**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

_______________**FORM 10-Q**_______________

| **(MarkOne)** |  |                                                                |
|---------------|--|----------------------------------------------------------------|
| ** **    |  |                                                                |
| **x**         |  | **QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF**         |
|          |  | **THE SECURITIES EXCHANGEACT OF 1934**                         |
|          |  |                                                                |
|          |  | **For the quarterlyperiod ended March 31, 2002**               |
|          |  |                                                                |
|          |  | **OR**                                                         |
| ** **    |  |                                                                |
| **o**         |  | **TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF**        |
|          |  | **THE SECURITIES EXCHANGEACT OF 1934**                         |
|          |  |                                                                |
|          |  | **For the transitionperiod from ____________ to ____________** |

**Commission File Number: 333-71934**_______________

**VANGUARD HEALTH SYSTEMS, INC.******(Exact name of registrant as specified inits charter)

| **Delaware**                                                   |          | **62-1698183**                        |
|----------------------------------------------------------------|----------|---------------------------------------|
| *(Stateor other jurisdiction of incorporation ororganization)* | * * | *(I.R.S.Employer Identification No.)* |

**20 Burton Hills Boulevard, Suite 100Nashville, TN 37215**(Address and zip code of principalexecutive offices)**(615) 665-6000**(Registrant’s telephone number, includingarea code)

     Indicate by checkmark whether the registrant (1) has filed all reports required tobe filed under Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days.     Yesx   Noo

     There were 203,308shares of Common Stock outstanding as of May 14, 2002 (all of whichare privately owned and not traded on a public market).

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**VANGUARD HEALTH SYSTEMS, INC.QUARTERLY REPORT ON FORM 10-QTABLE OF CONTENTS**

| ** **              | ** ** |                                                                                                               | ** ** | **Page** |
|-------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I.**             |       | **FINANCIALINFORMATION**                                                                                      |       |          |
| Item 1.                 |       | FinancialStatements:                                                                                          |       |          |
|                    |       | **Condensed Consolidated Balance Sheetsas of June 30, 2001 and March 31, 2002**                               |       | 3        |
|                    |       | **Condensed Consolidated IncomeStatements for the Three Months and Nine Months ended March 31,2001 and 2002** |       | 4        |
|                    |       | **Condensed Consolidated Statements of CashFlows for the Nine Months ended March 31, 2001 and 2002**          |       | 5        |
|                    |       | **Notes to Condensed Consolidated FinancialStatements**                                                       |       | 6        |
| Item 2.                 |       | **Management's Discussion and Analysis of FinancialCondition and Results of Operations**                      |            | 22       |
| Item 3.                 |       | **Quantitative and Qualitative Disclosures AboutMarket Risk**                                                 |            | 34       |
| **PART II. ** |       | **OTHERINFORMATION**                                                                                          |       |          |
| Item 2.                 |            | **Changes in Securities and Use ofProceeds**                                                                  |            | 35       |
| Item 6.                 |       | **Exhibits and Reports on Form8-K**                                                                           |       | 35       |
|                    |       | **Signature**                                                                                                 |       | 36       |
|                    |            | **Index to Exhibits**                                                                                         |            | 36       |

****

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**Table ofContents**

**PARTIFINANCIAL INFORMATION**

**Item1.    Financial Statements**

**VANGUARD HEALTH SYSTEMS, INC.CONDENSED CONSOLIDATED BALANCE SHEETS**

|                                                                                                                                                                                                                                                                                                                              |  | **June30, 2001**                     |    |   |   | **(Unaudited) March 31, 2002** |         |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--------------------------------------|---------|--------|--------|--------------------------------|---------|--------|
|                                                                                                                                                                                                                                                                                                                              |  |                                      |    |   |
| **ASSETS**                                                                                                                                                                                                                                                                                                                        |  | *(Inthousands except share amounts)* |    |   |
|                                                                                                                                                                                                                                                                                                                                   |  | **                                   |         |   |
| Current assets:                                                                                                                                                                                                                                                                                                                   |  |                                      |         |        |        |                                |         |        |
|    Cash andcash equivalents                                                                                                                                                                                                                                                                                        |  | $                                    | 12,079  |        |        | $                              | 89,351  |   |
|    Accountsreceivable, net of allowance for uncollectible accounts of       approximately $30,704 and$23,602 at June 30, 2001 and       March 31, 2002,respectively                                                                                    |  |                                      | 128,901 |        |        |                                | 147,971 |        |
|    Supplies                                                                                                                                                                                                                                                                                                        |  |                                      | 11,363  |        |        |                                | 13,537  |        |
|    Prepaidexpenses and other current assets                                                                                                                                                                                                                                                                        |  |                                      | 16,518  |        |        |                                | 17,014  |        |
|                                                                                                                                                                                                                                                                                                                              |  |                                      |         |        |        |                                |         |        |
|         Totalcurrent assets                                                                                                                                                                                                                                                               |  |                                      | 168,861 |        |        |                                | 267,873 |        |
| Property, plant andequipment, net of accumulated depreciation                                                                                                                                                                                                                                                                     |  |                                      | 362,964 |        |        |                                | 406,783 |        |
| Goodwill, net ofaccumulated amortization                                                                                                                                                                                                                                                                                          |  |                                      | 74,233  |        |        |                                | 78,585  |        |
| Intangible assets, net ofaccumulated amortization                                                                                                                                                                                                                                                                                 |  |                                      | 28,381  |        |        |                                | 39,436  |        |
| Other assets                                                                                                                                                                                                                                                                                                                      |  |                                      | 5,959   |        |        |                                | 6,797   |        |
|                                                                                                                                                                                                                                                                                                                              |  |                                      |         |        |        |                                |         |        |
|         Totalassets                                                                                                                                                                                                                                                                       |  | $                                    | 640,398 |        |        | $                              | 799,474 |        |
|                                                                                                                                                                                                                                                                                                                              |  |                                      |         |        |        |                                |         |        |
| **LIABILITIES AND STOCKHOLDERS’EQUITY**                                                                                                                                                                                                                                                                                     |  |                                      |         |        |        |                                |         |        |
| Currentliabilities:                                                                                                                                                                                                                                                                                                               |  |                                      |         |        |        |                                |         |        |
|    Accountspayable                                                                                                                                                                                                                                                                                                 |  | $                                    | 41,703  |        |        | $                              | 39,887  |        |
|    Accruedinterest                                                                                                                                                                                                                                                                                                 |  |                                      | 5,480   |        |        |                                | 5,757   |        |
|    Otheraccrued expenses and current liabilities                                                                                                                                                                                                                                                                   |  |                                      | 93,319  |        |        |                                | 96,088  |        |
|    Currentmaturities of long-term debt                                                                                                                                                                                                                                                                             |  |                                      | 10,332  |        |        |                                | 3,743   |        |
|                                                                                                                                                                                                                                                                                                                              |  |                                      |         |        |        |                                |         |        |
|         Totalcurrent liabilities                                                                                                                                                                                                                                                          |  |                                      | 150,834 |        |        |                                | 145,475 |        |
| Otherliabilities                                                                                                                                                                                                                                                                                                                  |  |                                      | 9,185   |        |        |                                | 16,326  |   |
| Long-term debt, lesscurrent maturities                                                                                                                                                                                                                                                                                            |  |                                      | 153,112 |        |        |                                | 303,906 |   |
| Payable-In-Kind PreferredStock; $.01 par value, 150,000 combined shares of     Preferred Stock and Payable-In-Kind PreferredStock authorized, 21,600     shares of Payable-In-Kind Preferred Stockissued and outstanding at     June 30, 2001 and March 31, 2002, at redemptionvalue |  |                                      | 22,320  |        |        |                                | 23,639  |        |
| Stockholders’Equity:                                                                                                                                                                                                                                                                                                        |  |                                      |         |        |        |                                |         |        |
| Preferred Stock; $1,000par value, 150,000 combined shares of Preferred Stock     and Payable-In-Kind Preferred Stock authorized,no shares of Preferred     Stock issued and outstanding                                                                                                             |  |                                      | — |        |        |                                | — |        |
| Common Stock; $.01 parvalue, 600,000 shares authorized, 203,294 and     203,308 shares issued and outstanding at June30, 2001 and     March 31, 2002, respectively                                                                                                                                  |  |                                      | 2       |        |        |                                | 2       |        |
| Additional paid incapital                                                                                                                                                                                                                                                                                                         |  |                                      | 307,131 |        |        |                                | 305,832 |        |
| Accumulated othercomprehensive loss                                                                                                                                                                                                                                                                                               |  |                                      | (1,654  | )      |        |                                | — |        |
| Retained (deficit)earnings                                                                                                                                                                                                                                                                                                        |  |                                      | (532    | )      |        |                                | 4,294   |        |
|                                                                                                                                                                                                                                                                                                                              |  |                                      |         |        |        |                                |         |        |
|         Totalliabilities and stockholders’ equity                                                                                                                                                                                                                                   |  | $                                    | 640,398 |        |        | $                              | 799,474 |        |
|                                                                                                                                                                                                                                                                                                                              |  |                                      |         |        |        |                                |         |        |

Seeaccompanying notes.

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**Table ofContents**

**VANGUARD HEALTH SYSTEMS, INC.CONDENSED CONSOLIDATED INCOME STATEMENTS(Unaudited)**

|   |                                                                                   |                 | **Threemonths ended March 31,** | ** ** | **Ninemonths ended March 31,** |     |
|--------|-----------------------------------------------------------------------------------|-----------------|---------------------------------|------------|--------------------------------|----------|
|        |                                                                                   | **2001**        | ** **                      | **2002**   | ** **                     | **2001** | ** ** | **2002** |
|        |                                                                                   | ******          |
|        |                                                                                   | *(Inthousands)* |
|        |                                                                                   | ******          |
|   | Patient servicerevenues                                                           |            | $                               | 156,975    |                                |     | $ | 186,775 |  |   | $ | 453,315 |  |   | $ | 530,687 |  |
|   | Premiumrevenues                                                                   |            |                            | 9,291      |                                |          |  | 49,110 |  |  |  | 27,245 |  |  |  | 135,635 |  |
|   |                                                                                   |            |                            |            |                                |          |  |  |  |  |  |  |  |  |  |  |  |
|   |       Totalrevenues                                 |            |                            | 166,266    |                                |          |  | 235,885 |  |  |  | 480,560 |  |  |  | 666,322 |  |
|   |                                                                              |            |                            |            |                                |          |  |  |  |  |  |  |  |  |  |  |  |
|   | Costs andExpenses:                                                                |            |                            |            |                                |          |  |  |  |  |  |  |  |  |  |  |  |
|   |    Salariesand benefits                                            |            |                            | 83,480     |                                |          |  | 99,118 |  |  |  | 238,819 |  |  |  | 281,064 |  |
|   |    Supplies                                                        |            |                            | 23,225     |                                |          |  | 30,040 |  |  |  | 67,153 |  |  |  | 83,518 |  |
|   |    Medicalclaims expense                                           |            |                            | 4,182      |                                |          |  | 34,935 |  |  |  | 11,924 |  |  |  | 97,400 |  |
|   |    Purchased services                                              |            |                            | 11,771     |                                |          |  | 16,827 |  |  |  | 33,714 |  |  |  | 48,913 |  |
|   |    Provision for doubtfulaccounts                                  |            |                            | 10,178     |                                |          |  | 11,927 |  |  |  | 43,364 |  |  |  | 41,975 |  |
|   |    Otheroperating expenses                                         |            |                            | 13,224     |                                |          |  | 16,403 |  |  |  | 39,301 |  |  |  | 48,119 |  |
|   |    Rentsand leases                                                 |            |                            | 2,870      |                                |          |  | 3,782 |  |  |  | 9,011 |  |  |  | 10,454 |  |
|   |    Depreciation andamortization                                    |            |                            | 6,057      |                                |          |  | 8,672 |  |  |  | 18,387 |  |  |  | 23,043 |  |
|   |    Interest, net                                                   |            |                            | 4,125      |                                |          |  | 7,194 |  |  |  | 12,623 |  |  |  | 20,435 |  |
|   |    Other                                                           |            |                            | (75        | )                              |          |  | (58 | ) |  |  | 198 |  |  |  | (695 | ) |
|   |                                                                              |            |                            |            |                                |          |  |  |  |  |  |  |  |  |  |  |  |
|   | Income before income taxesand    extraordinary item                |            |                            | 7,229      |                                |          |  | 7,045 |  |  |  | 6,066 |  |  |  | 12,096 |  |
|   | Income taxexpense                                                                 |            |                            | 444        |                                |          |  | 2,817 |  |  |  | 466 |  |  |  | 3,528 |  |
|   |                                                                              |            |                            |            |                                |          |  |  |  |  |  |  |  |  |  |  |  |
|   | Income beforeextraordinary item                                                   |            |                            | 6,785      |                                |          |  | 4,228 |  |  |  | 5,600 |  |  |  | 8,568 |  |
|   | Extraordinary loss (gain)on extinguishment of debt    (net of tax) |            |                            | —    |                                |          |  | (2,197 | ) |  |  | — |  |  |  | 3,741 |  |
|   |                                                                              |            |                            |            |                                |          |  |  |  |  |  |  |  |  |  |  |  |
|   | Net income                                                                        |            |                            | 6,785      |                                |          |  | 6,425 |  |  |  | 5,600 |  |  |  | 4,827 |  |
|   | Preferred stockdividends                                                          |            |                            | (400       | )                              |          |  | (455 | ) |  |  | (1,200 | ) |  |  | (1,319 | ) |
|   |                                                                              |            |                            |            |                                |          |  |  |  |  |  |  |  |  |  |  |  |
|   | Net income attributable tocommon    stockholders                   |            | $                               | 6,385      |                                |          | $ | 5,970 |  |  | $ | 4,400 |  |  | $ | 3,508 |  |
|   |                                                                              |            |                            |            |                                |          |  |  |  |  |  |  |  |  |  |  |  |

Seeaccompanying notes.

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**Table ofContents**

**VANGUARD HEALTH SYSTEMS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

| ** **                                                                                           | ** ** | **Ninemonths ended March 31,** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------|
| ** **                                                                                           | ** ** | ****                           |
| ** **                                                                                           | ** ** | **2001**                       | ** ** | **2002** |
|                                                                                                 |       |                                |
|                                                                                                      |            | *(Inthousands)*                |
| Operatingactivities:                                                                                 |       |                                |  |  |   |   |   |  |   |
| Net income                                                                                           |       | $                              | 5,600 |  |   | $ | 4,827 |  |   |
| Adjustments to reconcilenet income to net cash     provided by operating activities:  |       |                                |  |  |   |  |  |  |   |
|    Depreciation and amortization                                                      |       |                                | 18,387 |  |   |  | 23,043 |  |   |
|    Provision for doubtful accounts                                                    |       |                                | 43,364 |  |   |  | 41,975 |  |   |
|    Amortization of loan costs                                                         |       |                                | 645 |  |   |  | 1,018 |  |   |
|     Loss onsale of assets                                                             |            |                                | 308 |  |  |  | — |  |   |
|    Extraordinary loss on extinguishment of debt                                       |       |                                | — |  |   |  | 3,741 |  |   |
|     Changesin operating assets and liabilities, net of                                |       |                                |  |  |   |  |  |  |   |
|        effects of acquisitions:                                   |       |                                |  |  |   |  |  |  |   |
|        Accounts receivable                                        |       |                                | (55,070 | ) |   |  | (49,307 | ) |   |
|        Establishment of accounts receivable of recentacquisitions |       |                                | (7,236 | ) |   |  | (1,522 | ) |   |
|        Supplies                                                   |       |                                | (316 | ) |   |  | (474 | ) |   |
|        Prepaid expenses and other current assets                  |       |                                | 2,796 |  |   |  | (1,491 | ) |   |
|        Accounts payable                                           |       |                                | 8,755 |  |   |  | (3,781 | ) |   |
|        Accrued expenses and other current liabilities             |       |                                | (4,769 | ) |   |  | 2,945 |  |   |
|         Otherliabilities                                          |       |                                | 3,434 |  |   |  | 4,372 |  |   |
|                                                                                                      |       |                                |  |  |   |  |  |  |   |
| Net cash provided byoperating activities                                                             |       |                                | 15,898 |  |   |  | 25,346 |  |   |
|                                                                                                      |            |                                |  |  |  |  |  |  |   |
| Investingactivities:                                                                                 |       |                                |  |  |   |  |  |  |   |
| Acquisitions includingworking capital settlement payments                                            |       |                                | (1,717 | ) |   |  | (59,106 | ) |   |
| Capitalexpenditures                                                                                  |       |                                | (20,967 | ) |   |  | (20,483 | ) |   |
| Other                                                                                                |       |                                | (2,366 | ) |   |  | (838 | ) |   |
|                                                                                                      |       |                                |  |  |   |  |  |  |   |
| Net cash used in investingactivities                                                                 |       |                                | (25,050 | ) |   |  | (80,427 | ) |   |
|                                                                                                      |            |                                |  |  |  |  |  |  |   |
| Financingactivities:                                                                                 |       |                                |  |  |   |  |  |  |   |
| Proceeds from long-termdebt                                                                          |       |                                | — |  |   |  | 300,000 |  |   |
| Payments of long-term debtand capital leases                                                         |       |                                | (2,927 | ) |   |  | (153,026 | ) |   |
| Payments of loancosts                                                                                |       |                                | — |  |   |  | (14,641 | ) |   |
| Exercise of stockoptions                                                                             |       |                                | — |  |   |  | 20 |  |   |
|                                                                                                      |       |                                |  |  |   |  |  |  |   |
| Net cash (used in)provided by financing activities                                                   |       |                                | (2,927 | ) |   |  | 132,353 |  |   |
| Net (decrease) increase incash and cash equivalents                                                  |       |                                | (12,079 | ) |   |  | 77,272 |  |   |
| Cash and cash equivalents,beginning of period                                                        |       |                                | 16,812 |  |   |  | 12,079 |  |   |
|                                                                                                      |       |                                |  |  |   |  |  |  |   |
| Cash and cash equivalents,end of period                                                              |       | $                              | 4,733 |  |   | $ | 89,351 |  |   |
|                                                                                                      |       |                                |  |  |   |  |  |  |   |

Seeaccompanying notes.

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**Table ofContents**

**VANGUARD HEALTH SYSTEMS, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMarch 31, 2002(Unaudited)**

**1.            BASIS OF PRESENTATION AND ORGANIZATION**

****

               The unaudited condensed consolidated financial statements as ofMarch 31, 2002 and for the three months and nine months then endedinclude the accounts of Vanguard Health Systems, Inc.(“Vanguard” or the “Company”) and itswholly owned and majority-owned subsidiaries and have been preparedin conformity with accounting principles generally accepted in theUnited States for interim reporting and in accordance with Rule10-01 of Regulation S-X.  Accordingly, they do not include allof the information and notes required by accounting principlesgenerally accepted in the United States for complete financialstatements.

               In the opinion of management, the unaudited condensed consolidatedfinancial statements reflect all adjustments (consisting of normalrecurring adjustments) necessary for a fair presentation of thefinancial position and the results of operations for the periodspresented.  The results of operations for the periodspresented are not necessarily indicative of the results to beexpected for the year ending June 30, 2002.  The interimcondensed consolidated financial statements should be read inconnection with the audited consolidated financial statements as ofand for the year ended June 30, 2001 included in theCompany’s registration statement on Form S-1 filed with theSecurities and Exchange Commission (Registration No.333-71934).  Certain prior year amounts have been reclassifiedto conform with current year presentation.

               The preparation of financial statements in conformity withaccounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affectthe amounts reported in the accompanying unaudited condensedconsolidated financial statements and notes.  Actual resultscould differ from those estimates.

               As of March 31, 2002, the Company owned nine acute care hospitalswith a total of 1,838 beds and related outpatient service locationscomplementary to the hospitals providing health care services tothe metropolitan Phoenix, Arizona; metropolitan Los Angeles/OrangeCounty, California; and metropolitan Chicago, Illinoismarkets.  The Company also owned a prepaid Medicaid managedhealth plan, Phoenix Health Plan, which serves more than 66,000members in Arizona as of March 31, 2002.

**2.            ACQUISITIONS**

****

*               Fiscal 2002 Acquisitions*

****

               On November 1, 2001, the Company completed the acquisition of theassets of Paradise Valley Hospital (“Paradise Valley”),a 162-bed acute care hospital located in Phoenix, Arizona, for atotal purchase price of approximately $55,974,000, comprised ofcash of $55,303,000 and the assumption of other certain liabilitiesof $671,000.  The excess of the purchase price over net assetsacquired was $3,835,000 and has been allocated to net intangibleassets and net goodwill on the accompanying condensed consolidatedbalance sheets.  The Company funded the acquisition with aportion of its cash proceeds from the July 30, 2001 issuance of its9.75% senior subordinated notes due 2011.  The Paradise Valleyacquisition was accounted for using the purchase method ofaccounting, and the operating results of the acquired entity havebeen included in the accompanying condensed consolidated statementsof operations from the date of acquisition.

****

*               Fiscal 2001 Acquisitions*

****

               During the fiscal year ended June 30, 2001, the Company completedthe following acquisitions:

| **Date**       |            | **Entity**                        | **          ** | **Location**  |
|----------------|--------------------------------------------------------------|-----------------------------------|------------------------------------------------------------------|---------------|
|                |                                                              |                                   |                                                                  |               |
| July 2000      |                                                              | Trinity MedCare,Inc.              |                                                                  | Nashville, TN |
| September 2000 |                                                              | Pleasant Properties,Inc.          |                                                                  | Phoenix, AZ   |
| May 2001       |                                                              | PMH Health Resources,Inc.         |                                                                  | Phoenix, AZ   |
| June 2001      |                                                              | Touchstone Imaging ofArizona, LLC |                                                                  | Phoenix, AZ   |

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**Table of Contents**

               The Company acquired certain net assets of the aforementionedentities, which include a hospital, health plan and imaging centersfor a total purchase price of approximately $90,620,000, comprisedof cash of $31,602,000 and the assumption of certain liabilities of$59,018,000.  The excess of the purchase price over net assetsacquired was $31,193,000 and is included as part of net goodwilland net intangible assets on the accompanying condensedconsolidated balance sheets.  The acquisitions were financedwith the proceeds from equity issuances to various affiliates ofMorgan Stanley Capital Partners (“MSCP”) and certainmembers of management and internally generated cash.  The 2001acquisitions were accounted for using the purchase method ofaccounting, and the operating results of the acquired entities havebeen included in the accompanying condensed consolidated statementsof operations from the respective dates of acquisition.

**3.            GOODWILL AND INTANGIBLE ASSETS**

               Effective July 1, 2001, the Company adopted the provisions of SFASNo. 141, *Business Combinations*, and SFAS No. 142,*Goodwill and Other Intangible Assets*.  In accordancewith these provisions, the Company reclassified its previousallocations of excess purchase price over net assets acquiredbetween goodwill and intangible assets and re-assessed theamortization lives assigned to intangible assets.  Thefollowing table provides information regarding the intangibleassets, including deferred loan costs, included on the accompanyingcondensed consolidated balance sheets as of June 30, 2001 and March31, 2002 (in thousands).

|                                               |                         |   | ** ** | **GrossCarrying Amount** | ** ** | **Accumulated Amortization** |
|----------------------------------------------------|------------------------------|---|------------|--------------------------|------------|------------------------------|
|                                               |                    |   | ** ** | ****                     |
|                                               |                         |   |            | **June30, 2001**         | ** ** | **March31, 2002**            | ** ** | **June30, 2001** | ** ** | **March31, 2002** |   |
|                                               | **Class of IntangibleAsset** |   |            | ****                     |       |
| Amortized intangibleassets:                        |                              |   |            |                          |            |                              |  |  |  |  |  |  |  |  |  |  |   |
|    Deferred loan costs              |                              | $ | 4,461      |                          |            | $                            | 15,000 |  |  | $ | 1,116 |  |  | $ | 855 |  |   |
|    Certificate of need              |                              |   | 19,351     |                          |            |                              | — |  |  |  | 758 |  |  |  | — |  |   |
|    Assembled workforce              |                              |   | 3,580      |                          |            |                              | — |  |  |  | 1,874 |  |  |  | — |  |   |
|     Medicalrecords                  |                              |   | 6,150      |                          |            |                              | — |  |  |  | 2,792 |  |  |  | — |  |   |
|    Contracts                        |                              |   | —    |                          |            |                              | 7,910 |  |  |  | — |  |  |  | 1,034 |  |   |
|    Customer lists                   |                              |   | —    |                          |            |                              | 2,250 |  |  |  | — |  |  |  | 1,149 |  |   |
|    Other                            |                              |   | 2,340      |                          |            |                              | 3,587 |  |  |  | 961 |  |  |  | 790 |  |   |
|                                               |                              |   |            |                          |            |                              |  |  |  |  |  |  |  |  |  |  |   |
|        Subtotal |                              |   | 35,882     |                          |            |                              | 28,747 |  |  |  | 7,501 |  |  |  | 3,828 |  |   |
|                                               |                              |   |            |                          |            |                              |  |  |  |  |  |  |  |  |  |  |   |
| Indefinite-livedintangible assets:                 |                              |   |            |                          |            |                              |  |  |  |  |  |  |  |  |  |  |   |
|     Licenseand accreditation        |                              |   | —    |                          |            |                              | 8,013 |  |  |  | — |  |  |  | — |  |   |
|    Other                            |                              |   | —    |                          |            |                              | 6,504 |  |  |  | — |  |  |  | — |  |   |
|                                               |                              |   |            |                          |            |                              |  |  |  |  |  |  |  |  |  |  |   |
|        Subtotal |                              |   | —    |                          |            |                              | 14,517 |  |  |  | — |  |  |  | — |  |   |
|                                               |                              |   |            |                          |            |                              |  |  |  |  |  |  |  |  |  |  |   |
| Total                                              |                              | $ | 35,882     |                          |            | $                            | 43,264 |  |  | $ | 7,501 |  |  | $ | 3,828 |  |   |
|                                               |                              |   |            |                          |            |                              |  |  |  |  |  |  |  |  |  |  |   |

The Company estimatesamortization expense for these intangible assets, excludingdeferred loan costs which are amortized to interest expense, toapproximate $3,375,000, $2,441,000, $1,267,000, $1,245,000 and$1,155,000 for the fiscal years ending June 30, 2002, 2003, 2004,2005 and 2006, respectively.

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**Table of Contents**

The following tablepresents the changes in the carrying amount of goodwill from thedate of transition to March 31, 2002 (in thousands).

|                                      |  |   | **Acute Care Services** |  |        | **Health Plans** |        |   | **Total** |
|--------------------------------------|--|---|-------------------------|--|--------|------------------|--------|---|-----------|
|                                      |  |   |                         |
| Balance as of July 1,2001            |  | $ | 65,586                  |  | $      | 8,647            |   | $ | 74,233    |
| Working capital settlementadjustment |  |   | —                 |  |   | 2,752            |   |   | 2,752     |
| Acquisitions                         |  |   | 1,600                   |  |   | —          |   |   | 1,600     |
|                                 |  |   |                         |  |   |                  |   |   |           |
| Balance as of March 31,2002          |  | $ | 67,186                  |  | $      | 11,399           |   | $ | 78,585    |
|                                 |  |   |                         |  |   |                  |   |   |           |

The Company completed itstransition impairment tests of goodwill and indefinite-livedintangible assets during the first quarter of fiscal 2002 noting noimpairment and will perform its initial annual impairment testlater in fiscal 2002.  Amortization of goodwill andindefinite-lived intangible assets has been suspended in theaccompanying condensed consolidated statements of operations forthree months and nine months ended March 31, 2002.  Thefollowing table presents the amortization expense, net incomebefore extraordinary item and net income for the three-month andnine-month periods ended March 31, 2001 and 2002 assuming SFAS 141and 142 had been adopted on July 1, 2000, and given the effects ofthe adoption of SFAS 141 and 142 on July 1, 2001 (inthousands).

|   |                                                                                                                   |          | **Threemonths ended March 31,** | ** ** | **Ninemonths ended March 31,** |     |
|--------|-------------------------------------------------------------------------------------------------------------------|----------|---------------------------------|------------|--------------------------------|----------|
|        |                                                                                                                   | **2001** | ** **                      | **2002**   | ** **                     | **2001** | ** ** | **2002** |
|        |                                                                                                                   | ****     |
|   | Reported net income beforeextraordinary item                                                                      |     | $                               | 6,785      |                                |     | $ | 4,228 |  |  | $ | 5,600 |  |  | $ | 8,568 |  |
|   | Extraordinary loss (gain)on extinguishment of debt                                                                |     |                            | ―    |                                |          |  | (2,197 | ) |  |  | ― |  |  |  | 3,741 |  |
|   |                                                                                                                   |     |                            |            |                                |          |  |  |  |  |  |  |  |  |  |  |  |
|   | Reported netincome                                                                                                |     |                            | 6,785      |                                |          |  | 6,425 |  |  |  | 5,600 |  |  |  | 4,827 |  |
|   | Add back: Goodwillamortization                                                                                    |     |                            | 983        |                                |          |  | ― |  |  |  | 3,030 |  |  |  | ― |  |
|   | Adjust: Amortization ofintangible assets previously classified as    goodwill (net of taxes of $0) |     |                            | (355       | )                              |          |  | ― |  |  |  | (1,065 | ) |  |  | ― |  |
|   |                                                                                                                   |     |                            |            |                                |          |  |  |  |  |  |  |  |  |  |  |  |
|   |       Adjusted netincome                                                            |     | $                               | 7,413      |                                |          | $ | 6,425 |  |  | $ | 7,565 |  |  | $ | 4,827 |  |
|   |                                                                                                                   |          |                                 |            |                                |          |  |  |  |  |  |  |  |  |  |  |  |

**4.            FINANCING ARRANGEMENTS**

               On July 30, 2001, the Company received gross proceeds of$300,000,000 through the issuance of 9.75% Senior SubordinatedNotes (the “Notes”) which mature in August 2011. Interest on the Notes is payable semi-annually on February 1 andAugust 1.  The Company may redeem the Notes, in whole or inpart, at any time from August 1, 2006 to July 31, 2009 atredemption prices ranging from 104.875% to 101.625%, plus accruedand unpaid interest.  The Company may redeem the Notes on orafter August 1, 2009 at a 100.00% redemption price plus accrued andunpaid interest.  Additionally, at any time prior to August 1,2004, the Company may redeem up to 35% of the principal amount ofthe Notes with the net cash proceeds of one or more sales of itscapital stock at a redemption price of 109.75% plus accrued andunpaid interest to the redemption date; provided that at least 65%of the aggregate principal amount of the Notes originally issued onJuly 30, 2001 remains outstanding after each such redemption andnotice of any such redemption is mailed within 90 days of each suchsale of capital stock.

               Payment of the principal and interest of the Notes is subordinateto amounts owed for existing and future senior indebtedness of theCompany and is guaranteed, jointly and severally, on an unsecuredsenior subordinated basis by most of the Company’ssubsidiaries.  The Company is subject to certain restrictivecovenants under the Indenture governing the Notes.  TheCompany used a portion of the proceeds from the offering to repayall amounts outstanding under its then existing credit facility(“2000 credit facility”) of approximately$147,012,500.

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**Table of Contents**

               Concurrent with the issuance of the Notes, the Company entered intoa new senior secured credit facility (the “2001 creditfacility”) with a syndicate of lenders with Banc of AmericaSecurities LLC and Morgan Stanley Senior Funding, Inc. serving asjoint lead arrangers and book managers and Bank of America, N.A. asadministrative agent.  The 2001 credit facility initiallyprovides for up to $125 million of outstanding loans and letters ofcredit on a revolving basis and contemplates, but the lenders havenot committed to, additional term loans of up to $250million.  The Company would be required to obtain commitmentsfrom its existing or new lenders to obtain the term loans.  Asof March 31, 2002, the only amounts drawn against the 2001 creditfacility are letters of credit totaling approximately $5.6million.  The applicable interest rate under the revolvingcredit facility is based upon either: 1) LIBOR plus a marginranging from 2.25% to 3.25% depending on the Company’s netdebt to EBITDA ratio for the most recent four quarters or 2) a baserate plus a margin ranging from 1.25% to 2.25% depending on theCompany’s net debt to EBITDA ratio for the most recent fourquarters.  The Company is subject to certain restrictive andfinancial covenants under the 2001 credit facility.  TheCompany is in compliance with such covenants as of March 31,2002.  Obligations under the 2001 credit facility areguaranteed by most of the Company’s current and future whollyowned domestic subsidiaries and are secured by liens onsubstantially all of the assets of the Company and its subsidiariesand the stock of the Company’s subsidiaries.

               The Company incurred offering costs and loan costs of approximately$11,500,000 and $3,500,000 for the Notes and the 2001 creditfacility, respectively.  The Company capitalized the costsassociated with the 2001 credit facility and the offering of theNotes and is amortizing such costs to interest expense over the5-year life of the 2001 credit facility and the 10-year life of theNotes.

               On May 3, 2000, the Company entered into a three-year interest ratecollar having a notional principal amount of $67,000,000 with alarge financial institution as a result of a provision of the 2000credit facility requiring the Company to maintain a form ofinterest rate protection.  The Company adopted the provisionsof SFAS 133 effective July 1, 2000 for the collar agreement. The instrument qualified as a cash flow hedge under SFAS 133 andinitially expired on May 3, 2003.  The collar agreementincluded a 90-day settlement period at which time the Company madepayments to the hedging financial institution for instances inwhich 90-day LIBOR dropped below the designated rate floor of6.865% or received payments from the hedging financial institutionfor instances in which the 90-day LIBOR exceeded the designatedrate ceiling of 8.0%.  The Company terminated the collaragreement in July 2001 concurrently with the issuance of the Notesand repayment of the amounts outstanding under the 2000 creditfacility resulting in an extraordinary loss on extinguishment ofdebt – (see Note 6).

               On February 15, 2001, the Company entered into an interest rateswap agreement with Bank of America, N.A., to swap its 9.75% fixedinterest rate on a notional amount of $100,000,000 of the Notes fora floating rate designated at the 6-month LIBOR rate (the benchmarkinterest rate) plus a fixed percentage of 3.63%.  The swapagreement will terminate upon the maturity or redemption of theNotes.  The floating interest rate is determined for thesix-month period in arrears on semi-annual settlement dates ofFebruary 1 and August 1.  The swap qualifies as a fair valuehedge under SFAS 133, and the Company elected the shortcut methodof accounting due to the highly effective nature of the swap. As of March 31, 2002, the Company recorded the swap at fair marketvalue resulting in a liability of approximately $2,769,000 with anoffsetting reduction in the fair value of the Notes.

**5.            RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS**

               In April 2002, the FASB issued Statement of Financial AccountingStandards No. 145, *Rescission of FASB Statements No. 4, 44, and64, Amendment of FASB Statement No. 13, and TechnicalCorrections* (“SFAS 145”).  SFAS 145 prohibitsthe classification of gains or losses from debt extinguishments asextraordinary items unless the criteria outlined in APB Opinion No.30, *Reporting the Results of Operations – Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary,Unusual and Infrequently Occurring Events and Transactions*, aremet.  SFAS 145 also eliminates an inconsistency between therequired accounting for sale-leaseback transactions and therequired accounting for certain lease modifications that haveeconomic effects that are similar to sale-leasebacktransactions.  SFAS 145 is effective for fiscal yearsbeginning after May 15, 2002, with early adoption encouraged. The Company intends to adopt the provisions of SFAS 145 during the4th quarter of fiscal 2002 and restate its prior auditedconsolidated financial statements for the reclassification ofextraordinary loss on extinguishment of debt.

               In August 2001, the FASB issued Statement of Financial AccountingStandards No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets* (“SFAS 144”), which supersedesSFAS 121, *Accounting for the Impairment of Long-Lived Assets andfor Long-Lived Assets to Be Disposed Of*, and the accounting andreporting provisions of APB

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**Table of Contents**

Opinion No. 30.  SFAS144 removes goodwill from its scope and clarifies otherimplementation issues related to SFAS 121.  SFAS 144 alsoprovides a single framework for evaluating long-lived assets to bedisposed of by sale.  The Company does not expect SFAS 144 tohave a material effect on its results of operations or financialposition.

               In March 2000, the FASB issued Financial Accounting Standards BoardInterpretation No. 44, *Accounting for Certain TransactionsInvolving Stock Compensation – an interpretation of APBOpinion No. 25* (“FIN 44”), which became effectiveJuly 1, 2000, covering transactions occurring after December 15,1998.  FIN 44 clarifies the application of APB Opinion No. 25relating to the definition of an employee, criteria for determiningwhether a plan qualifies as a noncompensatory plan, accountingconsequences of various modifications to the terms of a previouslyfixed stock option or award and the accounting for an exchange ofstock compensation awards in a business combination.  Theapplication of FIN 44 had no effect on the Company’s resultsof operations or financial position.

**6.            EXTRAORDINARY ITEMS**

               Concurrent with the issuance of the Notes and repayment of theamounts outstanding under the 2000 credit facility, the Companyexpensed the remaining deferred loan costs associated with the 2000credit facility of approximately $3,180,000 ($1,795,000 net oftaxes) and incurred penalties for the early termination of certaincapital leases of $244,000 ($138,000 net of taxes) resulting in anextraordinary loss on extinguishment of debt for the nine monthsended March 31, 2002.  Additionally, the Company paidapproximately $3,737,000 in July 2001 representing accrued intereston the interest rate collar and a settlement fee to terminate thecollar agreement, which was required under the 2000 creditfacility.  The termination fee of $3,203,000 ($1,808,000 netof taxes) represents the fair market value of the collar agreementas of the termination date and is reflected on the accompanyingcondensed consolidated statement of operations for the nine monthsended March 31, 2002 as an extraordinary loss on extinguishment ofdebt. 

**7.            SEGMENT INFORMATION**

****

               The Company’s acute hospitals and related health carebusinesses are similar in their activities and the economicenvironments in which they operate (i.e. urban markets). Accordingly, the Company’s reportable operating segmentsconsist of 1) acute care hospitals and related health carebusinesses, collectively, and 2) health plans consisting of MacNealHealth Providers, a contracting entity for MacNeal Hospital, andPhoenix Health Plan, a Medicaid managed health plan inArizona.  Prior to the acquisitions of these entities, theCompany determined that it did not have separately reportablesegments as defined under Statement of Financial AccountingStandards No. 131, *Disclosures about Segments of an Enterpriseand Related Information*.

               The following table provides condensed financial information bybusiness segment for the three months and nine months ended March31, 2001 and 2002, respectively (in thousands).

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|                                                                                                                                       |  | **Threemonths ended March 31, 2001** |         | **Threemonths ended March 31, 2002** |
|---------------------------------------------------------------------------------------------------------------------------------------|--|--------------------------------------|---------|--------------------------------------|
|                                                                                                                                       |  | ****                                 |         | ****                                 |
|                                                                                                                                       |  | **Health Plans**                     |         | **AcuteCare Services**               |  | **Eliminations** |  | **Consolidated** |  | **Health Plans** |  | **AcuteCare Services** |  | **Eliminations** |  | **Consolidated** |
|                                                                                                                                       |  | ****                                 |         | ****                                 |
| Patient servicerevenues                                                                                                               |  | $                                    | ― |                                      |  | $ | 156,975 |  |  | $ | ― |  |  | $ | 156,975 |  |  | $ | ― |  |  | $ | 186,775 |  |  | $ | ― |  |  | $ | 186,775 |  |   |
| Capitationpremiums                                                                                                                    |  |                                      | 9,291   |                                      |  |  | ― |  |  |  | ― |  |  |  | 9,291 |  |  |  | 49,110 |  |  |  | ― |  |  |  | ― |  |  |  | 49,110 |  |   |
| Inter-segmentrevenues                                                                                                                 |  |                                      | ― |                                      |  |  | 3,793 |  |  |  | (3,793 | ) |  |  | ― |  |  |  | ― |  |  |  | 6,676 |  |  |  | (6,676 | ) |  |  | ­― |  |   |
|                                                                                                                                       |  |                                      |         |                                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
|       Totalrevenues                                                                                          |  |                                      | 9,291   |                                      |  |  | 160,768 |  |  |  | (3,793 | ) |  |  | 166,266 |  |  |  | 49,110 |  |  |  | 193,451 |  |  |  | (6,676 | ) |  |  | 235,885 |  |   |
|                                                                                                                                       |  |                                      |         |                                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
| Operating expenses -external                                                                                                          |  |                                      | 5,098   |                                      |  |  | 143,695 |  |  |  | ― |  |  |  | 148,793 |  |  |  | 38,423 |  |  |  | 174,486 |  |  |  | ― |  |  |  | 212,909 |  |   |
| Operating expenses -inter-segment                                                                                                     |  |                                      | 3,793   |                                      |  |  | ― |  |  |  | (3,793 | ) |  |  | ― |  |  |  | 6,676 |  |  |  | ― |  |  |  | (6,676 | ) |  |  | ― |  |   |
|                                                                                                                                       |  |                                      |         |                                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
|       Total operatingexpenses                                                                                |  |                                      | 8,891   |                                      |  |  | 143,695 |  |  |  | (3,793 | ) |  |  | 148,793 |  |  |  | 45,099 |  |  |  | 174,486 |  |  |  | (6,676 | ) |  |  | 212,909 |  |   |
|                                                                                                                                       |  |                                      |         |                                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
|      EBITDA(1)                                                                                               |  |                                      | 400     |                                      |  |  | 17,073 |  |  |  | ― |  |  |  | 17,473 |  |  |  | 4,011 |  |  |  | 18,965 |  |  |  | ― |  |  |  | 22,976 |  |   |
|                                                                                                                                       |  |                                      |         |                                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
| Depreciation andamortization                                                                                                          |  |                                      | 129     |                                      |  |  | 5,928 |  |  |  | ― |  |  |  | 6,057 |  |  |  | 361 |  |  |  | 8,311 |  |  |  | ― |  |  |  | 8,672 |  |   |
| Interest                                                                                                                              |  |                                      | 6       |                                      |  |  | 4,119 |  |  |  | ― |  |  |  | 4,125 |  |  |  | 642 |  |  |  | 6,552 |  |  |  | ― |  |  |  | 7,194 |  |   |
| Other (2)                                                                                                                             |  |                                      | ― |                                      |  |  | 62 |  |  |  | ― |  |  |  | 62 |  |  |  | ― |  |  |  | 65 |  |  |  | ― |  |  |  | 65 |  |   |
|                                                                                                                                       |  |                                      |         |                                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
|       Income beforeincome           taxes andextraordinary item |  | $                                    | 265     |                                      |  | $ | 6,964 |  |  | $ | ― |  |  | $ | 7,229 |  |  | $ | 3,008 |  |  | $ | 4,037 |  |  | $ | ― |  |  | $ | 7,045 |  |   |
|                                                                                                                                       |  |                                      |         |                                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
| Segment assets                                                                                                                        |  | $                                    | 5,192   |                                      |  | $ | 553,761 |  |  |  |  |  |  | $ | 558,953 |  |  | $ | 49,317 |  |  | $ | 750,157 |  |  |  |  |  |  | $ | 799,474 |  |   |
|                                                                                                                                       |  |                                      |         |                                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
|                                                                                                                                       |  | **Ninemonths ended March 31, 2001** |         | **Ninemonths ended March 31, 2002** |
|---------------------------------------------------------------------------------------------------------------------------------------|--|-------------------------------------|---------|-------------------------------------|
|                                                                                                                                       |  | ****                                |         | ****                                |
|                                                                                                                                       |  | **Health Plans**                    |         | **AcuteCare Services**              |  | **Eliminations** |  | **Consolidated** |  | **Health Plans** |  | **AcuteCare Services** |  | **Eliminations** |  | **Consolidated** |
|                                                                                                                                       |  | ****                                |         | ****                                |
| Patient servicerevenues                                                                                                               |  | $                                   | ― |                                     |  | $ | 453,315 |  |  | $ | ― |  |  | $ | 453,315 |  |  | $ | ― |  |  | $ | 530,687 |  |  | $ | ― |  |  | $ | 530,687 |  |   |
| Capitationpremiums                                                                                                                    |  |                                     | 27,245  |                                     |  |  | ― |  |  |  | ― |  |  |  | 27,245 |  |  |  | 135,635 |  |  |  | ― |  |  |  | ― |  |  |  | 135,635 |  |   |
| Inter-segmentrevenues                                                                                                                 |  |                                     | ― |                                     |  |  | 11,380 |  |  |  | (11,380 | ) |  |  | ― |  |  |  | ― |  |  |  | 19,465 |  |  |  | (19,465 | ) |  |  | ― |  |   |
|                                                                                                                                       |  |                                     |         |                                     |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
|       Totalrevenues                                                                                          |  |                                     | 27,245  |                                     |  |  | 464,695 |  |  |  | (11,380 | ) |  |  | 480,560 |  |  |  | 135,635 |  |  |  | 550,152 |  |  |  | (19,465 | ) |  |  | 666,322 |  |   |
|                                                                                                                                       |  |                                     |         |                                     |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
| Operating expenses -external                                                                                                          |  |                                     | 14,692  |                                     |  |  | 428,252 |  |  |  | ― |  |  |  | 442,944 |  |  |  | 106,988 |  |  |  | 503,922 |  |  |  | ― |  |  |  | 610,910 |  |   |
| Operating expenses -inter-segment                                                                                                     |  |                                     | 11,380  |                                     |  |  | ― |  |  |  | (11,380 | ) |  |  | ― |  |  |  | 19,465 |  |  |  | ― |  |  |  | (19,465 | ) |  |  | ― |  |   |
|                                                                                                                                       |  |                                     |         |                                     |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
|       Total operatingexpenses                                                                                |  |                                     | 26,072  |                                     |  |  | 428,252 |  |  |  | (11,380 | ) |  |  | 442,944 |  |  |  | 126,453 |  |  |  | 503,922 |  |  |  | (19,465 | ) |  |  | 610,910 |  |   |
|                                                                                                                                       |  |                                     |         |                                     |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
|      EBITDA(1)                                                                                               |  |                                     | 1,173   |                                     |  |  | 36,443 |  |  |  | ― |  |  |  | 37,616 |  |  |  | 9,182 |  |  |  | 46,230 |  |  |  | ― |  |  |  | 55,412 |  |   |
|                                                                                                                                       |  |                                     |         |                                     |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
| Depreciation andamortization                                                                                                          |  |                                     | 416     |                                     |  |  | 17,971 |  |  |  | ― |  |  |  | 18,387 |  |  |  | 862 |  |  |  | 22,181 |  |  |  | ― |  |  |  | 23,043 |  |   |
| Interest                                                                                                                              |  |                                     | (14     | )                                   |  |  | 12,637 |  |  |  | ― |  |  |  | 12,623 |  |  |  | 1,715 |  |  |  | 18,720 |  |  |  | ― |  |  |  | 20,435 |  |   |
| Other (2)                                                                                                                             |  |                                     | ― |                                     |  |  | 540 |  |  |  | ― |  |  |  | 540 |  |  |  | ― |  |  |  | (162 | ) |  |  | ― |  |  |  | (162 | ) |   |
|                                                                                                                                       |  |                                     |         |                                     |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
|       Income beforeincome           taxes andextraordinary item |  | $                                   | 771     |                                     |  | $ | 5,295 |  |  | $ | ― |  |  | $ | 6,066 |  |  | $ | 6,605 |  |  | $ | 5,491 |  |  | $ | ― |  |  | $ | 12,096 |  |   |
|                                                                                                                                       |  |                                     |         |                                     |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |

____________________

(1) EBITDA is defined asincome before interest expense (net of interest income), incometaxes, depreciation, amortization, minority interests, gain or losson sale of assets, equity method income or loss and extraordinaryitems.  EBITDA is not intended as a substitute for net income,operating cash flows or other cash flow statement data determinedin accordance with accounting principles generally accepted in theUnited States.  Management and others within the health careindustry use EBITDA as an analytical indicator and a generalmeasure of leverage capacity and debt service ability.  Due tovarying methods of calculation, EBITDA as presented may not becomparable to similarly titled measures of othercompanies.

(2) Other expenses includeminority interests, gain or loss on sale of assets, equity methodincome or loss and other non-operating revenue.

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**8.            CONTINGENCIES**

****

               Management continually monitors and evaluates contingencies basedupon the best available information and believes that adequateprovision for potential losses associated with contingencies hasbeen made.  In management’s opinion, based on currentavailable information, the following risks will not have a materialeffect on the Company’s results of operations or financialposition.

**Litigation**

****

               The Company is presently, and from time to time, subject to variousclaims and lawsuits arising in the normal course ofbusiness.

**NetRevenue**

****

               Final determination of amounts earned under prospective payment andcost-reimbursement activities is subject to review by appropriategovernmental authorities or their agents.

**GovernmentalRegulation**

****

               Laws and regulations governing the Medicare and Medicaid and otherfederal health care programs are complex and subject tointerpretation.  The Company’s management believes thatthe Company is in compliance with all applicable laws andregulations in all material respects and is not aware of anypending or threatened investigation involving allegations ofpotential wrongdoing.  While no such regulatory inquiries havebeen made, compliance with such laws and regulations can be subjectto future government review and interpretation as well assignificant regulatory action including fines, penalties, andexclusion from the Medicare, Medicaid and other federal health careprograms.

**Acquisitions**

****

               The Company has acquired and will continue to acquire businesseswith prior operating histories.  Acquired companies may haveunknown or contingent liabilities, including liabilities forfailure to comply with health care laws and regulations, such asbilling and reimbursement, fraud and abuse and similaranti-referral laws.  Although the Company institutes policiesdesigned to conform practices to its standards following completionof acquisitions and attempts to structure its acquisitions as assetacquisitions in which we do not assume liability for sellerwrongful actions, there can be no assurance that the Company willnot become liable for past activities that may later be asserted tobe improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification fromprospective sellers covering such matters, there can be noassurance that any such matter will be covered by indemnification,or if covered, that such indemnification will be adequate to coverpotential losses and fines.

**Professional andGeneral Liability Risks**

****

               As is typical in the health care industry, the Company is subjectto potential claims and legal actions in the ordinary course ofbusiness including patient care.  To mitigate this risk, theCompany maintains professional and general liability insurance inexcess of its self-insured retention from unrelated commercialcarriers on an occurrence basis for general liability and aclaims-made basis for professional liability up to $100,000,000 peroccurrence and in the aggregate.  The Company retainsliability for such risks up to $1,000,000 per claim and $13,200,000in the aggregate.  Liabilities for self-insured professionaland general liability risks for both asserted and unasserted claimsare estimated based upon historical claims data and actuarialassumptions, including demographic data and severity factors. Although ultimate settlement of these liabilities may vary fromsuch estimates, management believes the amounts classified withinOther Liabilities on the accompanying unaudited condensedconsolidated balance sheets are adequate.

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**Table of Contents**

**9.            COMPREHENSIVE INCOME**

               The components of comprehensive income, net of related taxes,follows (in thousands).

|   |                                                                                                           |          | **Threemonths ended March 31,** | ** ** | **Ninemonths ended March 31,** |     |
|--------|-----------------------------------------------------------------------------------------------------------|----------|---------------------------------|------------|--------------------------------|----------|
|        |                                                                                                           | **2001** | ** **                      | **2002**   | ** **                     | **2001** | ** ** | **2002** |
|        |                                                                                                           | ****     |
|   | Net income                                                                                                |     | $                               | 6,785      |                                |     | $ | 6,425 |  |  | $ | 5,600 |  |  | $ | 4,827 |  |
|   |                                                                                                           |          |                                 |            |                                |          |  |  |  |  |  |  |  |  |  |  |  |
|   | Cumulative effect ofchange in accounting principle -    fair value of interest rate collar |     |                            | ―    |                                |          |  | ― |  |  |  | (164 | ) |  |  | ― |  |
|   | Net change in fair valueof interest rate collar                                                           |     |                            | (398       | )                              |          |  | ― |  |  |  | (1,194 | ) |  |  | ― |  |
|   | Amortization of transitionadjustment                                                                      |     |                            | 25         |                                |          |  | ― |  |  |  | 75 |  |  |  | ― |  |
|   |                                                                                                           |     |                            |            |                                |          |  |  |  |  |  |  |  |  |  |  |  |
|   | Other comprehensiveloss                                                                                   |     |                            | (373       | )                              |          |  | ― |  |  |  | (1,283 | ) |  |  | ― |  |
|   |                                                                                                           |     |                            |            |                                |          |  |  |  |  |  |  |  |  |  |  |  |
|   | Comprehensiveincome                                                                                       |     | $                               | 6,412      |                                |          | $ | 6,425 |  |  | $ | 4,317 |  |  | $ | 4,827 |  |
|   |                                                                                                           |          |                                 |            |                                |          |  |  |  |  |  |  |  |  |  |  |  |

               Upon the termination of the interest rate collar agreement in July2001, the Company reclassified its previously recorded accumulatedother comprehensive loss to extraordinary loss on extinguishment ofdebt.

**10.         FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND               NON-GUARANTOR SUBSIDIARIES**

               The Company conducts substantially all of its business through itssubsidiaries.  Most of the Company’s subsidiariesjointly and severally guarantee the Company’s seniorsubordinated notes due 2011 on an unconditional basis. Certain other consolidated entities that are not wholly owned bythe Company have not guaranteed such notes in conformity with theprovisions of the indenture governing the notes.  Thecondensed consolidating financial information for the parentcompany, the subsidiary guarantors, the non-guarantor subsidiaries,certain eliminations and the consolidated Company as of June 30,2001 and March 31, 2002 and for the three-month and nine-monthperiods ended March 31, 2001 and 2002, follows.

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**Table of Contents**

**VANGUARDHEALTH SYSTEMS, INC.CONDENSED CONSOLIDATING BALANCE SHEETSJune 30, 2001**

|                                                               |   | **Parent**      |         | **Wholly-Owned Guarantor Subsidiaries** |        | **Combined Non-Guarantors** |         | **Eliminations** |        | **Total Consolidated** |    |
|--------------------------------------------------------------------|--------|-----------------|---------|-----------------------------------------|--------|-----------------------------|---------|------------------|--------|------------------------|---------|
|                                                               |   | **              |    |
|                                                               |   | *(Inthousands)* |    |
| **ASSETS**                                                         |        |                 |
| Current assets:                                                    |   |            |         |                                    |   |                        |         |             |   |                   |    |   |   |   |  |   |   |   |  |   |
| Cash and cashequivalents                                           |   | $               | ― |                                    |   | $                           | 11,734  |                  |   | $                      | 345     |   |   | $ | ― |   | $ |   | 12,079 |   |
| Accounts receivable,net                                            |   |            | ― |                                    |   |                        | 127,684 |                  |   |                        | 1,217   |   |   |   | ― |   |   |   | 128,901 |   |
| Supplies                                                           |   |            | ― |                                    |   |                        | 11,256  |                  |   |                        | 107     |   |   |   | ― |   |   |   | 11,363 |   |
| Prepaid expenses and othercurrent assets                           |   |            | 1,259   |                                    |   |                        | 15,047  |                  |   |                        | 212     |   |   |   | ― |   |   |   | 16,518 |   |
|                                                                    |   |            |         |                                    |   |                        |         |             |   |                   |         |   |   |   |  |   |   |   |  |   |
|     Totalcurrent assets                             |   |            | 1,259   |                                    |   |                        | 165,721 |                  |   |                        | 1,881   |   |   |   | ― |   |   |   | 168,861 |   |
|                                                                    |   |            |         |                                    |   |                        |         |                  |   |                        |         |   |   |   |  |   |   |   |  |   |
| Property, plant andequipment, net                                  |   |            | ― |                                    |   |                        | 358,083 |                  |   |                        | 4,881   |   |   |   | ― |   |   |   | 362,964 |   |
| Cost in excess of netassets acquired                               |   |            | ― |                                    |   |                        | 74,233  |                  |   |                        | ― |   |   |   | ― |   |   |   | 74,233 |   |
| Intangible assets,net                                              |   |            | ― |                                    |   |                        | 28,077  |                  |   |                        | 304     |   |   |   | ― |   |   |   | 28,381 |   |
| Investments insubsidiaries                                         |   |            | 323,855 |                                    |   |                        | ― |                  |   |                        | ― |   |   |   | (323,855 | ) |   |   | ― |   |
| Other assets                                                       |   |            | ― |                                    |   |                        | 5,924   |                  |   |                        | 35      |   |   |   | ― |   |   |   | 5,959 |   |
|                                                                    |   |            |         |                                    |   |                        |         |                  |   |                        |         |   |   |   |  |   |   |   |  |   |
|     Totalassets                                     |   | $               | 325,114 |                                    |   | $                           | 632,038 |                  |   | $                      | 7,101   |   |   | $ | (323,855 | ) |   | $ | 640,398 |   |
|                                                                    |   |            |         |                                    |   |                        |         |                  |   |                        |         |   |   |   |  |   |   |   |  |   |
| **LIABILITIES ANDSTOCKHOLDERS’ EQUITY**                      |   |            |         |                                    |   |                        |         |                  |   |                        |         |   |   |   |  |   |   |   |  |   |
| Currentliabilities:                                                |   |            |         |                                    |   |                        |         |                  |   |                        |         |   |   |   |  |   |   |   |  |   |
| Accountspayable                                                    |   | $               | ― |                                    |   |                        | 41,337  |                  |   | $                      | 366     |   |   |   | ― |   |   | $ | 41,703 |   |
| Accrued expenses and othercurrent liabilities                      |   |            | 743     |                                    |   |                        | 97,674  |                  |   |                        | 382     |   |   |   | ― |   |   |   | 98,799 |   |
| Current maturities oflong-term debt                                |   |            | ― |                                    |   |                        | 10,097  |                  |   |                        | 235     |   |   |   | ― |   |   |   | 10,332 |   |
|                                                                    |   |            |         |                                    |   |                        |         |                  |   |                        |         |   |   |   |  |   |   |   |  |   |
|     Totalcurrent liabilities                        |   |            | 743     |                                    |   |                        | 149,108 |                  |   |                        | 983     |   |   |   | ― |   |   |   | 150,834 |   |
|                                                                    |   |            |         |                                    |   |                        |         |                  |   |                        |         |   |   |   |  |   |   |   |  |   |
| Otherliabilities                                                   |   |            | ― |                                    |   |                        | 9,185   |                  |   |                        | ― |   |   |   | ― |   |   |   | 9,185 |   |
| Long-term debt, lesscurrent maturities                             |   |            | ― |                                    |   |                        | 150,239 |                  |   |                        | 2,873   |   |   |   | ― |   |   |   | 153,112 |   |
| Intercompany                                                       |   |            | (3,473  | )                                       |   |                        | 5,053   |                  |   |                        | (1,580  | ) |   |   | ― |   |   |   | ― |   |
| Payable-In-Kind PreferredStock                                     |   |            | 22,320  |                                    |   |                        | ― |                  |   |                        | ― |   |   |   | ― |   |   |   | 22,320 |   |
| Stockholders’equity                                          |   |            | 305,524 |                                    |   |                        | 318,453 |                  |   |                        | 4,825   |   |   |   | (323,855 | ) |   |   | 304,947 |   |
|                                                                    |   |            |         |                                    |   |                        |         |                  |   |                        |         |   |   |   |  |   |   |   |  |   |
|     Totalliabilities and stockholders’ equity |   | $               | 325,114 |                                    |   | $                           | 632,038 |                  |   | $                      | 7,101   |   |   | $ | (323,855 | ) |   | $ | 640,398 |   |
|                                                                    |   |            |         |                                    |   |                        |         |                  |   |                        |         |   |   |   |  |   |   |   |  |   |

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**VANGUARDHEALTH SYSTEMS, INC.CONDENSED CONSOLIDATING BALANCE SHEETSMarch 31, 2002(Unaudited)**

|                                                                    |        | **Parent**      |         | **Wholly-Owned Guarantor Subsidiaries** |        | **Combined Non-Guarantors** |         | **Eliminations** |        | **Total Consolidated** |    |
|--------------------------------------------------------------------|--------|-----------------|---------|-----------------------------------------|--------|-----------------------------|---------|------------------|--------|------------------------|---------|
|                                                                    |        |                 |    |
|                                                                    |        | *(Inthousands)* |    |
| **ASSETS**                                                         |        |                 |    |
| Current assets:                                                    |   |            |         |                                    |   |                        |    |             |   |                   |    |   |   |   |   |   |   |   |   |   |
| Cash and cashequivalents                                           |        | $               | ― |                                         |        | $                           | 89,191  |                  |        | $                      | 160     |  |  | $ | ― |  |  | $ | 89,351 |  |
| Accounts receivable,net                                            |        |                 | ― |                                         |        |                             | 147,117 |                  |        |                        | 854     |  |  |  | ― |  |  |  | 147,971 |  |
| Supplies                                                           |        |                 | ― |                                         |        |                             | 13,373  |                  |        |                        | 164     |  |  |  | ― |  |  |  | 13,537 |  |
| Prepaid expenses and othercurrent assets                           |        |                 | 1,297   |                                         |        |                             | 15,317  |                  |        |                        | 400     |  |  |  | ― |  |  |  | 17,014 |  |
|                                                                    |        |                 |         |                                         |        |                             |         |                  |        |                        |         |  |  |  |  |  |  |  |  |  |
|     Totalcurrent assets                             |        |                 | 1,297   |                                         |        |                             | 264,998 |                  |        |                        | 1,578   |  |  |  | ― |  |  |  | 267,873 |  |
|                                                                    |        |                 |         |                                         |        |                             |         |                  |        |                        |         |  |  |  |  |  |  |  |  |  |
| Property, plant andequipment, net                                  |        |                 | ― |                                         |        |                             | 402,097 |                  |        |                        | 4,686   |  |  |  | ― |  |  |  | 406,783 |  |
| Cost in excess of netassets acquired                               |        |                 | ― |                                         |        |                             | 78,326  |                  |        |                        | 259     |  |  |  | ― |  |  |  | 78,585 |  |
| Intangible assets,net                                              |        |                 | ― |                                         |        |                             | 39,397  |                  |        |                        | 39      |  |  |  | ― |  |  |  | 39,436 |  |
| Investments insubsidiaries                                         |        |                 | 323,855 |                                         |        |                             | ― |                  |        |                        | ― |  |  |  | (323,855 | ) |  |  | ― |  |
| Other assets                                                       |        |                 | ― |                                         |        |                             | 6,757   |                  |        |                        | 40      |  |  |  | ― |  |  |  | 6,797 |  |
|                                                                    |        |                 |         |                                         |        |                             |         |                  |        |                        |         |  |  |  |  |  |  |  |  |  |
|     Totalassets                                     |        | $               | 325,152 |                                         |        | $                           | 791,575 |                  |        | $                      | 6,602   |  |  | $ | (323,855 | ) |  | $ | 799,474 |  |
|                                                                    |        |                 |         |                                         |        |                             |         |                  |        |                        |         |  |  |  |  |  |  |  |  |  |
|                                                                    |        |                 |         |                                         |        |                             |         |                  |        |                        |         |  |  |  |  |  |  |  |  |  |
| **LIABILITIES ANDSTOCKHOLDERS’ EQUITY**                      |        |                 |         |                                         |        |                             |         |                  |        |                        |         |  |  |  |  |  |  |  |  |  |
| Currentliabilities:                                                |        |                 |         |                                         |        |                             |         |                  |        |                        |         |  |  |  |  |  |  |  |  |  |
| Accountspayable                                                    |        | $               | ― |                                         |        | $                           | 39,711  |                  |        | $                      | 176     |  |  | $ | ― |  |  | $ | 39,887 |  |
| Accrued expenses and othercurrent liabilities                      |        |                 | 590     |                                         |        |                             | 100,825 |                  |        |                        | 430     |  |  |  | ― |  |  |  | 101,845 |  |
| Current maturities oflong-term debt                                |        |                 | ― |                                         |        |                             | 3,586   |                  |        |                        | 157     |  |  |  | ― |  |  |  | 3,743 |  |
|                                                                    |        |                 |         |                                         |        |                             |         |                  |        |                        |         |  |  |  |  |  |  |  |  |  |
|     Totalcurrent liabilities                        |        |                 | 590     |                                         |        |                             | 144,122 |                  |        |                        | 763     |  |  |  | ― |  |  |  | 145,475 |  |
|                                                                    |        |                 |         |                                         |        |                             |         |                  |        |                        |         |  |  |  |  |  |  |  |  |  |
| Otherliabilities                                                   |        |                 | ― |                                         |        |                             | 16,326  |                  |        |                        | ― |  |  |  | ― |  |  |  | 16,326 |  |
| Long-term debt, lesscurrent maturities                             |        |                 | ― |                                         |        |                             | 301,179 |                  |        |                        | 2,727   |  |  |  | ― |  |  |  | 303,906 |  |
| Intercompany                                                       |        |                 | (3,047  | )                                       |        |                             | 4,756   |                  |        |                        | (1,709  | ) |  |  | ― |  |  |  | ― |  |
| Payable-In-Kind PreferredStock                                     |        |                 | 23,639  |                                         |        |                             | ― |                  |        |                        | ― |  |  |  | ― |  |  |  | 23,639 |  |
| Stockholders’equity                                          |        |                 | 303,970 |                                         |        |                             | 325,192 |                  |        |                        | 4,821   |  |  |  | (323,855 | ) |  |  | 310,128 |  |
|                                                                    |        |                 |         |                                         |        |                             |         |                  |        |                        |         |  |  |  |  |  |  |  |  |  |
|     Totalliabilities and stockholders’ equity |        | $               | 325,152 |                                         |        | $                           | 791,575 |                  |        | $                      | 6,602   |  |  | $ | (323,855 | ) |  | $ | 799,474 |  |
|                                                                    |        |                 |         |                                         |        |                             |         |                  |        |                        |         |  |  |  |  |  |  |  |  |  |

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**VANGUARDHEALTH SYSTEMS, INC.CONDENSED CONSOLIDATING INCOME STATEMENTSFor the three months ended March 31, 2001(Unaudited)**

|                                                                                |  | **Parent**      |         | **Wholly-Owned Guarantor Subsidiaries** |  | **Combined Non-Guarantors** |         | **Eliminations** |  | **Total Consolidated** |    |
|--------------------------------------------------------------------------------|--|-----------------|---------|-----------------------------------------|--|-----------------------------|---------|------------------|--|------------------------|---------|
|                                                                                |  |                 |    |
|                                                                                |  | *(Inthousands)* |    |
| ** **                                                                     |  |                 |    |
| Patient servicerevenues                                                        |  | $               | ― |                                         |  | $                           | 154,970 |                  |  | $                      | 2,005   |  |  | $ | ― |  |  | $ | 156,975 |  |
| Premiumrevenues                                                                |  |                 | ― |                                         |  |                             | 9,291   |                  |  |                        | ― |  |  |  | ― |  |  |  | 9,291 |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
|         Totalrevenues                       |  |                 | ― |                                         |  |                             | 164,261 |                  |  |                        | 2,005   |  |  |  | ― |  |  |  | 166,266 |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Salaries andbenefits                                                           |  |                 | ― |                                         |  |                             | 83,022  |                  |  |                        | 458     |  |  |  | ― |  |  |  | 83,480 |  |
| Medical claimsexpense                                                          |  |                 | ― |                                         |  |                             | 4,182   |                  |  |                        | ― |  |  |  | ― |  |  |  | 4,182 |  |
| Supplies                                                                       |  |                 | ― |                                         |  |                             | 22,928  |                  |  |                        | 297     |  |  |  | ― |  |  |  | 23,225 |  |
| Purchasedservices                                                              |  |                 | ― |                                         |  |                             | 11,693  |                  |  |                        | 78      |  |  |  | ― |  |  |  | 11,771 |  |
| Other operatingexpenses                                                        |  |                 | 2       |                                         |  |                             | 13,036  |                  |  |                        | 186     |  |  |  | ― |  |  |  | 13,224 |  |
| Provision for doubtfulaccounts                                                 |  |                 | ― |                                         |  |                             | 10,166  |                  |  |                        | 12      |  |  |  | ― |  |  |  | 10,178 |  |
| Rents andleases                                                                |  |                 | ― |                                         |  |                             | 2,739   |                  |  |                        | 131     |  |  |  | ― |  |  |  | 2,870 |  |
| Depreciation andamortization                                                   |  |                 | ― |                                         |  |                             | 5,884   |                  |  |                        | 173     |  |  |  | ― |  |  |  | 6,057 |  |
| Interest, net                                                                  |  |                 | ― |                                         |  |                             | 4,140   |                  |  |                        | (15     | ) |  |  | ― |  |  |  | 4,125 |  |
| Management fees                                                                |  |                 | ― |                                         |  |                             | (130    | )                |  |                        | 130     |  |  |  | ― |  |  |  | ― |  |
| Other                                                                          |  |                 | ― |                                         |  |                             | (75     | )                |  |                        | ― |  |  |  | ― |  |  |  | (75 | ) |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
|                                                                                |  |                 | 2       |                                         |  |                             | 157,585 |                  |  |                        | 1,450   |  |  |  | ― |  |  |  | 159,037 |  |
| Net income (loss) beforeincome taxes and     extraordinary item |  |                 | (2      | )                                       |  |                             | 6,676   |                  |  |                        | 555     |  |  |  | ― |  |  |  | 7,229 |  |
| Income taxexpense                                                              |  |                 | 444     |                                         |  |                             | ― |                  |  |                        | ― |  |  |  | ― |  |  |  | 444 |  |
| Equity in earnings ofsubsidiaries                                              |  |                 | 7,231   |                                         |  |                             | ― |                  |  |                        | ― |  |  |  | (7,231 | ) |  |  | ― |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Income beforeextraordinary item                                                |  |                 | 6,785   |                                         |  |                             | 6,676   |                  |  |                        | 555     |  |  |  | (7,231 | ) |  |  | 6,785 |  |
| Extraordinary loss onextinguishment of debt                                    |  |                 | ― |                                         |  |                             | ― |                  |  |                        | ― |  |  |  | ― |  |  |  | ― |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Net income                                                                     |  | $               | 6,785   |                                         |  | $                           | 6,676   |                  |  | $                      | 555     |  |  | $ | (7,231 | ) |  | $ | 6,785 |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |

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**Table of Contents**

**VANGUARDHEALTH SYSTEMS, INC.CONDENSED CONSOLIDATING INCOME STATEMENTSFor the three months ended March 31, 2002(Unaudited)**

|                                                                                |  | **Parent**      |         | **Wholly-Owned Guarantor Subsidiaries** |  | **Combined Non-Guarantors** |         | **Eliminations** |  | **Total Consolidated** |    |
|--------------------------------------------------------------------------------|--|-----------------|---------|-----------------------------------------|--|-----------------------------|---------|------------------|--|------------------------|---------|
|                                                                                |  |                 |    |
|                                                                                |  | *(Inthousands)* |    |
| ** **                                                                     |  |                 |    |
| Patient servicerevenues                                                        |  | $               | ― |                                         |  | $                           | 184,862 |                  |  | $                      | 1,913   |  |  | $ | ― |  |  | $ | 186,775 |  |
| Premiumrevenues                                                                |  |                 | ― |                                         |  |                             | 49,110  |                  |  |                        | ― |  |  |  | ― |  |  |  | 49,110 |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
|         Totalrevenues                       |  |                 | ― |                                         |  |                             | 233,972 |                  |  |                        | 1,913   |  |  |  | ― |  |  |  | 235,885 |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Salaries andbenefits                                                           |  |                 | ― |                                         |  |                             | 98,622  |                  |  |                        | 496     |  |  |  | ― |  |  |  | 99,118 |  |
| Medical claimsexpense                                                          |  |                 | ― |                                         |  |                             | 34,935  |                  |  |                        | ― |  |  |  | ― |  |  |  | 34,935 |  |
| Supplies                                                                       |  |                 | ― |                                         |  |                             | 29,698  |                  |  |                        | 342     |  |  |  | ― |  |  |  | 30,040 |  |
| Purchasedservices                                                              |  |                 | ― |                                         |  |                             | 16,770  |                  |  |                        | 57      |  |  |  | ― |  |  |  | 16,827 |  |
| Other operatingexpenses                                                        |  |                 | 1       |                                         |  |                             | 16,201  |                  |  |                        | 201     |  |  |  | ― |  |  |  | 16,403 |  |
| Provision for doubtfulaccounts                                                 |  |                 | ― |                                         |  |                             | 11,933  |                  |  |                        | (6      | ) |  |  | ― |  |  |  | 11,927 |  |
| Rents andleases                                                                |  |                 | ― |                                         |  |                             | 3,651   |                  |  |                        | 131     |  |  |  | ― |  |  |  | 3,782 |  |
| Depreciation andamortization                                                   |  |                 | ― |                                         |  |                             | 8,583   |                  |  |                        | 89      |  |  |  | ― |  |  |  | 8,672 |  |
| Interest, net                                                                  |  |                 | ― |                                         |  |                             | 7,180   |                  |  |                        | 14      |  |  |  | ― |  |  |  | 7,194 |  |
| Management fees                                                                |  |                 | ― |                                         |  |                             | (42     | )                |  |                        | 42      |  |  |  | ― |  |  |  | ― |  |
| Other                                                                          |  |                 | ― |                                         |  |                             | (58     | )                |  |                        | ― |  |  |  | ― |  |  |  | (58 | ) |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
|                                                                                |  |                 | 1       |                                         |  |                             | 227,473 |                  |  |                        | 1,366   |  |  |  | ― |  |  |  | 228,840 |  |
| Net income (loss) beforeincome taxes and     extraordinary item |  |                 | (1      | )                                       |  |                             | 6,499   |                  |  |                        | 547     |  |  |  | ― |  |  |  | 7,045 |  |
| Income taxexpense                                                              |  |                 | 2,811   |                                         |  |                             | 6       |                  |  |                        | ― |  |  |  | ― |  |  |  | 2,817 |  |
| Equity in earnings ofsubsidiaries                                              |  |                 | 7,040   |                                         |  |                             | ― |                  |  |                        | ― |  |  |  | (7,040 | ) |  |  | ― |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Income beforeextraordinary item                                                |  |                 | 4,228   |                                         |  |                             | 6,493   |                  |  |                        | 547     |  |  |  | (7,040 | ) |  |  | 4,228 |  |
| Extraordinary loss (gain)on extinguishment of debt                             |  |                 | (2,197  | )                                       |  |                             | ― |                  |  |                        | ― |  |  |  | ― |  |  |  | (2,197 | ) |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Net income                                                                     |  | $               | 6,425   |                                         |  | $                           | 6,493   |                  |  | $                      | 547     |  |  | $ | (7,040 | ) |  | $ | 6,425 |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |

-17-

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**Table of Contents**

**VANGUARDHEALTH SYSTEMS, INC.CONDENSED CONSOLIDATING INCOME STATEMENTSFor the nine months ended March 31, 2001(Unaudited)**

****

|                                                                                |  | **Parent**      |         | **Wholly-Owned Guarantor Subsidiaries** |  | **Combined Non-Guarantors** |         | **Eliminations** |  | **Total Consolidated** |    |
|--------------------------------------------------------------------------------|--|-----------------|---------|-----------------------------------------|--|-----------------------------|---------|------------------|--|------------------------|---------|
|                                                                                |  |                 |    |
|                                                                                |  | *(Inthousands)* |    |
| ** **                                                                     |  |                 |    |
| Patient servicerevenues                                                        |  | $               | ― |                                         |  | $                           | 447,653 |                  |  | $                      | 5,662   |  |  | $ | ― |  |  | $ | 453,315 |  |
| Premiumrevenues                                                                |  |                 | ― |                                         |  |                             | 27,245  |                  |  |                        | ― |  |  |  | ― |  |  |  | 27,245 |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
|         Totalrevenues                       |  |                 | ― |                                         |  |                             | 474,898 |                  |  |                        | 5,662   |  |  |  | ― |  |  |  | 480,560 |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Salaries andbenefits                                                           |  |                 | ― |                                         |  |                             | 237,502 |                  |  |                        | 1,317   |  |  |  | ― |  |  |  | 238,819 |  |
| Medical claimsexpense                                                          |  |                 | ― |                                         |  |                             | 11,924  |                  |  |                        | ― |  |  |  | ― |  |  |  | 11,924 |  |
| Supplies                                                                       |  |                 | ― |                                         |  |                             | 66,304  |                  |  |                        | 849     |  |  |  | ― |  |  |  | 67,153 |  |
| Purchasedservices                                                              |  |                 | ― |                                         |  |                             | 33,475  |                  |  |                        | 239     |  |  |  | ― |  |  |  | 33,714 |  |
| Other operatingexpenses                                                        |  |                 | 5       |                                         |  |                             | 38,764  |                  |  |                        | 532     |  |  |  | ― |  |  |  | 39,301 |  |
| Provision for doubtfulaccounts                                                 |  |                 | ― |                                         |  |                             | 43,281  |                  |  |                        | 83      |  |  |  | ― |  |  |  | 43,364 |  |
| Rents andleases                                                                |  |                 | ― |                                         |  |                             | 8,612   |                  |  |                        | 399     |  |  |  | ― |  |  |  | 9,011 |  |
| Depreciation andamortization                                                   |  |                 | ― |                                         |  |                             | 17,954  |                  |  |                        | 433     |  |  |  | ― |  |  |  | 18,387 |  |
| Interest, net                                                                  |  |                 | ― |                                         |  |                             | 12,756  |                  |  |                        | (133    | ) |  |  | ― |  |  |  | 12,623 |  |
| Management fees                                                                |  |                 | ― |                                         |  |                             | (207    | )                |  |                        | 207     |  |  |  | ― |  |  |  | ― |  |
| Other                                                                          |  |                 | ― |                                         |  |                             | 198     |                  |  |                        | ― |  |  |  | ― |  |  |  | 198 |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
|                                                                                |  |                 | 5       |                                         |  |                             | 470,563 |                  |  |                        | 3,926   |  |  |  | ― |  |  |  | 474,494 |  |
| Net income (loss) beforeincome taxes and     extraordinary item |  |                 | (5      | )                                       |  |                             | 4,335   |                  |  |                        | 1,736   |  |  |  | ― |  |  |  | 6,066 |  |
| Income taxexpense                                                              |  |                 | 466     |                                         |  |                             | ― |                  |  |                        | ― |  |  |  | ― |  |  |  | 466 |  |
| Equity in earnings ofsubsidiaries                                              |  |                 | 6,071   |                                         |  |                             | ― |                  |  |                        | ― |  |  |  | (6,071 | ) |  |  | ― |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Income beforeextraordinary item                                                |  |                 | 5,600   |                                         |  |                             | 4,335   |                  |  |                        | 1,736   |  |  |  | (6,071 | ) |  |  | 5,600 |  |
| Extraordinary loss onextinguishment of debt                                    |  |                 | ― |                                         |  |                             | ― |                  |  |                        | ― |  |  |  | ― |  |  |  | ― |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Net income                                                                     |  | $               | 5,600   |                                         |  | $                           | 4,335   |                  |  | $                      | 1,736   |  |  | $ | (6,071 | ) |  | $ | 5,600 |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |

-18-

----

**Table of Contents**

**VANGUARDHEALTH SYSTEMS, INC.CONDENSED CONSOLIDATING INCOME STATEMENTSFor the nine months ended March 31, 2002(Unaudited)**

|                                                                                |  | **Parent**      |         | **Wholly-Owned Guarantor Subsidiaries** |  | **Combined Non-Guarantors** |         | **Eliminations** |  | **Total Consolidated** |    |
|--------------------------------------------------------------------------------|--|-----------------|---------|-----------------------------------------|--|-----------------------------|---------|------------------|--|------------------------|---------|
|                                                                                |  |                 |    |
|                                                                                |  | *(Inthousands)* |    |
| ** **                                                                     |  |                 |    |
| Patient servicerevenues                                                        |  | $               | ― |                                         |  | $                           | 524,344 |                  |  | $                      | 6,343   |  |  | $ | ― |  |  | $ | 530,687 |  |
| Premiumrevenues                                                                |  |                 | ― |                                         |  |                             | 135,635 |                  |  |                        | ― |  |  |  | ― |  |  |  | 135,635 |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
|         Totalrevenues                       |  |                 | ― |                                         |  |                             | 659,979 |                  |  |                        | 6,343   |  |  |  | ― |  |  |  | 666,322 |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Salaries andbenefits                                                           |  |                 | ― |                                         |  |                             | 279,538 |                  |  |                        | 1,526   |  |  |  | ― |  |  |  | 281,064 |  |
| Medical claimsexpense                                                          |  |                 | ― |                                         |  |                             | 97,400  |                  |  |                        | ― |  |  |  | ― |  |  |  | 97,400 |  |
| Supplies                                                                       |  |                 | ― |                                         |  |                             | 82,456  |                  |  |                        | 1,062   |  |  |  | ― |  |  |  | 83,518 |  |
| Purchasedservices                                                              |  |                 | ― |                                         |  |                             | 48,737  |                  |  |                        | 176     |  |  |  | ― |  |  |  | 48,913 |  |
| Other operatingexpenses                                                        |  |                 | 5       |                                         |  |                             | 41,366  |                  |  |                        | 604     |  |  |  | ― |  |  |  | 41,975 |  |
| Provision for doubtfulaccounts                                                 |  |                 | ― |                                         |  |                             | 48,082  |                  |  |                        | 37      |  |  |  | ― |  |  |  | 48,119 |  |
| Rents andleases                                                                |  |                 | ― |                                         |  |                             | 10,055  |                  |  |                        | 399     |  |  |  | ― |  |  |  | 10,454 |  |
| Depreciation andamortization                                                   |  |                 | ― |                                         |  |                             | 22,839  |                  |  |                        | 204     |  |  |  | ― |  |  |  | 23,043 |  |
| Interest, net                                                                  |  |                 | (1      | )                                       |  |                             | 20,375  |                  |  |                        | 61      |  |  |  | ― |  |  |  | 20,435 |  |
| Management fees                                                                |  |                 | ― |                                         |  |                             | (139    | )                |  |                        | 139     |  |  |  | ― |  |  |  | ― |  |
| Other                                                                          |  |                 | ― |                                         |  |                             | (695    | )                |  |                        | ― |  |  |  | ― |  |  |  | (695 | ) |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
|                                                                                |  |                 | 4       |                                         |  |                             | 650,014 |                  |  |                        | 4,208   |  |  |  | ― |  |  |  | 654,226 |  |
| Net income (loss) beforeincome taxes and     extraordinary item |  |                 | (4      | )                                       |  |                             | 9,965   |                  |  |                        | 2,135   |  |  |  | ― |  |  |  | 12,096 |  |
| Income taxexpense                                                              |  |                 | 3,512   |                                         |  |                             | 16      |                  |  |                        | ― |  |  |  | ― |  |  |  | 3,528 |  |
| Equity in earnings ofsubsidiaries                                              |  |                 | 11,229  |                                         |  |                             | ― |                  |  |                        | ― |  |  |  | (11,229 | ) |  |  | ― |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Income beforeextraordinary item                                                |  |                 | 7,713   |                                         |  |                             | 9,949   |                  |  |                        | 2,135   |  |  |  | (11,229 | ) |  |  | 8,568 |  |
| Extraordinary loss onextinguishment of debt                                    |  |                 | 2,886   |                                         |  |                             | 855     |                  |  |                        | ― |  |  |  | ― |  |  |  | 3,741 |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Net income                                                                     |  | $               | 4,827   |                                         |  | $                           | 9,094   |                  |  | $                      | 2,135   |  |  | $ | (11,229 | ) |  | $ | 4,827 |  |
|                                                                                |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |

-19-

----

**Table of Contents**

**VANGUARDHEALTH SYSTEMS, INC.CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSFor the nine months ended March 31, 2001(Unaudited)**

|                                                                                                                          |  | **Parent**      |         | **Wholly-Owned Guarantor Subsidiaries** |  | **Combined Non-Guarantors** |         | **Eliminations** |  | **Total Consolidated** |    |
|--------------------------------------------------------------------------------------------------------------------------|--|-----------------|---------|-----------------------------------------|--|-----------------------------|---------|------------------|--|------------------------|---------|
|                                                                                                                          |  |                 |    |
|                                                                                                                          |  | *(Inthousands)* |    |
| ** **                                                                                                               |  |                 |    |
| Operatingactivities:                                                                                                     |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Net income                                                                                                               |  | $               | 5,600   |                                         |  | $                           | 4,335   |                  |  | $                      | 1,736   |  |  | $ | (6,071 | ) |  | $ | 5,600 |  |
| Adjustments to reconcilenet income to net cash     (used in) provided by operatingactivities:             |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
|    Depreciation and amortization                                                                          |  |                 | ― |                                         |  |                             | 17,954  |                  |  |                        | 433     |  |  |  | ― |  |  |  | 18,387 |  |
|    Provision for doubtful accounts                                                                        |  |                 | ― |                                         |  |                             | 43,281  |                  |  |                        | 83      |  |  |  | ― |  |  |  | 43,364 |  |
|    Amortization of loan costs                                                                             |  |                 | ― |                                         |  |                             | 645     |                  |  |                        | ― |  |  |  | ― |  |  |  | 645 |  |
|     Loss onsale of assets                                                                                 |  |                 | ― |                                         |  |                             | 308     |                  |  |                        | ― |  |  |  | ― |  |  |  | 308 |  |
|    Extraordinary loss on extinguishment of debt                                                           |  |                 | ― |                                         |  |                             | ― |                  |  |                        | ― |  |  |  | ― |  |  |  | ― |  |
| Changes in operatingassets and liabilities, net of     effects of acquisitions:                           |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
|     Equityin earnings of subsidiaries                                                                     |  |                 | (6,071  | )                                       |  |                             | ― |                  |  |                        | ― |  |  |  | 6,071 |  |  |  | ― |  |
|    Accounts receivable                                                                                    |  |                 | ― |                                         |  |                             | (54,623 | )                |  |                        | (447    | ) |  |  | ― |  |  |  | (55,070 | ) |
|    Establishment of accounts receivable of recent         acquisitions |  |                 | ― |                                         |  |                             | (7,236  | )                |  |                        | ― |  |  |  | ― |  |  |  | (7,236 | ) |
|    Supplies                                                                                               |  |                 | ― |                                         |  |                             | (288    | )                |  |                        | (28     | ) |  |  | ― |  |  |  | (316 | ) |
|     Prepaidexpenses and other current assets                                                              |  |                 | ― |                                         |  |                             | 4,080   |                  |  |                        | (1,284  | ) |  |  | ― |  |  |  | 2,796 |  |
|    Accounts payable                                                                                       |  |                 | ― |                                         |  |                             | 8,669   |                  |  |                        | 86      |  |  |  | ― |  |  |  | 8,755 |  |
|     Accruedexpenses and other current liabilities                                                         |  |                 | (853    | )                                       |  |                             | (3,923  | )                |  |                        | 7       |  |  |  | ― |  |  |  | (4,769 | ) |
|     Otherliabilities                                                                                      |  |                 | ― |                                         |  |                             | 3,401   |                  |  |                        | 33      |  |  |  | ― |  |  |  | 3,434 |  |
|                                                                                                                          |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Net cash (used in)provided by operating activities                                                                       |  |                 | (1,324  | )                                       |  |                             | 16,603  |                  |  |                        | 619     |  |  |  | ― |  |  |  | 15,898 |  |
| Investingactivities:                                                                                                     |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Acquisitions, includingworking capital settlement     payments                                            |  |                 | ― |                                         |  |                             | (1,717  | )                |  |                        | ― |  |  |  | ― |  |  |  | (1,717 | ) |
| Capitalexpenditures                                                                                                      |  |                 | ― |                                         |  |                             | (20,761 | )                |  |                        | (206    | ) |  |  | ― |  |  |  | (20,967 | ) |
| Other                                                                                                                    |  |                 | ― |                                         |  |                             | (2,342  | )                |  |                        | (24     | ) |  |  | ― |  |  |  | (2,366 | ) |
|                                                                                                                          |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Net cash used in investingactivities                                                                                     |  |                 | ― |                                         |  |                             | (24,820 | )                |  |                        | (230    | ) |  |  | ― |  |  |  | (25,050 | ) |
| Financingactivities:                                                                                                     |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Proceeds from long-termdebt                                                                                              |  |                 | ― |                                         |  |                             | ― |                  |  |                        | ― |  |  |  | ― |  |  |  | ― |  |
| Payments of long-term debtand capital leases                                                                             |  |                 | ― |                                         |  |                             | (2,879  | )                |  |                        | (48     | ) |  |  | ― |  |  |  | (2,927 | ) |
| Payments of loancosts                                                                                                    |  |                 | ― |                                         |  |                             | ― |                  |  |                        | ― |  |  |  | ― |  |  |  | ― |  |
| Cash provided by (used in)intercompany activity                                                                          |  |                 | 1,324   |                                         |  |                             | (1,102  | )                |  |                        | (222    | ) |  |  | ― |  |  |  | ― |  |
| Exercise of stockoptions                                                                                                 |  |                 | ― |                                         |  |                             | ― |                  |  |                        | ― |  |  |  | ― |  |  |  | ― |  |
|                                                                                                                          |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Net cash provided by (usedin) financing activities                                                                       |  |                 | 1,324   |                                         |  |                             | (3,981  | )                |  |                        | (270    | ) |  |  | ― |  |  |  | (2,927 | ) |
| Net (decrease) increase incash and cash equivalents                                                                      |  |                 | ― |                                         |  |                             | (12,198 | )                |  |                        | 119     |  |  |  | ― |  |  |  | (12,079 | ) |
| Cash and cash equivalents,beginning of period                                                                            |  |                 | ― |                                         |  |                             | 16,618  |                  |  |                        | 194     |  |  |  | ― |  |  |  | 16,812 |  |
|                                                                                                                          |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Cash and cash equivalents,end of period                                                                                  |  | $               | ― |                                         |  | $                           | 4,420   |                  |  | $                      | 313     |  |  | $ | ― |  |  | $ | 4,733 |  |
|                                                                                                                          |  |                 |         |                                         |  |                             |         |                  |  |                        |         |  |  |  |  |  |  |  |  |  |

****

****

-20-

----

**Table of Contents**

**VANGUARDHEALTH SYSTEMS, INC.CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSFor the nine months ended March 31, 2002(Unaudited)**

|                                                                                                                          |  | **Parent**      |         | **Wholly-Owned Guarantor Subsidiaries** |  | **Combined Non-Guarantors** |          | **Eliminations** |  | **Total Consolidated** |    |
|--------------------------------------------------------------------------------------------------------------------------|--|-----------------|---------|-----------------------------------------|--|-----------------------------|----------|------------------|--|------------------------|---------|
|                                                                                                                          |  |                 |    |
|                                                                                                                          |  | *(Inthousands)* |    |
| ** **                                                                                                               |  |                 |    |
| Operatingactivities:                                                                                                     |  |                 |         |                                         |  |                             |          |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Net income                                                                                                               |  | $               | 4,827   |                                         |  | $                           | 9,094    |                  |  | $                      | 2,135   |  |  | $ | (11,229 | ) |  | $ | 4,827 |  |
| Adjustments to reconcilenet income to net cash     (used in) provided by operatingactivities:             |  |                 |         |                                         |  |                             |          |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
|    Depreciation and amortization                                                                          |  |                 | ― |                                         |  |                             | 22,839   |                  |  |                        | 204     |  |  |  | ― |  |  |  | 23,043 |  |
|    Provision for doubtful accounts                                                                        |  |                 | ― |                                         |  |                             | 41,937   |                  |  |                        | 38      |  |  |  | ― |  |  |  | 41,975 |  |
|    Amortization of loan costs                                                                             |  |                 | ― |                                         |  |                             | 1,018    |                  |  |                        | ― |  |  |  | ― |  |  |  | 1,018 |  |
|    Extraordinary loss on extinguishment of debt                                                           |  |                 | 2,886   |                                         |  |                             | 855      |                  |  |                        | ― |  |  |  | ― |  |  |  | 3,741 |  |
| Changes in operatingassets and liabilities, net of     effects of acquisitions:                           |  |                 |         |                                         |  |                             |          |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
|     Equityin earnings of subsidiaries                                                                     |  |                 | (11,229 | )                                       |  |                             | ―  |                  |  |                        | ― |  |  |  | 11,229 |  |  |  | ― |  |
|    Accounts receivable                                                                                    |  |                 | ― |                                         |  |                             | (49,632  | )                |  |                        | 325     |  |  |  | ― |  |  |  | (49,307 | ) |
|    Establishment of accounts receivable of recent         acquisitions |  |                 | ― |                                         |  |                             | (1,522   | )                |  |                        | ― |  |  |  | ― |  |  |  | (1,522 | ) |
|    Supplies                                                                                               |  |                 | ― |                                         |  |                             | (417     | )                |  |                        | (57     | ) |  |  | ― |  |  |  | (474 | ) |
|     Prepaidexpenses and other current assets                                                              |  |                 | (38     | )                                       |  |                             | (1,265   | )                |  |                        | (188    | ) |  |  | ― |  |  |  | (1,491 | ) |
|    Accounts payable                                                                                       |  |                 | ― |                                         |  |                             | (3,591   | )                |  |                        | (190    | ) |  |  | ― |  |  |  | (3,781 | ) |
|     Accruedexpenses and other current liabilities                                                         |  |                 | (153    | )                                       |  |                             | 3,043    |                  |  |                        | 55      |  |  |  | ― |  |  |  | 2,945 |  |
|     Otherliabilities                                                                                      |  |                 | ― |                                         |  |                             | 4,216    |                  |  |                        | 156     |  |  |  | ― |  |  |  | 4,372 |  |
|                                                                                                                          |  |                 |         |                                         |  |                             |          |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Net cash (used in)provided by operating activities                                                                       |  |                 | (3,707  | )                                       |  |                             | 26,575   |                  |  |                        | 2,478   |  |  |  | ― |  |  |  | 25,346 |  |
| Investingactivities:                                                                                                     |  |                 |         |                                         |  |                             |          |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Acquisitions, includingworking capital settlement     payments                                            |  |                 | ― |                                         |  |                             | (59,106  | )                |  |                        | ― |  |  |  | ― |  |  |  | (59,106 | ) |
| Capitalexpenditures                                                                                                      |  |                 | ― |                                         |  |                             | (20,474  | )                |  |                        | (9      | ) |  |  | ― |  |  |  | (20,483 | ) |
| Other                                                                                                                    |  |                 | ― |                                         |  |                             | (833     | )                |  |                        | (5      | ) |  |  | ― |  |  |  | (838 | ) |
|                                                                                                                          |  |                 |         |                                         |  |                             |          |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Net cash used in investingactivities                                                                                     |  |                 | ― |                                         |  |                             | (80,413  | )                |  |                        | (14     | ) |  |  | ― |  |  |  | (80,427 | ) |
| Financingactivities:                                                                                                     |  |                 |         |                                         |  |                             |          |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Proceeds from long-termdebt                                                                                              |  |                 | ― |                                         |  |                             | 300,000  |                  |  |                        | ― |  |  |  | ― |  |  |  | 300,000 |  |
| Payments of long-term debtand capital leases                                                                             |  |                 | ― |                                         |  |                             | (152,645 | )                |  |                        | (381    | ) |  |  | ― |  |  |  | (153,026 | ) |
| Payments of loancosts                                                                                                    |  |                 | ― |                                         |  |                             | (14,641  | )                |  |                        | ― |  |  |  | ― |  |  |  | (14,641 | ) |
| Cash provided by (used in)intercompany activity                                                                          |  |                 | 3,687   |                                         |  |                             | (1,419   | )                |  |                        | (2,268  | ) |  |  | ― |  |  |  | ― |  |
| Exercise of stockoptions                                                                                                 |  |                 | 20      |                                         |  |                             | ―  |                  |  |                        | ― |  |  |  | ― |  |  |  | 20 |  |
|                                                                                                                          |  |                 |         |                                         |  |                             |          |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Net cash provided by (usedin) financing activities                                                                       |  |                 | 3,707   |                                         |  |                             | 131,295  |                  |  |                        | (2,649  | ) |  |  | ― |  |  |  | 132,353 |  |
| Net increase (decrease) incash and cash equivalents                                                                      |  |                 | ― |                                         |  |                             | 77,457   |                  |  |                        | (185    | ) |  |  | ― |  |  |  | 77,272 |  |
| Cash and cash equivalents,beginning of period                                                                            |  |                 | ― |                                         |  |                             | 11,734   |                  |  |                        | 345     |  |  |  | ― |  |  |  | 12,079 |  |
|                                                                                                                          |  |                 |         |                                         |  |                             |          |                  |  |                        |         |  |  |  |  |  |  |  |  |  |
| Cash and cash equivalents,end of period                                                                                  |  | $               | ― |                                         |  | $                           | 89,191   |                  |  | $                      | 160     |  |  | $ | ― |  |  | $ | 89,351 |  |
|                                                                                                                          |  |                 |         |                                         |  |                             |          |                  |  |                        |         |  |  |  |  |  |  |  |  |  |

****

****

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**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results ofOperations**

****

               You should read this discussion together with our unauditedcondensed consolidated financial statements and related notesincluded within this report.

**Forward LookingStatements**

****

               This report on Form 10-Q contains “forward-lookingstatements” within the meaning of the federal securities lawswhich are intended to be covered by the safe harbors createdthereby.   Forward-looking statements are those statementsthat are based upon management’s current plans andexpectations as opposed to historical and current facts and areoften identified herein by use of words including but not limitedto  “may,” “believe,”“will,” “project,” “expect”,“estimate,” “anticipate,” and“plan.”  These statements are based upon estimatesand assumptions made by the Company’s management that,although believed to be reasonable, are subject to numerousfactors, risks and uncertainties that could cause actual outcomesand results to be materially different from those projected. These factors, risks and uncertainties include, among others, thefollowing:

               •  Our high degree of leverage

               •  Our ability to incur substantially moredebt

               •  Operating and financial restrictions in our debtagreements

               •  Our ability to successfully implement ourbusiness strategies

               •  Our ability to successfully integrate any futureacquisitions

               •  The highly competitive nature of the health careindustry

               •  Governmental regulation of the industry includingMedicare and Medicaid reimbursement levels

               •  Pressures to contain costs by managed careorganizations and other insurers and our ability to negotiateacceptable                   terms with these third party payers

               •  Our ability to attract and retain qualifiedmanagement and personnel, including physicians andnurses

               •  Our ability to complete value-added acquisitionsand to effectively and efficiently integrate those operations                   within our corporate goals andobjectives

               •  Potential federal or state reform of healthcare

               •  Future governmental investigations

               •  Costs associated with newly enacted HIPAAregulations and other management information systemsintegrations

               •  The availability of capital to fund our corporategrowth strategy

               •  Potential lawsuits or other claims assertedagainst us

               •  Our ability to maintain or increase patientmembership and control costs of our managed health careplans

               •  Changes in general economic conditions

Except as required by law,we undertake no obligation to publicly update any forward-lookingstatements, whether as a result of new information, future eventsor otherwise.  We advise you, however, to consult anyadditional disclosures we make in our other filings with theSecurities and Exchange Commission, including, without limitation,the discussion of risks and other uncertainties under the caption“Risk Factors” contained in our Registration Statementon Form S-1 (Registration No.

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333-71934) filed with theSecurities and Exchange Commission.  You are cautioned not torely on such forward-looking statements when evaluating theinformation contained in this report.  In light of thesignificant uncertainties inherent in the forward-lookingstatements included herein, you should not regard the inclusion ofsuch information as a representation by the Company that itsobjectives and plans anticipated by the forward-looking statementswill occur or be achieved, or if any of them do, what impact theywill have on the Company’s results of operations andfinancial condition.

**Overview**

****

               As of March 31, 2002, we owned and operated nine hospitals with atotal of 1,838 licensed beds and related outpatient servicelocations complementary to the hospitals providing health careservices to the metropolitan Phoenix, Arizona, Chicago, Illinois,and Los Angeles/Orange County, California markets and a prepaidMedicaid managed health plan that serves more than 66,000 membersin Phoenix, Arizona.  Our objective is to providehigh-quality, cost-effective health care services in thecommunities we serve.  We focus our operations and businessdevelopment in urban and suburban markets, specifically thosefacilities where we identify an opportunity to improve operatingperformance and profitability and increase market share, eitherthrough a network of hospitals and other health care facilities ora single well-positioned facility.  We were incorporated inJuly 1997 and acquired our first hospital, Maryvale Hospital andMedical Center, on June 1, 1998.

****

**Impact ofAcquisitions**

****

               Acquiring acute care hospitals in urban and suburban markets is akey part of our business strategy.  Since we have grown mostyears through acquisitions accounted for as purchases, it isdifficult to make meaningful comparisons between our financialstatements for the fiscal periods presented.  In addition, weown a relatively small number of hospitals that can cause anindividual acquisition to have a material effect on our overalloperating performance.  At the time we acquire a hospital, wegenerally implement a number of measures to lower costs and mayalso make significant investments in the facility to expandservices, strengthen the medical staff and improve our overallmarket position.  The effects of these initiatives are notgenerally realized immediately.  Therefore, the financialperformance of a newly acquired hospital may adversely affect ouroverall performance in the short term.

               On November 1, 2001, we acquired the assets of Paradise ValleyHospital in Phoenix, Arizona for approximately $56.0 million. We financed the acquisition with a portion of our cash proceedsfrom the July 30, 2001 issuance of our 9.75% senior subordinatednotes due 2011.

               Effective May 1, 2001, we acquired Phoenix Memorial Hospital andPhoenix Health Plan and acquired certain other non-significanthealthcare related businesses during fiscal 2001.  We paid atotal of $90.6 million for the fiscal 2001 acquisitions.  Wefinanced these acquisitions through the sale of approximately $32.9million of our common stock to our existing shareholders, cash onhand and the assumption of certain liabilities of thesellers.

**Operational Strategiesand Related Risks**

****

               In order to increase revenues and enhance operating margins, theCompany’s management has implemented several operatinginitiatives including the following:

| • |  | Expanding the spectrum ofhealth care services provided by our facilities.  We believethat a key factor in increasing patient volume is to provide thecommunities we serve a comprehensive medical solution.  Thisstrategy requires effective recruiting and retention programs forgeneral practitioners and specialists and maintaining qualitynursing support as well as a commitment to capital projects toservice the existing facility framework and to provide currenttechnology.  Also, completing strategic acquisitions to allowfor consolidation of specialty practices at certain locations willprovide our patients with more effective and efficient care whileimproving the Company’s operating performance. |
|--------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| • |  | Providing continuoustraining and education to our hospital management teams to identifyareas in which operating efficiencies can realistically beachieved.  Management believes that the key to providing themost effective and efficient health care services as well asadministrative functions lies in both effective recruiting andretention programs and continual training and educationsupport.  Our affiliation with the University of Chicago atour MacNeal facility in Berwyn, Illinois demonstrates one of ourmany commitments to                                                                                                                                                                                         |

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|   |  | professional developmentfor both health care and administrative staff.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| • |  | Identifying geographicmarkets that provide a strategic fit with the Company’s goalsand objectives.  Management expects to continue to pursueacquisition activities in markets where the Company can obtainsignificant market share and position itself to capture additionalvolume of the aging U.S. population.  According to the U.S.Census Bureau there are approximately 35 million Americans aged 65or older in the United States today, comprising approximately 13%of the total U.S. population.  By the year 2030 the number ofthese elderly persons is expected to climb to 69 million, or 20% ofthe total population.  Management believes that itsinitiatives will position the Company to capitalize on thisdemographic trend. |

               Although we expect the initiatives above to increase our patientvolume, the following risk factors could offset those increases torevenues:

| • |  | Managed care, Medicare andMedicaid revenues are significant to our business and are subjectto pricing pressures.  For the nine months ended March 31,2002, patient days attributable to managed care, Medicare andMedicaid were 49%, 32% and 8% of total patient days,respectively.  For the nine months ended March 31, 2002,managed care, Medicare and Medicaid payers accounted for 59%, 25%and 6% of total gross patient revenues, respectively.  Thesepayers receive significant discounts compared to other payers, andthese payers continually seek to reduce payments to lower the costof health care for their members.  We are also at risk forhighly acute cases for payers under the prospective paymentsystem.                                                                                                                                      |
|--------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| • |  | Many procedures onceperformed exclusively at hospitals are now being provided on anoutpatient basis.  Advances in technology and the focus ofpayers on treating lower acuity patients in a less expensivesetting have driven the increase in outpatient utilization. For the nine months ended March 31, 2002, 70% of total surgeriesperformed were outpatient surgeries compared to 71% for the ninemonths ended March 31, 2001.  Outpatient revenues as apercentage of total gross revenues for the nine months ended March31, 2001 and 2002 were 37.5% and 36.0%, respectively.  Thepercentages between the periods are comparable after excluding theimpact of the acquisition of Phoenix Memorial Hospital in May2001.  Typically, the payments we receive for outpatientprocedures are less than those for the same procedure in aninpatient setting. |
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| • |  | Intense market competitionmay limit our ability to enter choice markets or recruit and retainquality health care personnel.  We face growing competition inour industry.  Consolidation of hospitals into for-profit ornot-for-profit systems continues to increase as other hospitalcompanies realize that regional market strength is pivotal inefficiently providing comprehensive health care services,recruiting and retaining qualified health care personnel andeffectively managing payer relationships.  We anticipate suchconsolidation and increased competition to continue to increase inthe near future.                                                                                                                                                                                                                                                |

**GeneralTrends**

****

               During fiscal year 2002, the Company has experienced a significantincrease in its insurance premiums paid to insurance carriers,especially for professional and general liability coverage. During fiscal 2002, the Company expects to incur insurance premiumcosts of approximately $7.3 million for professional and generalliability and workers compensation coverage in addition to itsself-insured retention costs.  The Company’s currentpolicy expires effective May 31, 2002 at which time the Companyexpects to establish a captive insurance subsidiary through whichit will self-insure a portion of its claims liability and purchaseexcess insurance coverage for losses above individual and aggregateretentions.  The cost of insurance has negatively affectedoperating results and cash flows throughout the health careindustry due to pricing pressures on insurers and fewer carriersunderwriting professional and general liability insurance. The Company currently has no information that would lead managementto believe that this trend is only temporary in nature, and thusthere is no assurance that these insurance costs will not have amaterial adverse effect on our future operating results.

               In August 2001, the Pennsylvania Insurance Commissioner obtained arehabilitation order for PHICO Insurance Company that gave thePennsylvania Department of Insurance control over PHICO includingits financial operations.  PHICO provided the Company’sprofessional and general liability coverage during the period June1, 1999 to May 31, 2000.  On February 1, 2002, PHICO enteredinto liquidation proceedings.  The Company is aware ofmultiple claims for which PHICO is responsible under its policywith the Company.  While the Company is unable to predict theoutcomes of these

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claims, managementbelieves that its professional and general liability reserve isadequate to cover such claims should PHICO not be financially ableto pay all or a portion of these claims.

               The Company continues to frequently renegotiate contracts withvarious managed care payers in its markets to improve reimbursementrates and improve operating results and cash flows.  Managedcare payers are subject to pricing pressures which oftencomplicates our renegotiation efforts.  Even whenrenegotiating contracts with improved reimbursement, the Companyhas, in some instances, experienced volume declines from themanaged care payers.  Management continually reviews itsportfolio of managed care relationships and attempts to balancepricing and volume issues; however, as long as strong competitionremains in the markets we serve, these challenges willcontinue.  Our future operating results and cash flows couldbe negatively impacted to the extent we are unable to achievepositive reimbursement arrangements while maintaining patientvolume.

**Results ofOperations**

****

               The following tables present a summary of our operating results forthe three-month and nine-month periods ended March 31, 2001 and2002.

| ** ** | ** **                                                                                                                      | **(Unaudited) Three months ended March 31,** |   |
|------------|---------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------|--------|
| ** ** | ** **                                                                                                                      |                                              |   |
| ** ** | ** **                                                                                                                      | **2001**                                     |        | **2002** |   |
| ** ** | ** **                                                                                                                      | **Amount**                                   |        | **%** |  | **Amount** |  | **%** |
| ** ** | ** **                                                                                                                      | ****                                         |        | **** |
| ** ** | ** **                                                                                                                      | *(Inmillions)*                               |
|       | Revenues                                                                                                                        |                                         | $      | 166.3 |  |   |  | 100.0 | % |  | $ | 235.9 |  |   |  | 100.0 | % |
|       |                                                                                                                                 |                                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|       | Salaries andbenefits                                                                                                            |                                              |        | 83.5 |  |  |  | 50.2  | % |  |  | 99.2 |  |  |  | 42.1 | % |
|       | Medical claimsexpense                                                                                                           |                                         |   | 4.2 |  |  |  | 2.5 | % |  |  | 34.9 |  |  |  | 14.8 | % |
|       | Supplies                                                                                                                        |                                         |   | 23.2 |  |  |  | 14.0 | % |  |  | 30.0 |  |  |  | 12.7 | % |
|       | Other operatingexpenses                                                                                                         |                                         |   | 27.7 |  |  |  | 16.7 | % |  |  | 36.9 |  |  |  | 15.6 | % |
|       | Provision for doubtfulaccounts                                                                                                  |                                         |   | 10.2 |  |  |  | 6.1 | % |  |  | 11.9 |  |  |  | 5.1 | % |
|       |                                                                                                                            |                                         |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|       | EBITDA (1)                                                                                                                      |                                         |   | 17.5 |  |  |  | 10.5 | % |  |  | 23.0 |  |  |  | 9.7 | % |
|       | Depreciation andamortization                                                                                                    |                                         |   | 6.1 |  |  |  | 3.7 | % |  |  | 8.7 |  |  |  | 3.7 | % |
|       | Interest expense,net                                                                                                            |                                         |   | 4.1 |  |  |  | 2.5 | % |  |  | 7.2 |  |  |  | 3.0 | % |
|       | Minority interests andother non-operating expenses                                                                              |                                         |   | 0.1 |  |  |  | 0.0 | % |  |  | 0.1 |  |  |  | 0.0 | % |
|       |                                                                                                                            |                                         |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|       | Income before income taxesand extraordinary item                                                                                |                                         |   | 7.2 |  |  |  | 4.3 | % |  |  | 7.0 |  |  |  | 3.0 | % |
|       | Provision for incometaxes                                                                                                       |                                         |   | 0.4 |  |  |  | 0.2 | % |  |  | 2.8 |  |  |  | 1.2 | % |
|       |                                                                                                                            |                                         |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|       | Income beforeextraordinary item                                                                                                 |                                         |   | 6.8 |  |  |  | 4.1 | % |  |  | 4.2 |  |  |  | 1.8 | % |
|       | Extraordinary gain onextinguishment of debt (tax benefit of    of $2.2 for the three months ended March 31,2002) |                                         |   | ― |  |  |  | 0.0 | % |  |  | 2.2 |  |  |  | 0.9 | % |
|       |                                                                                                                            |                                         |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|       | Net income                                                                                                                      |                                         | $      | 6.8 |  |  |  | 4.1 | % |  | $ | 6.4 |  |  |  | 2.7 | % |
|       |                                                                                                                                 |                                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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|        |                                                                                                                                    | **(Unaudited) Nine months ended March 31,** |   |
|--------|------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------|--------|
|        |                                                                                                                                    | **2001**                                    |        | **2002** |   |
|        |                                                                                                                                    | **Amount**                                  |        | **%** |  | **Amount** |  | **%** |
|        |                                                                                                                                    | ******                                      |        | ****** |
|        |                                                                                                                                    | *(Inmillions)*                              |
|   | Revenues                                                                                                                           |                                        | $      | 480.6 |  |   |  | 100.0 | % |  | $ | 666.4 |  |   |  | 100.0 | % |
|   |                                                                                                                                    |                                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|   | Salaries andbenefits                                                                                                               |                                             |        | 238.8 |  |  |  | 49.7 | % |  |  | 281.1 |  |  |  | 42.2 | % |
|   | Medical claimsexpense                                                                                                              |                                        |   | 11.9 |  |  |  | 2.5 | % |  |  | 97.4 |  |  |  | 14.6 | % |
|   | Supplies                                                                                                                           |                                        |   | 67.2 |  |  |  | 14.0 | % |  |  | 83.5 |  |  |  | 12.5 | % |
|   | Other operatingexpenses                                                                                                            |                                        |   | 81.7 |  |  |  | 17.0 | % |  |  | 107.0 |  |  |  | 16.1 | % |
|   | Provision for doubtfulaccounts                                                                                                     |                                        |   | 43.4 |  |  |  | 9.0 | % |  |  | 42.0 |  |  |  | 6.3 | % |
|   |                                                                                                                               |                                        |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|   | EBITDA (1)                                                                                                                         |                                        |   | 37.6 |  |  |  | 7.8 | % |  |  | 55.4 |  |  |  | 8.3 | % |
|   | Depreciation andamortization                                                                                                       |                                        |   | 18.4 |  |  |  | 3.8 | % |  |  | 23.1 |  |  |  | 3.5 | % |
|   | Interest expense,net                                                                                                               |                                        |   | 12.6 |  |  |  | 2.6 | % |  |  | 20.4 |  |  |  | 3.0 | % |
|   | Minority interests andother non-operating expenses                                                                                 |                                        |   | 0.5 |  |  |  | 0.1 | % |  |  | (0.2 | ) |  |  | 0.0 | % |
|   |                                                                                                                               |                                        |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|   | Income before income taxesand extraordinary item                                                                                   |                                        |   | 6.1 |  |  |  | 1.3 | % |  |  | 12.1 |  |  |  | 1.8 | % |
|   | Provision for incometaxes                                                                                                          |                                        |   | 0.5 |  |  |  | 0.1 | % |  |  | 3.5 |  |  |  | 0.5 | % |
|   |                                                                                                                               |                                        |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|   | Income beforeextraordinary item                                                                                                    |                                        |   | 5.6 |  |  |  | 1.2 | % |  |  | 8.6 |  |  |  | 1.3 | % |
|   | Extraordinary loss onextinguishment of debt (net of tax benefit    of $2.9 for the nine months ended March 31,2002) |                                        |   | ― |  |  |  | 0.0 | % |  |  | 3.8 |  |  |  | 0.6 | % |
|   |                                                                                                                               |                                        |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|   | Net income                                                                                                                         |                                        | $      | 5.6 |  |  |  | 1.2 | % |  | $ | 4.8 |  |  |  | 0.7 | % |
|   |                                                                                                                                    |                                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

(1)          EBITDA is defined as income before interest expense (net ofinterest income), income taxes, depreciation, amortization,minority interests, gain or loss on sale of assets, equity methodincome or loss and extraordinary items.  While you should notconsider EBITDA in isolation or as a substitute for net income,operating cash flows or other cash flow statement data determinedin accordance with accounting principles generally accepted in theUnited States, management understands that EBITDA is a commonlyused analytical indicator within the health care industry and alsoserves as a measure of leverage capacity and debt serviceability.  EBITDA, as presented, may not be comparable tosimilarly titled measures of other companies.

****

**Selected OperatingStatistics**

****

The following table setsforth certain operating statistics for each of the periodspresented.

|                                         |  | **(Unaudited) Three months ended March 31,**                                                |        |          | **(Unaudited) Nine months ended March 31,** |
|-----------------------------------------|--|---------------------------------------------------------------------------------------------|--------|----------|---------------------------------------------|
|                                         |  | **2001**                                                                                    |        | **2002** |                                             |  | **2001** |  | **2002** |
|                                         |  |                                                                                             |
| Number of hospitals at theend of period |  |                7 |   | 9        |                                             |  | 7 |   | 9 |
| Licensed beds                           |  | 1,481                                                                                       |   | 1,838    |                                             |  | 1,481 |   | 1,838 |
| Discharges                              |  | 16,704                                                                                      |   | 19,735   |                                             |  | 48,091 |   | 55,362 |
| Adjusted discharges(hospitals)          |  | 24,706                                                                                      |   | 28,684   |                                             |  | 73,247 |   | 81,677 |
| Average length ofstay                   |  | 4.23                                                                                        |   | 4.18     |                                             |  | 4.11 |   | 4.06 |
| Patient days                            |  | 70,726                                                                                      |   | 82,550   |                                             |  | 197,622 |   | 224,845 |
| Adjusted patient days(hospitals)        |  | 104,196                                                                                     |   | 120,065  |                                             |  | 299,704 |   | 331,585 |

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**Three months endedMarch 31, 2002 compared to three months ended March 31,2001**

****

               Revenues were $235.9 million for the three months ended March 31,2002, compared to $166.3 million for the three months ended March31, 2001, an increase of $69.6 million or 41.9%.  Acquisitionsduring fiscal 2001 and 2002 accounted for $76.3 million of theincrease in revenues during the three months ended March 31,2002.  On a same-store basis, patient days decreased by 3.2%for the three months ended March 31, 2002 compared to the prioryear period, while adjusted patient days (calculation includes afactor for outpatient volume) decreased by 3.9% for the threemonths ended March 31, 2002 compared to the prior yearperiod.  Revenues, exclusive of health plan premium and othernon-hospital revenues, per adjusted discharge increased 6.0% on asame-store basis for the three months ended March 31, 2002 comparedto the prior year period.  Health plan premium revenuesrepresent capitated payments received by our health plans fromthird party payers, the largest of which is the state of ArizonaMedicaid program, for managing the health care of coveredmembers.  Health plan premium revenues represented 20.8% ofour total revenues for the three months ended March 31, 2002, andincreased significantly from the same prior year period due to theacquisition of Phoenix Health Plan (the “Plan”) in May2001.

               Salaries and benefits expense was $99.2 million for the threemonths ended March 31, 2002, compared to $83.5 million for thethree months ended March 31, 2001, an increase of $15.7 million or18.8%.  Of this increase, $18.3 million related to the fiscal2001 and 2002 acquisitions.  Salaries and benefits expense asa percentage of revenues decreased from 50.2% for the three monthsended March 31, 2001 to 42.1% for the three months ended March 31,2002.  This decrease is due to the fact that the acquiredentities, which include a Medicaid health plan and outpatientradiology clinics, are much less labor-intensive than theCompany’s hospitals. 

               Medical claims expense was $34.9 million for the three months endedMarch 31, 2002, compared to $4.2 million for the three months endedMarch 31, 2001, an increase of $30.7 million.  The increase isdue to the May 2001 acquisition of Phoenix Health Plan. Medical claims expense represents the amounts paid by the Plan forhealth care services provided to its members including an estimateof incurred but not reported claims.  Revenues and expensesbetween the Plan and the Company’s wholly owned hospitals andrelated outpatient service providers are eliminated inconsolidation.

               Supplies expense was $30.0 million for the three months ended March31, 2002, compared to $23.2 million for the three months endedMarch 31, 2001, an increase of $6.8 million or 29.3%. Acquisitions during fiscal 2001 and 2002 accounted forapproximately $5.4 million of the increase.  Supplies expenseas a percentage of revenues decreased from 14.0% for the threemonths ended March 31, 2001 to 12.7% for the three months endedMarch 31, 2002, due to the reduced utilization of medical suppliesof the acquired entities including Phoenix Health Plan which hasvery minimal supplies costs.  Supplies expense on a same-storebasis increased from 14.0% of revenues for the three months endedMarch 31, 2001 to 15.4% for the three months ended March 31,2002.  This increase is due to increased pharmaceutical andother supply costs that the Company is managing through priceincreases and payer renegotiations.

               Other operating expenses were $36.9 million for the three monthsended March 31, 2002, compared to $27.7 million for the threemonths ended March 31, 2001, an increase of $9.2 million or33.2%.  Other operating expenses include professional fees,purchased services, rents and leases, repairs and maintenance,insurance, utilities and non-income taxes.  The fiscal 2001and 2002 acquisitions accounted for approximately $10.4 million ofthe increase.  On a same-store basis, other operating expensesas a percentage of revenues decreased from 16.7% for the threemonths ended March 31, 2001 to 16.6% for the three months endedMarch 31, 2002.

               The provision for doubtful accounts was $11.9 million for the threemonths ended March 31, 2002, compared to $10.2 million for thethree months ended March 31, 2001, an increase of 16.7%.  Theprovision for doubtful accounts for the fiscal 2001 and 2002acquisitions was approximately $1.5 million.  The provisionfor doubtful accounts as a percentage of revenue decreased from6.1% for the three months ended March 31, 2001 to 5.1% for thethree months ended March 31, 2002.  The decrease in theprovision for doubtful accounts is due to the acquisition ofPhoenix Health Plan, which has significant revenues and noprovision for doubtful accounts.  On a same-store basis, theprovision for doubtful accounts increased by $0.2 millionrepresenting an increase as a percentage of revenues from 6.1% forthe three months ended March 31, 2001 to 6.5% for the three monthsended March 31, 2002.

               Depreciation and amortization expense was $8.7 million for thethree months ended March 31, 2002, compared to $6.1 million for theprior year period, an increase of $2.6 million or 42.6%. Substantially all of the increase relates to the depreciation andamortization expense for the property, plant and equipment andintangible assets acquired during fiscal 2001 and 2002.  Theremaining increase relates to capital expenditures subsequent toMarch 31, 2001.  On July 1, 2001, the

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Company adopted theprovisions of SFAS 141 and 142 resulting in re-allocations of theexcess purchase price over net assets acquired to goodwill andidentifiable intangible assets.  Under SFAS 142, goodwill andindefinite-lived intangible assets are no longer amortized but aresubject to annual impairment tests.  The suspension ofgoodwill amortization and the changes in classifications ofidentifiable intangible assets and related remaining useful livesresulted in a decrease in amortization expense of approximately$1.2 million for the three months ended March 31, 2002.

               Net interest expense was $7.2 million for the three months endedMarch 31, 2002, compared to $4.1 million for the prior year period,an increase of $3.1 million or 75.6%.  The increase in netinterest expense is due to the issuance of $300 million ofsubordinated notes on July 30, 2001 offset by the repayment of theamounts outstanding under the 2000 credit facility and otheroutstanding term loans of approximately $147.8 million.  Inaddition, the Company incurred deferred loan costs of approximately$11.5 million related to the issuance of the subordinated notes and$3.5 million for the establishment of the 2001 creditfacility.  The deferred loan costs are being amortized overthe respective lives of the notes and the 2001 creditfacility.  The aforementioned increases to net interestexpense were offset by an increase in interest income on investedcash of approximately $0.4 million for the three months ended March31, 2002 compared to the three months ended March 31,2001.

               Minority interests represent the third party portion of earnings ofcertain non-wholly owned affiliates of the Company included in theCompany’s condensed consolidated statements ofoperations.  Minority interests were $0.1 million for thethree months ended March 31, 2001 and 2002.

               Income before income taxes and extraordinary item decreased to $7.0million for the three months ended March 31, 2002 from $7.2 millionfor the prior year period.  The 2001 and 2002 acquiredentities generated income before income taxes and extraordinaryitem of $3.3 million. 

               The provision for income taxes was $2.8 million for the threemonths ended March 31, 2002, compared to $0.4 million for thecomparable period of 2001.  These provisions reflect effectivetax rates of 40.0% and 5.6% for the three-month periods ended March31, 2002 and 2001, respectively.  The valuation allowance thatoffsets our deferred tax assets decreased $2.5 million for thethree months ended March 31, 2001, resulting in a decrease in oureffective tax rates.  The extraordinary gain on extinguishmentof debt reflects a tax benefit of $2.2 million for the three monthsended March 31, 2002.

**Nine months ended March31, 2002 compared to the nine months ended March 31,2001**

               Revenues were $666.4 million for the nine months ended March 31,2002, compared to $480.6 million for the prior year period, anincrease of $185.8 million or 38.7%.  Acquisitions duringfiscal 2001 and 2002 accounted for $192.0 million of the increasein revenues during the nine months ended March 31, 2002.  On asame-store basis, patient days decreased 0.2% for the nine monthsended March 31, 2002 compared to the prior year period, whileadjusted patient days (calculation includes a factor for outpatientvolume) decreased 2.1% for the nine months ended March 31, 2002compared to the prior year period.  Revenues, exclusive ofhealth plan premium and other non-hospital revenues, per adjusteddischarge increased 4.5% on a same-store basis for the nine monthsended March 31, 2002 compared to the prior year period. Health plan premium revenues represent capitated payments receivedby our health plans from third party payers, the largest of whichis the state of Arizona Medicaid program, for managing the healthcare of covered members.  Health plan premium revenuesrepresented 20.4% of our total revenues for the nine months endedMarch 31, 2002, and increased significantly from the same prioryear period due to the acquisition of Phoenix Health Plan in May2001.

               Salaries and benefits expense was $281.1 million for the ninemonths ended March 31, 2002, compared to $238.8 million for theprior year period, an increase of $42.3 million or 17.7%.  Ofthis increase, $40.7 million related to fiscal 2001 and 2002acquisitions.  Salaries and benefits expense as a percentageof revenues decreased from 49.7% for the nine months ended March31, 2001 to 42.2% for the nine months ended March 31, 2002. This decrease is due to the less labor-intensive operations of theacquired entities, which include a Medicaid health plan andoutpatient radiology clinics.

               Medical claims expense was $97.4 million for the nine months endedMarch 31, 2002, compared to $11.9 million for the prior yearperiod, an increase of $85.5 million.  The increase is due tothe acquisition of Phoenix Health Plan, a Medicaid health plan inPhoenix, Arizona, with over 66,000 members.  Medical claimsexpense represents the amounts paid by the Plan for health careservices provided to its members including an estimate of incurredbut not reported claims.

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Revenues and expensesbetween the Plan and the Company’s wholly owned hospitals andrelated outpatient service providers are eliminated inconsolidation.

               Supplies expense was $83.5 million for the nine months ended March31, 2002, compared to $67.2 million for the prior year period, anincrease of $16.3 million or 24.3%.  Acquisitions duringfiscal 2001 and 2002 accounted for approximately $11.5 million ofthe increase.  Supplies expense as a percentage of revenuesdecreased from 14.0% for the nine months ended March 31, 2001 to12.5% for the nine months ended March 31, 2002 as a result ofdecreased utilization of supplies by the acquired entitiesincluding Phoenix Health Plan which has very minimal suppliescosts.  Supplies expense on a same-store basis increased from14.0% of revenues for the nine months ended March 31, 2001 to 15.2%for the nine months ended March 31, 2002.  This increase isdue to increased pharmaceutical and other supply costs that theCompany is managing through price increases and payerrenegotiations.

               Other operating expenses were $107.0 million for the nine monthsended March 31, 2002, compared to $81.7 million for the prior yearperiod, an increase of $25.3 million or 31.0%.  Otheroperating expenses include professional fees, purchased services,rents and leases, repairs and maintenance, insurance, utilities andnon-income taxes.  The fiscal 2001 and 2002 acquisitionsaccounted for approximately $24.6 million of the increase.  Ona same-store basis, other operating expenses as a percentage ofrevenues increased from 17.0% for the nine months ended March 31,2001 to 17.4% for the nine months ended March 31, 2002 primarilydue to increases in malpractice insurance and professionalfees.

               The provision for doubtful accounts was $42.0 million for the ninemonths ended March 31, 2002, compared to $43.4 million for theprior year period.  The provision for doubtful accounts forthe fiscal 2001 and 2002 acquisitions was $5.2 million.  Theprovision for doubtful accounts as a percentage of revenuesdecreased from 9.0% for the nine months ended March 31, 2001 to6.3% for the nine months ended March 31, 2002.  On asame-store basis, the provision for doubtful accounts decreased by$6.6 million representing a decrease as a percentage of revenuesfrom 9.0% for the nine months ended March 31, 2001 to 7.8% for thenine months ended March 31, 2002.  The decrease in theprovision for doubtful accounts is due to several factors: (1) an increase in the provision for doubtful accounts during thefirst six months of fiscal 2001 due to the integration of thehospital acquired during fiscal 2000 to the Company’smethodology of estimating and recording the provision for doubtfulaccounts, (2) the acquisition of Phoenix Health Plan, which hassignificant revenues and no provision for doubtful accounts and (3)focused efforts by management to improve billing and collectionsprocesses and increase productivity of the hospital businessoffices.

               Depreciation and amortization expense was $23.1 million for thenine months ended March 31, 2002, compared to $18.4 million for theprior year period, an increase of $4.7 million or 25.5%. Substantially all of the increase relates to the depreciation andamortization expense for the property, plant and equipment andintangible assets acquired during fiscal 2001 and 2002.  Theremaining increase relates to capital expenditures subsequent toMarch 31, 2001.  On July 1, 2001, the Company adopted theprovisions of SFAS 141 and 142 resulting in re-allocations of theexcess purchase price over net assets acquired to goodwill andidentifiable intangible assets.  Under SFAS 142, goodwill andindefinite-lived intangible assets are no longer amortized but aresubject to annual impairment tests.  The suspension ofgoodwill amortization and the changes in classifications ofidentifiable intangible assets and related remaining useful livesresulted in a decrease in amortization expense of approximately$3.4 million for the nine months ended March 31, 2002.

               Net interest expense was $20.4 million for the nine months endedMarch 31, 2002, compared to $12.6 million for the prior yearperiod, an increase of $7.8 million or 61.9%.  The increase innet interest expense relates to the issuance of $300 million ofsubordinated notes on July 30, 2001 offset by the repayment of theamounts outstanding under the 2000 credit facility and otheroutstanding term loans of approximately $147.8 million.  Inaddition, the Company incurred deferred loan costs of approximately$11.5 million related to the issuance of the subordinated notes and$3.5 million for the establishment of the 2001 creditfacility.  The deferred loan costs are being amortized overthe respective lives of the notes and the 2001 creditfacility.  The aforementioned increases to net interestexpense were offset by an increase in interest income on investedcash of approximately $1.8 million for the nine months ended March31, 2002, compared to the nine months ended March 31,2001.

               Minority interests represent the third party portion of earnings ofcertain non-wholly owned affiliates of the Company included in theCompany’s condensed consolidated statements ofoperations.  Minority interests increased from $0.3 millionfor the nine months ended March 31, 2001 to $0.5 million for thenine months ended March 31, 2002.  Other non-operatingexpenses for the nine months ended March 31, 2002 include gainstotaling $0.7 million for equity method income and assetsales.

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               Income before income taxes and extraordinary item increased to$12.1 million for the nine months ended March 31, 2002, from $6.1million for the prior year period.  Approximately $8.4 millionof this increase relates to entities acquired during fiscal 2001and 2002, with a decrease of $2.4 million attributable tosame-store net income before income taxes and extraordinaryitem.

               The provision for income taxes was $3.5 million for the nine monthsended March 31, 2002, compared to $0.5 million for the comparableperiod of 2001.  These provisions reflect effective tax ratesof 28.9% and 8.2% for the nine months ended March 31, 2002 and2001, respectively.  The valuation allowance that offsets ourdeferred tax assets decreased by $1.4 million and $2.4 million forthe nine months ended March 31, 2002 and 2001, respectively,resulting in a decrease in our effective tax rates.  Theextraordinary loss on extinguishment of debt is net of a taxbenefit of $2.9 million for the nine months ended March 31,2002.

               The Company recorded an extraordinary loss of $3.8 million (net ofa tax benefit of $2.9 million) for the nine months ended March 31,2002.  The extraordinary loss relates to remaining deferredloan costs under the 2000 credit facility that the Company expensedupon entering into the 2001 credit facility in July 2001, feesincurred to terminate its interest rate collar agreement requiredby the 2000 credit facility and fees incurred to terminate certainlease agreements prior to their maturities.

**Liquidity and CapitalResources**

****

               At March 31, 2002, we had working capital of $122.4 million,including cash and cash equivalents of $89.4 million.  Workingcapital at June 30, 2001 was $18.0 million.  The increase inworking capital is primarily due to an increase in cash from theissuance of the Company’s subordinated notes due 2011 on July30, 2001.  Cash provided by operating activities increasedfrom $15.9 million for the nine months ended March 31, 2001 to$25.3 million for the nine months ended March 31, 2002.  TheCompany was able to generate cash flows from operations throughimproved earnings before interest, taxes, depreciation andamortization, improved collections on accounts receivable and as aresult of the timing of payments of accrued expenses and othercurrent liabilities.

               Cash used in investing activities increased from $25.1 million forthe nine months ended March 31, 2001 to $80.4 million for the ninemonths ended March 31, 2002.  The Company decreased capitalexpenditures from $21.0 million for the nine months ended March 31,2001 to $20.5 million for the nine months ended March 31,2002.  The funding of capital expenditures is in large partsubject to the timing of certain capital projects at MaryvaleHospital and Medical Center, Arrowhead Community Hospital andMedical Center and Phoenix Baptist Hospital and Medical Centerrequired as part of the respective purchase agreements for thesefacilities.  As of March 31, 2002, the Company has fundedapproximately $28.0 of its $65.0 million commitment for theseprojects, and the Company expects to complete these projects duringthe next two to five years.  We believe our capitalexpenditure program is sufficient to service, expand and improveour existing facilities to meet our quality objectives.  Thedecrease in capital expenditures was offset by an increase inacquisition expenditures of approximately $57.4 million from thenine months ended March 31, 2001 to the nine months ended March 31,2002 primarily due to the Paradise Valley acquisition and a workingcapital settlement payment made for the acquisition of PhoenixHealth Plan.

               Cash provided by financing activities was $132.4 million for thenine months ended March 31, 2002, an increase of $135.3 millionfrom the deficit of $2.9 million for the nine months ended March31, 2001.  The increase was primarily attributable to theissuance of $300 million of subordinated notes offset by therepayment of (1) the 2000 credit facility, (2) early buyouts ofcertain capital leases and (3) payments of deferred loan costsincurred as part of the issuance of the subordinated notes and theexecution of the binding documents in respect of the 2001 creditfacility.

               As of March 31, 2002, we had 21,600 shares of Payable-In-KindConvertible Redeemable Preferred Stock (“PIK PreferredStock”) outstanding with a liquidation value of $1,000 pershare.  The Company originally issued 20,000 shares of PIKPreferred Stock on February 1, 2000 in connection with theacquisition of MacNeal Hospital.  The Company currentlyintends to issue and record paid in kind dividends annually at 8%of the liquidation value of the PIK Preferred Stock until January31, 2008 and to pay cash dividends thereafter until the January 31,2015 maturity date.  On April 1, 2002, the Company issued1,728 shares of PIK Preferred Stock, which represents the 2002stock dividend.   The PIK Preferred Stock will automaticallyconvert to common stock upon an initial public offering of ourcommon stock with gross proceeds to us of at least $50.0 million ata conversion price equal to the initial public offeringprice.

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               We believe that the working capital on hand and the availabilityunder our 2001 credit facility are sufficient to meet our operatingand capital needs for the foreseeable future.  Additionally,certain funds controlled by Morgan Stanley Capital Partners (the“MSCP Funds”) have entered into a subscriptionagreement with us to purchase an additional $322.3 million of ourcommon stock to fund future acquisitions and cash flow needs. Common stock purchases by the MSCP Funds are subject to severalconditions outside the control of the Company, including theapproval of MSCP’s internal Investment Committee.  Noassurance can be given that any or all of such conditions toadditional common stock purchases will be met.  We intend toacquire additional hospitals and are actively seeking acquisitionsthat fit our corporate growth strategy.  These acquisitionsmay, however, require financing in addition to the working capitalon hand and future cash flows from operations.   Managementcontinually assesses its capital needs and may seek additionalfinancing, including debt or equity, as considered necessary tofund potential acquisitions or for other corporatepurposes.

               The Company is subject to certain restrictive and financialcovenants under the 2001 credit facility including an EBITDA todebt ratio and interest coverage ratio.  Should theCompany’s results of operations or cash flows decline andresult in violation of one or more of these covenants, amountsoutstanding under the 2001 credit facility could become immediatelypayable and additional borrowings could be restricted.  As ofMarch 31, 2002, the only amounts drawn against the 2001 creditfacility are letters of credit totaling approximately $5.6million.  However, restrictions on additional borrowings underthe 2001 credit facility could significantly impact theCompany’s acquisition growth objectives.  The Company isin compliance with all such covenants as of March 31,2002.

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               The following table reflects a summary of obligations andcommitments outstanding with payment dates as of March 31,2002.
|                             |   | **Paymentsdue by period** |         |              |   |
|----------------------------------|--------|---------------------------|---------|--------------|--------|
|                             |   | ****                      |         |              |   |
|                             |   | **Lessthan 1 year**       |         | **1-3years** |        | **4-5years** |  | **After 5 years** |  | **Total** |   |
|                             |   | **                        |    |
| **Contractual CashObligations:** |   | *(Inmillions)*            |    |
| Long-term debt                   |   | $                         | ― |         |   | $ | ― |   |   | $  | ― |   |   | $ | 300.0 |   | $ |   | 300.0 |   |
| Capital leaseobligations         |   |                           | 3.6     |         |   |  | 4.1 |  |   |  | 0.5 |   |   |  | ― |   |  |   | 8.2 |   |
| Operatingleases                  |   |                      | 11.3    |         |   |   | 15.6 |  |   |  | 9.0 |   |   |   | 26.0 |   |   |   | 61.9 |   |
| Other long-termobligations       |   |                      | 0.1     |         |   |   | 0.3 |  |   |  | 0.3 |   |   |   | 1.5 |   |   |   | 2.2 |   |
|                                  |        |                           |         |              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|    Subtotal       |   | $                         | 15.0    |         |   | $ | 20.0 |  |   | $ | 9.8 |   |   | $ | 327.5 |   |   | $ | 372.3 |   |
|                                  |   |                      |         |         |   |   |  |  |   |  |  |   |   |   |  |   |   |   |  |   |
|                                                |   | **Amountof commitment expiration per period** |         |              |   |
|-----------------------------------------------------|--------|-----------------------------------------------|---------|--------------|--------|
|                                                |   | ****                                          |         |              |   |
|                                                |   | **Lessthan 1 year**                           |         | **1-3years** |        | **4-5years** |  | **After 5 years** |  | **Total** |   |
|                                                |   | **                                            |    |
| **OtherCommitments:**                               |   | *(In  millions)*                         |    |
| Constructioncommitments                             |        | $                                             | 27.0    |         |   | $ | 19.8 |  |  | $ | ― |   |   | $ | ― |   | $ |   | 46.8 |   |
| Guarantees of suretybonds                           |   |                                               | 9.5     |         |   |  | 3.0 |   |   |  | ― |   |   |  | ― |   |  |   | 12.5 |   |
| Letters ofcredit                                    |   |                                               | ― |         |   |  | ― |  |   |  | 5.6 |   |   |  | ― |   |  |   | 5.6 |   |
| Capital expenditurecommitments                      |   |                                          | 6.8     |         |   |   | 14.8 |  |   |  | 14.3 |   |   |   | 1.2 |   |   |   | 37.1 |   |
| Physiciancommitments                                |   |                                          | 1.3     |         |   |   | ― |  |   |  | ― |   |   |   | ― |   |   |   | 1.3 |   |
| Othercommitments                                    |        |                                               | 0.1     |              |        |  | 0.1 |  |  |  | 0.1 |  |  |  | 0.7 |  |  |  | 1.0 |  |
|                                                     |        |                                               |         |              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|    Subtotal                          |   | $                                             | 44.7    |         |   | $ | 37.7 |  |   | $ | 20.0 |   |   | $ | 1.9 |   |   | $ | 104.3 |   |
|                                                     |   |                                          |         |         |   |   |  |  |   |  |  |   |   |   |  |   |   |   |  |   |
|     Totalobligations and commitments |        | $                                             | 59.7    |              |        | $ | 57.7 |  |  | $ | 29.8 |  |  | $ | 329.4 |  |  | $ | 476.6 |  |
|                                                     |   |                                          |         |         |   |   |  |  |   |  |  |   |   |   |  |   |   |   |  |   |

               The health care industry is typically not directly impacted byperiods of recession, erosions of consumer confidence or othergeneral economic trends as most health care services are notconsidered a component of discretionary spending.  However,our hospitals and related outpatient service providers may beindirectly negatively impacted to the extent such economicconditions result in decreased reimbursements to us by federal orstate governments or managed care payers.  Management is notaware of any economic trends that would lead us to believe that wewill not be able to remain in compliance with all debt covenantsand meet all required obligations and commitments in the nearfuture.

****

**Critical AccountingPolicies**

****

               Our consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in theUnited States.  In preparing our financial statements, we arerequired to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenues and expenses included inthe financial statements.  We base our estimates on historicalexperience and other information currently available, the resultsof which form the basis of our estimates and assumptions. While we believe our estimation processes are reasonable, actualresults could differ from those

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estimates.  Thefollowing represent the estimates that we consider most critical toour operating performance and involve the most subjective andcomplex assumptions and assessments.

****

               *Allowance for Doubtful Accounts*.  The Company’sability to collect outstanding receivables from third party payersis critical to its operating performance and cash flows.  Theallowance for doubtful accounts is approximately 13.8% of theaccounts receivable balance net of contractual discounts as ofMarch 31, 2002.  The primary collection risk lies withuninsured patient accounts or patient accounts for which primaryinsurance has paid but a patient portion remains outstanding. The Company estimates the allowance for doubtful accounts primarilybased upon the age of the accounts since patient dischargedate.  The Company continually monitors its accountsreceivable balances and utilizes cash collections data to supportthe basis for its estimates of the provision for doubtfulaccounts.  Significant changes in payer mix or business officeoperations could have a significant impact on the Company’sresults of operations and cash flows.

               *Allowance for Contractual Discounts*.  The percentage ofthe Company’s revenues derived from Medicare and managed carepatients continues to increase.  For the nine months endedMarch 31, 2002, Medicare and managed care revenues accounted for84.0% of total gross revenues.  The Medicare regulations andvarious managed care contracts are often complex and may includemultiple reimbursement mechanisms for different types of servicesprovided in our health care facilities and cost settlementprovisions requiring complex calculations and assumptions subjectto interpretation.  We estimate the allowance for contractualdiscounts on a payer-specific basis given our interpretation of theapplicable regulations or contract terms.  Management hasinvested significant resources in human resources and informationsystems to improve the estimation process.  However, theservices authorized and provided and related reimbursement areoften subject to interpretation that could result in payments thatdiffer from our estimates.  Additionally, updated regulationsand contract renegotiations occur frequently necessitatingcontinual review and assessment of the estimation process bymanagement.

               *Insurance Reserves*.  Given the nature of our operatingenvironment, the Company may become subject to medical malpracticeor workers compensation claims or lawsuits.  To mitigate aportion of this risk, the Company maintains insurance forindividual malpractice claims exceeding $1,000,000 and workerscompensation claims exceeding $250,000.  The Company estimatesits self-insured retention portion of the malpractice and workerscompensation risks using historical claims data, demographicfactors, severity factors and other actuarial assumptions. The estimated accrual for malpractice and workers compensationclaims could be significantly affected should current and futureoccurrences differ from historical claims trends.  Theestimation process is also complicated by the relatively shortperiod of time in which the Company has owned its health carefacilities as occurrence data under previous ownership may notnecessarily reflect occurrence data under our ownership. While management monitors current claims closely and considersoutcomes when estimating its insurance accruals, the complexity ofthe claims and wide range of potential outcomes often hamperstimely adjustments to the assumptions used in theestimates.

               *Medical Claims Reserves*.  With the acquisition ofPhoenix Health Plan in June 2001, medical claims expense as apercentage of revenues has increased to 14.6% for the nine monthsended March 31, 2002, as compared to 2.5% for the prior-yearperiod.  Given the increased patient enrollment for our healthplans, the medical claims reserve has continually increased. The Company estimates the medical claims reserve using historicalclaims experience (including severity and payment lag time) andother actuarial data including number of enrollees, age ofenrollees and certain enrollee health indicators to predict thecost of health care services provided to enrollees during any givenperiod.  While management believes that its estimationmethodology effectively captures trends in medical claims costs,actual payments could differ significantly from our estimates givenchanges in the health care cost structure or adverseexperience.  For the nine months ended March 31, 2002,approximately 16.7% of the medical claims expenses for our healthplans were paid to hospitals and other related health care entitiesalso under our ownership, which are eliminated inconsolidation.  Our operating results and cash flows could bematerially affected by increased or decreased utilization of ourowned health care facilities by enrollees of our healthplans.

**Contingencies andHealth Care Regulation**

               *Effects of Inflation and Changing Prices*.  Thehealth care industry is labor intensive.  Wages and otherexpenses increase during periods of inflation and when laborshortages occur in the marketplace.  Various Federal, stateand local laws have been enacted that, in certain cases, limit ourability to increase prices.  Revenues for acute care hospitalservices rendered to Medicare patients are established under theFederal government’s prospective payment system.  Webelieve that hospital industry operating margins have been, and maycontinue to be, under significant pressure because of deteriorationin

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inpatient volumes, changesin payer mix and growth in operating expenses in excess of theincrease in prospective payment under the Medicareprogram.

               *Health Care Reform*.  In recent years, anincreasing number of legislative proposals have been introduced orproposed to Congress and in some state legislatures that wouldsignificantly affect the services provided by and reimbursement tohealth care providers in our markets.  The cost of certainproposals would be funded in significant part by reduction inpayments by government programs, including Medicare and Medicaid,to health care providers or by taxes levied on hospitals or otherproviders.  While we are unable to predict which, if any,proposals for health care reform will be adopted, we can not assureyou that proposals adverse to our business will not beadopted.

               *Federal and State Regulation andInvestigations*.  The health care industry is subjectto extensive Federal, state and local laws and regulations relatingto licensing, conduct of operations, ownership of facilities,addition of facilities and services, confidentiality and securityissues associated with medical records, billing for services andprices for services.  These laws and regulations are extremelycomplex.  In many instances, the industry does not have thebenefit of significant regulatory or judicial interpretation ofthese laws and regulations.  As a result of these laws andregulations, some of our activities could become the subject ofgovernmental investigations or inquiries.  Both Federal andstate government agencies have heightened and coordinated civil andcriminal enforcement efforts as part of numerous ongoinginvestigations of hospital companies.  In the event of adetermination that we are in violation of any of these laws, rulesor regulations, or if further changes in the regulatory frameworkoccur, our results of operations could be significantlyharmed.

               *Malpractice and General LiabilityClaims*.  Plaintiffs frequently bring actions againsthospitals and other health care providers alleging malpractice orother liabilities.  Many of these claims involve large claimsand significant defense costs.  We maintain professional andgeneral liability insurance in amounts we believe are sufficient tocover claims arising out of the operations of our facilities. Some of the claims, however, could exceed the scope of the coveragein effect or coverage of particular claims or damages could bedenied.  Furthermore, our coverage may not continue to beavailable at a reasonable cost.  We are, from time to time,also subject to claims arising in the ordinary course of business,including employment related claims, damages related to personalinjuries and other general claims.  Although management is notaware of any specific proceeding that would have a material adverseeffect on our business, financial position or results ofoperations, the outcome of these cases are subject to numerousfactors, and potential judgments could exceed our current insurancecoverage.

               *Acquisitions*.  The Company has acquired and plansto continue acquiring businesses with prior operatinghistories.  Acquired companies may have unknown or contingentliabilities, including liabilities for failure to comply withhealth care laws and regulations, such as billing andreimbursement, fraud and abuse and similar anti-referrallaws.  Although the Company attempts to structure itsacquisitions as asset acquisitions in which we do not assumeliability for seller wrongful actions and institutes policies andprocedures designed to conform practices to its standards followingcompletion of acquisitions, the Company may become liable for suchpast actions of acquired entities deemed improper by privateplaintiffs or government agencies.  The Company generallyobtains indemnification from prospective sellers covering suchmatters; however, such indemnification may not cover such actionsor may not be adequate to cover potential losses andfines.

**Item 3.    Quantitative andQualitative Disclosures About Market Risk**

****

               The Company is exposed to market risk related to changes ininterest rates.  The Company has $300 million of seniorsubordinated notes outstanding as of March 31, 2002.  DuringFebruary 2002, the Company entered into an agreement with Bank ofAmerica, N.A. to swap its 9.75% fixed rate of interest on anotional amount of $100 million of the notes to a variablerate.  The Company continues to incur interest at a fixed rateof 9.75% on the remaining $200 million of notes.

               The Company records interest expense on the $100 million of notessubject to the swap agreement based upon the projected variablerate in effect as of first settlement date of August 1, 2002. A 1% increase (decrease) in this projected rate would result in anincrease (decrease) to recorded interest expense of $125,000 forthe three months and nine months ended March 31, 2002.  Thisestimated change to interest expense considers hypotheticalinterest rates on the Company’s borrowing costs and long-termdebt balances but does not consider the effects, if any, ofpotential changes in the Company’s credit ratings or overalleconomic activity.  In the event of significant changes ininterest rates, management would expect to take actions to mitigateits exposure to such risks.

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**Table of Contents**

**PARTIIOTHER INFORMATION**

**Item 2.    Changes in Securitiesand Use of Proceeds**

(c)          On January 31, 2002,  the registrant  issued to Rhett D.Thurman, a former member of management, 2 shares of theregistrant’s  common stock, for an aggregate purchaseprice of $3,402.36, upon his exercise of stock options previouslyissued to him under the registrant’s 1998 Stock OptionPlan.  This purchase of common stock was for cashconsideration at a purchase price of $1,701.18 per share. This transaction was not registered under the Securities Act of1933, as amended, pursuant to the exemption provided by Section4(2) thereof for a transaction not involving any publicoffering.

**Item 6.    Exhibits And Reports OnForm 8-K**

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               (a)          Exhibits                               Exhibit 12 - Computation of Ratio of Earnings to FixedCharges.               (b)          Reports on Form 8-K                               No Reports on Form 8-K were filed with the Securities and ExchangeCommission by the registrant during                               the registrant’s quarterly period ended March 31,2002.

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**Table of Contents**

**SIGNATURE**

               Pursuant to the requirements of the Securities Exchange Act of1934, the registrant has duly authorized this report to be signedon its behalf by the undersigned thereunto dulyauthorized.

|                                           |                                                                                                                                                    |        |                         |                                                                                                                                                                                                                                                                                                                                                                                                              |
|------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                           |                                                                                                                                                    |   |                         |                                                                                                                                                                                                                                                                                                                                                                                                              |
|                                           |                                                                                                                                                    |   | VANGUARD HEALTH SYSTEMS,INC. |
|                                           |                                                                                                                                                    |   |                         |                                                                                                                                                                                                                                                                                                                                                                                                              |
| DATE:     May 14,2002 |                                                                                                                                                    |   | By:                          | /s/ Phillip W.Roe                                                                 |
|                                           | * Phillip W.Roe  Senior Vice President, Controller and  Chief Accounting Officer*  (Authorized Officer and Chief AccountingOfficer) |

INDEX TO EXHIBITS
| ** **                                 | ** ** |                                                  | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|
| ExhibitNo.                                 |       | Description                                      |       |
|       **12** |       | Computation of Ratio ofEarnings to Fixed Charges |       |

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