospitals, we experienced delays in billings
related to information systems transitions, and as a

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result, our results of operations were negatively
affected. In addition to risk associated with information
systems integration, we face the following risks:




| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we may have difficulty integrating personnel and
    physicians from acquired hospitals;                                                                                                                            
|
| |  | we may discover deficiencies in the financial
    systems and controls at our newly acquired facilities;                                                                                                            
|
| |  | we may have difficulty, and may incur
    unanticipated expenses related to, upgrading the financial
    systems and controls at our new facilities;                                                                
|
| |  | we may uncover liabilities at our newly-acquired
    operations of which we are not aware or that are greater than
    expected and for which the previous owner may be unable or
    unwilling to indemnify us; and
|
| |  | we may be unable to improve existing managed care
    agreements and the mix of specialties offered at our hospitals.                                                                                               

Failure to integrate past and future acquisitions
successfully and in a timely fashion may have an adverse effect
on our business, results of operations and financial condition.

In addition, we may be unable to achieve the
anticipated cost savings from these acquisitions for many
reasons, including: contractual constraints on our ability to
reduce excess staffing, inability to achieve expected tax
savings from a more streamlined legal structure or inability to
extract lower prices from our suppliers.



| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our strategy depends in part on our ability to
    acquire hospitals that meet our target criteria. If we are
    unable to do so, our future growth could be limited and our
    operating results could be adversely affected.

The competition to acquire acute care and
behavioral hospitals in the selected markets that we will target
is significant, including competition from healthcare companies
with greater financial resources than us and larger development
staffs focused on identifying and completing acquisitions. We
may be unable to identify acquisition opportunities and to
negotiate and complete acquisitions on favorable terms. Our
inability to complete such acquisitions may negatively impact
our future growth and results of operations.



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | We may have difficulty acquiring hospitals
    from not-for-profit entities due to increased regulatory
    scrutiny.

Many states have enacted or are considering
enacting laws affecting sales, leases or other transactions in
which control of not-for-profit hospitals are acquired by
for-profit entities. These laws, in general, include provisions
relating to state attorney general approval, advance
notification and community involvement, determination of
appropriate valuation of assets divested and the use of proceeds
of the sale by the not-for-profit entity. In addition, state
attorneys general in states without specific conversion
legislation governing such transactions may exercise authority
based upon charitable trust and other existing laws. The
increased legal and regulatory review of these transactions
involving the change of control of not-for-profit hospitals may
increase the costs and time required for such acquisitions, and
therefore, limit our ability to acquire not-for-profit
hospitals. In addition, as a condition to approving an
acquisition, certain state attorneys general may require us to
maintain certain services, such as emergency departments, or to
continue to provide certain levels of charity care, which may
affect our decision to acquire or the terms of an acquisition of
these hospitals as well as the future profitability of any such
hospitals we acquire.



| |                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend heavily on our senior and local
    management personnel, and the loss of the services of one or
    more of our key senior management personnel or our key local
    management personnel could weaken our management team and our
    ability to deliver healthcare services efficiently.

We have been, and will continue to be, dependent
upon the services and management experience of David T.
Vandewater, our Chief Executive Officer, Jamie E. Hopping, our
Chief Operating Officer, R.

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Dirk Allison, our Chief Financial Officer, and
our other senior executive officers. We have entered into
employment agreements with each of these senior executive
officers, but we do not maintain key person life insurance for
these executive officers. If Mr. Vandewater,
Ms. Hopping, Mr. Allison or any of our other senior
executive officers were to resign their positions or otherwise
be unable to serve, our management could be weakened and
operating results could be adversely affected. In addition, our
success depends on our ability to attract and retain local
managers at our hospitals and related facilities, on the ability
of our officers and key employees to manage growth successfully
and on our ability to attract and retain skilled employees. If
we are unable to attract and retain local management, our
operating performance could be adversely affected.




| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | We have a limited operating history as an
    owner and operator of both acute care and behavioral
    facilities.

Prior to August 2001, we operated and owned only
behavioral facilities. We changed our business strategy to
include operating and owning both acute care and behavioral
facilities. Since August 2001, we have acquired seven acute care
facilities (and certain related health plans), and accordingly,
as a company, we do not have a long operating history as an
operator of acute care facilities. An integral part of our
expansion strategy is the continued selective acquisition of
acute care hospitals in urban and suburban markets and
behavioral hospitals. During 2003, our acute care services
segment accounted for approximately 79% of our total net
revenues. Our companys limited history of operating and
owning both types of facilities may hinder our ability to expand
our business and achieve our operating objectives.



| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business depends on our information
    systems; our inability to effectively integrate and manage our
    information systems could disrupt our operations.

Our business is dependent on effective
information systems that assist us in, among other things,
monitoring utilization and other cost factors, supporting our
healthcare management techniques, processing provider claims and
providing data to our regulators. Our managed care providers
also depend upon our information systems for membership
verifications, claims status and other information. If we
experience a reduction in the performance, reliability or
availability of our information systems, our operations and
ability to produce timely and accurate reports could be
adversely impacted.

Our information systems and applications require
continual maintenance, upgrading and enhancement to meet our
operational needs. Moreover, our acquisition activity requires
transitions to or from, and the integration of, various
information systems. We regularly upgrade and expand our
information systems capabilities. We have recently completed the
implementation of our standardized financial reporting system
throughout our operations. We have experienced difficulties with
the transition to a new patient accounting and clinical
information system. If these difficulties continue, we could
continue to suffer, among other things, from operational
disruptions, deficiencies in financial systems and controls,
loss of membership in our networks, regulatory problems and
increases in administrative expenses. We have budgeted to invest
approximately $17.8 million in information systems during
2004.



| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face intense competition from other
    hospitals and other healthcare providers which may result in a
    decline in revenues, profitability and market share.

The healthcare business is highly competitive and
competition among hospitals and other healthcare providers for
patients has intensified in recent years. Most of our facilities
operate in geographic areas where we compete with at least one
other hospital that provides services comparable to those
offered by our facilities. In addition, the number of
freestanding specialty hospitals and outpatient surgery and
diagnostic centers in the areas in which our hospitals operate
has also increased significantly. Some of the hospitals that
compete with us are owned or operated by tax-supported
governmental bodies or by private not-for-profit entities
supported by endowments and charitable contributions which can
finance capital expenditures on a tax-exempt basis and are
exempt from sales, property and income taxes. Some of our
competitors are more established, offer highly specialized
facilities, equipment and services, which may not be available
at our hospitals, offer a wider range of services or have more
capital or other resources. The

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intense competition we face from other healthcare
providers may have an adverse effect on our market share,
revenues and results of operations.




| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Recently enacted or proposed legislation,
    regulations and initiatives could adversely affect our business
    by increasing our operating costs, reducing our health plan
    membership or subjecting us to additional litigation.

In recent years, an increasing number of
legislative initiatives have been introduced or proposed in
Congress and in state legislatures that would effect major
changes in the healthcare system, either nationally or at the
state level. Among the proposals that have been introduced are
price controls on hospitals, insurance market reforms to
increase the availability of group health insurance to small
businesses, requirements that all businesses offer health
insurance coverage to their employees and the creation of a
government health insurance plan or plans that would cover all
citizens, and increased payments by beneficiaries. Increased
regulations, mandated benefits and more oversight, audits and
investigations and changes in laws allowing access to federal
and state courts to challenge healthcare decisions may increase
our administrative, litigation and healthcare costs. We cannot
predict whether any of the above proposals or any other
proposals will be adopted, and if adopted, no assurance can be
given that the implementation of such reforms will not have an
adverse effect on our business and results of operations.



| |                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have a limited history of filing public
    documents subject to the federal securities laws, and we expect
    to incur substantial additional costs in complying with the
    heightened public reporting and governance
    requirements.

In January 2004, we became subject to the
reporting obligations under the federal securities laws as a
result of the SEC declaring effective our registration statement
relating to the exchange offer for our subsidiarys 10%
senior subordinated notes due 2013 (the senior
subordinated notes). Prior to that time, we were a
privately held company which did not file periodic reports with
the SEC. We also became subject to the requirements of the
Sarbanes-Oxley Act of 2002 (SOA), which heightened
the standards of corporate governance and public disclosure.
Among other things, SOA requires us to assess our internal
control over financial reporting, to report on that assessment
and subject that assessment to an audit by our independent
auditors. We must comply with SOAs requirements for
internal control over financial reporting by December 31,
2005. We expect to incur substantial additional expenses to meet
our public reporting obligations and to comply with SOA. In
addition, we may determine in the course of the assessment and
audit of internal controls that deficiencies may exist which
require correction and the commitment of additional financial
and management resources.



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | Failure to maintain the privacy and security
    of patients medical records could expose us to
    liability.

HIPAA required HHS to issue regulations requiring
hospitals and other providers to implement measures to ensure
the privacy and security of patients medical records and
the use of uniform data standards for the exchange of
information between the hospitals and health plans, including
claims and payment transactions. The privacy standards became
effective October 15, 2002. Full compliance with the
privacy standards was required by April 14, 2003. Although
we believe we have met the April 14, 2003 privacy standards
compliance deadline, compliance will be an ongoing process. The
transaction standards and the security standards became
effective on October 16, 2000 and February 20, 2003,
respectively. Full compliance with the transaction standards was
required by October 16, 2003 and full compliance with the
security standards is required by April 20, 2005. We are in
the process of complying with the security standards. We may
incur additional expenses in order to comply with these
standards. We cannot predict the full extent of our costs of
implementing all of the requirements at this stage. If we
violate these standards, we may be subject to civil monetary
fines and sanctions and criminal penalties. Further, a
substantial portion of our revenue is derived from payments by
governmental health plans, such as Medicare, and private health
plans. Our failure, or the failure of the health plans with
which we transact, to comply with the transaction standards may
result in significant disruptions in the payments we receive

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from such health plans. Finally, because of the
confidential nature of the health information we store and
transmit, privacy or security breaches could expose us to a risk
of regulatory action, litigation, possible liability and loss.
Our privacy or security measures may be inadequate to prevent
breaches, and our business operations would be adversely
impacted by cancellation of contracts and loss of members if
they are not prevented.




| |                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our acquisition strategy may be limited by
    restrictions and covenants in our subsidiarys senior
    secured credit facility and by the lack of adequate alternative
    sources of financing.

Our subsidiarys senior secured credit
facility (the August 2003 Credit Agreement) contains
limitations on acquisitions of regulated and non-regulated
entities. If we are unable to obtain any required consents from
our lenders for future acquisitions, our strategy of growing by
selective acquisitions may be limited. In addition, our
acquisition strategy may require that we obtain additional
capital to finance future transactions. Sufficient capital or
financing may not be available to us on satisfactory terms, if
at all. Either of these factors would negatively affect our
future operating performance.



| |                                           
| | ------------------------------------------
| | Risks Relating to Our Debt
    Instruments



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Our substantial indebtedness could adversely
    affect our cash flow and prevent us from fulfilling our
    obligations.

We have a significant amount of debt. As of
December 31, 2003, we had $261.4 million of total debt
and members equity of $221.1 million. We may also
draw on our revolving commitment of up to $125.0 million,
of which $117.9 million was available as of
December 31, 2003.

Our substantial amount of debt could have adverse
consequences. For example, it could:



| |   |                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | make it more difficult for us to satisfy our
    obligations under the senior subordinated notes and under the
    August 2003 Credit Agreement;                                                                                                                                                    
|
| |  | require us to dedicate a substantial portion of
    our cash flow from operations to make interest and principal
    payments on our debt, thereby limiting the availability of our
    cash flow to fund future capital expenditures, working capital
    and other general corporate requirements;
|
| |  | limit our flexibility in planning for, or
    reacting to, changes in our business, which may place us at a
    competitive disadvantage compared with competitors that have
    less debt;                                                                                                         
|
| |  | increase our vulnerability to adverse economic
    and industry conditions; and                                                                                                                                                                                                                     
|
| |  | limit our ability to borrow additional funds,
    even when necessary to maintain adequate liquidity.                                                                                                                                                                                               

The terms of the agreement governing the August
2003 Credit Agreement and the indenture governing the senior
subordinated notes allow us to incur substantial amounts of
additional debt. Any such additional debt could increase the
risks associated with our substantial leverage.



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | We are a holding company and, as such, we do
    not have, and will not have in the future, any income from
    operations.

We are a holding company and conduct
substantially all of our operations through our subsidiaries.
Consequently we do not have any income from operations and do
not expect to generate income from operations in the future. As
a result, our ability to meet our debt service obligations,
including our obligations under the senior subordinated notes,
substantially depends upon our subsidiaries cash flow and
payment of funds to us by our subsidiaries as dividends, loans,
advances or other payments. The payment of dividends or the
making of loans, advances or other payments to us by our
subsidiaries may be subject to regulatory or contractual
restrictions.

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| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a regulated insurance company, Lovelace
    Sandia Health System, Inc. may be restricted from paying
    dividends to us, which may reduce the amount of cash available
    to us.

The ability of Lovelace Sandia Health
System, Inc. to pay dividends or make other distributions
to us is restricted by state insurance company laws and
regulations. These laws and regulations require Lovelace Sandia
Health System, Inc. to give notice to the New Mexico
Department of Insurance prior to paying dividends or making
distributions to us. In addition, Lovelace Sandia Health
System, Inc. is subject to state-imposed risk-based or
other net worth-based capital requirements that effectively
limit the amount of funds the subsidiary has available to
distribute or pay to us. As a result of these capital
requirements or other agreements we may enter into with state
regulators, we may not be able to receive any funds from
Lovelace Sandia Health System, Inc. and, moreover, we may
be required to make contributions to Lovelace Sandia Health
System, Inc. to enable the subsidiary to meet its capital
requirements, thereby further limiting the funds we may have to
make payments with respect to the senior subordinated notes. At
December 31, 2003, Lovelace Sandia Health System, Inc.
was required to maintain a net worth of $34.8 million.
Actual net worth as of that date exceeded the requirement by
$7.3 million. As a result of the merger and consolidation
of our New Mexico operations (other than the operations of AHS
S.E.D. Medical Laboratories, Inc.) into Lovelace Sandia
Health System, Inc., the entities constituting Lovelace
Sandia Health System, Inc. (which, for the year ended
December 31, 2003, accounted for approximately 71.1% of our
total net revenues) are subject to the above restrictions and
regulations. As of December 31, 2003, this entity had cash
and cash equivalents of approximately $36.8 million.



| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | To service our debt, we will require a
    significant amount of cash, which may not be available to
    us.

Our ability to make payments on, or repay or
refinance, our debt, including the senior subordinated notes,
and to fund planned capital expenditures, will depend largely
upon our future operating performance. Our debt service
obligations, including principal and interest payments, for
calendar year 2004 are anticipated to be approximately
$29.6 million. Our future performance, to a certain extent,
is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our
control. We may not generate sufficient cash flow from
operations or we may not have borrowings available to us under
the August 2003 Credit Agreement or from other sources in an
amount sufficient to enable us to pay our debt, including the
senior subordinated notes, or to fund our other liquidity needs.
In addition, prior to the repayment of the senior subordinated
notes, we will be required to refinance the August 2003 Credit
Agreement. We also may not be able to refinance any of our debt,
including the August 2003 Credit Agreement, on commercially
reasonable terms or at all. If we were unable to make payments
or refinance our debt or obtain new financing under these
circumstances, we would have to consider other options, such as:



| |   |                                                                      
| | - | ---------------------------------------------------------------------
| |  | sales of assets;                                                     
|
| |  | sales of equity; and/or                                              
|
| |  | negotiations with our lenders to restructure the
    applicable debt.

The August 2003 Credit Agreement and the
indenture governing the senior subordinated notes restrict, and
market or business conditions may limit, our ability to sell
assets or equity or restructure any debt.



| |                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The agreements governing our debt, including
    the senior subordinated notes and the August 2003 Credit
    Agreement, contain various covenants that limit our discretion
    in the operation of our business and could lead to the
    acceleration of our debt.

The August 2003 Credit Agreement imposes, and
future financing agreements are likely to impose, operating and
financial restrictions on our activities. These restrictions
require us to comply with or

30



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maintain certain financial tests and ratios,
including minimum net worth and interest coverage ratios and
maximum total and senior leverage ratios and limit or prohibit
our ability to, among other things:




| |   |                                                        
| | - | -------------------------------------------------------
| |  | incur additional debt and issue preferred equity;      
|
| |  | create liens;                                          
|
| |  | redeem and/or prepay certain debt;                     
|
| |  | pay dividends on our equity or repurchase equity;      
|
| |  | make certain investments;                              
|
| |  | enter new lines of business;                           
|
| |  | engage in consolidations, mergers and
    acquisitions;
|
| |  | make certain capital expenditures; and                 
|
| |  | make other distributions.                              

These restrictions on our ability to operate our
business could seriously harm our business by, among other
things, limiting our ability to take advantage of financings,
mergers, acquisitions and other corporate opportunities.

Various risks, uncertainties and events beyond
our control could affect our ability to comply with these
covenants and maintain these financial tests and ratios. Failure
to comply with any of the covenants in our existing or future
financing agreements could result in a default under those
agreements and under other agreements containing cross-default
provisions. A default would permit lenders to accelerate the
maturity for the debt under these agreements and to foreclose
upon any collateral securing the debt. Under these
circumstances, we might not have sufficient funds or other
resources to satisfy all of our obligations, including our
obligations under the senior subordinated notes. In addition,
the limitations imposed by financing agreements on our ability
to incur additional debt and to take other actions might
significantly impair our ability to obtain other financing.



| |                      
| | ---------------------
| | Available information

We maintain an internet website at
www.ardenthealth.comwhere our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, all amendments to these reports and
all other SEC documents will be available without charge, as
soon as reasonably practicable following the time that they are
filed with or furnished to the SEC. Information contained on our
website does not constitute a part of this Annual Report on
Form 10-K.






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

Listings of our owned acute hospitals and
behavioral hospitals are included in Item 1 of this report
under the caption Business  Our Acute Care
Hospitals and Business  Our Behavioral
Hospitals.

We currently lease approximately
35,700 square feet of office space at One Burton Hills
Boulevard, Suite 250, Nashville, Tennessee for our
corporate headquarters. In addition, we also currently lease
approximately 34,180 square feet of office space at 7100
Service Merchandise Drive, Nashville, Tennessee for our
information systems operations.

Our headquarters, hospitals and other facilities
are suitable for their respective uses and are, in general,
adequate for our present needs. Our obligations under the August
2003 Credit Agreement are secured by a pledge of all of our
assets, including first priority mortgages on most of our
hospitals. Our properties are also subject to various federal,
state and local statutes and ordinances regulating their
operation. Management does not believe that compliance with such
statutes and ordinances will materially affect our financial
position or results from operations.

31



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##### Table of Contents








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

From time to time, claims and suits arise in the
ordinary course of our business. In certain of these actions,
plaintiffs request punitive or other damages against us that may
not be covered by insurance. We do not believe that we are a
party to any proceeding that, in our opinion, would have a
material adverse effect on our business, financial condition or
results of operations.






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

No matters were submitted to a vote of
securityholders during the fourth quarter ended
December 31, 2003.




PART II






|        |                                                                                                                      
|------- | ---------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities.

There is no established public trading market for
our common units. At March 17, 2004, there were
146 holders of record of our common units.

We have not declared or paid any dividends or
distributions on our common units. We intend to retain all
current and foreseeable future earnings to support operations
and finance expansion. The August 2003 Credit Agreement and the
indenture governing the senior subordinated notes restrict our
ability to pay cash dividends on our common units.

In April and May 2003, we issued a total of
1,126,841 of our common units to an affiliate of WCAS and
certain accredited investors at a purchase price of
$4.50 per unit for an aggregate purchase price of
$5.1 million. In January 2003, we issued to WCAS an
additional 1,030,928 common units for $4.50 per unit for an
aggregate purchase price of $4.6 million in connection with
the issuance of the $36.0 million senior subordinated
notes. These transactions were not registered under the
Securities Act of 1933, as amended (the Securities
Act), pursuant to the exemption provided by
Section 4(2) thereto or Regulation D thereunder for a
transaction not involving any public offering.

During 2003 we issued 96,139 of our common units
upon the exercise of options by our employees. These
transactions were exempt from registration pursuant to
Rule 701 or Regulations D of the Securities Act.

See Item 12 of this report for information
regarding our equity compensation plans.






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

The following table sets forth, for the periods
and as of the dates indicated, our selected historical
consolidated financial information. The statement of operations
data and balance sheet data as of and for the years ended
December 31, 2003 and 2002, the five-month period ended
December 31, 2001, the seven-month period ended
July 31, 2001, the six-month period ended December 31,
2000 and the years ended June 30, 2000 and 1999 was derived
from our audited consolidated financial statements and our
Predecessor Companys audited consolidated financial
statements.

We were formed in June 2001 and had no operating
history prior to the contribution of the outstanding stock of
Behavioral Healthcare Corporation to us effective August 1,
2001. Consequently, all financial information prior to
August 1, 2001 is for Behavioral Healthcare Corporation
(our Predecessor Company). In June 2001, Behavioral Healthcare
Corporation changed its fiscal year end from June 30 to
December 31, effective December 31, 2001.

32



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##### Table of Contents



The table below should be read in conjunction
with the audited consolidated financial statements and related
notes and Managements Discussion and Analysis of
Financial Condition and Results of Operations that appear
elsewhere in this Annual Report on Form 10-K.

|                              |                                                                  |                        |   |              |   |              |   |                     |   |              |   |            |   |            |   |         |   |  |   |         |  |  |   |         |   |  |   |         |  
|----------------------------- | ---------------------------------------------------------------- | ---------------------- | - | ------------ | - | ------------ | - | ------------------- | - | ------------ | - | ---------- | - | ---------- | - | ------- | - |  | - | ------- |  |  | - | ------- | - |  | - | ------- | -
|                              |                                                                  |                        |   |              |   |              |   |                    
|                              |                                                                  |                        |   |              |   |              |   | Predecessor Company
|                              |                                                                  |                        |   |              |   |              |   |                    
|                              |                                                                  |                        |   |              |   | Five-Month   |   | Seven-Month         |   | Six-Month    |   |           
|                              |                                                                  | Year Ended             |   | Year Ended   |   | Period Ended |   | Period Ended        |   | Period Ended |   | Year Ended |   | Year Ended
|                              |                                                                  | December 31,           |   | December 31, |   | December 31, |   | July 31,            |   | December 31, |   | June 30,   |   | June 30,  
|                              |                                                                  | 2003                   |   | 2002         |   | 2001         |   | 2001                |   | 2000         |   | 2000       |   | 1999      
|                              |                                                                  |                        |   |              |   |              |   |                     |   |              |   |            |   |           
|                              |                                                                  |                       
|                              |                                                                  | (Dollars in thousands)
|Statement of Operations Data: |                                                                  |                        |   |              |   |              |   |                     |   |              |   |            |   |            |   |         |   |  |   |         |  |  |   |         |   |  |   |        
|Revenues:                     |                                                                  |                        |   |              |   |              |   |                     |   |              |   |            |   |            |   |         |   |  |   |         |  |  |   |         |   |  |   |        
|                              | Net patient service revenue                                      |                        | $ | 640,920      |   |              | $ | 369,539             |   |              | $ | 107,169    |   |            | $ | 129,222 |   |  | $ | 112,394 |  |  | $ | 231,823 |   |  | $ | 267,517 |  
|                              | Premium revenue                                                  |                        |   | 592,293      |   |              |   | 13,232              |   |              |   |           |   |            |   |        |   |  |   |        |  |  |   |        |   |  |   |        |  
|                              | Other revenues                                                   |                        |   | 86,461       |   |              |   | 25,213              |   |              |   | 5,349      |   |            |   | 2,868   |   |  |   | 1,866   |  |  |   | 4,578   |   |  |   | 6,713   |  
|                              |                                                                  |                        |   |              |   |              |   |                     |   |              |   |            |   |            |   |         |   |  |   |         |  |  |   |         |   |  |   |        
|                              | Total net revenues                                               |                        |   | 1,319,674    |   |              |   | 407,984             |   |              |   | 112,518    |   |            |   | 132,090 |   |  |   | 114,260 |  |  |   | 236,401 |   |  |   | 274,230 |  
|Expenses:                     |                                                                  |                        |   |              |   |              |   |                     |   |              |   |            |   |            |   |         |   |  |   |         |  |  |   |         |   |  |   |        
|                              | Salaries and benefits                                            |                        |   | 531,893      |   |              |   | 224,885             |   |              |   | 63,712     |   |            |   | 82,736  |   |  |   | 66,812  |  |  |   | 138,042 |   |  |   | 171,658 |  
|                              | Professional fees                                                |                        |   | 127,295      |   |              |   | 40,334              |   |              |   | 14,990     |   |            |   | 19,625  |   |  |   | 15,876  |  |  |   | 36,691  |   |  |   | 51,615  |  
|                              | Claims and capitation                                            |                        |   | 272,872      |   |              |   | 10,956              |   |              |   |           |   |            |   |        |   |  |   |        |  |  |   |        |   |  |   |        |  
|                              | Supplies                                                         |                        |   | 149,063      |   |              |   | 43,683              |   |              |   | 7,508      |   |            |   | 7,879   |   |  |   | 6,625   |  |  |   | 13,545  |   |  |   | 17,488  |  
|                              | Provision for doubtful accounts                                  |                        |   | 52,749       |   |              |   | 23,677              |   |              |   | 5,488      |   |            |   | 4,080   |   |  |   | 4,788   |  |  |   | 14,327  |   |  |   | 21,652  |  
|                              | Interest                                                         |                        |   | 22,155       |   |              |   | 2,751               |   |              |   | 1,288      |   |            |   | 2,488   |   |  |   | 4,339   |  |  |   | 10,062  |   |  |   | 8,422   |  
|                              | Change in fair value of interest rate swap
    agreements        |                        |   | (558         | ) |              |   |                    |   |              |   |           |   |            |   |        |   |  |   |        |  |  |   |        |   |  |   |        |  
|                              | Depreciation and amortization                                    |                        |   | 35,742       |   |              |   | 8,929               |   |              |   | 1,424      |   |            |   | 3,119   |   |  |   | 2,881   |  |  |   | 7,521   |   |  |   | 9,265   |  
|                              | Impairment of long-lived assets and restructuring
    costs      |                        |   | 2,913        |   |              |   | 78                  |   |              |   | 1,374      |   |            |   | 560     |   |  |   |        |  |  |   | 1,487   |   |  |   | 22,038  |  
|                              | Loss (gain) on divestitures                                      |                        |   | 61           |   |              |   | (1,206              | ) |              |   | (109       | ) |            |   | (9,123  | ) |  |   | 18      |  |  |   | 1,252   |   |  |   | 2,377   |  
|                              | Other                                                            |                        |   | 119,472      |   |              |   | 46,864              |   |              |   | 12,567     |   |            |   | 12,272  |   |  |   | 10,060  |  |  |   | 22,139  |   |  |   | 28,933  |  
|                              |                                                                  |                        |   |              |   |              |   |                     |   |              |   |            |   |            |   |         |   |  |   |         |  |  |   |         |   |  |   |        
|                              | Income (loss) from continuing operations before
    income taxes |                        |   | 6,017        |   |              |   | 7,033               |   |              |   | 4,276      |   |            |   | 8,454   |   |  |   | 2,861   |  |  |   | (8,665  | ) |  |   | (59,218 | )
|                              | Income tax expense (benefit)                                     |                        |   | 2,312        |   |              |   | 2,690               |   |              |   | 1,655      |   |            |   | (8,364  | ) |  |   | 51      |  |  |   | (983    | ) |  |   | (11,204 | )
|                              |                                                                  |                        |   |              |   |              |   |                     |   |              |   |            |   |            |   |         |   |  |   |         |  |  |   |         |   |  |   |        
|                              | Net income (loss) from continuing operations                     |                        |   | 3,705        |   |              |   | 4,343               |   |              |   | 2,621      |   |            |   | 16,818  |   |  |   | 2,810   |  |  |   | (7,682  | ) |  |   | (48,014 | )
|                              | Discontinued operations:                                         |                        |   |              |   |              |   |                     |   |              |   |            |   |            |   |         |   |  |   |         |  |  |   |         |   |  |   |         |  
|                              | Income (loss) from discontinued operations                       |                        |   | 953          |   |              |   | 1,042               |   |              |   | 158        |   |            |   | 1,749   |   |  |   | 866     |  |  |   | (250    | ) |  |   | 800     |  
|                              | Income tax expense (benefit)                                     |                        |   | 367          |   |              |   | 332                 |   |              |   | 63         |   |            |   | 698     |   |  |   | 340     |  |  |   | (103    | ) |  |   | 304     |  
|                              |                                                                  |                        |   |              |   |              |   |                     |   |              |   |            |   |            |   |         |   |  |   |         |  |  |   |         |   |  |   |        
|                              | Income (loss) from discontinued operations, net                  |                        |   | 586          |   |              |   | 710                 |   |              |   | 95         |   |            |   | 1,051   |   |  |   | 526     |  |  |   | (147    | ) |  |   | 496     |  
|                              |                                                                  |                        |   |              |   |              |   |                     |   |              |   |            |   |            |   |         |   |  |   |         |  |  |   |         |   |  |   |        
|                              | Net income (loss)                                                |                        | $ | 4,291        |   |              | $ | 5,053               |   |              | $ | 2,716      |   |            | $ | 17,869  |   |  | $ | 3,336   |  |  | $ | (7,829  | ) |  | $ | (47,518 | )
|                              |                                                                  |                        |   |              |   |              |   |                     |   |              |   |            |   |            |   |         |   |  |   |         |  |  |   |         |   |  |   |        

33



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|                                       |                         |                        |         |              |   |              |         |                     |   |              |         |            |   |            |        |        |   |   |         |        |   |   |         |         |   |   |         |         |  
|-------------------------------------- | ----------------------- | ---------------------- | ------- | ------------ | - | ------------ | ------- | ------------------- | - | ------------ | ------- | ---------- | - | ---------- | ------ | ------ | - | - | ------- | ------ | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                       |                         |                        |         |              |   |              |         |                    
|                                       |                         |                        |         |              |   |              |         | Predecessor Company
|                                       |                         |                        |         |              |   |              |         |                    
|                                       |                         |                        |         |              |   | Five-Month   |         | Seven-Month         |   | Six-Month    |         |           
|                                       |                         | Year Ended             |         | Year Ended   |   | Period Ended |         | Period Ended        |   | Period Ended |         | Year Ended |   | Year Ended
|                                       |                         | December 31,           |         | December 31, |   | December 31, |         | July 31,            |   | December 31, |         | June 30,   |   | June 30,  
|                                       |                         | 2003                   |         | 2002         |   | 2001         |         | 2001                |   | 2000         |         | 2000       |   | 1999      
|                                       |                         |                        |         |              |   |              |         |                     |   |              |         |            |   |           
|                                       |                         |                       
|                                       |                         | (Dollars in thousands)
|Other Financial Data:                  |                         |                        |         |              |   |              |         |                     |   |              |         |            |   |            |        |        |   |   |         |        |   |   |         |         |   |   |         |        
|EBITDA(1)                              |                         | $                      | 64,309  |              |   | $            | 19,755  |                     |   | $            | 7,146   |            |   | $          | 15,810 |        |   | $ | 10,947  |        |   | $ | 8,668   |         |   | $ | (40,731 | )      
|Capital expenditures                   |                         |                        | 86,974  |              |   |              | 46,029  |                     |   |              | 6,985   |            |   |            | 2,833  |        |   |   | 1,359   |        |   |   | 1,618   |         |   |   | 3,750   |        
|Net cash provided by (used in):        |                         |                        |         |              |   |              |         |                     |   |              |         |            |   |            |        |        |   |   |         |        |   |   |         |         |   |   |         |        
|                                       | Operating activities    |                        |         | 66,510       |   |              |         | 21,047              |   |              |         | 1,143      |   |            |        | 7,121  |   |   |         | 732    |   |   |         | 10,814  |   |   |         | 3,903   |  
|                                       | Investing activities    |                        |         | (274,120     | ) |              |         | (169,793            | ) |              |         | (25,271    | ) |            |        | 18,034 |   |   |         | (218   | ) |   |         | 18,419  |   |   |         | 11,124  |  
|                                       | Financing activities    |                        |         | 183,864      |   |              |         | 252,364             |   |              |         | 12,724     |   |            |        | (8,192 | ) |   |         | (6,377 | ) |   |         | (27,294 | ) |   |         | (12,066 | )
|                                       | Discontinued operations |                        |         | (61          | ) |              |         | (1                  | ) |              |         | (112       | ) |            |        | 34     |   |   |         | 27     |   |   |         | (12     | ) |   |         | (24     | )
|Balance Sheet Data (end of period):    |                         |                        |         |              |   |              |         |                     |   |              |         |            |   |            |        |        |   |   |         |        |   |   |         |         |   |   |         |        
|Cash and cash equivalents              |                         | $                      | 89,762  |              |   | $            | 113,569 |                     |   | $            | 9,952   |            |   | $          |       |        |   | $ | 4,471   |        |   | $ | 10,307  |         |   | $ | 8,380   |        
|Working capital                        |                         |                        | 102,140 |              |   |              | 104,504 |                     |   |              | 25,337  |            |   |            |       |        |   |   | 12,698  |        |   |   | 1,026   |         |   |   | 1,012   |        
|Total assets                           |                         |                        | 818,004 |              |   |              | 487,308 |                     |   |              | 169,541 |            |   |            |       |        |   |   | 163,340 |        |   |   | 168,859 |         |   |   | 210,597 |        
|Total debt                             |                         |                        | 261,443 |              |   |              | 72,844  |                     |   |              | 31,627  |            |   |            |       |        |   |   | 49,500  |        |   |   | 55,908  |         |   |   | 83,202  |        
|Other long-term liabilities            |                         |                        | 6,573   |              |   |              |        |                     |   |              |        |            |   |            |       |        |   |   |        |        |   |   |        |         |   |   |        |        
|Mandatorily redeemable preferred units |                         |                        | 111,931 |              |   |              | 103,898 |                     |   |              | 47,658  |            |   |            |       |        |   |   |        |        |   |   |        |         |   |   |        |        
|Members equity                        |                         |                        | 221,090 |              |   |              | 208,354 |                     |   |              | 49,915  |            |   |            |       |        |   |   | 77,258  |        |   |   | 73,903  |         |   |   | 81,756  |        



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | EBITDA represents net income before interest,
    income tax expense (benefit), depreciation and amortization, and
    change in fair value of interest rate swap agreements. EBITDA
    includes income (loss) from discontinued operations ($953,000
    and $1.0 million for the years ended December 31, 2003
    and 2002, respectively, $158,000 for the five-month period ended
    December 31, 2001, $1.7 million for the seven-month
    period ended July 31, 2001, $866,000 for the six months
    ended December 31, 2000 and ($250,000) and $800,000 for the
    years ended June 30, 2000 and 1999, respectively) and
    (gain) loss on divestitures ($61,000 and $1.2 million)
    for the years ended December 31, 2003 and 2002,
    respectively, ($109,000) for the five-month period ended
    December 31, 2001, ($9.1 million) for the seven-month
    period ended July 31, 2001, $18,000 for the six-month
    period ended December 31, 2000 and $1.3 million and
    $2.4 million for the years ended June 30, 2000 and
    1999, respectively). EBITDA is presented because we believe that
    it is a useful indicator of our liquidity. EBITDA, subject to
    certain adjustments, is also used as a measure in certain of the
    covenants in our subsidiarys senior secured credit
    facility and the indenture governing our subsidiarys
    senior subordinated notes. EBITDA is a non-GAAP financial
    measure and should not be considered in isolation from, and is
    not intended as an alternative measure of, net income or cash
    flow from operations, each as determined in accordance with
    generally accepted accounting principles. EBITDA is not
    necessarily comparable to similarly titled measures used by
    other companies.

34



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The following table reconciles net cash provided
by operating activities to EBITDA:

|                                           |                                                           |                        |         |              |   |              |         |                     |  |              |       |            |  |            |        |       |  |   |        |       |  |   |         |        |   |   |         |       | 
|------------------------------------------ | --------------------------------------------------------- | ---------------------- | ------- | ------------ | - | ------------ | ------- | ------------------- |  | ------------ | ----- | ---------- |  | ---------- | ------ | ----- |  | - | ------ | ----- |  | - | ------- | ------ | - | - | ------- | ----- | 
|                                           |                                                           |                        |         |              |   |              |         |                    
|                                           |                                                           |                        |         |              |   |              |         | Predecessor Company
|                                           |                                                           |                        |         |              |   |              |         |                    
|                                           |                                                           |                        |         |              |   | Five-Month   |         | Seven-Month         |  | Six-Month    |       |           
|                                           |                                                           | Year Ended             |         | Year Ended   |   | Period Ended |         | Period Ended        |  | Period Ended |       | Year Ended |  | Year Ended
|                                           |                                                           | December 31,           |         | December 31, |   | December 31, |         | July 31,            |  | December 31, |       | June 30,   |  | June 30,  
|                                           |                                                           | 2003                   |         | 2002         |   | 2001         |         | 2001                |  | 2000         |       | 2000       |  | 1999      
|                                           |                                                           |                        |         |              |   |              |         |                     |  |              |       |            |  |           
|                                           |                                                           |                       
|                                           |                                                           | (Dollars in thousands)
|Statement of Operations Data:              |                                                           |                        |         |              |   |              |         |                     |  |              |       |            |  |            |        |       |  |   |        |       |  |   |         |        |   |   |         |      
|Net cash provided by operating activities  |                                                           | $                      | 66,510  |              |   | $            | 21,047  |                     |  | $            | 1,143 |            |  | $          | 7,121  |       |  | $ | 732    |       |  | $ | 10,814  |        |   | $ | 3,903   |      
|Changes in working capital items and other |                                                           |                        | (60,493 | )            |   |              | (14,014 | )                   |  |              | 3,133 |            |  |            | 1,333  |       |  |   | 2,129  |       |  |   | (19,479 | )      |   |   | (63,121 | )    
|                                           |                                                           |                        |         |              |   |              |         |                     |  |              |       |            |  |            |        |       |  |   |        |       |  |   |         |        |   |   |         |      
|Operating income                           |                                                           |                        | 6,017   |              |   |              | 7,033   |                     |  |              | 4,276 |            |  |            | 8,454  |       |  |   | 2,861  |       |  |   | (8,665  | )      |   |   | (59,218 | )    
|                                           | Income from discontinued operations                       |                        |         | 953          |   |              |         | 1,042               |  |              |       | 158        |  |            |        | 1,749 |  |   |        | 866   |  |   |         | (250   | ) |   |         | 800   | 
|                                           | Interest                                                  |                        |         | 22,155       |   |              |         | 2,751               |  |              |       | 1,288      |  |            |        | 2,488 |  |   |        | 4,339 |  |   |         | 10,062 |   |   |         | 8,422 | 
|                                           | Change in fair value of interest rate swap
    agreements |                        |         | (558         | ) |              |         |                    |  |              |       |           |  |            |        |      |  |   |        |      |  |   |         |       |   |   |         |      | 
|                                           | Depreciation and amortization                             |                        |         | 35,742       |   |              |         | 8,929               |  |              |       | 1,424      |  |            |        | 3,119 |  |   |        | 2,881 |  |   |         | 7,521  |   |   |         | 9,265 | 
|                                           |                                                           |                        |         |              |   |              |         |                     |  |              |       |            |  |            |        |       |  |   |        |       |  |   |         |        |   |   |         |      
|EBITDA                                     |                                                           | $                      | 64,309  |              |   | $            | 19,755  |                     |  | $            | 7,146 |            |  | $          | 15,810 |       |  | $ | 10,947 |       |  | $ | 8,668   |        |   | $ | (40,731 | )    
|                                           |                                                           |                        |         |              |   |              |         |                     |  |              |       |            |  |            |        |       |  |   |        |       |  |   |         |        |   |   |         |      






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

The following discussion and analysis of
financial condition and results of operations should be read in
conjunction with our audited consolidated financial statements,
the notes to our audited consolidated financial statements, and
the other financial information appearing elsewhere in this
report. Data for the years ended December 31, 2003 and 2002
and the five-month period ended December 31, 2001 has been
derived from our audited consolidated financial statements. Data
for the seven-month period ended July 31, 2001 has been
derived from Behavioral Healthcare Corporations (our
Predecessor Company) audited consolidated financial statements.
We have combined the results of operations and operating
statistics for calendar year 2001 since we believe the
presentation and discussion of partial periods would not be
meaningful in terms of comparisons to other periods.

Executive Overview



| |            
| | -----------
| | Our Company

We are an owner and operator of acute care
hospitals and free-standing behavioral hospitals, principally
located in urban and suburban markets in the United States. We
own and operate seven acute care hospitals (including one
inpatient rehabilitation hospital), 21 behavioral hospitals, and
other related healthcare businesses. Our fully integrated
healthcare delivery system in Albuquerque, New Mexico (Lovelace
Sandia Health System, Inc.) comprises five of our seven
acute care hospitals, and includes a 168,000 member health plan,
approximately 328 employed physicians and 15 primary care
clinics. Through our wholly-owned subsidiary AHS S.E.D. Medical
Laboratories, Inc., we also operate a full service
reference laboratory in Albuquerque.

We were formed in June 2001 for the purpose of
owning, operating and acquiring acute care and behavioral
hospitals. The outstanding stock of our Predecessor Company was
contributed to us effective August 1, 2001 in exchange for
equity ownership. Prior to this contribution of predecessor
company shares, we had no operating history. In June 2001, the
predecessor company changed its fiscal year end from
June 30 to December 31, effective December 31,
2001.

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| |         
| | --------
| | Revenues

We generate revenue predominantly through three
sources: the provision of patient care at our acute care and
behavioral facilities; premiums charged to our health plan
membership; and other healthcare services. We evaluate the
growth of our revenue in many ways. In our acute care segment,
we utilize admissions and adjusted admissions, which are volume
measures, and revenue per adjusted admission, which is a pricing
and acuity measure. However, it has been historically difficult
to utilize revenue per adjusted admission due to the historical
treatment of our health plan members, which is discussed below
under net patient service revenue. In our behavioral care
segment, we utilize patient days and average length of stay,
measures of volume and acuity, as well as revenue per patient
day, a measure of pricing and acuity.

The following is an analysis of our revenue from
each source (in thousands):

|                            |                    |                   |         |                   |  |                   |      |       |   |            |         |         |  |  |      |       |   |   |         |         |  |  |      |       |  
|--------------------------- | ------------------ | ----------------- | ------- | ----------------- |  | ----------------- | ---- | ----- | - | ---------- | ------- | ------- |  |  | ---- | ----- | - | - | ------- | ------- |  |  | ---- | ----- | -
|                            |                    |                   |         |                   |  |                  
|                            |                    | Year Ended        |         | Year Ended        |  | Year Ended       
|                            |                    | December 31, 2003 |         | December 31, 2002 |  | December 31, 2001
|                            |                    |                   |         |                   |  |                  
|                            |                    |                   |         |                   |  |                   |      |       |   |            |         |        
|                            |                    |                   |         |                   |  |                   |      |       |   |           
|                            |                    |                   |         |                   |  |                   |      |       |   | (Combined)
|Net patient service revenue |                    | $                 | 640,920 |                   |  |                   | 48.6 | %     |   | $          | 369,539 |         |  |  | 90.6 | %     |   | $ | 236,391 |         |  |  | 96.6 | %    
|Premium revenue             |                    |                   | 592,293 |                   |  |                   | 44.9 |       |   |            | 13,232  |         |  |  | 3.2  |       |   |   |        |         |  |  |     |      
|Other revenue               |                    |                   | 86,461  |                   |  |                   | 6.5  |       |   |            | 25,213  |         |  |  | 6.2  |       |   |   | 8,217   |         |  |  | 3.4  |      
|                            |                    |                   |         |                   |  |                   |      |       |   |            |         |         |  |  |      |       |   |   |         |         |  |  |      |      
|                            | Total net revenues |                   | $       | 1,319,674         |  |                   |      | 100.0 | % |            | $       | 407,984 |  |  |      | 100.0 | % |   | $       | 244,608 |  |  |      | 100.0 | %
|                            |                    |                   |         |                   |  |                   |      |       |   |            |         |         |  |  |      |       |   |   |         |         |  |  |      |      



| |                            
| | ---------------------------
| | Net Patient Service Revenue

Our net patient service revenues are primarily
derived from Medicare and Medicaid programs and managed care
programs. These revenues are net of contractual adjustments and
policy discounts, which represent the difference between our
hospitals established charges and the payment rates under
the Medicare and Medicaid programs and managed care programs.
The percentage of our patient service revenue from Medicare and
Medicaid programs and managed care programs (expressed in
patient days) was as follows:

|             |  |                          |       |            |  |       |       |            |  |            |       |            |  |  |       |   |  |  |       |   |  |  |       |  
|------------ |  | ------------------------ | ----- | ---------- |  | ----- | ----- | ---------- |  | ---------- | ----- | ---------- |  |  | ----- | - |  |  | ----- | - |  |  | ----- | -
|             |  |                         
|             |  | Years Ended December 31,
|             |  |                         
|             |  |                          |       |            |  |      
|             |  | 2003                     |       | 2002       |  | 2001 
|             |  |                          |       |            |  |      
|             |  | Acute                    |       | Behavioral |  | Acute |       | Behavioral |  | Acute      |       | Behavioral
|             |  |                          |       |            |  |       |       |            |  |            |       |           
|             |  |                          |       |            |  |       |       |            |  |           
|             |  |                          |       |            |  |       |       |            |  | (Combined)
|Medicare     |  |                          | 44.0  | %          |  |       | 9.2   | %          |  |            | 56.6  | %          |  |  | 8.3   | % |  |  | 67.8  | % |  |  | 10.0  | %
|Medicaid     |  |                          | 5.5   |            |  |       | 33.7  |            |  |            | 5.1   |            |  |  | 33.5  |   |  |  | 7.6   |   |  |  | 32.6  |  
|Managed care |  |                          | 39.2  |            |  |       | 29.2  |            |  |            | 27.5  |            |  |  | 28.8  |   |  |  | 16.4  |   |  |  | 27.9  |  
|Other payors |  |                          | 11.3  |            |  |       | 27.9  |            |  |            | 10.8  |            |  |  | 29.4  |   |  |  | 8.2   |   |  |  | 29.5  |  
|             |  |                          |       |            |  |       |       |            |  |            |       |            |  |  |       |   |  |  |       |   |  |  |       |  
|             |  |                          | 100.0 | %          |  |       | 100.0 | %          |  |            | 100.0 | %          |  |  | 100.0 | % |  |  | 100.0 | % |  |  | 100.0 | %
|             |  |                          |       |            |  |       |       |            |  |            |       |            |  |  |       |   |  |  |       |   |  |  |       |  

Other payors primarily include state and local
governments, commercial payors, workers compensation and self
pay patients.

Patient service revenue within our acute care
services segment prior to January 1, 2004 excludes revenue
for services provided to our health plan members. During 2003,
the health plan did not qualify as a separate operating segment
in accordance with the criteria set forth by
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. However, beginning in
2004 we will manage the health plan as a separate operating
segment and our acute care services segment will exclude the
health plan and will include patient service revenue from the
health plan members. We believe this will allow us to better
manage the businesses within our company and make better
financial and operational decisions. As a result of this change
in how we will manage these operations, our health plan business
will become a separate reporting segment in 2004. However, due
to system limitations it will be impractical to restate our
segment information for prior periods to correspond with this
change in our reportable segments.

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The final determination of amounts earned under
Medicare and Medicaid programs often does not occur until the
fiscal year subsequent to submission of claims due to audits by
the administering agency, rights of appeal and the application
of numerous technical provisions. Differences between original
estimates and subsequent revisions, including final settlements,
are included in the statement of operations in the period in
which the revisions are made. As part of our acquisitions
discussed above, we did not assume any of the cost report
settlements under these programs through the dates of purchase.

The industry trends toward fixed payments and
outpatient services are outside of our control. To respond
effectively to these trends we must increase patient volume
while controlling the costs of the services we provide. If we
are unable to contain costs through operational efficiencies or
obtain higher reimbursements and payments from managed care or
government payors, our results of operations and cash flow will
be adversely affected.



| |                
| | ---------------
| | Premium Revenue

Our premium revenue is derived from our health
plan in New Mexico. We offer a portfolio of health plan
products, primarily to private and public purchasers. Premium
revenue is comprised of premiums we receive from our health plan
members, which we then are responsible for the costs of
healthcare services provided to those members. Because our
health plan is part of our integrated healthcare delivery
network in New Mexico, we ultimately provide many of those
healthcare services to our health plan members. Our health
plans products include (i) a commercial HMO product
portfolio marketed to employer groups of two or more persons,
(ii) a contract with the State of New Mexico to provide
services to the States managed Medicaid program, known as
Salud!, and (iii) Medicare HMO coverage through a contract
with CMS for eligible individuals, called Medicare+Choice. As of
December 31, 2003, we covered approximately 168,000
participants throughout New Mexico with these products. The
commercial HMO, Salud! and Medicare+Choice product portfolios
covered 46.1%, 39.8% and 14.1% of these participants,
respectively. For the commercial HMO products, we receive
monthly prepaid premiums, which are typically fixed for a
one-year period, for all participants under contracts with the
employer groups. For Salud! and Medicare+Choice, we receive a
fixed premium per member per month to provide all covered
services. Salud! premium rates are negotiated directly with the
New Mexico Department of Health and Human Services on an annual
basis. The Medicare+Choice contract is updated annually by CMS,
which bases its rates upon a formula using geographic, age, and
gender demographics.

Although premium revenue was 44.9% of total net
revenues for the year ended December 31, 2003, expanding
our presence in the managed care business is not one of our
primary growth strategies. One of our key growth strategies is
to expand through the selective acquisition of acute care and
behavioral hospitals in targeted markets. We do not plan to
acquire health plans unless these plans are tangential parts of
the hospitals or systems that we acquire. The health plan is an
important part of our integrated delivery system in Albuquerque,
but as we expand into new targeted markets over time, we
anticipate that health plan revenues will become a smaller
percentage of our total net revenues.



| |              
| | -------------
| | Other Revenue

We also derive revenue from our commercial
laboratory, retail pharmacies within our hospitals, provider
network access and medical management services through our
health plan, and educational services through our behavioral
segment.



| |                      
| | ---------------------
| | Our Business Strategy

Key elements of our business strategy include the
following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Physician Recruiting and
    Retention.We strive to recruit both
    primary and specialty care physicians who can provide quality
    services that we believe are currently needed in the communities
    we serve. We similarly seek to recruit new physicians (primarily
    psychiatrists) to our behavioral hospitals to provide services
    to our patients. For example, during 2003, we had a net increase
    of 44

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | physicians through our recruiting and hiring
    efforts. This reflects our strategy to expand capacity and more
    importantly our service lines at our facilities. Additionally,
    we strive to retain our physicians by maintaining strong
    relationships with them, by enhancing the scope and quality of
    services at our hospitals, and by constantly improving our
    hospitals work environment. We believe that as we continue
    to strengthen our position in each of our markets, we will
    further improve our ability to attract and retain quality
    physicians. An example of our retention efforts is the use of a
    program we refer to as Physician Leadership Councils, or PLCs.
    PLCs generally consist of leading physicians in our communities
    who provide their ideas and recommendations to the management of
    each facility on improving its operations. We use PLCs to
    develop and maintain strong relationships with members of the
    medical staffs at each of our acute care hospitals. Generally,
    PLCs meet with our hospital management teams on a regular basis
    to discuss operating and strategic issues, serve as a sounding
    board for the medical community at each hospital and enable our
    local management teams to communicate on a regular basis with
    the medical staff. PLCs also actively participate in the
    strategic planning process of each of our acute care hospitals.
|
| |  | Acquisitions.An
    integral part of our business strategy is the continued
    selective acquisitions of acute care hospitals in urban and
    suburban markets and behavioral hospitals. To accomplish this we
    selectively seek acquisition opportunities in markets with
    populations over 100,000 and growth rates above the national
    average, either through the acquisition of a network of
    hospitals and other healthcare facilities or a single
    well-positioned facility, where we generally can improve
    operating performance and profitability. We have generally
    acquired relatively underperforming acute care hospitals where
    we believe we can improve their operational performance,
    profitability and their financial systems and internal controls.
    After we acquire a hospital, we implement a number of measures
    designed to increase revenues, lower operating costs and improve
    their financial systems and internal controls. We also may make
    significant investments in the acquired hospital to expand
    services, strengthen the medical staff and improve our market
    position overall, as well as integrating the acquired
    hospitals systems into our systems. Please refer to the
    Acquisitions section below for further discussion of
    acquisitions made since 2001.                                                                                                        
|
| |  | Capital
    Expenditures.Upon acquisition, we
    generally invest substantial capital in our markets. For
    example, upon the acquisitions of entities comprising Lovelace
    Sandia Health System, we committed to invest $80.0 million
    of capital into those facilities in the Albuquerque, New Mexico
    market over a five-year period. Through December 31, 2003,
    we had invested approximately $51.5 million and we
    anticipate completing our commitment during 2004. That
    investment included a $15.0 million renovation of West Mesa
    Hospital as well as significant investments in information
    systems. Additionally, we have begun a $7.2 million
    conversion of our Northeast Heights facility in Albuquerque to a
    womens hospital. See Liquidity and Capital
    Resources below for additional discussion of our capital
    expenditures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Our ability to realize the benefits of these
strategies will be affected by a number of important factors,
including the known legislative, industry and economic trends
below and those described in this document under the caption
Risk Factors.



| |                                                    
| | ---------------------------------------------------
| | Known Legislative, Industry and
    Economic Trends

Our future financial condition and results of
operations may be affected by some known legislative, industry
and economic trends.



| |                                              
| | ---------------------------------------------
| | Acute Care and Behavioral Hospital
    Trends

Both federal and state legislatures are
continuing to scrutinize the healthcare industry for the purpose
of reducing healthcare costs. While we are unable to predict
what, if any, future healthcare reform legislation may be
enacted at the federal or state level, we expect continuing
pressure to limit expenditures by governmental healthcare
programs. The BBA of 1997 imposed certain limitations on
increases in the inpatient Medicare rates paid to acute care
hospitals. As required by the BBA of 1997, payments for

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hospital outpatient, psychiatric sub-acute, home
health and rehabilitation sub-acute services have converted to
PPS, instead of payments being based on costs. Most hospital
outpatient services are now reimbursed under an outpatient PPS
based on the ambulatory payment classification system.
Rehabilitation and psychiatric sub-acute services began
transitioning to PPS in 2002. The BBA of 1997 also includes a
managed care option that could direct Medicare patients to
managed care organizations. The MMA enhanced the likelihood of
this shift, through the creation of the Medicare Advantage
Program, which will begin in earnest in 2006. BIPA amended the
BBA of 1997 by giving hospitals a full market basket increase in
fiscal years 2002 and 2003. Medicare is to update payment rates
for inpatient services in fiscal year 2004 and each subsequent
year by the full rate of increase in the hospital market basket.
The MMA predicates payment of the full increase to a hospital in
fiscal years 2005 through 2007 on a facilitys
participation in CMSs quality-of-care National Voluntary
Hospital Reporting Initiative. In addition, BIPA contained
provisions delaying scheduled reductions in payments to home
health agencies and also contained provisions designed to lessen
the impact on providers of spending reductions contained in the
BBA of 1997. Further changes in the Medicare or Medicaid
programs and other proposals to limit healthcare spending could
have a material adverse effect on the healthcare industry and us.


The BBRA of 1999 required CMS to develop an
inpatient psychiatric per diem effective for the federal fiscal
year beginning October 1, 2002. On November 19, 2003,
CMS proposed a rule to implement PPS for psychiatric hospitals
and units. This new system will replace the current inpatient
psychiatric payment system described above. The proposed rule
designates that PPS under the new system will be effective for
cost reports beginning on or after April 1, 2004. The plan
will be implemented through a three year transition, ultimately
phasing into 100% PPS (year one: 75% cost/25% PPS; year two: 50%
cost/50% PPS; year three: 25% cost/75% PPS; year four: 100%
PPS). We cannot predict whether or not the rule will actually be
effective by April 1, 2004, nor whether the final rule will
mirror provisions of the proposed rule.

Our revenues are also affected by the industry
trend towards the provision of more services on an outpatient
basis rather than an inpatient basis. We expect this trend to
continue due to technological and pharmaceutical advances and
pressures from payors to use lower cost outpatient services. We
provide healthcare services as an extension of our hospitals
through a variety of outpatient activities, including ambulatory
surgery, diagnostic imaging and primary care and occupational
medicine clinics. In addition, because our behavioral hospitals
generally have a lower proportion of outpatient services
relative to our acute care hospitals, our acquisition of a
number of acute care hospitals in 2003, 2002 and 2001 increased
outpatient services as a percentage of net patient service
revenues. Outpatient services accounted for approximately 41.8%,
20.7% and 7.2% of gross patient service revenues for the years
ended December 31, 2003, 2002 and 2001, respectively.

The DRG weights used to calculate DRG payment
amounts are based upon a statistically normal distribution of
severity. When the cost of treatment for certain patients falls
well outside the normal distribution, hospitals typically
receive additional outlier payments designed to
protect the hospital from large financial losses due to
unusually expensive cases. Federal statutory provisions require
that total outlier payments must be between 5% and 6% of the
estimated Medicare inpatient payments in a federal fiscal year.
On December 20, 2002, CMS announced that it was initiating
an aggressive and immediate compliance strategy to ensure that
Medicare payments for outliers and services paid outside the PPS
system are appropriate. CMS published the outlier payment final
rule on June 9, 2003 as well as a program memorandum
providing further guidance to the final rule. The final rule
materially changes the way CMS intends for outlier payments to
be regulated. Fiscal intermediaries are instructed to make
outlier payments using more current cost-to-charge ratios
(CCRs) and target facilities for review where
(1) 10.0% of their Medicare payments are from cost
outliers, (2) outlier payments increased by 20.0% or more
from the periods ending 2001 to 2002 and 2002 to 2003, or
(3) the charge per case increased by 15.0% or more from the
periods ending 2000 to 2001 and 2001 to 2002. Interim payments
may also be adjusted to reflect reasonable CCRs. Finally, fiscal
intermediaries have the authority to retroactively adjust
outlier payments if (1) actual CCRs are within a band of
plus or minus 10 percentage points from the interim CCRs and
(2) total outlier payments are greater than $500,000. These
regulations will cause our

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facilities to monitor more closely outlier
reimbursement, but we do not anticipate a material impact on our
operations resulting from this final rule.




| |                                                                    
| | -------------------------------------------------------------------
| | Effects of the Recently Enacted Medicare
    Prescription Drug Bill

The MMA, which was signed into law on
December 8, 2003, made a number of significant changes to
the Medicare program. In addition to a highly publicized
prescription drug benefit that will provide direct relief to
Medicare beneficiaries starting in 2006, the MMA provides a
number of direct benefits to our hospitals including, but not
limited to: a provision confirming current law that the update
factor for inpatients for federal fiscal year 2004 will be the
full market basket of 3.4%; a provision effective
October 1, 2004 setting a lower threshold for determining
when CMS is required to provide additional reimbursement for new
technologies that would receive inadequate payment if assigned
to a standard DRG; provisions basically providing hospitals with
more reimbursement for outpatient drugs; a provision increasing
the payments teaching hospitals receive for the indirect
operating expenses incurred for training interns and residents
in the last half of federal fiscal year 2004 and all of federal
fiscal years 2005 and 2006, but decreasing such amount slightly
in federal fiscal year 2007; a provision increasing our
reimbursement by reducing the labor share percentage from 71.0%
to 62.0% for hospitals with wage indices less than 1.0; a
provision giving hospitals relief during calendar year 2004
making it easier for them to obtain payments related to their
residents in family practice programs; a provision eliminating
the requirement that hospitals must obtain secondary payment
information from all Medicare beneficiaries receiving reference
laboratory services; and a provision mandating that CMS pay the
routine costs associated with category A
(experimental/investigational) clinical trials beginning
January 1, 2005; among others. The MMA also decreases
hospital reimbursement in a few areas, including, but not
limited to, a provision denying updates to hospitals with
high-cost direct medical education programs. In
addition, for federal fiscal years 2005, 2006 and 2007, the Act
confirms current law that hospitals are to receive full market
basket updates for these years, but now conditions such update
amounts upon a hospital providing CMS with specific quality data
relating to the quality of services provided. Those hospitals
failing to provide CMS with the required data will receive an
update equal to the market basket minus 0.4%. We intend to have
our hospitals comply with this reporting requirement. On
balance, however, we believe that the MMA will have a positive
impact on our operating results, especially if future
legislation does not decrease the full market basket updates for
federal fiscal years 2005, 2006 and 2007 for those hospitals
complying with the new reporting requirement.



| |                   
| | ------------------
| | Health Plan Trends

New Mexico Market.The New Mexico health insurance market continues to see
increased cost shifting by employers through increases in
employee coinsurance for many health care services and higher
out of pocket costs (and reduced coverage) for prescription
drugs. Small employers (those with fewer than 50 employees) are
gravitating towards these plans and requesting options for
catastrophic plans with even greater employee cost sharing as a
way to further reduce their employee benefit costs.

Impact of Medicare Prescription Drug
Act.The MMA previously discussed
increases the Medicare+Choice reimbursement payment formula,
creates a prescription drug discount card program in federal
fiscal year 2005 and establishes a new Part D Medicare
prescription drug benefit beginning in federal fiscal year 2006.
With the changes in Medicare funding, we expect to be able to
improve our competitive position in Medicare+Choice beginning in
2004 as increased government funding under the MMA allows us to
improve benefits in some areas. These enhanced benefits, such as
discounted prescription drugs and lower out-of-pocket payments,
should also make our Medicare+Choice offering more competitive
with the governments traditional Medicare program. We
already offer prescription drug coverage that will not be
available under traditional Medicare until 2006.

Underwriting.In
establishing premium rates for our health care plans, we use
underwriting criteria based upon actuarial data, with
adjustments for factors such as the medical costs, claims
experience, member demographic mix and industry differences. Our
underwriting practices are filed and approved with the State of
New Mexico where they are subject to a variety of legislative
and regulatory requirements and

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restrictions. If our underwriting is not
accurate, our profit margins will be reduced until the next rate
negotiation period.


Medical Management.Our profitability depends, in part, on our ability to control
health care costs while providing quality care. Our medical
management staff consists of doctors and nurses who monitor the
medical treatment of our members in need of hospital and
specialist care. In some cases, our medical managers make
on-site visits to some of our key hospitals.

Our medical management programs include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Chronic Disease
    Management.We have created a wide
    range of disease management programs designed to provide
    specialized services to members with chronic disease states
    including, among others, congestive heart failure, asthma, and
    diabetes. These programs focus on prevention, member education,
    and evidence-based care to improve our members lifestyles
    and reduce unnecessary or preventable hospitalization costs.
    These programs may be developed and managed internally or we may
    contract with third parties who have specialized expertise or
    technology within a specific diagnostic category;
|
| |  | Precertification of
    Admission.In the precertification
    stage, our medical managers verify that requests for
    hospitalization and specified health care procedures meet
    specific clinical criteria and are approved in advance;                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Concurrent Review.Once our member has been admitted to the hospital for care, our
    on-site or telephonic medical managers provide administrative
    oversight of the hospitalization process. Our medical managers
    also monitor the discharge process and coordinate any outpatient
    services needed by the patient, including skilled nursing
    facility, home nursing care and rehabilitation therapy.                                                                                                                                                                                                                                 
|
| |  | Retrospective
    Review.Our retrospective review
    process involves confirming our certifications of services
    provided to our members when our medical management staff has
    not been concurrently involved in the hospitalization of our
    members. This process can also occur when our members receive
    emergency care at an out-of-area hospital or when medical claims
    may be disputed; and                                                                                                                                                                                                                                   
|
| |  | Case Management.Our
    case management department provides multi-disciplinary
    coordination of personalized care for patients with complex
    medical conditions, including arranging access to appropriate
    medical and social services, to improve the health status and
    manage health care costs for these patients.                                                                                                                                                                                                                                                                                                                   



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Accounts Receivable Collection Risks and
    Resulting Increased Provision for Bad Debts

We are susceptible to the industry-wide issue of
increased collection risk on uninsured self-pay patients as well
as insured patients whose employers have required them to pay
higher deductibles and co-payments. This risk has caused
deterioration in our accounts receivable, primarily related to
the uninsured self-pay patients, which has resulted in increased
write-offs and a larger provision for doubtful accounts as a
percentage of revenues. The increase in self-pay accounts
receivable results from a combination of factors including
general economic weakness, higher levels of patient deductibles
and co-insurance, continuing state budget struggles resulting in
reductions of Medicaid enrollees and an increase in uninsured
patients who may not qualify for charity care programs. We have
implemented policies and procedures designed to accelerate
upfront cash collections as well as to continue to focus on cash
collection efforts after discharge. However, we believe that
increased bad debts will remain a prevalent trend in the
hospital industry during the foreseeable future.



| |                                                        
| | -------------------------------------------------------
| | Charity Care and Contemplated Revisions to
    Policies

In February of 2004, CMS and the OIG issued
guidance that hospitals have the ability under Medicare
regulations to provide relief to uninsured and under-insured
patients who cannot afford their hospital bills and to Medicare
beneficiaries who cannot afford their Medicare cost sharing
amounts. We have approved and are in the process of implementing
a charity care policy that will provide discounts to

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uninsured and under-insured patients. The policy
will require facility personnel to first determine if a patient
has insurance or can qualify for state or locally funded
programs. If not, facility personnel will seek to qualify the
patient for charity care. The policy considers income level,
family size and the total annual family medical bills. Discounts
are applied on a sliding scale depending on income and family
size. We will begin the program at a pilot hospital and then
implement the policy throughout all facilities. Implementation
of this policy could result in decreased net patient service
revenue with a commensurate offsetting decrease to the provision
for doubtful accounts.




| |                            
| | ---------------------------
| | State Medicaid Funding Cuts

Many states, including certain states in which we
operate, have reported budget deficits as a result of increased
costs and lower than expected tax collections. Health and human
service programs, including Medicaid and similar programs,
represent a significant component of state spending. To address
these budgetary concerns, certain states have discussed the
potential for decreased funding for these programs and other
states have already made funding cuts. While our significant
operations are not located in any states that have taken
material action in this area, we anticipate this will become a
more prevalent trend. We are unable to assess the financial
impact of enacted or proposed state funding cuts at this time.
We remain at risk for funding decreases by the states in which
we operate, which could materially reduce our operating results
and cash flows.



| |                                    
| | -----------------------------------
| | Rising Professional Liability Costs

Effective October 31, 2003, we established a
wholly-owned captive insurance subsidiary to insure our
professional and general liability risk for claims up to
$2.0 million, subject to a $500,000 deductible per claim.
In addition, effective October 31, 2003, we purchased
excess insurance coverage with independent third-party carriers
for claims totaling up to $75.0 million per occurrence and
in the aggregate. Prior to October 31, 2003, we maintained
primary third-party general and professional liability insurance
policies from a third-party commercial insurance carrier for
losses up to $1.0 million per occurrence with policy limits
of $3.0 million in the aggregate on a claims-made basis.
The coverage included a $500,000 deductible or self insured
retention per occurrence and was supplemented with an umbrella
policy with coverage up to $50.0 million per occurrence and
in the aggregate. The cost of insurance has negatively affected
operating results and cash flows throughout the health care
industry due to pricing pressures on insurers and fewer carriers
willing to underwrite professional and general liability
insurance. Also, many physicians practicing in our hospitals
have encountered difficulty in obtaining malpractice insurance.
In the event these physicians are unable to obtain adequate
malpractice insurance coverage, our hospitals are likely to
incur a greater percentage of the amounts paid to claimants,
which would adversely affect our future operating results and
cash flows. The current industry environment appears to indicate
an increase in the quantity and severity of malpractice claims.
However, some states have recently passed tort reform
legislation or are considering such legislation to place limits
on non-economic damages. Absent significant additional
legislation to curb the size of malpractice judgments in the
other states, we expect our recent trend of increased insurance
costs to continue for the foreseeable future.



| |                 
| | ----------------
| | Nursing Shortage

The hospital industry continues to face a
nationwide shortage of nurses. We have experienced particular
difficulty in retaining and recruiting nurses in our Albuquerque
market. This shortage is forecasted to continue for the
foreseeable future. We have a comprehensive nurse recruiting and
retention plan that focuses on competitive salaries and benefits
as well as employee satisfaction, best practices, tuition
assistance, effective training programs and workplace
environment. Additionally, to compensate for a shortage of
employed nurses, we contract with registry nurses as we
determine necessary. However, should we be unsuccessful in our
attempts to maintain nursing coverage adequate for our present
and future needs, our future operating results could be
adversely impacted.

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| |                             
| | ----------------------------
| | Competition for Acquisitions

Intense market competition may limit our ability
to enter choice markets or to recruit and retain quality health
care personnel. We face growing competition in our industry.
Consolidation of hospitals continues to increase as other
hospital companies realize that regional market strength is
pivotal in efficiently providing comprehensive health care
services, recruiting and retaining qualified health care
professionals and effectively managing payer relationships.

Acquisitions

Following is a discussion of our significant
acquisitions during 2001, 2002 and 2003. Due to the number of
acute care hospital acquisitions that we have made since
June 1, 2001, it is difficult to make meaningful
comparisons between our financial results for the acute care
segment for the periods presented.



| |                 
| | ----------------
| | 2001 Acquisition

Effective August 1, 2001, we acquired our
first acute care hospital, Summit Hospital, a 201 bed acute care
hospital located in Baton Rouge, Louisiana, for
$19.0 million, plus acquisition costs. We financed this
acquisition through borrowings under a short-term note, which
was subsequently repaid from excess cash from operations and
financing activities. Results of operations for the year ended
December 31, 2001 include five months of operations for
this hospital.



| |                  
| | -----------------
| | 2002 Acquisitions

Effective January 1, 2002, we purchased
Samaritan Hospital, a 336 bed acute care hospital located in
Lexington, Kentucky. Results of operations for the year ended
December 31, 2002 include the entire year of operations for
this hospital.

Effective June 1, 2002, we purchased
Cumberland Hospital, a 118 bed pediatric rehabilitation hospital
located in New Kent, Virginia. Results of operations for the
year ended December 31, 2002 include seven months of
operations for this facility.

Effective September 1, 2002, we acquired
Sandia Health System (formerly known as St. Joseph Healthcare
System), which operated four hospitals and related healthcare
businesses in Albuquerque, New Mexico. Sandia Health System
included Albuquerque Regional Medical Center, a 254 bed acute
care hospital; Northeast Heights Medical Center, a 114 bed acute
care hospital; West Mesa Medical Center, a 91 bed acute care
hospital; the Rehabilitation Hospital of New Mexico, a 62 bed
inpatient rehabilitation hospital; and the Sandia HMO, a
6,000-member health maintenance organization. Results of
operations for the year ended December 31, 2002 include
four months of operations for this system.

We paid a total of $133.4 million, plus
acquisition costs, for all of the facilities we acquired for the
year ended December 31, 2002. We financed these
acquisitions through the sale of $122.7 million of equity
securities and the balance from borrowings under our existing
revolving credit facility.



| |                  
| | -----------------
| | 2003 Acquisitions

Effective January 1, 2003, we acquired
Lovelace Health Systems, Inc. in Albuquerque, New Mexico,
for $209.4 million, plus acquisition costs. Lovelace Health
Systems, Inc. included Lovelace Medical Center, a 201 bed
acute care hospital, and the Lovelace Health Plan, a health
maintenance organization. Effective June 1, 2003, we merged
the Sandia HMO and the Lovelace Health Plan and, together, they
serve approximately 168,000 participants throughout New Mexico
(plus approximately an additional 73,000 participants who access
our provider network through a contract with CIGNA HealthCare).
We financed the acquisition of Lovelace Health
Systems, Inc. through a combination of $112.5 million
of bank debt, $36.0 million of subordinated debt and the
balance from the proceeds of the sale of equity securities.
Results of operations for the year ended December 31, 2003
include an entire year of operations for this system. Effective
October 1, 2003, we completed the merger of Sandia Health
System and Lovelace

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Health Systems, Inc. The merged entity is
named Lovelace Sandia Health System, Inc., and is the
second largest integrated healthcare delivery system in
Albuquerque, New Mexico.


Effective October 8, 2003, we acquired the
146-bed Northwestern Institute of Psychiatry (renamed Brooke
Glen), a private behavioral health services facility located in
Fort Washington, Pennsylvania, for $7.7 million, plus
acquisition costs. The purchase price was paid in cash and
funded from the proceeds of our $225.0 million senior
subordinated notes issued in August 2003. Results of operations
for the year ended December 31, 2003 include approximately
three months of operations for this facility.

Critical Accounting Policies

Our consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States. In preparing our financial
statements, we are required to make estimates and assumptions
that affect the reported amounts of assets, liabilities,
revenues and expenses included in the financial statements. We
base our estimates on historical experience and other
information currently available to us, the results of which form
the basis of our estimates and assumptions. While we believe our
estimation processes are reasonable, actual results could differ
from those estimates. Management considers an accounting
estimate to be critical if:



| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | It requires assumptions to be made that were
    uncertain at the time the estimate was made; and                                                                                   
|
| |  | Changes in the estimate or different estimates
    that could have been selected could have a material impact on
    our consolidated results of operations and financial condition.

The following represent the estimates that we
consider most critical to our operating performance and involve
the most subjective and complex assumptions and assessments.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Allowance for Contractual Discounts (and
    related Net Patient Service Revenue)

In 2003, we derived 76.5% of our patient service
revenues (73.0% in 2002 and 71.0% in 2001) from Medicare,
Medicaid and other payors that receive discounts from our
standard charges. Revenues are recorded in the period the
healthcare services are provided, based upon the estimated
amounts due from Medicare, Medicaid and other payors. Typically,
insurance is verified within 24 to 48 hours from the time
of a patients admission. Our patient billing systems
typically compute payments based upon a fee schedule or other
arrangements from the payor and generate a contractual discount
for the remaining portion. In the Albuquerque market, however,
we must estimate the contractual discounts, as our patient
billing systems do not currently compute the amounts to be
received from Medicare, Medicaid and other payors. Therefore, in
the Albuquerque market, we manually estimate an allowance for
contractual discounts using a historical model basis. The
Medicare and Medicaid regulations and various managed care
contracts under which these discounts must be manually estimated
are complex and are subject to interpretation and adjustment. We
perform our estimate of the allowance for contractual discounts
on a payor-specific basis given our interpretation of the
applicable regulations or contract terms and the historical
collections of each payor. However, the services authorized and
provided and resulting reimbursement are often subject to
interpretation. These interpretations sometimes result in
payments that differ from our estimates. Additionally, updated
regulations and contract renegotiations occur frequently,
necessitating continual review and assessment of the estimation
process by management. Changes in estimates related to the
allowance for contractual discounts affect net patient revenue
reported in our results of operations.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Allowance for Doubtful Accounts (and
    related Provision for Doubtful Accounts)

The collection of receivables primarily from
Medicare, Medicaid, managed care payors, other third-party
payors and patients is critical to our operating performance. As
discussed above, we record contractual discounts using our
patient billing systems as well as manual estimates for the
Albuquerque market. Additionally, as discussed above, insurance
is verified timely upon a patients admission, and
appropriate contractual discounts are recorded at that time.
Consequently, the primary collection risk that could result in
bad debt relates to the uninsured patient accounts and patient
accounts for which the primary insurance carrier has paid the
amounts covered by the applicable agreement but the portion of
the

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amount that is the patients responsibility
(primarily deductibles and co-payments) remains outstanding.
Co-payments and deductibles are generally determined prior to
the patients discharge with emphasis on collection efforts
before discharge. Once these amounts are determined, any
remaining patient balance is identified and collection activity
is initiated before the patient is discharged. Our collection
procedures are then followed until such time that management
determines the account is uncollectible. Once this determination
is made, the account is written off.


We estimate the allowance for doubtful accounts
based primarily upon the age of the patient accounts receivable,
the patients inability to pay and the historical
effectiveness of our collection process. We routinely monitor
collection results for the self-pay portion, specifically
uninsured self-pay, of patient accounts receivable as well as
engage in detailed analysis of the historical collections and
write-offs associated with all patient receivable payors. The
provision for doubtful accounts and the allowance for doubtful
accounts relate primarily to self-pay amounts due from patients.
Our self-pay amounts due from patients were $27.9 million
at December 31, 2003, and our total allowance for doubtful
accounts was $42.4 million for the same date. The valuation
allowance related to the self-pay portion of our business is
substantially greater than any other payor and is based upon our
historical collection rates. Our total allowance for doubtful
accounts exceeds self-pay amounts due from patients primarily
due to our billing systems not currently tracking co-payments
and deductibles due from patients for which collection of the
primary payor accounts has not occurred. Therefore, our accounts
receivable agings reflect certain co-payments and deductibles as
due from third-party payors until those third-party payors have
made payment, at which time the co-payments and deductibles due
from patients is reclassified to self-pay. We review our
accounts receivable and related aging schedules at the
individual facility level as our billing systems do not allow us
to generate a consolidated accounts receivable aging. We
routinely monitor the accounts receivable balances at each
facility utilizing a combination of historical collection
experience as well as review of the current trend in business
lines to support the bases of our estimates of the provision for
doubtful accounts. We continue to review our present procedures
and trends in this area. Net days revenue in accounts receivable
were 59 and 57 as of December 31, 2003 and 2002,
respectively. This increase is primarily due to our system
conversions and their impact on our collection activity within
the acute care segment. Significant changes in payor mix,
business office operations or systems conversions at our
facilities could, however, have a significant impact on our
results of operations and cash flows.

The allowances for contractual discounts and
doubtful accounts are impacted by the estimated percentages used
to record such amounts. The table below shows the change in net
revenue (for contractual discounts) and the change in provision
for doubtful accounts based on a change in the estimate of the
respective allowance accounts. To demonstrate the impact on net
revenue and provision for doubtful accounts, we have shown the
impact of an increase or decrease to the allowance percentages
for contractual discounts and doubtful accounts within a range
of (3.0)% to 3.0%. This range was chosen based on the historical
trends we have experienced in these estimates, which we would
not anticipate to change by a percentage amount greater than
this range unless other unforeseen circumstances were to occur.
For example, a 1.0% decrease in the allowance for contractual
discounts would increase net revenue for 2003 by
$3.0 million and a similar 1.0% decrease in the allowance
for doubtful accounts would decrease the provision for doubtful
accounts for 2003 by $1.6 million:

|                                          |  |                   |        |                    |  |   |        |  
|----------------------------------------- |  | ----------------- | ------ | ------------------ |  | - | ------ | -
|                                          |  |                   |        | Doubtful Accounts 
|                                          |  | Contractual       |        | (Change in        
|                                          |  | Discounts (Change |        | Provision for     
|(Decrease) Increase in Allowance Accounts |  | in Net Revenue)   |        | Doubtful Accounts)
|                                          |  |                   |        |                   
|                                          |  |                  
|                                          |  | (In thousands)   
|(3.0)%                                    |  | $                 | 8,936  |                    |  | $ | (4,750 | )
|(2.0)%                                    |  |                   | 5,957  |                    |  |   | (3,167 | )
|(1.0)%                                    |  |                   | 2,979  |                    |  |   | (1,583 | )
|1.0%                                      |  |                   | (2,979 | )                  |  |   | 1,583  |  
|2.0%                                      |  |                   | (5,957 | )                  |  |   | 3,167  |  
|3.0%                                      |  |                   | (8,936 | )                  |  |   | 4,750  |  

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This analysis is meant only to be an example of
the high degree of uncertainty inherent in estimating our
allowances for contractual discounts and doubtful accounts.
These allowances could be impacted by unforeseen changes in
payor mix, business office operations and trends in state and
federal government payments. A significant increase in our
contractual discounts and provision for doubtful accounts could
have an adverse effect on our results of operations, financial
condition, liquidity and capital resources.



| |                                                                       
| | ----------------------------------------------------------------------
| | Medical Claims Payable (and related Claims
    and Capitation Expense)

Our results of operations depend on our ability
to effectively manage expenses related to the health benefits of
our Lovelace Health Plan members as well as our ability to
accurately predict costs incurred in recording these amounts in
our consolidated financial statements. Expenses related to
health benefits of our Lovelace Health Plan members have two
components: direct medical expenses and medically related
administrative costs. Direct medical expenses include costs
incurred at our healthcare facilities to provide care to our
Lovelace Health Plan members and capitation payments paid to
hospitals, physicians and providers for ancillary medical
services, such as pharmacy, laboratory, radiology, behavioral
health and vision. Capitation payments are amounts paid to
healthcare providers to cover all services that our Lovelace
Health Plan members may require. These amounts are predetermined
based on the scope of services, benefits provided and the
members age, gender and location. Medically related
administrative costs include expenses related to services such
as health promotion, quality assurance, case management, network
management, medical management, disease management and 24-hour
on-call nurses. Direct medical expenses also include estimates
of medical expenses incurred but not yet reported, a component
of IBNR, which is discussed below.

There are certain aspects of the managed care
business that are not predictable with consistency. These
aspects include the incidences of illness or disease state
(e.g., cardiac heart failure, cases of upper respiratory
illness, diabetes, the number of full-term versus premature
births, and the number of neonatal intensive care babies) as
well as non-medical aspects, such as changes in provider
contracting and contractual benefits. Therefore, we must rely
upon our historical experience, as continually monitored, to
reflect the ever changing mix and growth of members.

Each month end, we estimate medical claims
payments to be made under our health coverage plans of the
Lovelace Health Plan for reported claims and for claims and
losses incurred but not yet reported (IBNR). The
method employed to estimate our liability for medical claims
payable follows standard actuarial practice and utilizes data
developed from historical trends resulting in a best estimate
approach. Our estimates include assumptions related to the
effects of payment patterns, benefit changes, medical trends,
seasonality, and other relevant factors such as catastrophic
claims incidence. Other normal actuarial considerations are also
considered in estimating our medical claims payable. These
include comparisons of current and prior bed day and admissions
data to gauge the change in these metrics over time, comparing
the model results to prior period results, and the relative
change in claims inventory over recent months. These
considerations we refer to as claims trend factors. In
developing IBNR, we apply different estimation methods depending
on the period for which incurred claims are being estimated. For
the most recent three months, the incurred claims are estimated
from our historical claims on a per member per month claims
trend developed from the experience in preceding months as well
as considerations for more recent trends. For periods prior to
the most recent three months, the key assumption used in
developing our IBNR is that the completion factor pattern
remains consistent over the historical monthly periods. The
completion factor is an actuarial estimate, based upon
historical experience, of the percentage of claims incurred
during a given period that we have adjudicated as of the date of
estimation. This approach is consistently applied to each period
presented.

The completion factor and claims per member per
month trend factor are the most significant factors used in
estimating our IBNR. The table below illustrates the relative
significance of these two factors using December 31, 2003
data and the estimated potential impact on our claims payable
caused by changes in these factors. We have shown the impact of
an increase or decrease in the completion factor and claims
trend factor of (3.0)% to 3.0%. This range was chosen based on
the historical trends we have experienced in these estimates,
which we would not anticipate to change by a percentage amount
greater

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than this range unless other unforeseen
circumstances were to occur. For example, a 3.0% decrease in the
completion factor would increase both medical claims payable and
claims and capitation expense for 2003 by $2.3 million and
a similar 3.0% decrease in the claims trend factor would
decrease both medical claims payable and claims and capitation
expense for 2003 by $469,000:


|                              |  |                               |        |              |  |   |      |  
|----------------------------- |  | ----------------------------- | ------ | ------------ |  | - | ---- | -
|                              |  |                              
|                              |  | Change in Claims Payable and 
|                              |  | Claims and Capitation Expense
|                              |  |                              
|                              |  | Completion                    |        | Claims Trend
|(Decrease) Increase in Factor |  | Factor                        |        | Factor      
|                              |  |                               |        |             
|                              |  |                              
|                              |  | (In thousands)               
|(3.0)%                        |  | $                             | 2,300  |              |  | $ | (469 | )
|(2.0)%                        |  |                               | 1,518  |              |  |   | (312 | )
|(1.0)%                        |  |                               | 751    |              |  |   | (155 | )
|1.0%                          |  |                               | (736   | )            |  |   | 154  |  
|2.0%                          |  |                               | (1,458 | )            |  |   | 307  |  
|3.0%                          |  |                               | (2,166 | )            |  |   | 459  |  

The respective changes for the completion factor
have been applied to months four through fifteen of claims data,
as these months have matured in terms of claims data becoming
complete. The respective changes for the claims trend factor
have been applied to months one through three, as these months
have not matured in terms of claims data and reliance is placed
on the estimated per member per month costs.

This analysis is meant only to be an example of
the high degree of uncertainty inherent in estimating our
medical claims payable. Our medical claims payable could be
impacted by unforeseen changes in payment patterns, benefit
changes, medical trends, seasonality, and other relevant factors
such as catastrophic claims incidence. A significant increase in
our medical claims payable could have an adverse effect on our
results of operations, financial condition, liquidity and
capital resources.

At least annually, we must certify as to the
sufficiency of the liability. Should the assumptions or actual
developments change for any of the factors noted, our estimates
of accrued medical claims would change and could have a
significant impact on our results of operations and cash flows.
When estimates change, we record the adjustment in claims and
capitation expenses in the period the change in estimate occurs.

The following table shows the components of the
change in medical claims payable for the year ended
December 31, 2003 (in thousands):

|                             |              |   |        |         |  
|---------------------------- | ------------ | - | ------ | ------- | -
|Balance at January 1, 2003   |              | $ | 3,497  |        
|Assumed in acquisitions      |              |   | 40,606 |        
|Incurred related to:         |              |   |        |        
|                             | Current year |   |        | 280,700 |  
|                             | Prior years  |   |        | (7,828  | )
|Paid related to:             |              |   |        |        
|                             | Current year |   |        | 235,351 |  
|                             | Prior years  |   |        | 35,873  |  
|                             |              |   |        |        
|Balance at December 31, 2003 |              | $ | 45,751 |        
|                             |              |   |        |        

We also accrue administrative expenses associated
with those unpaid health claims that are in the process of
settlement as well as those that have been incurred but not yet
reported. This accrual is based on the historical relationship
between claims processing expenses and incurred claims.

An analysis is performed and an accrual is
recorded when it is probable that expected future health care
costs and maintenance costs under a group of existing contracts
will exceed anticipated future premiums and insurance recoveries
on those contracts.

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| |                                                 
| | ------------------------------------------------
| | Risk Management and Self-Insured
    Liabilities

We maintain certain claims-made commercial
insurance related to our general and professional risks and
commercial coverage for our workers compensation risks. We
provide an accrual for actual claims reported but not paid and
actuarially determined estimates of claims incurred but not
reported.

Effective October 31, 2003, we established a
wholly-owned captive insurance subsidiary to insure our
professional and general liability risk for claims up to
$2.0 million, subject to a $500,000 deductible per claim.
In addition, effective October 31, 2003, we purchased
excess insurance coverage with independent third-party carriers
for claims totaling up to $75.0 million per occurrence and
in the aggregate. Prior to October 31, 2003, we maintained
primary third-party general and professional liability insurance
policies from a third-party commercial insurance carrier for
losses up to $1.0 million per occurrence with policy limits
of $3.0 million in the aggregate on a claims-made basis.
The coverage included a $500,000 deductible or self insured
retention per occurrence and was supplemented with an umbrella
policy with coverage up to $50.0 million per occurrence and
in the aggregate. We also carry workers compensation
insurance with statutory limits and employers liability
policy limits of $1.0 million for each occurrence from an
unrelated commercial insurance carrier of which we are
responsible for deductibles of $250,000 per occurrence.

The liabilities for general, professional and
workers compensation liability risks are based on
actuarially determined estimates. Our independent actuaries
provided estimated reserve ranges for both our general and
professional liability and workers compensation liability
as of December 31, 2003. During 2002, our independent
actuary provided us a best estimate instead of a range. As of
December 31, 2003, our recorded reserves for professional,
general and workers compensation liability risks were
within the actuarially determined ranges. As of
December 31, 2002, our recorded reserves for professional,
general and workers compensation liability risks were at
the actuarially determined best estimate. Our recorded reserves
for professional, general and workers compensation
liability risks represent the estimated ultimate cost of all
reported and unreported losses incurred through the respective
consolidated balance sheet dates. The reserves are estimated
using individual case-basis valuations and actuarial analyses.
Those estimates are subject to the effects of trends in loss
severity and frequency. The estimates are continually reviewed
and adjustments are recorded as experience develops or new
information becomes known. As of December 31, 2003 and
2002, our professional and general liability accrual for
asserted and unasserted claims was $15.7 million and
$4.9 million, respectively. For the year ended
December 31, 2003, our total premiums and retention cost
for professional and general liability insurance was
$27.8 million, compared to $9.7 million for the year
ended December 31, 2002. As of December 31, 2003 and
2002, our workers compensation liability accrual for
asserted and unasserted claims was $8.0 million and
$6.5 million, respectively. For the year ended
December 31, 2003, our total premiums and retention cost
for workers compensation liability insurance was
$6.6 million, compared to $4.5 million for the year
ended December 31, 2002.

The liabilities for general, professional and
workers compensation risks could be significantly affected
should current and future occurrences differ from historical
claims trends. The time period required to resolve claims can
vary depending upon the jurisdiction and whether the claim is
settled or litigated. The estimation of the timing of payments
beyond a year can vary significantly. The estimation process is
also complicated by the relatively short period of time in which
we have owned many of our health care facilities as occurrence
data under previous ownership may not necessarily reflect
occurrence data under our ownership. Changes to the estimated
reserve amounts are included in current operating results. While
management monitors current claims closely and considers
outcomes when estimating its reserve, the complexity of the
claims and wide range of potential outcomes often hamper timely
adjustments to the assumptions used in the estimates. Due to the
considerable variability that is inherent in such estimates,
there can be no assurance that the ultimate liability will not
exceed our recorded estimates, which could have an adverse
effect on our results of operations, financial condition,
liquidity and capital resources.



| |                                         
| | ----------------------------------------
| | Goodwill and Other Intangible
    Assets

In assessing the recoverability of goodwill and
other intangible assets, management must make assumptions
regarding estimated future cash flows and other factors to
determine the fair value of the

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respective assets. If these estimates and related
assumptions change in the future, we may be required to record
impairment charges not previously recorded. On January 1,
2002, we adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, and
are required to assess the fair value of goodwill and
indefinite-lived intangible assets on at least an annual basis
to determine if there is potential impairment. If the fair value
of the asset is less than its carrying value, an impairment loss
is recognized. This two step impairment test first requires
management to determine if impairment has occurred and the
second test calculates the impairment. For the years ended
December 31, 2003 and 2002, we did not record any
impairment in conjunction with our impairment tests. We utilized
an independent third party to evaluate the fair value of the
goodwill assigned to our acute care and behavioral care
reporting units. This organization utilized several judgments
and assumptions that could have a significant impact on the
overall assessment of fair value assigned to these reporting
units. The assumptions utilized were based on a number of
factors including historical data related to the reporting
units, industry market benchmark data, and discussions with
management of the reporting units. The discounted cash flow
(DCF) method and guideline company method were
primarily relied upon to calculate the fair value of the
reporting units. Under the DCF method, cash flows were projected
for five years at an annual compound growth rate specific to our
acute care and behavioral care reporting units, respectively.
The discount rate utilized in the DCF method was based on the
capital asset pricing model and industry data. The items which
have the most variability to an estimate of fair value under the
DCF method are the revenue growth and profitability assumptions
in the projections and the assumed discount rate. Sensitivity
analysis was performed in relation to these inputs of the DCF to
test the variability of the concluded value under different
assumptions. Overall, it was determined that based on reasonable
ranges of the key inputs in the DCF method both of our reporting
units passed step 1 of the required impairment test. This
sensitivity analysis was performed at our discount rate and our
compound annual growth rate plus or minus 2.0%. The guideline
company method focused on the stock of similar publicly traded
companies to the reporting units. When choosing market multiples
to apply to the reporting units under the guideline company
approach, consideration was given to the risk, growth, and
profitability characteristics of the chosen guideline companies
relative to the reporting units. Future changes in the market
pricing of companies active in the hospital operations industry
may impact the results of the fair value calculation of the
reporting units under the guideline company approach.




| |                                                
| | -----------------------------------------------
| | Impairment or Disposal of Long-lived
    Assets

We are required to assess potential impairment of
long-lived assets in accordance with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived
Assets, if events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized, which is
equal to the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of
are to be presented separately in the balance sheet and reported
at the lower of the carrying amount or fair value less costs to
sell, and are no longer depreciated. The assets and liabilities
of a disposal group classified as held for sale are to be
presented separately in the asset and liability sections of the
balance sheet.

Our long-lived assets primarily include property,
plant and equipment and definite-lived intangible assets.
Management assesses the financial results of its hospitals and
underlying long-lived assets on a continual basis, and if
events, changes in circumstances or other indicators of
potential impairment exist, an analysis is performed to compare
estimated undiscounted cash flows of the specific long-lived
asset to its carrying amount. During the last three years, we
have divested several behavioral facilities that did not meet
our current or future strategic business objectives. Management
evaluated the carrying value of these facilities and long-lived
assets and in several instances recorded impairment charges.
Many of these facilities were ultimately sold at amounts
resulting in gains on divestiture. Due to the marked variability
in historical transactions and events, management does not
believe it is reasonably likely that our historical impairment
charges and gains on divestiture will continue in a consistent
manner to warrant an estimate of

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the variability of an impairment analysis.
Additionally, our history of ownership of acute care hospitals
is less than three years, and therefore, a similar analysis of
potential impairment would not provide meaningful information
due to the relatively short period of ownership. At
December 31, 2003, management does not believe indicators
of impairment exist related to its long-lived assets. However,
should events, changes in circumstances or other indicators of
potential impairment exist in the future, we may be required to
record impairment charges on our long-lived assets, which could
have an adverse effect on our results of operations, financial
condition and capital resources.


Results of Operations

The following table sets forth for the periods
indicated selected statement of operations data expressed in
dollar terms and as a percentage of total net revenues. The
results of operations for the seven-month period ended
July 31, 2001 for Behavioral Healthcare Corporation (our
predecessor company) and the five-month period ended
December 31, 2001 for Ardent Health Services LLC and
subsidiaries have been combined to present the results of
operations for calendar year 2001 since we believe the
presentation and discussion of partial periods would not be
meaningful in terms of comparisons to other periods.

|                                                          |                                                             |                        |       |                   |           |                   |     |               |       |               |       |         |         |        |     |        |       |   |        |         |         |  |      |      |       |   |        |         |         |   |         |         |         | 
|--------------------------------------------------------- | ----------------------------------------------------------- | ---------------------- | ----- | ----------------- | --------- | ----------------- | --- | ------------- | ----- | ------------- | ----- | ------- | ------- | ------ | --- | ------ | ----- | - | ------ | ------- | ------- |  | ---- | ---- | ----- | - | ------ | ------- | ------- | - | ------- | ------- | ------- | 
|                                                          |                                                             |                        |       |                   |           |                   |     |               |       |              
|                                                          |                                                             | Year Ended             |       | Year Ended        |           | Year Ended        |     | $ Change 2003 |       | $ Change 2002
|                                                          |                                                             | December 31, 2003      |       | December 31, 2002 |           | December 31, 2001 |     | from 2002     |       | from 2001    
|                                                          |                                                             |                        |       |                   |           |                   |     |               |       |              
|                                                          |                                                             | Amount                 |       | %                 |           | Amount            |     | %             |       | Amount        |       | %       |         | Amount |     | Amount
|                                                          |                                                             |                        |       |                   |           |                   |     |               |       |               |       |         |         |        |     |       
|                                                          |                                                             |                        |       |                   |           |                   |     |               |       |               |       |         |         |       
|                                                          |                                                             |                        |       |                   |           |                   |     |               |       | (Combined)    |       |         |         |       
|                                                          |                                                             |                       
|                                                          |                                                             | (Dollars in thousands)
|CONSOLIDATED                                              |                                                             |                        |       |                   |           |                   |     |               |       |               |       |         |         |        |     |        |       |   |        |         |         |  |      |      |       |   |        |         |         |   |         |        
|Statement of Operations Data:                             |                                                             |                        |       |                   |           |                   |     |               |       |               |       |         |         |        |     |        |       |   |        |         |         |  |      |      |       |   |        |         |         |   |         |        
|Revenues:                                                 |                                                             |                        |       |                   |           |                   |     |               |       |               |       |         |         |        |     |        |       |   |        |         |         |  |      |      |       |   |        |         |         |   |         |        
|                                                          | Net patient service revenue                                 |                        | $     | 640,920           |           |                   |     | 48.6          | %     |               | $     | 369,539 |         |        |     | 90.6   | %     |   | $      | 236,391 |         |  |      | 96.6 | %     |   | $      | 271,381 |         |   | $       | 133,148 |        
|                                                          | Premium revenue                                             |                        |       | 592,293           |           |                   |     | 44.9          |       |               |       | 13,232  |         |        |     | 3.2    |       |   |        |        |         |  |      |     |       |   |        | 579,061 |         |   |         | 13,232  |        
|                                                          | Other revenue                                               |                        |       | 86,461            |           |                   |     | 6.5           |       |               |       | 25,213  |         |        |     | 6.2    |       |   |        | 8,217   |         |  |      | 3.4  |       |   |        | 61,248  |         |   |         | 16,996  |        
|                                                          |                                                             |                        |       |                   |           |                   |     |               |       |               |       |         |         |        |     |        |       |   |        |         |         |  |      |      |       |   |        |         |         |   |         |        
|                                                          |                                                             | Total net revenues     |       |                   | 1,319,674 |                   |     |               | 100.0 |               |       |         | 407,984 |        |     |        | 100.0 |   |        |         | 244,608 |  |      |      | 100.0 |   |        |         | 911,690 |   |         |         | 163,376 | 
|Expenses:                                                 |                                                             |                        |       |                   |           |                   |     |               |       |               |       |         |         |        |     |        |       |   |        |         |         |  |      |      |       |   |        |         |         |   |         |        
|                                                          | Salaries and benefits                                       |                        |       | 531,893           |           |                   |     | 40.3          |       |               |       | 224,885 |         |        |     | 55.1   |       |   |        | 146,448 |         |  |      | 59.9 |       |   |        | 307,008 |         |   |         | 78,437  |        
|                                                          | Professional fees                                           |                        |       | 127,295           |           |                   |     | 9.6           |       |               |       | 40,334  |         |        |     | 9.9    |       |   |        | 34,615  |         |  |      | 14.2 |       |   |        | 86,961  |         |   |         | 5,719   |        
|                                                          | Claims and capitation                                       |                        |       | 272,872           |           |                   |     | 20.7          |       |               |       | 10,956  |         |        |     | 2.7    |       |   |        |        |         |  |      |     |       |   |        | 261,916 |         |   |         | 10,956  |        
|                                                          | Supplies                                                    |                        |       | 149,063           |           |                   |     | 11.3          |       |               |       | 43,683  |         |        |     | 10.7   |       |   |        | 15,387  |         |  |      | 6.3  |       |   |        | 105,380 |         |   |         | 28,296  |        
|                                                          | Provision for doubtful accounts                             |                        |       | 52,749            |           |                   |     | 4.0           |       |               |       | 23,677  |         |        |     | 5.8    |       |   |        | 9,568   |         |  |      | 3.9  |       |   |        | 29,072  |         |   |         | 14,109  |        
|                                                          | Interest                                                    |                        |       | 22,155            |           |                   |     | 1.7           |       |               |       | 2,751   |         |        |     | 0.7    |       |   |        | 3,776   |         |  |      | 1.5  |       |   |        | 19,404  |         |   |         | (1,025  | )      
|                                                          | Change in fair value of interest rate swap
    agreements   |                        |       | (558              | )         |                   |     | 0.0           |       |               |       |        |         |        |     |       |       |   |        |        |         |  |      |     |       |   |        | (558    | )       |   |         |        |        
|                                                          | Depreciation and amortization                               |                        |       | 35,742            |           |                   |     | 2.7           |       |               |       | 8,929   |         |        |     | 2.2    |       |   |        | 4,543   |         |  |      | 1.9  |       |   |        | 26,813  |         |   |         | 4,386   |        
|                                                          | Impairment of long-lived assets and restructuring
    costs |                        |       | 2,913             |           |                   |     | 0.2           |       |               |       | 78      |         |        |     | 0.0    |       |   |        | 1,934   |         |  |      | 0.8  |       |   |        | 2,835   |         |   |         | (1,856  | )      
|                                                          | Loss (gain) on divestitures                                 |                        |       | 61                |           |                   |     | 0.0           |       |               |       | (1,206  | )       |        |     | (0.3   | )     |   |        | (9,232  | )       |  |      | (3.8 | )     |   |        | 1,267   |         |   |         | 8,026   |        
|                                                          | Other                                                       |                        |       | 119,472           |           |                   |     | 9.1           |       |               |       | 46,864  |         |        |     | 11.5   |       |   |        | 24,839  |         |  |      | 10.1 |       |   |        | 72,608  |         |   |         | 22,025  |        
|                                                          |                                                             |                        |       |                   |           |                   |     |               |       |               |       |         |         |        |     |        |       |   |        |         |         |  |      |      |       |   |        |         |         |   |         |        
|Income from continuing operations before income
    taxes |                                                             |                        | 6,017 |                   |           |                   | 0.4 |               |       |               | 7,033 |         |         |        | 1.7 |        |       |   | 12,730 |         |         |  | 5.2  |      |       |   | (1,016 | )       |         |   | (5,697  | )      
|Income tax expense (benefit)                              |                                                             |                        | 2,312 |                   |           |                   | 0.2 |               |       |               | 2,690 |         |         |        | 0.7 |        |       |   | (6,709 | )       |         |  | (2.7 | )    |       |   | (378   | )       |         |   | 9,399   |        
|                                                          |                                                             |                        |       |                   |           |                   |     |               |       |               |       |         |         |        |     |        |       |   |        |         |         |  |      |      |       |   |        |         |         |   |         |        
|Net income from continuing operations                     |                                                             |                        | 3,705 |                   |           |                   | 0.2 |               |       |               | 4,343 |         |         |        | 1.0 |        |       |   | 19,439 |         |         |  | 7.9  |      |       |   | (638   | )       |         |   | (15,096 | )      
|Discontinued operations:                                  |                                                             |                        |       |                   |           |                   |     |               |       |               |       |         |         |        |     |        |       |   |        |         |         |  |      |      |       |   |        |         |         |   |         |        
|                                                          | Income from discontinued operations                         |                        |       | 953               |           |                   |     | 0.1           |       |               |       | 1,042   |         |        |     | 0.3    |       |   |        | 1,907   |         |  |      | 0.8  |       |   |        | (89     | )       |   |         | (865    | )      
|                                                          | Income tax expense                                          |                        |       | 367               |           |                   |     | 0.0           |       |               |       | 332     |         |        |     | 0.1    |       |   |        | 761     |         |  |      | 0.3  |       |   |        | 35      |         |   |         | (429    | )      
|                                                          |                                                             |                        |       |                   |           |                   |     |               |       |               |       |         |         |        |     |        |       |   |        |         |         |  |      |      |       |   |        |         |         |   |         |        
|                                                          | Income from discontinued operations, net                    |                        |       | 586               |           |                   |     | 0.1           |       |               |       | 710     |         |        |     | 0.2    |       |   |        | 1,146   |         |  |      | 0.5  |       |   |        | (124    | )       |   |         | (436    | )      
|                                                          |                                                             |                        |       |                   |           |                   |     |               |       |               |       |         |         |        |     |        |       |   |        |         |         |  |      |      |       |   |        |         |         |   |         |        
|Net income                                                |                                                             | $                      | 4,291 |                   |           |                   | 0.3 | %             |       | $             | 5,053 |         |         |        | 1.2 | %      |       | $ | 20,585 |         |         |  | 8.4  | %    |       | $ | (762   | )       |         | $ | (15,532 | )      
|                                                          |                                                             |                        |       |                   |           |                   |     |               |       |               |       |         |         |        |     |        |       |   |        |         |         |  |      |      |       |   |        |         |         |   |         |        

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|                                 |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |         |         | 
|-------------------------------- | ----------------------------------------------------------- | ---------------------- | ------ | ----------------- | --------- | ----------------- | ---- | ------------- | ----- | ------------- | ------ | ------- | ------- | ------ | ---- | ------ | ----- |  | ------ | ------- | ------- |  | ---- | ----- | ----- |  | ----- | ------- | ------- |  | ------ | ------- | ------- | 
|                                 |                                                             |                        |        |                   |           |                   |      |               |       |              
|                                 |                                                             | Year Ended             |        | Year Ended        |           | Year Ended        |      | $ Change 2003 |       | $ Change 2002
|                                 |                                                             | December 31, 2003      |        | December 31, 2002 |           | December 31, 2001 |      | from 2002     |       | from 2001    
|                                 |                                                             |                        |        |                   |           |                   |      |               |       |              
|                                 |                                                             | Amount                 |        | %                 |           | Amount            |      | %             |       | Amount        |        | %       |         | Amount |      | Amount
|                                 |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |       
|                                 |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |       
|                                 |                                                             |                        |        |                   |           |                   |      |               |       | (Combined)    |        |         |         |       
|                                 |                                                             |                       
|                                 |                                                             | (Dollars in thousands)
|ACUTE CARE SERVICES SEGMENT      |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        
|Statement of Operations Data:    |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        
|Revenues:                        |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        
|                                 | Net patient service revenue                                 |                        | $      | 378,252           |           |                   |      | 36.2          | %     |               | $      | 126,121 |         |        |      | 81.1   | %     |  | $      | 13,498  |         |  |      | 100.0 | %     |  | $     | 252,131 |         |  | $      | 112,623 |        
|                                 | Premium revenue                                             |                        |        | 592,293           |           |                   |      | 56.8          |       |               |        | 13,232  |         |        |      | 8.5    |       |  |        |        |         |  |      |      |       |  |       | 579,061 |         |  |        | 13,232  |        
|                                 | Other revenue                                               |                        |        | 72,959            |           |                   |      | 7.0           |       |               |        | 16,069  |         |        |      | 10.4   |       |  |        |        |         |  |      |      |       |  |       | 56,890  |         |  |        | 16,069  |        
|                                 |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        
|                                 |                                                             | Total net revenues     |        |                   | 1,043,504 |                   |      |               | 100.0 |               |        |         | 155,422 |        |      |        | 100.0 |  |        |         | 13,498  |  |      |       | 100.0 |  |       |         | 888,082 |  |        |         | 141,924 | 
|Expenses:                        |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        
|                                 | Salaries and benefits                                       |                        |        | 352,580           |           |                   |      | 33.8          |       |               |        | 70,713  |         |        |      | 45.5   |       |  |        | 5,284   |         |  |      | 39.1  |       |  |       | 281,867 |         |  |        | 65,429  |        
|                                 | Professional fees                                           |                        |        | 89,650            |           |                   |      | 8.6           |       |               |        | 5,983   |         |        |      | 3.8    |       |  |        | 1,949   |         |  |      | 14.4  |       |  |       | 83,667  |         |  |        | 4,034   |        
|                                 | Claims and capitation                                       |                        |        | 272,872           |           |                   |      | 26.1          |       |               |        | 10,956  |         |        |      | 7.0    |       |  |        |        |         |  |      |      |       |  |       | 261,916 |         |  |        | 10,956  |        
|                                 | Supplies                                                    |                        |        | 134,048           |           |                   |      | 12.8          |       |               |        | 29,226  |         |        |      | 18.8   |       |  |        | 1,645   |         |  |      | 12.2  |       |  |       | 104,822 |         |  |        | 27,581  |        
|                                 | Provision for doubtful accounts                             |                        |        | 46,041            |           |                   |      | 4.4           |       |               |        | 17,019  |         |        |      | 11.0   |       |  |        | 2,578   |         |  |      | 19.1  |       |  |       | 29,022  |         |  |        | 14,441  |        
|                                 | Impairment of long-lived assets and restructuring
    costs |                        |        | 2,913             |           |                   |      | 0.3           |       |               |        |        |         |        |      |       |       |  |        |        |         |  |      |      |       |  |       | 2,913   |         |  |        |        |        
|                                 | Loss on divestitures                                        |                        |        | 679               |           |                   |      | 0.1           |       |               |        |        |         |        |      |       |       |  |        |        |         |  |      |      |       |  |       | 679     |         |  |        |        |        
|                                 | Other                                                       |                        |        | 86,725            |           |                   |      | 8.3           |       |               |        | 19,515  |         |        |      | 12.6   |       |  |        | 2,170   |         |  |      | 16.1  |       |  |       | 67,210  |         |  |        | 17,345  |        
|                                 |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        
|                                 | EBITDA                                                      |                        |        | 57,996            |           |                   |      | 5.6           |       |               |        | 2,010   |         |        |      | 1.3    |       |  |        | (128    | )       |  |      | (0.9  | )     |  |       | 55,986  |         |  |        | 2,138   |        
|                                 | Interest                                                    |                        |        | 1,647             |           |                   |      | 0.2           |       |               |        | 465     |         |        |      | 0.3    |       |  |        | 178     |         |  |      | 1.3   |       |  |       | 1,182   |         |  |        | 287     |        
|                                 | Depreciation and amortization                               |                        |        | 25,194            |           |                   |      | 2.4           |       |               |        | 4,630   |         |        |      | 3.0    |       |  |        | 522     |         |  |      | 3.9   |       |  |       | 20,564  |         |  |        | 4,108   |        
|                                 |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        
|                                 | Income from continuing operations before income
    taxes   |                        | $      | 31,155            |           |                   |      | 3.0           | %     |               | $      | (3,085  | )       |        |      | (2.0   | )%    |  | $      | (828    | )       |  |      | (6.1  | )%    |  | $     | 34,240  |         |  | $      | (2,257  | )      
|                                 |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        
|                                
|BEHAVIORAL CARE SERVICES SEGMENT |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        
|Statement of Operations Data:    |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        
|Revenues:                        |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        
|                                 | Net patient service revenue                                 |                        | $      | 262,668           |           |                   |      | 93.8          | %     |               | $      | 243,417 |         |        |      | 96.0   | %     |  | $      | 222,404 |         |  |      | 96.6  | %     |  | $     | 19,251  |         |  | $      | 21,013  |        
|                                 | Other revenue                                               |                        |        | 17,441            |           |                   |      | 6.2           |       |               |        | 10,194  |         |        |      | 4.0    |       |  |        | 7,921   |         |  |      | 3.4   |       |  |       | 7,247   |         |  |        | 2,273   |        
|                                 |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        
|                                 |                                                             | Total net revenues     |        |                   | 280,109   |                   |      |               | 100.0 |               |        |         | 253,611 |        |      |        | 100.0 |  |        |         | 230,325 |  |      |       | 100.0 |  |       |         | 26,498  |  |        |         | 23,286  | 
|Expenses:                        |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        
|                                 | Salaries and benefits                                       |                        |        | 155,564           |           |                   |      | 55.5          |       |               |        | 139,791 |         |        |      | 55.1   |       |  |        | 137,029 |         |  |      | 59.5  |       |  |       | 15,773  |         |  |        | 2,762   |        
|                                 | Professional fees                                           |                        |        | 30,436            |           |                   |      | 10.9          |       |               |        | 29,403  |         |        |      | 11.6   |       |  |        | 31,532  |         |  |      | 13.7  |       |  |       | 1,033   |         |  |        | (2,129  | )      
|                                 | Supplies                                                    |                        |        | 15,102            |           |                   |      | 5.4           |       |               |        | 14,178  |         |        |      | 5.6    |       |  |        | 13,637  |         |  |      | 5.9   |       |  |       | 924     |         |  |        | 541     |        
|                                 | Provision for doubtful accounts                             |                        |        | 6,709             |           |                   |      | 2.4           |       |               |        | 6,659   |         |        |      | 2.6    |       |  |        | 6,990   |         |  |      | 3.0   |       |  |       | 50      |         |  |        | (331    | )      
|                                 | Impairment of long-lived assets and restructuring
    costs |                        |        |                  |           |                   |      |              |       |               |        | 78      |         |        |      | 0.0    |       |  |        | 1,934   |         |  |      | 0.8   |       |  |       | (78     | )       |  |        | (1,856  | )      
|                                 | Gain on divestitures                                        |                        |        | (618              | )         |                   |      | (0.2          | )     |               |        | (1,206  | )       |        |      | (0.5   | )     |  |        | (9,232  | )       |  |      | (4.0  | )     |  |       | 588     |         |  |        | 8,026   |        
|                                 | Other                                                       |                        |        | 23,965            |           |                   |      | 8.6           |       |               |        | 21,997  |         |        |      | 8.8    |       |  |        | 19,876  |         |  |      | 8.6   |       |  |       | 1,968   |         |  |        | 2,121   |        
|                                 |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        
|                                 |                                                             |                        | 48,951 |                   |           |                   | 17.4 |               |       |               | 42,711 |         |         |        | 16.8 |        |       |  | 28,559 |         |         |  | 12.5 |       |       |  | 6,240 |         |         |  | 14,152 |        
|                                 | Income from discontinued operations                         |                        |        | 953               |           |                   |      | 0.4           |       |               |        | 1,042   |         |        |      | 0.5    |       |  |        | 1,907   |         |  |      | 0.7   |       |  |       | (89     | )       |  |        | (865    | )      
|                                 |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        
|                                 | EBITDA                                                      |                        |        | 49,904            |           |                   |      | 17.8          |       |               |        | 43,753  |         |        |      | 17.3   |       |  |        | 30,466  |         |  |      | 13.2  |       |  |       | 6,151   |         |  |        | 13,287  |        
|                                 | Income from discontinued operations                         |                        |        | (953              | )         |                   |      | (0.4          | )     |               |        | (1,042  | )       |        |      | (0.5   | )     |  |        | (1,907  | )       |  |      | (0.7  | )     |  |       | 89      |         |  |        | 865     |        
|                                 | Interest                                                    |                        |        | 2,326             |           |                   |      | 0.8           |       |               |        | 2,180   |         |        |      | 0.9    |       |  |        | 3,052   |         |  |      | 1.4   |       |  |       | 146     |         |  |        | (872    | )      
|                                 | Depreciation and amortization                               |                        |        | 1,996             |           |                   |      | 0.7           |       |               |        | 1,768   |         |        |      | 0.7    |       |  |        | 3,011   |         |  |      | 1.3   |       |  |       | 228     |         |  |        | (1,243  | )      
|                                 |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        
|                                 | Income from continuing operations before income
    taxes   |                        | $      | 44,629            |           |                   |      | 15.9          | %     |               | $      | 38,763  |         |        |      | 15.2   | %     |  | $      | 22,496  |         |  |      | 9.8   | %     |  | $     | 5,866   |         |  | $      | 16,267  |        
|                                 |                                                             |                        |        |                   |           |                   |      |               |       |               |        |         |         |        |      |        |       |  |        |         |         |  |      |       |       |  |       |         |         |  |        |        

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| |                              
| | -----------------------------
| | Selected Operating Statistics

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

|                                           |  |              |         |              |  |              |         |  |  |  |         | 
|------------------------------------------ |  | ------------ | ------- | ------------ |  | ------------ | ------- |  |  |  | ------- | 
|                                           |  | Year Ended   |         | Year Ended   |  | Year Ended  
|                                           |  | December 31, |         | December 31, |  | December 31,
|                                           |  | 2003         |         | 2002         |  | 2001        
|                                           |  |              |         |              |  |             
|                                           |  |              |         |              |  | (Combined)  
|Acute Care Operating Data:                 |  |              |         |              |  |              |         |  |  |  |         | 
|Actual:                                    |  |              |         |              |  |              |         |  |  |  |         | 
|Number of hospitals (end of period)        |  |              | 7       |              |  |              | 6       |  |  |  | 1       | 
|Number of licensed beds (end of period)(1) |  |              | 1,259   |              |  |              | 1,059   |  |  |  | 201     | 
|Weighted average licensed beds(2)          |  |              | 1,259   |              |  |              | 710     |  |  |  | 84      | 
|Admissions(3)                              |  |              | 32,334  |              |  |              | 10,654  |  |  |  | 990     | 
|Adjusted admissions(4)                     |  |              | 76,348  |              |  |              | 20,274  |  |  |  | 1,784   | 
|Average length of stay (days)(6)           |  |              | 5.6     |              |  |              | 6.7     |  |  |  | 6.1     | 
|Average daily census(7)                    |  |              | 491.9   |              |  |              | 195.3   |  |  |  | 39.1    | 
|Outpatient surgeries                       |  |              | 18,413  |              |  |              | 4,420   |  |  |  | 435     | 
|Emergency room visits                      |  |              | 124,512 |              |  |              | 60,406  |  |  |  | 11,141  | 
|Health plan members (end of period)        |  |              | 167,901 |              |  |              | 6,002   |  |  |  |        | 
|Same Hospitals for 2003:                   |  |              |         |              |  |              |         |  |  |  |         | 
|Number of hospitals (end of period)        |  |              | 2       |              |  |              | 2       |  |  |  |        | 
|Number of licensed beds (end of period)(1) |  |              | 537     |              |  |              | 537     |  |  |  |        | 
|Weighted average licensed beds(2)          |  |              | 537     |              |  |              | 537     |  |  |  |        | 
|Admissions(3)                              |  |              | 8,498   |              |  |              | 7,725   |  |  |  |        | 
|Adjusted admissions(4)                     |  |              | 13,948  |              |  |              | 13,216  |  |  |  |        | 
|Average length of stay (days)(6)           |  |              | 6.2     |              |  |              | 5.9     |  |  |  |        | 
|Average daily census(7)                    |  |              | 143.6   |              |  |              | 125.8   |  |  |  |        | 
|Outpatient surgeries                       |  |              | 2,699   |              |  |              | 2,819   |  |  |  |        | 
|Emergency room visits                      |  |              | 44,073  |              |  |              | 45,620  |  |  |  |        | 
|Health plan members (end of period)        |  |              |        |              |  |              |        |  |  |  |        | 
|Behavioral Operating Data:                 |  |              |         |              |  |              |         |  |  |  |         | 
|Actual:                                    |  |              |         |              |  |              |         |  |  |  |         | 
|Number of hospitals (end of period)        |  |              | 21      |              |  |              | 20      |  |  |  | 20      | 
|Number of licensed beds (end of period)(1) |  |              | 2,044   |              |  |              | 1,912   |  |  |  | 1,901   | 
|Weighted average licensed beds(2)          |  |              | 1,928   |              |  |              | 1,863   |  |  |  | 1,965   | 
|Patient days(5)                            |  |              | 499,026 |              |  |              | 476,741 |  |  |  | 429,591 | 
|Adjusted patient days(4)                   |  |              | 526,985 |              |  |              | 503,803 |  |  |  | 453,747 | 
|Average length of stay (days)(6)           |  |              | 14.5    |              |  |              | 14.6    |  |  |  | 13.8    | 
|Average daily census(7)                    |  |              | 1,362.8 |              |  |              | 1,309.7 |  |  |  | 1,360.4 | 
|Same Hospitals for 2003:                   |  |              |         |              |  |              |         |  |  |  |         | 
|Number of hospitals (end of period)        |  |              | 19      |              |  |              | 19      |  |  |  |        | 
|Number of licensed beds (end of period)(1) |  |              | 1,805   |              |  |              | 1,805   |  |  |  |        | 
|Weighted average licensed beds(2)          |  |              | 1,805   |              |  |              | 1,805   |  |  |  |        | 
|Patient days(3)                            |  |              | 458,759 |              |  |              | 454,790 |  |  |  |        | 
|Adjusted patient days(4)                   |  |              | 486,718 |              |  |              | 481,789 |  |  |  |        | 
|Average length of stay (days)(6)           |  |              | 13.5    |              |  |              | 14.0    |  |  |  |        | 
|Average daily census(7)                    |  |              | 1,256.9 |              |  |              | 1,249.4 |  |  |  |        | 

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---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Licensed beds are those beds for which a facility
    has been granted approval to operate from the applicable state
    licensing agency.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(2) | Represents the average number of licensed beds,
    weighted based on periods owned.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(3) | Represents the total number of patients admitted
    (for a period in excess of 23 hours) to our hospitals and
    is used by management and certain investors as a general measure
    of inpatient volume.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(4) | Adjusted admissions and adjusted patient days are
    used by management and certain investors as a general measure of
    combined inpatient and outpatient volume. Adjusted
    admissions/patient days are computed by multiplying
    admissions/patient days (inpatient volume) by the sum of gross
    inpatient revenue and gross outpatient revenue and then dividing
    the resulting amount by gross inpatient revenue. The adjusted
    admissions/patient days computation equates
    outpatient revenue to the volume measure (admissions/patient
    days) used to measure inpatient volume resulting in a general
    measure of combined inpatient and outpatient volume.
|   
|(5) | Represents the number of days our beds were
    occupied by inpatients over the period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(6) | Represents the average number of days admitted
    patients stay in our hospitals.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(7) | Represents the average number of patients in our
    hospitals each day during our ownership.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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

Total Net Revenues.The $911.7 million increase in total net revenues, a 223.5%
increase over 2002, was due to a combination of an increase of
$888.1 million in total net revenues from our acute care
services segment, and an increase of $26.5 million in total
net revenues from our behavioral care services segment. Our
acute care total net revenues for 2003 include $441,000 of total
net revenues received from our behavioral care services segment,
which is eliminated in consolidation. Our behavioral care total
net revenues for 2003 and 2002 include $3.5 million and
$1.1 million, respectively, of total net revenues received
from our acute care services segment, which is eliminated in
consolidation.

Before eliminations, the $888.1 million
increase in our acute care total net revenues was attributed to
an $873.1 million increase in total net revenues from our
Albuquerque market as well as a $15.0 million increase in
our same hospital acute care total net revenues. These increases
are a result of our acquisition of Lovelace Health System
(Lovelace) effective January 1, 2003, and
Sandia Health System (Sandia) effective
September 1, 2002. Therefore, 2003 included a full year of
operating results for both Sandia and Lovelace, whereas 2002
included four months of Sandia operating results. Effective
October 1, 2003, we merged the Sandia and Lovelace
operations into Lovelace Sandia Health System, or LSHS, which
accounted for 71.1% of our total net revenues for 2003. The
significant change in our company, when attempting to compare
2003 to 2002, is evidenced by admissions at LSHS, which were
23,836 in 2003 compared to 2,929 in 2002, and outpatient
surgeries at LSHS, which were 8,388 in 2003 compared to 1,601 in
2002. Included in our acute care total net revenues for 2003 and
2002 was $592.3 million and $13.2 million,
respectively, of premium revenues. Both our Sandia and Lovelace
acquisitions included federally licensed health maintenance
organizations (the Sandia HMO and the Lovelace Health Plan).
Effective June 1, 2003, the health plans were merged and
are now referred to as the Lovelace Health Plan. The Lovelace
Health Plans membership for 2003 and 2002 was 167,901 and
6,002, respectively. The $15.0 million increase in same
hospital acute care total net revenues was predominantly related
to a 10.0% admissions growth (8,498 in 2003 compared to 7,725 in
2002), pricing increases and increased acuity. Adjusted
admissions on a same hospital basis increased to 13,948 in 2003
compared to 13,216 in 2002.

Before eliminations, the $26.5 million
increase, or 10.4%, in our behavioral care total net revenues
was attributed to an $11.5 million increase in total net
revenues from acquisitions during 2003 and 2002, as well as a
$13.9 million increase in our same hospital behavioral care
total net revenues. We acquired Cumberland Hospital effective
June 1, 2002, and the Northwestern Institute of Psychiatry
(which we renamed Brooke Glen) effective October 8, 2003.
Adjusted patient days contributed by these two acquisitions
totaled 40,267 in 2003 and 22,014 in 2002. We have experienced a
delay in obtaining our Medicare license at Brooke Glen. However,
this did not have a material effect on our adjusted patient

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days and total net revenues during 2003. We
continue to work with CMS and expect to obtain our Medicare
license during the second quarter of 2004. This delay will have
a negative impact on our 2004 total net revenues and results of
operations depending on the length of time before licensure
occurs. The $13.9 million increase in same hospital
behavioral care total net revenues was predominantly related to
pricing increases, as adjusted patient days and average daily
census remained relatively flat, and growth in management
revenues related to facilities we manage but do not own. The
management revenue growth includes an increase in management
revenues to our acute care facilities of $2.5 million. Our
same hospital behavioral facilities realized an approximate 5.3%
of pricing increases in 2003 as we continued efforts in our
managed care contracting.


Salaries and
Benefits.Salaries and benefits were
40.3% of total net revenues in 2003, compared to 55.1% of total
net revenues in 2002. Salaries and benefits in our acute care
services segment were 33.8% of total net revenues in 2003,
compared to 45.5% of total net revenues in 2002. Salaries and
benefits in our behavioral care services segment were 55.5% of
total net revenues in 2003, compared to 55.1% of total net
revenues in 2002. On a same hospital basis, salaries and
benefits as a percentage of total net revenues were 42.1% and
41.1% in 2003 and 2002, respectively, in our acute care services
segment, and 55.0% and 54.9% in 2003 and 2002, respectively, in
our behavioral care services segment.

The improvement in our acute care salaries and
benefits as a percentage of total net revenues was due to the
growth within our Albuquerque market and the previously
discussed Lovelace and Sandia acquisitions. With the acquisition
of Lovelace in 2003, we effectively realized economies of scale
within the Albuquerque market, which was further strengthened
with the merger of Lovelace and Sandia on October 1, 2003.
Our acute care same hospital salaries and benefits increased by
1.0% as our revenue growth on a same hospital basis was outpaced
by the increased utilization of resources and the impact of
labor pressures.

Our behavioral care salaries and benefits as a
percentage of total net revenues increased by 0.4% due to
general wage inflation brought on by nursing labor pressures,
offset by the impact of growth in our total net revenue from
pricing increases. Our behavioral care same hospital salaries
and benefits remained relatively flat despite nursing labor
pressures due to our ability to contain the use of contract
labor, a component of salaries and benefits (contract labor for
our behavioral same hospital facilities was constant at 0.6% of
total net revenues for both 2003 and 2002).

The remainder of our salaries and benefits relate
to costs not allocated to our reportable operating segments,
which include centralized services such as information services,
reimbursement, accounting, taxation, legal, advertising, design
and construction as well as our wholly-owned insurance
subsidiary. Salaries and benefits not allocated were
$23.8 million in 2003, or 1.8% of total net revenues,
compared to $14.4 million in 2002, or 3.5% of total net
revenues. The increase in unallocated salaries and benefits
relate to the growth of our centralized services as we continued
to strengthen these areas in connection with our becoming a
public reporting entity. We anticipate our centralized services
costs to continue to increase in total during 2004 as we
continue to build out our public reporting structure. However,
as a percentage of total net revenues, we expect these costs to
decline in 2004.

During 2003, we were able to successfully manage
the delivery of health care services with proper staffing and
utilization. However, we have also been negatively impacted by
the industry-wide shortage of nurses, which has caused labor
pricing pressures and some level of dependence on contracted
labor. Our acute care hospitals are not located in states that
have legislation mandating patient-to-nurse ratios, such as in
California; however, this type of legislation could be
implemented in the future in the states in which we operate.
Additionally, our behavioral hospitals are not currently subject
to the mandated patient-to-nurse ratios in California. Should we
be unable in the future to provide adequate nursing coverage at
our facilities, our future operating results could be negatively
impacted through increased salaries and wages and contract labor.

Professional Fees.Professional fees include amounts paid to non-employed
physicians, third-party contractors and legal, accounting and
banking firms. Our acute care professional fees for 2003 and
2002 include $3.5 million and $1.1 million,
respectively, of professional fees for services provided by our

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behavioral care services segment related to the
management of certain of our inpatient behavioral units. Our
behavioral care professional fees for 2003 include $441,000 of
professional fees for services provided by our acute care
services segment related to certain laboratory services provided
to behavioral patients. These amounts are eliminated at
consolidation. Professional fees were 9.6% of total net revenues
in 2003, compared to 9.9% of total net revenues in 2002. Before
eliminations, professional fees in our acute care services
segment were 8.6% of total net revenues in 2003, compared to
3.8% of total net revenues in 2002. Before eliminations,
professional fees in our behavioral care services segment were
10.9% of total net revenues in 2003, compared to 11.6% of total
net revenues in 2002. On a same hospital basis, professional
fees as a percentage of total net revenues were 10.5% and 10.8%
in 2003 and 2002, respectively, in our acute care services
segment, and 11.0% and 11.4% in 2003 and 2002, respectively, in
our behavioral care services segment.


The increase in our acute care professional fees
as a percentage of total net revenues was due to the growth
within our Albuquerque market and the previously discussed
Lovelace and Sandia acquisitions. With these acquisitions, we
now have contractual arrangements with approximately 5,000
non-employed physicians in the Albuquerque market who practice
at our fifteen physician clinics. Additionally, we are incurring
additional costs in Albuquerque related to the maintenance and
support of our Lawson-based financial, human resources and
procurement system and our Cerner-based clinical system. Our
acute care same hospital professional fees as a percentage of
total net revenues decreased by 0.3% as our revenue growth
outpaced our increased maintenance and support costs of our
Lawson and Cerner systems at our same hospital locations.

The decrease in our behavioral care professional
fees as a percentage of total net revenues, including same
hospital professional fees, was due to successful efforts at
hiring more physicians and reduced dependence on contract
physicians. Contract physician costs are substantially greater
on a per-patient visit than our employed physicians.

The remainder of our professional fees relate to
costs not allocated to our reportable operating segments.
Professional fees not allocated were $11.2 million in 2003
compared to $6.0 million in 2002. These costs predominantly
relate to our centralized services, specifically information
services, legal and accounting. We anticipate these costs to
decrease as a percentage of total net revenues during 2004 as we
complete the build out of our public reporting structure.

Claims and
Capitation.Claims and capitation
expense was 20.7% of total net revenues in 2003, compared to
2.7% of total net revenues in 2002. Our medical cost ratio, the
claims and capitation costs as a percentage of premium revenue,
was 46.1% in 2003 compared to 82.8% in 2002. As previously
discussed, the Sandia HMO was part of our acquisition of Sandia,
therefore, 2002 consisted only of Sandia HMO members, which were
6,002 at December 31, 2002. Our 2003 acquisition of
Lovelace included the Lovelace Health Plan, which was merged
with the Sandia HMO effective June 1, 2003, and the
combined plans now are referred to as the Lovelace Health Plan.
At December 31, 2003, membership in the Lovelace Health
Plan totaled 167,901. The medical cost ratios are not comparable
between 2003 and 2002 due to the previously discussed
limitations of the legacy information systems at Lovelace.
Therefore, prior to 2004, for Lovelace Health Plan members who
received services within our integrated LSHS network, we did not
record patient revenue within the hospital or claims expense on
the health plan. Beginning in 2004, we will present the Lovelace
Health Plan as a reporting segment.

Supplies.Supply
costs were 11.3% of total net revenues in 2003, compared to
10.7% of total net revenues in 2002. Supply costs in our acute
care services segment were 12.8% of total net revenues in 2003,
compared to 18.8% of total net revenues in 2002. Supply costs in
our behavioral care services segment were 5.4% of total net
revenues in 2003, compared to 5.6% of total net revenues in
2002. On a same hospital basis, supply costs as a percentage of
total net revenues were 19.0% and 21.8% in 2003 and 2002,
respectively, in our acute care services segment, and 5.3% and
5.5% in 2003 and 2002, respectively, in our behavioral care
services segment.

Our supply costs as a percentage of total net
revenues increased during 2003 due to the impact of our health
plan and our inability to track separate operating segment data
due to the previously discussed

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legacy system limitations. Health plan members
who received services within our integrated LSHS network led to
us incurring supply costs, but there was no corresponding
patient revenue being recorded. However, the overall improvement
in our acute care supply costs as a percentage of total net
revenues was due to the growth within our Albuquerque market and
the realized economies of scale from the merger of Lovelace and
Sandia. The large market presence has allowed us to effectively
utilize our group purchasing contract. Our acute care same
hospital supply costs as a percentage of total net revenues
decreased by 2.8% through continued compliance with our group
purchasing contract, however, we continue to focus efforts on
further reducing our supply costs. Our supply costs are impacted
by our retail pharmacies within our acute care facilities, which
generally run at a higher cost to revenue. Additionally, our
supply costs could be adversely impacted in the future as we
expand our service lines into specialized areas that could have
significantly higher supply costs.


The behavioral supply costs, including on a same
hospital basis, have remained relatively constant. Our supply
demands for our behavioral services are much less than our acute
services, and remain fairly constant and predictable. The slight
improvements in supply costs as a percentage of total net
revenues is due to continued compliance with our group
purchasing contract and effective leveraging of the growth in
volume and total net revenues.

Provision for Doubtful
Accounts.Our provision for doubtful
accounts is analyzed herein as a percentage of total net
revenues, less premium revenue, as we generally have minimal bad
debt related to our premium revenue. The provision for doubtful
accounts was 7.3% of total net revenues, less premium revenue in
2003, compared to 6.0% of total net revenues, less premium
revenue in 2002. The provision for doubtful accounts in our
acute care services segment was 10.2% of total net revenues,
less premium revenue in 2003, compared to 12.0% of total net
revenues, less premium revenue in 2002. The provision for
doubtful accounts in our behavioral care services segment was
2.4% of total net revenues in 2003, compared to 2.6% of total
net revenues in 2002. On a same hospital basis, provision for
doubtful accounts as a percentage of total net revenues, less
premium revenue was 10.4% and 10.2% in 2003 and 2002,
respectively, in our acute care services segment, and 2.8% and
2.9% in 2003 and 2002, respectively, in our behavioral care
services segment.

The improvement in our acute care provision for
doubtful accounts as a percentage of total net revenues, less
premium revenue is being driven by improved results in our
Albuquerque market, where the provision for doubtful accounts as
a percentage of total net revenues, less premium revenues was
10.1% in 2003 compared to 15.0% in 2002. During 2002, we
experienced higher than expected bad debt expense in our first
four months of operating Sandia, which was related to the
general integration of those facilities and the impact on our
collection processes. We have had success in 2003 merging the
operations of our Albuquerque market while maintaining strong
cash collections, which contributed to our acute care
segments reduction in the provision for doubtful accounts
as a percentage of total net revenues, less premium revenues.
However, we continue to face the well-documented industry
pressures of increased admissions of uninsured self-pay patients
as well as employers putting a higher burden on employees
through increased deductibles and co-payments. These factors did
have a negative impact on our 2003 results, and we expect these
factors to continue into 2004. Our acute care same hospital
provision for doubtful accounts as a percentage of total net
revenues, less premium revenues remained relatively constant as
cash collections at these facilities remained strong throughout
2003.

The behavioral care segments provision for
doubtful accounts as a percentage of total net revenues,
including on a same hospital basis, have remained relatively
constant. Our bad debt exposure related to our behavioral care
services is much less than our bad debt exposure on our acute
care services as our behavioral facilities have minimal
uninsured self-pay patients due to the behavioral facility
environment.

Other Operating
Expenses.Other operating expenses
consist of insurance costs (primarily general, professional and
workers compensation), non-income taxes (various states in
which we operate have gross receipts taxes or premium taxes),
utilities, rents and leases, repairs and maintenance and other
operating expenses. Other operating expenses were 9.1% of total
net revenue in 2003, compared to 11.5% of total net revenues in
2002. Other operating expenses in our acute care services
segment were 8.3% of total net

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revenues in 2003, compared to 12.6% of total net
revenues in 2002. Other operating expenses in our behavioral
care services segment were 8.6% of total net revenues in 2003,
compared to 8.8% of total net revenues in 2002. On a same
hospital basis, other operating expenses as a percentage of
total net revenues were 11.5% and 13.0% in 2003 and 2002,
respectively, in our acute care services segment, and 8.6% and
8.3% in 2003 and 2002, respectively, in our behavioral care
services segment.


The decrease in our other operating expenses as a
percentage of total net revenue was due to the growth within our
Albuquerque market and the previously discussed Lovelace and
Sandia acquisitions. With these acquisitions, we were able to
realize economies of scale and other efficiencies related to
various operating expense items due to our increased size and
the market share we own in Albuquerque. For example, our growth
as a company enabled us to offset the increases in our insurance
costs as a percentage of total net revenues. This benefit was
realized in both our acute care and behavioral care segments,
and was seen on a same hospital comparison as well. We were able
to negotiate more favorable rates on various operating leases,
maintenance contracts and other types of arrangements due to our
larger presence.

The remainder of our other operating expenses
relate to costs not allocated to our reportable operating
segments. Other operating expenses not allocated were
$8.8 million in 2003 compared to $5.3 million in 2002.
These costs predominantly relate to our centralized services,
specifically our lease costs for our corporate and information
services facilities increased $1.3 million in 2003 as we
grew our infrastructure. We anticipate these costs to decline as
a percentage of total net revenues during 2004 as we complete
the build out of our public reporting structure.

We expect to see continued increases in the cost
of insurance, especially for general and professional liability,
as the market has fewer competitors and remains depressed. We
have offset the pace of increases through the establishment of a
wholly-owned captive insurance subsidiary that now insures our
professional and general liability risk for claims up to
$2.0 million, subject to a $500,000 deductible per claim.
In addition, we purchased excess insurance coverage with
independent third-party carriers for claims totaling up to
$75.0 million per occurrence and in the aggregate.

Interest and Change in Fair Value of Interest
Rate Swap Agreements.Interest expense
increased to $22.2 million in 2003 compared to
$2.8 million in 2002. Our long-term debt balance increased
to $261.4 million at December 31, 2003, compared to
$72.8 million at December 31, 2002, which was
attributable to our acquisitions in 2003. Our cash paid for
acquisitions during 2003 was $204.8 million, which was
funded initially from our credit facilities, which were paid in
full from the proceeds of our $225.0 million offering of
senior subordinated notes. Our weighted average interest rate on
our outstanding debt was 9.3% in 2003, compared to 5.0% in 2002.
This increase is related to our senior subordinated notes and
subordinated debt having interest rates at 10.0% and 10.2%,
respectively.

In conjunction with our $225.0 million
senior subordinated notes, we entered into four interest rate
swap agreements which converted $80.0 million of the
$225.0 million fixed-rate 10.0% borrowings to floating-rate
borrowings. Our interest rate swap agreements did not qualify
for hedge accounting under the provisions of
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, therefore, we have recognized the
changes in fair value of the swaps in earnings. At
December 31, 2003, our interest rate swap agreements had a
fair value of $558,000.

Depreciation and
Amortization.Depreciation and
amortization expense increased to $35.7 million in 2003
from $8.9 million in 2002. This increase is due to the
full-year impact of our 2003 and 2002 acquisitions as well as
our capital expenditures during 2003 and 2002. The largest
contributor to the increase in depreciation and amortization is
our Albuquerque market where depreciation increased
$15.3 million from 2002 and amortization of identifiable
intangible assets from our Lovelace acquisition was
$4.1 million in 2003. Depreciation not allocated to our
reportable operating segments increased $6.0 million in
2003, which was predominantly related to the information systems
build out to support our centralized services and public
reporting structure. Our capital expenditures during 2003 and
2002 totaled $87.0 million and $46.0 million,
respectively. The capital expenditures during these two years
contributed to the increase in depreciation as the respective
assets became utilized and depreciable. As part of our

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Lovelace acquisition, we acquired certain
identifiable definite-lived intangible assets. Our customer
relationships and provider network intangible assets are being
amortized over weighted average lives of eleven years and thirty
years, respectively.


Impairment of Long-lived Assets and
Restructuring Costs and Loss (Gain) on
Divestitures.We recorded a
$2.9 million impairment charge in December 2003 related to
a sale agreement accounted for as a financing transaction due to
our continued involvement in connection with two medical office
buildings in Baton Rouge, Louisiana. We also recorded a loss on
divestiture of $679,000 related to the donation of a building in
Baton Rouge. This loss was offset by $618,000 of gains on
divestiture related to the sale of two facilities previously
held for sale.

Income Tax Expense.Our income tax effective rate from continuing operations was
38.4% in 2003 compared to 38.2% in 2002. Although the effective
rate was flat, our federal statutory rate increased to 35.0% in
2003 from 34.0% in 2002. This increase in the federal statutory
rate resulted in a revised valuation of our deferred tax assets,
which resulted in the recognition of a $743,000 benefit in 2003.
During 2003, we also recorded adjustments to our state deferred
tax assets and related valuation allowances for amounts
determined to be unrealizable in future periods.

Net Income from Continuing
Operations.Net income from continuing
operations decreased to $3.7 million in 2003 from
$4.3 million in 2002 primarily as a result of (a) the
$19.4 million increase in interest expense, (b) the
significant investments made in our centralized services
utilized to support our growing organization and public
reporting demands, and (c) the $3.0 million of net
impairments and losses on divestitures incurred during 2003.
These items were offset by the increased income from continuing
operations of our Albuquerque market.

Accrued Preferred
Dividends.Our accrued preferred
dividends amount to 8.0% of the principal amount and accrued
unpaid dividends outstanding on our mandatorily redeemable
preferred units. Effective January 2004, we amended the terms of
the preferred units such that the mandatory redemption date of
September 4, 2011 was deleted, thereby removing the
mandatory redemption feature. Had we not amended the preferred
units, effective January 1, 2004 we would have been
required to account for the preferred units as a liability and
record the dividends as interest expense.

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

Total Net Revenues.The $163.4 million increase in total net revenues, a 66.8%
increase over 2001, was due to a combination of an increase of
$141.9 million in total net revenues from our acute care
services segment, and an increase of $23.3 million in total
net revenues from our behavioral care services segment. Our
behavioral care total net revenues for 2002 includes
$1.1 million of total net revenues received from our acute
care services segment, which is eliminated in consolidation.

Before eliminations, the $141.9 million
increase in our acute care total net revenues was attributed to
a $123.2 million increase from the acquisitions of
Samaritan Hospital effective January 1, 2002, and the
Sandia Health System effective September 1, 2002 and
$18.7 million of the increase related to our ownership of
Summit Hospital for a full year in 2002 compared to five months
in 2001. Included in our acute care total net revenues for 2002
was $13.2 million of premium revenues. Our Sandia
acquisition included a federally licensed health maintenance
organization (the Sandia HMO), with membership of
6,002 at December 31, 2002.

Before eliminations, the $23.3 million, or
10.1%, increase in our behavioral care total net revenues was
attributed to an $11.7 million increase related to our
acquisition of Cumberland Hospital effective June 1, 2002
and to same hospital total net revenues. Same hospital total net
revenues from our behavioral hospitals increased 13.4% in 2002
from 2001 due to an increase in the number of patient days and
an increase in the total net revenue per adjusted patient day.
This increase in total net revenues was partially offset by the
fact that results for 2001 include partial year total net
revenues for four behavioral facilities we sold or closed during
2001.

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Salaries and
Benefits.Salaries and benefits were
55.1% of total net revenues in 2002, compared to 59.5% of total
net revenues in 2001. Salaries and benefits in our acute care
services segment were 45.5% of total net revenues in 2002,
compared to 39.1% of total net revenues in 2001. Salaries and
benefits in our behavioral care services segment were 55.1% of
total net revenues in 2002, compared to 59.5% of total net
revenues from in 2001. On a same hospital basis for our
behavioral hospitals, salaries and benefits as a percentage of
total net revenues increased slightly to 55.5% in 2002 from
55.0% in 2001.

Professional Fees.Professional fees were $40.3 million, or 9.9% of total net
revenues in 2002, compared to $34.6 million, or 14.2% of
total net revenues in 2001. Our acute care professional fees for
2002 include $1.1 million of professional fees for services
provided by our behavioral care services segment related to the
management of certain of our inpatient behavioral units. These
amounts are eliminated at consolidation. Professional fees at
acute care hospitals were $6.0 million, or 3.8% of total
net revenues, compared to $1.9 million, or 14.4% of total
net revenues in 2001. This decrease in professional fees at
acute care hospitals as a percentage of net revenues was due to
acquisitions in 2002 and the fact that Summit Hospital has
higher than average professional fees as a percentage of net
revenues. Professional fees at behavioral hospitals were
$29.4 million, or 11.6% of total net revenues in 2002,
compared to $31.5 million, or 13.7% of total net revenues
in 2001. On a same hospital basis for our behavioral hospitals,
professional fees as a percentage of total net revenues
decreased to 11.4% in 2002 from 12.3% in 2001.

Claims and
Capitation.Claims and capitation
expense was $11.0 million, or 2.7% of total net revenues in
2002. Because we did not own a health plan during 2001, there is
no comparable data for 2001.

Supplies.Supply
costs were $43.7 million, or 10.7% of total net revenues in
2002, compared to $15.4 million, or 6.3% of total net
revenues in 2001. Supply costs at acute care hospitals were
$29.2 million, or 18.8% of total net revenues in 2002,
compared to $1.6 million, or 12.2% of total net revenues in
2001. This increase was due to the higher level of patient
acuity at the hospitals we acquired in 2002. Supply costs at
behavioral hospitals were $14.2 million, or 5.6% of total
net revenues in 2002, compared to $13.6 million, or 5.9% of
total net revenues in 2001. On a same hospital basis for
behavioral hospitals, supply costs as a percentage of total net
revenues decreased to 5.5% in 2002 from 6.0% in 2001.

Provision for Doubtful
Accounts.The provision for doubtful
accounts was $23.7 million, or 5.8% of total net revenues
in 2002, compared to $9.6 million, or 3.9% of total net
revenues in 2001. The provision for doubtful accounts at acute
care hospitals was $17.0 million, or 11.0% of total net
revenues in 2002, compared to $2.6 million, or 19.1% of
total net revenues in 2001. This decrease was due to the fact
that Summit Hospital has historically had a higher than average
provision for doubtful accounts as a percentage of revenue
related to its emergency room operation. The provision for
doubtful accounts at behavioral hospitals was $6.7 million,
or 2.6% of total net revenues in 2002, compared to
$7.0 million, or 3.0% of total net revenues in 2001. On a
same hospital basis for our behavioral hospitals, the provision
for doubtful accounts as a percentage of total net revenues
increased slightly to 2.9% in 2002 from 2.8% in 2001.

Other Operating
Expenses.Other operating expenses
were $46.9 million, or 11.5% of total net revenues in 2002,
compared to $24.8 million, or 10.1% of total net revenues
in 2001. Other operating expenses at acute care hospitals were
$19.5 million, or 12.6% of total net revenues in 2002,
compared to $2.2 million, or 16.1% of total net revenues in
2001. Other operating expenses at behavioral hospitals were
$22.0 million, or 8.8% of total net revenues in 2002,
compared to $19.9 million, or 8.7% of total net revenues in
2001. On a same hospital basis for our behavioral hospitals,
other operating expenses as a percentage of total net revenues
decreased slightly to 8.3% in 2002 from 8.5% in 2001.

Interest.Interest
expense decreased to $2.8 million in 2002 compared to
$3.8 million in 2001. We funded our acquisitions through
2002 primarily through equity, therefore, our debt remained
relatively low and interest rates generally declined from 2001
to 2002.

Depreciation and
Amortization.Depreciation and
amortization expense increased to $8.9 million in 2002 from
$4.5 million in 2001. This increase is due to the full-year
impact of our 2002 and 2001 acquisitions as well as our capital
expenditures during 2002 and 2001. Depreciation not allocated to
our

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reportable operating segments increased
$2.1 million in 2002, which was predominantly related to
the information systems build out to support our centralized
services as we further expanded into the acute care segment. Our
capital expenditures during 2002 and 2001 totaled
$46.0 million and $9.8 million, respectively. The
capital expenditures during these two years contributed to the
increase in depreciation as the respective assets became
utilized and depreciable.


Impairment of Long-lived Assets and
Restructuring Costs and Loss (Gain) on
Divestitures.We recognized a net gain
of $1.2 million related to the sale of two behavioral
hospitals in 2002 and a working capital settlement of a
behavioral hospital sold in 2001, compared to a net gain of
$9.3 million in 2001.

Income Tax Expense.Our income tax effective rate from continuing operations was
38.2% in 2002 compared to 38.8% for the five-months ended
December 31, 2001 and to (98.8)% for the seven-months ended
July 31, 2001. The higher effective rate in 2002 was due to
the release of federal and state valuation allowances and the
effect of a higher foreign income tax rate on the sale of our
Predecessor Companys Puerto Rico assets in the
seven-months ended July 31, 2001.

Net Income from Continuing
Operations.Net income from continuing
operations decreased to $4.3 million in 2002 from
$19.4 million in 2001 primarily as a result of (a) the
$9.4 million increase in income tax expense and
(b) the $6.2 million increase in the net impairments
and losses on divestitures from 2001 to 2002.

Accrued Preferred
Dividends.Our accrued preferred
dividends amount to 8.0% of the principal amount and accrued
unpaid dividends outstanding on our mandatorily redeemable
preferred units.

Liquidity and Capital Resources



| |          
| | ---------
| | Liquidity

We require capital principally for the
acquisition of additional acute care and behavioral hospitals,
the expansion of the services provided through our existing
facilities, improvements to these facilities, including
designing and implementing new information systems, and for debt
service. Historically, we have financed our capital
requirements, including our acquisitions, through a combination
of cash flows from operations, borrowings under credit
facilities and proceeds from the issuance of subordinated debt
and equity securities.



| |                         
| | ------------------------
| | Sources and Uses of Cash

|                                             |                                                           |                        |        |              |   |              |         |          |   |   |       |        |  
|-------------------------------------------- | --------------------------------------------------------- | ---------------------- | ------ | ------------ | - | ------------ | ------- | -------- | - | - | ----- | ------ | -
|                                             |                                                           | December 31,           |        | December 31, |   | December 31,
|                                             |                                                           | 2003                   |        | 2002         |   | 2001        
|                                             |                                                           |                        |        |              |   |             
|                                             |                                                           |                        |        |              |   | (Combined)  
|                                             |                                                           |                       
|                                             |                                                           | (Amounts in thousands)
|Cash and cash equivalents (as of period end) |                                                           | $                      | 89,762 |              |   | $            | 113,569 |          |   | $ | 9,952 |       
|Statement of cash flows information:         |                                                           |                        |        |              |   |              |         |          |   |   |       |       
|                                             | Cash flows provided by operating activities               |                        |        | 66,510       |   |              |         | 21,047   |   |   |       | 8,264  |  
|                                             | Cash flows provided by (used in) investing
    activities |                        |        | (274,120     | ) |              |         | (169,793 | ) |   |       | (7,237 | )
|                                             | Cash flows provided by (used in) financing
    activities |                        |        | 183,864      |   |              |         | 252,364  |   |   |       | 4,532  |  

Our cash and cash equivalents decreased to
$89.8 million as of December 31, 2003, primarily
related to our significant investment in our Albuquerque market,
where the Lovelace Sandia Health System accounts for 71.1% of
our operations. As previously discussed, we acquired Sandia in
August 2002 and Lovelace in January 2003. Our cash and cash
equivalents increased to $113.6 million as of
December 31, 2002, predominantly related to total cash
provided by financing (through debt and equity) of
$252.4 million, offset by cash paid for acquisitions and
property and equipment totaling $175.2 million. A more
detailed discussion on specific sources and uses of cash is set
forth below.

Cash flows provided by operating activities
increased to $66.5 million for the year ended
December 31, 2003, compared to $21.0 million for the
year ended December 31, 2002. This increase is primarily
related to the impact of our Sandia acquisition in 2002 and our
Lovelace acquisition in 2003.

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These entities now comprise 71.1% of our total
net revenues. Our cash flows provided by operating activities
was negatively impacted by the previously discussed increase in
our net days revenue outstanding, which increased from
57 days at December 31, 2002 to 59 days at
December 31, 2003. Cash flows provided by operating
activities increased to $21.0 million for the year ended
December 31, 2002, compared to $8.3 million for the
year ended December 31, 2001. This increase is primarily
related to the impact of our Samaritan and Sandia acquisitions
in 2002. Additionally, our cash flows provided by operating
activities for the year ended December 31, 2001 included
$9.2 million gains from divestitures, which the cash
received from those divestitures was included as investing
activities.


Cash flows used in investing activities increased
to $274.1 million in 2003, compared to $169.8 million
in 2002. Again, the Lovelace and Sandia acquisitions contributed
the largest portion of the increase. Our total cash spent during
2003 related to capital expenditures was $87.0 million.
Upon the completion of these two acquisitions, we committed to
invest $80.0 million of capital expenditures in the
Albuquerque market, $51.5 million of which has been
invested through 2003. Cash flows used in investing activities
increased to $169.8 million for the year ended
December 31, 2002, compared to $7.2 million for the
year ended December 31, 2001. During 2002, we invested
approximately $175.2 million in acquisitions and capital
expenditures, compared to $29.0 million in 2001. This
increase is related to our business strategy of investing in
acute care facilities, both through acquisition and investment
of capital for property, plant and equipment.

Cash flows provided by financing activities
decreased to $183.9 million in 2003, compared to
$252.4 million in 2002. We financed our 2003 acquisitions
primarily from our credit facilities, which were paid in full
from the proceeds of our senior subordinated notes.
Additionally, in 2003 we issued $36.0 million of
subordinated notes to an affiliate of our largest equityholder,
Welsh, Carson, Anderson and Stowe (WCAS), the
proceeds of which were used for the purchase of Lovelace. Cash
flows provided by financing activities increased to
$252.4 million for the year ended December 31, 2002,
compared to $4.5 million for the year ended
December 31, 2001. During 2002, we raised
$51.0 million from the issuance of preferred units and
$161.0 million from the issuance of common units.
Additionally, during 2002, we raised total proceeds from
long-term debt and revolver of $41.0 million. The proceeds
from the preferred and common units and the long-term debt were
used to fund our acquisitions and working capital build-up.

At December 31, 2003, we currently have
borrowing capacity of $117.9 million on our revolver and,
in certain circumstances, $200.0 million on our term loans.
We anticipate that our acquisition strategy will necessitate the
funding of future acquisitions through use of our bank facility
and other financing means that may be available to us at those
times.



| |                           
| | --------------------------
| | Restrictions on Cash Flows

Lovelace Sandia Health System, Inc., our
wholly-owned subsidiary, includes, in addition to hospitals and
other healthcare facilities, the Lovelace Health Plan. Lovelace
Sandia Health System, Inc. is therefore subject to certain
restrictions on its ability to pay dividends or make other
distributions to us by state insurance company laws and
regulations. These laws and regulations require Lovelace Sandia
Health System, Inc. to give notice to the New Mexico
Department of Insurance prior to paying dividends or making
distributions to us. In May 2003 and August 2003, following
notification to the New Mexico Department of Insurance in each
case, we received dividend distributions of $15.0 million
and $10.0 million, respectively, from Lovelace Sandia
Health System, Inc. As of December 31, 2003, cash and
cash equivalents at Lovelace Sandia Health System, Inc.
were $36.8 million. In addition, Lovelace Sandia Health
System, Inc. is subject to state-imposed net worth-based
capital requirements that effectively limit the amount of funds
it has available to distribute to us. As of December 31,
2003, Lovelace Sandia Health System, Inc. is required to
maintain a net worth of approximately $34.8 million (based
on the preliminary statutory filing with the State of New
Mexico), as well as a minimum requirement of $610,000 in cash or
short-term government instruments. Actual net worth exceeded the
requirement by $7.3 million and, subject to the
requirements, may be available to us. In addition, as part of
Lovelace Health Plans participation in the Medicaid Salud!
program for New Mexico, Lovelace Sandia Health System, Inc.
is

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required to maintain a cash reserve of at least
3.0% of the annual capitated payments per member for each month
of the first year of the contract. As of December 31, 2003,
Lovelace Sandia Health System, Inc. maintained a balance of
$5.1 million to meet these two required reserve amounts.


As a result of the consolidation and merger of
our New Mexico operations, all of our operations in New Mexico
(other than the operations of AHS S.E.D. Medical
Laboratories, Inc.) are owned by Lovelace Sandia Health
System, Inc. and are subject to the restrictions and
requirements described above.



| |                  
| | -----------------
| | Cash Requirements

The following table reflects a summary of our
obligations and commitments outstanding, including both the
principal and interest portions of long-term debt, as of
December 31, 2003:

|                                 |          |                        |        |           |  |           |        |         |  |       |        |        |  |   |         |         |  |   |         |         | 
|-------------------------------- | -------- | ---------------------- | ------ | --------- |  | --------- | ------ | ------- |  | ----- | ------ | ------ |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                 |          |                       
|                                 |          | Payments Due by Period
|                                 |          |                       
|                                 |          | Less than              |        |           |  | More than |        |        
|                                 |          | 1 Year                 |        | 1-3 Years |  | 3-5 Years |        | 5 Years |  | Total
|                                 |          |                        |        |           |  |           |        |         |  |      
|                                 |          |                       
|                                 |          | (In thousands)        
|Contractual Cash Obligations:    |          |                        |        |           |  |           |        |         |  |       |        |        |  |   |         |         |  |   |         |        
|Long-term debt, with interest(1) |          | $                      | 29,627 |           |  | $         | 56,293 |         |  | $     | 54,028 |        |  | $ | 386,309 |         |  | $ | 526,257 |        
|Operating leases                 |          |                        | 12,051 |           |  |           | 19,299 |         |  |       | 8,471  |        |  |   | 5,478   |         |  |   | 45,299  |        
|                                 |          |                        |        |           |  |           |        |         |  |       |        |        |  |   |         |         |  |   |         |        
|                                 | Subtotal |                        |        | 41,678    |  |           |        | 75,592  |  |       |        | 62,499 |  |   |         | 391,787 |  |   |         | 571,556 | 
|                                 |          |                        |        |           |  |           |        |         |  |       |        |        |  |   |         |         |  |   |         |        

|                                               |          |                                            |        |           |  |           |        |         |  |       |        |        |  |   |         |   |  |   |         |        | 
|---------------------------------------------- | -------- | ------------------------------------------ | ------ | --------- |  | --------- | ------ | ------- |  | ----- | ------ | ------ |  | - | ------- | - |  | - | ------- | ------ | 
|                                               |          |                                           
|                                               |          | Amount of Commitment Expiration Per Period
|                                               |          |                                           
|                                               |          | Less than                                  |        |           |  | More than |        |        
|                                               |          | 1 Year                                     |        | 1-3 Years |  | 3-5 Years |        | 5 Years |  | Total
|                                               |          |                                            |        |           |  |           |        |         |  |      
|                                               |          |                                           
|                                               |          | (In thousands)                            
|Other Commitments:                             |          |                                            |        |           |  |           |        |         |  |       |        |        |  |   |         |   |  |   |         |       
|Construction and improvement commitments(2)(4) |          | $                                          | 6,927  |           |  | $         |       |         |  | $     | 22,673 |        |  | $ |        |   |  | $ | 29,600  |       
|Letters of credit(3)                           |          |                                            | 7,098  |           |  |           |       |         |  |       |       |        |  |   |        |   |  |   | 7,098   |       
|                                               |          |                                            |        |           |  |           |        |         |  |       |        |        |  |   |         |   |  |   |         |       
|                                               | Subtotal |                                            |        | 14,025    |  |           |        |        |  |       |        | 22,673 |  |   |         |  |  |   |         | 36,698 | 
|                                               |          |                                            |        |           |  |           |        |         |  |       |        |        |  |   |         |   |  |   |         |       
|Total obligations and commitments              |          | $                                          | 55,703 |           |  | $         | 75,592 |         |  | $     | 85,172 |        |  | $ | 391,787 |   |  | $ | 608,254 |       
|                                               |          |                                            |        |           |  |           |        |         |  |       |        |        |  |   |         |   |  |   |         |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | All of our outstanding debt as of
    December 31, 2003 was at fixed rates, therefore, the
    estimated interest is based on the fixed rates in effect. We
    have not made any assumptions, for the purposes of this table,
    about the estimated fair value of our interest rate swap
    agreements.                                                                                                                                                                                                                                                                                      
|   
|(2) | The largest portion of the $29.6 million
    relates to our Lovelace and Sandia acquisitions where we have
    committed to invest $80.0 million in capital expenditures
    in the Albuquerque market over a five year period (of which
    $51.5 million had been invested as of December 31,
    2003). We expect to invest the additional $28.5 million
    commitment in 2004, however, as our commitment to invest the
    $28.5 million does not expire until 2008, we have presented
    the commitment in 2008, except for actual commitments made as of
    December 31, 2003 for 2004.
|   
|(3) | We have letters of credit totaling
    $7.1 million outstanding at December 31, 2003, related
    to workers compensation and professional liability insurer
    requirements.                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(4) | We had projects under construction with an
    estimated cost to complete of $16.7 million as of
    December 31, 2003. Except for $5.8 million included in
    (2) above, we can terminate substantially all of the
    related construction contracts at any time without penalty,
    therefore such costs are excluded from the above table under
    footnote (2).                                                                                                                                                                                                                          

The other commitments table excludes our accrued
dividends on our mandatorily redeemable preferred units, which
accrue dividends at an amount equal to the greater of
(i) 8.0% annually of the sum of $3.43 plus the aggregate
amount of any accrued and unpaid preferred dividends and
(ii) the amount of cash actually distributed with respect
to a common member unit during the year. As of December 31,

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2003 and 2002, accrued but unpaid dividends on
the preferred units amounted to $15.3 million and
$7.2 million, respectively. It is anticipated that these
dividends will continue to accrue and be paid out of the
proceeds of a qualifying event, as defined. We have never
declared or paid dividends on our common units. We intend to
retain future earnings available to common members to finance
the growth and development of our business and, accordingly, do
not currently intend to declare or pay any dividends on our
common units. Our board of managers will evaluate our future
earnings, results of operations, financial condition and capital
requirements in determining whether to declare or pay cash
dividends on common units. Our ability to pay dividends is
restricted by our credit facilities and applicable Delaware law.




| |               
| | --------------
| | Long-term Debt

We provide a detailed discussion of our long-term
debt below under Capital Resources. Our contractual
cash obligations for our long-term debt consist primarily of our
interest obligations on our $225.0 million senior subordinated
notes and our $36.0 million subordinated notes. We plan to
fund these interest payments with cash flows generated from
operating activities.



| |                 
| | ----------------
| | Operating Leases

Our operating leases are primarily for medical
and office equipment, as well as office space. We generally
negotiate leases with periods ranging from three to five years;
however, we do have one office lease that expires in 2014. We
plan to fund these operating lease payments with cash flows
generated from operating activities.



| |                                                         
| | --------------------------------------------------------
| | Capital Expenditures (including Capital
    Commitments)

Capital expenditures, excluding amounts paid for
acquisitions, were $87.0 million, $46.0 million and
$9.8 million for the years ended December 31, 2003,
2002 and 2001, respectively. Prior to our investment in the
acute care hospital segment, our capital expenditure costs
ranged from approximately $3.8 million for our Predecessor
Companys year ended June 30, 1999 to approximately
$9.8 million for the combined year ended December 31,
2001. Beginning in 2002, we began significant investments in
capital expenditures, with the largest portion of that
investment in our acute care hospitals. Generally, the
facilities and equipment at the hospitals we have acquired were
in good condition; however, we have invested, and will continue
to invest, significant funds into facility improvements and
service enhancements undertaken by our hospitals. Additionally,
we have invested considerable funds to install and implement
sophisticated information systems that we believe will keep us
competitive and help achieve our business goals and objectives.
We expect to make total capital expenditures in 2004 of
approximately $60.0 million. We expect to fund these
expenditures through cash provided by operating activities and
borrowings under our current bank facility.

As previously discussed, we have committed to
invest $80.0 million of capital expenditures in the
Albuquerque market through 2008, of which $51.5 million has
been invested through December 31, 2003. We expect that the
remaining $28.5 million will be invested in the Albuquerque
market during 2004 as we continue to upgrade financial and
clinical systems, expand service lines and refurbish and retool
facilities.

Our August 2003 Credit Agreement contains
provisions that limit annual capital expenditures. We were in
compliance with this limit for the year ended December 31,
2003. Additionally, we believe our forecasted and committed
capital expenditures will be sufficient to meet our quality and
growth objectives while allowing us to expand our service lines
and complete our implementation of clinical and information
systems.



| |                  
| | -----------------
| | Letters of Credit

We are required to issue letters of credit for
the benefit of our insurers related to our workers compensation
and professional liability insurance coverage. As of
December 31, 2003, we had issued $7.1 million of
standby letters of credit which were secured by the collateral
of our August 2003 Credit Agreement.

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Capital Resources



| |                           
| | --------------------------
| | Long-term Debt and Capital

On December 28, 2000, our Predecessor
Company secured a $28.5 million term loan (the Term
Loan) with Bank One and a revolving line of credit
(Line of Credit) with Heller Healthcare
Finance, Inc. (Heller) (collectively the
2000 Credit Agreements) for the purpose of
refinancing the 1996 Credit Agreement, as amended. On
December 31, 2001, we amended the 2000 Credit Agreements to
extend the maturity of the Credit Agreements to
December 31, 2003, and the interest rate was modified.

The Term Loan was secured by mortgages on eight
of our behavioral hospitals and interest was at either prime
plus 0.75% or LIBOR plus 2.65%, at our election. We elected to
use LIBOR plus 2.65%. Interest was payable on the outstanding
principal balance of the Term Loan on the last day of the
selected interest period. The principal of the Term Loan was to
be paid in full on the maturity date. The Term Loan could be
prepaid in the amount of $50,000 or multiples thereof prior to
the maturity date.

The Line of Credit had a maximum borrowing limit
of $50 million as of December 31, 2002. Our
Predecessor Company utilized the proceeds from the sale of
certain operations to pay down existing indebtedness under the
Line of Credit. We were limited to a borrowing based on 85% of
qualified accounts receivable, as defined. As of
December 31, 2002, $11.3 million was available for
borrowing under the Line of Credit. The Line of Credit bore
interest at a rate of prime plus 1.25% and interest was payable
monthly in arrears.

The 2000 Credit Agreements were collateralized by
the assignment of all rights, title, and interest in all of our
equipment, fixtures, real property, inventory, and our common
stock excluding those facilities identified for divestiture as
part of our restructuring process (refer to Note 2 in the
consolidated financial statements).

The Term Loan and Line of Credit contained
various financial covenants that included requirements to
maintain a minimum fixed charge coverage ratio, minimum tangible
net worth, and a maximum leverage ratio.

We entered into a subscription agreement with
WCAS and Ferrer, Freeman & Company, LLC (Ferrer
Freeman) on December 11, 2002, pursuant to which WCAS
and Ferrer Freeman have the right, under certain circumstances,
in WCASs discretion, to purchase up to an aggregate of
$165.0 million of our common units at a purchase price of
$4.50 per common unit. The subscription agreement was
amended in February 2003 to add BancAmerica Capital
Investors I, L.P. (BAC) as a purchaser of up to
an additional $10.0 million of common units at the same
purchase price per common unit. Pursuant to the subscription
agreement, as amended, WCAS, Ferrer Freeman and BAC have
invested a total of $116.7 million, as of December 31,
2003, and WCAS, Ferrer Freeman and BAC have the right, under
certain circumstances, in WCASs discretion, to invest the
balance of up to an additional $58.3 million.

On January 15, 2003, we replaced the
existing Term Loan with a $112.5 million Senior Secured
Credit Facility (2003 Credit Agreement) with Bank
One, Bank of America, and UBS Warburg, LLC. Each lender
contributed $37.5 million and obtained a security pledge
from us of all assets which included: a unit pledge, all of our
present and future assets, including our guarantors, and a
second lien on accounts receivable currently pledged to GE
Healthcare Financial Services (formerly Heller). The 2003 Credit
Agreement incurred interest at LIBOR plus 450 basis points
or prime plus 350 basis points and matured on
April 30, 2004. Interest was payable on the outstanding
principal balance on the last day of the selected interest
period. The principal amount of the 2003 Credit Agreement was to
be paid in full on the maturity date.

On January 15, 2003, we issued
$36.0 million principal amount of 10.0% senior
subordinated notes due 2009 to an affiliate of the controlling
unit holder. On August 19, 2003, we modified certain terms
of the $36.0 million senior subordinated notes issued in
January 2003. Among other things, we extended the maturity date
from 2009 to 2014, increased the interest rate from 10.0% to
10.2% and subordinated the notes to the August 2003 Credit
Agreement and the senior subordinated notes. Proceeds were used
to

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(i) refinance the 2000 Term Loan,
(ii) pay down a portion of the Revolver and (iii) fund
in part the acquisition of Lovelace Health Systems, Inc.


In April 2003, we issued $5.0 million in
additional common units to a group of investors, including
members of our management team. We sold these additional units
in an exempt offering to accredited investors at a price of
$4.50 per unit.

On May 6, 2003, we amended the 2003 Credit
Agreement replacing the Line of Credit with a $50.0 million
revolving line of credit with Bank One, Bank of America, UBS
Warburg, LLC and GE Healthcare Financial Services. The amended
2003 Credit Agreement contained financial covenants, which
included requirements to maintain certain leverage, interest
coverage ratios, and EBITDA amounts.

On August 19, 2003, we received
$225.0 million through the issuance of 10.0% senior
subordinated notes due on August 15, 2013. On March 1,
2004, we exchanged all of our outstanding 10.0% senior
subordinated notes due August 15, 2013, for
10.0% senior subordinated exchange notes due
August 15, 2013, that have been registered under the
Securities Act of 1933, as amended. Terms and conditions of the
exchange offer were as set forth in the registration statement
on Form S-1 filed with the Securities and Exchange
Commission that became effective on January 28, 2004.
Interest on the senior subordinated notes is payable
semi-annually on February 15 and August 15. We may
redeem the senior subordinated notes, in whole or in part, at
any time before August 15, 2008, at the principal amount
plus a premium and accrued and unpaid interest. We may redeem
the senior subordinated notes after August 15, 2008, at
redemption prices ranging from 105.0% to 100.0%, plus accrued
and unpaid interest. Additionally, at any time prior to
August 15, 2006, we may redeem up to 35.0% of the principal
amount of the senior subordinated notes with the net cash
proceeds of one or more sales of our capital stock at a
redemption price of 110.0% plus accrued and unpaid interest to
the redemption date; provided that at least 65.0% of the
aggregate principal amount of the senior subordinated notes
originally issued on August 19, 2003 remains outstanding
after each such redemption and the redemption occurs within
90 days of the date of closing of the equity offering.

Payment of the principal and interest of the
senior subordinated notes is subordinate to amounts owed for our
existing and future senior indebtedness. The senior subordinated
notes are guaranteed, fully and unconditionally, jointly and
severally, on an unsecured senior subordinated basis by all of
our material subsidiaries (the Subsidiary
Guarantors), other than LSHS. We are subject to certain
restrictive covenants under the Indenture governing the senior
subordinated notes. We used the proceeds from the offering to
repay all amounts outstanding under its 2003 Credit Agreement of
$155.2 million plus accrued interest.

On August 19, 2003, concurrent with the
issuance of the senior subordinated notes, we replaced the 2003
Credit Agreement with a new senior secured credit facility
(August 2003 Credit Agreement) with a syndicate of
banks and other institutional lenders. The August 2003 Credit
Agreement consists of a $125.0 million revolving line of
credit, subject to a borrowing base, including a swing-line loan
of $10.0 million and an incremental term loan under which
we may request term loans of up to $200.0 million. The
revolving line of credit bears interest initially at LIBOR plus
3.75% or prime plus 2.75%. Interest on the revolving line of
credit is payable on the outstanding principal balance on the
last day of the selected interest period. The principal amount
of the revolving line of credit is to be paid in full on the
maturity date (5 years on the revolving credit facility and
as agreed for the term loans, when requested). The payment of
interest and principal for the term loans are subject to
scheduled amortization as agreed upon by us and the lenders. The
August 2003 Credit Agreement contains various financial
covenants including requirements to maintain a minimum interest
coverage ratio, a total leverage ratio, a senior leverage ratio,
a minimum net worth of the HMO subsidiaries, a capital
expenditures maximum and for 2003, a minimum EBITDA, as defined.
At December 31, 2003, we were in compliance with all such
covenants. The August 2003 Credit Agreement also restricts
certain of our activities including our ability to incur
additional debt, declare dividends, repurchase stock, engage in
mergers, acquisitions and sell assets. The August 2003 Credit
Agreement is guaranteed by us along with our material current
and future subsidiaries, other than LSHS and our wholly-owned
captive insurance subsidiary, and is secured by

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substantially all of our existing and future
property and assets and the capital stock of all of our
subsidiaries. We have designated certain of our immaterial
subsidiaries as unrestricted subsidiaries under the indenture
governing the senior subordinated notes. None of these
unrestricted subsidiaries carry on any significant business or
conduct any operations and, as a result, they are not material
to our business, financial condition or results of operations.


In connection with the merger of our New Mexico
subsidiaries on October 1, 2003, Lovelace Sandia Health
System, Inc. (the surviving entity) issued a
$70.0 million intercompany note to Ardent Health
Services, Inc. Interest accrues at a rate equal to the
greater of (i) our base rate plus 4.0% or (ii) 6.0%.
Interest is payable on demand. Principal is payable on the later
of November 19, 2008 or 30 days after the maturity
date of our incremental term loan, if any. We are required to
maintain a pledge of the intercompany note in favor of the
lenders of our August 2003 Credit Agreement and the holders of
the senior subordinated notes.



| |                              
| | -----------------------------
| | Interest Rate Swap Agreements

In September 2003, we entered into four interest
rate swap agreements with large financial institutions which
converted a notional amount of $80.0 million of the senior
subordinated notes to floating-rate borrowings. The swap
agreements mature in $40.0 million increments on
August 15, 2006 and August 15, 2008. The floating
interest rate is based on six-month LIBOR plus a margin and is
determined for the six-month period in arrears on semi-annual
settlement dates of February 15 and August 15. At
December 31, 2003, the weighted average floating rate was
7.64%. The swap agreements do not qualify for hedge accounting,
thus changes in the fair value of our interest rate hedging
arrangements are recognized each period in earnings. All
earnings adjustments resulting from changes in the fair values
of the interest rate swaps are non-cash charges or credits and
do not impact cash flows from operations or operating income.
There may be periods with significant non-cash increases or
decreases to our earnings relating to the change in the fair
value of the interest rate swap agreements. The fair value of
the swap obligations was $558,000 at December 31, 2003.



| |                                      
| | -------------------------------------
| | Availability of Capital
    Resources

We believe that the cash flows generated by our
operations, together with amounts available under our August
2003 Credit Agreement will be sufficient to meet our operating
and capital needs for at least the next twelve months. In
addition, there is an additional $58.3 million remaining
under the subscription agreement that WCAS, Ferrer Freeman and
BAC may invest. However, it is at WCASs discretion whether
any such investment will be made. No assurance can be given that
additional equity will be issued under the subscription
agreement.

We intend to acquire additional hospitals and are
actively seeking acquisitions that fit our corporate growth
strategy. These acquisitions may, however, require financing in
addition to the capital on hand and future cash flows from
operations. We continually assess our capital needs and may seek
additional financing, including debt or equity, as considered
necessary to fund potential acquisitions or for other corporate
purposes.

Recently Issued Accounting Standards

A discussion of recently issued accounting
pronouncements and their effect on our financial position and
results of operations can be found in Note 1 to our
consolidated financial statements under the caption
Recently Issued Accounting Pronouncements.

Seasonality

We typically experience higher patient volumes
and revenues in the first and fourth quarters of each year in
our acute care segment. We typically experience such seasonal
volume and revenue peaks because more people generally become
ill during the winter months, which in turn results in
significant increases in the number of patients we treat during
those months.

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Inflation

The healthcare industry is labor intensive.
Wages, contract labor and other expenses increase during periods
of inflation and when shortages in marketplaces occur. In
addition, our supply costs and insurance costs are subject to
inflation as the respective vendors pass along their increased
costs to us in the form of higher prices. Our ability to pass on
these increased costs is limited because of increasing
regulatory and competitive pressures. Accordingly, inflationary
pressures could have a material adverse effect on our results of
operations.






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

In September 2003, we entered into four interest
rate swap agreements with large financial institutions which
converted a notional amount of $80.0 million of the senior
subordinated notes to floating-rate borrowings. The swap
agreements mature in $40.0 million increments on
August 15, 2006 and August 15, 2008. The floating
interest rate is based on six-month LIBOR plus a margin and is
determined for the six-month period in arrears on semi-annual
settlement dates of February 15 and August 15. At
December 31, 2003, the weighted average floating rate was
7.64%. The swap agreements do not qualify for hedge accounting,
thus changes in the fair value of our interest rate hedging
arrangements are recognized each period in earnings. All
earnings adjustments resulting from changes in the fair values
of the interest rate swaps are non-cash charges or credits and
do not impact cash flows from operations or operating income.
There may be periods with significant non-cash increases or
decreases to our earnings relating to the change in the fair
value of the interest rate swap agreements. The fair value of
the swap obligations was $558,000 at December 31, 2003.






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

Information with respect to this Item is
contained in our consolidated financial statements indicated in
the Index on Page F-1 of this Annual Report on Form 10-K.






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

None.






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

Evaluation of Disclosure Controls and
Procedures

We conducted an evaluation, under the supervision
of our chief executive officer and chief financial officer, of
the effectiveness as of December 31, 2003 of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended
(the Exchange Act)). Based on this evaluation, our
chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures were
effective as of December 31, 2003 to ensure that
information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms and that such information is
accumulated and communicated to management, including our chief
executive officer and chief financial officer, as appropriate to
allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial
Reporting

There was no change in our internal control over
financial reporting during our last fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.

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##### Table of Contents






PART III






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

Executive Officers and Managers

The following table sets forth information with
respect to our executive officers and managers:

|                     |  |     |    |          |  |                                                                           
|-------------------- |  | --- | -- | -------- |  | --------------------------------------------------------------------------
|Name                 |  | Age |    | Position
|                     |  |     |    |         
|David T. Vandewater  |  |     | 53 |          |  | President, Chief Executive Officer and Manager                            
|Jamie E. Hopping     |  |     | 50 |          |  | Chief Operating Officer and Manager                                       
|R. Dirk Allison      |  |     | 48 |          |  | Chief Financial Officer and Manager                                       
|Vernon S. Westrich   |  |     | 53 |          |  | Executive Vice President, Behavioral Health Group                         
|Stephen C. Petrovich |  |     | 37 |          |  | Senior Vice President, General Counsel and
    Secretary                  
|Norman P. Becker     |  |     | 48 |          |  | President and Chief Executive Officer of Lovelace
    Sandia Health System
|Russell L. Carson    |  |     | 60 |          |  | Manager and Chairman of the Board                                         
|Norman Brownstein    |  |     | 60 |          |  | Manager                                                                   
|David C. Colby       |  |     | 50 |          |  | Manager                                                                   
|Colleen Conway-Welch |  |     | 59 |          |  | Manager                                                                   
|Carlos A. Ferrer     |  |     | 50 |          |  | Manager                                                                   
|D. Scott Mackesy     |  |     | 35 |          |  | Manager                                                                   
|Kenneth J. Melkus    |  |     | 57 |          |  | Manager                                                                   
|Thomas A. Scully     |  |     | 46 |          |  | Manager                                                                   

David T. Vandewater, President, Chief
Executive Officer and Manager.Mr.
Vandewater joined Behavioral Healthcare Corporation, or BHC, our
predecessor company, as Chairman in February 2001 and was named
President and Chief Executive Officer in September 2001. Prior
to joining BHC, Mr. Vandewater was a private investor and
consultant from July 1997 until February 2001. During that time,
Mr. Vandewater worked with WCAS as a consultant to United
Surgical Partners International Inc. to identify, analyze and
review international hospital acquisitions. From 1990 to 1997,
Mr. Vandewater served as President and Chief Operating
Officer of HCA, Inc. (formerly known as Columbia/ HCA
Healthcare Corporation), an acute care hospital company, with
responsibility for operations as the company grew, through both
internal means and acquisitions, from $100 million to over
$20 billion in revenue.

Jamie E. Hopping, Chief Operating Officer and
Manager.Ms. Hopping joined our
company in July 2002 with ultimate responsibility for the
operations of the acute care and behavioral health groups. Prior
to joining our company Ms. Hopping served as President and
Chief Operating Officer of Alliance Imaging, Inc. from
November 2000 to June 2002. From 1997 to October 2000,
Ms. Hopping was an independent consultant to various
healthcare providers including Catholic Health East and Quorum
Health Resources. Prior to that, she spent seven years at
HCA, Inc. (formerly known as Columbia/ HCA Healthcare
Corporation), most recently as President of the Western Group,
which included 60 hospitals in 13 states.

R. Dirk Allison, Chief Financial Officer
and Manager.Effective
December 1, 2003, R. Dirk Allison joined Ardent as
Executive Vice President, Chief Financial Officer and Manager.
From 1999 to November 2003, Mr. Allison served as Executive
Vice President, Chief Financial Officer and Treasurer for Renal
Care Group, Inc. which provides dialysis services to
patients with chronic kidney failure, through outpatient
dialysis centers and also in hospitals. From 1997 until 1999,
Mr. Allison was President and Chief Executive Officer of
MedSynergies, Inc., a physician practice management company
specializing in eye care based in Dallas, Texas. From 1995 until
1997, Mr. Allison was President and Chief Executive

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Officer of Capstone Pharmacy Services, Inc.,
a public institutional pharmacy company with more than 40
pharmacies. From 1993 until 1995, Mr. Allison was President
and Chief Executive Officer of PremierPharmacy, Inc., an
institutional pharmacy company that was sold to Capstone
Pharmacy Services, Inc.


Vernon S. Westrich, Executive Vice
President.Mr. Westrich joined
BHC in January 1999 and currently heads the behavioral health
group. From 1987 to December 1998, Mr. Westrich was with
Charter Behavioral Health Systems, LLC, a behavioral healthcare
company, where he held various leadership positions which
included acting as the Chief Operating Officer for the operation
of 92 behavioral healthcare facilities.

Stephen C. Petrovich, Senior Vice President,
General Counsel and Secretary.Mr. Petrovich joined BHC in March 2000 as Vice President
and General Counsel and was promoted to Senior Vice President in
May 2001. Prior to joining BHC, Mr. Petrovich served as
Chief Litigation Counsel for Charter Behavioral Health Systems,
LLC from 1997 to February 2000.

Norman P. Becker, President and Chief
Executive Officer of Lovelace Sandia Health
System.Mr. Becker joined us in
May 2003 as President and Chief Executive Officer of Lovelace
Sandia Health System. From March 1996 through April 2003,
Mr. Becker served as President and Chief Executive Officer
for Blue Cross Blue Shield of New Mexico, a health insurance
company.

Russell L. Carson, Manager and Chairman of the
Board.Mr. Carson co-founded WCAS
in 1979 and has focused on healthcare investments. WCAS is one
of the largest private equity firms in the United States and is
focused exclusively on investments in the healthcare,
information technology and telecommunications industries. WCAS
has created 12 institutionally funded limited partnerships with
total capital of $11 billion and has invested in more than
200 companies. Mr. Carson also serves as a director of
Select Medical Corporation and U.S. Oncology, Inc.

Norman Brownstein,
Manager.Mr. Brownstein is a
founding member and Chairman of the Board of Brownstein Hyatt
and Farber, P.C., a law firm, where his practice extends to
the telecommunications, financial services, real estate and
healthcare industries. Mr. Brownstein has been a member of
Brownstein Hyatt and Farber P.C. since 1968. Mr. Brownstein
is a presidential appointee to the United States Holocaust
Museum.

David C. Colby,
Manager.Mr. Colby has been
Executive Vice President and Chief Financial Officer for
WellPoint Health Networks, Inc., one of the nations
largest publicly traded managed healthcare companies, since
September 1997. From April 1996 until August 1997,
Mr. Colby was Executive Vice President, Chief Financial
Officer and Director of American Medical Response, Inc., a
healthcare services company focusing on ambulance services and
emergency physician practice management. From July 1988 until
March 1996, Mr. Colby was with HCA, Inc., most
recently serving as Senior Vice President and Treasurer.

Colleen Conway-Welch,
Manager.Ms. Conway-Welch has
been certified as a nurse-midwife since 1971 and since January
1984 has been Professor and Dean of Vanderbilt University School
of Nursing. She has been active in nursing practice and nursing
education for over three decades. Ms. Conway-Welch has
published extensively, served on President Reagans
Commission on the HIV Epidemic in 1988, and the National
Bipartisan Commission on the Future of Medicare in 1998. She is
a member of the Institute of Medicine and a director of Pinnacle
Bank, RehabCare Group and Caremark Rx, Inc.

Carlos A. Ferrer,
Manager.Mr. Ferrer co-founded
Ferrer, Freeman & Company, LLC, referred to as Ferrer
Freeman, in 1995, a private equity capital group with over
$500 million under management and focused exclusively in
the healthcare industry. Previously he was a Managing Director
at Credit Suisse First Boston. From 1982 through 1995, he
developed and served as Head of CSFBs Healthcare
Investment Banking Group. He is Vice Chairman of the Board of
the Cancer Research Institute and a director of Amerigroup
Corporation and several other private companies.

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D. Scott Mackesy,
Manager.Mr. Mackesy joined WCAS
in 1998 and is a General Partner focusing on investments in the
healthcare industry. Prior to joining WCAS, Mr. Mackesy was
a Vice President and Senior Research Analyst at Morgan Stanley
Dean Witter where he was responsible for coverage of the
facilities-based healthcare services sector. Mr. Mackesy is
a director of LabOne, Inc., and United Surgical Partners
International Inc., as well as several private companies.

Kenneth J. Melkus,
Manager.Since December 1996,
Mr. Melkus has served as a consultant to WCAS. Since
December 1996, Mr. Melkus has been the controlling and sole
member of Reliance Health Group, LLC, a healthcare consulting
company. From its founding in 1993 to its sale in 1996,
Mr. Melkus served as Chairman of the Board and Chief
Executive Officer of HealthWise of America, Inc., an
operator of health maintenance organizations. From 1986 until
1993, Mr. Melkus served as Vice Chairman and President of
Surgical Care Affiliates, Inc., an operator of outpatient
surgery centers. Mr. Melkus is also a director of Accredo
Health, Incorporated.

Thomas A. Scully,
Manager.Mr. Scully joined
Alston & Bird as Senior Counsel on January 1,
2004. He simultaneously joined WCAS as a Senior Advisor. Prior
to joining Alston & Bird and WCAS, Mr. Scully was
appointed by President George W. Bush and confirmed by the
United States Senate as the Administrator of the Centers for
Medicare & Medicaid Services (CMS), where he served
from 2001 through 2003. Before joining CMS, Mr. Scully
served as President and Chief Executive Officer of the
Federation of American Hospitals from January 1995 to May 2001.
Mr. Scully is also a director of Select Medical Corp.

Board of Managers

General.Our board
of managers has, subject to the terms of our limited liability
company agreement, general supervision, direction and control of
our business and the full power and authority and absolute
discretion to conduct that business. In addition, except as
otherwise provided for in the limited liability company
agreement, the board has the sole power and authority to act on
all matters that require the approval of our members (so that
the approval of the board will constitute all required member
approval) and no member has any right to vote on such matter and
such acts are subject only to the approval of the board. Other
than in connection with conversion into corporate form pursuant
to the limited liability company agreement, a merger or
consolidation with or into any other person or the sale of all
or substantially all our assets, will require the approval of
both the board and a majority in interest of the members holding
common units.

Our limited liability company agreement provides
that our board of managers shall consist of at least six members
as follows:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | three managers designated by WCAS;                                                                   
|
| |  | one manager designated by Ferrer Freeman;                                                            
|
| |  | the president and chief executive
    officer; and                                                   
|
| |  | one independent manager designated by a majority
    in interest of our members holding common units.

The board of managers may increase its size for
the purpose of adding additional independent managers. However,
if it chooses to do so, WCAS has the right to designate one
additional manager for each additional independent manager so
added. Subsequent to the designation of the initial board of
managers, the board elected Ms. Hopping, Mr. Colby,
Mr. Allison and Mr. Scully to serve as managers of the
board. Although WCAS chose not to immediately appoint four
additional managers, WCAS reserved its right to designate three
additional managers at any time in the future. WCAS and Ferrer
Freeman each have the right to designate managers to the board
for as long as they remain a member.

Committees of the Board of
Managers.Our board of managers has an
audit committee, a compensation committee and an executive
committee. The audit committee consists of Mr. Colby,
Ms. Conway-Welch and Messrs. Ferrer and Melkus. The
audit committee assesses, reports and makes

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recommendations to the board of managers
regarding our companys and our subsidiaries
independent auditors, financial statements, internal audit
activities and legal compliance.


The compensation committee consists of
Messrs. Brownstein, Ferrer and Mackesy. The primary
functions of the compensation committee are (i) to review
our compensation practices and to recommend or approve the
compensation paid to executive officers and (ii) to propose
payments under our incentive plan and to administer our option
and restricted unit purchase plans.

The executive committee consists of
Messrs. Carson, Ferrer, Mackesy and Vandewater. Subject to
specific exceptions, the executive committee may execute the
duties of the board of managers when the full board is not
meeting. The executive committee cannot declare dividends, issue
ownership units, recommend any action that requires a vote of
our members, alter, amend or repeal any resolution of the full
board of managers relating to the executive committee or take
any action which only the full board of managers may legally
undertake.

Indemnification of Managers and
Officers

We have entered into agreements to indemnify our
managers and executive officers. Under these agreements, we are
obligated to indemnify our managers and executive officers to
the fullest extent permitted under the Delaware Limited
Liability Company Act and all other applicable laws for
expenses, including attorneys fees, judgments, fines and
settlement amounts, incurred by them in any action or proceeding
arising out of their services as a manager or executive officer.
We believe these agreements are helpful in attracting and
retaining qualified managers and executive officers.

Audit Committee Financial Expert

Our board of managers has determined that
Mr. David Colby is an audit committee financial
expert as defined by the rules of the SEC. Although we do
not have any securities listed on any national securities
exchange, if our securities were listed on the New York
Stock Exchange, Mr. Colby would be deemed
independent under the listing standards of such
exchange.

Code of Ethics

We have adopted a Policy of Ethics and Compliance
that applies to all of our employees, including our chief
executive officer, chief financial officer and principal
accounting officer. We will post our code of ethics on our
Internet website at www.ardenthealth.com. We will make any
legally required disclosures regarding amendments to, or waivers
of, provisions of our Policy of Ethics and Compliance on our
internet website. Until our code of ethics has been posted on
our website, we will provide to any person without charge, upon
request, a copy of such code of ethics. Any request should be
made in writing to: Ardent Health Services LLC, One Burton Hills
Blvd., Suite 250, Nashville, TN 37215, Attention: Chief
Compliance Officer.






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

Executive Compensation

The information under this heading relates to the
compensation paid to our Chief Executive Officer and the five
other most highly-compensated executive officers who were, based
on such compensation, the most highly compensated executive
officers for the year ended December 31, 2003 (collectively
referred to as the Named Executive Officers).

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Summary Compensation Table

|                            |                         |      |      |                     |  |                        |         |              |  |             |         |                  |     |   |         |     |  |  |         |         |  |   |        |        |     
|--------------------------- | ----------------------- | ---- | ---- | ------------------- |  | ---------------------- | ------- | ------------ |  | ----------- | ------- | ---------------- | --- | - | ------- | --- |  |  | ------- | ------- |  | - | ------ | ------ | ----
|                            |                         |      |      |                     |  |                        |         |              |  |            
|                            |                         |      |      |                     |  | Long-Term Compensation
|                            |                         |      |      | Annual Compensation |  |                       
|                            |                         |      |      |                     |  | Securities             |         |             
|                            |                         |      |      |                     |  | Bonus                  |         | Other Annual |  | Underlying  |         | All Other       
|Name and Principal Position |                         | Year |      | Salary ($)          |  | ($)(1)                 |         | Compensation |  | Options (#) |         | Compensation ($)
|                            |                         |      |      |                     |  |                        |         |              |  |             |         |                 
|David T. Vandewater         |                         |      | 2003 |                     |  | $                      | 449,992 |              |  | $           | 405,000 |                  |     | $ |        |     |  |  | 149,581 |         |  | $ | 12,395 | (2)   
|                            | Chief Executive Officer |      |      | 2002                |  |                        | $       | 349,995      |  |             | $       | 175,000          |     |   | $       |    |  |  |         | 981,500 |  |   | $      | 6,395  | (2) 
|Jamie E. Hopping(3)         |                         |      | 2003 |                     |  | $                      | 407,989 |              |  | $           | 275,400 |                  |     | $ | 122,585 | (4) |  |  | 56,094  |         |  | $ | 6,000  | (5)   
|                            | Chief Operating Officer |      |      | 2002                |  |                        | $       | 199,997      |  |             | $       | 2,475,000        | (6) |   | $       |    |  |  |         | 885,443 |  |   | $      | 32,404 | (7) 
|R. Dirk Allison(8)(9)       |                         |      | 2003 |                     |  | $                      | 33,333  |              |  | $           | 700,000 | (9)              |     | $ |        |     |  |  | 942,808 |         |  | $ |       |       
|                            | Chief Financial Officer |      |      | 2002                |  |                        | $       |             |  |             | $       |                 |     |   | $       |    |  |  |         |        |  |   | $      |       |     
|Vernon S. Westrich          |                         |      | 2003 |                     |  | $                      | 333,560 |              |  | $           | 225,155 |                  |     | $ |        |     |  |  |        |         |  | $ | 6,000  | (5)   
|                            | President, Behavioral   |      |      | 2002                |  |                        | $       | 320,728      |  |             | $       | 320,734          |     |   | $       |    |  |  |         | 75,000  |  |   | $      | 5,438  | (10)
|                            | Division                |      |      |                     |  |                        |         |              |  |             |         |                  |     |   |         |     |  |  |         |         |  |   |        |        |     
|William P. Barnes(8)        |                         |      | 2003 |                     |  | $                      | 227,693 |              |  | $           | 122,957 |                  |     | $ |        |     |  |  | 95,000  |         |  | $ | 6,000  | (5)   
|                            | Senior Vice President   |      |      | 2002                |  |                        | $       | 207,796      |  |             | $       | 124,680          |     |   | $       |    |  |  |         |        |  |   | $      | 6,000  | (5) 
|Stephen C. Petrovich        |                         |      | 2003 |                     |  | $                      | 199,075 |              |  | $           | 107,503 |                  |     | $ |        |     |  |  | 40,000  |         |  | $ | 5,533  | (11)  
|                            | General Counsel         |      |      | 2002                |  |                        | $       | 189,897      |  |             | $       | 113,760          |     |   | $       |    |  |  |         | 10,000  |  |   | $      | 5,288  | (11)



---



|    |                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Although performance targets were not met under
    our incentive compensation plan for 2003 and 2002, the board
    approved additional compensation for selected individuals.                                       
|   
|(2) | For 2003, consists of $6,395 for term life
    insurance premium and $6,000 for employer 401(k) match. For
    2002, consists of $6,395 for term life insurance premium.                                              
|   
|(3) | Ms. Hopping commenced employment with Ardent
    in July 2002.                                                                                                                                                        
|   
|(4) | Consists of $86,951 for relocation expenses paid
    by Ardent and $35,634 for closing costs related to purchase of
    home paid by Ardent.                                                                          
|   
|(5) | Consists of $6,000 for employer 401(k) match.                                                                                                                                                                         
|   
|(6) | Includes $2,400,000 additional compensation to
    compensate Ms. Hopping for stock options and other
    compensation forfeited by reason of Ms. Hoppings
    termination of her employment with her prior employer.
|   
|(7) | Consists of $28,997 for relocation expenses paid
    by Ardent and $3,407 for employer 401(k) match.                                                                                                                  
|   
|(8) | William P. Barnes was our Chief Financial Officer
    until November 30, 2003. As of December 1, 2003, R.
    Dirk Allison was appointed our Chief Financial Officer.                                                 
|   
|(9) | Consists of additional compensation to compensate
    Mr. Allison for stock options and other compensation
    forfeited by reason of Mr. Allisons termination of
    his employment with his prior employer.        



|     |                                                                                                       
|---- | ------------------------------------------------------------------------------------------------------
|(10) | Consists of $5,438 employer 401(k) match.                                                             
|    
|(11) | Consists of $5,533 for employer 401(k) match in
    2003 and $5,288 for employer 401(k) match in 2002.

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The following table sets forth information
concerning the stock options granted to the Named Executive
Officers in 2003:

Option Grants in Fiscal Year 2003

|                     |  |                   |         |                               |  |             |      |                              |  |                |      |         |  |  |          |  |  |   |           |  |  |   |           | 
|-------------------- |  | ----------------- | ------- | ----------------------------- |  | ----------- | ---- | ---------------------------- |  | -------------- | ---- | ------- |  |  | -------- |  |  | - | --------- |  |  | - | --------- | 
|                     |  |                   |         |                               |  |            
|                     |  | Individual Grants |         |                              
|                     |  |                   |         | Potential Realizable Value at
|                     |  | Number of         |         | Percent of                    |  |             |      | Assumed Annual Rates of     
|                     |  | Securities        |         | Total Options                 |  |             |      | Stock Price Appreciation for
|                     |  | Underlying        |         | Granted to                    |  | Exercise of |      |                              |  | Option Term(1)
|                     |  | Options Granted   |         | Employees in                  |  | Base Price  |      | Expiration                   |  |               
|Name                 |  | (#)(1)            |         | Fiscal Year                   |  | ($/Share)   |      | Date                         |  | 5% ($)         |      | 10% ($)
|                     |  |                   |         |                               |  |             |      |                              |  |                |      |        
|David T. Vandewater  |  |                   | 41,237  |                               |  |             | 1.7  | %                            |  | $              | 4.50 |         |  |  | 1/15/13  |  |  | $ | 116,702   |  |  | $ | 295,745   | 
|                     |  |                   | 59,289  |                               |  |             | 2.4  | %                            |  | $              | 4.50 |         |  |  | 2/7/13   |  |  | $ | 167,789   |  |  | $ | 425,211   | 
|                     |  |                   | 44,874  |                               |  |             | 1.8  | %                            |  | $              | 4.50 |         |  |  | 4/18/13  |  |  | $ | 126,995   |  |  | $ | 321,829   | 
|                     |  |                   | 200     |                               |  |             | 0.0  | %                            |  | $              | 4.50 |         |  |  | 5/16/13  |  |  | $ | 566       |  |  | $ | 1,434     | 
|                     |  |                   | 406     |                               |  |             | 0.0  | %                            |  | $              | 4.50 |         |  |  | 12/1/13  |  |  | $ | 1,149     |  |  | $ | 2,912     | 
|                     |  |                   | 3,555   |                               |  |             | 0.1  | %                            |  | $              | 4.50 |         |  |  | 12/3/13  |  |  | $ | 10,061    |  |  | $ | 25,496    | 
|                     |  |                   | 20      |                               |  |             | 0.0  | %                            |  | $              | 4.50 |         |  |  | 12/22/13 |  |  | $ | 57        |  |  | $ | 143       | 
|Jamie E. Hopping     |  |                   | 15,464  |                               |  |             | 0.6  | %                            |  | $              | 4.50 |         |  |  | 1/15/13  |  |  | $ | 43,764    |  |  | $ | 110,905   | 
|                     |  |                   | 22,233  |                               |  |             | 0.9  | %                            |  | $              | 4.50 |         |  |  | 2/7/13   |  |  | $ | 62,920    |  |  | $ | 159,452   | 
|                     |  |                   | 16,827  |                               |  |             | 0.7  | %                            |  | $              | 4.50 |         |  |  | 4/18/13  |  |  | $ | 47,621    |  |  | $ | 120,681   | 
|                     |  |                   | 75      |                               |  |             | 0.0  | %                            |  | $              | 4.50 |         |  |  | 5/16/13  |  |  | $ | 212       |  |  | $ | 538       | 
|                     |  |                   | 152     |                               |  |             | 0.0  | %                            |  | $              | 4.50 |         |  |  | 12/1/13  |  |  | $ | 430       |  |  | $ | 1,090     | 
|                     |  |                   | 1,333   |                               |  |             | 0.1  | %                            |  | $              | 4.50 |         |  |  | 12/3/13  |  |  | $ | 3,772     |  |  | $ | 9,560     | 
|                     |  |                   | 7       |                               |  |             | 0.0  | %                            |  | $              | 4.50 |         |  |  | 12/22/13 |  |  | $ | 20        |  |  | $ | 50        | 
|R. Dirk Allison      |  |                   | 852,579 |                               |  |             | 35.0 | %                            |  | $              | 4.50 |         |  |  | 12/1/13  |  |  | $ | 2,412,821 |  |  | $ | 6,114,561 | 
|                     |  |                   | 88,889  |                               |  |             | 3.6  | %                            |  | $              | 4.50 |         |  |  | 12/1/13  |  |  | $ | 251,558   |  |  | $ | 637,498   | 
|                     |  |                   | 1,333   |                               |  |             | 0.1  | %                            |  | $              | 4.50 |         |  |  | 12/3/13  |  |  | $ | 3,772     |  |  | $ | 9,560     | 
|                     |  |                   | 7       |                               |  |             | 0.0  | %                            |  | $              | 4.50 |         |  |  | 12/22/13 |  |  | $ | 20        |  |  | $ | 50        | 
|Vernon S. Westrich   |  |                   |        |                               |  |             |     |                              |  | $              |     |         |  |  |         |  |  | $ |          |  |  | $ |          | 
|William P. Barnes    |  |                   | 95,000  |                               |  |             | 3.9  | %                            |  | $              | 4.50 |         |  |  | 5/15/13  |  |  | $ | 268,852   |  |  | $ | 681,325   | 
|Stephen C. Petrovich |  |                   | 40,000  |                               |  |             | 1.6  | %                            |  | $              | 4.50 |         |  |  | 5/15/13  |  |  | $ | 113,201   |  |  | $ | 286,874   | 



---



|    |                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Options were granted pursuant to our Option and
    Restricted Unit Purchase Plan described below and generally
    become exercisable in four equal installments on each of the
    first four anniversaries of the grant.

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The following table provides certain information
with respect to the Named Executive Officers concerning the
exercise of options during the last fiscal year and unexercised
options held as of the end of the 2003 fiscal year:

Aggregated Option Exercises in Last Fiscal
Year

and Fiscal Year-End Option Values


|                     |  |              |        |              |  |                            |   |                              |  |             |         |               |  |  |           |  |  |   |         |  |  |   |         | 
|-------------------- |  | ------------ | ------ | ------------ |  | -------------------------- | - | ---------------------------- |  | ----------- | ------- | ------------- |  |  | --------- |  |  | - | ------- |  |  | - | ------- | 
|                     |  |              |        |              |  |                            |   |                              |  |            
|                     |  |              |        |              |  | Number of Securities       |   |                              |  |            
|                     |  |              |        |              |  | Underlying Unexercised     |   |                             
|                     |  |              |        |              |  | Options at Fiscal Year-End |   | Value of Unexercised In-the-
|                     |  |              |        |              |  | 2003 (Both In- and At-the- |   | Money Options at Fiscal     
|                     |  | Shares       |        |              |  | Money)                     |   | Year-End(1)                 
|                     |  | Acquired on  |        | Value        |  |                            |   |                             
|Name                 |  | Exercise (#) |        | Realized ($) |  | Exercisable                |   | Unexercisable                |  | Exercisable |         | Unexercisable
|                     |  |              |        |              |  |                            |   |                              |  |             |         |              
|David T. Vandewater  |  |              |       |              |  |                            |  |                              |  |             | 850,347 |               |  |  | 1,430,678 |  |  | $ | 648,323 |  |  | $ | 586,129 | 
|Jamie E. Hopping     |  |              |       |              |  |                            |  |                              |  |             | 199,495 |               |  |  | 654,576   |  |  | $ | 115,379 |  |  | $ | 346,137 | 
|R. Dirk Allison      |  |              | 88,889 |              |  |                            |  |                              |  |             |        |               |  |  | 853,912   |  |  |   |        |  |  |   |        | 
|Vernon S. Westrich   |  |              |       |              |  |                            |  |                              |  |             | 87,500  |               |  |  | 37,500    |  |  | $ | 93,625  |  |  | $ | 40,125  | 
|William P. Barnes    |  |              |       |              |  |                            |  |                              |  |             | 47,500  |               |  |  | 142,500   |  |  | $ | 50,825  |  |  | $ | 50,825  | 
|Stephen C. Petrovich |  |              |       |              |  |                            |  |                              |  |             | 22,500  |               |  |  | 67,500    |  |  | $ | 24,075  |  |  | $ | 29,425  | 



---



|    |                                                                               
|--- | ------------------------------------------------------------------------------
|(1) | Value of options has been calculated using a
    current share value of $4.50.

Compensation of Managers

The managers, other than those employed by us or
our subsidiary, are entitled to receive the following
compensation for serving as managers:



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | cash compensation of $3,000 each quarter, plus
    $1,500 for each board meeting attended and $1,500 for each
    committee meeting attended;     
|
| |  | reimbursement for reasonable out-of-pocket
    expenses incurred in attending board meetings;                                                     
|
| |  | the grant of an option to acquire 25,000 of our
    common units, granted upon election to the board; and                                         
|
| |  | the grant of an additional option to acquire
    10,000 common units, granted on each anniversary date of the
    managers election to the board.

Employment Agreements

David T. Vandewater.On January 30, 2002, we entered into a letter agreement
with Mr. Vandewater outlining his relationship with the
company and his employment as President and Chief Executive
Officer. Our agreement with Mr. Vandewater provides, among
other things, for a base salary of $350,000 subject to annual
review, annual performance-based bonus compensation of up to a
maximum of 100% of his base salary, a five-year life insurance
policy of $5 million and a disability benefit equal to 100%
of his annual salary.

Mr. Vandewater also has been granted options
allowing him to purchase up to 4% of our outstanding common
equity. Mr. Vandewaters options will be adjusted, as
appropriate, for any reclassification, split, dividend,
combination, subdivision, conversion or similar change in our
equity interests. This option terminates on the earlier to occur
of the closing of a registered initial public offering of our
equity securities, with net cash proceeds of at least
$75 million, or our change in control. If
Mr. Vandewater is still employed by us at the time of our
initial public offering as described above, we will offer him a
five-year employment agreement on mutually agreed upon terms.

Jamie E. Hopping.On
June 1, 2002, we entered into a three-year employment
agreement with Ms. Hopping that provides for annual base
compensation of $400,000 or a higher salary on the approval of
the board. Ms. Hopping is also eligible for a performance
bonus of up to 75% of her base salary if certain

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objectives are met pursuant to our executive
compensation plan and 125% of 75% of her base salary if certain
objectives are exceeded by 10% or more.


If we terminate this employment agreement other
than for cause, or in the event of our change of control,
Ms. Hopping would be entitled to receive three times her
highest salary level during the term of this agreement and the
cash equivalent of three years of her fringe benefits paid over
a thirty-six month period.

R. Dirk
Allison.On December 1, 2003, we
entered into a three-year employment agreement with
Mr. Allison that provides for annual base compensation of
$400,000 or a higher salary approved by the board.
Mr. Allison is also eligible for a performance bonus of 75%
of his base salary if certain objectives are met pursuant to our
incentive compensation plan and 125% of 75% of his base salary
if certain objectives are exceeded by 10% or more. In addition,
the employment agreement provided for the payment to
Mr. Allison of a one-time employment acceptance bonus of
$700,000. If we terminate this employment agreement other than
for cause, or in the event of our change of control,
Mr. Allison will receive as severance compensation three
times his highest salary during the term of the employment and
the cash equivalent of three years of his fringe benefits paid
over a thirty-six month period.

Vernon S. Westrich.On September 13, 2001, we entered into an employment
agreement with Mr. Westrich with an initial term that
expired on December 31, 2003, however, the Company extended
this agreement until a new agreement is finalized and executed.
His employment agreement provides for annual base compensation
of $312,934 or a higher salary on the approval of the board.
Mr. Westrich is also eligible for a performance bonus of up
to 75% of his base salary if certain objectives are met pursuant
to our executive compensation plan and 125% of 75% of his base
salary if certain objectives are exceeded by 10% or more. If we
do not renew this agreement or terminate this employment
agreement other than for cause, or in the event of our change in
control, Mr. Westrich will receive as severance
compensation $917,800 paid over twenty-four months.

W. Page Barnes.On May 2, 2001, we entered into an employment agreement
with Mr. Barnes that provides for annual base compensation
of $190,000 or a higher salary on the approval of the board of
managers. Mr. Barnes is also eligible for a performance
bonus of up to 60% of his base salary if certain objectives are
met pursuant to our executive compensation and 125% of 60% of
his base salary if certain objectives are exceeded by 10% or
more. If we do not renew this agreement or we terminate this
employment agreement other than for cause, Mr. Barnes will
receive as severance compensation his salary and benefits in
effect immediately prior to his termination for two years. In
the event of a change of control in the company, Mr. Barnes
may receive two years of his annual salary currently in effect,
his performance bonus regardless of whether the company met
actual performance levels and the cash equivalent of his
benefits for two years. These change in control payments would
be payable over a twenty-four month period.

Norman P. Becker.On
May 5, 2003, we entered into a three-year employment
agreement with Mr. Becker that provides for annual base
compensation of $300,000 or a higher salary on the approval of
the board. Mr. Becker is also eligible for a performance
bonus of 75% of his base salary if certain objectives are met
pursuant to our executive compensation plan and 125% of 75% of
his base salary if certain objectives are exceeded by 10% or
more. If we do not renew this agreement or terminate this
employment agreement other than for cause, or in the event of
our change of control, Mr. Becker will receive as severance
compensation one and one-half times his highest salary level
during the term of this agreement and the cash equivalent of
eighteen months of his benefits, payable over a period of
eighteen months.

Option and Restricted Unit Purchase
Plan

General.Individuals
who are employed by or are performing services for us or any of
our subsidiaries, including our executive officers and managers,
are eligible to receive awards or options under our Third
Amended and Restated Ardent Health Services LLC and its
Subsidiaries Option and Restricted

75



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##### Table of Contents



Unit Purchase Plan (the Option Plan).
The Option Plan is administered by the compensation committee of
our board of managers.


Both common units and redeemable preferred units
can be granted under our Option Plan. The maximum number of
common units available under the Option Plan is 4,390,113, plus
12.0% of the number of new common units, calculated on a fully
diluted basis, that are issued after January 30, 2002 but
prior to an initial public offering of common units that results
in net proceeds of at least $75 million (excluding units
issued under the Subscription Agreement, dated as of
September 25, 2001, among us, WCAS and the several
purchasers listed on Annex I thereto, Ferrer Freeman, and
BAC). The maximum number of redeemable preferred units that can
be issued under the Option Plan is 48,182, all of which have
been issued.

The Option Plan will terminate on August 3,
2011 unless terminated sooner by our board of managers.

Units acquired upon exercise of options under the
Option Plan are subject to our right of repurchase upon
termination of the participants employment with us and our
affiliates. Participants who are officers, directors or managers
of us or any of our affiliates or who are consultants to us or
any of our affiliates (collectively, Specified
Employees) who are terminated for cause may be
required to sell any units purchased by them upon exercise of an
option to us for a purchase price equal to the lesser of the
fair market value of the units or the price paid by the holder
to acquire the units. Participants (other than Specified
Employees) who are terminated for cause may be
required to sell any units purchased by them upon exercise of an
option to us for a purchase price equal to the price paid by the
holder to acquire the units. For all other terminations, we may
pay the fair market value of the units at the time of
repurchase. Certain of the repurchase rights in respect of units
acquired by participants other than Specified Employees lapse at
the rate of 20.0% per year over the five years from the
date the option is originally granted to such participants and
terminate in the event that our securities become publicly
traded. In addition, the terms of options or awards specified by
the committee may provide for a right of first refusal in favor
of us or other repurchase rights.

Stock Options held by Mr. Vandewater,
Ms. Hopping and Mr. Allison.Mr. Vandewater, Ms. Hopping and Mr. Allison each have
the right, pursuant to grants made by our board of managers, to
acquire common units under the Option Plan. The option
agreements of Mr. Vandewater, Ms. Hopping and
Mr. Allison contain provisions that increase the number of
common units subject to their respective options as the number
of common units issued by us increases. Under his letter
agreement described above, Mr. Vandewater is entitled to
acquire up to 4.0% of the outstanding common units. Under their
option agreements, Ms. Hopping and Mr. Allison are
each entitled to acquire 1.5% of the outstanding common units.

Incentive Compensation Program

Our board of managers approves our incentive
compensation program each year. This program rewards our
employees, including our executive officers, based on whether we
and the employee meet the incentive targets set by the board of
managers each year and other employee-specific criteria.
Employees are only compensated pursuant to this program after
our auditors have completed our year-end audit. We do not make
any payments under this program if we do not meet our financial
objectives although the board has, in the past, awarded
additional compensation (not pursuant to the plan) to reward
good performance even when the companys financial
objectives were not met.

Compensation Committee Interlocks and Insider
Participation in Compensation Decisions

The compensation committee consists of
Messrs. Brownstein, Ferrer and Mackesy. None of the
compensation committee members have been officers or employees
of our company or its subsidiaries. Mr. Mackesy is a
General Partner of WCAS. See Item 13 of this report for a
description of our companys relationship with WCAS.

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

The following table provides information, as of
March 17, 2004, about the ownership of our common units by
(1) each person who we know to be the beneficial owner of
more than 5.0% of the outstanding common units, (2) each of
our managers and named executive officers named in the Summary
Compensation Table above and (3) all of our managers and
executive officers as a group. Except as otherwise indicated,
the beneficial owners listed below have, to our knowledge, sole
voting and investment power with respect to all units owned by
them, except to the extent such power is shared by a spouse
under applicable law. Holders of redeemable preferred units are
entitled to vote such units only when required by applicable
law. Information regarding our institutional holders and their
beneficial ownership of our units is based upon information
provided to us by such holders.

|                                                                   |  |                 |            |              |  |                 |            |              |  |  |       |   |  |  |       |  
|------------------------------------------------------------------ |  | --------------- | ---------- | ------------ |  | --------------- | ---------- | ------------ |  |  | ----- | - |  |  | ----- | -
|                                                                   |  | Number of       |            |              |  | Percent of      |            |             
|                                                                   |  | Redeemable      |            | Number of    |  | Redeemable      |            | Percent of  
|                                                                   |  | Preferred Units |            | Common Units |  | Preferred Units |            | Common Units
|                                                                   |  | Beneficially    |            | Beneficially |  | Beneficially    |            | Beneficially
|Name of Beneficial Owner                                           |  | Owned           |            | Owned        |  | Owned           |            | Owned       
|                                                                   |  |                 |            |              |  |                 |            |             
|BancAmerica Capital Investors I, L.P.(1)(2)                        |  |                 | 1,457,726  |              |  |                 | 2,939,207  |              |  |  | 5.17  | % |  |  | 5.15  | %
|FFC Executive Partners II, L.P.(3)(4)                              |  |                 | 31,039     |              |  |                 | 62,584     |              |  |  | *     |   |  |  | *     |  
|FFC Partners II, L.P.(3)(4)                                        |  |                 | 2,155,549  |              |  |                 | 4,346,227  |              |  |  | 7.65  |   |  |  | 7.62  | %
|WCAS Capital Partners III, L.P.(5)(6)                              |  |                 | 0          |              |  |                 | 1,030,928  |              |  |  | *     |   |  |  | 1.81  | %
|WCAS Healthcare Partners, L.P.(5)(6)                               |  |                 | 182,305    |              |  |                 | 182,305    |              |  |  | *     |   |  |  | *     |  
|WCAS Management Corporation(5)(6)                                  |  |                 | 0          |              |  |                 | 889        |              |  |  | *     |   |  |  | *     |  
|WCAS IX(5)(6)                                                      |  |                 | 20,986,392 |              |  |                 | 42,561,281 |              |  |  | 74.57 |   |  |  | 74.63 | %
|R. Dirk Allison(8)                                                 |  |                 | 0          |              |  |                 | 88,889     |              |  |  | *     |   |  |  | *     |  
|William P. Barnes(7)(8)                                            |  |                 | 29,345     |              |  |                 | 82,345     |              |  |  | *     |   |  |  | *     |  
|Norman Brownstein(8)                                               |  |                 | 58,320     |              |  |                 | 251,098    |              |  |  | *     |   |  |  | *     |  
|Russell L. Carson(6)(8)                                            |  |                 | 95,844     |              |  |                 | 228,065    |              |  |  | *     |   |  |  | *     |  
|David C. Colby(8)                                                  |  |                 | 0          |              |  |                 | 0          |              |  |  | *     |   |  |  | *     |  
|Colleen Conway-Welch(8)                                            |  |                 | 0          |              |  |                 | 15,000     |              |  |  | *     |   |  |  | *     |  
|Carlos A. Ferrer(4)(8)                                             |  |                 | 0          |              |  |                 | 0          |              |  |  | *     |   |  |  | *     |  
|Jamie E. Hopping(8)                                                |  |                 | 0          |              |  |                 | 296,382    |              |  |  | *     |   |  |  | *     |  
|Scott D. Mackesy(6)(8)                                             |  |                 | 8,199      |              |  |                 | 16,866     |              |  |  | *     |   |  |  | *     |  
|Kenneth J. Melkus(8)(9)                                            |  |                 | 150,799    |              |  |                 | 165,799    |              |  |  | *     |   |  |  | *     |  
|Stephen C. Petrovich(8)                                            |  |                 | 4,557      |              |  |                 | 28,057     |              |  |  | *     |   |  |  | *     |  
|Thomas A. Scully(8)                                                |  |                 | 0          |              |  |                 | 0          |              |  |  | *     |   |  |  | *     |  
|David T. Vandewater(8)(10)                                         |  |                 | 0          |              |  |                 | 1,421,058  |              |  |  | *     |   |  |  | 2.49  | %
|Vernon S. Westrich(8)                                              |  |                 | 24,781     |              |  |                 | 112,281    |              |  |  | *     |   |  |  | *     |  
|All managers and executive officers as a group
    (14 persons)(6) |  |                 | 342,500    |              |  |                 | 2,623,495  |              |  |  | 1.20  |   |  |  | 4.60  | %



---



| |   |                                       
| | - | --------------------------------------
| | * | Indicates ownership of less than 1.0%.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The business address of BancAmerica Capital
    Investors I, L.P. is 100 North Tryon Street,
    Suite 2500, Charlotte, NC 28255.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(2) | Banc of America Capital Management, L.P., a
    Delaware limited partnership (BA Capital
    Management), is the general partner of Banc of America
    Capital Investors, I, L.P. (BAC) which
    beneficially owns 1,457,726 redeemable preferred units and
    2,939,207 common units. BACM I GP, LLC, a Delaware limited
    liability company (BACM), is the general partner of
    BA Capital Management. J. Travis Hain, an employee of a
    subsidiary of Bank of America Corporation (Bank of
    America), is the managing member of BACM. As a result of
    these relationships, each of BA

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Capital Management, BACM and Mr. Hain may be
    deemed to have shared voting and dispositive power with regard
    to the units held by BAC. Mr. Hain disclaims beneficial
    ownership of such units. If Mr. Hains employment with
    Bank of America or any of its subsidiaries is terminated,
    Mr. Hain will cease to be the managing member of BACM. Bank
    of America has the right to approve any replacement managing
    member of BACM. Bank of America does not have any rights with
    respect to voting or disposition of the preferred and common
    units owned by BAC.                                                                                                                                                                                                                                
|   
|(3) | The business address of FFC Executive
    Partners II, L.P. and FFC Partners II, L.P. is The Mill, 10
    Glenville Street, Greenwich, CT 06831.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(4) | Carlos A. Ferrer serves on our board of managers.
    Mr. Ferrers beneficial ownership includes 4,346,227
    common units held by FFC Partners II, L.P.
    (FFC II), 62,584 common units held by FFC
    Executive Partners II, L.P. (FFC EP II),
    2,155,549 redeemable preferred units held by FFC II and
    31,039 redeemable preferred units held by FFC EP II.
    Mr. Ferrer is a member of FFC GP II, LLC and FFC
    Executive GP II, LLC, the general partners of FFC II and
    FFC EP II (which are collectively referred to as the
    FFC Funds). Mr. Ferrer has shared voting and
    dispositive power over the units held by the FFC Funds.
    Mr. Ferrer disclaims beneficial ownership of the units held
    by the FFC Funds except to the extent of his pecuniary interest
    therein, if any.
|   
|(5) | The business address of WCAS Capital
    Partners III, L.P., WCAS Healthcare Partners, L.P., WCAS
    Management Corporation and WCAS IX, L.P. is c/o WCAS, 320
    Park Avenue, Suite 2500, New York, NY 10022-6815.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(6) | Through their association with WCAS,
    Messrs. Carson and Mackesy may be deemed to beneficially
    own redeemable preferred and common units owned by WCAS Capital
    Partners III, L.P., WCAS Healthcare Partners, L.P., WCAS
    Management Corporation and WCAS IX. Messrs. Carson and
    Mackesy disclaim beneficial ownership of any such preferred and
    common units.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(7) | William P. Barnes was our Chief Financial Officer
    until November 30, 2003. As of December 1, 2003, R.
    Dirk Allison was appointed our Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(8) | Includes options vested but unexercised as of
    March 17, 2004 (Mr. Allison, 0; Mr. Barnes, 47,500;
    Mr. Brownstein, 15,000; Mr. Carson, 0; Mr. Colby,
    0; Ms. Conway-Welch, 15,000; Mr. Ferrer, 0;
    Ms. Hopping, 208,919; Mr. Mackesy, 0; Mr. Melkus,
    2,500; Mr. Petrovich, 22,500; Mr. Scully, 0;
    Mr. Vandewater, 815,478 and Mr. Westrich, 87,500).                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(9) | Includes shares owned by The Lauren Evelyn Melkus
    Trust, The Melkus Family Foundation, and Mr. Melkus.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



|     |                                                                                                                                                                                                                                                       
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes shares owned by The Vandewater
    Foundation, The David & Phyllis Vandewater 2001
    Childrens GST-Exempt Trust, The Phyllis Baker Vandewater
    Marital Trust, The David T. Vandewater Annuity Trust
    No. 5-2003, and Mr. Vandewater.

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EQUITY COMPENSATION PLAN INFORMATION

The following table gives information about our
common units that may be issued upon the exercise of options,
warrants and rights under all of our existing equity
compensation plans as of December 31, 2003.

|                                                               |  |                                      |           |                     |  |                         |      |  |  |  |           |    
|-------------------------------------------------------------- |  | ------------------------------------ | --------- | ------------------- |  | ----------------------- | ---- |  |  |  | --------- | ---
|                                                               |  |                                     
|                                                               |  | Equity Compensation Plan Information
|                                                               |  |                                     
|                                                               |  | Number of                            |           |                     |  | Number of Securities   
|                                                               |  | Securities to be                     |           | Weighted-Average    |  | Remaining Available for
|                                                               |  | Issued upon                          |           | Exercise Price of   |  | Future Issuance Under  
|                                                               |  | Exercise of                          |           | Outstanding Options |  | Equity Compensation    
|                                                               |  | Outstanding Options                  |           | Warrants and        |  | Plans (excluding       
|                                                               |  | Warrants and Rights                  |           | Rights              |  | securities reflected in
|Plan Category                                                  |  | (a)                                  |           | (b)                 |  | column (a)) (c)        
|                                                               |  |                                      |           |                     |  |                        
|Equity compensation plans approved by security
    holders     |  |                                      | 6,130,731 |                     |  | $                       | 4.07 |  |  |  | 1,899,125 | (1)
|Equity compensation plans not approved by
    security holders |  |                                      |          |                     |  |                         |     |  |  |  |          |    
|                                                               |  |                                      |           |                     |  |                         |      |  |  |  |           |    
|Total                                                          |  |                                      | 6,130,731 |                     |  | $                       | 4.07 |  |  |  | 1,899,125 |    
|                                                               |  |                                      |           |                     |  |                         |      |  |  |  |           |    



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Additional common units would become available
    under our Option Plan if we issue new common units (other than
    common units issued under the Option Plan and common units
    issued pursuant to the Subscription Agreement, dated as of
    September 25, 2001, which we describe in Item 13
    below). The number of additional common units available under
    the Option Plan would be equal to 12.0% of the number of new
    common units we issue, calculated on a fully diluted basis.






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

Subscription Agreement

We entered into a subscription agreement, dated
as of September 25, 2001, with WCAS, which owns
approximately 74.5% of our outstanding common units, and Ferrer
Freeman, which owns approximately 7.7% of the outstanding common
units, pursuant to which WCAS and Ferrer Freeman purchased
$110.0 million in common units and redeemable preferred
units.

We entered into a second subscription agreement
with WCAS and Ferrer Freeman on December 11, 2002, pursuant
to which WCAS and Ferrer Freeman have the right, in certain
circumstances described below, to purchase up to an aggregate of
$165.0 million of common units at a purchase price of
$4.50 per common unit. The second subscription agreement
was amended in February 2003 to add BAC as a purchaser of up to
an additional $10.0 million of common units at a purchase
price of $4.50 per common unit. Pursuant to the second
subscription agreement, as amended, subject to the approval of
its board of managers, we may request that WCAS, Ferrer Freeman
and BAC purchase common units to finance acquisitions, capital
expenditures, operating expenses and for other general corporate
purposes. Upon receipt of a request, WCAS may elect, at its sole
option, to purchase, and cause Ferrer Freeman and BAC to
purchase, all or a portion of the common units needed to finance
such project.

The second subscription agreement terminates upon
the earlier of a registered initial public offering of equity
securities by us or our change of control. At any time during
the 20-day period prior to the termination of the second
subscription agreement, WCAS, Ferrer Freeman and BAC have the
right, in WCASs discretion, to purchase any remaining
common units. As of December 31, 2003, WCAS, Ferrer Freeman
and BAC have purchased $116.7 million in common units under
the second subscription agreement, as amended, and have the
right to purchase the remaining $58.3 million in common
units in accordance with its terms.

10.2% Subordinated Notes due
2014

On January 15, 2003, we issued to WCAS
Capital Partners III, L.P., an investment fund affiliated
with WCAS, which we refer to as WCAS CP III,
$36.0 million in principal amount of our subsidiarys

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10.0% senior subordinated notes due
December 31, 2009 and 1,030,928 of our common units for an
aggregate purchase price of $36.0 million. We and WCAS
CP III amended and restated the terms of the WCAS notes,
which we refer to as the amended WCAS notes, concurrently with
our subsidiarys offering of its 10.0% senior
subordinated notes, among other things, to increase their
interest rate to 10.2%, subordinate them to the senior secured
credit facility and the 10.0% senior subordinated notes as
described below and extend their maturity date to August 2014.


Interest on the amended WCAS notes accrues at a
rate of 10.2% per annum, except that if any interest
payment cannot be paid in cash, an amount equal to the interest
that would have accrued during the applicable interest period at
an effective rate of 12.2% (instead of 10.2%) will be added to
the outstanding principal amount of the amended WCAS notes.
Interest on the amended WCAS notes is payable semi-annually in
arrears.

The amended WCAS notes may be prepaid, in whole
or in part, without premium or penalty. In addition, subject to
certain limitations, the amended WCAS notes are required to be
prepaid in the event of any of the following occurring with
respect to us: (i) change of control, (ii) initial
public offering or (iii) sale of all or substantially all
of the assets.

The amended WCAS notes contain certain covenants,
including covenants restricting our ability to
(i) consolidate or merge with other entities and
(ii) make restricted payments.

The amended WCAS notes are unsecured and are not
guaranteed by us or by any of our subsidiaries.

Under the subordination provisions of the amended
WCAS notes, we may not make any payment in respect of the
amended WCAS notes (1) for so long as a payment default
under any Senior Indebtedness (defined as
obligations under our subsidiarys senior secured credit
facility and the 10.0% senior subordinated notes) occurs
and is continuing or (2) during the 180-day period
following notice of any other default under such Senior
Indebtedness, until (x) such default is cured or waived in
writing or (y) the applicable Senior Indebtedness has been
paid in full in cash. Subject to certain limitations, the
trustee (on behalf of the 10.0% senior subordinated notes)
and the agent under the new senior secured credit facility (on
behalf of the lenders) may each deliver up to two payment
blockage notices during any 360-day period, but in no event will
cash payments be blocked for more than 180 days during any
such 360-day period.

8% Cumulative Redeemable Preferred
Units

We have outstanding a total of 28,141,807
redeemable preferred units pursuant to the terms of our limited
liability company agreement. The redeemable preferred units
entitle their holders to the following rights and preferences:

Distribution Rights.We accrue a cumulative preferred yield on each redeemable
preferred unit in an amount equal to the greater of
(x) 8.0% per annum of the sum of (i) $3.43
(adjusted for any splits, dividends, recapitalizations and the
like with respect to such units) plus (ii) the aggregate
amount of any accrued and unpaid preferred yield on such unit;
and (y) the amount of cash actually distributed with
respect to a common unit. The preferred yield accrues on the
basis of a 360-day year consisting of twelve 30-day months from
and after the date a redeemable preferred unit is issued whether
or not we have any funds legally available for the payment of
distributions.

We are not permitted, without the prior written
consent of the holders of the redeemable preferred units, to
purchase or redeem, or pay dividends on, our common units if we
fail to redeem, or pay the total accrued preferred yield on, the
outstanding redeemable preferred units.

Conversion Rights.Our redeemable preferred units are not convertible into or
exchangeable for any other property or securities.

Liquidation Rights.Upon liquidation, winding up or dissolution, the holders of the
redeemable preferred units will be entitled to receive, in
preference to any payment or distribution to the holders of
securities (including common units) ranking junior to the
redeemable preferred units with respect to

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liquidation rights, an amount equal to
(i) $3.43 (adjusted for any splits, dividends,
recapitalizations and the like with respect to our redeemable
preferred units) plus (ii) the aggregate amount of any
accrued and unpaid preferred yield on such units through the
date of payment.


Redemption.We may,
in our sole discretion, redeem at any time and from time to
time, any whole number of the redeemable preferred units at a
redemption price per unit equal to (i) $3.43 (adjusted for
any splits, dividends, recapitalizations and the like with
respect to the redeemable preferred units) plus (ii) the
aggregate amount of any accrued and unpaid preferred yield on
such units through the date of redemption.

In addition, we are required to redeem, at the
same redemption price described above, all outstanding
redeemable preferred units upon the first to occur of:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the closing of the merger or consolidation of us
    with or into another entity with the effect that the holders of
    a majority of the common units or other common equity interests
    do not continue to represent more than 50.0% of the voting power
    of all outstanding equity securities in the surviving entity, in
    substantially the same proportions, immediately after such
    consolidation or merger;
|
| |  | the closing of a sale or other disposition of all
    or substantially all of the assets and properties; or                                                                                                                                                                                                                                                                                                                   
|
| |  | a registered initial public offering of
    securities by us with gross proceeds of at least
    $50.0 million.                                                                                                                                                                                                                                                                                                               

Voting Rights.Holders of our redeemable preferred units have no voting rights,
except as provided above and as required by law.

Professional Services Arrangement

We have entered into professional services
arrangements with WCAS Management Corporation, an affiliate of
WCAS, pursuant to which WCAS Management provides us with certain
financial and management consulting services related to our
equity financings. In consideration for its services, we have
paid WCAS Management a fee equal to 1.0% to 1.5% of the total
consideration, whether in cash or in kind, received by us in
connection with the completion of such transactions. For the
year ended December 31, 2003, the year ended
December 31, 2002 and the five-month period ended
December 31, 2001, we paid WCAS Management
$1.8 million, $0 and $2.8 million pursuant to those
arrangements, respectively. We believe that the terms of this
agreement are comparable to the fee arrangements of other
unrelated private equity firms for financing activities.

Use of Private Aircraft

From time to time, we use and expect to continue
to use a private aircraft owned by a partnership in which
Mr. Vandewater, our President and Chief Executive Officer,
owns a one-fourth interest. During the year ended
December 31, 2003 we paid $94,000 to use the aircraft for a
total of 112.2 hours. We believe these terms are at least
comparable to the costs of using a private aircraft of an
unrelated third party.






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

The following table sets forth the aggregate fees
for services related to December 31, 2003 and 2002 provided
by KPMG LLP, our principal accountants for such years.

|                      |  |              |           |              |  |   |         | 
|--------------------- |  | ------------ | --------- | ------------ |  | - | ------- | 
|                      |  | December 31, |           | December 31,
|                      |  | 2003         |           | 2002        
|                      |  |              |           |             
|Audit Fees(a)         |  | $            | 2,372,450 |              |  | $ | 235,000 | 
|Audit-Related Fees(b) |  |              | 74,800    |              |  |   | 45,000  | 
|Tax Fees(c)           |  |              | 272,025   |              |  |   | 76,000  | 
|All Other Fees(d)     |  |              |          |              |  |   | 124,000 | 

81



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---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Audit fees represent fees billed for professional
    services rendered for the audit of our annual financial
    statements and review of our quarterly financial statements, and
    audit services provided in connection with other statutory or
    regulatory filings, including services related to our
    10.0% senior subordinated notes issued in August 2003 and
    fees associated with the reaudit of our 2001 financial
    statements.
|   
|(b) |  | Audit-related fees represent fees billed for
    assurance services related to the audit of our employee benefit
    plans.                                                                                                                                                                                                                                                                                                                            
|   
|(c) |  | Tax fees represent fees billed for services
    principally consisting of tax advisory and compliance services.                                                                                                                                                                                                                                                                                                                                        
|   
|(d) |  | All other fees represent information systems post
    implementation review and Medicare cost report preparation
    assistance.                                                                                                                                                                                                                                                                                                                       

During fiscal 2003, we reviewed our existing
practices regarding the use of our independent auditors to
provide non-audit and consulting services, to ensure compliance
with recent SEC proposals. Our audit committee adopted a policy,
which provides that our independent auditors may provide certain
non-audit services which do not impair the auditors
independence. In that regard, our audit committee must
pre-approve all audit services provided to our company, as well
as all non-audit services provided by our companys
independent auditors. This policy is administered by our senior
corporate financial management, which reports throughout the
year to our audit committee. Our audit committee pre-approved
all audit and non-audit services provided by KPMG LLP during
2003 and reviewed all audit and non-audit services for fiscal
2002.




PART IV






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

(a) Documents filed as part of this
report:



| |                                                                            
| | ---------------------------------------------------------------------------
| | 1. Financial Statements: See Item 8 of
    this report.                    
|
| | 2. Financial Statement Schedules: Not
    Applicable                       
|
| | 3. List of Exhibits: The following exhibits
    are filed with this report:

|        |   |    |  |             |  |                                                                                                                                                                                                                                                                                                                                   
|------- | - | -- |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |   |    |  |            
|No.     |   |    |  | Description
|        |   |    |  |            
|        | 3 | .1 |  |            |  | Certificate of Formation of Ardent Health
    Services LLC, as filed with the Delaware Secretary of State on
    June 1, 2001 (Incorporated by reference to Exhibit 3.1
    to the Registrants Registration Statement on
    Form S-1, File No. 333-110117)                                                                      
|        | 3 | .2 |  |            |  | Limited Liability Company Agreement of Ardent
    Health Services LLC, including Amendment No. 1 thereto
    (Incorporated by reference to Exhibit 3.2 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                       
|        | 3 | .3 |  |            |  | Amendment No. 2 to Limited Liability Company
    Agreement of Ardent Health Services LLC                                                                                                                                                                                                                                          
|        | 4 | .1 |  |            |  | Indenture, dated as of August 19, 2003,
    among Ardent Health Services, Inc., Ardent Health Services,
    LLC, the Subsidiary Guarantors and U.S. Bank Trust National
    Association, as trustee (Incorporated by reference to
    Exhibit 4.1 to the Registrants Registration Statement
    on Form S-1, File No. 333-110117)
|        | 4 | .2 |  |            |  | Form of Ardent Health Services, Inc.
    10% Senior Subordinated Note due 2013 (Incorporated by
    reference to Exhibit 4.2 to the Registrants
    Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                 
|        | 4 | .3 |  |            |  | Form of Notation of Guarantee, dated as of
    August 19, 2003, executed by each of the Guarantors
    (Incorporated by reference to Exhibit 4.3 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                             

82



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|        |    |    |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- | -- | -- |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  |            
|No.     |    |    |  | Description
|        |    |    |  |            
|        | 4  | .4 |  |            |  | Amended and Restated Intercompany Promissory Note
    dated October 1, 2003 issued by Lovelace Health
    Systems, Inc. in favor of Ardent Health Services, Inc.
    (Incorporated by reference to Exhibit 4.4 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                                                                                                                                                                                           
|        | 4  | .5 |  |            |  | Amended and Restated Security Agreement, dated as
    of October 1, 2003, between Lovelace Health
    Systems, Inc. and Ardent Health Services, Inc.
    (Incorporated by reference to Exhibit 4.5 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                                                                                                                                                                                                       
|        | 4  | .6 |  |            |  | Intercreditor and Subordination Agreement, dated
    as of August 19, 2003, among Bank one, NA, as Collateral
    Agent, Bank One, NA, as Administrative Agent, U.S. Bank
    Trust National Association, as Trustee, and Ardent Health
    Services, Inc. (Incorporated by reference to
    Exhibit 4.6 to the Registrants Registration Statement
    on Form S-1, File No. 333-110117)                                                                                                                                                                                                                                     
|        | 4  | .7 |  |            |  | Collateral Assignment of Note and Security
    Agreement dated October 1, 2003 issued by Ardent Health
    Services, Inc. to Bank One, NA, as Collateral Agent
    (Incorporated by reference to Exhibit 4.7 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                                                                                                                                                                                             
|        | 4  | .8 |  |            |  | Registration Rights Agreement, dated as of
    August 19, 2003, among Ardent Health Services, Inc.,
    Ardent Health Services, LLC and the Subsidiary Guarantors and
    Banc of America Securities LLC, UBS Securities LLC, Banc One
    Capital Markets, Inc. and Merrill Lynch, Pierce,
    Fenner & Smith Incorporated (Incorporated by reference
    to Exhibit 4.8 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)                                                                                                                                                                    
|        | 10 | .1 |  |            |  | Credit Agreement, dated as of August 19,
    2003, among Ardent Health Services, Inc., as Borrower,
    Ardent Health Services LLC and certain of its subsidiaries as
    the Guarantors, Bank One, NA, as Administrative Agent, Swing
    Line Lender and L/C Issuer, Bank of America, N.A. and UBS
    Securities LLC, as Co-Syndication Agents, General Electric
    Capital Corporation and Merrill Lynch Capital, as
    Co-Documentation Agents, and the other Lenders party thereto
    (Incorporated by reference to Exhibit 10.1 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)
|        | 10 | .2 |  |            |  | Form of 10.2% Senior Subordinated Notes due
    August 15, 2014 (Incorporated by reference to Exhibit 10.2
    to the Registrants Registration Statement on
    Form S-1, File No. 333-110117)                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 10 | .3 |  |            |  | Third Amended and Restated Ardent Health Services
    LLC and its Subsidiaries Option and Restricted Unit Purchase Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .4 |  |            |  | Form of Non-Qualified Common Membership Interest
    Option Agreement for Directors and Officers (Incorporated by
    reference to Exhibit 10.4 to the Registrants
    Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10 | .5 |  |            |  | Subscription Agreement, dated as of
    September 25, 2001, among Ardent Health Services, LLC,
    Welsh, Carson, Anderson & Stowe IX, L.P., FFC
    Partners II, L.P., BancAmerica Capital Investors I,
    L.P. and the several other purchasers listed on Annex I
    thereto (Incorporated by reference to Exhibit 10.5 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                                                                              
|        | 10 | .6 |  |            |  | Subscription Agreement, dated as of
    December 11, 2002, as amended on February 7, 2003,
    among Ardent Health Services, LLC, Welsh, Carson,
    Anderson & Stowe IX, L.P., FFC Partners II, L.P.
    and related entities, BancAmerica Capital Investors I, L.P.
    and the several other purchasers listed on Annex I thereto
    (Incorporated by reference to Exhibit 10.6 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                      
|        | 10 | .7 |  |            |  | Professional Services Arrangement, dated as of
    December 11, 2002, between Ardent Health Services LLC and
    WCAS Management Corporation (Incorporated by reference to
    Exhibit 10.7 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)                                                                                                                                                                                                                                                                                                                                                  
|        | 10 | .8 |  |            |  | Letter Agreement, dated as of January 30,
    2002, between Welsh, Carson, Anderson & Stowe and David
    T. Vandewater (Incorporated by reference to Exhibit 10.8 to
    the Registrants Registration Statement on Form S-1,
    File No. 333-110117)                                                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .9 |  |            |  | Indemnification Agreement, dated as of
    January 31, 2002, between Ardent Health Services LLC and
    William Page Barnes (Incorporated by reference to
    Exhibit 10.9 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)                                                                                                                                                                                                                                                                                                                                                                   

83



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|        |    |     |  |             |  |                                                                                                                                                                                                                                                                                                                                    
|------- | -- | --- |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |            
|No.     |    |     |  | Description
|        |    |     |  |            
|        | 10 | .10 |  |            |  | Employment Agreement, dated as of May 5,
    2003, between AHS Management Company, Inc. and Norm Becker
    (Incorporated by reference to Exhibit 10.10 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                       
|        | 10 | .11 |  |            |  | Employment Agreement, dated as of June 1,
    2001, between AHS Management Company, Inc. and Jaime E.
    Hopping (Incorporated by reference to Exhibit 10.11 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                 
|        | 10 | .12 |  |            |  | Employment Agreement, dated as of
    September 13, 2001, between AHS Management
    Company, Inc. and Vernon S. Westrich (Incorporated by
    reference to Exhibit 10.12 to the Registrants
    Registration Statement on Form S-1, File
    No. 333-110117)                                                                     
|        | 10 | .13 |  |            |  | Employment Agreement, dated as of May 2,
    2001, between Behavioral Healthcare Corporation and William P.
    Barnes (Incorporated by reference to Exhibit 10.13 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                            
|        | 10 | .14 |  |            |  | Indemnification Agreement, dated as of
    July 1, 2002, between Ardent Health Services LLC and Jamie
    E. Hopping (Incorporated by reference to Exhibit 10.14 to
    the Registrants Registration Statement on Form S-1,
    File No. 333-110117)                                                                              
|        | 10 | .15 |  |            |  | Indemnification Agreement, dated as of
    January 31, 2002, between Ardent Health Services LLC and
    Stephen C. Petrovich (Incorporated by reference to
    Exhibit 10.15 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)                                                                      
|        | 10 | .16 |  |            |  | Indemnification Agreement, dated as of
    August 4, 2001, between Ardent Health Services LLC and
    David T. Vandewater (Incorporated by reference to
    Exhibit 10.16 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)                                                                         
|        | 10 | .17 |  |            |  | Indemnification Agreement, dated as of
    January 31, 2002, between Ardent Health Services LLC and
    Vernon S. Westrich (Incorporated by reference to
    Exhibit 10.17 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)                                                                        
|        | 10 | .18 |  |            |  | Employment Agreement, dated as of
    December 1, 2003, between AHS Management Company, Inc.
    and R. Dirk Allison (Incorporated by reference to
    Exhibit 10.18 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)                                                                              
|        | 10 | .19 |  |            |  | Indemnification Agreement, dated as of
    December 1, 2003, between Ardent Health Services LLC and R.
    Dirk Allison (Incorporated by reference to Exhibit 10.19 to
    the Registrants Registration Statement on Form S-1,
    File No. 333-110117)                                                                           
|        | 10 | .20 |  |            |  | Medicaid Managed Care Services Agreement No. PSC
    02-05, effective July 1, 2001, between the New Mexico Human
    Services Department and Lovelace Community Health Plan
    (Incorporated by reference to Exhibit 10.20 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                   
|        | 10 | .21 |  |            |  | Amendment No. 1 to Medicaid Managed Care
    Services Agreement No. PSC 02-05, effective July 1, 2003,
    between the New Mexico Human Services Department and Lovelace
    Community Health Plan (Incorporated by reference to
    Exhibit 10.21 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)
|        | 10 | .22 |  |            |  | Contract P00149, effective January 1, 2002,
    between Centers for Medicare & Medicaid Services and
    Lovelace Health Plan, Inc. (Incorporated by reference to
    Exhibit 10.22 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)                                                               
|        | 21 |     |  |            |  | Subsidiaries of Ardent Health Services LLC                                                                                                                                                                                                                                                                                         
|        | 31 | .1  |  |            |  | Certification of CEO pursuant to Rule
    13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                                                                            
|        | 31 | .2  |  |            |  | Certification of CFO pursuant to Rule
    13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                                                                            

84



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|        |    |    |  |             |  |                                                                                                                                      
|------- | -- | -- |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  |            
|No.     |    |    |  | Description
|        |    |    |  |            
|        | 32 | .1 |  |            |  | Certification of CEO pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002
|        | 32 | .2 |  |            |  | Certification of CFO pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K: Not
applicable.

(c) Exhibits:See Item 15(a)(3)
of this report.

(d) Financial Statement Schedules:
See Item 15(a)(2) of this report.

85



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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS

Ardent Health Services LLC and its Predecessor
Company

Consolidated Financial Statements


|                                                                                                                                                                                                               |  |      |     | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                                                                                                               |  | Page
|                                                                                                                                                                                                               |  |     
|Independent Auditors Report                                                                                                                                                                                   |  |      | F-2 | 
|Consolidated Balance Sheets, As of
    December 31, 2003 and 2002                                                                                                                                              |  |      | F-3 | 
|Consolidated Statements of Operations, Years
    Ended December 31, 2003 and 2002, the Five-Month Period
    Ended December 31, 2001, and the Seven-Month Period Ended
    July 31, 2001 (Predecessor Company) |  |      | F-4 | 
|Consolidated Statements of Members Equity,
    Years Ended December 31, 2003 and 2002 and the Five-Month
    Period Ended December 31, 2001                                                                   |  |      | F-5 | 
|Consolidated Statements of Stockholders
    Equity, Seven-Month Period Ended July 31, 2001 (Predecessor
    Company)                                                                                          |  |      | F-6 | 
|Consolidated Statements of Cash Flows, Years
    Ended December 31, 2003 and 2002, the Five-Month Period
    Ended December 31, 2001, and the Seven-Month Period Ended
    July 31, 2001 (Predecessor Company) |  |      | F-7 | 
|Notes to Consolidated Financial Statements,
    December 31, 2003 and 2002                                                                                                                                     |  |      | F-9 | 

F-1



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Managers

Ardent Health Services LLC:


We have audited the accompanying consolidated
balance sheets of Ardent Health Services LLC (a Delaware limited
liability company) and subsidiaries (the Company) as of
December 31, 2003 and 2002, and the related consolidated
statements of operations, members equity, and cash flows
for the years ended December 31, 2003 and 2002 and the
five-month period ended December 31, 2001. We have also
audited the accompanying consolidated statements of operations,
stockholders equity and cash flows of Behavioral
Healthcare Corporation (Predecessor Company  see
note 1) for the seven-month period ended July 31,
2001. These consolidated financial statements are the
responsibility of the Companies management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Ardent Health Services LLC
and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for the years
ended December 31, 2003 and 2002, and the five-month period
ended December 31, 2001, and the consolidated results of
the Predecessor Companys operations and cash flows for the
seven-month period ended July 31, 2001, in conformity with
accounting principles generally accepted in the United States of
America.

As discussed in Note 1 to the consolidated
financial statements, effective August 1, 2001, the Company
was capitalized (Capitalization) in a transaction which resulted
in a reduction to the historical book value of certain assets of
the Predecessor Company. As a result of the transaction, the
consolidated financial information for the periods after the
Capitalization is presented on a different cost basis than that
for the periods before the Capitalization and, therefore, is not
comparable. Accordingly, financial information contained in the
accompanying consolidated financial statements of the Company
and the Predecessor Company is not comparable.

As discussed in Note 1 to the consolidated
financial statements, in 2002 the Company changed its method of
accounting for goodwill and other intangible assets and its
method of accounting and reporting for long-lived asset
impairments and discontinued operations.



| |         
| | --------
| | KPMG LLP

Nashville, Tennessee

March 3, 2004


F-2



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2002


|                                                                                                                                                                                                                        |                                                                                                                                                          |                                       |         |         |         |  |         |         |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ------- | ------- |  | ------- | ------- | ------- | 
|                                                                                                                                                                                                                        |                                                                                                                                                          |                                      
|                                                                                                                                                                                                                        |                                                                                                                                                          | December 31,                         
|                                                                                                                                                                                                                        |                                                                                                                                                          |                                      
|                                                                                                                                                                                                                        |                                                                                                                                                          | 2003                                  |         | 2002   
|                                                                                                                                                                                                                        |                                                                                                                                                          |                                       |         |        
|                                                                                                                                                                                                                        |                                                                                                                                                          |                                      
|                                                                                                                                                                                                                        |                                                                                                                                                          | (Amounts in thousands,               
|                                                                                                                                                                                                                        |                                                                                                                                                          | except unit data)                    
|ASSETS                                                                                                                                                                                                                 
|Current assets:                                                                                                                                                                                                         |                                                                                                                                                          |                                       |         |         |         |  |         |        
|                                                                                                                                                                                                                        | Cash and cash equivalents                                                                                                                                |                                       | $       | 89,762  |         |  | $       | 113,569 |        
|                                                                                                                                                                                                                        | Accounts receivable, less allowance for doubtful
    accounts of $42,438 in 2003 and $25,809 in 2002                                                     |                                       |         | 116,515 |         |  |         | 72,680  |        
|                                                                                                                                                                                                                        | Premiums receivable                                                                                                                                      |                                       |         | 14,733  |         |  |         |        |        
|                                                                                                                                                                                                                        | Inventories                                                                                                                                              |                                       |         | 16,783  |         |  |         | 7,920   |        
|                                                                                                                                                                                                                        | Deferred income taxes                                                                                                                                    |                                       |         | 27,792  |         |  |         | 16,910  |        
|                                                                                                                                                                                                                        | Prepaid expenses and other current assets                                                                                                                |                                       |         | 31,556  |         |  |         | 24,079  |        
|                                                                                                                                                                                                                        | Assets held for sale                                                                                                                                     |                                       |         |        |         |  |         | 1,814   |        
|                                                                                                                                                                                                                        | Income tax receivable                                                                                                                                    |                                       |         | 2,128   |         |  |         | 2,122   |        
|                                                                                                                                                                                                                        |                                                                                                                                                          |                                       |         |         |         |  |         |        
|                                                                                                                                                                                                                        |                                                                                                                                                          | Total current assets                  |         |         | 299,269 |  |         |         | 239,094 | 
|Property, plant, and equipment, net                                                                                                                                                                                     |                                                                                                                                                          |                                       | 368,574 |         |         |  | 206,798 |        
|Other assets:                                                                                                                                                                                                           |                                                                                                                                                          |                                       |         |         |         |  |         |        
|                                                                                                                                                                                                                        | Goodwill                                                                                                                                                 |                                       |         | 75,529  |         |  |         | 13,072  |        
|                                                                                                                                                                                                                        | Other intangible assets                                                                                                                                  |                                       |         | 48,289  |         |  |         |        |        
|                                                                                                                                                                                                                        | Deferred income taxes                                                                                                                                    |                                       |         | 5,682   |         |  |         | 15,935  |        
|                                                                                                                                                                                                                        | Other assets                                                                                                                                             |                                       |         | 20,661  |         |  |         | 12,409  |        
|                                                                                                                                                                                                                        |                                                                                                                                                          |                                       |         |         |         |  |         |        
|                                                                                                                                                                                                                        |                                                                                                                                                          | Total assets                          |         | $       | 818,004 |  |         | $       | 487,308 | 
|                                                                                                                                                                                                                        |                                                                                                                                                          |                                       |         |         |         |  |         |        
|                                                                                                                                                                                                                       
|LIABILITIES AND MEMBERS EQUITY                                                                                                                                                                                        
|Current liabilities:                                                                                                                                                                                                    |                                                                                                                                                          |                                       |         |         |         |  |         |        
|                                                                                                                                                                                                                        | Current installments of long-term debt                                                                                                                   |                                       | $       | 2,082   |         |  | $       | 40,901  |        
|                                                                                                                                                                                                                        | Accounts payable                                                                                                                                         |                                       |         | 53,408  |         |  |         | 40,767  |        
|                                                                                                                                                                                                                        | Medical claims payable                                                                                                                                   |                                       |         | 45,751  |         |  |         | 3,497   |        
|                                                                                                                                                                                                                        | Accrued salaries and benefits                                                                                                                            |                                       |         | 44,783  |         |  |         | 29,206  |        
|                                                                                                                                                                                                                        | Accrued interest                                                                                                                                         |                                       |         | 10,133  |         |  |         | 257     |        
|                                                                                                                                                                                                                        | Unearned premiums                                                                                                                                        |                                       |         | 15,399  |         |  |         | 3,202   |        
|                                                                                                                                                                                                                        | Other accrued expenses and liabilities                                                                                                                   |                                       |         | 25,573  |         |  |         | 16,760  |        
|                                                                                                                                                                                                                        |                                                                                                                                                          |                                       |         |         |         |  |         |        
|                                                                                                                                                                                                                        |                                                                                                                                                          | Total current liabilities             |         |         | 197,129 |  |         |         | 134,590 | 
|Long-term debt, less current installments                                                                                                                                                                               |                                                                                                                                                          |                                       | 259,361 |         |         |  | 31,943  |        
|Other long-term liabilities                                                                                                                                                                                             |                                                                                                                                                          |                                       | 6,573   |         |         |  |        |        
|Self-insured liabilities                                                                                                                                                                                                |                                                                                                                                                          |                                       | 21,920  |         |         |  | 8,523   |        
|                                                                                                                                                                                                                        |                                                                                                                                                          |                                       |         |         |         |  |         |        
|                                                                                                                                                                                                                        |                                                                                                                                                          | Total liabilities                     |         |         | 484,983 |  |         |         | 175,056 | 
|                                                                                                                                                                                                                        |                                                                                                                                                          |                                       |         |         |         |  |         |        
|Mandatorily redeemable preferred units and
    accrued dividends, $3.43 unit price, $3.43 per unit
    redemption value; authorized, issued, and outstanding:
    28,141,807 units in 2003 and 28,161,799 units in 2002 |                                                                                                                                                          |                                       | 111,931 |         |         |  | 103,898 |        
|Commitments and contingencies                                                                                                                                                                                           |                                                                                                                                                          |                                       |         |         |         |  |         |        
|Members equity:                                                                                                                                                                                                        |                                                                                                                                                          |                                       |         |         |         |  |         |        
|                                                                                                                                                                                                                        | Authorized: 69,961,407 units in 2003 and
    67,727,491 units in 2002; issued and outstanding:
    56,998,444 units in 2003 and 53,283,047 units in 2002 |                                       |         | 224,331 |         |  |         | 207,788 |        
|                                                                                                                                                                                                                        | (Accumulated deficit) retained earnings                                                                                                                  |                                       |         | (3,241  | )       |  |         | 566     |        
|                                                                                                                                                                                                                        |                                                                                                                                                          |                                       |         |         |         |  |         |        
|                                                                                                                                                                                                                        |                                                                                                                                                          | Total members equity                 |         |         | 221,090 |  |         |         | 208,354 | 
|                                                                                                                                                                                                                        |                                                                                                                                                          |                                       |         |         |         |  |         |        
|                                                                                                                                                                                                                        |                                                                                                                                                          | Total liabilities and members equity |         | $       | 818,004 |  |         | $       | 487,308 | 
|                                                                                                                                                                                                                        |                                                                                                                                                          |                                       |         |         |         |  |         |        

See accompanying notes to consolidated financial
statements.

F-3



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES

(Behavioral Healthcare Corporation for the
Seven-Month Period Ended July 31, 2001  See
Note 1)


CONSOLIDATED STATEMENTS OF
OPERATIONS

Years Ended December 31, 2003 and 2002,
the Five-Month Period Ended December 31, 2001,


and the Seven-Month Period Ended July 31,
2001


|                             |                                                                                                                                                                                                                                        |                                                           |                                          |                                                                                                              |       |              |        |               |       |         |       |         |       |         |        |         |       |         |        | 
|---------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ---------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ----- | ------------ | ------ | ------------- | ----- | ------- | ----- | ------- | ----- | ------- | ------ | ------- | ----- | ------- | ------ | 
|                             |                                                                                                                                                                                                                                        |                                                           |                                          |                                                                                                              |       |              |        | Predecessor  
|                             |                                                                                                                                                                                                                                        |                                                           |                                          |                                                                                                              |       |              |        | Company      
|                             |                                                                                                                                                                                                                                        |                                                           |                                          |                                                                                                              |       | Five-Month   |        |              
|                             |                                                                                                                                                                                                                                        | Year Ended                                                |                                          | Year Ended                                                                                                   |       | Period Ended |        | Seven-Month  
|                             |                                                                                                                                                                                                                                        | December 31,                                              |                                          | December 31,                                                                                                 |       | December 31, |        | Period Ended 
|                             |                                                                                                                                                                                                                                        | 2003                                                      |                                          | 2002                                                                                                         |       | 2001         |        | July 31, 2001
|                             |                                                                                                                                                                                                                                        |                                                           |                                          |                                                                                                              |       |              |        |              
|                             |                                                                                                                                                                                                                                        |                                                          
|                             |                                                                                                                                                                                                                                        | (Amounts in thousands)                                   
|Revenues:                    |                                                                                                                                                                                                                                        |                                                           |                                          |                                                                                                              |       |              |        |               |       |         |       |         |       |         |        |        
|                             | Net patient service revenue                                                                                                                                                                                                            |                                                           | $                                        | 640,920                                                                                                      |       |              | $      | 369,539       |       |         | $     | 107,169 |       |         | $      | 129,222 |      
|                             | Premium revenue                                                                                                                                                                                                                        |                                                           |                                          | 592,293                                                                                                      |       |              |        | 13,232        |       |         |       |        |       |         |        |        |      
|                             | Other revenue                                                                                                                                                                                                                          |                                                           |                                          | 86,461                                                                                                       |       |              |        | 25,213        |       |         |       | 5,349   |       |         |        | 2,868   |      
|                             |                                                                                                                                                                                                                                        |                                                           |                                          |                                                                                                              |       |              |        |               |       |         |       |         |       |         |        |        
|                             |                                                                                                                                                                                                                                        |                                                           | Total net revenues                       |                                                                                                              |       | 1,319,674    |        |               |       | 407,984 |       |         |       | 112,518 |        |         |       | 132,090 |       
|Expenses:                    |                                                                                                                                                                                                                                        |                                                           |                                          |                                                                                                              |       |              |        |               |       |         |       |         |       |         |        |        
|                             | Salaries and benefits                                                                                                                                                                                                                  |                                                           |                                          | 531,893                                                                                                      |       |              |        | 224,885       |       |         |       | 63,712  |       |         |        | 82,736  |      
|                             | Professional fees                                                                                                                                                                                                                      |                                                           |                                          | 127,295                                                                                                      |       |              |        | 40,334        |       |         |       | 14,990  |       |         |        | 19,625  |      
|                             | Claims and capitation                                                                                                                                                                                                                  |                                                           |                                          | 272,872                                                                                                      |       |              |        | 10,956        |       |         |       |        |       |         |        |        |      
|                             | Supplies                                                                                                                                                                                                                               |                                                           |                                          | 149,063                                                                                                      |       |              |        | 43,683        |       |         |       | 7,508   |       |         |        | 7,879   |      
|                             | Provision for doubtful accounts                                                                                                                                                                                                        |                                                           |                                          | 52,749                                                                                                       |       |              |        | 23,677        |       |         |       | 5,488   |       |         |        | 4,080   |      
|                             | Interest                                                                                                                                                                                                                               |                                                           |                                          | 22,155                                                                                                       |       |              |        | 2,751         |       |         |       | 1,288   |       |         |        | 2,488   |      
|                             | Change in fair value of interest rate swap
    agreements                                                                                                                                                                              |                                                           |                                          | (558                                                                                                         | )     |              |        |              |       |         |       |        |       |         |        |        |      
|                             | Depreciation and amortization                                                                                                                                                                                                          |                                                           |                                          | 35,742                                                                                                       |       |              |        | 8,929         |       |         |       | 1,424   |       |         |        | 3,119   |      
|                             | Impairment of long-lived assets and restructuring
    costs                                                                                                                                                                            |                                                           |                                          | 2,913                                                                                                        |       |              |        | 78            |       |         |       | 1,374   |       |         |        | 560     |      
|                             | Loss (gain) on divestitures                                                                                                                                                                                                            |                                                           |                                          | 61                                                                                                           |       |              |        | (1,206        | )     |         |       | (109    | )     |         |        | (9,123  | )    
|                             | Other                                                                                                                                                                                                                                  |                                                           |                                          | 119,472                                                                                                      |       |              |        | 46,864        |       |         |       | 12,567  |       |         |        | 12,272  |      
|                             |                                                                                                                                                                                                                                        |                                                           |                                          |                                                                                                              |       |              |        |               |       |         |       |         |       |         |        |        
|                             |                                                                                                                                                                                                                                        |                                                           | Total expenses                           |                                                                                                              |       | 1,313,657    |        |               |       | 400,951 |       |         |       | 108,242 |        |         |       | 123,636 |       
|                             |                                                                                                                                                                                                                                        |                                                           |                                          |                                                                                                              |       |              |        |               |       |         |       |         |       |         |        |        
|                             |                                                                                                                                                                                                                                        | Income from continuing operations before income
    taxes |                                          |                                                                                                              | 6,017 |              |        |               | 7,033 |         |       |         | 4,276 |         |        |         | 8,454 |        
|Income tax expense (benefit) |                                                                                                                                                                                                                                        |                                                           | 2,312                                    |                                                                                                              |       |              | 2,690  |               |       |         | 1,655 |         |       |         | (8,364 | )      
|                             |                                                                                                                                                                                                                                        |                                                           |                                          |                                                                                                              |       |              |        |               |       |         |       |         |       |         |        |        
|                             |                                                                                                                                                                                                                                        |                                                           | Net income from continuing operations    |                                                                                                              |       | 3,705        |        |               |       | 4,343   |       |         |       | 2,621   |        |         |       | 16,818  |       
|Discontinued operations:     |                                                                                                                                                                                                                                        |                                                           |                                          |                                                                                                              |       |              |        |               |       |         |       |         |       |         |        |        
|                             | Income from discontinued operations (including
    gain on disposal of $1,032 and $2,349 for the years ended
    December 31, 2003 and 2002, respectively, and restructuring
    costs of $1,075 for the year ended December 31, 2002) |                                                           |                                          | 953                                                                                                          |       |              |        | 1,042         |       |         |       | 158     |       |         |        | 1,749   |      
|                             | Income tax expense                                                                                                                                                                                                                     |                                                           |                                          | 367                                                                                                          |       |              |        | 332           |       |         |       | 63      |       |         |        | 698     |      
|                             |                                                                                                                                                                                                                                        |                                                           |                                          |                                                                                                              |       |              |        |               |       |         |       |         |       |         |        |        
|                             |                                                                                                                                                                                                                                        |                                                           | Income from discontinued operations, net |                                                                                                              |       | 586          |        |               |       | 710     |       |         |       | 95      |        |         |       | 1,051   |       
|                             |                                                                                                                                                                                                                                        |                                                           |                                          |                                                                                                              |       |              |        |               |       |         |       |         |       |         |        |        
|                             |                                                                                                                                                                                                                                        |                                                           |                                          | Net income                                                                                                   |       |              | 4,291  |               |       |         | 5,053 |         |       |         | 2,716  |         |       |         | 17,869 | 
|Accrued preferred dividends  |                                                                                                                                                                                                                                        |                                                           | 8,098                                    |                                                                                                              |       |              | 5,993  |               |       |         | 1,210 |         |       |         | 8      |        
|                             |                                                                                                                                                                                                                                        |                                                           |                                          |                                                                                                              |       |              |        |               |       |         |       |         |       |         |        |        
|                             |                                                                                                                                                                                                                                        |                                                           |                                          | Net (loss attributable to) income available for
    common members/common stockholders (Predecessor Company) |       | $            | (3,807 | )             |       | $       | (940  | )       |       | $       | 1,506  |         |       | $       | 17,861 | 
|                             |                                                                                                                                                                                                                                        |                                                           |                                          |                                                                                                              |       |              |        |               |       |         |       |         |       |         |        |        

See accompanying notes to consolidated financial
statements.

F-4



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF MEMBERS
EQUITY

Years Ended December 31, 2003 and 2002
and the Five-Month Period Ended December 31, 2001


|                                                                       |  |                                          |            |              |  |          |         |        |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------- |  | ---------------------------------------- | ---------- | ------------ |  | -------- | ------- | ------ |  | - | ------ | - |  | - | ------- | -
|                                                                       |  |                                          |            | Retained     |  |         
|                                                                       |  | Common Units                             |            | Earnings     |  | Total   
|                                                                       |  |                                          |            | (Accumulated |  | Members
|                                                                       |  | Units                                    |            | Amount       |  | Deficit) |         | Equity
|                                                                       |  |                                          |            |              |  |          |         |       
|                                                                       |  |                                         
|                                                                       |  | (Amounts in thousands, except unit data)
|Balance at August 1, 2001                                              |  |                                          |           |              |  | $        |        |        |  | $ |       |   |  | $ |        |  
|Issuance of units in connection with initial
    capitalization        |  |                                          | 8,883,396  |              |  |          | 32,196  |        |  |   |       |   |  |   | 32,196  |  
|Issuance of common units at $3.43, net of
    issuance costs of $906   |  |                                          | 4,991,073  |              |  |          | 16,213  |        |  |   |       |   |  |   | 16,213  |  
|Net income                                                             |  |                                          |           |              |  |          |        |        |  |   | 2,716  |   |  |   | 2,716   |  
|Accrual of dividends on preferred units                                |  |                                          |           |              |  |          |        |        |  |   | (1,210 | ) |  |   | (1,210  | )
|                                                                       |  |                                          |            |              |  |          |         |        |  |   |        |   |  |   |         |  
|Balance at December 31, 2001                                           |  |                                          | 13,874,469 |              |  |          | 48,409  |        |  |   | 1,506  |   |  |   | 49,915  |  
|Issuance of common units at $3.43, net of
    issuance costs of $765   |  |                                          | 14,874,134 |              |  |          | 50,262  |        |  |   |       |   |  |   | 50,262  |  
|Issuance of common units at $4.50, net of
    issuance costs of $1,190 |  |                                          | 24,444,445 |              |  |          | 108,810 |        |  |   |       |   |  |   | 108,810 |  
|Exercise of options                                                    |  |                                          | 93,713     |              |  |          | 321     |        |  |   |       |   |  |   | 321     |  
|Redemption of common units                                             |  |                                          | (3,714     | )            |  |          | (14     | )      |  |   |       |   |  |   | (14     | )
|Net income                                                             |  |                                          |           |              |  |          |        |        |  |   | 5,053  |   |  |   | 5,053   |  
|Accrual of dividends on preferred units                                |  |                                          |           |              |  |          |        |        |  |   | (5,993 | ) |  |   | (5,993  | )
|                                                                       |  |                                          |            |              |  |          |         |        |  |   |        |   |  |   |         |  
|Balance at December 31, 2002                                           |  |                                          | 53,283,047 |              |  |          | 207,788 |        |  |   | 566    |   |  |   | 208,354 |  
|Issuance of common units at $4.50, net of
    issuance costs of $173   |  |                                          | 3,649,416  |              |  |          | 16,254  |        |  |   |       |   |  |   | 16,254  |  
|Exercise of options                                                    |  |                                          | 96,139     |              |  |          | 425     |        |  |   |       |   |  |   | 425     |  
|Redemption of common units                                             |  |                                          | (30,158    | )            |  |          | (136    | )      |  |   |       |   |  |   | (136    | )
|Net income                                                             |  |                                          |           |              |  |          |        |        |  |   | 4,291  |   |  |   | 4,291   |  
|Accrual of dividends on preferred units                                |  |                                          |           |              |  |          |        |        |  |   | (8,098 | ) |  |   | (8,098  | )
|                                                                       |  |                                          |            |              |  |          |         |        |  |   |        |   |  |   |         |  
|Balance at December 31, 2003                                           |  |                                          | 56,998,444 |              |  | $        | 224,331 |        |  | $ | (3,241 | ) |  | $ | 221,090 |  
|                                                                       |  |                                          |            |              |  |          |         |        |  |   |        |   |  |   |         |  

See accompanying notes to consolidated financial
statements.

F-5



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES

(Behavioral Healthcare Corporation for the
Seven-Month Period Ended July 31, 2001  See
Note 1)


CONSOLIDATED STATEMENT OF STOCKHOLDERS
EQUITY

(PREDECESSOR COMPANY)


Seven-Month Period Ended July 31,
2001


|                                                       |                                                                       |                                           |           |              |   |            |    |             |   |                |            |               |  |        |     |        |  |        |         |       |   |   |         |        |  |  |        |   |  |   |     |   |  |   |        |        |  
|------------------------------------------------------ | --------------------------------------------------------------------- | ----------------------------------------- | --------- | ------------ | - | ---------- | -- | ----------- | - | -------------- | ---------- | ------------- |  | ------ | --- | ------ |  | ------ | ------- | ----- | - | - | ------- | ------ |  |  | ------ | - |  | - | --- | - |  | - | ------ | ------ | -
|                                                       |                                                                       |                                           |           |              |   |            |    |             |   |                |            |               |  |        |     |       
|                                                       |                                                                       | Series A Convertible                      |           |              |   |            |    |             |   |                |            |              
|                                                       |                                                                       | Preferred Stock                           |           | Common Stock |   | Additional |    |             |   | Treasury Stock |            | Total        
|                                                       |                                                                       |                                           |           |              |   | Paid-in    |    | Accumulated |   |                |            | Stockholders
|                                                       |                                                                       | Shares                                    |           | Amount       |   | Shares     |    | Amount      |   | Capital        |            | Deficit       |  | Shares |     | Amount |  | Equity
|                                                       |                                                                       |                                           |           |              |   |            |    |             |   |                |            |               |  |        |     |        |  |       
|                                                       |                                                                       |                                          
|                                                       |                                                                       | (Amounts in thousands, except share data)
|Balance at December 31, 2000 
    Predecessor Company |                                                                       |                                           | 5,651,368 |              |   | $          | 57 |             |   |                | 13,575,461 |               |  | $      | 135 |        |  | $      | 115,654 |       |   | $ | (38,546 | )      |  |  | (5,858 | ) |  | $ | (42 | ) |  | $ | 77,258 |       
|                                                       | Accrual of dividends on preferred stock                               |                                           |           |             |   |            |    |            |   |                |            |              |  |        |     |       |  |        |         | (8    | ) |   |         |       |  |  |        |  |  |   |     |  |  |   |        | (8     | )
|                                                       | Conversion of Series A preferred stock to
    common stock            |                                           |           | (5,651,368   | ) |            |    | (57         | ) |                |            | 5,651,368     |  |        |     | 57     |  |        |         |      |   |   |         |       |  |  |        |  |  |   |     |  |  |   |        |       |  
|                                                       | Stock-based compensation in connection with
    Ardent Capitalization |                                           |           |             |   |            |    |            |   |                |            |              |  |        |     |       |  |        |         | 1,049 |   |   |         |       |  |  |        |  |  |   |     |  |  |   |        | 1,049  |  
|                                                       | Net income                                                            |                                           |           |             |   |            |    |            |   |                |            |              |  |        |     |       |  |        |         |      |   |   |         | 17,869 |  |  |        |  |  |   |     |  |  |   |        | 17,869 |  
|                                                       |                                                                       |                                           |           |              |   |            |    |             |   |                |            |               |  |        |     |        |  |        |         |       |   |   |         |        |  |  |        |   |  |   |     |   |  |   |        |       
|Balance at July 31, 2001 
    Predecessor Company     |                                                                       |                                           |          |              |   | $          |   |             |   |                | 19,226,829 |               |  | $      | 192 |        |  | $      | 116,695 |       |   | $ | (20,677 | )      |  |  | (5,858 | ) |  | $ | (42 | ) |  | $ | 96,168 |       
|                                                       |                                                                       |                                           |           |              |   |            |    |             |   |                |            |               |  |        |     |        |  |        |         |       |   |   |         |        |  |  |        |   |  |   |     |   |  |   |        |       

See accompanying notes to consolidated financial
statements.

F-6



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES

(Behavioral Healthcare Corporation for the
Seven-Month Period Ended July 31, 2001  See
Note 1)


CONSOLIDATED STATEMENTS OF CASH
FLOWS

Years Ended December 31, 2003 and 2002,
the Five-Month Period Ended December 31, 2001,


and the Seven-Month Period Ended July 31,
2001


|                                                                                                                                                           |                                                                                                   |                                           |                                                         |              |         |              |          |               |         |          |         |       |        |         |        |         |        |        | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------- | ------------ | ------- | ------------ | -------- | ------------- | ------- | -------- | ------- | ----- | ------ | ------- | ------ | ------- | ------ | ------ | 
|                                                                                                                                                           |                                                                                                   |                                           |                                                         |              |         |              |          | Predecessor  
|                                                                                                                                                           |                                                                                                   |                                           |                                                         |              |         |              |          | Company      
|                                                                                                                                                           |                                                                                                   |                                           |                                                         |              |         | Five-Month   |          |              
|                                                                                                                                                           |                                                                                                   | Year Ended                                |                                                         | Year Ended   |         | Period Ended |          | Seven-Month  
|                                                                                                                                                           |                                                                                                   | December 31,                              |                                                         | December 31, |         | December 31, |          | Period Ended 
|                                                                                                                                                           |                                                                                                   | 2003                                      |                                                         | 2002         |         | 2001         |          | July 31, 2001
|                                                                                                                                                           |                                                                                                   |                                           |                                                         |              |         |              |          |              
|                                                                                                                                                           |                                                                                                   |                                          
|                                                                                                                                                           |                                                                                                   | (Amounts in thousands)                   
|Cash flows from operating
    activities:                                                                                                                  |                                                                                                   |                                           |                                                         |              |         |              |          |               |         |          |         |       |        |         |        |        
|Net income from continuing operations                                                                                                                      |                                                                                                   | $                                         | 3,705                                                   |              |         | $            | 4,343    |               |         | $        | 2,621   |       |        | $       | 16,818 |        
|Adjustments to reconcile net income from
    continuing operations to net cash provided by operating
    activities, net of acquisitions and divestitures: |                                                                                                   |                                           |                                                         |              |         |              |          |               |         |          |         |       |        |         |        |        
|                                                                                                                                                           | Provision for doubtful accounts                                                                   |                                           |                                                         | 52,749       |         |              |          | 23,677        |         |          |         | 5,488 |        |         |        | 4,080   |       
|                                                                                                                                                           | Change in fair value of interest rate swap
    agreements                                         |                                           |                                                         | (558         | )       |              |          |              |         |          |         |      |        |         |        |        |       
|                                                                                                                                                           | Depreciation and amortization                                                                     |                                           |                                                         | 35,742       |         |              |          | 8,929         |         |          |         | 1,424 |        |         |        | 3,119   |       
|                                                                                                                                                           | Impairment of long-lived assets and restructuring
    costs                                       |                                           |                                                         | 2,913        |         |              |          | 78            |         |          |         | 1,374 |        |         |        | 560     |       
|                                                                                                                                                           | Loss (gain) on divestitures                                                                       |                                           |                                                         | 61           |         |              |          | (1,206        | )       |          |         | (109  | )      |         |        | (9,123  | )     
|                                                                                                                                                           | Amortization of loan costs                                                                        |                                           |                                                         | 6,042        |         |              |          | 344           |         |          |         | 186   |        |         |        | 133     |       
|                                                                                                                                                           | Amortization of discount on subordinated debt                                                     |                                           |                                                         | 635          |         |              |          |              |         |          |         |      |        |         |        |        |       
|                                                                                                                                                           | Deferred income taxes                                                                             |                                           |                                                         | (631         | )       |              |          | 199           |         |          |         | 812   |        |         |        | (12,227 | )     
|                                                                                                                                                           | Stock-based compensation                                                                          |                                           |                                                         |             |         |              |          |              |         |          |         |      |        |         |        | 1,049   |       
|                                                                                                                                                           | Changes in operating assets and liabilities, net
    of effects of acquisitions and divestitures: |                                           |                                                         |              |         |              |          |               |         |          |         |       |        |         |        |         |       
|                                                                                                                                                           |                                                                                                   | Accounts receivable                       |                                                         |              | (79,604 | )            |          |               | (28,943 | )        |         |       | (8,523 | )       |        |         | (918   | )     
|                                                                                                                                                           |                                                                                                   | Premiums receivable                       |                                                         |              | 1,588   |              |          |               |        |          |         |       |       |         |        |         |       |       
|                                                                                                                                                           |                                                                                                   | Prepaid expenses and other current assets |                                                         |              | (6,749  | )            |          |               | (17,410 | )        |         |       | (1,548 | )       |        |         | 787    |       
|                                                                                                                                                           |                                                                                                   | Income tax receivable (payable)           |                                                         |              | (355    | )            |          |               | (3,528  | )        |         |       | (735   | )       |        |         | 2,013  |       
|                                                                                                                                                           |                                                                                                   | Medical claims payable                    |                                                         |              | 1,688   |              |          |               | 450     |          |         |       |       |         |        |         |       |       
|                                                                                                                                                           |                                                                                                   | Accounts payable                          |                                                         |              | 12,804  |              |          |               | 20,763  |          |         |       | (210   | )       |        |         | 675    |       
|                                                                                                                                                           |                                                                                                   | Accrued salaries and benefits             |                                                         |              | 3,909   |              |          |               | 6,288   |          |         |       | (1,288 | )       |        |         | 2,539  |       
|                                                                                                                                                           |                                                                                                   | Accrued interest                          |                                                         |              | 9,876   |              |          |               | 186     |          |         |       | (55    | )       |        |         | 93     |       
|                                                                                                                                                           |                                                                                                   | Unearned premiums                         |                                                         |              | 12,197  |              |          |               | (146    | )        |         |       |       |         |        |         |       |       
|                                                                                                                                                           |                                                                                                   | Other accrued expenses and liabilities    |                                                         |              | (2,841  | )            |          |               | 4,815   |          |         |       | 3,730  |         |        |         | (2,310 | )     
|                                                                                                                                                           |                                                                                                   | Self-insured liabilities                  |                                                         |              | 13,339  |              |          |               | 2,208   |          |         |       | (2,024 | )       |        |         | (167   | )     
|                                                                                                                                                           |                                                                                                   |                                           |                                                         |              |         |              |          |               |         |          |         |       |        |         |        |        
|                                                                                                                                                           |                                                                                                   |                                           | Net cash provided by operating activities               |              |         | 66,510       |          |               |         | 21,047   |         |       |        | 1,143   |        |         |        | 7,121  | 
|Cash flows from investing
    activities:                                                                                                                  |                                                                                                   |                                           |                                                         |              |         |              |          |               |         |          |         |       |        |         |        |        
|Investments in acquisitions, less cash acquired                                                                                                            |                                                                                                   |                                           | (204,826                                                | )            |         |              | (129,128 | )             |         |          | (19,200 | )     |        |         |       |        
|Purchases of property, plant, and equipment                                                                                                                |                                                                                                   |                                           | (86,974                                                 | )            |         |              | (46,029  | )             |         |          | (6,985  | )     |        |         | (2,833 | )      
|Proceeds from divestitures                                                                                                                                 |                                                                                                   |                                           | 9,803                                                   |              |         |              | 5,419    |               |         |          | 1,656   |       |        |         | 21,140 |        
|Other                                                                                                                                                      |                                                                                                   |                                           | 7,877                                                   |              |         |              | (55      | )             |         |          | (742    | )     |        |         | (273   | )      
|                                                                                                                                                           |                                                                                                   |                                           |                                                         |              |         |              |          |               |         |          |         |       |        |         |        |        
|                                                                                                                                                           |                                                                                                   |                                           | Net cash (used in) provided by investing
    activities |              |         | (274,120     | )        |               |         | (169,793 | )       |       |        | (25,271 | )      |         |        | 18,034 | 

F-7



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period Ended July 31, 2001  See
Note 1)


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)

|                                                                                                                                             |                                                          |                        |          |              |   |              |         |               |  |   |        |         |   |   |        |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ---------------------- | -------- | ------------ | - | ------------ | ------- | ------------- |  | - | ------ | ------- | - | - | ------ | ------ | -
|                                                                                                                                             |                                                          |                        |          |              |   |              |         | Predecessor  
|                                                                                                                                             |                                                          |                        |          |              |   |              |         | Company      
|                                                                                                                                             |                                                          |                        |          |              |   | Five-Month   |         |              
|                                                                                                                                             |                                                          | Year Ended             |          | Year Ended   |   | Period Ended |         | Seven-Month  
|                                                                                                                                             |                                                          | December 31,           |          | December 31, |   | December 31, |         | Period Ended 
|                                                                                                                                             |                                                          | 2003                   |          | 2002         |   | 2001         |         | July 31, 2001
|                                                                                                                                             |                                                          |                        |          |              |   |              |         |              
|                                                                                                                                             |                                                          |                       
|                                                                                                                                             |                                                          | (Amounts in thousands)
|Cash flows from financing
    activities:                                                                                                    |                                                          |                        |          |              |   |              |         |               |  |   |        |         |   |   |        |       
|(Payments on) proceeds from revolving line of
    credit, net                                                                                |                                                          |                        | (38,703  | )            |   |              | 35,577  |               |  |   | (9,747 | )       |   |   | (7,787 | )     
|Proceeds from long-term debt                                                                                                                 |                                                          |                        | 373,500  |              |   |              | 5,468   |               |  |   |       |         |   |   |       |       
|Payments on long-term debt                                                                                                                   |                                                          |                        | (143,415 | )            |   |              | (667    | )             |  |   |       |         |   |   |       |       
|Debt financing costs paid                                                                                                                    |                                                          |                        | (17,436  | )            |   |              | (305    | )             |  |   | (53    | )       |   |   |       |       
|Proceeds from issuance of preferred units                                                                                                    |                                                          |                        |         |              |   |              | 50,999  |               |  |   | 15,143 |         |   |   |       |       
|Proceeds from issuance of common units                                                                                                       |                                                          |                        | 11,737   |              |   |              | 160,999 |               |  |   | 17,119 |         |   |   |       |       
|Proceeds from exercise of stock options                                                                                                      |                                                          |                        | 425      |              |   |              | 321     |               |  |   |       |         |   |   |       |       
|Cash paid to Predecessor Company shareholders and
    option holders in Ardent Capitalization, net                                           |                                                          |                        |         |              |   |              |        |               |  |   | (6,434 | )       |   |   |       |       
|Redemption of preferred stock                                                                                                                |                                                          |                        |         |              |   |              |        |               |  |   |       |         |   |   | (405   | )     
|Redemption of preferred units                                                                                                                |                                                          |                        | (116     | )            |   |              | (14     | )             |  |   |       |         |   |   |       |       
|Redemption of common units                                                                                                                   |                                                          |                        | (136     | )            |   |              | (14     | )             |  |   |       |         |   |   |       |       
|Preferred and common unit issuance costs                                                                                                     |                                                          |                        | (1,992   | )            |   |              |        |               |  |   | (3,304 | )       |   |   |       |       
|                                                                                                                                             |                                                          |                        |          |              |   |              |         |               |  |   |        |         |   |   |        |       
|                                                                                                                                             | Net cash provided by (used in) financing
    activities  |                        |          | 183,864      |   |              |         | 252,364       |  |   |        | 12,724  |   |   |        | (8,192 | )
|Net cash (used in) provided by discontinued
    operations                                                                                   |                                                          |                        | (61      | )            |   |              | (1      | )             |  |   | (112   | )       |   |   | 34     |       
|                                                                                                                                             |                                                          |                        |          |              |   |              |         |               |  |   |        |         |   |   |        |       
|                                                                                                                                             | Net (decrease) increase in cash and cash
    equivalents |                        |          | (23,807      | ) |              |         | 103,617       |  |   |        | (11,516 | ) |   |        | 16,997 |  
|Cash and cash equivalents, beginning of period                                                                                               |                                                          |                        | 113,569  |              |   |              | 9,952   |               |  |   | 21,468 |         |   |   | 4,471  |       
|                                                                                                                                             |                                                          |                        |          |              |   |              |         |               |  |   |        |         |   |   |        |       
|Cash and cash equivalents, end of period                                                                                                     |                                                          | $                      | 89,762   |              |   | $            | 113,569 |               |  | $ | 9,952  |         |   | $ | 21,468 |       
|                                                                                                                                             |                                                          |                        |          |              |   |              |         |               |  |   |        |         |   |   |        |       
|Supplemental cash flow information:                                                                                                          |                                                          |                        |          |              |   |              |         |               |  |   |        |         |   |   |        |       
|Cash paid for interest, net of capitalized
    interest of $1,780 and $500, for the years ended
    December 31, 2003 and 2002, respectively |                                                          | $                      | 12,279   |              |   | $            | 2,546   |               |  | $ | 1,438  |         |   | $ | 2,346  |       
|Cash paid for income taxes                                                                                                                   |                                                          |                        | 3,374    |              |   |              | 6,663   |               |  |   | 534    |         |   |   | 3,149  |       
|Non-cash common units issued                                                                                                                 |                                                          |                        | 4,690    |              |   |              | 28      |               |  |   | 32,196 |         |   |   |       |       
|Non-cash preferred units issued                                                                                                              |                                                          |                        | 51       |              |   |              | 28      |               |  |   | 32,196 |         |   |   |       |       
|Preferred unit and preferred stock dividends
    accrued                                                                                     |                                                          |                        | 8,098    |              |   |              | 5,993   |               |  |   | 1,210  |         |   |   | 8      |       
|Note received in connection with facility
    divestiture                                                                                    |                                                          |                        |         |              |   |              |        |               |  |   | 964    |         |   |   |       |       
|Conversion of Predecessor Company Series A
    preferred stock to common stock                                                               |                                                          |                        |         |              |   |              |        |               |  |   |       |         |   |   | 57     |       
|Non-cash changes due to acquisitions and
    divestitures:                                                                                   |                                                          |                        |          |              |   |              |         |               |  |   |        |         |   |   |        |       
|Current assets                                                                                                                               |                                                          |                        | 71,154   |              |   |              | 58,084  |               |  |   | 5,507  |         |   |   | 2,947  |       
|Non-current assets                                                                                                                           |                                                          |                        | 225,137  |              |   |              | 107,226 |               |  |   | 13,953 |         |   |   | 8,884  |       
|Current liabilities                                                                                                                          |                                                          |                        | 75,991   |              |   |              | 30,913  |               |  |   | 1,810  |         |   |   | 698    |       
|Non-current liabilities                                                                                                                      |                                                          |                        | 7,242    |              |   |              | 342     |               |  |   |       |         |   |   | 513    |       

See accompanying notes to consolidated financial
statements.

F-8



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES

(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003 and 2002




|   |                                                                               
|-- | ------------------------------------------------------------------------------
|1. | Description of the Business and Summary of
    Significant Accounting Policies



| |                                                
| | -----------------------------------------------
| | Form of Organization and Nature of
    Business

Ardent Health Services LLC (the Company), a
Delaware limited liability company, was formed in June 2001 for
the purpose of owning and operating general acute care and
mental health facilities. The Delaware Limited Liability Company
Act provides that no member or manager of an LLC shall be
obligated personally for any debt, obligation, or liability of
the LLC solely by reason of being a member or acting as a
manager of the LLC.

As discussed more fully below, the outstanding
stock of Behavioral Healthcare Corporation (the Predecessor
Company) was contributed to the Company effective August 1,
2001, in exchange for member units in the Company. The
Predecessor Companys operations include owning and
operating healthcare facilities that provide psychiatric and
related mental health services. Prior to this contribution of
Predecessor Company shares to capitalize the Company, the
Company had no operating history. Accordingly, the accompanying
consolidated financial statements include the operations of the
Company as of and for the years ended December 31, 2003 and
2002, and for the five-month period ended December 31,
2001, and the operations of the Predecessor Company for the
seven-month period ended July 31, 2001.

In June 2001, the Predecessor Company changed its
fiscal year end from June 30 to December 31, effective
December 31, 2001.

As of December 31, 2003, the Company owned
and operated seven acute care hospitals (including one inpatient
rehabilitation hospital), 21 behavioral hospitals, and other
related healthcare businesses. The Companys fully
integrated healthcare delivery system in Albuquerque, New Mexico
(Lovelace Sandia Health System, Inc.) comprises five of the
seven acute care hospitals, and includes a 168,000 member health
plan (the Lovelace Health Plan), 328 employed physicians and 15
primary care clinics. The Company also owns and operates a full
service reference laboratory in Albuquerque.



| |                      
| | ---------------------
| | Basis of Presentation

During 2001, through a series of private
transactions, a certain Predecessor Company shareholder
(Controlling Shareholder) acquired approximately 63% of the
outstanding shares of the Predecessor Company at a price of
$3.43 per share to increase its ownership to approximately
80% of the outstanding shares of the Predecessor Company. In
August 2001, the Controlling Shareholder capitalized the Company
by contributing its shares in the Predecessor Company in
exchange for common and preferred units of the Company.
Concurrently, the Company authorized an exchange whereby the
remaining Predecessor Company shareholders could exchange their
shares for Company units or receive cash of $3.43 per
share. Each Predecessor Company share contributed to the Company
was exchanged for 0.5 preferred units and 0.5 common units of
the Company.

The formation and capitalization of the Company
(Ardent Capitalization) was accounted for as a common control
merger. The shares, and resulting net assets, contributed by the
Controlling Shareholder to the Company were valued at
$3.43 per unit (Controlling Shareholder Basis) in
accordance with Emerging Issues Task Force (EITF) Issue
90-5, Exchanges of Ownership Interests between Entities
under Common Control, which is consistent with the carrying
value of the shares recorded by the Controlling Shareholder. The
shares exchanged by minority Predecessor Company shareholders
were valued at their historical cost basis, $4.98 per unit
(Carryover Basis), in the capitalization of the Company.

F-9



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As a result of the valuations assigned to the
Companys units, the historical cost basis of the
Predecessor Companys net assets was in excess of the
assigned values by approximately $31.6 million upon
capitalization of the Company in August 2001. This reduction in
book value was allocated to the Predecessor Companys net
assets such that each of the Companys assets and
liabilities were valued with a component of the Controlling
Shareholder Basis and the Carryover Basis. As a result, based on
the proportional amount of shares contributed by the controlling
Shareholder at the date of the Ardent Capitalization,
approximately 80% of the Companys net assets were valued
at the Controlling Shareholder Basis and approximately 20% were
valued at the Carryover Basis.

Additionally, the reduction in book value
resulted in the recognition of approximately $16.9 million
of noncurrent deferred tax assets based on the income tax and
financial reporting basis differences created in the transaction.

The accompanying consolidated financial
statements have been prepared using the separate cost basis of
the Company and the Predecessor Company and reflect the change
in the cost basis effective August 1, 2001. Financial
information of the Company and the Predecessor Company are not
comparable due to the different cost basis.

As none of the Companys common units are
publicly held, no earnings per share information is presented in
the accompanying consolidated financial statements. The majority
of the Companys expenses are cost of revenue
items.



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements include the
financial statements of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.



| |                                               
| | ----------------------------------------------
| | Summary of Significant Accounting
    Policies

Accounting
Estimates

The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and judgments that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. On an on-going basis, the Company evaluates its
estimates. The Company bases its estimates on historical
experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under
different assumptions or conditions.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Allowance for Contractual Discounts (and
    related Net Patient Service Revenue)

The Company derives a significant portion of its
net patient service revenue from Medicare, Medicaid and other
payors that receive discounts from its standard charges,
requiring the Company to estimate an allowance for contractual
discounts. Medicare, Medicaid and other payors that receive
discounts from standard charges represented 76.5% and 73.0% for
the years ended December 31, 2003 and 2002, respectively,
71.0% for the five-months ended December 31, 2001, and
71.0% for the seven-months ended July 31, 2001 (Predecessor
Company), of our total patient days.

F-10



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Revenues are recorded in the period the
healthcare services are provided, based upon the estimated
amounts due from Medicare, Medicaid and other payors. The
Medicare and Medicaid regulations and various managed care
contracts under which these discounts must be calculated are
complex and are subject to interpretation and adjustment. The
Company estimates the allowance for contractual discounts on a
payor-specific basis given its interpretation of the applicable
regulations or contract terms. However, the services authorized
and provided and resulting reimbursements are often subject to
interpretation. These interpretations sometimes result in
payments that differ from the Companys estimates.
Additionally, updated regulations and contract renegotiations
occur frequently necessitating continual review and assessment
of the estimation process by management. Changes in estimates
related to the allowance for contractual discounts affect net
revenues reported in the Companys results of operations
and are recorded in the period the change in estimate occurs.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Allowance for Doubtful Accounts (and related
    Provision for Doubtful Accounts)

The collection of receivables primarily from
Medicare, Medicaid, managed care payers, other third-party
payors and patients is critical to the Companys operating
performance. The Companys primary collection risk that
could result in bad debt relates to the uninsured patient
accounts and patient accounts whereby the primary insurance
carrier has paid the amounts covered by the applicable agreement
but the portion of the amount that is the patients
responsibility (primarily deductibles and co-payments) remains
outstanding. The Company estimates the allowance for doubtful
accounts related to its net patient service revenue based
primarily upon the age of patient accounts receivable, the
patients economic inability to pay and the effectiveness
of historical collection efforts. Typically, the provision for
doubtful accounts and the allowance for doubtful accounts relate
primarily to self-pay amounts due from patients. The Company
routinely monitors its accounts receivable balances and utilizes
historical collection experience to support the basis for its
estimates of the provision for doubtful accounts. Significant
changes in payor mix or business office operations could have a
significant impact on the Companys consolidated results of
operations and cash flows. The allowance for doubtful accounts
was $42.4 million and $25.8 million as of
December 31, 2003 and 2002, respectively.

A summary of activity in the Companys
allowance for doubtful accounts follows (in thousands):

|                                 |                                                                  |           |   |              |  |             |   |              |  |         |   |        |  |  |   |         |   |  |   |        | 
|-------------------------------- | ---------------------------------------------------------------- | --------- | - | ------------ |  | ----------- | - | ------------ |  | ------- | - | ------ |  |  | - | ------- | - |  | - | ------ | 
|                                 |                                                                  |           |   |              |  |             |   | Accounts     |  |        
|                                 |                                                                  |           |   | Provision    |  | Charged to  |   | Written Off, |  |        
|                                 |                                                                  | Beginning |   | for Doubtful |  | Other       |   | Net of       |  | Ending 
|                                 |                                                                  | Balance   |   | Accounts     |  | Accounts(1) |   | Recoveries   |  | Balance
|                                 |                                                                  |           |   |              |  |             |   |              |  |        
|Allowance for doubtful accounts: |                                                                  |           |   |              |  |             |   |              |  |         |   |        |  |  |   |         |   |  |   |       
|                                 | Seven-month period ended July 31, 2001
    (Predecessor Company) |           | $ | 10,059       |  |             | $ | 4,080        |  |         | $ |       |  |  | $ | (7,368  | ) |  | $ | 6,771  | 
|                                
|                                 | Five-month period ended December 31, 2001                        |           |   | 6,771        |  |             |   | 5,488        |  |         |   | 6,986  |  |  |   | (5,522  | ) |  |   | 13,723 | 
|                                 | Year ended December 31, 2002                                     |           |   | 13,723       |  |             |   | 23,677       |  |         |   | 12,146 |  |  |   | (23,737 | ) |  |   | 25,809 | 
|                                 | Year ended December 31, 2003                                     |           |   | 25,809       |  |             |   | 52,749       |  |         |   | 4,106  |  |  |   | (40,226 | ) |  |   | 42,438 | 



---



|    |                                        
|--- | ---------------------------------------
|(1) | Allowances as a result of acquisitions.

The provision for doubtful accounts included in
discontinued operations was $65,000 and $6,000 for the years
ended December 31, 2003 and 2002, respectively, $89,000 for
the five-month period ended December 31, 2001, and $79,000
for the seven-month period ended July 31, 2001 (Predecessor
Company), respectively.

F-11



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                       
| | ----------------------------------------------------------------------
| | Medical Claims Payable (and related Claims and
    Capitation Expense)

Accrued medical claims are estimates of payments
to be made under the health coverage plans of the Lovelace
Health Plan for reported claims and for losses incurred but not
yet reported (IBNR). Management employs standard actuarial
practices to estimate the liability for medical claims payable
and utilizes data developed from historical trends resulting in
a best estimate approach. The estimates include assumptions
related to the effects of payment patterns, benefit changes,
medical trends, seasonality, and other relevant factors such as
catastrophic claims incidence. Other normal actuarial
considerations are also considered in estimating the medical
claims payable. This includes comparisons of current and prior
bed day and admissions data to gauge the change in these metrics
over time, comparing the model results to prior period results,
and the relative change in claims inventory over recent months.

When estimates change, the Company records the
adjustment in claims and capitation in the period the change in
estimate occurs. In addition, the Company accrues administrative
expenses associated with those unpaid health claims that are in
the process of settlement as well as those that have been
incurred but not yet reported. This reserve is based on the
historical relationship between claims processing expenses and
incurred claims.

An analysis is performed and an accrual is
recorded when it is probable that expected future health care
costs and maintenance costs under a group of existing contracts
will exceed anticipated future premiums and insurance recoveries
on those contracts.



| |                                                 
| | ------------------------------------------------
| | Risk Management and Self-Insured
    Liabilities

The Company maintains certain claims-made
commercial insurance related to general and professional risks
and commercial insurance related to workers compensation
risks. The Company provides an accrual for actual claims
reported but not paid and actuarially determined estimates of
claims incurred but not reported.

Effective October 31, 2003, the Company
established a wholly-owned captive insurance subsidiary to
insure the Companys professional and general liability
risk for claims up to $2.0 million subject to a $500,000
deductible per claim. In addition, effective October 31,
2003, the Company purchased excess insurance coverage with
independent third-party carriers for claims totaling up to
$75.0 million per occurrence and in the aggregate. Prior to
October 31, 2003, the Company maintained primary
third-party general and professional liability insurance
policies from a third-party commercial insurance carrier for
losses up to $1.0 million per occurrence with policy limits
of $3.0 million in the aggregate on a claims-made basis.
The coverage included a $500,000 deductible or self insured
retention per occurrence and was supplemented with an umbrella
policy with coverage up to $50.0 million per occurrence and
in the aggregate. The Company also carries workers
compensation insurance with statutory limits and employers
liability policy limits of $1.0 million for each occurrence
from an unrelated commercial insurance carrier of which the
Company is responsible for deductibles of $250,000 per
occurrence.

The liabilities for general, professional and
workers compensation liability risks are based on
actuarially determined estimates. Reserves for professional,
general and workers compensation liability risks represent
the estimated ultimate cost of all reported and unreported
losses incurred through the respective consolidated balance
sheet dates. The reserves are estimated using individual
case-basis valuations and actuarial analyses. As of
December 31, 2003 and 2002, the Companys professional
and general liability accrual for asserted and unasserted claims
was $15.7 million and $4.9 million, respectively, of
which $14.0 million and $3.0 million, respectively,
was included in self insured liabilities and $1.7 million
and $1.9 million, respectively, was included in other
accrued expenses and liabilities in the accompanying
consolidated balance sheets. The Companys total premiums
and retention cost for

F-12



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

professional and general liability insurance were
$27.8 million and $9.7 million for the years ended
December 31, 2003 and 2002, respectively, $2.4 million
for the five-months ended December 31, 2001, and
$1.5 million for the seven-month period ended July 31,
2001 (Predecessor Company), and were included as other operating
expenses in the accompanying consolidated statements of
operations. As of December 31, 2003 and 2002, the
Companys workers compensation liability accrual for
asserted and unasserted claims was $8.0 million and
$6.5 million, respectively, of which $7.5 million and
$5.5 million, respectively, was included in self insured
liabilities and $500,000 and $1.0 million, respectively,
was included in other accrued expenses and liabilities in the
accompanying consolidated balance sheets. The Companys
total premiums and retention cost for workers compensation
liability insurance were $6.6 million and $4.5 million
for the years ended December 31, 2003 and 2002,
respectively, $1.4 million for the five-months ended
December 31, 2001, and $1.5 million for the
seven-month period ended July 31, 2001 (Predecessor
Company), and were included as other operating expenses in the
accompanying consolidated statements of operations.



| |                                     
| | ------------------------------------
| | Goodwill and Other Intangible Assets

Goodwill represents the excess of costs over fair
value of assets of businesses acquired. The Company adopted
Statement of Financial Accounting Standard No. 142
(SFAS No. 142), Goodwill and Other Intangible
Assets, on January 1, 2002. Under
SFAS No. 142, beginning in 2002, goodwill and
intangible assets acquired in a purchase business combination
and determined to have an indefinite useful life are no longer
amortized, but are subject to annual impairment tests. The
Company compares the fair value of the reporting units to their
carrying amounts on at least an annual basis to determine if
there is potential impairment. If the fair value is less than
carrying value, the fair value of the reporting unit is assigned
to its respective assets and liabilities to determine if an
impairment charge is required. Fair value of goodwill is
estimated based upon internal evaluations and through the use of
independent third-party valuation consultants.
SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with
SFAS No. 144, Accounting for Impairment or Disposal
of Long-Lived Assets. No impairment loss was recognized
during the years ended December 31, 2003 and 2002 related
to goodwill and indefinite-lived intangible assets.

Prior to the adoption of SFAS No. 142,
goodwill was amortized on a straight-line basis over the
expected periods to be benefited, generally 30 years, and
assessed for recoverability by determining whether the
amortization of the goodwill balance over its remaining life
could be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill and
other intangible asset impairment, if any, was measured based on
projected discounted future operating cash flows using a
discount rate reflecting the Companys average cost of
funds.



| |                                                
| | -----------------------------------------------
| | Impairment or Disposal of Long-Lived
    Assets

On January 1, 2002, the Company adopted
SFAS No. 144.Prior to
January 1, 2002, the Company recognized impairments of
long-lived assets in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. In accordance with
SFAS No. 144, when events, circumstances or operating
results indicate that the carrying values of certain long-lived
assets and related identifiable intangible assets (excluding
goodwill) that are expected to be held and used, might be
impaired, the Company prepares projections of the undiscounted
future cash flows expected to result from the use of the assets
and their eventual disposition. If the projections indicate that
the recorded amounts are not expected to be recoverable, such
amounts are reduced to estimated fair value. Fair value may be
estimated based upon internal evaluations of each market that
include

F-13



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##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

quantitative analyses of revenues and cash flows,
reviews of recent sales of similar facilities and independent
appraisals.

Long-lived assets to be disposed of are reported
at the lower of their carrying amounts or fair value less costs
to sell or close. The estimates of fair value are usually based
upon recent sales of similar assets and market responses based
upon discussions with and offers received from potential buyers.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash and cash equivalents consist of all highly
liquid investments with maturity of 90 days or less when
purchased.



| |             
| | ------------
| | Market Risks

The Albuquerque, New Mexico market operations,
specifically the Lovelace Sandia Health System, represented
71.1% and 16.4% of the Companys total net revenues for the
years ended December 31, 2003 and 2002, respectively.
Should economic or other factors limit the Companys
ability to provide health care services in this market, the
Companys cash flows and results of operations could be
significantly impacted.



| |                              
| | -----------------------------
| | Concentrations of Credit Risk

The Companys primary concentration of
credit risk is patient accounts receivable, which consists of
amounts owed by various governmental agencies, insurance
companies, and private patients. The Company manages its patient
accounts receivable by regularly reviewing its accounts and
contracts and by providing appropriate allowances for
uncollectible amounts. Medicare and Medicaid programs comprised
17.0% and 9.0% of patient accounts receivable, respectively, at
December 31, 2003; and 22.0% and 16.0% of patient accounts
receivable, respectively, at December 31, 2002. Receivables
from Medicaid include amounts from the various states in which
the Company operates. Remaining receivables relate primarily to
various commercial insurance carriers and managed care programs.
The number of patients and payors limits concentration of credit
risk from other payors.



| |            
| | -----------
| | Inventories

Inventories consist primarily of hospital
supplies and pharmaceuticals and are stated at the lower of cost
(first-in, first-out method) or market.



| |                               
| | ------------------------------
| | Property, Plant, and Equipment

Property, plant, and equipment on hand at
August 1, 2001 were stated based upon the values assigned
in connection with the Ardent Capitalization. Property, plant,
and equipment additions subsequent to the Ardent Capitalization
are stated at cost. Routine maintenance and repairs are charged
to expense as incurred. Expenditures that increase values,
change capacities, or extend useful lives are capitalized.
Depreciation is computed by the straight-line method over the
estimated useful lives of the assets, which approximate five to
forty years for buildings and improvements, one to twenty years
for equipment and three to ten years for leasehold improvements.

F-14



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Property, plant, and equipment consisted of the
following (in thousands):

|                                               |                                     |              |         |         |  |   |         |         | 
|---------------------------------------------- | ----------------------------------- | ------------ | ------- | ------- |  | - | ------- | ------- | 
|                                               |                                     |             
|                                               |                                     | December 31,
|                                               |                                     |             
|                                               |                                     | 2003         |         | 2002   
|                                               |                                     |              |         |        
|Land and improvements                          |                                     | $            | 31,211  |         |  | $ | 20,813  |        
|Buildings and improvements                     |                                     |              | 193,639 |         |  |   | 116,450 |        
|Equipment                                      |                                     |              | 150,952 |         |  |   | 56,090  |        
|Leasehold improvements                         |                                     |              | 7,596   |         |  |   | 4,372   |        
|Construction in progress                       |                                     |              | 24,279  |         |  |   | 18,534  |        
|                                               |                                     |              |         |         |  |   |         |        
|                                               |                                     |              | 407,677 |         |  |   | 216,259 |        
|Less accumulated depreciation and amortization |                                     |              | (39,103 | )       |  |   | (9,461  | )      
|                                               |                                     |              |         |         |  |   |         |        
|                                               | Property, plant, and equipment, net |              | $       | 368,574 |  |   | $       | 206,798 | 
|                                               |                                     |              |         |         |  |   |         |        

The estimated cost to complete projects
classified as construction in progress is $16.7 million and
is expected to be expended during fiscal 2004.



| |             
| | ------------
| | Other Assets



| |                         
| | ------------------------
| | Deferred Financing Costs

Financing costs are deferred and amortized over
the life of the related debt using the effective interest
method. Deferred financing costs were $12.0 million and
$348,000 at December 31, 2003 and 2002, and were included
in other assets in the accompanying consolidated balance sheets.
The deferred financing costs were net of accumulated
amortization of $616,000 and $663,000 at December 31, 2003
and 2002, respectively. The Company incurred loan costs of
$17.4 million and $112,000 in the years ended
December 31, 2003 and 2002, respectively, and $128,000 in
the seven-month period ended July 31, 2001 (Predecessor
Company), related to its various debt arrangements. Amortization
of financing costs of $6.0 million, $344,000, $186,000 and
$133,000, respectively, is included in interest expense for the
years ended December 31, 2003 and 2002, the five-month
period ended December 31, 2001, and the seven-month period
ended July 31, 2001 (Predecessor Company). During the year
ended December 31, 2003, the Company recognized interest
expense of $3.3 million related to the write-off of
deferred financing costs associated with extinguished debt. See
Note 4.



| |                                    
| | -----------------------------------
| | Restricted Cash and
    Investments

Restricted cash and investments, which are
included as other assets in the accompanying consolidated
balance sheets, related to the Lovelace Health Plan include the
following (in thousands):

|                                          |                                       |              |       |       |  |   |     |     | 
|----------------------------------------- | ------------------------------------- | ------------ | ----- | ----- |  | - | --- | --- | 
|                                          |                                       |             
|                                          |                                       | December 31,
|                                          |                                       |             
|                                          |                                       | 2003         |       | 2002 
|                                          |                                       |              |       |      
|State of New Mexico reserve fund          |                                       | $            | 610   |       |  | $ | 300 |    
|Medicaid Managed Care Salud! reserve fund |                                       |              | 5,146 |       |  |   |    |    
|Bond reserve account                      |                                       |              | 49    |       |  |   |    |    
|                                          |                                       |              |       |       |  |   |     |    
|                                          | Total restricted cash and investments |              | $     | 5,805 |  |   | $   | 300 | 
|                                          |                                       |              |       |       |  |   |     |    

To comply with regulatory requirements, a
U.S. Treasury Note totaling $610,000 and $300,000 at
December 31, 2003 and 2002, respectively, is on deposit
with the Insurance Division of the State of New Mexico.

F-15



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In addition, state laws and regulatory agencies
require Lovelace to maintain restricted liquid asset balances
equal to 3.0% of annual premium revenue during the first year of
the Salud! contract. These balances are required throughout the
term of the contract unless otherwise adjusted by the Human
Services Department of the State of New Mexico. The Company
maintained $5.1 million held in a trust account with the
Wells Fargo Corporate Trust and Escrow Services, representing
the minimum requirement at December 31, 2003.

Lovelace is also required to maintain restricted
liquid asset balances for its 1981 Series A-Healthcare
System Revenue Bonds and its 1983 Series A-Healthcare
System Revenue Bonds. The reserve account was $49,000 at
December 31, 2003.



| |                
| | ---------------
| | Note Receivable

Note receivable at December 31, 2002
consisted of an acquired subordinated note from Health Care
Horizons, Inc. in connection with the St. Joseph
acquisition (Note 2) bearing interest at 7.0% per
annum. The note was recorded at fair market value, upon
acquisition, including a $359,000 premium amortizable over the
remaining life of the note. During 2003, the note was paid in
full and all remaining unamortized premium was recognized as
interest expense in the accompanying consolidated statements of
operations.



| |                            
| | ---------------------------
| | Net Patient Service Revenue

Net patient service revenue is recorded on the
accrual basis in the period in which services are provided. Net
patient service revenue includes amounts estimated by management
to be reimbursable by Medicare, Medicaid, and other payors under
provisions of cost or prospective reimbursement formulas in
effect. Amounts received are generally less than the established
billing rates and the differences (contractual discounts) are
reported as deductions from patient service revenue at the time
the service is rendered. The effects of other arrangements for
providing services at less than established rates are also
reported as deductions from patient service revenue.

The Companys facilities provide charity
care to patients who are financially unable to pay for the
health care services they receive. Because the Company does not
pursue collection of amounts determined to qualify as charity
care, they are not reported in net patient service revenue.

Settlements under cost reimbursement agreements
with third-party payors are estimated and recorded in the period
in which the related services are rendered and are adjusted in
future periods as final settlements are determined. Final
determination of amounts earned under the Medicare and Medicaid
and other third-party payor programs often occur in subsequent
years because of audits by the programs, rights of appeal, and
the application of numerous technical provisions. Settlements
are considered in the recognition of net patient service revenue
on an estimated basis in the period the related services are
rendered, and such amounts are subsequently adjusted in future
periods as adjustments become known or as years are no longer
subject to such audits, reviews, and investigations. Adjustments
to estimated settlements resulted in increases to net patient
service revenue of $1.7 million and $1.5 million for
the years ended December 31, 2003 and 2002, respectively,
$2.6 million for the five-month period ended
December 31, 2001, and $2.0 million for the
seven-month period ended July 31, 2001.

Final determination of amounts earned under
prospective payment and cost-reimbursement activities is subject
to review by appropriate governmental authorities or their
agents. In the opinion of the Companys management,
adequate provision has been made for any adjustments that may
result from such reviews.

F-16



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                            
| | -------------------------------------------
| | Premium Revenue and Related
    Receivables

Premium revenues for health care services
provided by the Lovelace Health Plan are recognized as revenue
over the period in which enrollees are entitled to medical care.
An allowance is established for retroactive premium adjustments,
as well as for doubtful accounts and other potential charges.
Premiums collected in advance are deferred and recorded as
unearned premiums. Premium receivables and the related allowance
for doubtful accounts and retroactive adjustments are recorded
on an accrual basis to report the receivables at their net
realizable value.

The Lovelace Health Plan has a contract with the
State of New Mexico to provide healthcare services to Medicaid
beneficiaries who select the Lovelace Health Plan as their
provider through a managed care program known as
Salud! Under Salud!, the Lovelace Health Plan
receives a fixed premium per member per month based on medical
condition, age and gender-based criteria. In addition, the
Lovelace Health Plan is a party to a Medicare risk contract,
whereby the Lovelace Health Plan receives a fixed premium per
member per month based on health status, geographic, age and
gender-based criteria. Salud! and Medicare represented 38.6% and
20.4%, respectively, of premium revenue for the year ended
December 31, 2003.

Premiums receivable includes amounts due from one
major employer group representing 28.5% of total premiums
receivable at December 31, 2003. This employer represented
8.9% of our premium revenue for the year ended December 31,
2003.



| |               
| | --------------
| | Other Revenues

Other revenues consist primarily of commercial
laboratory, retail pharmacies within the Companys
hospitals, provider network access and medical management
services through the Companys health plan and behavioral
educational services, which are recognized as services are
provided or sold.



| |                         
| | ------------------------
| | Stock-Based Compensation

SFAS No. 123, Accounting for
Stock-Based Compensation(SFAS No. 123),
encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to continue to account for
employee unit/stock-based compensation using the intrinsic value
method as prescribed in APB Opinion No. 25, Accounting
for Stock Issued to Employees(APB 25), and related
interpretations, under which $1.0 million of compensation
cost related to employee unit/stock options was recognized
during the seven-month period ended July 31, 2001, as
further described in Note 8 under the 1993 and 1996 Plans
of the predecessor company.

F-17



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Had the Company determined compensation cost
based on the fair value at the grant date for its stock options
under SFAS No. 123, the Companys net income
would have been changed to the pro forma amounts indicated below
(in thousands):

|                        |                                                                                                                                          |              |       |              |   |              |       |               |   |   |       |      |   |   |        |      |  
|----------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ----- | ------------ | - | ------------ | ----- | ------------- | - | - | ----- | ---- | - | - | ------ | ---- | -
|                        |                                                                                                                                          |              |       |              |   |              |       | Predecessor  
|                        |                                                                                                                                          |              |       |              |   |              |       | Company      
|                        |                                                                                                                                          |              |       |              |   | Five-Month   |       |              
|                        |                                                                                                                                          | Year Ended   |       | Year Ended   |   | Period Ended |       | Seven-Month  
|                        |                                                                                                                                          | December 31, |       | December 31, |   | December 31, |       | Period Ended 
|                        |                                                                                                                                          | 2003         |       | 2002         |   | 2001         |       | July 31, 2001
|                        |                                                                                                                                          |              |       |              |   |              |       |              
|Net income, as reported |                                                                                                                                          | $            | 4,291 |              |   | $            | 5,053 |               |   | $ | 2,716 |      |   | $ | 17,869 |     
|                        | Add unit/stock-based employee compensation
    expense included in reported net earnings, net of tax                                     |              |       |             |   |              |       |              |   |   |       |     |   |   |        | 650  |  
|                        | Deduct total unit/stock-based employee
    compensation expense determined under fair-value based method
    for all rewards, net of tax |              |       | (1,131       | ) |              |       | (400          | ) |   |       | (179 | ) |   |        | (412 | )
|                        |                                                                                                                                          |              |       |              |   |              |       |               |   |   |       |      |   |   |        |     
|Pro forma net income    |                                                                                                                                          | $            | 3,160 |              |   | $            | 4,653 |               |   | $ | 2,537 |      |   | $ | 18,107 |     
|                        |                                                                                                                                          |              |       |              |   |              |       |               |   |   |       |      |   |   |        |     

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

The fair value of each option grant is estimated
on the date of grant using a minimum value option pricing model.
The weighted average assumptions used for grants are as follows:

|                                   |  |              |     |              |  |              |     |               |  |  |      |   |  |  |     |  
|---------------------------------- |  | ------------ | --- | ------------ |  | ------------ | --- | ------------- |  |  | ---- | - |  |  | --- | -
|                                   |  |              |     |              |  |              |     | Predecessor  
|                                   |  |              |     |              |  |              |     | Company      
|                                   |  |              |     |              |  | Five-Month   |     |              
|                                   |  | Year Ended   |     | Year Ended   |  | Period Ended |     | Seven-Month  
|                                   |  | December 31, |     | December 31, |  | December 31, |     | Period Ended 
|                                   |  | 2003         |     | 2002         |  | 2001         |     | July 31, 2001
|                                   |  |              |     |              |  |              |     |              
|Risk-free investment interest rate |  |              | 3.9 | %            |  |              | 3.9 | %             |  |  | 5.2  | % |  |  | 5.2 | %
|Expected life in years             |  |              | 8.8 |              |  |              | 9.3 |               |  |  | 10.0 |   |  |  | 8.3 |  
|Expected dividend yield            |  |              | 0.0 | %            |  |              | 0.0 | %             |  |  | 0.0  | % |  |  | 0.0 | %



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

Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial reporting and tax bases of
assets and liabilities, with the primary differences related to
the allowance for doubtful accounts, accrued liabilities,
depreciation methods and periods and deferred cost amortization
methods. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.



| |                              
| | -----------------------------
| | Interest Rate Swap Agreements

The Company accounts for interest rate swaps in
accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities(SFAS No. 133).
SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and hedging activities and
requires that an entity recognize the fair value of all hedging
arrangements as assets or liabilities in the financial
statements. It also requires the recognition of changes in the
fair value of these derivatives. These market value

F-18



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

adjustments are to be included either in the
income statement or other comprehensive income, depending on the
nature of the hedged transaction.



| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments

The carrying amounts of cash and cash
equivalents, accounts receivable, prepaids, other current
assets, accounts payable and accrued liabilities approximate
fair value because of the short-term nature of these items.
Based on the current market rates offered for debt with similar
risks and debt with similar maturities, the carrying amount of
the Companys notes payable and subordinated debt also
approximates fair value at December 31, 2003 and 2002. The
Companys senior subordinated debt was trading at 109.0% at
December 31, 2003. The Companys note receivable
approximated fair value at December 31, 2002.



| |                  
| | -----------------
| | Reclassifications

Certain reclassifications have been made to prior
period amounts to conform with the current period presentation.
Such reclassifications had no material effect on the financial
position and results of operations as previously reported.



| |                                         
| | ----------------------------------------
| | Recently Issued Accounting
    Standards

In May 2003, the FASB issued Statement of
Financial Standards No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equities(SFAS No. 150).
SFAS No. 150 requires issuers to classify as
liabilities, or assets in some circumstances, three classes of
freestanding financial instruments that embody obligations of
the issuer. Generally, SFAS No. 150 is effective for
financial instruments entered into or modified after
May 31, 2003 and is otherwise effective for interim periods
beginning after June 15, 2003. For mandatorily redeemable
financial instruments, as defined by SFAS No. 150, the
statement is effective for fiscal periods beginning after
December 15, 2003. Prior to the Companys amendment,
the mandatorily redeemable preferred stock would have been
reflected as a liability in the accompanying consolidated
balance sheets effective January 1, 2004. However, in
January 2004, the holders of the mandatorily redeemable
preferred stock voted to delete the mandatory redemption feature
of their units. Therefore, the Company does not expect a change
in the presentation as reflected in the accompanying
consolidated balance sheet at December 31, 2003. In October
2003, the FASB voted to defer for an indefinite period, the
application of the SFAS No. 150 guidance to
noncontrolling interests in limited-life subsidiaries. The FASB
decided to defer this application of SFAS No. 150 to
allow them the opportunity to consider possible implementation
issues that would result from the proposed
SFAS No. 150 guidance regarding measurement and
recognition of noncontrolling interests. The Company will assess
the impact of the FASBs reconsiderations, if any, on the
Companys consolidated financial statements when they are
finalized.

In December 2003, the FASB issued Interpretation
No. 46 (revised December 2003), Consolidation of
Variable Interest Entities(FIN46R). FIN46R replaces
Interpretation No. 46, Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51,
which was issued in January 2003. FIN46R addresses the
consolidation by business enterprises of variable interest
entities as defined within the Interpretation. The Company has
met the definition of a non-public entity provided under FIN46R;
therefore, the Company must immediately apply the provisions of
FIN46R to variable interests in variable interest entities
created after December 31, 2003. The Company must apply the
provisions of FIN46R to all other variable interests in variable
interest entities by January 1, 2005. The application of
FIN46R is not expected to have a material effect on the
Companys consolidated financial statements.

F-19



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                                                      
|-- | -------------------------------------------------------------------------------------
|2. | Acquisitions, Divestitures, Impairments
    and Restructuring Charges and Liabilities



| |             
| | ------------
| | Acquisitions

Acquisitions have been accounted for using the
purchase method of accounting prescribed by
SFAS No. 141, and the results of their respective
operations have been included in the consolidated statements of
operations from the dates of acquisition. The purchase prices of
these transactions were allocated to the assets acquired and
liabilities assumed based upon their respective fair values and
are subject to change during the twelve-month period subsequent
to the acquisition date due to settling amounts related to
purchased working capital and final determination of fair value
estimates.



| |                  
| | -----------------
| | 2003 Acquisitions

Northwestern Institute of
Psychiatry.Effective October 8,
2003, the Company acquired the 146 bed Northwestern Institute of
Psychiatry (renamed Brooke Glen), a private behavioral health
services facility located in Fort Washington, Pennsylvania.
The aggregate purchase price of $7.7 million plus
acquisition costs was paid in cash and funded from the proceeds
of the $225.0 million senior subordinated notes (see
Note 4).

The purchase price was determined as follows (in
thousands):

|                    |  |   |       | 
|------------------- |  | - | ----- | 
|Purchase price paid |  | $ | 7,700 | 
|Acquisition costs   |  |   | 1,012 | 
|                    |  |   |       | 
|                    |  | $ | 8,712 | 
|                    |  |   |       | 

The purchase price for the acquisition was
allocated to the estimated fair value of the net assets acquired
as follows (in thousands):

|                              |  |   |       |  
|----------------------------- |  | - | ----- | -
|Current assets                |  | $ | 115   |  
|Property, plant and equipment |  |   | 8,943 |  
|Current liabilities assumed   |  |   | (346  | )
|                              |  |   |       |  
|                              |  | $ | 8,712 |  
|                              |  |   |       |  

Lovelace Hospital and Health
Plan.Effective January 1, 2003,
the Company acquired Lovelace Hospital and Health Plan
(Lovelace) in Albuquerque, New Mexico from CIGNA Health Plan
(Cigna). Lovelace operates a 201-bed acute care hospital and a
health maintenance organization and provider network. The
aggregate purchase price of $209.4 million plus acquisition
costs was paid in cash and was financed with debt and equity
issued in 2002.

The purchase price was determined as follows (in
thousands):

|                             |  |   |         | 
|---------------------------- |  | - | ------- | 
|Purchase price paid to Cigna |  | $ | 209,350 | 
|Acquisition costs            |  |   | 7,823   | 
|                             |  |   |         | 
|                             |  | $ | 217,173 | 
|                             |  |   |         | 

F-20



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The purchase price for the acquisition was
allocated to the estimated fair value of the net assets acquired
as follows (in thousands):

|                              |  |   |         |  
|----------------------------- |  | - | ------- | -
|Cash                          |  | $ | 22,677  |  
|Accounts receivable           |  |   | 17,113  |  
|Premiums receivable           |  |   | 17,345  |  
|Other current assets          |  |   | 14,858  |  
|Restricted assets             |  |   | 5,468   |  
|Property, plant and equipment |  |   | 104,916 |  
|Goodwill                      |  |   | 62,457  |  
|Other intangible assets       |  |   | 52,000  |  
|Current liabilities assumed   |  |   | (78,762 | )
|Other liabilities assumed     |  |   | (899    | )
|                              |  |   |         |  
|                              |  | $ | 217,173 |  
|                              |  |   |         |  

In conjunction with the acquisition of Lovelace,
certain post-closing items have resulted in a dispute with Cigna
related to a net worth settlement provision. The dispute, when
resolved could result in a reduction to the purchase price. The
Company expects the dispute to be resolved during 2004.



| |                  
| | -----------------
| | 2002 Acquisitions

Samaritan Hospital.Effective January 1, 2002, the Company acquired
substantially all of the assets of Samaritan Hospital
(Samaritan) located in Lexington, Kentucky from HCA Inc. (HCA).

The purchase price was determined as follows (in
thousands):

|                           |  |   |        | 
|-------------------------- |  | - | ------ | 
|Purchase price paid to HCA |  | $ | 21,498 | 
|Acquisition costs          |  |   | 872    | 
|                           |  |   |        | 
|                           |  | $ | 22,370 | 
|                           |  |   |        | 

The purchase price for the acquisition of
Samaritan was allocated to the estimated fair value of the net
assets acquired as follows (in thousands):

|                               |  |   |        |  
|------------------------------ |  | - | ------ | -
|Cash                           |  | $ | 9      |  
|Accounts receivable            |  |   | 7,315  |  
|Other current assets           |  |   | 2,479  |  
|Property, plant, and equipment |  |   | 15,328 |  
|Current liabilities assumed    |  |   | (2,761 | )
|                               |  |   |        |  
|                               |  | $ | 22,370 |  
|                               |  |   |        |  

Cumberland Hospital.Effective June 1, 2002, the Company acquired certain assets
and liabilities of Cumberland Hospital located in New Kent,
Virginia from The Brown Schools.

The purchase price was determined as follows (in
thousands):

|                                    |  |   |        | 
|----------------------------------- |  | - | ------ | 
|Purchase price paid to Brown School |  | $ | 14,640 | 
|Acquisition costs                   |  |   | 333    | 
|                                    |  |   |        | 
|                                    |  | $ | 14,973 | 
|                                    |  |   |        | 

F-21



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The purchase price for the acquisition of
Cumberland was allocated to the estimated fair value of the net
assets acquired as follows (in thousands):

|                               |  |   |        |  
|------------------------------ |  | - | ------ | -
|Cash                           |  | $ | 2      |  
|Other current assets           |  |   | 129    |  
|Property, plant, and equipment |  |   | 6,134  |  
|Goodwill                       |  |   | 9,233  |  
|Other assets                   |  |   | 9      |  
|Current liabilities assumed    |  |   | (534   | )
|                               |  |   |        |  
|                               |  | $ | 14,973 |  
|                               |  |   |        |  

St. Joseph Healthcare
System.Effective September 1,
2002, the Company acquired substantially all of the assets and
certain affiliated entities of St. Joseph Healthcare System (St.
Joseph), a subsidiary of Catholic Health Initiatives (CHI),
located in Albuquerque, New Mexico. This acquisition also
included all stock, partnership, membership and other ownership
or investment interests and rights in the St. Joseph Healthcare
PSO, Inc. (PSO), as well as the stock of S.E.D.
Laboratories (SED Lab).

The purchase price was determined as follows (in
thousands):

|                           |  |   |         | 
|-------------------------- |  | - | ------- | 
|Purchase price paid to CHI |  | $ | 97,238  | 
|Acquisition costs          |  |   | 5,891   | 
|                           |  |   |         | 
|                           |  | $ | 103,129 | 
|                           |  |   |         | 

The purchase price for the acquisition of
St. Joseph and the related assets previously noted was
allocated to the estimated fair value of the net assets acquired
as follows (in thousands):

|                               |  |   |         |  
|------------------------------ |  | - | ------- | -
|Cash                           |  | $ | 10,009  |  
|Accounts receivable            |  |   | 29,436  |  
|Other current assets           |  |   | 10,114  |  
|Goodwill                       |  |   | 1,712   |  
|Other assets                   |  |   | 7,995   |  
|Property, plant, and equipment |  |   | 68,878  |  
|Current liabilities assumed    |  |   | (24,673 | )
|Other liabilities assumed      |  |   | (342    | )
|                               |  |   |         |  
|                               |  | $ | 103,129 |  
|                               |  |   |         |  



| |                 
| | ----------------
| | 2001 Acquisition

Summit Hospital.Effective August 1, 2001, the Company acquired
substantially all of the assets of Summit Hospital (Summit)
located in Baton Rouge, Louisiana, from Triad
Hospitals, Inc. (Triad).

The purchase price was determined as follows (in
thousands):

|                             |  |   |        | 
|---------------------------- |  | - | ------ | 
|Purchase price paid to Triad |  | $ | 19,000 | 
|Acquisition costs            |  |   | 200    | 
|                             |  |   |        | 
|                             |  | $ | 19,200 | 
|                             |  |   |        | 

F-22



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The purchase price for the acquisition of Summit
was allocated to the estimated fair value of the net assets
acquired as follows (in thousands):

|                               |  |   |        |  
|------------------------------ |  | - | ------ | -
|Accounts receivable            |  | $ | 2,158  |  
|Other current assets           |  |   | 1,989  |  
|Property, plant, and equipment |  |   | 16,965 |  
|Current liabilities assumed    |  |   | (1,912 | )
|                               |  |   |        |  
|                               |  | $ | 19,200 |  
|                               |  |   |        |  



| |                        
| | -----------------------
| | Acquisition Commitments

In conjunction with the acquisitions of Lovelace
and St. Joseph, the Company has committed to the previous owners
to invest $80.0 million in capital expenditures in the
Albuquerque market. Through December 31, 2003, the Company
had invested $51.5 million.



| |                             
| | ----------------------------
| | Divestitures and Impairments

The Company completed significant portions of its
restructuring plans during 2002 and 2001 in part through the
divestiture of underperforming or nonstrategic behavioral
hospitals which were previously identified as not compatible
with the Companys operating plans based upon
managements review of all hospitals and giving
consideration to expected market conditions. In 2002, certain
divestiture activities and assets held for sale qualified for
discontinued operations reporting under SFAS No. 144.



| |                             
| | ----------------------------
| | Year Ended December 31, 2003

For the year ended December 31, 2003, the
Company recognized a net pre-tax loss of $61,000 resulting from
the sale of two hospitals, which were previously identified for
sale under SFAS No. 121 and the donation of a medical
office building; a pre-tax gain of $782,000 on the sale of one
hospital which was identified for sale under
SFAS No. 144; and a pre-tax gain of $250,000 on the
recoveries of fully reserved items related to a facility
identified for sale under SFAS No. 144 and sold in a
previous period.

The Company recognized an impairment charge of
$2.9 million upon entering into a $6.5 million
fifteen-year financing agreement in connection with two medical
office buildings in Baton Rogue, Louisiana. Refer to
Note 12 for further detail regarding the financing
agreement.

The Company received net cash proceeds of
$12.5 million on the divestitures, recoveries and financing
arrangement.



| |                             
| | ----------------------------
| | Year Ended December 31, 2002

For the year ended December 31, 2002 the
Company recognized a net pre-tax gain of $900,000 on the sale of
two hospitals, which were previously identified for sale under
SFAS No. 121; a pre-tax gain of $2.3 million on
the sale of one hospital, which was identified for sale under
SFAS No. 144; and a net pre-tax gain of $306,000 on
the net working capital settlement of a hospital sold in the
seven-month period ended July 31, 2001. The Company
received net cash proceeds of $9.4 million on the
divestitures and working capital settlement.

The Company recognized impairment charges of
$203,000 based on revised estimates of selling prices related to
facilities identified for sale in 2001.

F-23



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                              
| | ---------------------------------------------
| | Five-Month Period Ended December 31,
    2001

For the five-month period ended December 31,
2001, the Company recognized a net pre-tax gain of $109,000 on
the sale of two hospitals, which were previously identified for
divestiture in fiscal 1999. The Company received net cash
proceeds of $1.7 million and a note in the amount of
$964,000. The note was paid in full in January 2002.

The Company recorded impairment charges of
$369,000 related to changes in the estimates of fair value of
facilities held for sale.



| |                                           
| | ------------------------------------------
| | Seven-Month Period Ended July 31,
    2001

For the seven-month period ended July 31,
2001, the Predecessor Company recognized a net pre-tax gain of
$9.1 million related to one hospital and three clinics sold
in Puerto Rico (collectively the San Juan Operations) to
Universal Health Services, Inc, for $21.1 million net
cash proceeds which were used to pay down existing indebtedness
in accordance with the 2000 Credit Agreements (Note 4).

Additionally, the Predecessor Company recognized
impairment charges of $303,000 for hospitals identified for sale
in fiscal 1999 and two additional hospitals identified for
divestiture in the seven-month period ended July 31, 2001.
The impairment charges for the seven-month period relate to
revisions to the estimated fair market values of the facilities
held for sale based on purchase offers received.

The reconciliation of the pretax gain on
divestitures, discontinued operations and financing arrangement
is as follows (in thousands):

|                                                          |                                           |                      |        |              |     |              |       |               |       |   |       |        |     |   |        |        |       | 
|--------------------------------------------------------- | ----------------------------------------- | -------------------- | ------ | ------------ | --- | ------------ | ----- | ------------- | ----- | - | ----- | ------ | --- | - | ------ | ------ | ----- | 
|                                                          |                                           |                      |        |              |     |              |       | Predecessor  
|                                                          |                                           |                      |        |              |     |              |       | Company      
|                                                          |                                           |                      |        |              |     | Five-Month   |       |              
|                                                          |                                           | Year Ended           |        | Year Ended   |     | Period Ended |       | Seven-Month  
|                                                          |                                           | December 31,         |        | December 31, |     | December 31, |       | Period Ended 
|                                                          |                                           | 2003                 |        | 2002         |     | 2001         |       | July 31, 2001
|                                                          |                                           |                      |        |              |     |              |       |              
|Proceeds from divestitures, net of selling costs
    paid |                                           | $                    | 12,513 |              |     | $            | 9,390 |               |       | $ | 1,656 |        |     | $ | 21,140 |       
|Selling costs accrued                                     |                                           |                      |       |              |     |              |      |               |       |   |      |        |     |   | (1,623 | )     
|Note receivable                                           |                                           |                      |       |              |     |              |      |               |       |   | 964   |        |     |   |       |       
|Net assets sold:                                          |                                           |                      |        |              |     |              |       |               |       |   |       |        |     |   |        |       
|                                                          | Property, plant, and equipment            |                      |        | (3,768       | )   |              |       | (5,041        | )     |   |       | (2,674 | )   |   |        | (8,103 | )    
|                                                          | Accounts receivable                       |                      |        |             |     |              |       |              |       |   |       |       |     |   |        | (2,806 | )    
|                                                          | Prepaid expenses and other current assets |                      |        | (1,611       | )   |              |       | (315          | )     |   |       | (9     | )   |   |        | (141   | )    
|                                                          | Other long-term assets                    |                      |        |             |     |              |       | (479          | )     |   |       |       |     |   |        | (780   | )    
|                                                          | Accounts payable                          |                      |        |             |     |              |       |              |       |   |       |       |     |   |        | 708    |      
|                                                          | Other liabilities                         |                      |        | (6,163       | )   |              |       |              |       |   |       | 172    |     |   |        | 728    |      
|                                                          |                                           |                      |        |              |     |              |       |               |       |   |       |        |     |   |        |       
|                                                          |                                           | Gain on divestitures |        | $            | 971 |              |       | $             | 3,555 |   |       | $      | 109 |   |        | $      | 9,123 | 
|                                                          |                                           |                      |        |              |     |              |       |               |       |   |       |        |     |   |        |       

F-24



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The major components of the impairment charges
recognized are as follows (in thousands):

|                               |  |              |       |              |  |              |     |               |  |   |     |  |  |   |     | 
|------------------------------ |  | ------------ | ----- | ------------ |  | ------------ | --- | ------------- |  | - | --- |  |  | - | --- | 
|                               |  |              |       |              |  |              |     | Predecessor  
|                               |  |              |       |              |  |              |     | Company      
|                               |  |              |       |              |  | Five-Month   |     |              
|                               |  | Year Ended   |       | Year Ended   |  | Period Ended |     | Seven-Month  
|                               |  | December 31, |       | December 31, |  | December 31, |     | Period Ended 
|                               |  | 2003         |       | 2002         |  | 2001         |     | July 31, 2001
|                               |  |              |       |              |  |              |     |              
|Property, plant, and equipment |  | $            | 2,913 |              |  | $            | 203 |               |  | $ | 19  |  |  | $ | 279 | 
|Other assets, net              |  |              |      |              |  |              |    |               |  |   | 350 |  |  |   | 24  | 
|                               |  |              |       |              |  |              |     |               |  |   |     |  |  |   |     | 
|                               |  | $            | 2,913 |              |  | $            | 203 |               |  | $ | 369 |  |  | $ | 303 | 
|                               |  |              |       |              |  |              |     |               |  |   |     |  |  |   |     | 



| |                                          
| | -----------------------------------------
| | Restructuring Charges and
    Liabilities

The Company initiated restructuring activities
during 2002 and 2001 in part through the divestiture of under
performing or non-strategic mental health hospitals which were
identified as not compatible with the Companys and
Predecessor Companys operating plans based upon both
managements review of all hospitals.



| |                             
| | ----------------------------
| | Year Ended December 31, 2003

For the year ended December 31, 2003, the
Company paid $906,000 in selling and other facility exit costs
related to three hospitals identified for divestiture in prior
periods.



| |                             
| | ----------------------------
| | Year Ended December 31, 2002

For the year ended December 31, 2002 the
Company recognized restructuring and exit cost charges of
$1.1 million comprised of selling and other facility exit
costs related to a hospital identified for divestiture in 2002.
The Company paid $509,000 of such costs during the year ended
December 31, 2002. The Company also reversed charges of
$125,000 based upon revised selling and exit costs of facilities
identified for divestiture in prior periods.



| |                                              
| | ---------------------------------------------
| | Five-Month Period Ended December 31,
    2001

For the five-month period ended December 31,
2001, the Company recognized restructuring and exit cost charges
of $1.1 million on two hospitals identified for divestiture
in the seven-month period ended July 31, 2001 and one
hospital identified for divestiture in the five-month period
ended December 31, 2001. These restructuring and exit cost
charges represent severance costs, lease cancellation and other
facility exit costs. The severance costs related to 50
employees. The Company paid $638,000 during the five-month
period ended December 31, 2001 related to the severance,
lease cancellation fees, and other exit costs on three
hospitals. Additionally, $50,000 of lease cancellation fees were
reversed related to a hospital identified for divestiture in the
prior period.



| |                                           
| | ------------------------------------------
| | Seven-Month Period Ended July 31,
    2001

For the seven-month period ended July 31,
2001, the Predecessor Company recognized restructuring and exit
cost charges of $492,000 related to severance costs, lease
cancellation costs, and other exit costs on two hospitals
identified for divestiture in the period. The severance costs
related to 116 employees. The Company also reversed $235,000
related to revised estimates of exit costs on three hospitals
identified for divestiture in prior periods.

F-25



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the restructuring
and exit costs accruals (classified as other current
liabilities) and payment activity for the following periods (in
thousands):

|                                                       |                                                          |             |     |                 |   |       |       |       |   |   |       |       |  
|------------------------------------------------------ | -------------------------------------------------------- | ----------- | --- | --------------- | - | ----- | ----- | ----- | - | - | ----- | ----- | -
|                                                       |                                                          |             |     | Facility, Lease |   |      
|                                                       |                                                          | Severance   |     | Termination     |   |      
|                                                       |                                                          | and Related |     | and Other       |   |      
|                                                       |                                                          | Costs       |     | Exit Costs      |   | Total
|                                                       |                                                          |             |     |                 |   |      
|Balance at December 31, 2000 (Predecessor
    Company) |                                                          | $           |    |                 |   | $     | 495   |       |   | $ | 495   |      
|                                                       | Charges                                                  |             |     | 255             |   |       |       | 237   |   |   |       | 492   |  
|                                                       | Changes in estimates related to prior period
    charges |             |     |                |   |       |       | (235  | ) |   |       | (235  | )
|                                                       |                                                          |             |     |                 |   |       |       |       |   |   |       |      
|Balance at July 31, 2001 (Predecessor
    Company)     |                                                          |             | 255 |                 |   |       | 497   |       |   |   | 752   |      
|                                                      
|                                                       | Charges                                                  |             |     | 141             |   |       |       | 914   |   |   |       | 1,055 |  
|                                                       | Payments                                                 |             |     | (396            | ) |       |       | (242  | ) |   |       | (638  | )
|                                                       | Changes in estimates related to prior period
    charges |             |     |                |   |       |       | (50   | ) |   |       | (50   | )
|                                                       |                                                          |             |     |                 |   |       |       |       |   |   |       |      
|Balance at December 31, 2001                           |                                                          |             |    |                 |   |       | 1,119 |       |   |   | 1,119 |      
|                                                       | Charges                                                  |             |     |                |   |       |       | 1,075 |   |   |       | 1,075 |  
|                                                       | Payments                                                 |             |     |                |   |       |       | (509  | ) |   |       | (509  | )
|                                                       | Changes in estimates related to prior period
    charges |             |     |                |   |       |       | (125  | ) |   |       | (125  | )
|                                                       |                                                          |             |     |                 |   |       |       |       |   |   |       |      
|Balance at December 31, 2002                           |                                                          |             |    |                 |   |       | 1,560 |       |   |   | 1,560 |      
|                                                       | Payments                                                 |             |     |                |   |       |       | (906  | ) |   |       | (906  | )
|                                                       |                                                          |             |     |                 |   |       |       |       |   |   |       |      
|Balance at December 31, 2003                           |                                                          | $           |    |                 |   | $     | 654   |       |   | $ | 654   |      
|                                                       |                                                          |             |     |                 |   |       |       |       |   |   |       |      



| |                     
| | --------------------
| | Assets Held for Sale

The net assets of the hospitals identified for
divestiture under SFAS No. 121 are included in the
following captions in the accompanying consolidated balance
sheets (in thousands):

|                                       |                                                    |              |   |      |  |   |       |       | 
|-------------------------------------- | -------------------------------------------------- | ------------ | - | ---- |  | - | ----- | ----- | 
|                                       |                                                    |             
|                                       |                                                    | December 31,
|                                       |                                                    |             
|                                       |                                                    | 2003         |   | 2002
|                                       |                                                    |              |   |     
|Accounts receivable                    |                                                    | $            |  |      |  | $ | 395   |      
|Other current assets                   |                                                    |              |  |      |  |   | 156   |      
|Property, plant, and equipment, net    |                                                    |              |  |      |  |   | 2,970 |      
|Other accrued expenses and liabilities |                                                    |              |  |      |  |   | (441  | )    
|                                       |                                                    |              |   |      |  |   |       |      
|                                       | Net assets of hospitals identified for divestiture |              | $ |     |  |   | $     | 3,080 | 
|                                       |                                                    |              |   |      |  |   |       |      

As of December 31, 2002, there were two
hospitals held for sale under SFAS No. 121. These
hospitals were subsequently sold in 2003.

F-26



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following components of the net assets of the
hospitals identified for divestiture under
SFAS No. 144 are included in assets held for sale in
the accompanying consolidated balance sheets (in thousands):

|                                    |                                                |              |   |      |  |   |       |       | 
|----------------------------------- | ---------------------------------------------- | ------------ | - | ---- |  | - | ----- | ----- | 
|                                    |                                                |             
|                                    |                                                | December 31,
|                                    |                                                |             
|                                    |                                                | 2003         |   | 2002
|                                    |                                                |              |   |     
|Other current assets, net           |                                                | $            |  |      |  | $ | 74    |      
|Property, plant, and equipment, net |                                                |              |  |      |  |   | 1,740 |      
|                                    |                                                |              |   |      |  |   |       |      
|                                    | Assets of hospitals identified for divestiture |              | $ |     |  |   | $     | 1,814 | 
|                                    |                                                |              |   |      |  |   |       |      

As of December 31, 2002, there was one
hospital held for sale under SFAS 144. This hospital was
subsequently sold in 2003.



| |                                                
| | -----------------------------------------------
| | Pro Forma Results of Operations
    (Unaudited)

The following unaudited pro forma results of
operations give effect to the operations of the acquisitions and
divestitures as if the respective transactions had occurred as
of the first day of the period immediately preceding the period
of the transaction (in thousands):

|                  |  |              |           |              |  |              |           |               |  |   |         |   |  |   |         | 
|----------------- |  | ------------ | --------- | ------------ |  | ------------ | --------- | ------------- |  | - | ------- | - |  | - | ------- | 
|                  |  |              |           |              |  |              |           | Predecessor  
|                  |  |              |           |              |  |              |           | Company      
|                  |  |              |           |              |  | Five-Month   |           |              
|                  |  | Year Ended   |           | Year Ended   |  | Period Ended |           | Seven-Month  
|                  |  | December 31, |           | December 31, |  | December 31, |           | Period Ended 
|                  |  | 2003         |           | 2002         |  | 2001         |           | July 31, 2001
|                  |  |              |           |              |  |              |           |              
|Revenues          |  | $            | 1,319,845 |              |  | $            | 1,214,186 |               |  | $ | 230,024 |   |  | $ | 319,851 | 
|Net income (loss) |  |              | 3,513     |              |  |              | 4,026     |               |  |   | (184    | ) |  |   | 2,604   | 

The unaudited pro forma results of operations do
not purport to represent what the Companys results of
operations would have been had such transactions occurred at the
beginning of the period presented or to project the
Companys results of operations in any future period.



|   |                                     
|-- | ------------------------------------
|3. | Goodwill and Other Intangible Assets



| |         
| | --------
| | Goodwill

Amortization expense related to goodwill was
$70,000 for the five-month period ended December 31, 2001,
and $247,000 for the seven-month period ended July 31,
2001. The following table reconciles previously reported net
income as if the provisions of SFAS No. 142 were in
effect for the following periods (in thousands):

|                                                  |                     |              |       |              |  |              |       |               |  |   |       |       |  |   |        |        | 
|------------------------------------------------- | ------------------- | ------------ | ----- | ------------ |  | ------------ | ----- | ------------- |  | - | ----- | ----- |  | - | ------ | ------ | 
|                                                  |                     |              |       |              |  |              |       | Predecessor  
|                                                  |                     |              |       |              |  |              |       | Company      
|                                                  |                     |              |       |              |  | Five-Month   |       |              
|                                                  |                     | Year Ended   |       | Year Ended   |  | Period Ended |       | Seven-Month  
|                                                  |                     | December 31, |       | December 31, |  | December 31, |       | Period Ended 
|                                                  |                     | 2003         |       | 2002         |  | 2001         |       | July 31, 2001
|                                                  |                     |              |       |              |  |              |       |              
|Reported net income                               |                     | $            | 4,291 |              |  | $            | 5,053 |               |  | $ | 2,716 |       |  | $ | 17,869 |       
|Add back goodwill amortization, net of tax effect |                     |              |      |              |  |              |      |               |  |   | 43    |       |  |   | 151    |       
|                                                  |                     |              |       |              |  |              |       |               |  |   |       |       |  |   |        |       
|                                                  | Adjusted net income |              | $     | 4,291        |  |              | $     | 5,053         |  |   | $     | 2,759 |  |   | $      | 18,020 | 
|                                                  |                     |              |       |              |  |              |       |               |  |   |       |       |  |   |        |       

The Company completed its transition impairment
tests of goodwill during the second quarter of 2002 and noted no
impairment. The Company also performed its annual impairment
test as of October 1, 2003 and 2002, respectively, and
noted no impairment.

F-27



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the changes in the
carrying amount of goodwill for the following periods (in
thousands):

|                             |  |            |        |            |  |       |        |  |  |   |        | 
|---------------------------- |  | ---------- | ------ | ---------- |  | ----- | ------ |  |  | - | ------ | 
|                             |  |            |        | Behavioral |  |      
|                             |  | Acute Care |        | Care       |  |      
|                             |  | Services   |        | Services   |  | Total
|                             |  |            |        |            |  |      
|Balance at January 1, 2002   |  | $          |       |            |  | $     | 2,127  |  |  | $ | 2,127  | 
|Goodwill acquired            |  |            | 1,712  |            |  |       | 9,233  |  |  |   | 10,945 | 
|                             |  |            |        |            |  |       |        |  |  |   |        | 
|Balance at December 31, 2002 |  |            | 1,712  |            |  |       | 11,360 |  |  |   | 13,072 | 
|Goodwill acquired            |  |            | 62,457 |            |  |       |       |  |  |   | 62,457 | 
|                             |  |            |        |            |  |       |        |  |  |   |        | 
|Balance at December 31, 2003 |  | $          | 64,169 |            |  | $     | 11,360 |  |  | $ | 75,529 | 
|                             |  |            |        |            |  |       |        |  |  |   |        | 



| |                                     
| | ------------------------------------
| | Acquired Other Intangible
    Assets

Other intangible assets acquired in the Lovelace
acquisition are as follows as of December 31, 2003 (in
thousands):

|                               |                        |          |   |              |  |  |   |        |  
|------------------------------ | ---------------------- | -------- | - | ------------ |  |  | - | ------ | -
|                               |                        | Gross    |   |             
|                               |                        | Carrying |   | Accumulated 
|                               |                        | Amount   |   | Amortization
|                               |                        |          |   |             
|Amortized intangible assets:   |                        |          |   |              |  |  |   |       
|                               | Customer relationships |          | $ | 29,500       |  |  | $ | (3,578 | )
|                               | Provider network       |          |   | 1,500        |  |  |   | (133   | )
|Unamortized intangible assets: |                        |          |   |              |  |  |   |       
|                               | Trade name             |          |   | 21,000       |  |  |   |       |  

The Company is amortizing the customer
relationships over eleven weighted average years and its
provider network over thirty weighted average years.
Amortization expense related to customer relationships and
provider networks was $3.6 million and $133,000,
respectively, for the year ended December 31, 2003.
Estimated annual amortization expense of customer relationships
and provider network for each of the next five fiscal years is
as follows (in thousands):

|     |  |               |       |          |  |   |    | 
|---- |  | ------------- | ----- | -------- |  | - | -- | 
|     |  | Customer      |       | Provider
|     |  | Relationships |       | Network 
|     |  |               |       |         
|2004 |  | $             | 4,798 |          |  | $ | 47 | 
|2005 |  |               | 4,798 |          |  |   | 47 | 
|2006 |  |               | 1,529 |          |  |   | 47 | 
|2007 |  |               | 1,529 |          |  |   | 47 | 
|2008 |  |               | 1,529 |          |  |   | 47 | 

F-28



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                     
|-- | ------------------------------------
|4. | Long-Term Debt and Financing Matters

Long-term debt includes the following (in
thousands):

|                                                                                                                                                                                           |                                           |              |         |         |  |   |         |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------- | ------------ | ------- | ------- |  | - | ------- | ------ | 
|                                                                                                                                                                                           |                                           |             
|                                                                                                                                                                                           |                                           | December 31,
|                                                                                                                                                                                           |                                           |             
|                                                                                                                                                                                           |                                           | 2003         |         | 2002   
|                                                                                                                                                                                           |                                           |              |         |        
|Bank facilities (interest on term loan at LIBOR
    plus 2.65% and on revolving line of credit at LIBOR plus 3.75%
    at December 31, 2003 and prime plus 1.25% at
    December 31, 2002) |                                           | $            |        |         |  | $ | 67,203  |       
|Senior subordinated notes (interest at 10.0%)                                                                                                                                              |                                           |              | 225,000 |         |  |   |        |       
|Subordinated debt (interest at 10.2%), net of
    unamortized discount of $4.0 million at December 31,
    2003                                                                            |                                           |              | 31,996  |         |  |   |        |       
|Notes payable                                                                                                                                                                              |                                           |              | 3,157   |         |  |   | 4,845   |       
|Other                                                                                                                                                                                      |                                           |              | 1,290   |         |  |   | 796     |       
|                                                                                                                                                                                           |                                           |              |         |         |  |   |         |       
|                                                                                                                                                                                           | Total long-term debt                      |              |         | 261,443 |  |   |         | 72,844 | 
|Less current installments                                                                                                                                                                  |                                           |              | (2,082  | )       |  |   | (40,901 | )     
|                                                                                                                                                                                           |                                           |              |         |         |  |   |         |       
|                                                                                                                                                                                           | Long-term debt, less current installments |              | $       | 259,361 |  |   | $       | 31,943 | 
|                                                                                                                                                                                           |                                           |              |         |         |  |   |         |       



| |                
| | ---------------
| | Bank Facilities

On December 28, 2000, the Predecessor
Company secured a $28.5 million term loan (the Term Loan)
with Bank One and a revolving line of credit (Line of Credit)
with Heller Healthcare Finance, Inc. (Heller) 
(collectively the 2000 Credit Agreements) for the purpose of
refinancing the 1996 Credit Agreement, as amended. On
December 31, 2001, the Company amended the 2000 Credit
Agreements such that the maturity of the Credit Agreements was
extended to December 31, 2003, and the interest rate was
modified.

The Term Loan was secured by mortgages on eight
of the Companys behavioral hospitals and interest was at
either prime plus 0.75% or LIBOR plus 2.65%, as amended, which
was selected at the discretion of the Company. The Company
elected to use LIBOR plus 2.65%. Interest was payable on the
outstanding principal balance of the Term Loan on the last day
of the selected interest period. The principal of the Term Loan
was to be paid in full on the maturity date. The Company could
prepay the Term Loan in the amount of $50,000 or multiples
thereof prior to the maturity date.

The Line of Credit had a maximum borrowing limit
of $50 million as of December 31, 2002. The
Predecessor Company utilized the proceeds from the sale of
certain operations to pay down existing indebtedness under the
Line of Credit. The Company was limited to a borrowing based on
85% of qualified accounts receivable, as defined. As of
December 31, 2002, $11.3 million was available for
borrowing under the Line of Credit. The Line of Credit bore
interest at a rate of prime plus 1.25% and interest was payable
monthly in arrears. Based on the Companys funding of the
Line of Credit through a lock-box arrangement, the outstanding
indebtedness was classified as current in the accompanying
consolidated balance sheet at December 31, 2002.

The 2000 Credit Agreements were collateralized by
the assignment of all rights, title, and interest in all
equipment, fixtures, real property, inventory, and common stock
of the Company and its subsidiaries excluding those facilities
identified for divestiture by the Company as part of the
restructuring process (Note 2).

F-29



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Term Loan and Line of Credit contained
various financial covenants that included requirements for the
Company to maintain a minimum fixed charge coverage ratio,
minimum tangible net worth, and a maximum leverage ratio.

On January 15, 2003, the Company replaced
the existing Term Loan with a $112.5 million Senior Secured
Credit Facility (2003 Credit Agreement) with Bank One, Bank of
America, and UBS Warburg, LLC. Each lender contributed
$37.5 million and obtained a security pledge from the
Company of all assets which included: a unit pledge, all present
and future assets of the Company and guarantors and a second
lien on accounts receivable currently pledged to GE Healthcare
Financial Services (formerly Heller). The 2003 Credit Agreement
incurred interest at LIBOR plus 450 basis points or prime
plus 350 basis points and matured on April 30, 2004.
Interest was payable on the outstanding principal balance on the
last day of the selected interest period. The principal amount
of the 2003 Credit Agreement was to be paid in full on the
maturity date.

On May 6, 2003, the Company amended the 2003
Credit Agreement replacing the Line of Credit with a
$50.0 million revolving line of credit with Bank One, Bank
of America, UBS Warburg, LLC and GE Healthcare Financial
Services. The amended 2003 Credit Agreement contained financial
covenants, which included requirements for the Company to
maintain certain leverage, interest coverage ratios, and EBITDA
amounts.

On August 19, 2003, the Company replaced the
2003 Credit Agreement with a new senior secured credit facility
(August 2003 Credit Agreement) with a syndicate of banks and
other institutional lenders. The August 2003 Credit Agreement
consists of a $125.0 million revolving line of credit,
subject to a borrowing base, including a swing-line loan of
$10.0 million, a $25.0 million sublimit for the
issuance of letters of credit, and an incremental term loan
under which the Company may request term loans of up to
$200.0 million. The revolving line of credit bears interest
initially at LIBOR plus 3.75% or prime plus 2.75%. Interest on
the revolving line of credit is payable on the outstanding
principal balance on the last day of the selected interest
period. The principal amount of the revolving line of credit is
to be paid in full on the maturity date (5 years on the
revolving credit facility and as mutually agreed upon for the
term loans, when requested). The payment of interest and
principal for the term loans are subject to scheduled
amortization as agreed upon by the Company and the lenders. The
Company pays a commitment fee ranging from 0.5% to 0.75% of the
average daily amount of availability under the revolving credit
facility and other fees based on the applicable LIBOR margin on
outstanding standby letters of credit. The August 2003 Credit
Agreement contains various financial covenants including
requirements for the Company to maintain a minimum interest
coverage ratio, a total leverage ratio, a senior leverage ratio,
a minimum net worth of the HMO subsidiaries, a capital
expenditures maximum and for 2003, a minimum EBITDA, as defined.
The August 2003 Credit Agreement also restricts certain
activities of the Company including its ability to incur
additional debt, declare dividends, repurchase stock, engage in
mergers, acquisitions and sell assets. The August 2003 Credit
Agreement is guaranteed by the Company and its material current
and future subsidiaries, other than Lovelace Sandia Health
System, Inc. and our wholly-owned captive insurance
subsidiary, and is secured by substantially all of the
Companys existing and future property and assets and the
capital stock of all of the Companys subsidiaries.

In connection with the merger of the
Companys New Mexico subsidiaries on October 1, 2003,
Lovelace Sandia Health System, Inc. (the surviving entity)
issued a $70.0 million intercompany note to Ardent Health
Services, Inc. Interest accrues at a rate equal to the
greater of (i) the Companys base rate plus 4.0% or
(ii) 6.0%. Interest is payable on demand. Principal is
payable on the later of November 19, 2008 or 30 days
after the maturity date of the Companys incremental term
loan, if any. The Company is required to maintain a pledge of
the intercompany note in favor of the lenders of the
Companys August 2003 Credit Agreement and the holders of
the $225.0 million senior subordinated notes.

F-30



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Effective December 31, 2003, the Company
amended the August 2003 Credit Agreement. The amendment related
to increasing the maximum capital expenditures covenant for 2003.



| |                                            
| | -------------------------------------------
| | $36.0 Million Senior Subordinated
    Notes

On January 15, 2003, the Company issued
$36.0 million principal amount of 10.0% senior
subordinated notes due 2009 to an affiliate of the controlling
unit holder. On August 19, 2003, the Company modified
certain terms of the $36.0 million senior subordinated
notes issued in January 2003. Among other things, the Company
extended the maturity date from 2009 to 2014, increased the
interest rate from 10.0% to 10.2% and subordinated the notes to
the August 2003 Credit Agreement and the $225.0 million
senior subordinated notes. The Company issued 1,030,928 common
units for total fair value of $4.6 million in lieu of cash
financing costs. These amounts are recorded as a discount and
are being accreted over the term of the notes. Accretion
included in interest expense for the year ended
December 31, 2003 was $635,000.



| |                                             
| | --------------------------------------------
| | $225.0 Million Senior Subordinated
    Notes

On August 19, 2003, the Company received
$225.0 million through the issuance of 10.0% senior
subordinated notes due on August 15, 2013. On March 1,
2004, the Company exchanged all of its outstanding
10.0% senior subordinated notes due August 15, 2013,
for 10.0% senior subordinated exchange notes due
August 15, 2013, that have been registered under the
Securities Act. Terms and conditions of the exchange offer were
as set forth in the registration statement on Form S-1
filed with the SEC that became effective on January 28,
2004. Interest on the senior subordinated notes is payable
semi-annually on February 15 and August 15. The
Company may redeem the senior subordinated notes, in whole or in
part, at any time before August 15, 2008, at the principal
amount plus a premium and accrued and unpaid interest. The
Company may redeem the senior subordinated notes after
August 15, 2008, at redemption prices ranging from 105.0%
to 100.0%, plus accrued and unpaid interest. Additionally, at
any time prior to August 15, 2006, the Company may redeem
up to 35.0% of the principal amount of the senior subordinated
notes with the net cash proceeds of one or more sales of its
capital stock at a redemption price of 110.0% plus accrued and
unpaid interest to the redemption date; provided that at least
65.0% of the aggregate principal amount of the senior
subordinated notes originally issued on August 19, 2003
remains outstanding after each such redemption and the
redemption occurs within 90 days of the date of closing of
the equity offering.

Payment of the principal and interest of the
senior subordinated notes is subordinate to amounts owed for
existing and future senior indebtedness of the Company. The
senior subordinated notes are guaranteed, fully and
unconditionally, jointly and severally, on an unsecured senior
subordinated basis by all of the Companys material
subsidiaries (the Subsidiary Guarantors), other than Lovelace
Sandia Health System, Inc. and our wholly-owned captive
insurance subsidiary. The Company is subject to certain
restrictive covenants under the Indenture governing the senior
subordinated notes. The Company used the proceeds from the
offering to repay all amounts outstanding under its 2003 Credit
Agreement.



| |              
| | -------------
| | Notes Payable

In 2002, the Company entered into two notes
payable arrangements (Notes Payable) for the purpose of
financing certain hardware, software and implementation costs
pertaining to the upgrade of the Companys information
systems. The Notes Payable are secured by the assets placed in
service. The Notes Payable bear interest at 6.5% and 7.2% and
have monthly scheduled principal and interest payments through
maturity in 2005.

F-31



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                  
| | -----------------
| | Letters of Credit

The Company has $7.1 million and
$7.8 million outstanding in letters of credit at
December 31, 2003 and 2002, respectively. The letters of
credit are outstanding for insurer requirements and were secured
by the collateral of the bank facilities.



| |                              
| | -----------------------------
| | Interest Rate Swap Agreements

In September 2003, the Company entered into four
interest rate swap agreements with financial institutions which
converted a notional amount of $80.0 million of the
$225.0 million fixed-rate borrowings under the
10.0% senior subordinated notes to floating-rate
borrowings. The swap agreements mature in $40.0 million
increments on August 15, 2006 and August 15, 2008. The
floating interest rate is based on six-month LIBOR plus a margin
and is determined for the six-month period in arrears on
semi-annual settlement dates of February 15 and
August 15. At December 31, 2003, the weighted average
floating rate was 7.64%.

As the interest rate swap agreements do not
qualify for hedge accounting under the provisions of
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, changes in the fair value of its
interest rate hedging arrangements are recognized each period in
earnings. The fair value of the swap obligations was $558,000 at
December 31, 2003.



| |                    
| | -------------------
| | Future Installments

Future installments of long-term debt at
December 31, 2003 are as follows (in thousands):

|           |                                                               |   |         |         | 
|---------- | ------------------------------------------------------------- | - | ------- | ------- | 
|2004       |                                                               | $ | 2,082   |        
|2005       |                                                               |   | 1,806   |        
|2006       |                                                               |   | 141     |        
|2007       |                                                               |   | 114     |        
|2008       |                                                               |   | 19      |        
|Thereafter |                                                               |   | 261,285 |        
|           |                                                               |   |         |        
|           | Total (excludes the $4.0 million of
    unamortized discount) |   | $       | 265,447 | 
|           |                                                               |   |         |        

F-32



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |             
|-- | ------------
|5. | Income Taxes

Significant components of the Companys
deferred tax assets are as follows (in thousands):

|                     |                                             |                           |   |        |        |  |   |        |        | 
|-------------------- | ------------------------------------------- | ------------------------- | - | ------ | ------ |  | - | ------ | ------ | 
|                     |                                             |                          
|                     |                                             | December 31,             
|                     |                                             |                          
|                     |                                             | 2003                      |   | 2002  
|                     |                                             |                           |   |       
|Deferred tax assets: |                                             |                           |   |        |        |  |   |       
|                     | Patient accounts receivable, net            |                           | $ | 13,033 |        |  | $ | 9,170  |       
|                     | Accrued liabilities                         |                           |   | 14,060 |        |  |   | 7,373  |       
|                     | Depreciation                                |                           |   | 3,065  |        |  |   | 9,448  |       
|                     | Amortization                                |                           |   | 943    |        |  |   | 3,949  |       
|                     | Federal net operating loss carry forward    |                           |   | 3,420  |        |  |   | 3,722  |       
|                     | State net operating loss carryforward       |                           |   | 4,716  |        |  |   | 5,552  |       
|                     |                                             |                           |   |        |        |  |   |       
|                     |                                             | Total deferred tax assets |   |        | 39,237 |  |   |        | 39,214 | 
|                     | Valuation allowance for deferred tax assets |                           |   | (5,763 | )      |  |   | (6,369 | )     
|                     |                                             |                           |   |        |        |  |   |       
|                     |                                             | Net deferred tax assets   |   | $      | 33,474 |  |   | $      | 32,845 | 
|                     |                                             |                           |   |        |        |  |   |       

As discussed in Note 1, in connection with
the Ardent Capitalization, the Company recorded
$16.9 million of noncurrent deferred tax assets based on
the income tax and financial reporting basis differences created
in the Ardent Capitalization.

The net deferred tax assets are presented in the
accompanying consolidated balance sheets under the following
captions (in thousands):

|                              |                        |              |        |        |  |   |        |        | 
|----------------------------- | ---------------------- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                              |                        |             
|                              |                        | December 31,
|                              |                        |             
|                              |                        | 2003         |        | 2002  
|                              |                        |              |        |       
|Current deferred tax asset    |                        | $            | 27,792 |        |  | $ | 16,910 |       
|Noncurrent deferred tax asset |                        |              | 5,682  |        |  |   | 15,935 |       
|                              |                        |              |        |        |  |   |        |       
|                              | Net deferred tax asset |              | $      | 33,474 |  |   | $      | 32,845 | 
|                              |                        |              |        |        |  |   |        |       

At December 31, 2003, the Company has
federal and state net operating loss carryforwards of
$9.8 million and $90.3 million respectively, for
income tax purposes that expire in 2004 through 2017.

During the years ended December 31, 2003 and
2002, the five-month period ended December 31, 2001 and the
seven-month period ended July 31, 2001, the Company and the
Predecessor Company increased (decreased) the valuation
allowance related to its deferred tax assets by $(606,000),
$348,000, $(161,000) and $(13.0 million), respectively. In
2002, the valuation allowance was increased by $1.8 million
for certain deferred tax assets associated with acquisitions.
Additionally, during the seven-month period ended July 31,
2001, the Predecessor Company reduced the valuation allowance
and goodwill by $418,000 related to certain purchase price
adjustments on prior business combinations in accordance with
SFAS 109, Accounting for Income Taxes.

As of December 31, 2003 and 2002, a
valuation allowance of $5.8 million and $6.4 million,
respectively, has been recognized as an offset to deferred tax
assets related primarily to the realizability of certain net
operating loss carryforwards. In assessing the realizability of
deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income,
and tax planning

F-33



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

strategies in making this assessment. Based upon
the level of historical taxable income and projections for
future taxable income over the periods, which the deferred tax
assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these
deductible differences, net of the existing valuation allowance.
The amount of the deferred tax assets considered realizable,
however, could be reduced in the near term if estimates of
future taxable income during the carryforward period are
reduced. Subsequently recognized tax benefit or expense relating
to the valuation allowance for deferred tax assets will be
reported as an income tax benefit or expense in the consolidated
statement of operations.

For financial reporting purposes, income (loss)
from continuing operations consists of (in thousands):

|                      |               |              |       |              |  |              |       |               |  |   |       |       |  |   |       |       |  
|--------------------- | ------------- | ------------ | ----- | ------------ |  | ------------ | ----- | ------------- |  | - | ----- | ----- |  | - | ----- | ----- | -
|                      |               |              |       |              |  |              |       | Predecessor  
|                      |               |              |       |              |  |              |       | Company      
|                      |               |              |       |              |  | Five-Month   |       |              
|                      |               | Year Ended   |       | Year Ended   |  | Period Ended |       | Seven-Month  
|                      |               | December 31, |       | December 31, |  | December 31, |       | Period Ended 
|                      |               | 2003         |       | 2002         |  | 2001         |       | July 31, 2001
|                      |               |              |       |              |  |              |       |              
|Pretax income (loss): |               |              |       |              |  |              |       |               |  |   |       |       |  |   |       |      
|                      | United States |              | $     | 6,017        |  |              | $     | 7,033         |  |   | $     | 4,258 |  |   | $     | (771  | )
|                      | Foreign       |              |       |             |  |              |       |              |  |   |       | 18    |  |   |       | 9,225 |  
|                      |               |              |       |              |  |              |       |               |  |   |       |       |  |   |       |      
|                      |               | $            | 6,017 |              |  | $            | 7,033 |               |  | $ | 4,276 |       |  | $ | 8,454 |      
|                      |               |              |       |              |  |              |       |               |  |   |       |       |  |   |       |      

Significant components of the provision (benefit)
for income taxes attributable to continuing operations are as
follows (in thousands):

|          |         |                              |   |              |       |              |   |               |       |  |   |       |       |  |   |        |         |  
|--------- | ------- | ---------------------------- | - | ------------ | ----- | ------------ | - | ------------- | ----- |  | - | ----- | ----- |  | - | ------ | ------- | -
|          |         |                              |   |              |       |              |   | Predecessor  
|          |         |                              |   |              |       |              |   | Company      
|          |         |                              |   |              |       | Five-Month   |   |              
|          |         | Year Ended                   |   | Year Ended   |       | Period Ended |   | Seven-Month  
|          |         | December 31,                 |   | December 31, |       | December 31, |   | Period Ended 
|          |         | 2003                         |   | 2002         |       | 2001         |   | July 31, 2001
|          |         |                              |   |              |       |              |   |              
|Current:  |         |                              |   |              |       |              |   |               |       |  |   |       |       |  |   |       
|          | Federal |                              | $ | 2,663        |       |              | $ | 1,458         |       |  | $ | 421   |       |  | $ | 954    |        
|          | Foreign |                              |   |             |       |              |   |              |       |  |   | 4     |       |  |   | 2,670  |        
|          | State   |                              |   | 278          |       |              |   | 1,033         |       |  |   | 418   |       |  |   | 239    |        
|          |         |                              |   |              |       |              |   |               |       |  |   |       |       |  |   |       
|          |         | Total current                |   |              | 2,941 |              |   |               | 2,491 |  |   |       | 843   |  |   |        | 3,863   |  
|          |         |                              |   |              |       |              |   |               |       |  |   |       |       |  |   |       
|Deferred: |         |                              |   |              |       |              |   |               |       |  |   |       |       |  |   |       
|          | Federal |                              |   | (1,207       | )     |              |   | 796           |       |  |   | 1,074 |       |  |   | (9,511 | )      
|          | Foreign |                              |   |             |       |              |   |              |       |  |   |      |       |  |   | 258    |        
|          | State   |                              |   | 578          |       |              |   | (597          | )     |  |   | (262  | )     |  |   | (2,974 | )      
|          |         |                              |   |              |       |              |   |               |       |  |   |       |       |  |   |       
|          |         | Total deferred               |   |              | (629  | )            |   |               | 199   |  |   |       | 812   |  |   |        | (12,227 | )
|          |         |                              |   |              |       |              |   |               |       |  |   |       |       |  |   |       
|          |         | Income tax expense (benefit) |   | $            | 2,312 |              |   | $             | 2,690 |  |   | $     | 1,655 |  |   | $      | (8,364  | )
|          |         |                              |   |              |       |              |   |               |       |  |   |       |       |  |   |       

F-34



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company and Predecessor Companys
consolidated effective tax rate differed from the amounts
computed by the federal statutory rate to pre-tax income from
continuing operations as set forth below (dollars in thousands):

|                                         |       |                   |       |                   |  |                   |       |                     |   |        |       |         |  |                     |      |         |   |   |       |       |  |  |      |      |   |   |         |        |   |  |        |       |   
|---------------------------------------- | ----- | ----------------- | ----- | ----------------- |  | ----------------- | ----- | ------------------- | - | ------ | ----- | ------- |  | ------------------- | ---- | ------- | - | - | ----- | ----- |  |  | ---- | ---- | - | - | ------- | ------ | - |  | ------ | ----- | --
|                                         |       |                   |       |                   |  |                   |       |                     |   |        |       |         |  |                    
|                                         |       |                   |       |                   |  |                   |       |                     |   |        |       |         |  | Predecessor Company
|                                         |       |                   |       |                   |  |                   |       |                     |   |        |       |        
|                                         |       |                   |       |                   |  | Five-Month        |       |                    
|                                         |       | Year Ended        |       | Year Ended        |  | Period Ended      |       | Seven-Month Period 
|                                         |       | December 31, 2003 |       | December 31, 2002 |  | December 31, 2001 |       | Ended July 31, 2001
|                                         |       |                   |       |                   |  |                   |       |                    
|                                         |       | Amount            |       | Percent           |  | Amount            |       | Percent             |   | Amount |       | Percent |  | Amount              |      | Percent
|                                         |       |                   |       |                   |  |                   |       |                     |   |        |       |         |  |                     |      |        
|Tax at federal statutory rate            |       | $                 | 2,106 |                   |  |                   | 35.0  | %                   |   | $      | 2,392 |         |  |                     | 34.0 | %       |   | $ | 1,454 |       |  |  | 34.0 | %    |   | $ | 2,874   |        |   |  | 34.0   | %    
|States taxes, net of federal benefits    |       |                   | 460   |                   |  |                   | 7.6   |                     |   |        | (86   | )       |  |                     | (1.2 | )       |   |   | 103   |       |  |  | 2.4  |      |   |   | (1,805  | )      |   |  | (21.4  | )    
|Higher (lower) effective foreign taxes   |       |                   |      |                   |  |                   |      |                     |   |        |      |         |  |                     |     |         |   |   | (2    | )     |  |  |     |      |   |   | 1,021   |        |   |  | 12.1   |      
|Change in federal valuation allowance    |       |                   | 42    |                   |  |                   | 0.7   |                     |   |        |      |         |  |                     |     |         |   |   |      |       |  |  |     |      |   |   | (10,430 | )      |   |  | (123.3 | )    
|Expiration of state net operating losses |       |                   | 96    |                   |  |                   | 1.6   |                     |   |        | 374   |         |  |                     | 5.3  |         |   |   |      |       |  |  |     |      |   |   |        |        |   |  |       |      
|Permanent differences                    |       |                   | 312   |                   |  |                   | 5.2   |                     |   |        | 157   |         |  |                     | 2.2  |         |   |   | 122   |       |  |  | 2.9  |      |   |   | 166     |        |   |  | 2.0    |      
|Change in federal tax rate               |       |                   | (743  | )                 |  |                   | (12.3 | )                   |   |        |      |         |  |                     |     |         |   |   |       |       |  |  |      |      |   |   |         |        |   |  |        |      
|Other, net                               |       |                   | 39    |                   |  |                   | 0.6   |                     |   |        | (147  | )       |  |                     | (2.1 | )       |   |   | (22   | )     |  |  | (0.5 | )    |   |   | (190    | )      |   |  | (2.2   | )    
|                                         |       |                   |       |                   |  |                   |       |                     |   |        |       |         |  |                     |      |         |   |   |       |       |  |  |      |      |   |   |         |        |   |  |        |      
|                                         | Total |                   | $     | 2,312             |  |                   |       | 38.4                | % |        | $     | 2,690   |  |                     |      | 38.2    | % |   | $     | 1,655 |  |  |      | 38.8 | % |   | $       | (8,364 | ) |  |        | (98.8 | )%
|                                         |       |                   |       |                   |  |                   |       |                     |   |        |       |         |  |                     |      |         |   |   |       |       |  |  |      |      |   |   |         |        |   |  |        |      



|   |                                                          
|-- | ---------------------------------------------------------
|6. | Redeemable Preferred Member Units and
    Preferred Stock



| |                                      
| | -------------------------------------
| | Redeemable Preferred Member
    Units

As discussed in Note 1, in connection with
the Ardent Capitalization, the Company issued common and
preferred member units in exchange for the outstanding shares of
the Predecessor Company. The Company issued 8,883,396 preferred
units in connection with the Ardent Capitalization.
Additionally, the Company subsequently issued an additional
19,282,117 preferred units through December 31, 2002 at
$3.43 per unit. The Company redeemed 30,158 and 3,714
preferred units in 2003 and 2002, respectively.

The Company is required to redeem all preferred
units upon the occurrence of a triggering event defined as
(i) a business combination whereby unit holders of the
Company owned less than 50.0% of the voting power of all
outstanding equity securities of the surviving or resulting
Company, (ii) sale or other disposition by the Company of
all or substantially all of its assets to an independent third
party, or (iii) an initial equity public offering of the
Company under the Securities Act of at least $50 million.
In January 2004, the preferred units were amended to delete a
mandatory redemption date of September 4, 2011. Therefore,
as discussed in Note 1 under Recently Issued Accounting
Standards, the financial statement presentation in 2004 will
remain consistent with the presentation in the accompanying
consolidated financial statements.

The holders of preferred units are entitled to
receive cumulative preferred dividends on each mandatorily
redeemable preferred unit in an amount equal to the greater of
(i) 8.0% annually of the sum of $3.43 plus the aggregate
amount of any accrued and unpaid preferred dividends and
(ii) the amount of cash actually distributed with respect
to a common member unit during the year. As of December 31,
2003 and 2002, accrued but unpaid dividends on the preferred
units amounted to $15.3 million and $7.2 million,
respectively, and are included in the mandatorily redeemable
preferred units caption in the accompanying consolidated balance
sheets.

F-35



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The holders of preferred units do not have voting
rights, except as required by law. Upon liquidation,
dissolution, or winding up of the Company, holders of preferred
units will be entitled to be paid out of the assets available
for distribution to unit holders before any distribution or
payment is made to any common unit holder. The amount shall be
equal to the sum of $3.43 per unit plus the aggregate
amount of any accrued and unpaid preferred dividends on such
unit through the date of payment.

The Company, at its option, can redeem the
preferred units at any time for a price equal to $3.43 per
unit plus the aggregate amount of any accrued and unpaid
preferred dividends on such units with 30 days notice.

In 2001, the Company incurred issuance costs of
$1.6 million related to units issued in 2001 and units to
be issued under a certain 2001 subscription agreement with the
Controlling Shareholder, as agent. The Company accounts for
issuance costs as reductions from the proceeds of preferred
units. Due to the mandatory redemption nature of the
Companys preferred units, the preferred units are being
accreted to their liquidation value, $3.43, through the date of
the required redemption. The net accretion for the years ended
December 31, 2003 and 2002 and the five-month period ended
December 31, 2001 was $5,000, $46,000 and $36,000,
respectively.



| |                
| | ---------------
| | Preferred Stock

The Predecessor Company issued Series B
Preferred Stock in 1996. The Series B Preferred shares of
the Predecessor Company accrued cumulative dividends equal to
8.0% per annum of the liquidation value of the shares. Such
dividends were cumulative and accrued automatically whether or
not paid by the Predecessor Company. Accumulated accrued
dividends as of December 31, 2000 were $96,000. Holders of
the Series B Preferred Stock were entitled to a preference
in the amount of $6.00 per share of Series B Preferred
Stock, plus any accrued but unpaid dividends on such shares in
the event of the liquidation or dissolution of the Predecessor
Company.

On April 30, 2001, the Predecessor Company
redeemed all Series B Preferred Stock of the Predecessor
Company for $405,000, which included $104,000 of accrued
dividends.



|   |                                             
|-- | --------------------------------------------
|7. | Members Equity and Stockholders
    Equity



| |             
| | ------------
| | Common Units

As of December 31, 2003 and 2002, the
Company had authorized 69,961,407 and 67,727,491 common member
units, respectively. In connection with the Ardent
Capitalization, the Company issued 8,883,396 common member
units, including 55,667 units in connection with the
conversion of Predecessor Company option holders (Note 1).
Subsequent to the Ardent Capitalization, the Company issued an
additional 4,991,073 common member units in connection with the
2001 subscription agreement described above for $3.43 per
unit. The Company repurchased 30,518 and 3,714 common member
units in 2003 and 2002, respectively.

In 2003, the Company issued 1,126,841 common
member units in connection with a private offering for
$4.50 per unit. The Company issued an additional 1,030,928
common member units for $4.50 per unit in connection with
the issuance of the $36.0 million senior subordinated notes
(Note 4).

In 2002, the Company issued 39,313,079 common
member units in connection with the 2001 and 2002 subscription
agreements for $3.43 and $4.50 per unit. In 2003, the
Company issued 1,481,481 common member units in connection with
the 2002 Subscription Agreement for $4.50 per unit.

In 2003, the Company incurred issuance costs of
$206,000 related to the 2002 subscription agreement and a
private offering. In 2002, the Company incurred issuance costs
of $1.8 million related to units issued

F-36



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

in 2002 and units to be issued in 2003. As of
December 31, 2003 and 2002, $629,000 and $596,000,
respectively, of these issuance costs related to future equity
unit issuances were included in other non-current assets in the
accompanying consolidated balance sheets. In 2001, the Company
incurred issuance costs of $1.7 million related to units
issued in 2001 and units to be issued under a certain 2001
subscription agreement with the Controlling Shareholder, as
agent.



| |                                         
| | ----------------------------------------
| | Common Shares of Predecessor
    Company

As of July 31, 2001, the Predecessor Company
had 19,226,829 common shares outstanding. As discussed in
Note 1, in connection with the Ardent Capitalization,
holders of common shares of the Predecessor Company were
entitled to receive either $3.43 per share in cash or
convert their shares into 0.5 common member units and 0.5
preferred member units of the Company. As a result,
19,226,829 shares were converted into 8,827,729 Company
common member units and Predecessor shareholders holding
1,571,371 shares received cash proceeds totaling
$5.4 million.



| |                                                                
| | ---------------------------------------------------------------
| | Series A Convertible Preferred Stock
    of Predecessor Company

The Predecessor Company issued Series A
Convertible Preferred Stock in 1996. The Series A
Convertible Preferred Stock were subject to a $0.48 per
share quarterly dividend at the discretion of the Predecessor
Companys board of directors. Such dividends were not
cumulative and, if not declared by the board of directors for a
particular quarter, did not accrue and were not paid. Holders of
Series A Convertible Preferred Stock were entitled to a
preference in the amount of $6.00 per share in the event of
a dissolution or liquidation of the Predecessor Company (for
which a merger or consolidation would not qualify) after
satisfaction of the obligations of the Series B Preferred
shareholders.

In accordance with the Series B Preferred
Stock terms, each share of Series A Convertible Preferred
Stock automatically converted to one share of the Predecessor
Companys common stock upon (i) the sale or transfer
of the Predecessor Company to a non-affiliate of the
Series A Convertible Preferred shareholders or (ii) at
the shareholders election to the extent the shareholders
would own in the aggregate less than 20.0% of the outstanding
common stock of the Predecessor Company.

Effective May 2001, in connection with the Ardent
Capitalization, holders of Series A Preferred Stock of the
Predecessor Company converted 5,651,368 shares
Series A Preferred Stock to shares of common stock of the
Predecessor Company.



|   |                       
|-- | ----------------------
|8. | Employee Benefit Plans



| |                    
| | -------------------
| | Unit Incentive Plan

On January 30, 2002, the Company amended the
Amended and Restated Ardent Health Services LLC and its
Subsidiaries Option and Restricted Unit Purchase Plan (2002
Plan) to provide a performance incentive and to encourage unit
ownership by officers, directors, consultants, and advisors of
the Company, and to align the interest of such individuals with
those of the Company and its members. The maximum number of
options to be granted under the 2002 Plan at December 31,
2003 is 8,219,708.

In the event of any merger, reorganization,
consolidation, reclassification, stock split, split-up,
combination, or other change in corporate structure affecting
the Common Units, an appropriate substitution would be made in
the maximum number of option units that may be awarded under the
2002 Plan as determined by the Company. Additionally, in the
case of such events, there may be a change in the number and
price of common member units subject to outstanding options
granted under the 2002 Plan as may be determined to be
appropriate by the Company.

F-37



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock option activity during the periods
indicated is as follows:

|                                      |  |           |           |                |  |   |      | 
|------------------------------------- |  | --------- | --------- | -------------- |  | - | ---- | 
|                                      |  |           |           | Weighted      
|                                      |  | Number of |           | Average       
|                                      |  | Options   |           | Exercise Price
|                                      |  |           |           |               
|Balance at August 1, 2001 (inception) |  |           |          |                |  | $ |     | 
|Granted                               |  |           | 2,043,156 |                |  |   | 3.43 | 
|Exercised                             |  |           |          |                |  |   |     | 
|Cancelled                             |  |           | (7,000    | )              |  |   |     | 
|                                      |  |           |           |                |  |   |      | 
|Balance at December 31, 2001          |  |           | 2,036,156 |                |  |   | 3.43 | 
|Granted                               |  |           | 2,178,231 |                |  |   | 4.15 | 
|Exercised                             |  |           | (93,713   | )              |  |   | 3.43 | 
|Cancelled                             |  |           | (46,000   | )              |  |   | 3.43 | 
|                                      |  |           |           |                |  |   |      | 
|Balance at December 31, 2002          |  |           | 4,074,674 |                |  |   | 3.80 | 
|Granted                               |  |           | 2,384,196 |                |  |   | 4.50 | 
|Exercised                             |  |           | (96,139   | )              |  |   | 4.42 | 
|Cancelled                             |  |           | (232,000  | )              |  |   | 3.66 | 
|                                      |  |           |           |                |  |   |      | 
|Balance at December 31, 2003          |  |           | 6,130,731 |                |  | $ | 4.07 | 
|                                      |  |           |           |                |  |   |      | 

At December 31, 2003, the range of exercise
prices and weighted average remaining contractual life of
outstanding options were $3.43  $4.50 and
8.8 years, respectively.

|                                                                      |  |              |           |              |  |              |           |  |  |   |      | 
|--------------------------------------------------------------------- |  | ------------ | --------- | ------------ |  | ------------ | --------- |  |  | - | ---- | 
|                                                                      |  |              |           |              |  | Five-Month  
|                                                                      |  | Year Ended   |           | Year Ended   |  | Period Ended
|                                                                      |  | December 31, |           | December 31, |  | December 31,
|                                                                      |  | 2003         |           | 2002         |  | 2001        
|                                                                      |  |              |           |              |  |             
|Weighted average fair value of options granted
    (per unit)         |  | $            | 1.44      |              |  | $            | 1.37      |  |  | $ | 1.38 | 
|Options exercisable                                                   |  |              | 1,435,342 |              |  |              | 503,861   |  |  |   |     | 
|Weighted average exercise price of options
    exercisable (per unit) |  | $            | 3.70      |              |  | $            | 3.43      |  |  |   |     | 
|Options available for grant                                           |  |              | 1,899,125 |              |  |              | 3,172,163 |  |  |   |     | 

All options granted under the 2002 Plan expire
10 years from the date of grant. Options granted under the
2002 Plan vest ratably 25.0% at the beginning of each year of a
four-year period with the exception of options granted to key
employees, as defined, which vest ratably over either two years
(50% annually) or three years (33% annually). Unit options are
granted with an exercise price equal to the units
estimated fair market value at date of grant. The units
estimated fair market value is estimated based on investments by
outside investors.



| |                                           
| | ------------------------------------------
| | Predecessor Company Stock Option
    Plans

1993 Plan.The 1993
Incentive Stock Plan (1993 Plan), as amended, provided for the
grant of options of the Predecessor Companys common stock
to directors, officers, and other key employees. Under the plan,
the Predecessor Company granted incentive stock options and
nonqualified stock options. Options were exercisable as
determined by the board of directors. Effective May 2001, and in
connection with the Ardent Capitalization, options outstanding
under the 1993 Plan became fully vested. As discussed more fully
below, in 2000, the Predecessor Company re-priced all
outstanding options to $2.55 per share. As a

F-38



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

result, the Predecessor Company recorded
compensation expense of $33,000 in the seven-month period ended
July 31, 2001 related to options outstanding under the 1993
plan.

1996 Plan.In
November 1996, the Predecessor Company established the 1996
Stock Option Plan (1996 Plan) to provide a performance incentive
and to encourage stock ownership by officers, directors,
consultants, and advisors of the Predecessor Company, and to
align the interest of such individuals with those of the
Predecessor Company and its shareholders. The 1996 Plan
effectively superseded the 1993 Plan in that only those options
outstanding under the 1993 Plan as of the date of the adoption
of the 1996 Plan were exercisable.

The 1996 Plan was administered by the board of
directors who retained ultimate authority to determine the
number of options to be granted to certain participants.
Effective May 2001, and in connection with the Ardent
Capitalization, options outstanding under the 1996 Plan became
fully vested. In 2000, the Predecessor Company re-priced all
outstanding options to $2.55 per share. As a result, the
Predecessor Company recorded compensation expense of
$1.0 million in the seven-month period ended July 31,
2001 related to options outstanding under the 1996 Plan.

Information with respect to the 1993 Plan and the
1996 Plan is as follows:

|                                             |           |                                      |           |           |           |   |      |      |      | 
|-------------------------------------------- | --------- | ------------------------------------ | --------- | --------- | --------- | - | ---- | ---- | ---- | 
|                                             |           |                                     
|                                             |           | Predecessor Company                 
|                                             |           |                                     
|                                             |           |                                      |           | Weighted-
|                                             |           |                                      |           | Average  
|                                             |           | July 31,                             |           | Exercise 
|                                             |           | 2001                                 |           | Price    
|                                             |           |                                      |           |          
|1993 Incentive Stock Plan                    |           |                                      |           |           |           |   |      |     
|Options outstanding at beginning of period   |           |                                      | 76,937    |           |           | $ | 2.55 |     
|                                             | Granted   |                                      |           |          |           |   |      |     |     
|                                             | Exercised |                                      |           |          |           |   |      |     |     
|                                             | Cancelled |                                      |           | (39,375   | )         |   |      |     |     
|                                             |           |                                      |           |           |           |   |      |     
|                                             |           | Options outstanding at end of period |           |           | 37,562    |   |      | $    | 2.55 | 
|                                             |           |                                      |           |           |           |   |      |     
|Options available for grant at end of period |           |                                      |          |           |           |   |     |     
|Options exercisable at end of period         |           |                                      | 37,562    |           |           | $ | 2.55 |     
|Option price range at end of period          |           | $                                    | 2.55      |           |           | $ | 2.55 |     
|1996 Incentive Stock Plan                    |           |                                      |           |           |           |   |      |     
|Options outstanding at beginning of period   |           |                                      | 1,661,925 |           |           | $ | 2.55 |     
|                                             | Granted   |                                      |           | 43,500    |           |   |      | 2.55 |     
|                                             | Exercised |                                      |           |          |           |   |      |     |     
|                                             | Cancelled |                                      |           | (73,800   | )         |   |      |     |     
|                                             |           |                                      |           |           |           |   |      |     
|                                             |           | Options outstanding at end of period |           |           | 1,631,625 |   |      | $    | 2.55 | 
|                                             |           |                                      |           |           |           |   |      |     
|Options available for grant at end of period |           |                                      |          |           |           |   |     |     
|Options exercisable at end of period         |           |                                      | 1,631,625 |           |           | $ | 2.55 |     
|Option price range at end of period          |           | $                                    | 2.55      |           |           | $ | 2.55 |     

As discussed above, effective January 26,
2000, the Predecessor Companys board of directors approved
a re-pricing of options granted under either the 1993 Plan or
the 1996 Plan to an exercise price of $2.55 per share.
Prior to the re-pricing, the stock option exercise prices ranged
from $6.25 to $7.00 per share. In accordance with the
requirements of FASB Interpretation No. 44, Accounting
for Certain

F-39



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Transactions Including Stock Compensation(FIN44), which provides guidance on
the application of APB 25, the re-pricing resulted in
variable plan accounting from July 1, 2000, to the date the
options were exercised, forfeited or expired. All options
outstanding under the 1993 Plan and the 1996 Plan became fully
vested as of May 2001 and the Predecessor Company recognized
$1.0 million of compensation expense during the seven-month
period ended July 31, 2001 in accordance with FIN44.



| |                                          
| | -----------------------------------------
| | Predecessor Company Option
    Conversion

In connection with the Ardent Capitalization,
Predecessor Company option holders were given the choice to
either receive cash of $0.88 per option, calculated as the
excess of the $3.43 fair value of the Companys units over
the option exercise price of $2.55, or apply the $0.88 per
option value in the purchase of Company common and preferred
units. As a result, 483,187 options were redeemed towards
exchange for 55,667 common member units and 55,667 preferred
member units of the Company and Predecessor Company option
holders holding 1,186,000 options received cash proceeds
totaling $1.0 million.



| |            
| | -----------
| | 401(k) Plan

The Company maintains a defined contribution
retirement plan, the Ardent Health Services Retirement Savings
Plan, formerly the AHS Management Company, Inc., 401(k)
Plan (the Plan). The Plan covers all employees who have attained
the age of 21 and have completed ten hours of service in a three
month period. The Plan provides for an employer contribution
each year equal to 100.0% of eligible employees pre-tax
contributions not to exceed a maximum of 3.0% of the eligible
employees compensation contributed to the Plan. Retirement
plan expense for the Plan was $2.2 million,
$1.6 million, $295,000 and $208,000 for the years ended
December 31, 2003 and 2002, the five-month period ended
December 31, 2001 and the seven-month period ended
July 31, 2001 (Predecessor Company), respectively.

The Company maintained four Lovelace defined
contribution retirement plans for the majority of 2003; with two
Lovelace plans merging into the Plan effective October 1,
2003 and the remaining two Lovelace plans merging into the Plan
effective January 1, 2004. The Lovelace plans covered
non-physician employees as well as the employed physicians.
Generally, the plans covered full or part-time benefit-eligible
employees who had completed one year of service. Two of the
plans provided for employer matching contributions each year
equal to 100.0% of eligible employees pre-tax
contributions not to exceed a maximum of 4.0% of the eligible
employees compensation contributed to the plans.
Retirement plan expense for the Lovelace plans was
$4.0 million for the year ended December 31, 2003.



| |                     
| | --------------------
| | Employee Health Plan

The Company maintains a self-insured medical and
dental plan for substantially all employees. Self-insured
liabilities are maintained in accordance with an average lag
time and past experience. Claims are accrued under the
Companys various risk management plans as the incidents
that give rise to them occur and the Company includes a
provision for incurred but not reported incidents. Accruals are
based on the estimated ultimate cost of settlement, including
claim settlement expenses. The Company has entered into a
reinsurance agreement with an independent insurance company to
limit its exposure to losses on certain claims. Under the terms
of the agreement, the insurance company will reimburse the
Company for claims exceeding $150,000 up to $1.0 million
per employee. The Company incurred total expenses related to the
self-insured retention of employee health coverage, including
the self-insured retention portion, of $29.9 million,
$13.6 million, $3.2 million and $3.9 million for
the years ended December 31, 2003 and

F-40



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

2002, the five-month period ended
December 31, 2001 and the seven-month period ended
July 31, 2001 (Predecessor Company), respectively.



|   |                                                
|-- | -----------------------------------------------
|9. | Minimum Net Worth and Dividend
    Restrictions

Statutory requirements of the State of New Mexico
require Lovelace to maintain minimum net worth of approximately
8.0% of total medical and hospital expenses, as such net worth
is defined by accounting practices as prescribed or permitted by
the Insurance Division of the New Mexico Public Regulation
Commission. As of December 31, 2003, the preliminary
statutory filing with the State of New Mexico indicated that the
Company was required to maintain a net worth as defined of
$34.8 million and was in compliance with New Mexico
insurance statutes minimum net worth requirement.
Currently, the New Mexico insurance statutes require compliance
with a defined minimum net worth and do not require compliance
with the risk-based capital (RBC) standards
established by the NAIC. The RBC calculation serves as a
benchmark for the regulation of insurance companies and health
maintenance organizations by state insurance regulators. RBC
provides for surplus formulas similar to target surplus formulas
used by commercial rating agencies. The formulas specify various
weighting factors that are applied to financial balances or
various levels of activity based on the perceived degree of risk
and are set forth in the RBC requirements.

Without prior approval of its domiciliary
superintendent, dividends from Lovelace to the Company are
limited by the laws of the State of New Mexico in an amount that
is based on restrictions relating to statutory surplus. Within
the limitations above, there are no restrictions placed on the
portion of Company profits that may be paid as ordinary
dividends to the shareholder. Dividends paid to the Company by
Lovelace during the year ended December 31, 2003 were
$25.0 million.



|    |            
|--- | -----------
|10. | Reinsurance

In the ordinary course of business, the Company
reinsures risks for the purpose of limiting the maximum exposure
on large Medicaid claims. Lovelace has entered into an Agreement
for Reinsurance (the Reinsurance Agreement) with Chubb Executive
Risk Indemnity, Inc. for Lovelaces Medicaid Salud!
members. Under the provisions of the Reinsurance Agreement,
Lovelace pays a monthly premium based on an established rate per
Salud! member. In return for premiums paid, Lovelace is
reimbursed a percentage of costs in excess of a deductible for
hospital and physician services rendered to eligible Salud!
members. Reinsurance does not remove Lovelace from its
obligation in the event that the assuming insurers are unable to
meet their contractual requirements.

Premiums paid to Chubb Executive Risk
Indemnity, Inc. for the year ended December 31, 2003
were $1.9 million and are included in claims and capitation
expense in the accompanying consolidated statement of
operations. Recoveries for covered charges were
$1.4 million for the year ended December 31, 2003 and
are included in claims and capitation expense in the
accompanying consolidated statement of operations.



|    |                    
|--- | -------------------
|11. | Segment Information

The Companys acute care hospitals and
related healthcare businesses are similar in their activities
and the economic environments in which they operate (i.e., urban
and suburban markets). Accordingly, the Companys
reportable operating segments consist of (1) acute care
hospitals and related healthcare businesses, collectively, and
(2) behavioral hospitals. The Other segment
column below includes centralized services including information
services, reimbursement, accounting, taxation, legal,
advertising, design and construction as well as the
Companys wholly-owned insurance subsidiary. Prior to the
Summit acquisition on August 1, 2001, management had
determined that the Company had only one separately

F-41



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##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

reportable segment as defined under Statement of
Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information.

The following is a financial summary by business
segment for the periods indicated (in thousands):

|                                                                 |  |            |           |               |  |       |         |              |  |       |         |   |  |   |        |   |  |   |           |  
|---------------------------------------------------------------- |  | ---------- | --------- | ------------- |  | ----- | ------- | ------------ |  | ----- | ------- | - |  | - | ------ | - |  | - | --------- | -
|                                                                 |  | Acute Care |           | Behavioral    |  |       |         |              |  |      
|                                                                 |  | Services   |           | Care Services |  | Other |         | Eliminations |  | Total
|                                                                 |  |            |           |               |  |       |         |              |  |      
|Year ended December 31, 2003                                     |  |            |           |               |  |       |         |              |  |       |         |   |  |   |        |   |  |   |           |  
|Total net revenues                                               |  | $          | 1,043,504 |               |  | $     | 280,109 |              |  | $     | 3       |   |  | $ | (3,942 | ) |  | $ | 1,319,674 |  
|                                                                
|EBITDA                                                           |  | $          | 57,996    |               |  | $     | 49,904  |              |  | $     | (43,591 | ) |  | $ |       |   |  | $ | 64,309    |  
|Income from discontinued operations                              |  |            |          |               |  |       | 953     |              |  |       |        |   |  |   |       |   |  |   | 953       |  
|Interest                                                         |  |            | 1,647     |               |  |       | 2,326   |              |  |       | 18,182  |   |  |   |       |   |  |   | 22,155    |  
|Change in fair value of interest rate swap                       |  |            |          |               |  |       |        |              |  |       | (558    | ) |  |   |       |   |  |   | (558      | )
|Depreciation and amortization                                    |  |            | 25,194    |               |  |       | 1,996   |              |  |       | 8,552   |   |  |   |       |   |  |   | 35,742    |  
|                                                                 |  |            |           |               |  |       |         |              |  |       |         |   |  |   |        |   |  |   |           |  
|Income (loss) from continuing operations before
    income taxes |  | $          | 31,155    |               |  | $     | 44,629  |              |  | $     | (69,767 | ) |  | $ |       |   |  | $ | 6,017     |  
|                                                                 |  |            |           |               |  |       |         |              |  |       |         |   |  |   |        |   |  |   |           |  
|Segment assets                                                   |  | $          | 548,518   |               |  | $     | 139,780 |              |  | $     | 129,706 |   |  | $ |       |   |  | $ | 818,804   |  
|Goodwill                                                         |  |            | 64,169    |               |  |       | 11,360  |              |  |       |        |   |  |   |       |   |  |   | 75,529    |  
|Other identifiable intangible assets                             |  |            | 48,289    |               |  |       |        |              |  |       |        |   |  |   |       |   |  |   | 48,289    |  
|Capital expenditures                                             |  |            | 60,224    |               |  |       | 6,717   |              |  |       | 20,033  |   |  |   |       |   |  |   | 86,974    |  

|                                                                 |  |            |         |               |  |       |         |              |  |       |         |   |  |   |        |   |  |   |         | 
|---------------------------------------------------------------- |  | ---------- | ------- | ------------- |  | ----- | ------- | ------------ |  | ----- | ------- | - |  | - | ------ | - |  | - | ------- | 
|                                                                 |  | Acute Care |         | Behavioral    |  |       |         |              |  |      
|                                                                 |  | Services   |         | Care Services |  | Other |         | Eliminations |  | Total
|                                                                 |  |            |         |               |  |       |         |              |  |      
|Year ended December 31, 2002:                                    |  |            |         |               |  |       |         |              |  |       |         |   |  |   |        |   |  |   |         | 
|Total net revenues                                               |  | $          | 155,422 |               |  | $     | 253,611 |              |  | $     |        |   |  | $ | (1,049 | ) |  | $ | 407,984 | 
|                                                                
|EBITDA                                                           |  | $          | 2,010   |               |  | $     | 43,753  |              |  | $     | (26,008 | ) |  | $ |       |   |  | $ | 19,755  | 
|Income from discontinued operations                              |  |            |        |               |  |       | 1,042   |              |  |       |        |   |  |   |       |   |  |   | 1,042   | 
|Interest                                                         |  |            | 465     |               |  |       | 2,180   |              |  |       | 106     |   |  |   |       |   |  |   | 2,751   | 
|Depreciation and amortization                                    |  |            | 4,630   |               |  |       | 1,768   |              |  |       | 2,531   |   |  |   |       |   |  |   | 8,929   | 
|                                                                 |  |            |         |               |  |       |         |              |  |       |         |   |  |   |        |   |  |   |         | 
|Income (loss) from continuing operations before
    income taxes |  | $          | (3,085  | )             |  | $     | 38,763  |              |  | $     | (28,645 | ) |  | $ |       |   |  | $ | 7,033   | 
|                                                                 |  |            |         |               |  |       |         |              |  |       |         |   |  |   |        |   |  |   |         | 
|Segment assets                                                   |  | $          | 197,168 |               |  | $     | 127,380 |              |  | $     | 162,760 |   |  | $ |       |   |  | $ | 487,308 | 
|Goodwill                                                         |  |            | 1,712   |               |  |       | 11,360  |              |  |       |        |   |  |   |       |   |  |   | 13,072  | 
|Capital expenditures                                             |  |            | 10,711  |               |  |       | 4,793   |              |  |       | 30,525  |   |  |   |       |   |  |   | 46,029  | 

F-42



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                 |  |            |        |               |  |       |         |              |  |       |        |   |  |   |   |  |  |   |         | 
|---------------------------------------------------------------- |  | ---------- | ------ | ------------- |  | ----- | ------- | ------------ |  | ----- | ------ | - |  | - | - |  |  | - | ------- | 
|                                                                 |  | Acute Care |        | Behavioral    |  |       |         |              |  |      
|                                                                 |  | Services   |        | Care Services |  | Other |         | Eliminations |  | Total
|                                                                 |  |            |        |               |  |       |         |              |  |      
|Five-month period ended December 31,
    2001:                   |  |            |        |               |  |       |         |              |  |       |        |   |  |   |   |  |  |   |         | 
|Total net revenues                                               |  | $          | 13,498 |               |  | $     | 98,235  |              |  | $     | 785    |   |  | $ |  |  |  | $ | 112,518 | 
|                                                                
|EBITDA                                                           |  | $          | (128   | )             |  | $     | 13,391  |              |  | $     | (6,117 | ) |  | $ |  |  |  | $ | 7,146   | 
|Income from discontinued operations                              |  |            |       |               |  |       | 158     |              |  |       |       |   |  |   |  |  |  |   | 158     | 
|Interest                                                         |  |            | 178    |               |  |       | 1,110   |              |  |       |       |   |  |   |  |  |  |   | 1,288   | 
|Depreciation and amortization                                    |  |            | 522    |               |  |       | 680     |              |  |       | 222    |   |  |   |  |  |  |   | 1,424   | 
|                                                                 |  |            |        |               |  |       |         |              |  |       |        |   |  |   |   |  |  |   |         | 
|Income (loss) from continuing operations before
    income taxes |  | $          | (828   | )             |  | $     | 11,443  |              |  | $     | (6,339 | ) |  | $ |  |  |  | $ | 4,276   | 
|                                                                 |  |            |        |               |  |       |         |              |  |       |        |   |  |   |   |  |  |   |         | 
|Segment assets                                                   |  | $          | 24,578 |               |  | $     | 113,527 |              |  | $     | 31,436 |   |  | $ |  |  |  | $ | 169,541 | 
|Goodwill                                                         |  |            |       |               |  |       | 2,127   |              |  |       |       |   |  |   |  |  |  |   | 2,127   | 
|Capital expenditures                                             |  |            | 2,309  |               |  |       | 65      |              |  |       | 4,611  |   |  |   |  |  |  |   | 6,985   | 



|    |                              
|--- | -----------------------------
|12. | Commitments and Contingencies



| |                                           
| | ------------------------------------------
| | Medical Office Building Sale
    Agreement

On December 19, 2003, the Company entered
into a sale agreement for $6.5 million, accounted for as a
financing transaction due to the Companys continued
involvement in connection with two medical office buildings in
Baton Rouge, Louisiana. The financing transaction resulted in
the Company recording an impairment charge of $2.9 million.
The net cash proceeds received from the financing agreement are
presented in the accompanying consolidated balance sheet as
other long-term liabilities. The transaction included the
execution of a Lease Vacancy Agreement (LVA) which
provides that the Company is responsible for future cash outlay
including i) a guaranteed minimum annual net operating
income and ii) minimum annual capital expenditure obligations.
The Company has estimated a 2004 net operating income
shortfall payment to approximate $450,000. The Company is
obligated to make initial capital improvements to the properties
estimated at approximately $480,000 to be incurred during fiscal
2004. Also, the Company is required to provide subsequent annual
capital improvements to the medical office buildings generally
not to exceed $100,000 per year during the fifteen-year LVA
contract period through the year 2018.



| |              
| | -------------
| | Contingencies

The Company is subject to various claims and
lawsuits arising in the normal course of business. In the
opinion of management the ultimate resolution of these matters
will not have a material adverse effect on the Companys
consolidated financial position, results of operations or cash
flows.



| |                                      
| | -------------------------------------
| | Litigation and Regulatory
    Matters

From time to time, claims and suits arise in the
ordinary course of our business. In certain of these actions,
plaintiffs request punitive or other damages against us that may
not be covered by insurance. Except for the matters described
below, we do not believe that we are a party to any proceeding
that, in our opinion, would have a material adverse effect on
our business, financial condition or results of operations.

F-43



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##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Healthcare
Regulations.The healthcare industry
is subject to numerous laws and regulations of federal, state,
and local governments. These laws and regulations include, but
are not necessarily limited to, matters such as licensure,
accreditation, government healthcare program participation
requirements, reimbursement for patient services, and Medicare
and Medicaid fraud and abuse. Government activity has increased
with respect to investigations and allegations concerning
possible violations of fraud and abuse statutes and regulations
by healthcare providers. Violations of these laws and
regulations could result in expulsion from government healthcare
programs together with the imposition of significant fines and
penalties, as well as significant repayments for patient
services previously billed. Management believes that the Company
is in substantial compliance with fraud and abuse as well as
other applicable government laws and regulations in all material
respects. Compliance with such laws and regulations can be
subject to future government review and interpretation as well
as regulatory actions unknown or unasserted at this time.

Healthcare
Legislation.The Health Insurance
Portability and Accountability Act (HIPAA) was enacted
August 21, 1996 to assure health insurance portability,
reduce healthcare fraud and abuse, guarantee security and
privacy of health information and enforce standards for health
information. The Company will be subject to significant fines
and penalties if found to be noncompliant with the provisions
outlined in the regulations. Management continues to evaluate
the impact of this legislation on its operations including
future financial commitments that will be required to comply
with the legislation.

Risk Associated With Liabilities of Acquired
Businesses.The Company has acquired
and plans to continue to acquire businesses with prior operating
histories. Acquired companies may have unknown or contingent
liabilities, including liabilities for failure to comply with
healthcare laws and regulations, such as billing and
reimbursement, fraud, and abuse and similar anti-referral laws.
The Company has from time to time identified certain past
practices of acquired companies that do not conform to its
standards. Although the Company institutes policies designed to
conform such practices to its standards following completion of
acquisitions, there can be no assurance that the Company will
not become liable for past activities that may later be asserted
to be improper by private plaintiffs or government agencies.
Although the Company generally seeks to obtain indemnification
from prospective sellers covering such matters, there can be no
assurance that any such matter will be covered by
indemnification, or if covered, that such indemnification will
be adequate to cover potential losses and fines.



| |                      
| | ---------------------
| | Employment Agreements

Certain members of the Companys management
have entered into employment agreements with the Company. The
agreements provide for minimum salary levels, participation in
bonus plans and amounts payable in connection with severance of
employment from the Company.



| |                 
| | ----------------
| | Operating Leases

The Company leases certain office facilities and
equipment under non-cancelable operating leases that expire at
various dates through 2014. As of December 31, 2003, the
future minimum lease commitments

F-44



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

under these non-cancelable leases (with initial
or remaining lease terms in excess of one year) are as follows
(in thousands):

|           |                       |   |        |        | 
|---------- | --------------------- | - | ------ | ------ | 
|2004       |                       | $ | 12,051 |       
|2005       |                       |   | 11,002 |       
|2006       |                       |   | 8,297  |       
|2007       |                       |   | 4,873  |       
|2008       |                       |   | 3,598  |       
|Thereafter |                       |   | 5,478  |       
|           |                       |   |        |       
|           | Total rental payments |   | $      | 45,299 | 
|           |                       |   |        |       

Total rental expense amounted to
$18.8 million and $7.7 million for the years ended
December 31, 2003 and 2002, respectively, $1.8 million
for the five-month period ended December 31, 2001, and
$2.0 million for the seven-month period ended July 31,
2001 (Predecessor Company).



|    |                           
|--- | --------------------------
|13. | Related Party Transactions

The Company has a professional services
arrangement with WCAS Management Corporation (WCAS Management),
an affiliate of the controlling unit holder. WCAS Management
provides the Company with financial and management consulting
services related to equity financings. For services rendered,
the Company pays WCAS Management a fee equal to 1.0% to 1.5% of
total consideration, whether in cash or in kind, received by the
Company in connection with the completion of such transactions.
For the years ended December 31, 2003 and 2002 and the
five-month period ended December 31, 2001, the Company paid
expenses of $1.8 million, $0 and $2.8 million,
respectively, pursuant to these arrangements, respectively.

The Company uses a private aircraft owned by a
partnership in which the Companys Chief Executive Officer
owns a 25.0% interest. During the years ended December 31,
2003 and 2002, the Company incurred expenses of approximately
$94,000 and $84,000, respectively, for use of the aircraft.



|    |                                                               
|--- | --------------------------------------------------------------
|14. | Financial Information for the Company and Its
    Subsidiaries

The Notes described in Note 4 are fully and
unconditionally guaranteed on a joint and several basis by all
of the Companys material subsidiaries except for entities
comprising Lovelace Sandia Health System, Inc. and RIVID
Insurance Company Ltd., our wholly-owned captive insurance
subsidiary.

The Company conducts substantially all of its
business through its subsidiaries. Presented below is a
condensed consolidating balance sheet as of December 31,
2003, and condensed consolidating statements of operations and
cash flows for the year then ended for the Company and its
subsidiaries. The information segregates the parent company
(Ardent Health Services LLC), the issuer (Ardent Health
Services, Inc.), the combined Subsidiary Guarantors, the
combined Non-Guarantors (the entities comprising Lovelace Sandia
Health System, Inc. and RIVID Insurance Company Ltd.), and
eliminations. The issuer and each of the Subsidiary Guarantors
and Non-Guarantors are 100% owned, directly or indirectly, by
Ardent Health Services, LLC. No combining financial information
has been presented for prior periods, as there were no material
Non-Guarantor Subsidiaries prior to January 1, 2003.

F-45



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE
SHEET

December 31, 2003


|                                                                 |                                                                          |                                         |         |         |         |            |         |            |         |              |         |              |         |  |         |         |         |  |   |            |            |   |         |         |         | 
|---------------------------------------------------------------- | ------------------------------------------------------------------------ | --------------------------------------- | ------- | ------- | ------- | ---------- | ------- | ---------- | ------- | ------------ | ------- | ------------ | ------- |  | ------- | ------- | ------- |  | - | ---------- | ---------- | - | ------- | ------- | ------- | 
|                                                                 |                                                                          |                                         |         |         |         | Subsidiary |         | Non-       |         |              |         | Condensed   
|                                                                 |                                                                          | Parent                                  |         | Issuer  |         | Guarantors |         | Guarantors |         | Eliminations |         | Consolidated
|                                                                 |                                                                          |                                         |         |         |         |            |         |            |         |              |         |             
|                                                                 |                                                                          |                                        
|                                                                 |                                                                          | (In thousands)                         
|ASSETS                                                          
|Current assets:                                                  |                                                                          |                                         |         |         |         |            |         |            |         |              |         |              |         |  |         |         |         |  |   |            |            |   |         |        
|                                                                 | Cash and cash equivalents                                                |                                         | $       |        |         |            | $       |           |         |              | $       | 49,919       |         |  | $       | 39,843  |         |  | $ |           |            |   | $       | 89,762  |        
|                                                                 | Accounts receivable, less allowance for doubtful
    accounts of $42,438 |                                         |         |        |         |            |         |           |         |              |         | 59,743       |         |  |         | 56,772  |         |  |   |           |            |   |         | 116,515 |        
|                                                                 | Premiums receivable                                                      |                                         |         |        |         |            |         |           |         |              |         |             |         |  |         | 14,733  |         |  |   |           |            |   |         | 14,733  |        
|                                                                 | Inventories                                                              |                                         |         |        |         |            |         |           |         |              |         | 6,547        |         |  |         | 10,236  |         |  |   |           |            |   |         | 16,783  |        
|                                                                 | Deferred income taxes                                                    |                                         |         |        |         |            |         |           |         |              |         | 16,559       |         |  |         | 11,233  |         |  |   |           |            |   |         | 27,792  |        
|                                                                 | Prepaid expenses and other current assets                                |                                         |         |        |         |            |         |           |         |              |         | 12,433       |         |  |         | 19,123  |         |  |   |           |            |   |         | 31,556  |        
|                                                                 | Income tax receivable                                                    |                                         |         |        |         |            |         |           |         |              |         | 7,000        |         |  |         | (4,872  | )       |  |   |           |            |   |         | 2,128   |        
|                                                                 |                                                                          |                                         |         |         |         |            |         |            |         |              |         |              |         |  |         |         |         |  |   |            |            |   |         |        
|                                                                 |                                                                          | Total current assets                    |         |         |        |            |         |            |        |              |         |              | 152,201 |  |         |         | 147,068 |  |   |            |           |   |         |         | 299,269 | 
|Property, plant and equipment, net                               |                                                                          |                                         |        |         |         |            |        |            |         |              | 157,348 |              |         |  | 211,226 |         |         |  |  |            |            |   | 368,574 |        
|Other assets:                                                    |                                                                          |                                         |         |         |         |            |         |            |         |              |         |              |         |  |         |         |         |  |   |            |            |   |         |        
|                                                                 | Goodwill                                                                 |                                         |         |        |         |            |         |           |         |              |         | 13,072       |         |  |         | 62,457  |         |  |   |           |            |   |         | 75,529  |        
|                                                                 | Other intangible assets                                                  |                                         |         |        |         |            |         |           |         |              |         |             |         |  |         | 48,289  |         |  |   |           |            |   |         | 48,289  |        
|                                                                 | Deferred income taxes                                                    |                                         |         |        |         |            |         |           |         |              |         | 9,071        |         |  |         | (3,389  | )       |  |   |           |            |   |         | 5,682   |        
|                                                                 | Other assets                                                             |                                         |         | 333,021 |         |            |         | 528,109    |         |              |         | 266,226      |         |  |         | 6,174   |         |  |   | (1,112,869 | )          |   |         | 20,661  |        
|                                                                 |                                                                          |                                         |         |         |         |            |         |            |         |              |         |              |         |  |         |         |         |  |   |            |            |   |         |        
|                                                                 |                                                                          | Total assets                            |         | $       | 333,021 |            |         | $          | 528,109 |              |         | $            | 597,918 |  |         | $       | 471,825 |  |   | $          | (1,112,869 | ) |         | $       | 818,004 | 
|                                                                 |                                                                          |                                         |         |         |         |            |         |            |         |              |         |              |         |  |         |         |         |  |   |            |            |   |         |        
|LIABILITIES AND MEMBERS AND
    STOCKHOLDERS EQUITY           
|Current liabilities:                                             |                                                                          |                                         |         |         |         |            |         |            |         |              |         |              |         |  |         |         |         |  |   |            |            |   |         |        
|                                                                 | Current installments of long-term debt                                   |                                         | $       |        |         |            | $       |           |         |              | $       | 1,931        |         |  | $       | 151     |         |  | $ |           |            |   | $       | 2,082   |        
|                                                                 | Accounts payable                                                         |                                         |         |        |         |            |         |           |         |              |         | 26,282       |         |  |         | 27,126  |         |  |   |           |            |   |         | 53,408  |        
|                                                                 | Medical claims payable                                                   |                                         |         |        |         |            |         |           |         |              |         |             |         |  |         | 45,751  |         |  |   |           |            |   |         | 45,751  |        
|                                                                 | Accrued salaries and benefits                                            |                                         |         |        |         |            |         |           |         |              |         | 23,520       |         |  |         | 21,263  |         |  |   |           |            |   |         | 44,783  |        
|                                                                 | Accrued interest                                                         |                                         |         |        |         |            |         | 10,133     |         |              |         |             |         |  |         |        |         |  |   |           |            |   |         | 10,133  |        
|                                                                 | Unearned premiums                                                        |                                         |         |        |         |            |         |           |         |              |         |             |         |  |         | 15,399  |         |  |   |           |            |   |         | 15,399  |        
|                                                                 | Other accrued expenses and liabilities                                   |                                         |         |        |         |            |         |           |         |              |         | 9,225        |         |  |         | 16,348  |         |  |   |           |            |   |         | 25,573  |        
|                                                                 |                                                                          |                                         |         |         |         |            |         |            |         |              |         |              |         |  |         |         |         |  |   |            |            |   |         |        
|                                                                 |                                                                          | Total current liabilities               |         |         |        |            |         |            | 10,133  |              |         |              | 60,958  |  |         |         | 126,038 |  |   |            |           |   |         |         | 197,129 | 
|Long-term debt, less current installments                        |                                                                          |                                         |        |         |         |            | 256,996 |            |         |              | 1,908   |              |         |  | 457     |         |         |  |  |            |            |   | 259,361 |        
|Other long-term liabilities                                      |                                                                          |                                         |        |         |         |            |        |            |         |              | 6,573   |              |         |  |        |         |         |  |  |            |            |   | 6,573   |        
|Self-insured liabilities                                         |                                                                          |                                         |        |         |         |            |        |            |         |              | 10,255  |              |         |  | 11,665  |         |         |  |  |            |            |   | 21,920  |        
|Note payable to Parent                                           |                                                                          |                                         |        |         |         |            | (71,412 | )          |         |              |        |              |         |  | 71,412  |         |         |  |  |            |            |   |        |        
|Due to/from Parent                                               |                                                                          |                                         |        |         |         |            |        |            |         |              | 2,108   |              |         |  | (2,108  | )       |         |  |  |            |            |   |        |        
|                                                                 |                                                                          |                                         |         |         |         |            |         |            |         |              |         |              |         |  |         |         |         |  |   |            |            |   |         |        
|Total liabilities                                                |                                                                          |                                         |        |         |         |            | 195,717 |            |         |              | 81,802  |              |         |  | 207,464 |         |         |  |  |            |            |   | 484,983 |        
|Mandatorily redeemable preferred units and
    accrued dividends |                                                                          |                                         | 111,931 |         |         |            |        |            |         |              |        |              |         |  |        |         |         |  |  |            |            |   | 111,931 |        
|Members and stockholders equity:                               |                                                                          |                                         |         |         |         |            |         |            |         |              |         |              |         |  |         |         |         |  |   |            |            |   |         |        
|                                                                 | Capital stock                                                            |                                         |         |        |         |            |         |           |         |              |         |             |         |  |         | 150     |         |  |   | (150       | )          |   |         |        |        
|                                                                 | Common units                                                             |                                         |         | 224,331 |         |            |         |           |         |              |         |              |         |  |         |        |         |  |   |           |            |   |         | 224,331 |        
|                                                                 | Additional paid in capital                                               |                                         |         |        |         |            |         | 320,332    |         |              |         | 486,207      |         |  |         | 266,677 |         |  |   | (1,073,216 | )          |   |         |        |        
|                                                                 | (Accumulated deficit) retained earnings                                  |                                         |         | (3,241  | )       |            |         | 12,060     |         |              |         | 29,909       |         |  |         | (2,466  | )       |  |   | (39,503    | )          |   |         | (3,241  | )      
|                                                                 |                                                                          |                                         |         |         |         |            |         |            |         |              |         |              |         |  |         |         |         |  |   |            |            |   |         |        
|                                                                 |                                                                          | Total members and stockholders equity |         |         | 221,090 |            |         |            | 332,392 |              |         |              | 516,116 |  |         |         | 264,361 |  |   |            | (1,112,869 | ) |         |         | 221,090 | 
|                                                                 |                                                                          |                                         |         |         |         |            |         |            |         |              |         |              |         |  |         |         |         |  |   |            |            |   |         |        
|Commitments and contingencies                                    |                                                                          |                                         |         |         |         |            |         |            |         |              |         |              |         |  |         |         |         |  |   |            |            |   |         |        
|                                                                 |                                                                          | Total liabilities and members equity   |         | $       | 333,021 |            |         | $          | 528,109 |              |         | $            | 597,918 |  |         | $       | 471,825 |  |   | $          | (1,112,869 | ) |         | $       | 818,004 | 
|                                                                 |                                                                          |                                         |         |         |         |            |         |            |         |              |         |              |         |  |         |         |         |  |   |            |            |   |         |        

F-46



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS

Year Ended December 31, 2003


|                            |                                                                    |                                                                  |                |        |       |            |   |            |        |              |     |              |         |         |       |         |         |         |   |         |         |         |       |         |           |           | 
|--------------------------- | ------------------------------------------------------------------ | ---------------------------------------------------------------- | -------------- | ------ | ----- | ---------- | - | ---------- | ------ | ------------ | --- | ------------ | ------- | ------- | ----- | ------- | ------- | ------- | - | ------- | ------- | ------- | ----- | ------- | --------- | --------- | 
|                            |                                                                    |                                                                  |                |        |       | Subsidiary |   | Non-       |        |              |     | Condensed   
|                            |                                                                    | Parent                                                           |                | Issuer |       | Guarantors |   | Guarantors |        | Eliminations |     | Consolidated
|                            |                                                                    |                                                                  |                |        |       |            |   |            |        |              |     |             
|                            |                                                                    |                                                                 
|                            |                                                                    | (In thousands)                                                  
|Revenues:                   |                                                                    |                                                                  |                |        |       |            |   |            |        |              |     |              |         |         |       |         |         |         |   |         |         |         |       |        
|                            | Net patient service revenue                                        |                                                                  | $              |       |       |            | $ |           |        |              | $   | 342,144      |         |         | $     | 298,776 |         |         | $ |        |         |         | $     | 640,920 |          
|                            | Premium revenue                                                    |                                                                  |                |       |       |            |   |           |        |              |     |             |         |         |       | 592,293 |         |         |   |        |         |         |       | 592,293 |          
|                            | Other revenue                                                      |                                                                  |                | 4,291  |       |            |   | 22,140     |        |              |     | 60,127       |         |         |       | 45,071  |         |         |   | (45,168 | )       |         |       | 86,461  |          
|                            |                                                                    |                                                                  |                |        |       |            |   |            |        |              |     |              |         |         |       |         |         |         |   |         |         |         |       |        
|                            |                                                                    | Total net revenues                                               |                |        | 4,291 |            |   |            | 22,140 |              |     |              | 402,271 |         |       |         | 936,140 |         |   |         | (45,168 | )       |       |         | 1,319,674 |          
|Expenses:                   |                                                                    |                                                                  |                |        |       |            |   |            |        |              |     |              |         |         |       |         |         |         |   |         |         |         |       |        
|                            | Salaries and benefits                                              |                                                                  |                |       |       |            |   |           |        |              |     | 231,270      |         |         |       | 300,623 |         |         |   |        |         |         |       | 531,893 |          
|                            | Professional fees                                                  |                                                                  |                |       |       |            |   |           |        |              |     | 52,596       |         |         |       | 88,774  |         |         |   | (14,075 | )       |         |       | 127,295 |          
|                            | Claims and capitation                                              |                                                                  |                |       |       |            |   |           |        |              |     |             |         |         |       | 273,852 |         |         |   | (980    | )       |         |       | 272,872 |          
|                            | Supplies                                                           |                                                                  |                |       |       |            |   |           |        |              |     | 40,375       |         |         |       | 108,688 |         |         |   |        |         |         |       | 149,063 |          
|                            | Provision for doubtful accounts                                    |                                                                  |                |       |       |            |   |           |        |              |     | 17,668       |         |         |       | 35,081  |         |         |   |        |         |         |       | 52,749  |          
|                            | Interest                                                           |                                                                  |                |       |       |            |   | 18,407     |        |              |     | 1,669        |         |         |       | 2,079   |         |         |   |        |         |         |       | 22,155  |          
|                            | Change in fair value of interest rate swap
    agreements          |                                                                  |                |       |       |            |   | (558       | )      |              |     |             |         |         |       |        |         |         |   |        |         |         |       | (558    | )        
|                            | Depreciation and amortization                                      |                                                                  |                |       |       |            |   |           |        |              |     | 14,304       |         |         |       | 21,438  |         |         |   |        |         |         |       | 35,742  |          
|                            | Impairment of long-lived assets                                    |                                                                  |                |       |       |            |   |           |        |              |     | 2,913        |         |         |       |        |         |         |   |        |         |         |       | 2,913   |          
|                            | Loss on divestitures                                               |                                                                  |                |       |       |            |   |           |        |              |     | 61           |         |         |       |        |         |         |   |        |         |         |       | 61      |          
|                            | Other                                                              |                                                                  |                |       |       |            |   |           |        |              |     | 19,000       |         |         |       | 101,820 |         |         |   | (1,348  | )       |         |       | 119,472 |          
|                            |                                                                    |                                                                  |                |        |       |            |   |            |        |              |     |              |         |         |       |         |         |         |   |         |         |         |       |        
|                            |                                                                    |                                                                  | Total expenses |        |       |           |   |            |        | 17,849       |     |              |         | 379,856 |       |         |         | 932,355 |   |         |         | (16,403 | )     |         |           | 1,313,657 | 
|                            |                                                                    |                                                                  |                |        |       |            |   |            |        |              |     |              |         |         |       |         |         |         |   |         |         |         |       |        
|                            |                                                                    | Income (loss) from continuing operations before
    income taxes |                |        | 4,291 |            |   |            | 4,291  |              |     |              | 22,415  |         |       |         | 3,785   |         |   |         | (28,765 | )       |       |         | 6,017     |          
|Income tax expense          |                                                                    |                                                                  |               |        |       |            |  |            |        |              | 861 |              |         |         | 1,451 |         |         |         |  |         |         |         | 2,312 |        
|                            |                                                                    |                                                                  |                |        |       |            |   |            |        |              |     |              |         |         |       |         |         |         |   |         |         |         |       |        
|                            | Net income (loss) from continuing operations                       |                                                                  |                | 4,291  |       |            |   | 4,291      |        |              |     | 21,554       |         |         |       | 2,334   |         |         |   | (28,765 | )       |         |       | 3,705   |          
|Discontinued operations:    |                                                                    |                                                                  |                |        |       |            |   |            |        |              |     |              |         |         |       |         |         |         |   |         |         |         |       |        
|                            | Income from discontinued operations                                |                                                                  |                |       |       |            |   |           |        |              |     | 953          |         |         |       |        |         |         |   |        |         |         |       | 953     |          
|                            | Income tax expense                                                 |                                                                  |                |       |       |            |   |           |        |              |     | 367          |         |         |       |        |         |         |   |        |         |         |       | 367     |          
|                            |                                                                    |                                                                  |                |        |       |            |   |            |        |              |     |              |         |         |       |         |         |         |   |         |         |         |       |        
|                            | Income from discontinued operations, net                           |                                                                  |                |       |       |            |   |           |        |              |     | 586          |         |         |       |        |         |         |   |        |         |         |       | 586     |          
|                            |                                                                    |                                                                  |                |        |       |            |   |            |        |              |     |              |         |         |       |         |         |         |   |         |         |         |       |        
|                            |                                                                    | Net income (loss)                                                |                |        | 4,291 |            |   |            | 4,291  |              |     |              | 22,140  |         |       |         | 2,334   |         |   |         | (28,765 | )       |       |         | 4,291     |          
|Accrued preferred dividends |                                                                    |                                                                  | 8,098          |        |       |            |  |            |        |              |    |              |         |         |      |         |         |         |  |         |         |         | 8,098 |        
|                            |                                                                    |                                                                  |                |        |       |            |   |            |        |              |     |              |         |         |       |         |         |         |   |         |         |         |       |        
|                            | Net (loss attributable to) income available for
    common members |                                                                  | $              | (3,807 | )     |            | $ | 4,291      |        |              | $   | 22,140       |         |         | $     | 2,334   |         |         | $ | (28,765 | )       |         | $     | (3,807  | )        
|                            |                                                                    |                                                                  |                |        |       |            |   |            |        |              |     |              |         |         |       |         |         |         |   |         |         |         |       |        

F-47



---



##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH
FLOWS

Year Ended December 31, 2003


|                                                                                                                                                                  |                                                                                                   |                                                         |                                           |        |        |            |          |            |          |              |         |              |         |        |          |        |          |        |         |        |   |   |          |        |          |        | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------------------------- | ------ | ------ | ---------- | -------- | ---------- | -------- | ------------ | ------- | ------------ | ------- | ------ | -------- | ------ | -------- | ------ | ------- | ------ | - | - | -------- | ------ | -------- | ------ | 
|                                                                                                                                                                  |                                                                                                   |                                                         |                                           |        |        | Subsidiary |          | Non-       |          |              |         | Condensed   
|                                                                                                                                                                  |                                                                                                   | Parent                                                  |                                           | Issuer |        | Guarantors |          | Guarantors |          | Eliminations |         | Consolidated
|                                                                                                                                                                  |                                                                                                   |                                                         |                                           |        |        |            |          |            |          |              |         |             
|                                                                                                                                                                  |                                                                                                   |                                                        
|                                                                                                                                                                  |                                                                                                   | (In thousands)                                         
|Cash flows from operating
    activities:                                                                                                                         |                                                                                                   |                                                         |                                           |        |        |            |          |            |          |              |         |              |         |        |          |        |          |        |         |        |   |   |          |       
|Net income (loss) from continuing operations                                                                                                                      |                                                                                                   | $                                                       | 4,291                                     |        |        | $          | 4,291    |            |          | $            | 21,554  |              |         | $      | 2,334    |        |          | $      | (28,765 | )      |   | $ | 3,705    |       
|Adjustments to reconcile net income (loss) from
    continuing operations to net cash provided by operating
    activities, net of acquisitions and divestitures: |                                                                                                   |                                                         |                                           |        |        |            |          |            |          |              |         |              |         |        |          |        |          |        |         |        |   |   |          |       
|                                                                                                                                                                  | Provision for doubtful accounts                                                                   |                                                         |                                           |       |        |            |          |           |          |              |         | 17,668       |         |        |          | 35,081 |          |        |         |       |   |   |          | 52,749 |         
|                                                                                                                                                                  | Change in fair value of interest rate swap
    agreements                                         |                                                         |                                           |       |        |            |          | (558       | )        |              |         |             |         |        |          |       |          |        |         |       |   |   |          | (558   | )       
|                                                                                                                                                                  | Depreciation and amortization                                                                     |                                                         |                                           |       |        |            |          |           |          |              |         | 14,304       |         |        |          | 21,438 |          |        |         |       |   |   |          | 35,742 |         
|                                                                                                                                                                  | Impairment of long-lived assets and restructuring
    costs                                       |                                                         |                                           |       |        |            |          |           |          |              |         | 2,913        |         |        |          |       |          |        |         |       |   |   |          | 2,913  |         
|                                                                                                                                                                  | Loss on divestitures                                                                              |                                                         |                                           |       |        |            |          |           |          |              |         | 61           |         |        |          |       |          |        |         |       |   |   |          | 61     |         
|                                                                                                                                                                  | Amortization on loan costs                                                                        |                                                         |                                           |       |        |            |          | 5,637      |          |              |         | 405          |         |        |          |       |          |        |         |       |   |   |          | 6,042  |         
|                                                                                                                                                                  | Amortization of discount on subordinated debt                                                     |                                                         |                                           |       |        |            |          | 635        |          |              |         |             |         |        |          |       |          |        |         |       |   |   |          | 635    |         
|                                                                                                                                                                  | Deferred income taxes                                                                             |                                                         |                                           |       |        |            |          |           |          |              |         | 2,790        |         |        |          | (3,421 | )        |        |         |       |   |   |          | (631   | )       
|                                                                                                                                                                  | Change in equity earnings of subsidiaries                                                         |                                                         |                                           | (4,291 | )      |            |          | (22,140    | )        |              |         | (2,334       | )       |        |          |       |          |        |         | 28,765 |   |   |          |       |         
|                                                                                                                                                                  | Changes in operating assets and liabilities, net
    of effects of acquisitions and divestitures: |                                                         |                                           |        |        |            |          |            |          |              |         |              |         |        |          |        |          |        |         |        |   |   |          |        |         
|                                                                                                                                                                  |                                                                                                   | Accounts receivable                                     |                                           |        |       |            |          |            |         |              |         |              | (32,689 | )      |          |        | (46,915  | )      |         |        |  |   |          |        | (79,604  | )     
|                                                                                                                                                                  |                                                                                                   | Premiums receivable                                     |                                           |        |       |            |          |            |         |              |         |              | (1,017  | )      |          |        | 2,605    |        |         |        |  |   |          |        | 1,588    |       
|                                                                                                                                                                  |                                                                                                   | Prepaid expenses and other current assets               |                                           |        |       |            |          |            |         |              |         |              | 5,381   |        |          |        | (12,130  | )      |         |        |  |   |          |        | (6,749   | )     
|                                                                                                                                                                  |                                                                                                   | Income tax receivable (payable)                         |                                           |        |       |            |          |            |         |              |         |              | (4,878  | )      |          |        | 4,523    |        |         |        |  |   |          |        | (355     | )     
|                                                                                                                                                                  |                                                                                                   | Medical claims payable                                  |                                           |        |       |            |          |            |         |              |         |              |        |        |          |        | 1,688    |        |         |        |  |   |          |        | 1,688    |       
|                                                                                                                                                                  |                                                                                                   | Accounts payable                                        |                                           |        |       |            |          |            |         |              |         |              | 4,252   |        |          |        | 8,552    |        |         |        |  |   |          |        | 12,804   |       
|                                                                                                                                                                  |                                                                                                   | Accrued salaries and benefits                           |                                           |        |       |            |          |            |         |              |         |              | 2,577   |        |          |        | 1,332    |        |         |        |  |   |          |        | 3,909    |       
|                                                                                                                                                                  |                                                                                                   | Accrued interest                                        |                                           |        |       |            |          |            | 10,133   |              |         |              | (257    | )      |          |        |         |        |         |        |  |   |          |        | 9,876    |       
|                                                                                                                                                                  |                                                                                                   | Unearned premiums                                       |                                           |        |       |            |          |            |         |              |         |              |        |        |          |        | 12,197   |        |         |        |  |   |          |        | 12,197   |       
|                                                                                                                                                                  |                                                                                                   | Other accrued expenses and liabilities                  |                                           |        |       |            |          |            |         |              |         |              | (6,059  | )      |          |        | 3,218    |        |         |        |  |   |          |        | (2,841   | )     
|                                                                                                                                                                  |                                                                                                   | Self-insured liabilities                                |                                           |        |       |            |          |            |         |              |         |              | 1,675   |        |          |        | 11,664   |        |         |        |  |   |          |        | 13,339   |       
|                                                                                                                                                                  |                                                                                                   |                                                         |                                           |        |        |            |          |            |          |              |         |              |         |        |          |        |          |        |         |        |   |   |          |       
|                                                                                                                                                                  |                                                                                                   |                                                         | Net cash provided by operating activities |        |        |           |          |            |          | (2,002       | )       |              |         | 26,346 |          |        |          | 42,166 |         |        |   |  |          |        |          | 66,510 | 
|Cash flows from investing
    activities:                                                                                                                         |                                                                                                   |                                                         |                                           |        |        |            |          |            |          |              |         |              |         |        |          |        |          |        |         |        |   |   |          |       
|Investments in acquisitions, less cash acquired                                                                                                                   |                                                                                                   |                                                         |                                          |        |        |            |         |            |          |              | (7,902  | )            |         |        | (196,924 | )      |          |        |        |        |   |   | (204,826 | )     
|Purchases of property, plant and equipment                                                                                                                        |                                                                                                   |                                                         |                                          |        |        |            |         |            |          |              | (40,912 | )            |         |        | (46,062  | )      |          |        |        |        |   |   | (86,974  | )     
|Transfer of assets                                                                                                                                                |                                                                                                   |                                                         |                                          |        |        |            |         |            |          |              | 6,625   |              |         |        | (6,625   | )      |          |        |        |        |   |   |         |       
|Proceeds from divestitures                                                                                                                                        |                                                                                                   |                                                         |                                          |        |        |            |         |            |          |              | 9,803   |              |         |        |         |        |          |        |        |        |   |   | 9,803    |       
|Other                                                                                                                                                             |                                                                                                   |                                                         | (9,918                                    | )      |        |            | (171,562 | )          |          |              | 183,582 |              |         |        | 5,775    |        |          |        |        |        |   |   | 7,877    |       
|                                                                                                                                                                  |                                                                                                   |                                                         |                                           |        |        |            |          |            |          |              |         |              |         |        |          |        |          |        |         |        |   |   |          |       
|                                                                                                                                                                  |                                                                                                   | Net cash (used in) provided by investing
    activities |                                           |        | (9,918 | )          |          |            | (171,562 | )            |         |              | 151,196 |        |          |        | (243,836 | )      |         |        |  |   |          |        | (274,120 | )     

F-48



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##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                           |                         |                                                          |        |        |       |            |          |            |         |              |          |              |          |   |         |         |         |   |   |   |   |   |          |         |         |  
|---------------------------------------------------------- | ----------------------- | -------------------------------------------------------- | ------ | ------ | ----- | ---------- | -------- | ---------- | ------- | ------------ | -------- | ------------ | -------- | - | ------- | ------- | ------- | - | - | - | - | - | -------- | ------- | ------- | -
|                                                           |                         |                                                          |        |        |       | Subsidiary |          | Non-       |         |              |          | Condensed   
|                                                           |                         | Parent                                                   |        | Issuer |       | Guarantors |          | Guarantors |         | Eliminations |          | Consolidated
|                                                           |                         |                                                          |        |        |       |            |          |            |         |              |          |             
|                                                           |                         |                                                         
|                                                           |                         | (In thousands)                                          
|Cash flows from financing
    activities:                  |                         |                                                          |        |        |       |            |          |            |         |              |          |              |          |   |         |         |         |   |   |   |   |   |          |        
|Payments on revolving line of credit, net                  |                         |                                                          |       |        |       |            |         |            |         |              | (38,703  | )            |          |   |        |         |         |   |  |   |   |   | (38,703  | )      
|Proceeds from long-term debt                               |                         |                                                          |       |        |       |            | 373,500  |            |         |              |         |              |          |   |        |         |         |   |  |   |   |   | 373,500  |        
|Payments on long-term debt                                 |                         |                                                          |       |        |       |            | (112,500 | )          |         |              | (30,721  | )            |          |   | (194    | )       |         |   |  |   |   |   | (143,415 | )      
|Debt financing costs paid                                  |                         |                                                          |       |        |       |            | (17,436  | )          |         |              |         |              |          |   |        |         |         |   |  |   |   |   | (17,436  | )      
|Intercompany advances, net                                 |                         |                                                          |       |        |       |            |         |            |         |              | 7,030    |              |          |   | (7,030  | )       |         |   |  |   |   |   |         |        
|Contributions from guarantors                              |                         |                                                          |       |        |       |            |         |            |         |              | (192,731 | )            |          |   | 192,731 |         |         |   |  |   |   |   |         |        
|Dividend paid                                              |                         |                                                          |       |        |       |            |         |            |         |              | 25,000   |              |          |   | (25,000 | )       |         |   |  |   |   |   |         |        
|Note payable to Issuer                                     |                         |                                                          |       |        |       |            | (70,000  | )          |         |              |         |              |          |   | 70,000  |         |         |   |  |   |   |   |         |        
|Proceeds from issuance of common units                     |                         |                                                          | 11,737 |        |       |            |         |            |         |              |         |              |          |   |        |         |         |   |  |   |   |   | 11,737   |        
|Proceeds from exercise of stock options                    |                         |                                                          | 425    |        |       |            |         |            |         |              |         |              |          |   |        |         |         |   |  |   |   |   | 425      |        
|Redemption of preferred units                              |                         |                                                          | (116   | )      |       |            |         |            |         |              |         |              |          |   |        |         |         |   |  |   |   |   | (116     | )      
|Redemption of common units                                 |                         |                                                          | (136   | )      |       |            |         |            |         |              |         |              |          |   |        |         |         |   |  |   |   |   | (136     | )      
|Preferred and common unit issuance costs                   |                         |                                                          | (1,992 | )      |       |            |         |            |         |              |         |              |          |   |        |         |         |   |  |   |   |   | (1,992   | )      
|                                                           |                         |                                                          |        |        |       |            |          |            |         |              |          |              |          |   |         |         |         |   |   |   |   |   |          |        
|                                                           |                         | Net cash provided by (used in) financing
    activities  |        |        | 9,918 |            |          |            | 173,564 |              |          |              | (230,125 | ) |         |         | 230,507 |   |   |   |  |   |          |         | 183,864 |  
|Net cash used in discontinued operations                   |                         |                                                          |       |        |       |            |         |            |         |              | (61      | )            |          |   |        |         |         |   |  |   |   |   | (61      | )      
|                                                           |                         |                                                          |        |        |       |            |          |            |         |              |          |              |          |   |         |         |         |   |   |   |   |   |          |        
|                                                           |                         | Net (decrease) increase in cash and cash
    equivalents |        |        |      |            |          |            |        |              |          |              | (52,644  | ) |         |         | 28,837  |   |   |   |  |   |          |         | (23,807 | )
|Cash and cash equivalents, beginning of period             |                         |                                                          |       |        |       |            |          |            |         |              | 102,563  |              |          |   | 11,006  |         |         |   |  |   |   |   | 113,569  |        
|                                                           |                         |                                                          |        |        |       |            |          |            |         |              |          |              |          |   |         |         |         |   |   |   |   |   |          |        
|Cash and cash equivalents, end of period                   |                         | $                                                        |       |        |       | $          |         |            |         | $            | 49,919   |              |          | $ | 39,843  |         |         | $ |  |   |   | $ | 89,762   |        
|                                                           |                         |                                                          |        |        |       |            |          |            |         |              |          |              |          |   |         |         |         |   |   |   |   |   |          |        
|Supplemental cash flow information:                        |                         |                                                          |        |        |       |            |          |            |         |              |          |              |          |   |         |         |         |   |   |   |   |   |          |        
|Cash paid for interest                                     |                         | $                                                        |       |        |       | $          | 10,537   |            |         | $            | 1,075    |              |          | $ | 667     |         |         | $ |  |   |   | $ | 12,279   |        
|Cash paid for income taxes                                 |                         |                                                          |       |        |       |            |         |            |         |              | 3,374    |              |          |   |        |         |         |   |  |   |   |   | 3,374    |        
|Non-cash common units issued                               |                         |                                                          | 4,690  |        |       |            |         |            |         |              |         |              |          |   |        |         |         |   |  |   |   |   | 4,690    |        
|Non-cash preferred units issued                            |                         |                                                          | 51     |        |       |            |         |            |         |              |         |              |          |   |        |         |         |   |  |   |   |   | 51       |        
|Preferred unit dividends accrued                           |                         |                                                          | 8,098  |        |       |            |         |            |         |              |         |              |          |   |        |         |         |   |  |   |   |   | 8,098    |        
|Non-cash changes due to acquisitions and
    divestitures: |                         |                                                          |        |        |       |            |          |            |         |              |          |              |          |   |         |         |         |   |   |   |   |   |          |        
|                                                           | Current assets          |                                                          | $      |       |       |            | $        |           |         |              | $        | (12,548      | )        |   | $       | 83,702  |         |   | $ |  |   |   | $        | 71,154  |        
|                                                           | Non current assets      |                                                          |        |       |       |            |          |           |         |              |          | (1,107       | )        |   |         | 226,244 |         |   |   |  |   |   |          | 225,137 |        
|                                                           | Current liabilities     |                                                          |        |       |       |            |          |           |         |              |          | (6,635       | )        |   |         | 82,626  |         |   |   |  |   |   |          | 75,991  |        
|                                                           | Non current liabilities |                                                          |        |       |       |            |          |           |         |              |          | (471         | )        |   |         | 7,713   |         |   |   |  |   |   |          | 7,242   |        

F-49



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##### Table of Contents



ARDENT HEALTH SERVICES LLC AND
SUBSIDIARIES


(Behavioral Healthcare Corporation for the
Seven-Month Period ended July 31, 2001)


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                             
|--- | ------------------------------------------------------------
|15. | Quarterly Consolidated Financial Information
    (Unaudited)

The quarterly interim financial information shown
below has been prepared by the Companys management and is
unaudited. It should be read in conjunction with the audited
consolidated financial statements appearing herein.

|                                             |  |       |         |        |  |       |         |           |  |   |         |  |  |   |         | 
|-------------------------------------------- |  | ----- | ------- | ------ |  | ----- | ------- | --------- |  | - | ------- |  |  | - | ------- | 
|                                             |  |      
|                                             |  | 2003 
|                                             |  |      
|                                             |  | First |         | Second |  | Third |         | Fourth(1)
|                                             |  |       |         |        |  |       |         |          
|Total net revenues                           |  | $     | 313,269 |        |  | $     | 321,031 |           |  | $ | 329,926 |  |  | $ | 355,448 | 
|Net income (loss) from continuing operations |  |       | 2,152   |        |  |       | (910    | )         |  |   | 2,046   |  |  |   | 417     | 
|Net income (loss)                            |  |       | 2,618   |        |  |       | (758    | )         |  |   | 2,046   |  |  |   | 385     | 

|                                             |  |       |        |        |  |       |        |        |  |   |         |   |  |   |         |  
|-------------------------------------------- |  | ----- | ------ | ------ |  | ----- | ------ | ------ |  | - | ------- | - |  | - | ------- | -
|                                             |  |      
|                                             |  | 2002 
|                                             |  |      
|                                             |  | First |        | Second |  | Third |        | Fourth
|                                             |  |       |        |        |  |       |        |       
|Total net revenues                           |  | $     | 82,228 |        |  | $     | 84,519 |        |  | $ | 103,186 |   |  | $ | 138,051 |  
|Net income (loss) from continuing operations |  |       | 2,947  |        |  |       | 3,243  |        |  |   | (1,068  | ) |  |   | (779    | )
|Net income (loss)                            |  |       | 3,000  |        |  |       | 3,081  |        |  |   | (1,074  | ) |  |   | 46      |  



---



|    |                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The significant decreases in net income (loss)
    from continuing operations and net income (loss) during the
    fourth quarter of 2003 was primarily the result of the Company
    recording an impairment charge of approximately $2.9 million as
    more fully disclosed in Notes 2 and 12.

F-50



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                           
| | --------------------------
| | ARDENT HEALTH SERVICES LLC



| |     |                    
| | --- | -------------------
| | By: | /s/ R. DIRK ALLISON

| |                                                                  
| | -----------------------------------------------------------------
| |                                                                  
| | R. Dirk Allison                                                  
| | Executive Vice President, Chief Financial
    Officer and Manager

Date: March 26, 2004

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

|                                             |  |                                                                                                                |  |                |  | 
|-------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                             |  |                                                                                                                |  |               
|Signature                                    |  | Title                                                                                                          |  | Date          
|                                             |  |                                                                                                                |  |               
|                                            
|/s/ DAVID T. VANDEWATERDavid T. Vandewater   |  | President, Chief Executive Officer and Manager
    (Principal Executive Officer)                               |  | March 26, 2004
|                                            
|/s/ R. DIRK ALLISONR. Dirk Allison           |  | Executive Vice President, Chief Financial Officer
    and Manager (Principal Financial and Accounting Officer) |  | March 26, 2004
|                                            
|/s/ NORMAN BROWNSTEINNorman Brownstein       |  | Manager                                                                                                        |  | March 26, 2004
|                                            
|/s/ RUSSELL L. CARSONRussell L. Carson       |  | Manager                                                                                                        |  | March 26, 2004
|                                            
|/s/ DAVID C. COLBYDavid C. Colby             |  | Manager                                                                                                        |  | March 26, 2004
|                                            
|/s/ COLLEEN CONWAY-WELCHColleen Conway-Welch |  | Manager                                                                                                        |  | March 26, 2004
|                                            
|/s/ CARLOS A. FERRERCarlos A. Ferrer         |  | Manager                                                                                                        |  | March 26, 2004
|                                            
|/s/ JAMIE E. HOPPINGJamie E. Hopping         |  | Manager                                                                                                        |  | March 26, 2004
|                                            
|/s/ D. SCOTT MACKESYD. Scott Mackesy         |  | Manager                                                                                                        |  | March 26, 2004



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##### Table of Contents



|                                       |  |         |  |                |  | 
|-------------------------------------- |  | ------- |  | -------------- |  | 
|                                       |  |         |  |               
|Signature                              |  | Title   |  | Date          
|                                       |  |         |  |               
|                                      
|/s/ KENNETH J. MELKUSKenneth J. Melkus |  | Manager |  | March 26, 2004
|                                      
|/s/ THOMAS A. SCULLYThomas A. Scully   |  | Manager |  | March 26, 2004

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH
REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY
REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

No annual report or proxy material has been sent
to security holders.



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##### Table of Contents



EXHIBIT INDEX

|        |    |    |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | -- | -- |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  |            
|No.     |    |    |  | Description
|        |    |    |  |            
|        | 3  | .1 |  |            |  | Certificate of Formation of Ardent Health
    Services LLC, as filed with the Delaware Secretary of State on
    June 1, 2001 (Incorporated by reference to Exhibit 3.1
    to the Registrants Registration Statement on
    Form S-1, File No. 333-110117)                                                                                                                                                                                                                                                                                                                                                                   
|        | 3  | .2 |  |            |  | Limited Liability Company Agreement of Ardent
    Health Services LLC, including Amendment No. 1 thereto
    (Incorporated by reference to Exhibit 3.2 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                                                                                                                                                                                                                                                    
|        | 3  | .3 |  |            |  | Amendment No. 2 to Limited Liability Company
    Agreement of Ardent Health Services LLC                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 4  | .1 |  |            |  | Indenture, dated as of August 19, 2003,
    among Ardent Health Services, Inc., Ardent Health Services,
    LLC, the Subsidiary Guarantors and U.S. Bank Trust National
    Association, as trustee (Incorporated by reference to
    Exhibit 4.1 to the Registrants Registration Statement
    on Form S-1, File No. 333-110117)                                                                                                                                                                                                                                                                                             
|        | 4  | .2 |  |            |  | Form of Ardent Health Services, Inc.
    10% Senior Subordinated Note due 2013 (Incorporated by
    reference to Exhibit 4.2 to the Registrants
    Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                                                                                                                                                                                                                                                                              
|        | 4  | .3 |  |            |  | Form of Notation of Guarantee, dated as of
    August 19, 2003, executed by each of the Guarantors
    (Incorporated by reference to Exhibit 4.3 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                                                                                                                                                                                                                                                          
|        | 4  | .4 |  |            |  | Amended and Restated Intercompany Promissory Note
    dated October 1, 2003 issued by Lovelace Health
    Systems, Inc. in favor of Ardent Health Services, Inc.
    (Incorporated by reference to Exhibit 4.4 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                                                                                                                                                                                            
|        | 4  | .5 |  |            |  | Amended and Restated Security Agreement, dated as
    of October 1, 2003, between Lovelace Health
    Systems, Inc. and Ardent Health Services, Inc.
    (Incorporated by reference to Exhibit 4.5 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                                                                                                                                                                                                        
|        | 4  | .6 |  |            |  | Intercreditor and Subordination Agreement, dated
    as of August 19, 2003, among Bank one, NA, as Collateral
    Agent, Bank One, NA, as Administrative Agent, U.S. Bank
    Trust National Association, as Trustee, and Ardent Health
    Services, Inc. (Incorporated by reference to
    Exhibit 4.6 to the Registrants Registration Statement
    on Form S-1, File No. 333-110117)                                                                                                                                                                                                                                      
|        | 4  | .7 |  |            |  | Collateral Assignment of Note and Security
    Agreement dated October 1, 2003 issued by Ardent Health
    Services, Inc. to Bank One, NA, as Collateral Agent
    (Incorporated by reference to Exhibit 4.7 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                                                                                                                                                                                              
|        | 4  | .8 |  |            |  | Registration Rights Agreement, dated as of
    August 19, 2003, among Ardent Health Services, Inc.,
    Ardent Health Services, LLC and the Subsidiary Guarantors and
    Banc of America Securities LLC, UBS Securities LLC, Banc One
    Capital Markets, Inc. and Merrill Lynch, Pierce,
    Fenner & Smith Incorporated (Incorporated by reference
    to Exhibit 4.8 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)                                                                                                                                                                     
|        | 10 | .1 |  |            |  | Credit Agreement, dated as of August 19,
    2003, among Ardent Health Services, Inc., as Borrower,
    Ardent Health Services LLC and certain of its subsidiaries as
    the Guarantors, Bank One, NA, as Administrative Agent, Swing
    Line Lender and L/C Issuer, Bank of America, N.A. and UBS
    Securities LLC, as Co- Syndication Agents, General Electric
    Capital Corporation and Merrill Lynch Capital, as
    Co-Documentation Agents, and the other Lenders party thereto
    (Incorporated by reference to Exhibit 10.1 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)
|        | 10 | .2 |  |            |  | Form of 10.2% Senior Subordinated Notes due
    August 15, 2014 (Incorporated by reference to Exhibit 10.2
    to the Registrants Registration Statement on
    Form S-1, File No. 333-110117)                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10 | .3 |  |            |  | Third Amended and Restated Ardent Health Services
    LLC and its Subsidiaries Option and Restricted Unit Purchase Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 10 | .4 |  |            |  | Form of Non-Qualified Common Membership Interest
    Option Agreement for Directors and Officers (Incorporated by
    reference to Exhibit 10.4 to the Registrants
    Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                                                                                                                                                                                                                                                           



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##### Table of Contents



|        |    |     |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | -- | --- |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |            
|No.     |    |     |  | Description
|        |    |     |  |            
|        | 10 | .5  |  |            |  | Subscription Agreement, dated as of
    September 25, 2001, among Ardent Health Services, LLC,
    Welsh, Carson, Anderson & Stowe IX, L.P., FFC
    Partners II, L.P., BancAmerica Capital Investors I,
    L.P. and the several other purchasers listed on Annex I
    thereto (Incorporated by reference to Exhibit 10.5 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                        
|        | 10 | .6  |  |            |  | Subscription Agreement, dated as of
    December 11, 2002, as amended on February 7, 2003,
    among Ardent Health Services, LLC, Welsh, Carson,
    Anderson & Stowe IX, L.P., FFC Partners II, L.P.
    and related entities, BancAmerica Capital Investors I, L.P.
    and the several other purchasers listed on Annex I thereto
    (Incorporated by reference to Exhibit 10.6 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)
|        | 10 | .7  |  |            |  | Professional Services Arrangement, dated as of
    December 11, 2002, between Ardent Health Services LLC and
    WCAS Management Corporation (Incorporated by reference to
    Exhibit 10.7 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)                                                                                                                                                                                            
|        | 10 | .8  |  |            |  | Letter Agreement, dated as of January 30,
    2002, between Welsh, Carson, Anderson & Stowe and David
    T. Vandewater (Incorporated by reference to Exhibit 10.8 to
    the Registrants Registration Statement on Form S-1,
    File No. 333-110117)                                                                                                                                                                                                                 
|        | 10 | .9  |  |            |  | Indemnification Agreement, dated as of
    January 31, 2002, between Ardent Health Services LLC and
    William Page Barnes (Incorporated by reference to
    Exhibit 10.9 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)                                                                                                                                                                                                             
|        | 10 | .10 |  |            |  | Employment Agreement, dated as of May 5,
    2003, between AHS Management Company, Inc. and Norm Becker
    (Incorporated by reference to Exhibit 10.10 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                                                                                            
|        | 10 | .11 |  |            |  | Employment Agreement, dated as of June 1,
    2001, between AHS Management Company, Inc. and Jaime E.
    Hopping (Incorporated by reference to Exhibit 10.11 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                                                                                      
|        | 10 | .12 |  |            |  | Employment Agreement, dated as of
    September 13, 2001, between AHS Management
    Company, Inc. and Vernon S. Westrich (Incorporated by
    reference to Exhibit 10.12 to the Registrants
    Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                                                                          
|        | 10 | .13 |  |            |  | Employment Agreement, dated as of May 2,
    2001, between Behavioral Healthcare Corporation and William P.
    Barnes (Incorporated by reference to Exhibit 10.13 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                                                                                 
|        | 10 | .14 |  |            |  | Indemnification Agreement, dated as of
    July 1, 2002, between Ardent Health Services LLC and Jamie
    E. Hopping (Incorporated by reference to Exhibit 10.14 to
    the Registrants Registration Statement on Form S-1,
    File No. 333-110117)                                                                                                                                                                                                                   
|        | 10 | .15 |  |            |  | Indemnification Agreement, dated as of
    January 31, 2002, between Ardent Health Services LLC and
    Stephen C. Petrovich (Incorporated by reference to
    Exhibit 10.15 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)                                                                                                                                                                                                           
|        | 10 | .16 |  |            |  | Indemnification Agreement, dated as of
    August 4, 2001, between Ardent Health Services LLC and
    David T. Vandewater (Incorporated by reference to
    Exhibit 10.16 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)                                                                                                                                                                                                              
|        | 10 | .17 |  |            |  | Indemnification Agreement, dated as of
    January 31, 2002, between Ardent Health Services LLC and
    Vernon S. Westrich (Incorporated by reference to
    Exhibit 10.17 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)                                                                                                                                                                                                             
|        | 10 | .18 |  |            |  | Employment Agreement, dated as of
    December 1, 2003, between AHS Management Company, Inc.
    and R. Dirk Allison (Incorporated by reference to
    Exhibit 10.18 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)                                                                                                                                                                                                                   
|        | 10 | .19 |  |            |  | Indemnification Agreement, dated as of
    December 1, 2003, between Ardent Health Services LLC and R.
    Dirk Allison (Incorporated by reference to Exhibit 10.19 to
    the Registrants Registration Statement on Form S-1,
    File No. 333-110117)                                                                                                                                                                                                                
|        | 10 | .20 |  |            |  | Medicaid Managed Care Services Agreement No. PSC
    02-05, effective July 1, 2001, between the New Mexico Human
    Services Department and Lovelace Community Health Plan
    (Incorporated by reference to Exhibit 10.20 to the
    Registrants Registration Statement on Form S-1, File
    No. 333-110117)                                                                                                                                                        



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##### Table of Contents



|        |    |     |  |             |  |                                                                                                                                                                                                                                                                                                                                    
|------- | -- | --- |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |            
|No.     |    |     |  | Description
|        |    |     |  |            
|        | 10 | .21 |  |            |  | Amendment No. 1 to Medicaid Managed Care
    Services Agreement No. PSC 02-05, effective July 1, 2003,
    between the New Mexico Human Services Department and Lovelace
    Community Health Plan (Incorporated by reference to
    Exhibit 10.21 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)
|        | 10 | .22 |  |            |  | Contract P00149, effective January 1, 2002,
    between Centers for Medicare & Medicaid Services and
    Lovelace Health Plan, Inc. (Incorporated by reference to
    Exhibit 10.22 to the Registrants Registration
    Statement on Form S-1, File No. 333-110117)                                                               
|        | 21 |     |  |            |  | Subsidiaries of Ardent Health Services LLC                                                                                                                                                                                                                                                                                         
|        | 31 | .1  |  |            |  | Certification of CEO pursuant to Rule
    13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                                                                            
|        | 31 | .2  |  |            |  | Certification of CFO pursuant to Rule
    13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                                                                            
|        | 32 | .1  |  |            |  | Certification of CEO pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                                                                              
|        | 32 | .2  |  |            |  | Certification of CFO pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002