**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549**

_______________**FORM 10-Q**_______________

| **(Mark One)** |       |                                                            |
|----------------|------------|-----------------------------------------------------------------|
| ** **     | ** ** | ** **                                                      |
| **x**          |       | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF**         |
|           | ** ** | **THE SECURITIES EXCHANGE ACT OF 1934**                         |
|           |       |                                                            |
|           | ** ** | **For the quarterly period ended September 30, 2006**           |
|           |       |                                                            |
|           |       | **OR**                                                          |
| ** **     | ** ** | ** **                                                      |
| o              | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF**        |
|           | ** ** | **THE SECURITIES EXCHANGE ACT OF 1934**                         |
|           |       |                                                            |
|           | ** ** | **For the transition period from ____________ to ____________** |

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

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

| **Delaware**                                                     |          | **62-1698183**                         |
|------------------------------------------------------------------|----------|----------------------------------------|
| *(State or other jurisdiction of incorporation or organization)* | * * | *(I.R.S. Employer Identification No.)* |

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

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

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.                                                               Large accelerated filero     Accelerated Filero       Non-acceleratedfilerx

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yeso   Nox

          There were 749,550 shares of common stock outstanding as of November 1, 2006 (all of which are 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.**             |       | **FINANCIAL INFORMATION**                                                                              |       |          |
| Item 1.                 |       | Financial Statements:                                                                                  |       |          |
|                    |       | Condensed Consolidated Balance Sheets as of June 30, 2006 and September 30, 2006                       |       | 3        |
|                         |            | Condensed Consolidated Statements of Operations for the three months ended September 30, 2005 and 2006 |       | 4        |
|                         |            | Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2005 and 2006 |       | 5        |
|                    |       | Notes to Condensed Consolidated Financial Statements                                                   |       | 6        |
| Item 2.                 |       | Management's Discussion and Analysis of Financial Condition and Results of Operations                  |            | 25       |
| Item 3.                 |       | Quantitative and Qualitative Disclosures About Market Risk                                             |            | 42       |
| Item 4.                 |       | Controls and Procedures                                                                                |            | 42       |
| **PART II. ** |       | **OTHER INFORMATION**                                                                                  |       |          |
| Item 2.                 |       | Unregistered Sales of Equity Securities and Use of Proceeds                                            |       | 43       |
| Item 6.                 |       | Exhibits                                                                                               |       | 43       |
|                    |       | Signature                                                                                              |       | 44       |
|                    |            | Index to Exhibits                                                                                      |            | 45       |

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**PART IFINANCIAL INFORMATION**

**Item 1.    Financial Statements.**

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

|                                                                                                                                                                                                                                                |   | **June 30, 2006**                                  |    |   |   | **(Unaudited) September 30, 2006** |    |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|---------|--------|--------|------------------------------------|---------|--------|
|                                                                                                                                                                                                                                                |   |                                                    |    |   |
| **ASSETS**                                                                                                                                                                                                                                          |   | *(In millions except share and per share amounts)* |    |   |
| Current assets:                                                                                                                                                                                                                                     |   |                                               |    |   |   |                               |    |   |
|    Cash and cash equivalents                                                                                                                                                                                                         |        | $                                                  | 123.6   |        |        | $                                  | 95.1    |        |
|    Accounts receivable, net of allowance for uncollectible accounts of       approximately $103.5 and $108.5 at June 30, 2006 and       September 30, 2006, respectively |        |                                                    | 294.1   |        |        |                                    | 316.2   |   |
|    Inventories                                                                                                                                                                                                                       |        |                                                    | 45.3    |        |        |                                    | 46.6    |   |
|    Assets held for sale                                                                                                                                                                                                              |        |                                                    | 52.1    |        |        |                                    | 47.2    |        |
|    Prepaid expenses and other current assets                                                                                                                                                                                         |        |                                                    | 45.9    |        |        |                                    | 42.7    |   |
|                                                                                                                                                                                                                                                |        |                                                    |         |        |        |                                    |         |   |
|         Total current assets                                                                                                                                                                                |        |                                                    | 561.0   |        |        |                                    | 547.8   |   |
| Property, plant and equipment, net of accumulated depreciation                                                                                                                                                                                      |        |                                                    | 1,159.5 |        |        |                                    | 1,154.4 |   |
| Goodwill                                                                                                                                                                                                                                            |        |                                                    | 812.8   |        |        |                                    | 812.8   |   |
| Intangible assets, net of accumulated amortization                                                                                                                                                                                                  |        |                                                    | 69.0    |        |        |                                    | 68.8    |   |
| Investments in unconsolidated subsidiaries                                                                                                                                                                                                          |        |                                                    | 8.2     |        |        |                                    | 8.3     |        |
| Other assets                                                                                                                                                                                                                                        |        |                                                    | 40.0    |        |        |                                    | 46.0    |   |
|                                                                                                                                                                                                                                                |        |                                                    |         |        |        |                                    |         |   |
|         Total assets                                                                                                                                                                                        |        | $                                                  | 2,650.5 |        |        | $                                  | 2,638.1 |   |
|                                                                                                                                                                                                                                                |        |                                                    |         |        |        |                                    |         |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                      |        |                                                    |         |        |        |                                    |         |   |
| Current liabilities:                                                                                                                                                                                                                                |        |                                                    |         |        |        |                                    |         |   |
|    Accounts payable                                                                                                                                                                                                                  |        | $                                                  | 151.8   |        |        | $                                  | 141.2   |   |
|    Accrued salaries and benefits                                                                                                                                                                                                     |        |                                                    | 78.5    |        |        |                                    | 65.9    |        |
|    Accrued health claims                                                                                                                                                                                                             |        |                                                    | 44.0    |        |        |                                    | 46.6    |   |
|    Accrued interest                                                                                                                                                                                                                  |        |                                                    | 13.3    |        |        |                                    | 26.4    |   |
|    Other accrued expenses and current liabilities                                                                                                                                                                                    |        |                                                    | 72.1    |        |        |                                    | 67.4    |   |
|    Current maturities of long-term debt                                                                                                                                                                                              |        |                                                    | 8.3     |        |        |                                    | 8.2     |   |
|                                                                                                                                                                                                                                                |        |                                                    |         |        |        |                                    |         |   |
|         Total current liabilities                                                                                                                                                                           |        |                                                    | 368.0   |        |        |                                    | 355.7   |   |
| Minority interests in equity of consolidated entities                                                                                                                                                                                               |        |                                                    | 9.4     |        |        |                                    | 9.6     |   |
| Other liabilities                                                                                                                                                                                                                                   |        |                                                    | 73.0    |        |        |                                    | 77.8    |   |
| Long-term debt, less current maturities                                                                                                                                                                                                             |        |                                                    | 1,510.9 |        |        |                                    | 1,513.3 |   |
| Commitments and contingencies                                                                                                                                                                                                                       |        |                                                    |         |        |        |                                    |         |        |
| Stockholders’ Equity:                                                                                                                                                                                                                         |        |                                                    |         |        |        |                                    |         |        |
| Common Stock; $.01 par value, 1,000,000 shares authorized, 749,550 shares     issued and outstanding at June 30, 2006 and September 30, 2006                                                                                         |        |                                                    | – |        |        |                                    | – |        |
| Additional paid-in capital                                                                                                                                                                                                                          |        |                                                    | 643.7   |        |        |                                    | 643.9   |        |
| Retained earnings                                                                                                                                                                                                                                   |        |                                                    | 45.5    |        |        |                                    | 37.8    |        |
|                                                                                                                                                                                                                                                |        |                                                    |         |        |        |                                    |         |        |
|         Total stockholders’ equity                                                                                                                                                                    |        |                                                    | 689.2   |        |        |                                    | 681.7   |   |
|                                                                                                                                                                                                                                                |        |                                                    |         |        |        |                                    |         |        |
|         Total liabilities and stockholders’ equity                                                                                                                                                    |        | $                                                  | 2,650.5 |        |        | $                                  | 2,638.1 |        |
|                                                                                                                                                                                                                                                |        |                                                    |         |        |        |                                    |         |        |
|                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                |
| See accompanying notes.                                                                                                                                                                                                                             |

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Table of Contents

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

|                                                                                                                                             |        | **Three months ended September 30, 2005** |        |        |        |        | **Three months ended September 30, 2006** |        |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|--------|--------|--------|-------------------------------------------|--------|
|                                                                                                                                        |   |                                           |   |   |   |   |                                           |   |
|                                                                                                                                             |        | *(In millions)*                           |        |
|                                                                                                                                             |        |                                           |        |        |        |        |                                           |        |
| Patient service revenues                                                                                                                    | $      | 519.5                                     |   |   |   | $      | 537.9                                     |   |
| Premium revenues                                                                                                                            |   | 86.1                                      |   |   |   |   | 97.0                                      |   |
|                                                                                                                                        |   |                                           |   |   |   |   |                                           |   |
|      Total revenues                                                                                                |   | 605.6                                     |   |   |   |   | 634.9                                     |   |
|                                                                                                                                        |   |                                      |   |   |   |   |                                      |   |
| Costs and Expenses:                                                                                                                         |   |                                      |   |   |   |   |                                      |   |
|    Salaries and benefits (includes stock compensation of       $0.3 for each period presented) |   | 246.1                                     |   |   |   |   | 268.2                                     |   |
|    Supplies                                                                                                                  |   | 98.9                                      |   |   |   |   | 103.5                                     |   |
|    Medical claims expense                                                                                                    |   | 59.4                                      |   |   |   |   | 71.7                                      |   |
|    Purchased services                                                                                                        |   | 30.6                                      |   |   |   |   | 34.5                                      |   |
|    Provision for doubtful accounts                                                                                           |   | 46.5                                      |   |   |   |   | 42.1                                      |   |
|    Other operating expenses                                                                                                  |   | 51.2                                      |   |   |   |   | 51.6                                      |   |
|    Rents and leases                                                                                                          |   | 7.9                                       |   |   |   |   | 9.3                                       |   |
|    Depreciation and amortization                                                                                             |   | 23.3                                      |   |   |   |   | 29.4                                      |   |
|    Interest, net                                                                                                             |   | 24.7                                      |   |   |   |   | 29.9                                      |   |
|    Other                                                                                                                     |   | 1.5                                       |        |   |   |   | (0.8                                      | )      |
|                                                                                                                                        |   |                                           |   |   |   |   |                                           |   |
| Income (loss) from continuing operations before       income taxes                                            |   | 15.5                                      |   |   |   |   | (4.5                                      | )      |
| Income tax expense (benefit)                                                                                                                |   | 6.6                                       |   |   |   |        | (1.6                                      | )      |
|                                                                                                                                        |   |                                           |   |   |   |   |                                           |   |
| Income (loss) from continuing operations                                                                                                    |   | 8.9                                       |   |   |   |        | (2.9                                      | )      |
| Discontinued operations, net of taxes                                                                                                       |   | (1.6                                      | )      |   |   |        | (4.8                                      | )      |
|                                                                                                                                        |   |                                           |   |   |   |   |                                           |   |
| Net income (loss)                                                                                                                           | $      | 7.3                                       |        |   |   | $      | (7.7                                      | )      |
|                                                                                                                                        |   |                                           |   |   |   |   |                                           |   |
|                                                                                                                                        |   |                                      |   |   |   |   |                                      |   |
|                                                                                                                                        |
| See accompanying notes.                                                                                                                     |

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Table of Contents

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

|                                                                                                                 |   |   | **Three months ended September 30, 2005** | ** ** | ** ** |   | **Three months ended September 30, 2006** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|--------|-------------------------------------------|------------|------------|--------|-------------------------------------------|--------|
|                                                                                                                 |   |   |                                           |       |       |   |                                           |   |
|                                                                                                                 |   |   | *(In millions)*                           |            |
| **Operating activities:**                                                                                            |   |   |                                      |       |       |   |                                      |   |
| Net income (loss)                                                                                                    |   | $      | 7.3                                       |       |       | $      | (7.7                                      | )      |
| Adjustments to reconcile net income (loss) to net cash provided by    (used in) operating activities: |   |   |                                      |       |       |   |                                      |   |
|    Loss from discontinued operations                                                                  |        |        | 1.6                                       |            |            |        | 4.8                                       |        |
|    Depreciation and amortization                                                                      |   |   | 23.3                                      |       |       |   | 29.4                                      |   |
|    Provision for doubtful accounts                                                                    |   |   | 46.5                                      |       |       |   | 42.1                                      |   |
|    Deferred income taxes                                                                              |   |        | 4.9                                       |            |       |        | (1.8                                      | )      |
|    Amortization of loan costs                                                                         |   |   | 1.0                                       |       |       |   | 1.1                                       |   |
|    Accretion of principal on senior discount notes                                                    |   |        | 3.7                                       |       |       |        | 4.1                                       |   |
|    Loss (gain) on sale of assets                                                                      |   |   | 0.1                                       |       |       |   | (2.5                                      | )      |
|    Stock compensation                                                                                 |   |   | 0.3                                       |       |       |   | 0.3                                       |   |
|    Changes in operating assets and liabilities, net of effects of acquisitions:                       |   |   |                                      |       |       |   |                                      |   |
|       Accounts receivable                                                              |   |   | (48.4                                     | )          |       |   | (59.2                                     | )      |
|       Inventories                                                                      |   |   | (0.6                                      | )          |       |   | (1.2                                      | )      |
|       Prepaid expenses and other current assets                                        |   |   | (1.3                                      | )          |       |   | (5.5                                      | )      |
|       Accounts payable                                                                 |   |   | (45.6                                     | )          |       |   | (4.6                                      | )      |
|       Accrued expenses and other current liabilities                                   |   |   | (26.7                                     | )          |       |   | 9.2                                       |        |
|       Other liabilities                                                                |   |   | 6.0                                       |       |       |   | (7.9                                      | )      |
|                                                                                                                 |   |   |                                           |       |       |   |                                           |   |
| Net cash provided by (used in) operating activities – continuing operations                                    |   |   | (27.9                                     | )          |       |   | 0.6                                       |        |
| Net cash provided by (used in) operating activities – discontinued operations                                  |        |        | (0.7                                      | )          |            |        | 1.6                                       |        |
|                                                                                                                      |        |   |                                           |       |       |   |                                           |   |
| Net cash provided by (used in) operating activities                                                                  |        |        | (28.6                                     | )          |            |        | 2.2                                       |        |
|                                                                                                                 |   |   |                                      |       |       |   |                                      |   |
| **Investing activities:**                                                                                            |   |   |                                      |       |       |   |                                      |   |
| Acquisitions, including working capital settlement payments                                                          |   |   | (0.4                                      | )          |       |   | –                                   |        |
| Capital expenditures                                                                                                 |   |   | (60.3                                     | )          |       |   | (37.2                                     | )      |
| Purchases of short-term investments                                                                                  |   |   | (30.0                                     | )          |       |   | (30.0                                     | )      |
| Sales of short-term investments                                                                                      |        |        | 30.0                                      |       |            |        | 30.0                                      |   |
| Proceeds from asset dispositions                                                                                     |   |   | –                                   |       |       |   | 6.5                                       |   |
| Other                                                                                                                |   |   | 1.2                                       |            |       |   | 2.6                                       |        |
|                                                                                                                 |   |   |                                           |       |       |   |                                           |   |
| Net cash used in investing activities – continuing operations                                                  |   |   | (59.5                                     | )          |       |   | (28.1                                     | )      |
| Net cash used in investing activities – discontinued operations                                                |        |        | (0.3                                      | )          |            |        | (0.5                                      | )      |
|                                                                                                                      |        |   |                                           |       |       |   |                                           |   |
| Net cash used in investing activities                                                                                |        |        | (59.8                                     | )          |            |        | (28.6                                     | )      |
|                                                                                                                 |   |   |                                      |       |       |   |                                      |   |
| **Financing activities:**                                                                                            |   |   |                                      |       |       |   |                                      |   |
| Proceeds from long-term debt                                                                                         |   |   | 175.0                                     |       |       |   | –                                   |   |
| Payments of long-term debt and capital leases                                                                        |   |   | (23.5                                     | )          |       |   | (2.1                                      | )      |
| Payments of loan costs and debt termination fees                                                                     |   |        | (0.5                                      | )          |       |        | –                                   |        |
|                                                                                                                 |   |   |                                           |       |       |   |                                           |   |
| Net cash provided by (used in) financing activities                                                                  |   |   | 151.0                                     |       |       |   | (2.1                                      | )      |
|                                                                                                                 |   |   |                                           |       |       |   |                                           |   |
| Net increase (decrease) in cash and cash equivalents                                                                 |   |   | 62.6                                      |            |       |   | (28.5                                     | )      |
| Cash and cash equivalents, beginning of period                                                                       |   |   | 79.2                                      |            |       |   | 123.6                                     |        |
|                                                                                                                 |   |   |                                           |       |       |   |                                           |   |
|                                                                                                                 |   |   |                                           |       |       |   |                                           |   |
| Cash and cash equivalents, end of period                                                                             |   | $      | 141.8                                     |       |       | $      | 95.1                                      |   |
|                                                                                                                 |   |   |                                           |       |       |   |                                           |   |
| Net cash paid for interest                                                                                           |   | $      | 38.4                                      |            |       | $      | 14.6                                      |        |
|                                                                                                                 |   |   |                                           |       |       |   |                                           |   |
| Net cash paid for income taxes                                                                                       |   | $      | 0.3                                       |            |       | $      | 0.4                                       |        |
|                                                                                                                 |   |   |                                           |       |       |   |                                           |   |
|                                                                                                                 |   |   |                                      |       |       |   |                                      |   |
|                                                                                                                 |
| See accompanying notes.                                                                                              |

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Table of Contents

**VANGUARD HEALTH SYSTEMS, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSeptember 30, 2006(Unaudited)**

**1.             BUSINESS AND BASIS OF PRESENTATION**

**Business**

                Vanguard is an investor-owned healthcare company whose affiliates own and operate hospitals and related healthcare businesses in urbanand suburban areas.  As of September 30, 2006, Vanguard’s affiliates owned and managed 19 acute care hospitals with 4,783 licensed beds and related outpatient service locations complementary to the hospitals providing healthcare services in San Antonio,Texas; metropolitan Phoenix, Arizona; metropolitan Chicago, Illinois; Orange County, California, and Massachusetts. Vanguard also owns managed health plans in Chicago, Illinois and Phoenix, Arizona.  Vanguard’s three California hospitals with combined 491licensed beds were held for sale as of September 30, 2006.

**Basis of Presentation**

                The accompanying unaudited condensed consolidated financial statements include the accounts of subsidiaries and affiliates controlledby Vanguard. Vanguard generally considers control to represent the majority of an entity’s voting interests. Vanguard also consolidates any entities for which it receives the majority of the entity’s expected returns or is at risk for the majority of theentity’s expected losses based upon its investment or financial interest in the entity. All material intercompany accounts and transactions have been eliminated. As none of Vanguard’s common shares are publicly held, no earnings per share information ispresented in the accompanying unaudited condensed consolidated financial statements. The majority of Vanguard’s expenses are “cost of revenue” items. Costs that could be classified as general and administrative include certain Vanguard corporateoffice costs, which approximated $9.1 million and $7.5 million for the three months ended September 30, 2005 and 2006, respectively.

                The unaudited condensed consolidated financial statements as of September 30, 2006 and for the three months ended September 30, 2005and 2006 have been prepared in conformity with accounting principles generally accepted in the United States for interim reporting and in accordance with Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and notes required byaccounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments)necessary for a fair presentation of the financial position and the results of operations for the periods presented.  The results of operations for the periods presented are not necessarily indicative of the expected results for the fiscal year ending June 30,2007.  The interim unaudited condensed consolidated financial statements should be read in connection with the audited consolidated financial statements as of and for the year ended June 30, 2006 included in Vanguard’s Annual Report on Form 10-K filed withthe Securities and Exchange Commission on September 20, 2006.

                *Use of Estimates*

                In preparing Vanguard’s financial statements in conformity with accounting principles generally accepted in the United States,management makes estimates and assumptions that affect the amounts recorded or classification of items in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

**Reclassifications**

                Vanguard adjusted its condensed consolidated balance sheet as of June 30, 2006 to classify the fixed assets, goodwill and intangibleassets and certain current assets of its California hospitals, the sale of which was approved by Vanguard’s Board of Directors on August 12, 2006, as assets held for sale. Vanguard adjusted its condensed consolidated statement of operations and condensedconsolidated statement of cash flows for the three months ended September 30, 2005, to reflect the impact of the expected sale of the California hospitals as discontinued operations.  See Note 3 for further discussion of discontinued operations.

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Table of Contents

**2.             STOCK-BASED COMPENSATION**

                Vanguard’s only stock-based employee compensation is in the form of stock option grants to employees.  Vanguard uses theminimum value pricing model permitted under SFAS 123 to determine stock compensation costs related to stock option grants prior to July 1, 2006.  On July 1, 2006, Vanguard adopted the provisions of Statement of Financial Accounting Standards No. 123(R),*Share-Based Payment* (“SFAS 123(R)”) to account for stock option grants subsequent to July 1, 2006.  Vanguard adopted SFAS 123(R) on a prospective basis as required for companies that chose to adopt SFAS 123 using the transition guidance setforth in SFAS 148.  SFAS 123(R) requires that stock-based employee compensation be measured at fair value using models that incorporate certain minimum inputs, the most notable of which are the Black-Scholes-Merton model and various lattice models.  SFAS123(R) no longer permits nonpublic companies to use the minimum value pricing model.  Upon adoption of SFAS 123(R), Vanguard chose to utilize the Black-Scholes-Merton model for option valuation purposes and to calculate separate forfeiture estimates for stockoption grants to members of executive management and for stock option grants to other employees.  Under SFAS 123, Vanguard calculated a blended forfeiture rate for all option grants.  Vanguard’s adoption of SFAS 123(R) did not significantly impact itsloss from continuing operations, loss before income taxes, net loss, cash flows from operating activities or cash flows from financing activities for the quarter ended September 30, 2006.

                In March 2005, the United States Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) toprovide supplemental implementation guidance to the provisions of SFAS 123(R).  Vanguard has applied the guidance set forth in SAB 107 in determining its accounting treatment and related disclosures for stock-based employee compensation.

**2004 Stock Incentive Plan**

                After the Blackstone merger, Vanguard adopted the 2004 Stock Incentive Plan (“the 2004 Option Plan”). As of September 30,2006, the 2004 Option Plan, as amended, allows for the issuance of up to 98,120 options to purchase common stock of Vanguard to its employees. The stock options may be granted as Liquidity Event Options, Time Options or Performance Options at the discretion of theBoard. The Liquidity Event Options vest 100% at the eighth anniversary of the date of grant and have an exercise price per share as determined by the Board or a committee thereof.  The Time Options vest 20% at each of the first five anniversaries of the date ofgrant and have an exercise price per share as determined by the Board or a committee thereof.  The Performance Options vest 20% at each of the first five anniversaries of the date of grant and have an exercise price equal to $3,000 per share or as determined bythe Board. The Time Options and Performance Options immediately vest upon a change of control, while the Liquidity Event Options immediately vest only upon a qualifying Liquidity Event, as defined in the Plan Document. As of September 30, 2006, 64,764 options wereoutstanding under the 2004 Option Plan.

|                                              |   | **2004 Option Plan**                                                                 |
|---------------------------------------------------|--------|--------------------------------------------------------------------------------------|
|                                              |   | ****                                                                                 |
|                                              |        | **# of Options**                                                                     |                 |  | **Weighted Avg Exercise Price** |
|                                              |   | ****                                                                                 |   |   | **** |
| Options outstanding at June 30, 2006              |   |             70,657  |   | $ | 1,644.12 |
|    Options granted                 |        | 1,542                                                                           |  |  | 1,704.54 |
|    Options exercised               |        | (36)                                                                                 |  |  | 1,000.00 |
|    Options cancelled               |        | (7,399)                                                                              |  |  | 1,584.76 |
|                                              |   | ****                                                                                 |   |  | **** |
| Options outstanding at September 30, 2006         |        | 64,764                                                                          |  | $ | 1,652.70 |
|                                              |   | ****                                                                                 |   |  | **** |
| Options available for grant at September 30, 2006 |   | 33,179                                                                          |   | $ | 1,717.27 |
|                                              |   | ****                                                                                 |   |  | **** |
| Options exercisable at September 30, 2006         |   | 5,431                                                                           |   | $ | 1,922.85 |
|                                              |   | ****                                                                                 |   |  | **** |

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                The following table provides information relating to the 2004 Option Plan as of September 30, 2006.

| Exercise price                              | ** ** | $1,000.00 |   | $1,150.37 |   | $3,000.00 |
|---------------------------------------------|------------|-----------|--------|-----------|--------|-----------|
| Number outstanding                          |       | 24,444    |   | 20,744    |   | 19,576    |
| Weighted average remaining contractual life |       | 8.4 years |   | 9.2 years |   | 8.7 years |
| Weighted average value                      |            | $360.93   |        | $436.63   |        | $0.00     |
| Number exercisable                          |       | 2,925     |   | –   |        | 2,506     |

                The following table sets forth the weighted average assumptions utilized in the minimum value pricing model for stock option grantsprior to July 1, 2006 and those utilized in the Black-Scholes-Merton valuation model for grants under the 2004 Option Plan subsequent to July 1, 2006.

|                    | **Minimum Value** | ** **                           | **Black-Scholes- Merton** |
|-------------------------|-------------------|--------------------------------------|---------------------------|
|                    |                   |        |                           |
| Risk-free interest rate | 4.5%              |                                 | 5.0%                      |
| Dividend yield          | 0.0%              |                                 | 0.0%                      |
| Volatility              | N/A               |                                      | 37.6%                     |
| Expected option life    | 10 years          |                                 | 7.5 years                 |

                For stock options included in the Black-Scholes-Merton valuation model, Vanguard used historical stock price information of certainpeer group companies for a period of time equal to the expected option life period to determine estimated volatility. Vanguard determined the expected life of the stock options by averaging the contractual life of the options and the vesting period of theoptions.

**3.             DISCONTINUED OPERATIONS**

                On August 12, 2006, Vanguard’s Board of Directors approved the sale of its three hospitals in Orange County, California (WestAnaheim Medical Center, Huntington Beach Hospital and La Palma Intercommunity Hospital) to subsidiaries of Prime Healthcare, Inc. for a base purchase price of $44.0 million, exclusive of working capital included in the sale and transaction expenses. Vanguardaccounted for these hospital operations as discontinued operations under SFAS 144 for the three months ended September 30, 2005 and 2006.   The following table sets forth total revenues and loss before income taxes of the California hospitals included indiscontinued operations for the three months ended September 30, 2005 and 2006 (in millions).

|                     |   | **2005** |   |      | ** ** | **2006** |   |
|--------------------------|--------|----------|--------|--------------------------|------------|----------|--------|
|                     |   | ****     |   |                     | ** ** | ****     |   |
| Total revenues           | $      | 42.1     |   |                     | $          | 44.4     |   |
| Loss before income taxes | $      | (2.7     | )      |                     | $          | (7.8     | )      |

                Vanguard allocated $1.7 million and $2.0 million of interest expense to discontinued operations during the three months ended September30, 2005 and 2006, respectively.  These allocations were based upon the ratio of net assets to be sold to the sum of Vanguard’s total net assets and Vanguard’s outstanding debt.  Discontinued operations included approximately $1.1 million and$3.0 million of income tax benefits during the three months ended September 30, 2005 and 2006, respectively, calculated using an effective tax rate of approximately 40.0% and 38.5%, respectively.

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                The following table sets forth the components of assets held for sale and liabilities to be assumed by purchaser as of June 30, 2006and September 30, 2006 that are included in the acute care services segment (in millions).

|                                           |   | **June 30, 2006** |   |   | **September 30, 2006** |   |
|------------------------------------------------|--------|-------------------|--------|--------|------------------------|--------|
|                                           |   |                   |   |   |                        |   |
| Current assets-CA hospitals                    |   | $                 | 3.7    |   |                   | $      | 3.9 |   |
| Net property, plant and equipment-CA hospitals |   |              | 40.0   |   |                   |   | 39.9 |   |
| Goodwill-CA hospitals                          |        |                   | 3.0    |        |                        |        | 3.0 |  |
| Net intangible assets-CA hospitals             |        |                   | 0.4    |        |                        |        | 0.4 |  |
| Net property, plant and equipment-other        |        |                   | 5.0    |        |                        |        | – |  |
|                                           |   |              |        |   |                   |   |  |   |
|    Total assets held for sale   |        |                   | 52.1   |        |                        |        | 47.2 |  |
| Liabilities to be assumed by purchaser         |        |                   | (7.4   | )      |                        |        | (7.4 | ) |
|                                           |   |              |        |   |                   |   |  |   |
|    Net assets to be divested    |   | $                 | 44.7   |   |                   | $      | 39.8 |   |
|                                           |   |              |        |   |                   |   |  |   |

                Since net accounts receivable will not be included in the sale, the net accounts receivable of the California hospitals ofapproximately $27.3 million and $25.3 million as of June 30, 2006 and September 30, 2006, respectively, is excluded from assets held for sale.  Vanguard retained net working capital of approximately $12.8 million for the California hospitals representing theaccounts receivable and other current assets not included in the sale and the liabilities not assumed by the purchaser.

**4.             GOODWILL AND INTANGIBLE ASSETS**

                The following table provides information regarding the intangible assets, including deferred loan costs, included on the accompanyingcondensed consolidated balance sheets as of June 30, 2006 and September 30, 2006 (in millions).

|                                                    |                                                                                                 | **Gross Carrying Amount**                                                                            | **Accumulated Amortization**                                                                                              |
|---------------------------------------------------------|------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|
|                                                    |                                                                                                 |                                                                                                      |                                                                                                                           |
| **Class of Intangible Asset**                      |                                                                                                 | **June 30, 2006**                                                                                    | **September 30, 2006**                                                                                                    | **June 30, 2006** | **September 30, 2006** |
|                                                         | **            **                         |                                                                                                      |                                                                                                                           |  |  |
| Amortized intangible assets:                            |                                                                                                 |                                                                                                 |                                                                                                                      |   |
|    Deferred loan costs                   |    $          43.8                            |    $          43.8                            |    $            6.7                                      |    $            7.8 |
|    Contracts                             |                31.4            |                31.4            |                  5.5                      |                  6.3 |
|    Physician income and other guarantees |                  2.0 |                  4.0 |                  0.3                      |                  0.5 |
|    Other                                 |                  1.3 |                  1.3 |                  0.2                      |                  0.3 |
|                                                    |                                                                                                      |                                                                                                      |                                                                                                                           |  |
|    Subtotal                              |                78.5            |                80.5            |                12.7                                 |                14.9 |
| Indefinite-lived intangible assets:                     |                                                                                                 |                                                                                                 |                                                                                                                      |   |
|    License and accreditation             |                  3.2 |                  3.2 |                    – |                    – |
|                                                    |                                                                                                      |                                                                                                      |                                                                                                                           |  |
| Total                                                   |    $          81.7                            |    $          83.7                            |    $          12.7                                                 |    $          14.9 |
|                                                    |                                                                                                      |                                                                                                      |                                                                                                                           |  |

                Amortization expense for the three months ended September 30, 2005 and 2006 was $0.8 million.

**5.             IMPAIRMENT OF GOODWILL AND LONG-LIVED ASSETS**

                Vanguard has experienced gradual changes to the business climate at its Chicago hospitals, the most significant factor being payer mixshifts, which have resulted in weaker than expected operating results at those hospitals. Vanguard believes that these trends may not be temporary in nature and may not be sufficiently offset by various initiatives to improve operating results. Accordingly, Vanguardis in the process of assessing whether the goodwill or long-lived assets of these hospitals are impaired under the provisions of SFAS 142 or SFAS 144. As of September 30, 2006, approximately $169.3 million and $177.3 million of Vanguard’s consolidated goodwilland net property, plant and equipment balances,

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respectively, were attributable to the Chicago hospitals. The potential impairment charges related to these hospitals could materially adversely impact Vanguard’s future financial position and results ofoperations.

**6.             FINANCING ARRANGEMENTS**

                A summary of Vanguard’s long-term debt at June 30, 2006 and September 30, 2006 follows (in millions).

| ** **                               | ** ** | ** ** | **June 30, 2006** | **         ** | ** ** | **September 30, 2006** |
|------------------------------------------|------------|------------|-------------------|------------------------------------------------------------|------------|------------------------|
|                                     |       |       |                   |                                                       |       |                        |
| 9.0% Senior Subordinated Notes           |       | $          | 575.0        |                                                       | $          | 575.0             |
| 11.25% Senior Discount Notes             |       |       | 151.4        |                                                       |       | 155.5             |
| Term loans payable under credit facility |            |            | 789.7        |                                                            |            | 787.8             |
| Capital leases                           |       |       | 0.4          |                                                       |       | 0.2               |
| Other                                    |       |       | 2.7          |                                                            |       | 3.0               |
|                                     |       |       |                   |                                                       |       |                        |
|                                     |            |            | 1,519.2      |                                                            |            | 1,521.5           |
| Less: current maturities                 |            |            | (8.3)             |                                                            |            | (8.2)                  |
|                                     |       |       |                   |                                                       |       |                        |
|                                     |            | $          | 1,510.9      |                                                            | $          | 1,513.3           |
|                                     |            |            |                   |                                                            |            |                        |

**9.0% Notes**

                In connection with the Blackstone merger on September 23, 2004, two of Vanguard’s wholly owned subsidiaries, Vanguard HealthHolding Company II, LLC and Vanguard Holding Company II, Inc. (collectively the “Issuers”), completed a private placement of $575.0 million 9.0% Notes. Interest on the 9.0% Notes is payable semi-annually on October 1 and April 1, with the first interestpayment made on April 1, 2005. The 9.0% Notes are general unsecured senior subordinated obligations and rank junior in right of payment to all existing and future senior indebtedness of the Issuers. All payments on the 9.0% Notes are guaranteed jointly and severallyon a senior subordinated basis by Vanguard and its domestic subsidiaries, other than those subsidiaries that do not guarantee the obligations of the borrowers under the senior credit facilities.

                At any time prior to October 1, 2007, the Issuers may redeem up to 35% of the aggregate principal amount of the 9.0% Notes with the netproceeds of certain equity offerings at a redemption price of 109% of the principal amount of the 9.0% Notes plus accrued and unpaid interest. Prior to October 1, 2009, the issuers may redeem the 9.0% Notes, in whole or in part, at a price equal to 100% of theprincipal amount thereof plus a make-whole premium. On or after October 1, 2009, the Issuers may redeem all or part of the 9.0% Notes at various redemption prices given the date of redemption as set forth in the indenture governing the 9.0% Notes.  The initialredemption price for the 9.0% Notes on October 1, 2009 will equal 104.50% of their principal amount, plus accrued and unpaid interest.  The redemption price will decline each year after 2009.  The redemption price will be 100% of the principal amount, plusaccrued and unpaid interest, beginning on October 1, 2012.

                On January 26, 2005, Vanguard exchanged all of its outstanding 9.0% senior subordinated notes due 2014 for new 9.0% senior subordinatednotes due 2014 with identical terms and conditions, except that they were registered under the Securities Act of 1933.  Terms and conditions of the exchange offer were set forth in the registration statement on Form S-4 filed with the Securities and ExchangeCommission that became effective on December 23, 2004.

**11.25% Notes**

                In connection with the Blackstone merger on September 23, 2004, two of Vanguard’s wholly owned subsidiaries, Vanguard HealthHolding Company I, LLC and Vanguard Holding Company I, Inc. (collectively the “Discount Issuers”), completed a private placement of $216.0 million aggregate principal amount at maturity ($124.7 million in gross proceeds) of 11.25% Notes. The 11.25% Notesaccrete at the stated rate compounded semi-annually on April 1 and October 1 of each year to, but not including, October 1, 2009. From and after October 1, 2009, cash interest on the 11.25% Notes will accrue at 11.25% per annum, and will be payable on April 1 andOctober 1 of each year, commencing on April 1, 2010 until maturity. The 11.25% Notes are general senior unsecured obligations and rank junior in right of payment to all existing and future senior indebtedness of the Discount Issuers but senior to any of the DiscountIssuers’ future senior subordinated indebtedness. All payments on the 11.25% Notes are guaranteed by Vanguard as a holding company guarantee.

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                At any time prior to October 1, 2007, the Discount Issuers may redeem up to 35% of the aggregate principal amount at maturity of the11.25% Notes with the net proceeds of certain equity offerings at 111.25% of the accreted value of the 11.25% Notes plus accrued and unpaid interest. Prior to October 1, 2009, the issuers may redeem the 11.25% Notes, in whole or in part, at a price equal to 100% ofthe accreted value thereof, plus accrued and unpaid interest, plus a make-whole premium. On or after October 1, 2009, the Discount Issuers may redeem all or a part of the 11.25% Notes at various redemption prices given the date of redemption as set forth in theindenture governing the 11.25% Notes.

                On January 26, 2005, Vanguard exchanged all of its outstanding 11.25% senior discount notes due 2015 for new 11.25% senior discountnotes due 2015 with identical terms and conditions, except that they were registered under the Securities Act of 1933.  Terms and conditions of the exchange offer were set forth in the registration statement on Form S-4 filed with the Securities and ExchangeCommission that became effective on December 23, 2004.

**Credit Facility Debt**

                In connection with the Blackstone merger on September 23, 2004, two of Vanguard’s wholly owned subsidiaries, Vanguard HealthHolding Company II, LLC and Vanguard Health Company II, Inc. (the “Co-borrowers”), entered into new senior secured credit facilities (the “merger credit facilities”) with various lenders and Bank of America, N.A. as administrative agent andCiticorp North America, Inc. as syndication agent, and repaid all amounts outstanding under its previous 2004 credit facility. The merger credit facilities included a seven-year term loan facility in the aggregate principal amount of $800.0 million (of which $475.0million was funded at closing) and a six-year $250.0 million revolving credit facility. Vanguard borrowed $60.0 million of the available $325.0 million term loans in order to fund a portion of the acquisition purchase price of three hospitals in Massachusetts onDecember 31, 2004 and borrowed an additional $90.0 million on February 18, 2005 to fund the working capital of these hospitals and to fund capital expenditures.  Vanguard borrowed the final $175.0 million of the available term loans in September 2005 for capitalexpenditure and general corporate purposes.  All of such loans were scheduled to mature on September 23, 2011.

                On September 26, 2005, the Co-borrowers refinanced and repriced all $795.7 million of the then outstanding term loans under the mergercredit facilities by borrowing $795.7 million of replacement term loans that also mature on September 23, 2011 (the “2005 term loan facility”).  In addition, upon the occurrence of certain events, the Co-borrowers may request an incremental term loanfacility to be added to the 2005 term loan facility in an amount not to exceed $300.0 million in the aggregate, subject to receipt of commitments by existing lenders or other financing institutions and to the satisfaction of certain other conditions.  Therevolving loan facility under the merger credit facilities did not change in connection with the term loan refinancing. As of September 30, 2006, $787.8 million was outstanding under the 2005 term loan facility. The total remaining borrowing capacity under therevolving credit facility, net of letters of credit, was $207.2 million as of September 30, 2006.

                The 2005 term loan facility borrowings bear interest at a rate equal to, at Vanguard’s option, either LIBOR plus 2.25% per annumor a base rate plus 1.25% per annum. These interest rates reflect a savings of 1.00% per annum over the interest rate options for term loan borrowings under the merger credit facilities. Borrowings under the revolving credit facility currently bear interest at a rateequal to, at Vanguard’s option, LIBOR plus 2.0% per annum or a base rate plus 1.0% per annum, subject to an increase of up to 0.50% per annum should Vanguard’s leverage ratio increase over certain designated levels. Vanguard pays a commitment fee to thelenders under the revolving credit facility in respect of unutilized commitments thereunder at a rate equal to 0.50% per annum.  Vanguard also pays customary letter of credit fees.

                The 2005 term loan facility and the revolving credit facility contain a number of covenants that, among other things, restrict, subjectto certain exceptions, Vanguard’s ability, and the ability of its subsidiaries, to sell assets, incur additional indebtedness or issue preferred stock, repay other indebtedness (including the 9.0% Notes and 11.25% Notes), pay dividends and distributions orrepurchase its capital stock, create liens on assets, make investments, loans or advances, make certain acquisitions, engage in mergers or consolidations, enter into sale and leaseback transactions, engage in certain transactions with affiliates, amend certainmaterial agreements governing its indebtedness, including the 9.0% Notes and 11.25% Notes, change the business conducted by its subsidiaries and enter into hedging agreements. In addition, the senior credit facilities require Vanguard to maintain the followingfinancial covenants: a maximum total leverage ratio, a maximum senior leverage ratio, a minimum interest coverage ratio and a maximum capital expenditures limitation. Vanguard was in compliance with each of these financial covenants as of September 30, 2006.Obligations under the credit agreement are unconditionally guaranteed by Vanguard and Vanguard Health Holding Company I, LLC (“VHS Holdco I”) and, subject to certain exceptions, each of VHS Holdco I’s wholly-owned domestic subsidiaries (the“U.S. Guarantors”). Obligations under the

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credit agreement are also secured by substantially all of the assets of Vanguard Health Holding Company II, LLC (“VHS Holdco II”) and the U.S. Guarantors including a pledge of 100% of the membership interests ofVHS Holdco II, 100% of the capital stock of substantially all U.S. Guarantors (other than VHS Holdco I) and 65% of the capital stock of each of VHS Holdco II’s non-U.S. subsidiaries that are directly owned by VHS Holdco II or one of the U.S. Guarantors and asecurity interest in substantially all tangible and intangible assets of VHS Holdco II and each U.S. Guarantor.

**7.             INCOME TAXES**

                Significant components of the provision for income taxes are as follows (in millions).

|                                                 |   | **Three months ended** |    |
|------------------------------------------------------|--------|------------------------|---------|
|                                                 |   |                        |         |
|                                                 |   | **September 30, 2005** |    |   | **September 30, 2006** |   |
| Current:                                             |   |                        |    |
|    Federal                            |   | $                      | 0.4     |   | $ | (0.4 | ) |
|    State                              |   |                   | 0.2     |   |   | 0.5 |  |
|                                                 |        |                        |         |  |  |  |
| Total current                                        |   |                   | 0.6     |   |   | 0.1 |   |
|                                                 |   |                   |    |   |   |   |   |
| Deferred:                                            |   |                   |    |   |   |   |   |
|    Federal                            |   |                   | 5.4     |  |   | (1.6 | ) |
|    State                              |   |                   | 0.6     |  |   | (0.6 | ) |
|                                                      |        |                        |         |  |  |  |
|                                                 |   |                   | 6.0     |  |   | (2.2 | ) |
| Increase in valuation allowance                      |   |                   | – |   |   | 0.5 |   |
|                                                 |   |                        |    |   |  |  |
|    Total income tax expense (benefit) |   | $                      | 6.6     |  | $ | (1.6 | ) |
|                                                 |   |                        |    |   |  |   |

                The effective income tax rate differed from the federal statutory rate for the periods presented as follows:

|                                 |   | **Three months ended** |        |
|--------------------------------------|--------|------------------------|--------|
|                                 |   |                        |        |
|                                 |   | **September 30, 2005** |   |      | **September 30, 2006** |   |
|                                 |   |                        |   |
| Income tax at federal statutory rate |   | 35.0%                  |   |      | 35.0% |   |
| Income tax at state statutory rate   |        | 4.6%                   |   |  | (10.8)% |   |
| Nondeductible expenses and other     |   | 3.0%                   |   |   | 0.3% |   |
| Increase in valuation allowance      |        | 0.0%                   |        |  | 11.1% |  |
|                                 |   |                        |   |   |  |   |
| Effective income tax rate            |   | 42.6%                  |   |   | 35.6% |   |
|                                 |   |                        |   |   |  |   |

                Net non-current deferred tax assets of $30.6 million and $39.0 million are included in other assets in the accompanying condensedconsolidated balance sheets as of June 30, 2006 and September 30, 2006, respectively.  Net current deferred tax assets of $8.9 million and $5.3 million are included in prepaid expenses and other current assets in the accompanying condensed consolidated balancessheets as of June 30, 2006 and September 30, 2006, respectively.

                As of September 30, 2006, Vanguard had generated net operating loss (“NOL”) carryforwards for federal income tax and stateincome tax purposes of approximately $145.0 million and $371.0 million, respectively, that expire from 2007 to 2025.  Approximately $3.9 million of these NOLs are subject to annual limitation for federal purposes.  These limitations are not expected tosignificantly affect Vanguard’s ability to ultimately recognize the benefit of these NOLs in future years.

                Vanguard must make estimates in recording its provision for income taxes, including the determination of deferred tax assets andliabilities and any valuation allowance that may be required against the deferred tax assets.  Vanguard had a

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valuation allowance for combined continuing and discontinued operations of $11.9 million and $13.3 million as of June 30, 2006 and September 30, 2006, respectively.

                On May 18, 2006, Texas repealed its current income tax and replaced it with a gross margins tax to be accounted for as an incometax.  Vanguard became subject to the Texas margins tax on July 1, 2006.

**8.             RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS**

                On September 15, 2006, the FASB issued Statement of Financial Accounting Standards No. 157, *Fair Value Measurement* (“SFAS157”).  SFAS 157 sets forth comprehensive guidance for measuring fair value of assets and liabilities.  Under the provisions of SFAS 157, fair value should be based on the assumptions market participants would use to complete the sale of an asset ortransfer of a liability.  SFAS 157 provides a hierarchy of information to be used to determine the applicable market assumptions, and fair value measurements would be separately disclosed under each applicable layer of the hierarchy.  SFAS 157 does notexpand or restrict the use of fair value for measuring assets and liabilities but provides a single methodology to be used when fair value accounting is applied.  SFAS 157 is effective for Vanguard’s fiscal year beginning July 1, 2008 with early adoptionpermitted.  Vanguard does not expect the adoption of SFAS 157 to significantly impact its future financial position or results of operations.

                In July 2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes, an interpretation of FASB StatementNo. 109, Accounting for Income Taxes* (“FIN 48”).  FIN 48 sets forth the minimum recognition criteria tax positions are required to meet before being recognized in the financial statements.  FIN 48 requires recognition when a tax position ismore likely than not to be sustained upon examination.  Measurement of the tax position is determined as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement.  FIN48 also provides guidance regarding derecognition and classification of tax positions, interest and penalties and multiple expanded disclosures including a rollforward of aggregate unrecognized tax benefits and detail for tax uncertainties for which it is reasonablypossible that estimated tax benefits will significantly change during the subsequent twelve months.  FIN 48 is effective for Vanguard’s fiscal year beginning July 1, 2007.  Vanguard does not expect FIN 48 to have a significant impact on its financialposition or results of operations but would require potential balance sheet reclassifications and significant additional disclosures in its consolidated financial statements.

                In June 2006, the FASB ratified Emerging Issues Task Force 05-1, *Accounting for the Conversion of an Instrument That BecameConvertible upon the Issuer’s Exercise of a Call Option* (“EITF 05-1”).  EITF 05-1 addresses instruments that are currently not convertible to equity but the instrument becomes convertible upon the exercise of the issuer’s calloption.  EITF 05-1 calls for debt extinguishment treatment if the instrument did not contain a substantive conversion feature apart from the right to convert upon the issuer’s exercise of its call right at the date of issuance.  Conversely, if suchsubstantive conversion feature did exist at issuance date, EITF 05-1 requires conversion treatment for those equity securities issued to satisfy the debt conversion.  EITF 05-1 must be applied prospectively as of June 28, 2006.  Vanguard’s adoption ofEITF 05-1 did not impact its financial position or results of operations.

                In April 2006, the FASB issued Staff Position FIN 46(R)-6, *Determining the Variability to be Considered in Applying FASBInterpretation No. 46(R)*.  This Staff Position addresses how an entity should determine variability when applying FIN 46(R).  Entities are required to apply this Staff Position on a prospective basis to new entities under the scope of FIN 46(R) orprevious entities for which a reconsideration event has occurred for the first reporting period beginning after June 15, 2006.  Vanguard’s adoption of FIN 46(R)-6 did not impact its financial position or results of operations.

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**9.             SEGMENT INFORMATION**

                Vanguard’s acute care hospitals and related healthcare businesses are similar in their activities and the economic environmentsin which they operate (i.e. urban markets).  Accordingly, Vanguard’s reportable operating segments consist of 1) acute care hospitals and related healthcare businesses, collectively, and 2) health plans consisting of MacNeal Health Providers, a contractingentity for MacNeal Hospital and Weiss Memorial Hospital in the metropolitan Chicago area, Phoenix Health Plan, a Medicaid managed health plan operating in Arizona and Abrazo Advantage Health Plan, a Medicare and Medicaid dual eligible managed health plan operating inArizona.

                The following table provides unaudited condensed financial information by business segment for the three months ended September 30,2005 and 2006, including a reconciliation of Segment EBITDA to income (loss) from continuing operations before income taxes (in millions).

|                                                                                                                                                      |   | **Three months ended September 30, 2005** | ** ** | **Three months ended September 30, 2006** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|-------------------------------------------|
|                                                                                                                                                      |   | ****                                      | ** ** | ****                                      |
|                                                                                                                                                      |   | **Health Plans**                          | ** ** | **Acute Care Services**                   | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** | **Health Plans** | ** ** | **Acute Care Services** | ** ** | **Eliminations** | ** ** | **Consolidated** |
|                                                                                                                                                           |        | ****                                      |            | ****                                      |
| Patient service revenues                                                                                                                                  |        | $                                         | –    |                                           |  | $ | 519.5 |  |  | $ | – |  |  | $ | 519.5 |  |  | $ | – |  |  | $ | 537.9 |  |  | $ | – |  |  | $ | 537.9 |  |   |
| Premium revenues                                                                                                                                          |        |                                           | 86.1       |                                           |  |  | – |  |  |  | – |  |  |  | 86.1 |  |  |  | 97.0 |  |  |  | – |  |  |  | – |  |  |  | 97.0 |  |   |
| Inter-segment revenues                                                                                                                                    |        |                                           | –    |                                           |  |  | 10.0 |  |  |  | (10.0 | ) |  |  | – |  |  |  | – |  |  |  | 9.1 |  |  |  | (9.1 | ) |  |  | – |  |   |
|                                                                                                                                                           |        |                                           |            |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
|       Total revenues                                                                                                             |        |                                           | 86.1       |                                           |  |  | 529.5 |  |  |  | (10.0 | ) |  |  | 605.6 |  |  |  | 97.0 |  |  |  | 547.0 |  |  |  | (9.1 | ) |  |  | 634.9 |  |   |
|                                                                                                                                                           |        |                                           |            |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
| Operating expenses - external                                                                                                                             |        |                                           | 66.8       |                                           |  |  | 473.5 |  |  |  | – |  |  |  | 540.3 |  |  |  | 80.6 |  |  |  | 500.0 |  |  |  | – |  |  |  | 580.6 |  |   |
| Operating expenses - inter-segment                                                                                                                        |        |                                           | 10.0       |                                           |  |  | – |  |  |  | (10.0 | ) |  |  | – |  |  |  | 9.1 |  |  |  | – |  |  |  | (9.1 | ) |  |  | – |  |   |
|                                                                                                                                                           |        |                                           |            |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
|       Total operating expenses                                                                                                   |        |                                           | 76.8       |                                           |  |  | 473.5 |  |  |  | (10.0 | ) |  |  | 540.3 |  |  |  | 89.7 |  |  |  | 500.0 |  |  |  | (9.1 | ) |  |  | 580.6 |  |   |
|                                                                                                                                                           |        |                                           |            |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
|       Segment EBITDA(1)                                                                                                          |        |                                           | 9.3        |                                           |  |  | 56.0 |  |  |  | – |  |  |  | 65.3 |  |  |  | 7.3 |  |  |  | 47.0 |  |  |  | – |  |  |  | 54.3 |  |   |
|                                                                                                                                                           |        |                                           |            |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
| Less:                                                                                                                                                     |        |                                           |            |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
| Interest, net                                                                                                                                             |        |                                           | (0.1       | )                                         |  |  | 24.8 |  |  |  | – |  |  |  | 24.7 |  |  |  | 0.2 |  |  |  | 29.7 |  |  |  | – |  |  |  | 29.9 |  |   |
| Depreciation and amortization                                                                                                                             |        |                                           | 1.1        |                                           |  |  | 22.2 |  |  |  | – |  |  |  | 23.3 |  |  |  | 1.0 |  |  |  | 28.4 |  |  |  | – |  |  |  | 29.4 |  |   |
| Minority interests                                                                                                                                        |        |                                           | –    |                                           |  |  | 0.7 |  |  |  | – |  |  |  | 0.7 |  |  |  | – |  |  |  | 0.7 |  |  |  | – |  |  |  | 0.7 |  |   |
| Equity method income                                                                                                                                      |        |                                           | –    |                                           |  |  | (0.6 | ) |  |  |  |  |  |  | (0.6 | ) |  |  | – |  |  |  | (0.3 | ) |  |  |  |  |  |  | (0.3 | ) |   |
| Stock compensation                                                                                                                                        |        |                                           | –    |                                           |  |  | 0.3 |  |  |  | – |  |  |  | 0.3 |  |  |  | – |  |  |  | 0.3 |  |  |  | – |  |  |  | 0.3 |  |   |
| Loss (gain) on sale of assets                                                                                                                             |        |                                           | –    |                                           |  |  | 0.1 |  |  |  | – |  |  |  | 0.1 |  |  |  | – |  |  |  | (2.5 | ) |  |  | – |  |  |  | (2.5 | ) |   |
| Monitoring fees                                                                                                                                           |        |                                           | –    |                                           |  |  | 1.3 |  |  |  | – |  |  |  | 1.3 |  |  |  | – |  |  |  | 1.3 |  |  |  | – |  |  |  | 1.3 |  |   |
|                                                                                                                                                           |        |                                           |            |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
|       Income (loss) from continuing             operations before income taxes |        | $                                         | 8.3        |                                           |  | $ | 7.2 |  |  | $ | – |  |  | $ | 15.5 |  |  | $ | 6.1 |  |  | $ | (10.6 | ) |  | $ | – |  |  | $ | (4.5 | ) |   |
|                                                                                                                                                           |        |                                           |            |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
| Capital expenditures – continuing             operations                                          |        | $                                         | –    |                                           |  | $ | 60.3 |  |  | $ | – |  |  | $ | 60.3 |  |  | $ | – |  |  | $ | 37.2 |  |  | $ | – |  |  | $ | 37.2 |  |   |
|                                                                                                                                                           |        |                                           |            |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |
| Segment assets                                                                                                                                            |        |                                           |            |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 120.1 |  |  | $ | 2,518.0 |  |  | $ | – |  |  | $ | 2,638.1 |  |   |
|                                                                                                                                                           |        |                                           |            |                                           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |   |

____________________(1) Segment EBITDA is defined as income before interest expense (net of interest income), income taxes, depreciation and amortization, minority interests, equity method income or loss, stock compensation, debt extinguishment costs, merger expenses, gain or loss onsale of assets, monitoring fees and income (loss) from discontinued operations.  Management uses Segment EBITDA to measure performance for Vanguard’s segments and to develop strategic objectives and operating plans for those segments.  Segment EBITDAeliminates the uneven effect of non-cash depreciation of tangible assets and amortization of intangible assets, much of which results from acquisitions accounted for under the purchase method of accounting.  Segment EBITDA also eliminates the effects of changesin interest rates which management believes relate to general trends in global capital markets, but are not necessarily indicative of the operating performance of Vanguard’s segments.  Management believes that Segment EBITDA provides useful informationabout the financial performance of Vanguard’s segments to investors, lenders, financial analysts and rating agencies.  Additionally, management believes that investors and lenders view Segment EBITDA as an important factor in making investment decisionsand assessing the value of Vanguard.  Segment EBITDA is not a substitute for net income, operating cash flows or other cash flow statement data determined in accordance with accounting principles generally accepted in the United States.  Segment EBITDA, aspresented, may not be comparable to similarly titled measures of other companies.

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**10.          COMMITMENTS AND CONTINGENCIES**

                Management evaluates contingencies based upon the best available information and believes that adequate provision for potential lossesassociated with contingencies has been made.  In management’s opinion, based on current available information, these commitments described below will not have a material effect on Vanguard’s results of operations or financial position, but theconstruction and facility expansion obligations could have an effect on the timing of Vanguard’s cash flows, including its need to borrow available amounts under its revolving credit facility.

**Capital Expenditures and Construction Commitments**

                Vanguard currently has multiple capital expansion and replacement projects underway.  As of September 30, 2006, Vanguardestimatedits remaining commitments to complete the expansion projects in San Antonio and Phoenix and its remaining obligations for other capital projects in process to be approximately $89.2 million.

**Claims and Litigation**

While in the process of closing the October 1, 2006 sale of the fixed assets of its three California hospitals to subsidiaries of Prime Healthcare Services, Inc. (collectively, the “Buyer”), Vanguard received aletter (the “BC Claims Letter”) dated September 29, 2006, from Blue Cross of California (“BC-CA”) threatening to sue the Vanguard subsidiaries that, prior to the sale, owned Huntington Beach Hospital and La Palma Intercommunity Hospital forbreach of contract if Buyer did not assume the provider contracts that Huntington Beach Hospital and La Palma Intercommunity Hospital each purportedly had with BC-CA.  In the BC Claims Letter BC-CA estimated its compensatory damages at approximately $73.7million and stated that it may also be entitled to punitive damages in the event of Buyer’s non-assumption of these two contracts. Vanguard had written BC-CA on September 27, 2006, to confirm that in a meeting between Vanguard and  BC-CA  held onAugust 22, 2006, an official of BC-CA had assured Vanguard that, in a sale of the fixed assets of these two hospitals, the two contracts would automatically terminate upon consummation of the sale of the assets without liability to Vanguard’s subsidiaries; andto inform BC-CA that Vanguard had relied upon such assurances from BC-CA in planning to close the sale of the assets of these two hospitals without Buyer’s assumption of these two contracts. Additionally, in the BC Claims Letter, BC-CA denied that a Blue Crossofficial had previously given these assurances to Vanguard. Despite these threats from BC-CA, Vanguard’s subsidiaries closed the sale of these two California hospitals (see Note 12) to Buyer without Buyer’s assumption of these two provider agreements withBC-CA based upon (1) Vanguard’s belief that its subsidiaries had good and valid legal defenses to any BC-CA suit for breach and (2) Buyer’s execution in connection with the closing of the sale of the assets of an agreement providing full indemnificationto Vanguard and its subsidiaries in respect of the damages and expenses which Vanguard and its subsidiaries might incur in respect of these BC-CA claims. In the event that BC-CA brings suit for breach of contract in this matter, Vanguard’s subsidiaries intendto vigorously defend against the litigation. However, in the event such legal defenses are inadequate or Vanguard is unsuccessful in enforcing the indemnity against Buyer, then the ultimate resolution of this matter may have a material adverse effect onVanguard’s financial position, results of operations or cash flows.

**Patient Service Revenues**

                Final determinations of amounts earned under the Medicare and Medicaid programs often occur in subsequent years because of audits bythe programs, rights of appeal and the application of numerous technical provisions.  Differences between original estimates and subsequent revisions (including final settlements) are included in the condensed consolidated statements of operations in the periodin which the revisions are made.  Management believes that adequate provision has been made for adjustments that may result from final determination of amounts earned under the Medicare and Medicaid programs.  Net adjustments for final third partysettlements resulted in increases to income from continuing operations before income taxes of $1.7 million and $0.5 million for the three months ended September 30, 2005 and 2006, respectively.  Vanguard recorded $15.9 million and $23.3 million of charity caredeductions from continuing operations during the three months ended September 30, 2005 and 2006, respectively.

**Governmental Regulation**

                Laws and regulations governing the Medicare, Medicaid and other federal healthcare programs are complex and subject tointerpretation.  Vanguard’s management believes that it is in compliance with all applicable laws and regulations in all material respects. However, compliance with such laws and regulations can be subject to future government review and

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interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal healthcare programs.  Vanguard is not aware of any material regulatoryproceeding or investigation underway or threatened involving allegations of potential wrongdoing.

**Acquisitions**

                Vanguard has acquired and will continue to acquire businesses with prior operating histories.  Acquired companies may have unknownor contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, anti-kickback and physician self-referral laws.  Although Vanguard institutes policies designed to conform practicesto its standards following completion of acquisitions and attempts to structure its acquisitions as asset acquisitions in which Vanguard does not assume liability for seller wrongful actions, there can be no assurance that Vanguard will not become liable for pastactivities that may later be alleged to be improper by private plaintiffs or government agencies.  Although Vanguard obtains general indemnifications from sellers covering such matters, there can be no assurance that any specific matter will be covered by suchindemnifications, or if covered, that such indemnifications will be adequate to cover potential losses and fines.

**Professional and General Liability Risks**

                Given the nature of its operating environment, Vanguard is subject to professional and general liability claims and related lawsuits inthe ordinary course of business.  For professional and general liability claims incurred from June 1, 2002 to May 31, 2006, Vanguard’s wholly owned captive subsidiary insured its professional and general liability risks at a $10.0 million retention level.For professional and general liability claims incurred subsequent to May 31, 2006, Vanguard self-insures the first $9.0 million per claim, and the captive subsidiary insures the next $1.0 million per claim. Vanguard maintains excess coverage from independent thirdparty insurers on a claims-made basis for individual claims exceeding $10.0 million up to $75.0 million, but limited to total annual payments of $65.0 million in the aggregate. The captive insurance subsidiary funds its portion of claims costs from premium paymentsreceived from Vanguard.  Vanguard’s reserve for reported and unreported professional and general liability claims was $58.8 million and $63.6 million as of June 30, 2006 and September 30, 2006, respectively.  Vanguard’s professional liabilitycosts remain sensitive to market factors affecting premiums for excess coverage and the quantity and severity of professional liability claims.  Also, Vanguard is exposed to increased payments to malpractice claimants in the event physicians practicing atVanguard’s hospitals are unable to obtain adequate malpractice insurance or in the event Vanguard employs more physicians.

**Guarantees**

                As part of its contract with the Arizona Health Care Cost Containment System (“AHCCCS”), one of Vanguard’s healthplans, Phoenix Health Plan, is required to maintain a performance guarantee, the amount of which is based upon Plan membership and capitation premiums received.  As of September 30, 2006, Vanguard maintained this performance guarantee in the form of $18.0million of surety bonds with independent third party insurers collateralized by letters of credit of approximately $5.3 million.  In October 2006, upon the expiration of the previous surety bonds, Vanguard purchased $19.0 million of new surety bonds that expireon October 2, 2007 collateralized by approximately $2.9 million of replacement letters of credit to meet this obligation.

                Vanguard has entered into physician relocation agreements under which it guarantees minimum monthly income to physicians during aperiod of time (typically 12 months to 24 months) in which they establish their practices in the community. In return for the minimum income guarantee payment, the physicians are required to practice in the community for a specified period of time (typically 3 to 4years) or else return the payments to Vanguard. On January 1, 2006, Vanguard adopted Financial Accounting Standards Board Staff Position No. FIN 45-3, *Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners*(“FIN 45-3”). FIN 45-3 requires that a liability be recorded at fair value for all guarantees entered into on or after January 1, 2006. Vanguard determines this liability and an offsetting intangible asset by calculating an estimate of expected paymentsto be made over the guarantee period. Vanguard reduces the liability as it makes guarantee payments and amortizes the intangible asset over the term of the physicians’ work agreements. As of September 30, 2006, Vanguard had a net intangible asset of $3.3million and a remaining liability of $2.5 million related to these physician income guarantees. The maximum amount of Vanguard’s unpaid physician income guarantees under FIN 45-3 as of September 30, 2006 was approximately $5.5 million. Vanguard also hadphysician income guarantees entered into prior to January 1, 2006, for which the maximum remaining liability was approximately $3.2 million as of September 30, 2006.

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**Variable Interest Entities**

                Vanguard is a party to four contractual agreements whereby it may be required to make monthly payments to the developers and managersof four medical office buildings located on its hospital campuses through minimum rent revenue guarantees.  Vanguard entered into these agreements to provide an incentive to the developers to fund the construction of the medical office buildings and manage thebuildings upon their completion in order to make physician office space available near its hospital campuses.  One of the contracts commenced prior to the effective date of Financial Interpretation Number 46, *Variable Interest Entities*, (as amended by FIN46R) and is scheduled to terminate in March 2016.  Due to the significance of Vanguard’s minimum rent revenue payments to the operations of the medical office building, Vanguard consolidated this entity for financial reporting purposes effective June 30,2006. A second contract commenced in June 2004 for a period of 12 years.  Vanguard deemed this contract a variable interest entity in which Vanguard is not the primary beneficiary.  The maximum annual amount Vanguard would pay under the contract assuming nochanges to current occupancy levels would be approximately $0.2 million. Vanguard expects to achieve the permanent burnoff provisions under the remaining two contracts during fiscal 2007 and deems the developer landlords to be the primary beneficiaries.

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

                Vanguard conducts substantially all of its business through its subsidiaries. Most of Vanguard’s subsidiaries jointly andseverally guarantee the 9.0% Notes on an unsecured senior subordinated basis. Certain of Vanguard’s other consolidated wholly-owned and non wholly-owned entities do not guarantee the 9.0% Notes in conformity with the provisions of the indenture governing the9.0% Notes and do not guarantee Vanguard’s senior secured credit facilities in conformity with the provisions thereof. The condensed consolidating financial information for the parent company, the issuers of the 9.0% Notes, the issuers of the 11.25% Notes, thesubsidiary guarantors, the non-guarantor subsidiaries, certain eliminations and consolidated Vanguard as of June 30, 2006 and September 30, 2006 and for the three months ended September 30, 2005 and 2006 follows.

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**VANGUARD HEALTH SYSTEMS, INC.CONDENSED CONSOLIDATING BALANCE SHEETSJune 30, 2006**

| ** **                                                          | **Parent**                                                                     | **Issuers of 9.0% Notes**                                                                          | **Issuers of 11.25% Notes**                                                                        | **Guarantor Subsidiaries**                                                       | **Combined Non- Guarantors**                                               | **Eliminations**                                                                                   | **Total Consolidated**                                                                |
|---------------------------------------------------------------------|--------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------|----------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
| ** **                                                          | ****                                                                           |
| **ASSETS**                                                          | *(In millions)*                                                                |
| Current assets:                                                     |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                            |                                                                                                    |                                                                                       |
| Cash and cash equivalents                                           | $         –                 | $             –             | $             –             | $       38.5                                       | $      85.1                                       | $             –             | $      123.6                                                 |
| Accounts receivable, net                                            |            –      |                –  |                –  |        249.3                                       |         44.8                            |                –  |         294.1                                      |
| Inventories                                                         |            –      |                 – |                 – |          40.1                            |           5.2                 |                 – |           45.3                           |
| Assets held for sale                                                |            –      |                 – |                 – |          45.6                            |           6.5                 |                 – |           52.1                           |
| Prepaid expenses and other current assets                           |             0.1         |                 – |                 – |          28.7                            |         20.8                            |             (3.7)                           |           45.9                           |
|                                                                |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                            |                                                                                                    |                                                                                       |
|     Total current assets                             |             0.1         |                 – |                 – |        402.2                                       |       162.4                                       |             (3.7)                           |         561.0                                      |
|                                                                     |               |                                                                                                    |                                                                                                    |                                                                                  |                                                                            |                                                                                                    |                                                                                       |
| Property, plant and equipment, net                                  |            –      |                –  |                –  |     1,073.5                                                       |         86.0                            |                –  |      1,159.5                                                      |
| Goodwill                                                            |            –      |                –  |                –  |        725.5                                       |         87.3                            |                –  |         812.8                                      |
| Intangible assets, net                                              |            –      |             33.5                            |               3.6                 |            3.7                 |         28.2                            |                –  |           69.0                           |
| Investments in consolidated subsidiaries                            |         608.8                               |                –  |                –  |              – |         26.6                            |         (635.4)                                                 |              – |
| Other assets                                                        |            –      |                –  |                –  |          47.9                            |           0.3                 |                –  |           48.2                           |
|                                                                     |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                            |                                                                                                    |                                                                                       |
|                                                                     |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                            |                                                                                                    |                                                                                       |
|     Total assets                                     | $      608.9                                          | $          33.5                                       | $            3.6                            | $  2,252.8                                                                  | $    390.8                                                  | $      (639.1)                                                            | $   2,650.5                                                                 |
|                                                                     |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                            |                                                                                                    |                                                                                       |
|                                                                     |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                            |                                                                                                    |                                                                                       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                      |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                            |                                                                                                    |                                                                                       |
| Current liabilities:                                                |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                            |                                                                                                    |                                                                                       |
| Accounts payable                                                    | $         –                 | $             –             | $             –             | $     136.8                                                  | $      15.0                                       | $             –             | $      151.8                                                 |
| Accrued expenses and other current liabilities                      |             –     |             13.3                            |                –  |        130.2                                       |         78.9                            |           (14.5)                                      |         207.9                                      |
| Current maturities of long-term debt                                |             –     |               8.0                 |                –  |              – |           0.3                 |                 – |             8.3                |
|                                                                     |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                            |                                                                                                    |                                                                                       |
|     Total current liabilities                        |             –     |             21.3                            |                –  |        267.0                                       |         94.2                            |           (14.5)                                      |         368.0                                      |
|                                                                     |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                            |                                                                                                    |                                                                                       |
| Other liabilities                                                   |             –     |                –  |                –  |          25.0                            |         63.4                            |             (6.0)                           |           82.4                           |
| Long-term debt, less current maturities                             |            –      |        1,356.8                                                       |           151.4                                       |            2.7                 |             – |                –  |      1,510.9                                                      |
| Intercompany                                                        |        (80.3)                                    |      (1,136.2)                                                                 |         (120.8)                                                 |     1,462.1                                                       |         23.8                            |         (148.6)                                                 |              – |
| Stockholders’ equity                                          |         689.2                               |         (208.4)                                                 |           (27.0)                                      |        496.0                                       |       209.4                                       |         (470.0)                                                 |         689.2                                      |
|                                                                |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                            |                                                                                                    |                                                                                       |
|     Total liabilities and stockholders’ equity | $      608.9                                          | $          33.5                                            | $            3.6                            | $  2,252.8                                                                  | $    390.8                                                  | $      (639.1)                                                            | $   2,650.5                                                                 |
|                                                                     |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                            |                                                                                                    |                                                                                       |

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**VANGUARD HEALTH SYSTEMS, INC.CONDENSED CONSOLIDATING BALANCE SHEETSSeptember 30, 2006(Unaudited)**

| ** **                                                          | **Parent**                                                                     | **Issuers of 9.0% Notes**                                                                          | **Issuers of 11.25% Notes**                                                                        | **Guarantor Subsidiaries**                                                       | **Combined Non- Guarantors**                                              | **Eliminations**                                                                                   | **Total Consolidated**                                                                |
|---------------------------------------------------------------------|--------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------|---------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
| ** **                                                          | ****                                                                           |
| **ASSETS**                                                          | *(In millions)*                                                                |
| Current assets:                                                     |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                           |                                                                                                    |                                                                                       |
| Cash and cash equivalents                                           | $         –                 | $             –             | $             –             | $       46.3                                       | $      48.8                                      | $             –             | $        95.1                                      |
| Accounts receivable, net                                            |            –      |                –  |                –  |        270.8                                       |         45.4                           |                –  |         316.2                                      |
| Inventories                                                         |            –      |                 – |                 – |          41.3                            |           5.3                |                 – |           46.6                           |
| Assets held for sale                                                |            –      |                 – |                 – |          36.4                            |         10.8                           |                 – |           47.2                           |
| Prepaid expenses and other current assets                           |             0.1         |                 – |                 – |          27.0                            |         19.1                           |             (3.5)                           |           42.7                           |
|                                                                |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                           |                                                                                                    |                                                                                       |
|     Total current assets                             |             0.1         |                 – |                 – |        421.8                                       |       129.4                                      |             (3.5)                           |         547.8                                      |
|                                                                     |               |                                                                                                    |                                                                                                    |                                                                                  |                                                                           |                                                                                                    |                                                                                       |
| Property, plant and equipment, net                                  |            –      |                –  |                –  |     1,078.3                                                       |         76.1                           |                –  |      1,154.4                                                      |
| Goodwill                                                            |            –      |                –  |                –  |        725.5                                       |         87.3                           |                –  |         812.8                                      |
| Intangible assets, net                                              |            –      |             32.4                            |               3.6                 |            5.6                 |         27.2                           |                –  |           68.8                           |
| Investments in consolidated subsidiaries                            |         608.8                               |                –  |                –  |              – |         26.6                           |         (635.4)                                                 |              – |
| Other assets                                                        |            –      |                –  |                –  |          54.0                            |           0.3                |                –  |           54.3                           |
|                                                                     |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                           |                                                                                                    |                                                                                       |
|                                                                     |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                           |                                                                                                    |                                                                                       |
|     Total assets                                     | $      608.9                                          | $          32.4                                       | $            3.6                            | $  2,285.2                                                                  | $    346.9                                                 | $      (638.9)                                                            | $   2,638.1                                                                 |
|                                                                     |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                           |                                                                                                    |                                                                                       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                      |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                           |                                                                                                    |                                                                                       |
| Current liabilities:                                                |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                           |                                                                                                    |                                                                                       |
| Accounts payable                                                    | $         –                 | $             –             | $             –             | $     127.7                                                  | $      13.5                                      | $             –             | $      141.2                                                 |
| Accrued expenses and other current liabilities                      |            –      |             26.4                            |                –  |        118.4                                       |         76.3                           |           (14.8)                                      |         206.3                                      |
| Current maturities of long-term debt                                |             –     |               8.0                 |                –  |              – |           0.2                |                 – |             8.2                |
|                                                                     |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                           |                                                                                                    |                                                                                       |
|     Total current liabilities                        |            –      |             34.4                            |                –  |        246.1                                       |         90.0                           |           (14.8)                                      |         355.7                                      |
|                                                                     |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                           |                                                                                                    |                                                                                       |
| Other liabilities                                                   |            –      |                –  |                –  |          32.4                            |         59.3                           |             (4.3)                           |           87.4                           |
| Long-term debt, less current maturities                             |            –      |        1,354.8                                                       |           155.5                                       |            3.0                 |            – |                –  |      1,513.3                                                      |
| Intercompany                                                        |          (72.8)                        |      (1,118.1)                                                                 |         (120.7)                                                 |     1,485.9                                                       |          (0.7)                    |         (173.6)                                                 |              – |
| Stockholders’ equity                                          |         681.7                               |         (238.7)                                                 |           (31.2)                                      |        517.8                                       |       198.3                                      |         (446.2)                                                 |         681.7                                      |
|                                                                |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                           |                                                                                                    |                                                                                       |
|     Total liabilities and stockholders’ equity | $      608.9                                          | $          32.4                                       | $            3.6                            | $  2,285.2                                                                  | $    346.9                                                 | $      (638.9)                                                            | $   2,638.1                                                                 |
|                                                                     |                                                                                |                                                                                                    |                                                                                                    |                                                                                  |                                                                           |                                                                                                    |                                                                                       |

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**VANGUARD HEALTH SYSTEMS, INC.CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONSFor the three months ended September 30, 2005(Unaudited)**

| ** **                                                                | **Parent**                                                                | **Issuers of 9.0% Notes**                                                 | **Issuers of 11.25% Notes**                                                     | **Guarantor Subsidiaries**                                                      | **Combined Non- Guarantors**                                                    | **Eliminations**                                                                | **Total Consolidated**                                                                |
|---------------------------------------------------------------------------|---------------------------------------------------------------------------|---------------------------------------------------------------------------|---------------------------------------------------------------------------------|---------------------------------------------------------------------------------|---------------------------------------------------------------------------------|---------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
| ** **                                                                | ****                                                                      |
| ** **                                                                | *(In millions)*                                                           |
| ** **                                                                | ** **                                                                |
| Patient service revenues                                                  | $         –            |     $     –                 |     $      –                 |    $  475.7                                                      |    $    51.2                                           |     $   (7.4)                                     |    $   519.5                                                      |
| Premium revenues                                                          |            – |            – |             – |          11.0                           |         83.8                                 |           (8.7)                    |           86.1                           |
|                                                                      |                                                                           |                                                                           |                                                                                 |                                                                                 |                                                                                 |                                                                                 |                                                                                       |
|     Total revenues                                         |            – |            – |             – |        486.7                                      |       135.0                                            |         (16.1)                               |         605.6                                      |
| Salaries and benefits                                                     |            – |            – |             – |        221.0                                      |         25.1                                 |             – |         246.1                                      |
| Supplies                                                                  |            – |            – |             – |          90.7                           |           8.2                      |             – |           98.9                           |
| Medical claims expense                                                    |            – |            – |             – |            6.7                |         60.1                                 |           (7.4)                    |           59.4                           |
| Purchased services                                                        |            – |            – |             – |          25.6                           |           5.0                      |             – |           30.6                           |
| Provision for doubtful accounts                                           |            – |            – |             – |          42.0                           |           4.5                      |             – |           46.5                           |
| Other operating expenses                                                  |          0.1                      |            – |             – |          43.1                           |         16.7                                 |           (8.7)                    |           51.2                           |
| Rents and leases                                                          |            – |            – |             – |            6.1                |           1.8                      |             – |             7.9                |
| Depreciation and amortization                                             |            – |            – |             – |          19.5                           |           3.8                      |             – |           23.3                           |
| Interest, net                                                             |            – |        26.2                                 |            3.8                |           (6.0)                    |           0.7                      |             – |           24.7                           |
| Management fees                                                           |            – |            – |             – |           (1.6)                    |           1.6                      |             – |              – |
| Other                                                                     |            – |            – |             – |            1.4                |           0.1                      |             – |             1.5                |
|                                                                      |                                                                           |                                                                           |                                                                                 |                                                                                 |                                                                                 |                                                                                 |                                                                                       |
|     Total costs and expenses                               |          0.1                      |        26.2                                 |            3.8                |        448.5                                      |       127.6                                            |         (16.1)                               |         590.1                                      |
|                                                                      |                                                                           |                                                                           |                                                                                 |                                                                                 |                                                                                 |                                                                                 |                                                                                       |
| Income (loss) from continuing    operations before income taxes |         (0.1)                          |       (26.2)                                     |           (3.8)                    |          38.2                           |           7.4                      |             – |           15.5                           |
| Income tax expense (benefit)                                              |          6.6                      |            – |             – |             – |         (0.9)                           |            0.9                |             6.6                |
| Equity in earnings of subsidiaries                                        |        14.0                                 |            – |             – |             – |             – |         (14.0)                               |              – |
|                                                                      |                                                                           |                                                                           |                                                                                 |                                                                                 |                                                                                 |                                                                                 |                                                                                       |
| Income (loss) from continuing    operations                     |          7.3                      |       (26.2)                                     |           (3.8)                    |          38.2                           |           8.3                      |         (14.9)                               |             8.9                |
| Discontinued operations, net    of taxes                        |            – |            – |             – |           (0.9)                    |         (0.7)                           |             – |            (1.6)                    |
|                                                                      |                                                                           |                                                                           |                                                                                 |                                                                                 |                                                                                 |                                                                                 |                                                                                       |
| Net income (loss)                                                         | $      7.3                                       |     $ (26.2)                                               |     $    (3.8)                                    |    $    37.3                                           |    $      7.6                                |     $  (14.9)                                               |    $       7.3                                |
|                                                                      |                                                                           |                                                                           |                                                                                 |                                                                                 |                                                                                 |                                                                                 |                                                                                       |

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**VANGUARD HEALTH SYSTEMS, INC.CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONSFor the three months ended September 30, 2006(Unaudited)**

| ** **                                                                | **Parent**                                                                | **Issuers of 9.0% Notes**                                                 | **Issuers of 11.25% Notes**                                                     | **Guarantor Subsidiaries**                                                      | **Combined Non- Guarantors**                                                    | **Eliminations**                                                                | **Total Consolidated**                                                                |
|---------------------------------------------------------------------------|---------------------------------------------------------------------------|---------------------------------------------------------------------------|---------------------------------------------------------------------------------|---------------------------------------------------------------------------------|---------------------------------------------------------------------------------|---------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|
| ** **                                                                | ****                                                                      |
| ** **                                                                | *(In millions)*                                                           |
| ** **                                                                | ** **                                                                |
| Patient service revenues                                                  | $         –            |     $     –                 |     $      –                 |    $  491.8                                                      |    $    52.9                                           |     $   (6.8)                                     |    $   537.9                                                      |
| Premium revenues                                                          |            – |            – |             – |          12.6                           |         84.5                                 |           (0.1)                    |           97.0                           |
|                                                                      |                                                                           |                                                                           |                                                                                 |                                                                                 |                                                                                 |                                                                                 |                                                                                       |
|     Total revenues                                         |            – |            – |             – |        504.4                                      |       137.4                                            |           (6.9)                    |         634.9                                      |
| Salaries and benefits                                                     |            – |            – |             – |        240.0                                      |         28.2                                 |             – |         268.2                                      |
| Supplies                                                                  |            – |            – |             – |          93.3                           |         10.2                                 |             – |         103.5                                      |
| Medical claims expense                                                    |            – |            – |             – |            8.8                |         69.7                                 |           (6.8)                    |           71.7                           |
| Purchased services                                                        |            – |            – |             – |          29.8                           |           4.7                      |             – |           34.5                           |
| Provision for doubtful accounts                                           |            – |            – |             – |          39.3                           |           2.8                      |             – |           42.1                           |
| Other operating expenses                                                  |          0.1                      |            – |             – |          43.2                           |           8.4                      |           (0.1)                    |           51.6                           |
| Rents and leases                                                          |            – |            – |             – |            7.1                |           2.2                      |             – |             9.3                |
| Depreciation and amortization                                             |            – |            – |             – |          25.3                           |           4.1                      |             – |           29.4                           |
| Interest, net                                                             |            – |        30.3                                 |            4.2                |           (4.7)                    |           0.1                      |             – |           29.9                           |
| Management fees                                                           |            – |            – |             – |           (2.4)                    |           2.4                      |             – |              – |
| Other                                                                     |            – |            – |             – |           (0.9)                    |           0.1                      |             – |            (0.8)                    |
|                                                                      |                                                                           |                                                                           |                                                                                 |                                                                                 |                                                                                 |                                                                                 |                                                                                       |
|     Total costs and expenses                               |          0.1                      |        30.3                                 |            4.2                |        478.8                                      |       132.9                                            |           (6.9)                    |         639.4                                      |
|                                                                      |                                                                           |                                                                           |                                                                                 |                                                                                 |                                                                                 |                                                                                 |                                                                                       |
| Income (loss) from continuing    operations before income taxes |         (0.1)                          |       (30.3)                                     |           (4.2)                    |          25.6                           |           4.5                      |             – |            (4.5)                    |
| Income tax expense (benefit)                                              |         (1.6)                          |            – |             – |             – |           0.5                      |           (0.5)                    |            (1.6)                    |
| Equity in earnings of subsidiaries                                        |          9.2                      |            – |             – |             – |             – |           (9.2)                    |              – |
|                                                                      |                                                                           |                                                                           |                                                                                 |                                                                                 |                                                                                 |                                                                                 |                                                                                       |
| Income (loss) from continuing    operations                     |         (7.7)                          |       (30.3)                                     |           (4.2)                    |          25.6                           |           4.0                      |            9.7                |            (2.9)                    |
| Discontinued operations, net    of taxes                        |            – |            – |             – |           (3.9)                    |         (0.9)                           |             – |            (4.8)                    |
|                                                                      |                                                                           |                                                                           |                                                                                 |                                                                                 |                                                                                 |                                                                                 |                                                                                       |
| Net income (loss)                                                         | $     (7.7)                                           |     $ (30.3)                                               |     $    (4.2)                                    |    $    21.7                                           |    $      3.1                                |     $     9.7                                |    $     (7.7)                                          |
|                                                                      |                                                                           |                                                                           |                                                                                 |                                                                                 |                                                                                 |                                                                                 |                                                                                       |

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**VANGUARD HEALTH SYSTEMS, INC.CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSFor the three months ended September 30, 2005(Unaudited)**

| ** **                                                                                                             | **Parent**                                                                           | **Issuers of 9.0% Notes**                                                            | **Issuers of 11.25% Notes**                                                                      | **Guarantor Subsidiaries**                                                                 | **Combined Non- Guarantors**                                                         | **Eliminations**                                                                           | **Total Consolidated**                                                                                 |
|------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
| ** **                                                                                                             | ****                                                                                 |
| ** **                                                                                                             | *(In millions)*                                                                      |
| **Operating activities:**                                                                                              |                                                                                 |                                                                                 |                                                                                             |                                                                                       |                                                                                 |                                                                                       |                                                                                                   |
| Net income (loss)                                                                                                      | $        7.3                                      | $    (26.2)                                                           | $        (3.8)                                                | $       37.3                                                 | $        7.6                                      | $      (14.9)                                                     | $           7.3                                      |
| Adjustments to reconcile net income (loss) to net    cash provided by (used in) operating activities    |                                                                                 |                                                                                 |                                                                                             |                                                                                       |                                                                                 |                                                                                       |                                                                                                   |
| Loss from discontinued operations                                                                                      |           —                       |            —                 |              —                 |            0.9                           |           0.7                           |              —           |              1.6                           |
| Depreciation and amortization                                                                                          |           —                       |            —                 |              —                 |          19.5                                      |           3.8                           |              —           |            23.3                                      |
| Provision for doubtful accounts                                                                                        |           —                       |            —                 |              —                 |          42.0                                      |           4.5                           |              —           |            46.5                                      |
| Deferred income taxes                                                                                                  |           4.9                           |            —                 |              —                 |             —                 |             —           |              —           |              4.9                           |
| Amortization of loan costs                                                                                             |           —                       |          0.9                                 |            0.1                                 |             —                 |             —           |              —           |              1.0                           |
| Accretion of principal on senior discount notes                                                                        |           —                       |            —                 |            3.7                                 |             —                 |             —           |              —           |              3.7                           |
| Loss on sale of assets                                                                                                 |           —                       |            —                 |              —                 |            0.1                           |             —           |              —           |              0.1                           |
| Stock compensation                                                                                                     |           0.3                           |            —                 |              —                 |             —                 |             —           |              —           |              0.3                           |
| Changes in operating assets and liabilities, net of    effects of acquisitions:                         |                |                |                  |                 |                |                 |                   |
|     Equity in earnings of subsidiaries                                                                  |      (14.0)                                                      |            —                 |              —                 |             —                 |             —           |          14.0                                      |                —           |
|     Accounts receivable                                                                                 |           —                       |            —                 |              —                 |        (47.8)                                                |          (0.6)                               |              —           |           (48.4)                                          |
|     Inventories                                                                                         |           —                       |            —                 |              —                 |          (0.5)                                     |          (0.1)                               |              —           |             (0.6)                               |
|     Prepaid expenses and other current assets                                                           |        (3.8)                                           |            —                 |              —                 |          (7.3)                                     |           9.8                           |              —           |             (1.3)                               |
|     Accounts payable                                                                                    |           —                       |            —                 |              —                 |        (41.1)                                                |          (4.5)                               |              —           |           (45.6)                                          |
|     Accrued expenses and other liabilities                                                              |           1.5                           |       (13.6)                                                |              —                 |            8.1                           |        (17.6)                                          |            0.9                           |           (20.7)                                          |
| Net cash provided by (used in) operating activities –        continuing operations |        (3.8)                                           |       (38.9)                                                |              —                 |          11.2                                      |           3.6                           |              —           |           (27.9)                                          |
| Net cash used in operating activities –        discontinued operations             |            —                 |            —                 |              —                 |          (0.7)                                     |             —           |              —           |             (0.7)                               |
| Net cash provided by (used in) operating activities                                                                    |        (3.8)                                           |       (38.9)                                                |              —                 |          10.5                                      |           3.6                           |              —           |           (28.6)                                          |
| **Investing activities:**                                                                                              |                |                |                  |                 |                |              —           |                   |
| Acquisitions                                                                                                           |           —                       |            —                 |              —                 |          (0.4)                                     |             —           |              —           |             (0.4)                               |
| Capital expenditures                                                                                                   |           —                       |            —                 |              —                 |        (58.5)                                                |          (1.8)                               |              —           |           (60.3)                                          |
| Proceeds from short-term investments                                                                                   |           —                       |            —                 |              —                 |             —                 |        (30.0)                                          |              —           |           (30.0)                                          |
| Sales of short-term investments                                                                                        |           —                       |            —                 |              —                 |             —                 |         30.0                                      |              —           |            30.0                                      |
| Other                                                                                                                  |            —                 |            —                 |              —                 |        (21.4)                                                |             —           |          22.6                                      |              1.2                           |
| Net cash used in investing activities –       continuing operations                     |           —                       |            —                 |              —                 |        (80.3)                                                |          (1.8)                               |          22.6                                      |           (59.5)                                          |
| Net cash used in investing activities –       discontinued operations                   |            —                 |            —                 |              —                 |          (0.2)                                     |          (0.1)                               |              —           |             (0.3)                               |
| Net cash used in investing activities                                                                                  |           —                       |            —                 |              —                 |        (80.5)                                                |          (1.9)                               |          22.6                                      |           (59.8)                                          |
| **Financing activities:**                                                                                              |                |                |                  |                 |                |                 |                   |
| Proceeds from long-term debt                                                                                           |           —                       |      175.0                                                       |              —                 |             —                 |             —           |              —           |          175.0                                                 |
| Payments of long-term debt and capital leases                                                                          |           —                       |       (23.0)                                                |              —                 |          (0.4)                                     |          (0.1)                               |              —           |           (23.5)                                          |
| Payments of loan costs and debt termination fees                                                                       |           —                       |            —                 |              —                 |          (0.5)                                     |             —           |              —           |             (0.5)                               |
| Cash provided by (used in) intercompany activity                                                                       |           3.8                           |     (113.1)                                                           |              —                 |        131.5                                                 |           0.4                           |         (22.6)                                          |                —           |
| Net cash provided by financing activities                                                                              |           3.8                           |        38.9                                            |              —                 |        130.6                                                 |           0.3                           |         (22.6)                                          |          151.0                                                 |
| Net increase in cash and cash equivalents                                                                              |           —                       |            —                 |              —                 |          60.6                                      |           2.0                           |              —           |            62.6                                      |
| Cash and cash equivalents, beginning of period                                                                         |           0.8                           |            —                 |              —                 |          (5.9)                                     |         84.3                                      |              —           |            79.2                                      |
| Cash and cash equivalents, end of period                                                                               | $        0.8                                      | $          —                      | $           —                            | $       54.7                                                 | $      86.3                                                 | $           —                      | $       141.8                                                            |

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**VANGUARD HEALTH SYSTEMS, INC.CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWSFor the three months ended September 30, 2006(Unaudited)**

| ** **                                                                                                             | **Parent**                                                                                 | **Issuers of 9.0% Notes**                                                            | **Issuers of 11.25% Notes**                                                                      | **Guarantor Subsidiaries**                                                                 | **Combined Non- Guarantors**                                                         | **Eliminations**                                                                           | **Total Consolidated**                                                                                 |
|------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
| ** **                                                                                                             | ****                                                                                       |
| ** **                                                                                                             | *(In millions)*                                                                            |
| **Operating activities:**                                                                                              |                                                                                       |                                                                                 |                                                                                             |                                                                                       |                                                                                 |                                                                                       |                                                                                                   |
| Net income (loss)                                                                                                      | $       (7.7)                                                | $    (30.3)                                                           | $        (4.2)                                                | $       21.7                                                 | $        3.1                                      | $         9.7                                      | $          (7.7)                                          |
| Adjustments to reconcile net income (loss) to net    cash provided by (used in) operating activities    |                                                                                       |                                                                                 |                                                                                             |                                                                                       |                                                                                 |                                                                                       |                                                                                                   |
| Loss from discontinued operations                                                                                      |           —                             |            —                 |              —                 |            3.9                           |           0.9                           |              —           |              4.8                           |
| Depreciation and amortization                                                                                          |           —                             |            —                 |              —                 |          25.3                                      |           4.1                           |              —           |            29.4                                      |
| Provision for doubtful accounts                                                                                        |           —                             |            —                 |              —                 |          39.3                                      |           2.8                           |              —           |            42.1                                      |
| Deferred income taxes                                                                                                  |          (1.8)                                     |            —                 |              —                 |             —                 |             —           |              —           |             (1.8)                               |
| Amortization of loan costs                                                                                             |           —                             |           1.0                           |            0.1                                 |             —                 |             —           |              —           |              1.1                           |
| Accretion of principal on senior discount notes                                                                        |           —                             |            —                 |            4.1                                 |             —                 |             —           |              —           |              4.1                           |
| (Gain) loss on sale of assets                                                                                          |           —                             |            —                 |              —                 |          (2.6)                                     |           0.1                           |              —           |             (2.5)                               |
| Stock compensation                                                                                                     |           0.3                                 |            —                 |              —                 |             —                 |             —           |              —           |              0.3                           |
| Changes in operating assets and liabilities, net of    effects of acquisitions:                         |                 |                |                  |                 |                |                 |                   |
|     Equity in earnings of subsidiaries                                                                  |          (9.2)                                     |            —                 |              —                 |             —                 |             —           |            9.2                           |                —           |
|     Accounts receivable                                                                                 |           —                             |            —                 |              —                 |        (55.8)                                                |          (3.4)                               |              —           |           (59.2)                                          |
|     Inventories                                                                                         |           —                             |            —                 |              —                 |          (1.2)                                     |             —           |              —           |             (1.2)                               |
|     Prepaid expenses and other current assets                                                           |           —                             |            —                 |              —                 |          (7.2)                                     |           1.7                           |              —           |             (5.5)                               |
|     Accounts payable                                                                                    |           —                             |            —                 |              —                 |          (3.2)                                     |          (1.4)                               |              —           |             (4.6)                               |
|     Accrued expenses and other liabilities                                                              |            2.6                           |         13.1                                      |              —                 |          11.5                                      |          (7.0)                               |         (18.9)                                          |              1.3                           |
| Net cash provided by (used in) operating activities –        continuing operations |        (15.8)                                                |        (16.2)                                          |              —                 |          31.7                                      |           0.9                           |              —           |              0.6                           |
| Net cash provided by operating activities –        discontinued operations         |            —                       |            —                 |              —                 |            1.5                           |           0.1                           |              —           |              1.6                                |
| Net cash provided by (used in) operating activities                                                                    |        (15.8)                                                |        (16.2)                                          |              —                 |          33.2                                      |           1.0                           |              —           |              2.2                           |
| **Investing activities:**                                                                                              |                 |                |                  |                 |                |              —           |                   |
| Acquisitions                                                                                                           |           —                             |            —                 |              —                 |             —                 |             —           |              —           |                —           |
| Capital expenditures                                                                                                   |           —                             |            —                 |              —                 |        (36.1)                                                |          (1.1)                               |              —           |           (37.2)                                          |
| Proceeds from short-term investments                                                                                   |           —                             |            —                 |              —                 |             —                 |        (30.0)                                          |              —           |           (30.0)                                          |
| Sales of short-term investments                                                                                        |           —                             |            —                 |              —                 |             —                 |         30.0                                      |              —           |            30.0                                      |
| Proceeds from asset dispositions                                                                                       |           —                             |            —                 |              —                 |            6.5                           |             —           |              —           |              6.5                           |
| Other                                                                                                                  |            —                       |            —                 |              —                 |            2.6                           |             —           |              —           |              2.6                           |
| Net cash used in investing activities –       continuing operations                     |           —                             |            —                 |              —                 |        (27.0)                                                |          (1.1)                               |              —           |           (28.1)                                          |
| Net cash used in investing activities –       discontinued operations                   |            —                       |            —                 |              —                 |          (0.4)                                     |          (0.1)                               |              —           |             (0.5)                               |
| Net cash used in investing activities                                                                                  |           —                             |            —                 |              —                 |        (27.4)                                                |          (1.2)                               |              —           |           (28.6)                                          |
| **Financing activities:**                                                                                              |                 |                |                  |                 |                |                 |                   |
| Payments of long-term debt and capital leases                                                                          |           —                             |          (2.0)                               |              —                 |             —                 |          (0.1)                               |              —           |             (2.1)                               |
| Cash provided by (used in) intercompany activity                                                                       |         15.8                                            |         18.2                                      |              —                 |            2.0                           |        (36.0)                                          |              —           |                —           |
| Net cash provided by (used in) financing activities                                                                    |         15.8                                            |         16.2                                      |              —                 |            2.0                           |        (36.1)                                          |              —           |             (2.1)                               |
| Net increase (decrease) in cash and cash equivalents                                                                   |           —                             |            —                 |              —                 |            7.8                           |        (36.3)                                          |              —           |           (28.5)                                          |
| Cash and cash equivalents, beginning of period                                                                         |           —                             |            —                 |              —                 |          38.5                                      |         85.1                                      |              —           |          123.6                                                 |
| Cash and cash equivalents, end of period                                                                               | $        —                                        | $          —                      | $           —                            | $       46.3                                                 | $      48.8                                                 | $           —                      | $         95.1                                                 |

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**12.          SUBSEQUENT EVENT**

                On October 1, 2006, certain of Vanguard’s subsidiaries completed the sale its three hospitals in Orange County, California (WestAnaheim Medical Center, Huntington Beach Hospital and La Palma Intercommunity Hospital) to subsidiaries of Prime Healthcare, Inc. for net proceeds of $40.0 million, comprised of cash proceeds of $37.0 million and $3.0 million of proceeds placed in escrow to bedistributed to a subsidiary of Vanguard on July 2, 2007. Vanguard expects additional cash proceeds of approximately $12.8 million related to retained working capital.

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

**Forward Looking Statements**

                This report on Form 10-Q contains “forward-looking statements” within the meaning of the federal securities laws which areintended to be covered by the safe harbors created thereby.  Forward-looking statements are those statements that are based upon management’s current plans and expectations as opposed to historical and current facts and are often identified in this reportby use of words including but not limited to  “may,” “believe,” “will,” “project,” “expect,” “estimate,” “anticipate,” and “plan.”  These statements are basedupon estimates and assumptions made by Vanguard’s management that, although believed to be reasonable, are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those projected. These factors, risks and uncertainties include, among others, the following:

                •  Our high degree of leverage and interest rate risk

                •  Our ability to incur substantially more debt

                •  Operating and financial restrictions in our debt agreements

                •  Our ability to successfully implement our business strategies

                •  Our ability to successfully integrate our recent and any future acquisitions

                •  The highly competitive nature of the healthcare industry

                •  Governmental regulation of the industry, including Medicare and Medicaid reimbursement levels

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

                •  Our ability to attract and retain qualified management and healthcare professionals, including physicians                    and nurses

                •  Potential federal or state reform of healthcare

                •  Future governmental investigations

                •  Costs associated with HIPAA regulations and other management information systems integrations

                •  The availability of capital to fund our corporate growth strategy

                •  Potential lawsuits or other claims asserted against us

                •  Our ability to maintain or increase patient membership and control costs of our managed healthcare plans

                •  Changes in general economic conditions

                •  Our exposure to the increased amounts of and collection risks associated with uninsured accounts and the co-pay                    and deductible portions of insured accounts

                •  Dependence on our senior management team and local management personnel

                •  Volatility of professional and general liability insurance for us and the physicians who practice at ourhospitals                    and increases in the quantity and severity of professional liability claims

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                •  Our ability to maintain and increase patient volumes and control the costs of providing services, including                   salaries and benefits, supplies and bad debts

                •  Our failure to comply, or allegations of our failure to comply, with applicable laws and regulations

                •  The geographic concentration of our operations

                •  Technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for,                   healthcare services and shift demand for inpatient services to outpatient settings

                •  Costs and compliance risks associated with Section 404 of the Sarbanes-Oxley Act

                •  Material non-cash charges to earnings from impairment of goodwill associated with declines in the fair market                   values of our reporting units

                Our forward-looking statements speak only as of the date made.  Except as required by law, we undertake no obligation to publiclyupdate or revise any forward-looking statements contained herein, whether as a result of new information, future events or otherwise.  We advise you, however, to consult any additional disclosures we make in our other filings with the Securities and ExchangeCommission, including, without limitation, the discussion of risks and other uncertainties under the caption “Item 1A. Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2006. You are cautioned to not rely on suchforward-looking statements when evaluating the information contained in this report.  In light of the significant uncertainties inherent in the forward-looking statements included in this report, you should not regard the inclusion of such information as arepresentation by us that our objectives and plans anticipated by the forward-looking statements will occur or be achieved, or if any of them do, what impact they will have on our results of operations and financial condition.

**Executive Overview**

                As of September 30, 2006, we owned and operated 19 hospitals with a total of 4,783 licensed beds, and related outpatient servicefacilities complementary to the hospitals in San Antonio, Texas, metropolitan Phoenix, Arizona, metropolitan Chicago, Illinois, Orange County, California, and Massachusetts. As of September 30, 2006, our three California hospitals with combined 491 licensed beds wereheld for sale. We sold these hospitals to subsidiaries of Prime Healthcare, Inc. on October 1, 2006 for a base purchase price of $44.0 million, prior to adjustments for working capital items included in the sale and transaction expenses.  The operating resultsof the California hospitals are classified as discontinued operations in our condensed consolidated statements of operations for the quarters ended September 30, 2005 and 2006.  We also owned three health plans as set forth in the following table.

| **Health Plan**                                                                              |   |   | **Location** |   | **September 30, 2006 Membership** |
|----------------------------------------------------------------------------------------------|--------|--------|--------------|--------|-----------------------------------|
|                                                                                              |        |        |              |        |                                   |
| Phoenix Health Plan (“PHP”) – managed Medicaid                             |   |        | Arizona      |        | 94,600                            |
| Abrazo Advantage Health Plan (“AAHP”) – managed Medicare and Dual Eligible |   |        | Arizona      |        | 3,600                             |
| MacNeal Health Providers (“MHP”) – capitated outpatient services           |   |        | Illinois     |        | 45,800                            |
|                                                                                         |   |        |              |        |                                   |
|                                                                                         |        |        |              |        | 144,000                           |
|                                                                                         |        |        |              |        |                                   |

                Our objective is to provide high-quality, cost-effective healthcare services through an integrated delivery platform serving the needsof the communities in which we operate.  We focus our business development efforts and operations on hospital and other related healthcare facilities where we see an opportunity to improve operating performance and profitability and increase market share. We were incorporated in July 1997 and acquired our first hospital, Maryvale Hospital, on June 1, 1998.

                We have implemented multiple operating strategies to achieve our mission of providing high-quality, cost-effective healthcare servicesin the communities we serve. We consider the following to be the most important of these strategies: quality of care and patient safety; expansion of services; nurse and physician relations; compliance and ethics; and resource

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allocation.  We believe the successful implementation of these strategies and initiatives will improve our operating results and our competitive position in the communities we serve. However, there are many risks anduncertainties, including those previously discussed, that make it more difficult for us to achieve our objectives and could limit our ability to realize improved operating results.

**Operating Strategies**

Specific action steps we are taking to implement our business strategies are set forth below.
|                • |     | *Commitment to quality of care and safety*.  

We believe that our success will be determined by the quality of care we provide and our ability to provide a safe environment for our patients to receive care.  We believe our commitment to quality of care and safetymust start at the top.  We have employed chief medical officers at the regional level to review and improve clinical protocols and have maintained an active role on hospital governing boards to promote quality initiatives and staff education programs.  Wehave implemented or are in the process of implementing the following initiatives: 1) investing in clinical information systems that will allow us to standardize compliance reporting of more than 40 quality and safety indicators across our hospitals including qualitydashboard metrics; 2) dedicating resources such as rapid response teams to make the delivery of care more efficient; 3) revising clinical protocols where needed to minimize patient falls and worker injuries, 4) developing expanded peer groups against which to measureour progress and success; and 5) utilizing Hospital Consumer Assessment of Healthcare Providers and Systems patient satisfaction surveys at our hospitals.  Our goal is to achieve a top 10% compliance rate with quality and safety standards.  |
|--------------------------------------------------------------------------------------------------|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                             |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                • |     | *Expanding the range of healthcare services provided by our facilities*.  

Each of the markets we serve is unique.  We believe that a key factor in increasing patient volumes is to provide the range of services that our patients need.  Our strategy of developing market-focused regionalhealthcare systems provides us greater flexibility in improving the quality, convenience and efficiency of healthcare services. As we expand our service offerings and grow patient volumes, we seek to recruit and retain physicians and nurses and to invest resources incapital projects including upgrading our existing facility framework and expanding facilities. Expanding facilities may include constructing new facilities or increasing capacities at existing facilities. By the end of calendar 2006, we expect to have completedconstruction projects at two San Antonio hospitals and one Arizona hospital to expand emergency services, surgery and labor and delivery units. We have also begun expansion projects at three other hospitals that we expect to complete during fiscal years 2007 and2008.                                                                                                                                                                                                                                  |
|                                                                                             |               | * *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                • |     | *Becoming the employer of choice in the markets we serve and attracting quality physicians.*

Providing high-quality, efficient healthcare services to our patients requires skilled physicians, nurses and employees at our hospitals who share our ideals and beliefs. We plan to continue to invest heavily in trainingprograms to provide upward mobility for our employees.  These programs include expanded degree and designation programs in our nursing schools in San Antonio and Phoenix and development of a senior management training program intended to attract candidates bothwithin and external to our existing hospitals.  We believe the best physicians want to work with hospital management and nurses who are proven leaders and who are dedicated to service excellence.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                                                                             |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                             |               | We have significant physician recruitment goals in place for fiscal 2007 with primary emphasis on family practice and internal medicine, internists, obstetrics and gynecology, cardiology and orthopedics.  This recruitingeffort will include many employed physicians, and we may provide incentives for many of the non-employed physicians to move their practices to our communities where primary or specialty care is needed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                             |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                             |               | We maintain residency programs at certain of our hospitals including a residency arrangement with the University of Chicago School of Medicine at our MacNeal and Weiss hospitals.  We also intend to                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

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|                                                                                             |               | increase our participation, consistent with applicable laws, in the development of joint venture partnerships with physicians in those situations where such relationships fit our strategic objectives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------------------------------------------------------------------------------------------------|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                             |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                • |     | *Furthering our commitment to ethics and compliance*.

We are committed to respecting the privacy of our patients and delivering care in all of our facilities that is founded on a common set of ethical beliefs and behaviors.  We expect all of our employees and physicians toshare in this commitment.  During the past twelve months, we allocated significant resources to strengthen our comprehensive corporate compliance program. We employed regional compliance officers to monitor employee compliance training, physician relations andcompliance with state and federal regulations.  The regional compliance officers report directly to our Chief Compliance Officer who reports jointly to our Chairman and Chief Executive Officer and to our board of directors.  We also plan to make ouremployee orientation process more comprehensive to reinforce our commitment to ethics and compliance and to promote ownership in these values to our employees.                                  |
|                                                                                             |               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                • |     | *Allocating resources to strategic geographical markets*.

We expect to continue allocating resources to existing markets or to acquire hospitals in new markets where we can obtain significant market share and capture additional business from the aging U.S. population.  Accordingto the U.S. Census Bureau, there were approximately 35 million Americans aged 65 or older in the United States in 2000, comprising approximately 12.4% of the total U.S. population.  The number of these elderly persons is expected to climb to 40 million, or 13.0%of the total population by 2010 and to nearly 55 million or 16.3% of the total population by 2020.  We believe our capital investment initiatives will position us to capitalize on this demographic trend. Growing our presence in the communities we serve will makeour delivery of care more efficient, will provide greater flexibility in negotiations with managed care and other third party payers and will aid in our recruiting initiatives. |

**Revenue/Volume Trends**

                Our revenues depend upon inpatient occupancy levels, outpatient procedures performed at our facilities, the ancillary services andtherapy programs ordered by physicians and provided to patients and our ability to successfully negotiate appropriate rates for these services with third party payers.  During the quarter ended September 30, 2006, we experienced a 1.5% increase in dischargesfrom continuing operations and a 1.9% decrease in hospital adjusted discharges from continuing operations compared to the prior year quarter.  The following table provides details of discharges from continuing operations by payer for the quarter ended September30, 2006 compared to the prior year quarter.

|            |   | **Quarter ended September 30,** |
|-----------------|--------|---------------------------------|
|            |   |                                 |
|            |   | **2005**                        |   | **2006** |
|            |   |                                 |   |  |
| Medicare        |   | 11,730                          |   | 28.1% |   | 11,222 |   | 26.5% |
| Medicaid        |   | 5,712                           |   | 13.7% |   | 6,114 |   | 14.4% |
| Managed care(1) |   | 22,381                          |   | 53.6% |   | 23,127 |   | 54.6% |
| Self pay        |   | 1,487                           |   | 3.6% |   | 1,524 |   | 3.6% |
| Other           |        | 435                             |  | 1.0% |  | 400 |  | 0.9% |
|            |   |                                 |   |  |   |  |   |  |
| Total           |   | 41,745                          |   | 100.0% |   | 42,387 |   | 100.0% |
|            |   |                                 |   |  |   |  |   |  |

| ____________________ |
|----------------------|
| (1)                  |   | Includes discharges under managed Medicare, managed Medicaid and other governmental managed plans in addition to commercial managed care plans. |

                While total discharges increased slightly quarter over quarter, we continue to experience weakened demand for high acuity inpatientservices. Additionally, decreases in certain subacute services as a result of regulatory changes and reduced

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demand for elective procedures as a result of changes in patient insurance coverage continue to weaken inpatient and outpatient volumes. We expect our volumes to improve over the long-term as a result of service expansioninitiatives, new contracts negotiated with managed care providers and our market-driven management strategies. We also expect that as we complete our significant expansion projects, patient volumes will improve at those facilities where growth is currentlyconstrained by physical plant limitations and patient throughput inefficiencies. However, the success of our growth initiatives is dependent upon maintaining the community’s confidence in our services and staying ahead of the competition in the markets weserve.  Continued weakened demand for hospital healthcare services could negate these growth initiatives in the short-term.

                The majority of our patient service revenues are based on negotiated, per diem or pre-determined payment structures.  Ourfacilities’ gross charges typically do not reflect what the facilities are actually paid.  In addition to volume factors described above, patient mix, acuity factors and pricing trends affect our patient service revenues.  Net patient revenues peradjusted hospital discharge from continuing operations increased 6.6% from $7,055 during the prior year quarter to $7,519 during the current year quarter.  This increase reflects improved reimbursement for services provided under negotiated managed carecontracts and improved Medicare reimbursements. Increases in levels of charity care and negotiated self-pay discounts also impact this statistic by decreasing revenues and decreasing the provision for doubtful accounts. We cannot assure you that future reimbursementrates, even if improved, will sufficiently cover potential increases in the cost of providing healthcare services to our patients.

                We recognize premium revenues from our three health plans, PHP, AAHP and MHP. AAHP commenced operations on January 1, 2006 to providehealthcare services for Medicare Part D recipients and for those individuals eligible for Medicare who also receive full Medicaid benefits. As of September 30, 2006, approximately 3,600 members were enrolled in this program, most of whom were previously enrolled inPHP. PHP’s membership decreased to approximately 94,600 at September 30, 2006 compared to approximately 99,300 at September 30, 2005. Premium revenues from these three plans increased by $10.9 million or 12.7% during the quarter ended September 30, 2006compared to the prior year quarter.  This increase resulted primarily from the increased per member per month reimbursement from AAHP. PHP also experienced quarter over quarter increased per member per month reimbursement as a result of a rate increase that wentinto effect on October 1, 2005. We do not anticipate a significant increase in membership for our health plan reporting segment during our fiscal year ending June 30, 2007 but could realize significant membership increases during future fiscal years.  TheArizona Health Care Cost Containment System (“AHCCCS”) recently exercised one of its two one-year renewal options under its contract with PHP that commenced on October 1, 2003, which extends the current contract through September 30, 2007. AAHP’s contract with the Centers for Medicare and Medicaid Services (“CMS”) went into effect on January 1, 2006 for a term of one year with a provision for successive yearly renewals.  Should the PHP contract terminate, our future operatingresults and cash flows could be materially reduced.

**General Trends**

                The following paragraphs discuss recent trends that we believe are significant factors in our current and/or future operating resultsand cash flows.  Many of these trends apply to the entire hospital industry while others may more specifically apply to us, and the trends could be relatively short-term in nature or could require our long-term focus.  While these trends may involve certainfactors that are outside of our control, the extent to which these trends affect us and our ability to manage the impact of these trends play vital roles in our current and future success.  In many cases, we are unable to predict what impact these trends, ifany, will have on us.

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                *Accounts Receivable Collection Risks Leading to Increased Bad Debts*

                Similar to others in the hospital industry, the collectibility of our accounts receivable has deteriorated primarily due to an increasein self-pay accounts receivable. The following table provides a summary of our accounts receivable by age since discharge date by payer type as of June 30, 2005, June 30, 2006 and September 30, 2006 (in millions).

| **June 30, 2005**             |        | **0-90 days(2)** |        |        | **91-180 days(2)** |        | **Over 180 days** |        | **Total** |
|-------------------------------|--------|------------------|--------|--------|--------------------|--------|-------------------|--------|-----------|
|                               |        |                  |        |        |                    |        |                   |        |           |
| Medicare                      |   | $                | 95.9   |   |               | $      | 5.5               |   | $         | 2.3 |   | $ | 103.7 |
| Medicaid                      |        |                  | 43.1   |        |                    |        | 12.1              |        |           | 7.3 |  |  | 62.5 |
| Managed Care                  |        |                  | 204.1  |        |                    |        | 21.2              |        |           | 10.1 |  |  | 235.4 |
| Self Pay(1)                   |        |                  | 53.8   |        |                    |        | 45.4              |        |           | 10.0 |  |  | 109.2 |
| Other                         |        |                  | 17.8   |        |                    |        | 6.0               |        |           | 1.8 |  |  | 25.6 |
|                          |        |                  |        |        |                    |        |                   |        |           |  |  |  |  |
|     Total(3)   |        | $                | 414.7  |        |                    | $      | 90.2              |        | $         | 31.5 |  | $ | 536.4 |
|                          |   |             |        |   |               |   |                   |   |           |  |   |   |  |
|                          |   |             |   |   |               |   |              |   |      |
| **June 30, 2006****(2)**      |        | **0-90 days**    |        |        | **91-180 days**    |        | **Over 180 days** |        | **Total** |
|                               |        |                  |        |        |                    |        |                   |        |           |
| Medicare                      |   | $                | 93.7   |   |               | $      | 5.4               |   | $         | 3.5 |   | $ | 102.6 |
| Medicaid                      |        |                  | 40.6   |        |                    |        | 11.6              |        |           | 7.2 |  |  | 59.4 |
| Managed Care                  |        |                  | 208.6  |        |                    |        | 24.0              |        |           | 11.9 |  |  | 244.5 |
| Self Pay(1)                   |        |                  | 58.8   |        |                    |        | 51.7              |        |           | 11.9 |  |  | 122.4 |
| Other                         |        |                  | 14.7   |        |                    |        | 5.3               |        |           | 2.3 |  |  | 22.3 |
|                          |        |                  |        |        |                    |        |                   |        |           |  |  |  |  |
|     Total(3)   |        | $                | 416.4  |        |                    | $      | 98.0              |        | $         | 36.8 |  | $ | 551.2 |
|                          |        |                  |        |        |                    |        |                   |        |           |  |  |  |  |
|                          |   |             |   |   |               |   |              |   |      |
| **September 30, 2006****(2)** |        | **0-90 days**    |        |        | **91-180 days**    |        | **Over 180 days** |        | **Total** |
|                               |        |                  |        |        |                    |        |                   |        |           |
| Medicare                      |   | $                | 106.2  |   |               | $      | 4.8               |   | $         | 3.9 |   | $ | 114.9 |
| Medicaid                      |        |                  | 47.3   |        |                    |        | 6.8               |        |           | 6.2 |  |  | 60.3 |
| Managed Care                  |        |                  | 226.8  |        |                    |        | 23.0              |        |           | 13.2 |  |  | 263.0 |
| Self Pay(1)                   |        |                  | 64.3   |        |                    |        | 52.9              |        |           | 11.8 |  |  | 129.0 |
| Other                         |        |                  | 15.9   |        |                    |        | 5.6               |        |           | 2.6 |  |  | 24.1 |
|                          |        |                  |        |        |                    |        |                   |        |           |  |  |  |  |
|     Total(3)   |        | $                | 460.5  |        |                    | $      | 93.1              |        | $         | 37.7 |  | $ | 591.3 |
|                          |        |                  |        |        |                    |        |                   |        |           |  |  |  |  |

____________________(1)   Includes uninsured patients and those patient co-insurance and deductible amounts for which payment has been received from the        primary payer. If primary payment has not been received for an account, the patient co-insurance and deductible amounts remain        classified in the primary payer category.(2)   Includes accounts receivable balances for the Massachusetts hospitals acquired on December 31, 2004.(3)   The total accounts receivable balances reflected on these tables differ from the net accounts receivable balances as stated on the        consolidated balance sheets for those respective periods because the balance sheet accounts receivable amounts are reduced by manual        contractual allowances for unbilled patient accounts, certain billed patient accounts and for cash payments received but not posted to        patient accounts, whereas those deductions are not reflected on the aging reports.  The table below provides a reconciliation of these        amounts.

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| ** **                                                                    |   | ** ** | **June 30, 2006**                                                                     | **            ** | ** ** | **September 30, 2006**                                                                           |
|-------------------------------------------------------------------------------|--------|------------|---------------------------------------------------------------------------------------|------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|
|                                                                          |   |       |                                                                                       |                                                                         |       |                                                                                                  |
|                                                                               |        |            | *(In millions)*                                                                       |
|                                                                               |        |            |                                                                                       |                                                                              |            |                                                                                                  |
| Accounts receivable per aging report                                          |   | $          |              551.2        |                                                                         | $          |              591.3                   |
| Less:  Allowance for doubtful accounts                                   |   |       |             (103.5)            |                                                                         |       |             (108.5)                       |
| Less:  Manual contractual allowances for unbilled patient accounts       |   |       |             (118.4)            |                                                                              |            |             (122.5)                       |
| Less:  Manual contractual allowances for certain billed patient accounts |   |       |               (22.5) |                                                                         |       |               (34.6)            |
| Less:  Unposted cash receipts and other                                  |   |       |               (12.7) |                                                                         |       |                 (9.5) |
|                                                                          |   |       |                                                                                       |                                                                         |       |                                                                                                  |
| Net accounts receivable reflected on the consolidated balance sheets          |   | $          |              294.1        |                                                                         | $          |               316.2             |
|                                                                          |   |       | **                                                                                    | * *                                                                     | * *   | **                                                                                               |

                Our combined allowance for bad debts and allowance for charity care covered 93.4% and 92.9% of self-pay accounts receivable as of June30, 2006 and September 30, 2006, respectively.

                The increase in self-pay accounts receivable has led to increased write-offs and older accounts receivable outstanding, resulting inthe need for an increased allowance for doubtful accounts.  The increase in self-pay accounts receivable results from a combination of factors including increased patient volumes, price increases, higher levels of patient deductibles and co-insurance undermanaged care programs and the increased difficulties of uninsured patients who do not qualify for charity care programs to pay for escalating healthcare costs.  We have implemented policies and procedures designed to expedite upfront cash collections and promoterepayment plans from our patients.  Our upfront cash collections from continuing operations increased by 8.0% during the quarter ended September 30, 2006 compared to the prior year quarter.  However, we believe bad debts will remain sensitive to changes inpayer mix, pricing and general economic conditions for the hospital industry during the foreseeable future.

                *Expansion of Charity Care and Self-Pay Discount Programs*

We do not pursue collection of amounts due from uninsured patients that qualify for charity care under our guidelines (currently those uninsured patients whose incomes are equal to or less than 200% of the current federalpoverty guidelines set forth by the Department of Health and Human Services).  We exclude charity care accounts from revenues when we determine that the account meets our charity care guidelines.  During the quarters ended September 30, 2005 and 2006, wededucted $15.9 million and $23.3 million of charity care from continuing operations revenues, respectively.  During fiscal 2006, we began tracking healthcare services provided to undocumented aliens and recording those costs as charity care deductions. Paymentsreceived for these services are recorded as a decrease to charity deductions when received. These costs, net of payments received, accounted for $1.9 million and $6.3 million of our charity care deductions during the quarters ended September 30, 2005 and 2006,respectively.

                *Medicaid Funding Cuts*

                Many states, including certain states in which we operate, have periodically reported budget deficits as a result of increased costsand lower than expected tax collections.  Health and human service programs, including Medicaid and similar programs, represent a significant component of state spending.  To address these budgetary concerns, certain states have decreased funding for theseprograms and other states may make similar funding cuts.  These cuts may include tightened participant eligibility standards, reduction of benefits, enrollment caps or payment reductions.  Additionally, pressure exists at the federal level to reduceMedicaid matching funds provided to states as evidenced by a budget resolution set forth by Congress in April 2005 calling for $10.0 billion in cuts to federal funding of the Medicaid program over a five-year period. We are unable to assess the financial impact ofenacted or proposed state or federal funding cuts at this time.

                *Volatility of Professional Liability Costs*

                We maintain professional and general liability insurance coverage through a wholly owned captive insurance subsidiary for individualclaims incurred through May 31, 2006 up to $10.0 million. For claims incurred subsequent to May 31, 2006, we self-insure the first $9.0 million per occurrence, and the captive subsidiary insures the next $1.0 million per occurrence. We maintain excess insurancecoverage with independent third party carriers on a claims-made basis for

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individual claims exceeding $10.0 million up to $75.0 million, but limited to total annual payments of $65.0 million in the aggregate. The total cost of our professional and general liability insurance is sensitive to thevolume and severity of cases reported.  Moreover, malpractice premiums have adversely affected the ability of physicians to obtain malpractice insurance at reasonable rates in certain markets, particularly in metropolitan Chicago, Illinois, resulting inphysicians relocating to different geographic areas.  In the event physicians practicing in our hospitals are unable to obtain adequate malpractice insurance coverage, our hospitals are likely to incur a greater percentage of the amounts paid to claimants. Our professional liability exposures also increase when we employ physicians.  Some states, including Texas and Illinois, have recently passed tort reform legislation to place limits on non-economic damages.  While we have implemented multiple steps at ourfacilities to reduce our professional liability exposures, absent significant additional legislation to curb the size of malpractice judgments in other states in which we operate, our insurance costs may increase in the future.

                *Nursing Shortage*

                The hospital industry continues to face a nationwide shortage of nurses.  We have experienced particular difficulties in retainingand recruiting nurses in our metropolitan Phoenix, Arizona market. As a result of this shortage, we have utilized more contract labor resources that are typically more costly and less reliable than employed nurses.  We expect this shortage to continue for theforeseeable future. We expect to mitigate the effects of the nursing shortage by expanding our comprehensive nurse recruiting and retention program.  This program includes the following key components, among others:
|                • |        | Nursing schools in San Antonio andPhoenix                                                                                                |
|--------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                • |   | Foreign nurse recruiting initiatives                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                • |   | Tuition reimbursement and internal training to promote career advancement opportunities, including specialization qualifications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                • |   | Extern programs and campus events to network with students                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                • |   | Preceptor and other mentoring programs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                • |   | Expansion of orientation programs and employee involvement initiatives                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                • |   | Performance leadership training for managers and directors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                • |   | Flexible work hours for nurses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                • |   | Quality of care and employee safety initiatives                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                • |   | Competitive pay and benefits and nursing recognition programs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

                We operate the Baptist Health System School of Health Professions (“SHP”) in San Antonio, which offers eight differentprograms with the greatest enrollment in the professional nursing program.  The SHP trains approximately 400 students each year, the majority of which we expect to choose permanent employment with us.  SHP experienced an enrollment growth of over 30% forfall 2006 compared to fall 2005.  Plans are underway to transition SHP’s current diploma program to a degree granting program that will be more attractive to potential students.  SHP enrollment includes approximately 80 students in our metropolitanPhoenix market that are trained using state of the art distance learning technology maximizing utilization of SHP instructors.  Students are provided with company-funded scholarships that cover tuition, books and fees in return for a commitment to work at one ofour hospitals for a defined period of time.  Should we be unsuccessful in our attempts to maintain adequate nursing staff for our present and future needs, our future operating results could be adversely impacted.

                *Increased Cost of Compliance in a Heavily Regulated Industry*

                We conduct business in a heavily regulated industry. Accordingly, we maintain a comprehensive, company-wide compliance program toaddress healthcare regulatory and other compliance requirements since if a determination were ever made that we were in material violation of any of the federal or state statutes regulating our healthcare operations, our operations and financial results could bematerially adversely affected.  This compliance program includes, among other things, initial and periodic ethics and compliance training, a toll-free reporting hotline for employees, annual fraud and abuse audits and annual coding audits.  Theorganizational structure of our compliance program includes oversight by our board of directors and a high-level corporate management compliance committee.  Our Senior Vice President of Compliance and Ethics reports jointly to our Chairman and Chief ExecutiveOfficer and to our board of directors, serves as Chief Compliance Officer and is charged with direct responsibility for the day-to-day management of our compliance program.  During fiscal 2006, we established six regional compliance officers in our markets andstaffed the new positions with professionals 100% dedicated to compliance duties. The financial resources necessary for program oversight, enforcement and periodic

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improvements to our program continue to grow, especially when we add new features to our program or engage external resources to assist with these highly complex matters.

**Update of Critical Accounting Policies and Estimates**

                The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generallyaccepted in the United States. In preparing these financial statements, we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses included in the financial statements. Management bases its estimates on historicalexperience and other available information, the results of which form the basis of the estimates and assumptions. We consider the following accounting policies to be critical accounting policies because they involve the most subjective and complex assumptions andassessments, are subject to a great degree of fluctuation period over period and are the most critical to our operating performance:  revenues and revenue deductions, allowance for doubtful accounts and provision for doubtful accounts, insurance reserves,medical claims reserves, income taxes and impairment of long-lived assets and goodwill.

                Other than the update provided below, there have been no changes in the nature or application of our critical accounting policies andestimates as discussed in Note 3 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2006.

*                Allowance for Doubtful Accounts and Provision for Doubtful Accounts*

                Vanguard’s ability to collect the self-pay portions of outstanding receivables is critical to its operating performance and cashflows. The allowance for doubtful accounts was approximately 26.0% and 25.5% of accounts receivable, net of contractual discounts, as of June 30, 2006 and September 30, 2006, respectively. The primary collection risk relates to uninsured patient accounts and patientaccounts for which primary insurance has paid but patient deductibles or co-insurance portions remain outstanding. Vanguard estimates the allowance for doubtful accounts using a standard policy that reserves 100% of all accounts aged greater than 180 days subsequentto discharge date plus a pre-determined percentage of accounts receivable due from self-pay patients less than 180 days old. Vanguard adjusts its estimate as necessary on a quarterly basis using a hindsight calculation that utilizes write-off data for all payerclasses during**the previous twelve-month period to estimate the allowance for doubtful accounts at a point in time. Vanguard also monitors cash collections and self-pay utilization. Management believes that its standard policy is flexible to adapt to changingcollection and self-pay utilization trends and its procedures for testing the standard policy provide timely and accurate information. Significant changes in payer mix, business office operations, general economic conditions or healthcare coverage provided by federalor state governments or private insurers may have a significant impact on Vanguard’s estimates and significantly affect its operations and cash flows.

                Vanguard classifies accounts pending Medicaid approval as Medicaid accounts in its accounts receivable aging report and records amanual contractual allowance for these accounts equal to the average Medicaid reimbursement rate for that specific state.  Vanguard has historically been successful in qualifying approximately 55%-60% of submitted accounts for Medicaid coverage. As of September30, 2006, Vanguard had approximately $13.3 million of Medicaid pending accounts receivable from continuing operations ($4.9 million of which was stated at gross charges with a manual contractual allowance and $8.4 million of which was stated net of contractualdiscounts).  In the event an account is not successfully qualified for Medicaid coverage and does not meet Vanguard’s charity guidelines, the previously recorded Medicaid contractual adjustment remains a revenue deduction (similar to a self-pay discount),and the remaining net account balance is reclassified to self-pay status and subjected to Vanguard’s allowance for doubtful accounts policy. During the quarter ended September 30, 2006, approximately $2.5 million of net accounts receivable from continuingoperations was reclassified from Medicaid pending status to self-pay status. If the account does not qualify for Medicaid coverage but does qualify as charity care, the contractual adjustment is reversed and the gross account balance is recorded as a charitydeduction.  During the quarter ended September 30, 2006, Vanguard recorded approximately $1.4 million of charity deductions from continuing operations for the net balances of accounts previously classified as Medicaid pending that did not meet Medicaideligibility requirements.

                Because Vanguard requires patient verification of coverage at the time of admission or service, reclassifications of Medicare ormanaged care accounts to self-pay, other than patient coinsurance or deductible amounts, occur infrequently and are not material to its financial statements.  Additionally, the impact of these classification changes is further limited by Vanguard’s abilityto identify any necessary classification changes prior to patient discharge or soon thereafter.  Due to

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information system limitations and timing of claims or benefits adjudication, Vanguard is unable to quantify patient deductible and co-insurance receivables that are included in the primary payer classification in the accountsreceivable aging report at any given point in time.  Vanguard’s self-pay financial class includes uninsured patients and those patient co-insurance and deductible amounts for which payment has been received from the primary payer.  If primary paymenthas not been received for an account, the patient co-insurance and deductible amounts remain classified in the primary payer category. When classification changes occur, the account balance remains aged from the patient discharge date.

                *Long-Lived Assets and Goodwill*

                Long-lived assets, including property, plant and equipment and amortizable intangible assets, comprise a significant portion of ourtotal assets. We evaluate the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist under the provisions of SFAS 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.When we believe impairment indicators may exist, we prepare projections of the undiscounted future cash flows associated with the use of and eventual disposition of long-lived assets held for use. If the projections indicate that the carrying values of the long-livedassets are not expected to be recoverable, we reduce the carrying values to fair value. For long-lived assets held for sale, we compare the carrying values to an estimate of fair value less selling costs to determine potential impairment. We test for impairment oflong-lived assets at the lowest level for which cash flows are measurable. These impairment tests are heavily influenced by assumptions and estimates that are subject to change as additional information becomes available. Given the relatively few number of hospitalswe own and the significant amounts of long-lived assets attributable to those hospitals, an impairment of the long-lived assets for even a single hospital could materially adversely impact our operating results or statement of position.

                Goodwill also represents a significant portion of our total assets. We review goodwill for impairment annually during our fourth fiscalquarter or more frequently if certain impairment indicators arise under the provisions of SFAS 142, *Goodwill and Other Intangible Assets*. We review goodwill at the reporting level unit, which is one level below an operating segment. We compare the carryingvalue of the net assets of each reporting unit to the net present value of estimated discounted future cash flows of the reporting unit. If the carrying value exceeds the net present value of estimated discounted future cash flows, an impairment indicator exists andan estimate of the impairment loss is calculated. The fair value calculation includes multiple assumptions and estimates, including the projected cash flows and discount rates applied. Changes in these assumptions and estimates could result in goodwill impairmentthat could materially adversely impact our results of operations or statement of position.

                We have experienced gradual changes to the business climate at our Chicago hospitals, the most significant factor being payer mixshifts, which have resulted in weaker than expected operating results at those hospitals. We believe that these trends may not be temporary in nature and may not be sufficiently offset by various initiatives to improve operating results. Accordingly, we are in theprocess of assessing whether the goodwill or long-lived assets of these hospitals are impaired under the provisions of SFAS 142 or SFAS 144. As of September 30, 2006, approximately $169.3 million and $177.3 million of our consolidated goodwill and net property, plantand equipment balances, respectively, were attributable to the Chicago hospitals. The potential impairment charges related to these hospitals could materially adversely impact our financial position and results of operations.

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**Selected Operating Statistics**

The following table sets forth certain operating statistics from continuing operations for each of the periods presented.

|                                               |   |   |   | **(Unaudited) Quarter ended September 30,** |   |
|----------------------------------------------------|--------|--------|--------|---------------------------------------------|--------|
|                                                    |        |        |        |                                             |        |
|                                               |   |   |   | **2005**                                    |   |   | **2006** |   |
|                                                    |        |        |        |                                             |        |  |  |  |
| Number of hospitals at end of period               |   |   |   | 16                                          |        |   | 16 |  |
| Number of licensed beds at end of period           |   |   |   | 4,066                                       |        |   | 4,292 |  |
| Discharges (a)                                     |   |   |   | 41,745                                      |        |   | 42,387 |  |
| Adjusted discharges - hospitals (b)                |   |   |   | 69,080                                      |        |   | 67,747 |  |
| Net revenue per adjusted discharge - hospitals (c) |   |   | $      | 7,055                                       |        | $ | 7,519 |  |
| Patient days (d)                                   |   |   |   | 176,555                                     |        |   | 180,174 |  |
| Adjusted patient days - hospitals (e)              |   |   |   | 292,165                                     |        |   | 287,969 |  |
| Average length of stay (days) (f)                  |   |   |   | 4.23                                        |        |   | 4.25 |  |
| Outpatient surgeries (g)                           |   |   |   | 19,856                                      |        |   | 19,405 |  |
| Emergency room visits (h)                          |   |   |   | 146,595                                     |        |   | 146,788 |  |
| Occupancy rate (i)                                 |        |        |        | 47.2                                        | %      |  | 47.0 | % |
| Average daily census (j)                           |        |        |        | 1,919.0                                     |        |  | 1,958.0 |  |
| Member lives (k)                                   |        |        |        | 145,400                                     |        |  | 144,000 |  |
| Medical claims percentage (l)                      |        |        |        | 69.0                                        | %      |  | 73.9 | % |

| ____________________ |
|----------------------|
| (a)                  |   | Discharges represent the total number of patients discharged (in the facility for a period in excess of 23 hours) from our hospitals and is used by management and certain investors as a general measure of inpatientvolumes. |
|                 |   |   |
| (b)                  |   | Adjusted discharges-hospitals is used by management and certain investors as a general measure of combined hospital inpatient and outpatient volumes.  Adjusted discharges-hospitals is computed by multiplying discharges bythe sum of gross hospital inpatient and outpatient revenues and then dividing the result by gross hospital inpatient revenues.  This computation enables management to assess hospital volumes by a combined measure of inpatient and outpatientutilization. |
|                 |   |   |
| (c)                  |   | Net revenue per adjusted discharge-hospitals is calculated by dividing net hospital patient revenues by hospital adjusted discharges and measures the average net payment expected to be received for a patient’s stay inthe hospital. |
|                 |   |   |
| (d)                  |   | Patient days represent the number of days (calculated as overnight stays) our beds were occupied by patients during the periods. |
|                 |   |   |
| (e)                  |   | Adjusted patient days-hospitals is calculated by multiplying patient days by the sum of gross hospital inpatient and outpatient revenues and then dividing the result by gross hospital inpatient revenues.  This computationis an indicator of combined inpatient and outpatient volumes. |
|                 |   |   |
| (f)                  |   | Average length of stay represents the average number of days an admitted patient stays in our hospitals. |
|                 |   |   |
| (g)                  |   | Outpatient surgeries represent the number of surgeries performed at hospitals or ambulatory surgery centers on an outpatient basis (patient overnight stays not necessary). |
|                 |   |   |
| (h)                  |   | Emergency room visits represent the number of patient visits to a hospital emergency room where treatment is received, regardless of whether an overnight stay is subsequently required. |
|                 |   |   |
| (i)                  |   | Occupancy rate represents the percentage of hospital licensed beds occupied by patients.  Occupancy rate provides a measure of the utilization of inpatient rooms. |
|                 |   |   |
| (j)                  |   | Average daily census represents the average number of patients in our hospitals each day during our ownership. |
|                 |   |   |
| (k)                  |   | Member lives represent the total number of enrollees in our PHP, AAHP and MHP health plans as of the end of the respective period. |
|                 |   |   |
| (l)                  |   | Medical claims percentage is calculated by dividing medical claims expense by premium revenues. |

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**Results of Operations
                The following table presents summaries of our operating results for the quarters ended September 30, 2005 and 2006.

 

 

**(Unaudited) Quarter ended September 30,**

 

 

 

 

**2005**

 

**2006**

 

 
****
 
****
 

 

**Amount**

 

**%**

** **

** **

**Amount**

** **

** **

**%**

 

 

 
****
 
****
 

 

*(In millions)*

 

 

** **

Patient service revenues

 

$

519.5

 

 

 

85.8

%

 

$

537.9

 

 

 

84.7

%

Premium revenues

 

 

86.1

 

 

 

14.2

%

 

 

97.0

 

 

 

15.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

605.6

 

 

 

100.0

%

 

634.9

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and benefits (includes stock compensation of $0.3    for both periods presented)

 

 

246.1

 

 

 

40.6

%

 

 

268.2

 

 

 

42.3

%

Supplies

 

 

98.9

 

 

 

16.3

%

 

 

103.5

 

 

 

16.3

%

Medical claims expense

 

 

59.4

 

 

 

9.8

%

 

 

71.7

 

 

 

11.3

%

Provision for doubtful accounts

 

 

46.5

 

 

 

7.7

%

 

 

42.1

 

 

 

6.6

%

Other operating expenses

 

 

89.7

 

 

 

14.8

%

 

 

95.4

 

 

 

15.0

%

Depreciation and amortization

 

 

23.3

 

 

 

3.9

%

 

 

29.4

 

 

 

4.6

%

Interest, net

 

 

24.7

 

 

 

4.1

%

 

 

29.9

 

 

 

4.7

%

Minority interests and other expenses

 

 

1.5

 

 

0.2

%

 

 

(0.8

)

 

 

(0.1

)%

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations before income taxes

 

 

15.5

 

 

 

2.6

%

 

 

(4.5

)

 

 

(0.7

)%

Income tax expense (benefit)

 

 

6.6

 

 

 

1.1

%

 

 

(1.6

)

 

 

(0.2

)%

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

8.9

 

 

 

1.5

%

(2.9

)

(0.5

)%

Discontinued operations, net of taxes

(1.6

)

(0.3

)%

(4.8

)

(0.7

)%

Net income (loss)

 

$

7.3

 

 

 

1.2

%

 

$

(7.7

)

 

 

(1.2

)%

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

**Quarter ended September 30, 2006 compared to Quarter ended September 30, 2005**

                *Revenues*.  Revenues increased $29.3 million during the quarter ended September 30, 2006 compared to the prior year quarterdue to improved reimbursement for services provided.  Net revenue per adjusted hospital discharge from continuing operations increased by 6.6% quarter over quarter.  Our service expansion initiatives and managed care contracting strategies playedsignificant roles in our rate improvements.  Hospital adjusted discharges from continuing operations decreased 1.9% during the current year quarter.  We attribute this weakened demand to multiple factors including patient wellness, greater competition fromother hospitals in recruiting and retaining quality physicians, decreases in subacute discharges as a result of regulatory changes and reduced elective outpatient procedures resulting from an increase in the number of uninsured patients or those insured patients withhigher coinsurance and deductibles limits.  Emergency room visits were flat quarter over quarter, and outpatient surgery volumes decreased 2.3% during the current year quarter.  Outpatient surgeries were negatively impacted by the sale of our partnershipinterest in a San Antonio surgery center in October 2005.  We expect revenue growth to continue during the remainder of our current fiscal year, although factors outside our control including patient demand for healthcare services and increased competition couldlimit such growth.

                Premium revenues increased 12.7% during the current year quarter as a result of the start of AAHP’s operations on January 1,2006. Approximately 3,500 former PHP enrollees are now AAHP enrollees.  Per member per month reimbursement rates are significantly higher under AAHP than under the traditional AHCCCS Medicaid program.  Per member per month reimbursement for PHP alsoincreased quarter over quarter as a result of an AHCCCS rate increase effective October 1, 2005.

                We continue to focus on implementing the appropriate service line mix that both meets the needs of our patients and improves ouroperating results.  The success of this strategy depends on our physician recruitment and retention initiatives, emergency department and throughput design improvements, surgery unit expansions and primary care development initiatives.  We believe thatthese initiatives and the favorable demographic trends in most of our markets will position us to recapture patient volumes once demand for healthcare services recovers.

                *Costs and Expenses*.  Total costs and expenses, exclusive of income taxes and discontinued operations, were $639.4 millionor 100.7% of total revenues during the current year quarter, compared to 97.4% during the prior year quarter.  Salaries and benefits, supplies, medical claims and provision for doubtful accounts represent the most significant of our normal costs and expenses orthose subject to the greatest level of fluctuation period over period.

               •

  

**Salaries and benefits.  Salaries and benefits as a percentage of total revenues increased to 42.3% during the current year quarter from 40.6% during the prior year quarter.  We attribute this increaseprimarily to staffing mix challenges in our Arizona and San Antonio hospitals.  During the current year quarter, portions of our significant expansion projects in San Antonio and Arizona were staffed to begin operations.  During the transition period ofproviding new services, salaries and benefits costs often precede the revenue growth associated with those services.  The national nursing shortage also continues to hinder our ability to fully manage salaries and benefits.  Adjusting staffing levels duringperiods of weakened demand for healthcare services is more difficult when nursing resources are constrained limiting our ability to re-adjust staffing levels when demand recovers. We expect the nursing shortage to continue to pressure our salaries and benefits costs,although we expect our comprehensive recruiting and retention plan to mitigate these pressures.
 

 

** **

               •

**Supplies.  Supplies as a percentage of total revenues remained consistent at 16.3% during the current year quarter compared to the prior year quarter.  We continue to implement our materials managementstrategies including efforts to increase utilization of our group purchasing organization.  Because our growth strategies include expansion of high acuity services, we do not expect to realize significant future decreases in this ratio.  Price increases forpharmaceuticals and medical supplies, including the impact of increased use of drug-eluting stents, could have a significant adverse impact on future supplies costs.
 

 

** **

               •

**Medical claims.  Medical claims expense as a percentage of premium revenues increased from 69.0% to 73.9% during the current year quarter compared to the prior year quarter as a result of reserve adjustmentsat PHP during the prior year quarter.  Medical claims expense represents the amounts paid by the health plans for healthcare services provided to their members, including an estimate of incurred but not yet reported claims that is determined based upon lag dataand other actuarial assumptions.  Revenues and expenses between the health plans and our hospitals and related outpatient service providers of approximately $9.1 million, or 11.3% of gross
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health plan medical claims expense, were eliminated in consolidation during the current year quarter.

 

 

 

               •

**Provision for doubtful accounts.  During the current year quarter, the provision for doubtful accounts as a percentage of patient service revenues decreased to 7.8% during the current year quarter from 8.9%during the prior year quarter.  This decrease is primarily due to the significant quarter over quarter increase in patient accounts qualifying for charity care, including border funding coverage.  During the quarters ended September 30, 2005 and 2006, werecorded $15.9 million and $23.3 million of charity care revenue deductions from continuing operations, respectively.  While self-pay discharges as a percentage of total discharges remained steady at 3.6% for both the current and prior year quarters, more of theself-pay accounts were recorded as charity deductions during the current year quarter resulting in a reduction to the provision for doubtful accounts.  On a combined basis, the provision for doubtful accounts and charity care deductions as a percentage ofpatient service revenues increased to 12.2% during the current year quarter compared to 12.0% during the prior year quarter.  Collecting outstanding self-pay accounts remains difficult; however, we have experienced improved upfront cash collections and successin qualifying patients for coverage under Medicaid or similar programs.
                *Income taxes*. Our effective tax rate decreased from approximately 42.6% during the prior year quarter to approximately 35.6%during the current year quarter due primarily to an increase in the valuation allowance attributable to deferred tax assets during the current year quarter.

                *Net income*.  The $15.0 million quarter over quarter decrease in net income resulted primarily from the increased salariesand benefits and medical claims expenses described above, increased depreciation and amortization resulting from the completion of portions of our expansion projects and increased net interest resulting from the $175.0 million term loan borrowing in September2005.

**Liquidity and Capital Resources**

                *Operating Activities. * At September 30, 2006, we had working capital of $192.1 million, including cash and cash equivalentsof $95.1 million.  Working capital at June 30, 2006 was $193.0 million.  Cash provided by operating activities increased $30.8 million quarter over quarter.  The increase in operating cash flows was primarily due to a significant increase in thepayments of liabilities during the prior year quarter including accounts payable, accrued interest and accrued health plan claims payable compared to the current year quarter.  Payments of accounts payable and accrued health plan claims payable stabilized duringthe current year quarter to more normal levels.  We made the semi-annual interest payment on our 9.0% Notes at the end of September in the prior year, while this payment was made in early October of the current year.  The improved cash flows related to thetiming of the payments of liabilities was offset by an increase in net accounts receivable days from 57.2 during the prior year quarter to 59.8 during the current year quarter.

                *Investing Activities*.  Cash used in investing activities decreased from $59.8 million during the prior year quarter to$28.6 million during the current year quarter, primarily as a result of a $23.1 million quarter over quarter decrease in capital expenditures. 

                We spent $37.2 million for capital expenditures from continuing operations during the current year quarter.  In May 2004 and July2005, our board of directors approved material new internal construction projects at six of our existing hospitals in San Antonio and metropolitan Phoenix.  We have spent $256.1 million for these projects since inception through September 30, 2006 and expect tospend an estimated additional $78.9 million through fiscal year 2008.  All of these projects will result in expanded capacity at each of the six hospitals. In addition, most of the projects will facilitate an expansion of clinical servicecapabilities.

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                The following table summarizes these major expansion projects as of November 1, 2006.

**Hospital**

**Estimated Construction Period**

**Approximate Additional Licensed Bed Capacity**

**Approximate Additional Licensed Beds Completed**

**Additional Emergency Room Positions**

**Additional Operating Rooms**

**Additional Labor & Delivery Rooms**

**Begin**

**Completed**

**Phoenix**

 

 

 

 

 

 

 

 

 

 

 

 

Arrowhead Hospital

Q4 FY 04

 

Q2 FY 07

 

100

 

100

P

 

P

 

P

Paradise Valley Hospital

 

Q1 FY 07

 

Q4 FY 08

 

22(4)

 

0

(2)

 

P

 

P

West Valley Hospital

 

Q1 FY 06

 

Q4 FY 07

 

57

 

32

P

 

P

 

(1)

** **

 

 

 

 

 

 

 

 

 

 

 

**San Antonio**

 

 

 

 

 

 

 

 

 

 

 

North Central Baptist Hospital

 

Q4 FY 04

 

Q2 FY 07

 

140

 

140

P

 

P

 

P

Northeast Baptist Hospital

 

Q4 FY 04

 

Q2 FY 07

 

33(3)

 

33

P

 

P

 

P

St. Luke’s Baptist Hospital

Q2 FY 06

Q3 FY 07

27

27

____________________

(1)

 

Will increase post partum capacity to better utilize labor, delivery and recovery suites.

(2)

An expanded emergency room was opened in July 2004, expanding capacity from 16 to 28 bays.

(3)

 

In addition to increasing the number of licensed beds by 33, the expansion project will allow for the utilization of an additional 67 previously licensed beds.

(4)

 

In addition to increasing the number of licensed beds by 22, the expansion will allow for the utilization of an additional 18 previously licensed beds.

                We anticipate spending a total of $230.0 million to $250.0 million in capital expenditures during fiscal 2007 including the $37.2million spent through September 30, 2006.  This estimate includes the expansion projects mentioned above and all other renovation projects and technology upgrades at our facilities. These capital expenditures will be funded by cash on hand, cash flows fromoperations and availability under our revolving credit facility. We believe our capital expenditure program is sufficient to service, expand and improve our existing facilities to meet our quality objectives.

                *Financing Activities*.  Cash flows from financing activities decreased by $153.1 million during the current year quartercompared to the prior year quarter, due to the $175.0 million in term loan borrowings during September 2005.

                As of September 30, 2006, we had outstanding $1,521.5 million in aggregate indebtedness, with an additional $207.2 million of availableborrowing capacity under our revolving credit facility ($250.0 million net of outstanding letters of credit of $42.8 million). Our liquidity requirements are significant, primarily due to debt service requirements. The 9.0% Notes require semi-annual interestpayments. Prior to October 1, 2009, our interest expense on the 11.25% Notes will consist solely of non-cash accretions of principal.

                Our previous senior secured credit facilities executed in September 2004 consisted of a revolving credit facility and the initial termloan facility. Our revolving credit facility provides for loans in a total principal amount of up to $250.0 million, and matures in September 2010. The initial term loan facility, which was scheduled to mature in September 2011, provided for loans in a totalprincipal amount of up to $800.0 million as follows: (1) $475.0 million borrowed on September 23, 2004 to finance the Blackstone merger, to refinance our then existing indebtedness and to pay fees and expenses relating thereto; (2) $150.0 million borrowed on December31, 2004 and February 18, 2005 to finance the acquisition of our Massachusetts hospitals and for other general corporate purposes and (3) $175.0 million borrowed in September 2005 to fund capital expenditures and for other general corporate purposes.

                On September 26, 2005, we refinanced and repriced all $795.7 million of the outstanding term loans under the initial term loan facilityby borrowing $795.7 million of replacement term loans (the “2005 term loan facility”).

                The 2005 term loan facility borrowings bear interest at a rate equal to, at our option, a base rate plus 1.25% per annum or LIBOR plus2.25% per annum. These rates reflect a savings of 1.0% per annum over the interest rate options for our previous initial term loan facility. The borrowings under the revolving credit facility currently bear interest at a rate equal to, at our option, a base rate plus1.00% per annum or LIBOR plus 2.00% per annum. These rates are subject to increase by up to 0.50% per annum should our leverage ratio exceed certain designated levels.

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                We are required to pay a commitment fee to the lenders under the revolving credit facility in respect of the unutilized commitmentsthereunder at a rate equal to 0.50% per annum.  We also pay customary letter of credit fees.

                The 2005 term loan facility and the revolving credit facility contain a number of covenants that, among other things, restrict, subjectto certain exceptions, our ability, and the ability of our subsidiaries, to sell assets, incur additional indebtedness or issue preferred stock, repay other indebtedness (including the 9.0% Notes and 11.25% Notes), pay dividends and distributions or repurchase ourcapital stock, create liens on assets, make investments, loans or advances, make certain acquisitions, engage in mergers or consolidations, enter into sale and leaseback transactions, engage in certain transactions with affiliates, amend certain material agreementsgoverning our indebtedness, including the 9.0% Notes and 11.25% Notes, change the business conducted by our subsidiaries and enter into hedging agreements. In addition, the senior credit facilities require us to maintain the following financial covenants: a maximumtotal leverage ratio, a maximum senior leverage ratio, a minimum interest coverage ratio and a maximum capital expenditures limitation.

                As of September 30, 2006, we were in compliance with the debt covenant ratios as defined in our senior secured credit agreement, asfollows.

 

 

**Debt Covenant Ratio**

    

**Actual Ratio**

 

 

Interest coverage ratio requirement

 

2.00x

 

2.52x

Total leverage ratio limit

 

5.95x

 

4.47x

Senior leverage ratio limit

 

3.75x

 

2.10x

                The senior credit facilities and the indentures governing the 9.0% Notes and the 11.25% Notes limit our ability to:

              •  incur additional indebtedness or issue preferred stock;

              •  pay dividends on or make other distributions or repurchase our capital stock or make other restricted payments;

              •  make investments;

              •  enter into certain transactions with affiliates;

              •  pay dividends or other similar payments by our subsidiaries;

              •  create liens on *pari passu* or subordinated indebtedness without securing the Notes;

              •  designate the issuers’ subsidiaries as unrestricted subsidiaries; and

              •  sell certain assets or merge with or into other companies or otherwise dispose of all or substantially all of their                   assets.

                The table below summarizes our credit ratings as of the date of this filing.

**Standard & Poor’s**

               

**Moody’s**

 

 

Corporate credit rating

B

 

B2

9% Senior Subordinated Notes            

CCC+

 

Caa1

111⁄4% Senior Discount Notes

CCC+

 

Caa1

Senior credit facilities

B

 

Ba3

                *Capital Resources*.  We expect that cash generated from our operations and cash available to us under our revolving creditfacility will be sufficient to meet our working capital needs, debt service requirements and planned capital expenditure programs that we consider necessary to continue our growth. However, we cannot assure you that our operations will

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generate sufficient cash or that future borrowings under our refinanced senior credit facilities will be available to enable us to meet these requirements and needs.

                We also intend to continue to pursue acquisitions or partnering arrangements, either in existing markets or new markets, which fit ourgrowth strategies. To finance such transactions, we might have to draw upon amounts available under our revolving credit facility or seek additional funding sources. We continually assess our capital needs and may seek additional financing, including debt or equity,as considered necessary to fund potential acquisitions, fund capital projects or for other corporate purposes. However, should our operating results and borrowing capacities not sufficiently support these capital projects or acquisition opportunities, our growthstrategies may not be fully realized. Our future operating performance, ability to service or refinance our new debt and ability to draw upon other sources of capital will be subject to future economic conditions and other business factors, many of which are beyond our control.

**Guarantees and Off Balance Sheet Arrangements**

                We are a party to certain rent shortfall agreements with certain unconsolidated entities and other guarantee arrangements, includingparent-subsidiary guarantees, in the ordinary course of business. We have not engaged in any transaction or arrangement with an unconsolidated entity that is reasonably likely to materially affect liquidity.

**Obligations and Commitments**

                The following table reflects a summary of obligations and commitments outstanding, including both the principal and interest portionsof long-term debt and capital leases, with payment dates as of September 30, 2006.

 

 

**Payments due by period**

** **

** **

 

 

 
****
** **

** **

 

 

 

**Within 1 year**
** **
**During Years 2-3**

** **

**During Years 4-5**

** **

**After 5 years**

** **

**Total**

 

 

 
**
 

**Contractual Cash Obligations:**

 

*(In millions)*

 

Long-term debt

 

$

121.5

 

 

$

241.0

 

 

$

990.2

 

 

$

1,081.5

 

$

 

2,434.2

 

Capital lease obligations

 

0.2

 

 

–

 

–

 

 

–

 

 

0.2

 

Operating leases

 

 

26.8

 

 

 

41.3

 

25.8

 

 

 

44.8

 

 

 

138.7

 

Purchase obligations

 

 

26.5

 

 

 

–

 

–

 

 

 

–

 

 

 

26.5

 

Health claims payable

46.6

–

–

–

46.6

Estimated self-insuranceliabilities                               

 

 

21.3

 

 

 

36.3

 

18.1

 

 

 

6.1

 

 

 

81.8

 

 

 

 

 

 

 

 

 

 

 

    Subtotal

 

$

242.9

 

 

$

318.6

 

$

1,034.1

 

 

$

1,132.4

 

 

$

2,728.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
****
** **

** **

 

 

 

**Within 1 year**
** **
**During Years 2-3**

** **

**During Years 4-5**

** **

**After 5 years**

** **

**Total**

 

 

 
**
 

**Other Commitments:**

 

*(In  millions)*

 

Construction and improvements commitments             

$

63.4

 

 

$

22.0

$

3.8

 

 

$

–

 

$

 

89.2

 

Guarantees of surety bonds

 

18.0

 

 

–

 

 

–

 

 

–

 

 

18.0

 

Letters of credit

 

–

 

 

–

 

42.8

 

 

–

 

 

42.8

 

Physician commitments

 

 

8.7

 

 

 

–

 

–

 

 

 

–

 

 

 

8.7

 

Minimum rent revenue commitments

0.2

–

–

–

0.2

 

    Subtotal

 

$

90.3

 

 

$

22.0

 

$

46.6

 

 

$

–

 

 

$

158.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Total obligations and commitments

$

333.2

$

340.6

$

1,080.7

 

 

$

1,132.4

$

2,886.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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**Item 3.    Quantitative and Qualitative Disclosures About Market Risk.**

****

                    We are subject to market risk from exposure to changes in interest rates based on our financing, investing, andcash management activities. As of September 30, 2006, we had in place $1,037.8 million of senior credit facilities bearing interest at variable rates at specified margins above either the agent bank’s alternate base rate or its LIBOR rate. The senior creditfacilities consist of $787.8 million in term loans maturing in September 2011 and a $250.0 million revolving credit facility maturing in September 2010 (of which $42.8 million of capacity was utilized by outstanding letters of credit as of September 30, 2006).Although changes in the alternate base rate or the LIBOR rate would affect the cost of funds borrowed in the future, we believe the effect, if any, of reasonably possible near-term changes in interest rates would not be material to our results of operations or cashflows. Holding other variables constant, including levels of indebtedness, a 0.125% increase in interest rates would have an annual estimated impact on pre-tax income and cash flows of approximately $1.0 million.

                    The $250.0 million revolving credit facility bears interest at the alternate base rate plus a margin rangingfrom 1.00%-1.50% per annum or the LIBOR rate plus a margin ranging from 2.00%-2.50% per annum, in each case dependent upon our leverage ratio. The revolving credit facility matures in September 2010. The $787.8 million in outstanding term loans bear interest at thealternate base rate plus a margin of 1.25% per annum or the LIBOR rate plus a margin of 2.25% per annum and mature in September 2011.  The interest rate for the term loans was approximately 7.9% as of September 30, 2006.

                    From time to time, we use derivatives such as interest rate swaps to manage our market risk associated withvariable rate debt or similar derivatives for fixed rate debt. We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage features.

**Item 4.    Controls and Procedures.**

**                Evaluation of Disclosure Controls and Procedures**

                As of the end of the period covered by this report, our management conducted an evaluation, with the participation of our chiefexecutive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Based on this evaluation, ourchief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, asappropriate to allow timely decisions regarding required disclosure.

**                Changes in Internal Control Over Financial Reporting**

                There were no changes in our internal control over financial reporting during our fiscal quarter ended September 30, 2006, that hasmaterially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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**PART IIOTHER INFORMATION**

**Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.**

                (a)           During the quarterly period ended September 30, 2006, we issued thesecurities described below that were not registered under the Securities Act of 1933. The transaction described below was conducted in reliance upon the exemption from registration provided in Rule 701 of the Securities Act for a sale of securities under a writtencompensatory benefit plan established by the issuer for the participation of its current and former employees. This sale was made without the use of an underwriter, and the certificate evidencing the securities issued in connection with this transaction bears arestrictive legend permitting transfer of the securities only upon registration under the Securities Act or pursuant to an exemption from registration.

                On July 6, 2006, for an aggregate purchase price of $36,000, we issued 36 shares of our common stock to a former employee upon herexercise of vested options which would have otherwise expired 90 days after her termination of employment.

**Item 6.    Exhibits.**

                The exhibits filed as part of this report are listed in the Index to Exhibits which is located at the end of this report.

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**SIGNATURE**

****

                Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

DATE:     November 9,2006                                                                              VANGUARD HEALTH SYSTEMS, INC.

                                                                                                               BY:          /s/ Phillip W.Roe                                                                                                                                                                               *Phillip W. Roe                                                                                                                               Senior Vice President, Controller and                                                                                                                               Chief Accounting Officer*                                                                                                                               (Authorized Officer and Chief Accounting Officer)

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**INDEX TO EXHIBITS**

**Exhibit No.     **

  

**Description**

 

 

 

10.1

 

Contract Amendment Number 15, executed on September 5, 2006, but effective as of October 1, 2006, to the Arizona Health Care Cost Containment System Administration Contract No. YH04-0001-06 between Phoenix Health Plan and theArizona Health Care Cost Containment System. (Incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 8, 2006, File No. 333-71934.)

 

 

 

31.1

 

Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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