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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

|           |  |                                                                                                                                    
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------
|(Mark One)
|x          |  | Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 2002 or
|           |  |                                                                                                                                    
|[   ]      |  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934                                           
|           |  | For the Transition Period from 
to                                                                                                 

Commission File Number 0-23639

PROVINCE HEALTHCARE COMPANY
(Exact Name of Registrant Specified in Its Charter)

|                                                                                           |  |                                                
|------------------------------------------------------------------------------------------ |  | -----------------------------------------------
|Delaware
(State or Other Jurisdiction of
Incorporation or Organization)                    |  | 62-1710772
(I.R.S. Employer
Identification No.)
|                                                                                           |  |                                                
|105 Westwood Place
Suite 400
Brentwood, Tennessee
(Address of Principal Executive Offices) |  | 37027
(Zip Code)                               

(615) 370-1377
(Registrants Telephone Number, Including Area Code)

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

Securities registered pursuant to Section 12 (g) of the Act:

Common Stock, $.01 Par Value Per Share
(Title of Class)

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

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

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X]          No [   ]

The aggregate market value of the shares of Common Stock of the Registrant
held by nonaffiliates on June 28, 2002 (the last business day of the
Registrants second fiscal quarter) was $1,065,041,547 (based upon the closing
price of $22.36 per share as reported on the New York Stock Exchange on such
date).

As of March 1, 2003, 48,713,946 shares of the Registrants Common Stock
were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants Definitive Proxy Statement for the 2003
Annual Meeting of Shareholders are incorporated by reference under Part III of
this report. The Proxy Statement will be filed with the Securities and
Exchange Commission within 120 days after December 31, 2002.





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TABLE OF CONTENTS



|                                        |                                                                                                         |  |  |  |  |  |  | 
|--------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                 
|                                        | ITEM 1. BUSINESS                                                                                       
|                                        | ITEM 2. PROPERTIES                                                                                     
|                                        | ITEM 3. LEGAL PROCEEDINGS                                                                              
|                                        | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            
|PART II                                
|                                        | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                          
|                                        | ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                           
|                                        | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                    
|                                        | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    
|                                        | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           
|PART III                               
|                                        | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                            
|                                        | ITEM 11. EXECUTIVE COMPENSATION                                                                        
|                                        | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|                                        | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                
|                                        | ITEM 14. CONTROLS AND PROCEDURES                                                                       
|PART IV                                
|                                        | ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                  
|SIGNATURES                             
|Certification                          
|EX-10.12  EXECUTIVE SEVERANCE AGREEMENT
|EX-10.14  EXECUTIVE SEVERANCE AGREEMENT
|SUBSIDIARIES OF THE REGISTRANT         
|EX-23.1  CONSENT OF ERNST & YOUNG LLP  



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FORWARD-LOOKING STATEMENTS

Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Such statements may
include words such as anticipate, estimate, expect, project, intend,
plan, believe and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. Any or all
of our forward-looking statements in this report may turn out to be wrong. They
can be affected by inaccurate assumptions we might make or by known or unknown
risks and uncertainties. Many factors mentioned in our discussion in this
report will be important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future results may vary
materially. Factors that may cause our plans, expectations, future financial
condition and results to change include, but are not limited to:



| |  |  | the highly competitive nature of the healthcare business;                                                                                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the efforts of insurers, healthcare providers and others to contain healthcare costs;                                                                         
|
| |  |  | the financial condition of managed care organizations that pay us for healthcare services;                                                                    
|
| |  |  | possible changes in the levels and terms of reimbursement for
our charges by government programs, including Medicare and Medicaid
or other third-party payors;
|
| |  |  | changes in or failure to comply with federal, state or local
laws and regulations affecting the healthcare industry;                                          
|
| |  |  | the possible enactment of federal or state healthcare reform;                                                                                                 
|
| |  |  | the departure of key members of our management;                                                                                                               
|
| |  |  | claims and legal actions relating to professional liability;                                                                                                  
|
| |  |  | our ability to implement successfully our acquisition and development strategy;                                                                               
|
| |  |  | our ability to recruit and retain qualified personnel and physicians;                                                                                         
|
| |  |  | potential federal or state
investigations;                                                                                                                    
|
| |  |  | fluctuations in the market value of our common stock or notes;                                                                                                
|
| |  |  | changes in accounting principles generally accepted in the
United States or in our critical accounting policies;                                              
|
| |  |  | changes in demographic, general economic and business
conditions, both nationally and in the regions in which we operate;                                     
|
| |  |  | changes in the availability, cost and terms of insurance
coverage for our hospitals and physicians who practice at our
hospitals; and                         
|
| |  |  | other risks described in this report.                                                                                                                         

Except as required by law, we undertake no obligation to publicly update
any forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any additional
disclosures we make in our Form 10-K, 10-Q and 8-K reports to the Securities
and Exchange Commission, as well as the discussion of risks and uncertainties
under the caption Principal Risk Factors That May Affect Our Business and
Results of Operations contained elsewhere in this report. These are factors
that we think could cause our actual results to differ materially from expected
results. Other factors besides those listed here also could affect us
adversely. You are cautioned not to place undue reliance on such
forward-looking statements when evaluating the information presented in this
report. This discussion is provided as permitted by the Private Securities
Litigation Reform Act of 1995.





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PROVINCE HEALTHCARE COMPANY

FORM 10-K ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

|         |     |  |  |                                                                                       |                |      |    |  |  | 
|-------- | --- |  |  | ------------------------------------------------------------------------------------- | -------------- | ---- | -- |  |  | 
|Item     |     |  |  |                                                                                       |                | Page
|PART I  
|         | 1.  |  |  | Business                                                                              |                |      | 1  | 
|         | 2.  |  |  | Properties                                                                            |                |      | 23 | 
|         | 3.  |  |  | Legal Proceedings                                                                     |                |      | 23 | 
|         | 4.  |  |  | Submission of Matters to a Vote of Security Holders                                   |                |      | 23 | 
|         |     | 
|PART II 
|         | 5.  |  |  | Market for the Registrants Common Equity and Related Stockholder Matters             |                |      | 24 | 
|         | 6.  |  |  | Selected Financial Data                                                               |                |      | 24 | 
|         | 7.  |  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |                |      | 25 | 
|         | 7A. |  |  | Quantitative and Qualitative Disclosures About Market Risk                            |                |      | 34 | 
|         | 8.  |  |  | Financial Statements and Supplementary Data                                           |                |      | 35 | 
|         | 9.  |  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |                |      | 36 | 
|         |     | 
|PART III
|         | 10. |  |  | Directors and Executive Officers of the Registrant                                    |                |      | 36 | 
|         | 11. |  |  | Executive Compensation                                                                |                |      | 36 | 
|         | 12. |  |  | Security Ownership of Certain Beneficial Owners and Management and Related            |                |      | 36 | 
|         |     |  |  | Stockholder Matters                                                                   |                |      |    | 
|         | 13. |  |  | Certain Relationships and Related Transactions                                        |                |      | 36 | 
|         | 14. |  |  | Controls and Procedures                                                               |                |      | 36 | 
|         |     | 
|PART IV 
|         | 15. |  |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |                |      | 38 | 
|         |     |  |  |                                                                                       | Exhibit
Index  |      | 38 | 
|         |     |  |  |                                                                                       | Signatures     |      | 43 | 
|         |     |  |  |                                                                                       | Certifications |      | 44 | 





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PART I




ITEM 1.     BUSINESS

Overview

We own and operate acute care hospitals located in non-urban markets. We
currently own or lease 20 general acute care hospitals in 13 states with a
total of 2,284 licensed beds. Our objective is to be the primary provider of
quality healthcare services in the selected non-urban markets that we serve.
We target hospitals for acquisition that are the sole or a primary provider of
healthcare in the non-urban communities that they serve. After acquiring a
hospital, we implement a number of strategies designed to improve financial
performance. These strategies include improving hospital operations, expanding
the breadth of services and recruiting and retaining physicians to increase
market share.

What We Do

Our general acute care hospitals typically provide a full range of
services commonly available in acute care hospitals, such as internal medicine,
general surgery, cardiology, oncology, orthopedics, obstetrics, rehabilitation,
subacute care, as well as diagnostic and emergency services. Our hospitals
also generally provide outpatient and ancillary healthcare services such as
outpatient surgery, laboratory, radiology, respiratory therapy, home healthcare
and physical therapy. In addition, certain of our general acute care hospitals
have a limited number of licensed psychiatric beds. We provide capital
resources and make available a variety of management services to our owned and
leased hospitals. In addition, we provide management services to 36 primarily
non-urban hospitals that we do not own or lease in 14 states with a total of
2,896 licensed beds. For the year ended December 31, 2002, our owned and
leased hospitals accounted for 97.9% of our net operating revenue.

The Non-Urban Healthcare Market

According to 2000 U.S. Census Bureau statistics, over one-third of the
people in the United States live in counties with a population of less than
150,000. In these non-urban areas, hospitals are typically the primary resource
for healthcare services, and in many cases the local hospital is the only
provider of acute hospital services. According to the Centers for Medicare and
Medicaid Services, as of October 1, 2002, there were approximately 2,200
non-urban hospitals in the country. Of those, approximately 1,100 hospitals
meet our acquisition criteria described below.

We believe that non-urban areas are attractive markets in which to operate
hospitals. Because non-urban service areas have smaller populations, only one
or two hospitals generally are located in each market. We believe the size and
demographic characteristics of non-urban markets and the relative strength of
the local hospital also make non-urban markets less attractive to health
maintenance organizations, other forms of managed care, and alternate site
providers, such as full service outpatient surgery centers, rehabilitation or
diagnostic imaging providers.

We believe that a significant opportunity for consolidation exists in the
non-urban healthcare market. Despite the attractive characteristics of these
markets for healthcare service providers, many not-for-profit and governmental
operators of non-urban hospitals are under increasing pressure due to capital
constraints, limited management resources and the challenges of managing in a
complex healthcare regulatory environment. This combination of factors often
causes these operators to limit the range of services offered through their
non-urban hospitals. As a result, patients, by choice or physician direction,
may obtain care outside of the community. This out-migration often leads to
deteriorating operating performance at the hospital, further limiting its
ability to address the issues that initially led to these pressures. As a
result of these pressures, not-for-profit and governmental hospitals
increasingly are selling or leasing these hospitals to companies, like us, that
have greater financial and management resources, coupled with proven operating
strategies, to help serve the community better.

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Business Strategy

The key elements of our business strategy are to:

Acquire Hospitals in Attractive Non-Urban Markets. We seek to acquire
hospitals that are the sole or a primary provider of healthcare services in
their markets and that present the opportunity to increase profitability and
local market share. We believe that approximately 1,100 non-urban hospitals in
the United States meet our acquisition criteria; however, we remain selective
in our acquisition decisions.

Improve Hospital Operations. Following the acquisition of a hospital, we
augment local management with appropriate operational and financial managers
and install our standardized information system. Using demonstrated best
practices, the local management team implements expense controls, manages
staffing levels according to patient volumes, reduces supply costs by requiring
strict compliance with our supply arrangements and often renegotiates vendor
contracts. By implementing this strategy, we seek to improve operating
performance at each of the hospitals we acquire.

Expand Breadth of Services to Increase Market Share and Reduce Patient
Out-migration. We seek to provide additional healthcare services and programs
in response to community needs. These services may include specialty inpatient,
outpatient and rehabilitation services. We also may make capital investments
in technology and physical plant to improve both the quality of healthcare and
the reputation of the hospital in the community. By providing a broader range
of services in a more attractive setting, we encourage residents in our markets
to seek care in our hospitals, thereby reducing patient out-migration and
increasing hospital revenues.

Recruit and Retain Physicians. We believe that recruiting physicians into
local communities and retaining their services at our hospitals are key to
increasing the quality of healthcare and breadth of available services. We work
with the local hospital board, management and medical staff to determine the
number and type of additional physicians needed in the community. Our Vice
President of Medical Staff Development and his staff then assists the local
management team and local hospital boards in identifying and recruiting
specific physicians to the community to meet those needs. We recruited 82, 57
and 58 new physicians during 2002, 2001 and 2000, respectively. Approximately
42% of the physicians recruited during the last three years have been primary
care physicians and approximately 58% have been specialty-care physicians. In
addition, we have already recruited 42 new physicians to join our hospital
staffs in 2003 and 2004. We believe that expansion of services in our
hospitals should assist in future physician recruiting efforts.

Acquisition Program

We proactively identify acquisition targets and respond to requests for
proposals from entities that are seeking to sell or lease hospitals. We
identify attractive markets and hospitals and initiate meetings with hospital
systems to discuss acquiring non-urban hospitals or operating them through a
joint venture.

We believe that it generally takes six to 12 months from a hospital
owners decision to accept an offer until the consummation of a sale or lease
of a hospital. After a potential acquisition has been identified, we undertake
a systematic approach to evaluate and close the transaction. We begin the
acquisition process with a thorough due diligence review of the target hospital
and its community. We use our dedicated teams of experienced personnel to
conduct a formalized review of all aspects of the targets operations,
including Medicare reimbursement, purchasing, fraud and abuse compliance,
litigation, capital requirements and employment and environmental issues.
During the course of our due diligence review, we prepare an operating plan for
the target hospital, identify opportunities for operating efficiencies and
physician recruiting needs, and assess productivity and management information
systems. Throughout the process, we work closely with community leaders in
order to enhance both the communitys understanding of our philosophy and
abilities and our knowledge of the needs of the community.

From time to time, we enter into letters of intent with acquisition
targets in connection with our evaluation of a potential acquisition. Such
letters of intent generally are executed prior to the commencement of due
diligence undertaken during the evaluation process. In addition to due
diligence, proposed transactions to acquire hospitals for which we have signed
a letter of intent are subject to numerous conditions and contingencies,
including internal

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approvals of both our company and the target companies, receipt of
regulatory approvals, receipt of attorney general approval, resolution of legal
and equitable matters relating to continuation of labor agreements, review of
supply and service agreements, receipt of satisfactory surveys, title insurance
commitments and environmental and engineering surveys, and preparation and
negotiation of documentation. In addition, our letters of intent generally
provide that they may be terminated by either party without cause. Accordingly,
we cannot assure you that any such proposed transaction for which we have
signed a letter of intent will occur, or if it occurs, we cannot predict the
values or condition of the assets that may be acquired, the purchase price of
such assets or the terms of their acquisition.

The acquisition of non-urban hospitals is competitive, and we believe that
the acquiror will be selected for a variety of reasons, not exclusively on the
basis of price. We believe that we are well-positioned to compete for
acquisitions for several reasons. First, our management team has extensive
experience in acquiring and operating previously under-performing non-urban
hospitals. Second, we benefit from access to capital, strong financial and
operating systems, a national purchasing organization and training programs
focused on employee and patient satisfaction. Third, we believe our strategy of
increasing access to, and quality of, healthcare in the communities served by
our hospitals aligns our interests with those of the communities. Finally, we
believe that the alignment of interests with the community, our reputation for
providing market-specific, quality healthcare, and our focus on physician
recruiting and retention enables us to compete successfully for acquisitions.

Hospital Operations

Following the acquisition of a hospital, we implement our systematic
policies and procedures to improve the hospitals operating and financial
performance. We implement an operating plan designed to reduce costs by
improving operating efficiency and increasing revenue through the expansion of
the breadth of services offered by the hospitals and the recruitment of
physicians to the community. We believe that the long-term growth potential of
a hospital is dependent on that hospitals ability to add appropriate
healthcare services and effectively recruit and retain physicians.

Each hospital management team is comprised of a chief executive officer,
chief financial officer and chief nursing officer. We believe that the quality
of the local management team at each hospital is critical to the hospitals
success because the management team is responsible for implementing the
elements of our operating plan. The operating plan is developed by the local
management team in conjunction with our senior management team and sets forth
revenue enhancement strategies and specific expense benchmarks. We have
implemented a performance-based compensation program for each local management
team based upon the achievement of the goals set forth in the operating plan.

The local management team is responsible for the day-to-day operations of
the hospitals. Our corporate staff provides support services to each hospital,
including physician recruiting, corporate compliance, reimbursement advice,
standardized information systems, human resources, accounting, cash management
and other finance activities, as well as tax and insurance support. Financial
controls are maintained through utilization of standardized policies and
procedures. We promote communication among our hospitals so that local
expertise and improvements can be shared throughout our network.

To achieve the operating efficiencies set forth in the operating plan, we do the following:



| |  |  | evaluate existing hospital management;                                                              
| | - |  | ----------------------------------------------------------------------------------------------------
|
| |  |  | adjust staffing levels according to patient volumes
using best demonstrated practices by department;
|
| |  |  | install a standardized management information system;                                               
|
| |  |  | capitalize on purchasing efficiencies and renegotiate certain vendor contracts; and                 
|
| |  |  | improve billing and collection policies and procedures.                                             

We also enforce strict protocols for compliance with our supply contracts.
All of our owned or leased hospitals currently purchase supplies and certain
equipment pursuant to an arrangement we have with an affiliate of HCA Inc. We
also evaluate the vendor contracts, and based on cost comparisons, we may
renegotiate or terminate

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such contracts. We prepare for the transition of management information
systems to our standardized system prior to the completion of an acquisition,
in order that the newly-acquired hospital may begin using our management
information systems following completion of the acquisition.

Expansion of Services

As part of our efforts to improve access to quality healthcare in the
communities we serve, we add services at our hospitals on an as-needed basis.
Added services and care programs may include specialty inpatient services, such
as cardiology, rehabilitation and subacute care, and outpatient services such
as same-day surgery. We believe the establishment of quality emergency room
departments and obstetrics and gynecological services are particularly
important because they are often the most visible and needed services in the
community. We also make capital investments in technology and facilities to
increase the quality and breadth of services available in the communities. By
increasing the services provided at our hospitals and upgrading the technology
used in providing such services, we believe that we improve each hospitals
quality of care and reputation in the community, which in turn may increase
patient admissions and revenue.

Physician Recruitment

We work with local hospital boards, management and medical staff to
determine the number and type of additional physicians needed in the community.
Our corporate staff then assists the local management team in identifying and
recruiting specific physicians to the community to meet those needs. The
majority of physicians who relocate their practices to the communities served
by our hospitals are identified by our Vice President of Medical Staff
Development and his physician recruiting staff, with assistance from
independent recruiting firms at times. When recruiting a physician to a
community, we generally guarantee the physician a minimum level of cash
collections during a limited initial period and assist the physician with his
or her transition to the community. We require the physician to repay some or
all of the amounts expended for such assistance in the event the physician
leaves the community prior to the end of the contract period. We prefer not to
employ physicians; therefore, recruited physicians generally do not become our
employees.

Physician Retention

We have implemented a number of procedures to help retain physicians at
our hospitals. We have a new Vice President of Medical Staff Development to
oversee all aspects of physician recruiting and retention and to work with our
hospital Chief Executive Officers in recognizing and addressing physician
issues. Additionally, our company has instituted an early alert system in
every hospital to address physician concerns and to identify physicians that
are at risk of leaving. We are also re-establishing a physician advisory
council, which will serve as a direct conduit between physicians at our
hospitals and our management.

Owned and Leased Hospitals

We currently own or lease 20 general acute care hospitals in 13 states,
with a total of 2,284 licensed beds. Of our 20 hospitals, 19 are the only
providers of acute hospital services in their communities. The owned or leased
hospitals represented 97.9% of our net operating revenue for the year ended
December 31, 2002, compared to 97.0% for the year ended December 31, 2001, and
96.0% for the year ended December 31, 2000.

Our hospitals offer a wide range of inpatient medical services such as
operating/recovery rooms, intensive care units, diagnostic services and
emergency room services, as well as outpatient services such as same-day
surgery, radiology, laboratory, pharmacy and physical therapy. Our hospitals
frequently provide specialty services that include rehabilitation and home
healthcare. Our hospitals currently do not provide highly specialized surgical
services such as organ transplants and open heart surgery and are not engaged
in extensive medical research or educational programs.

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The following table sets forth certain information with respect to each of
our owned or leased hospitals as of March 1, 2003.

|                                                   |                           |                     |     |          |       |            |  |           |  |  |  |  |  | 
|-------------------------------------------------- | ------------------------- | ------------------- | --- | -------- | ----- | ---------- |  | --------- |  |  |  |  |  | 
|                                                   |                           |                     |     | Licensed |       | Owned/     |  | Date     
|Hospital                                           |                           | Beds                |     | Leased   |       | Acquired  
|                                                   |                           |                     |     |          |       |           
|Ashland Regional Medical Center                    |                           |                     | 126 | (1)      |       | Owned      |  | Aug. 2001
|                                                   | Ashland, Pennsylvania     |                     |     |          |       |            |  |           |  |  |  |  | 
|Bolivar Medical Center                             |                           |                     | 165 | (2)      |       | Leased     |  | Apr. 2000
|                                                   | Cleveland, Mississippi    |                     |     |          |       |            |  |           |  |  |  |  | 
|Colorado Plains Medical Center                     |                           |                     | 50  |          |       | Leased(3)  |  | Dec. 1996
|                                                   | Fort Morgan, Colorado     |                     |     |          |       |            |  |           |  |  |  |  | 
|Colorado River Medical Center                      |                           |                     | 49  |          |       | Leased(4)  |  | Aug. 1997
|                                                   | Fort Morgan, Colorado     |                     |     |          |       |            |  |           |  |  |  |  | 
|Doctors Hospital of Opelousas                     |                           |                     | 165 |          |       | Owned      |  | Jun. 1999
|                                                   | Opelousas, Louisiana      |                     |     |          |       |            |  |           |  |  |  |  | 
|Ennis Regional Medical Center                      |                           |                     | 45  |          |       | Leased(5)  |  | Feb. 2000
|                                                   | Ennis, Texas              |                     |     |          |       |            |  |           |  |  |  |  | 
|Eunice Community Medical Center                    |                           |                     | 91  |          |       | Leased(6)  |  | Feb. 1999
|                                                   | Eunice, Louisiana         |                     |     |          |       |            |  |           |  |  |  |  | 
|Glades General Hospital                            |                           |                     | 73  |          |       | Owned      |  | Apr. 1999
|                                                   | Belle Glade, Florida      |                     |     |          |       |            |  |           |  |  |  |  | 
|Havasu Regional Medical Center                     |                           |                     | 138 |          |       | Owned      |  | May 1998 
|                                                   | Lake Havasu City, Arizona |                     |     |          |       |            |  |           |  |  |  |  | 
|Los Alamos Medical Center                          |                           |                     | 47  |          |       | Owned      |  | Jun. 2002
|                                                   | Los Alamos, New Mexico    |                     |     |          |       |            |  |           |  |  |  |  | 
|Medical Center of Southern Indiana                 |                           |                     | 96  |          |       | Owned      |  | Oct. 2001
|                                                   | Charlestown, Indiana      |                     |     |          |       |            |  |           |  |  |  |  | 
|Memorial Hospital of Martinsville and Henry County |                           |                     | 237 |          |       | Owned      |  | May 2002 
|                                                   | Martinsville, Virginia    |                     |     |          |       |            |  |           |  |  |  |  | 
|Minden Medical Center                              |                           |                     | 159 |          |       | Owned      |  | Oct. 1999
|                                                   | Minden, Louisiana         |                     |     |          |       |            |  |           |  |  |  |  | 
|Northeastern Nevada Regional Hospital (7)          |                           |                     | 75  |          |       | Owned      |  | Jun. 1998
|                                                   | Elko, Nevada              |                     |     |          |       |            |  |           |  |  |  |  | 
|Palestine Regional Medical Center                  |                           |                     | 249 |          |       | Owned(8)   |  | July 1996
|                                                   | Palestine, Texas          |                     |     |          |       |            |  |           |  |  |  |  | 
|Palo Verde Hospital                                |                           |                     | 51  |          |       | Leased(9)  |  | Dec. 1996
|                                                   | Blythe, California        |                     |     |          |       |            |  |           |  |  |  |  | 
|Parkview Regional Hospital                         |                           |                     | 59  |          |       | Leased(10) |  | Dec. 1996
|                                                   | Mexia, Texas              |                     |     |          |       |            |  |           |  |  |  |  | 
|Starke Memorial Hospital                           |                           |                     | 53  |          |       | Leased(11) |  | Oct. 1996
|                                                   | Knox, Indiana             |                     |     |          |       |            |  |           |  |  |  |  | 
|Teche Regional Medical Center                      |                           |                     | 142 |          |       | Leased(12) |  | Dec. 2001
|                                                   | Morgan City, Louisiana    |                     |     |          |       |            |  |           |  |  |  |  | 
|Vaughan Regional Medical Center (13)               |                           |                     | 214 |          |       | Owned      |  | Oct. 2001
|                                                   | Selma, Alabama            |                     |     |          |       |            |  |           |  |  |  |  | 
|                                                   |                           |                     |     |          |       |            |  |           |  |  |  | 
|                                                   |                           | Total licensed beds |     |          | 2,284 |            |  |           |  |  |  |  |  | 



---

|(1) |  | Includes 40 dually licensed skilled nursing and long-term care beds.                                                                       
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes 24 skilled nursing beds but excludes 35 long-term care beds.
The lease expires in April 2040.                                     
|   
|(3) |  | The lease expires in April 2014, and is subject to a five-year renewal
term. We have a right of first refusal to purchase the hospital.    
|   
|(4) |  | The lease expires in July 2012, and is subject to three five-year renewal
terms. We have a right of first refusal to purchase the hospital.
|   
|(5) |  | The lease expires in February 2030, and is subject to three 10-year
renewal terms at our option.                                           

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##### Table of Contents



|(6)  |  | The lease expires in June 2008, and is subject to a five-year renewal
option.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(7)  |  | This 75-bed, 125,000 square foot hospital replaced the 50-bed Elko
General Hospital in September 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|(8)  |  | The hospital is owned by a partnership in which a subsidiary of ours is
the sole general partner, with a 1.0% general partnership interest, and
another subsidiary of ours has a limited partnership interest of 96.35%,
subject to an option by the other non-affiliated limited partner (which
currently owns a 2.65% interest) to acquire up to 10% of the total limited
partnership interests.                                                                                                                                                                                                                                                                                                                                    
|    
|(9)  |  | The lease expires in December 2012. We have the option to purchase the
hospital at any time prior to termination of the lease, subject to
regulatory approval.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|(10) |  | The lease expires in January 2011, and is subject to two five-year
renewal terms. We have a right of first refusal to purchase the hospital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    
|(11) |  | The lease expires in September 2016, and is subject to two ten-year
renewal options. We have a right of first refusal to purchase the
hospital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    
|(12) |  | The lease expires in December 2041.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    
|(13) |  | We acquired Selma Regional Medical Center, formerly known as Selma
Baptist Medical Center, located in Selma, Alabama, in July 2001. In
October 2001, we acquired Vaughan Regional Medical Center, which is also
located in Selma, Alabama, approximately four miles from Selma Baptist.
In April 2002, we consolidated the operations of Selma Regional Medical
Center with Vaughan Regional Medical Center, and formed one regional
hospital with two campuses. Upon completion of the consolidation, we
changed the name of Selma Regional Medical Center to Vaughan Regional
Medical Center  Parkway Campus, and we changed the name of Vaughan
Regional Medical Center to Vaughan Regional Medical Center  Dallas Avenue
Campus.

Ashland Regional Medical Centeris a general acute care facility with 126
beds located in Ashland, Pennsylvania, approximately 110 miles northwest of
Philadelphia, Pennsylvania. Ashland, Pennsylvania has a service area
population of approximately 65,000. The nearest competitor of Ashland Regional
Medical Center is Regional Medical Center in Pottsville, Pennsylvania, located
20 miles from Ashland.

Bolivar Medical Centeris a general acute care facility with 141 acute
care beds, 24 skilled nursing beds and 35 long-term care beds located in
Cleveland, Mississippi. Established in 1962, the hospital is owned by Bolivar
County, Mississippi. Cleveland is a manufacturing-based community with an
estimated 16,000 residents and an estimated service area population of 55,000.
The nearest competitor is South Sunflower County Hospital in Indianola,
Mississippi, located 32 miles from Cleveland.

Colorado Plains
Medical Centeris a 50-bed general acute care facility
located in Fort Morgan, Colorado, approximately 70 miles from Denver. Fort
Morgan is an agricultural-based community with an estimated 12,000 residents
and an estimated service area population of 43,000. The original hospital was
built in 1952. The hospital is the only rural-based Level III trauma center in
Colorado, and one of only 10 such rural centers in the United States. The
hospitals major competition comes from the 276-bed Northern Colorado Medical
Center located in Greeley, Colorado, which is approximately 45 miles west of
Colorado Plains. East Morgan County Hospital, located nine miles away in Brush,
Colorado, is the closest hospital to Colorado Plains and offers only limited
services. Both of these competing hospitals are owned by the Lutheran Health
System.

Colorado River Medical Centeris a 49-bed general acute care facility
located in Needles, California, approximately 100 miles southwest of Las Vegas,
Nevada. The hospital, established in 1974, previously was owned by the City of
Needles. Colorado River Medical Center is the only hospital serving a community
base of approximately 20,000 people. The nearest competitor is Bullhead
Community Hospital, located 22 miles away, which serves the Laughlin, Nevada
and Bullhead City, Arizona areas.

Doctors Hospital of Opelousasis a 165-bed general acute care facility,
located in Opelousas, Louisiana, approximately 21 miles east of Eunice,
Louisiana, where we operate Eunice Community Medical Center, a 91-bed
healthcare facility and approximately 22 miles north of Lafayette, Louisiana.
Opelousas is the parish seat with a population of approximately 21,000 in the
city of Opelousas and approximately 100,000 residents of the St. Landry Parish.
The primary competition for Doctors Hospital of Opelousas is the 134-bed
Opelousas General Hospital, a county-owned not-for-profit facility located
approximately five miles from Doctors Hospital of Opelousas. We completed a
$3.0 million 32-bed addition to the hospital in April 2000.

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Ennis Regional Medical Centeris a 45-bed general acute care facility
located in Ennis, Texas, approximately 35 miles southeast of Dallas.
Established in the mid-1950s, the hospital is owned by the City of Ennis. The
acute care facility is the only hospital serving the Ennis community, which has
a total service area population of approximately 85,000 people. The nearest
competitor is the 73-bed Baylor HealthCare System Waxahachie Hospital, located
17 miles from Ennis.

Eunice Community Medical Centeris a 91-bed general acute care facility
located in Eunice, Louisiana. Eunice, Louisiana is a community of approximately
20,000 people, located approximately 50 miles northwest of Lafayette. The total
service area consisting of St. Landry Parish has a population of approximately
100,000. We entered into a 10-year lease with a 5-year renewal option on the
facility. The hospital is located 21 miles from Opelousas General Hospital, a
133-bed facility, which we own. We must construct a replacement facility,
currently expected to cost approximately $20 million, at such time as the
hospital reaches pre-determined operating levels. The lease will terminate at
the time the replacement facility commences operations. Eunice Community
Medical Center competes with Savoy Medical Center located in Mamou, Louisiana,
approximately 15 miles north of Eunice.

Glades General Hospitalis a 73-bed general acute care facility serving
the residents of Western Palm Beach, Hendry and Glades counties and is located
45 miles west of West Palm Beach on the southeast corner of Lake Okeechobee.
Belle Glade, Florida has a service area population of 36,000. The nearest
competitor is Palms West, located 30 miles away in Loxahatchee, Florida. We
must construct a replacement facility, anticipated to cost approximately $25.0
million, at such time as the hospital reaches pre-determined operating levels.

Havasu Regional Medical Centeris a 138-bed general acute care facility
providing healthcare services for a population of over 41,000, primarily in the
Lake Havasu City, Arizona area. Lake Havasu City is on the shore of Lake Havasu
on the Colorado River border of California and Arizona. It is now the major
population center of southern Mohave County, one of the fastest growing
counties in the United States. We acquired the facility in May 1998 from the
Samaritan Health System, a Phoenix, Arizona, based not-for-profit healthcare
system. Lake Havasu City has a service area population of 127,000 residents in
the rapidly growing Colorado River basin. We completed construction of a $26.0
million ancillary expansion in February 2002. The nearest acute hospital
competitor is Kingman Regional Medical Center in Kingman, Arizona, which is
approximately 60 miles from Havasu Regional Medical Center.

Los Alamos Medical Centeris a 47-bed acute care facility located in Los
Alamos, New Mexico. Los Alamos, New Mexico is located approximately 96 miles
north of Albuquerque and 40 miles west of Santa Fe, New Mexico, and has a
service area population of approximately 50,000. We acquired the facility in
June 2002 from Banner Health System. Los Alamos Medical Center is the only
hospital in the community. The hospitals nearest competitor is Espanola
Hospital in Espanola, New Mexico, which is located approximately 35 miles from
Los Alamos Medical Center.

Medical Center of Southern Indianais a 96-bed general acute care facility
located in Charlestown, Indiana. Charlestown, Indiana is located approximately
16 miles northwest of Louisville, Kentucky, and has a service area population
of approximately 48,000. Medical Center of Southern Indiana is the only
hospital in the community. The hospitals nearest competitor is Clark Memorial
in Jeffersonville, Indiana, which is located approximately 20 miles from
Medical Center of Southern Indiana.

Memorial Hospital of Martinsville and Henry Countyis a 237-bed acute care
facility located in Martinsville, Virginia. Martinsville, Virginia is located
approximately 50 miles south of Roanoke, Virginia and has a service area
population of approximately 100,000. We acquired the facility in May 2002 from
Memorial Health System, Inc. Memorial Hospital of Martinsville and Henry
County is the only hospital in the county. The hospitals nearest competitor
is Danville Regional Medical Center in Danville, Virginia, which is located
approximately 30 miles from Memorial Hospital of Martinsville and Henry County.

Minden Medical Centeris a 159-bed general acute care facility located in
Minden, Louisiana. Minden, Louisiana is approximately 28 miles from Shreveport
and has a service area population of approximately 64,000. We acquired the
facility in October 1999, along with Trinity Valley Medical Center, from Tenet
Healthcare Corporation. The hospitals nearest competitors are the
Willis-Knight Medical Center and Bossier Medical Center, which are both located
in Shreveport.

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Northeastern Nevada Regional Hospital, which opened in September 2001 as a
replacement to Elko General Hospital, is a 75-bed general acute care facility
located in Elko, Nevada. Elko, Nevada is located 237 miles west of Salt Lake
City, Utah, 295 miles northeast of Reno and 475 miles north of Las Vegas. Elko
Countys population is approximately 55,000, with the primary population base
residing in the City of Elko. Originally constructed as a 20-bed hospital in
1920, Elko General Hospital grew and expanded with the community, undergoing
two major renovations in 1958 and 1976. The nearest acute hospital competitors
are in Salt Lake City, Utah.

Palestine Regional Medical Centeris a two-campus facility located in
Palestine, Texas. Palestine, a community of approximately 19,000 residents, is
located 50 miles south of Tyler, Texas and is roughly equidistant from Dallas
and Houston. The total service area population for the hospital, which includes
Anderson and eight surrounding counties, is estimated at 104,000 people. The
facility is comprised of Palestine Regional Medical Center, the former Trinity
Valley Medical Center, a 172-bed acute care facility that we acquired in
October 1999 from Tenet Healthcare Corporation, and Palestine Regional
Rehabilitation Hospital, the former Memorial Mother Frances Hospital, a 77-bed
acute care facility also located in Palestine, which we have owned since 1996.
Palestine Regional Medical Center competes indirectly with two other hospitals,
Mother Frances Hospital Regional HealthCare Center and East Texas Medical
Center, both in Tyler, Texas.

Palo Verde Hospitalis a 51-bed general acute care facility located in
Blythe, California, which is in southeast California on the Arizona border. The
hospital is located in a community with a stable population of 20,000; however,
the population increases significantly during the winter months due to a
seasonal influx of retirees. The nearest competitor is Parker Hospital in
Parker, California, which is approximately 45 miles from Palo Verde Hospital.

Parkview Regional Hospitalis a 59-bed general acute care facility located
in Mexia, Texas, approximately 85 miles south of Dallas, Texas. Parkviews
primary service area includes Mexia and the surrounding Limestone County, as
well as Freestone, Leon, and Hill counties. Mexia is the areas largest city
with a population of 7,000 people. The service area of the hospital includes
approximately 50,000 residents. Brim Hospitals, Inc. acquired the hospital
through a long-term lease in February 1996. Parkview Regional Hospital is the
only hospital in the community, but experiences competition from Waco
hospitals, about 40 miles to the west.

Starke Memorial Hospitalis a 53-bed general acute care facility in Knox,
Indiana, a community located approximately 50 miles from South Bend. The town
of Knox has a population of approximately 8,000, and the population of Starke
County is estimated to be 23,000. The hospitals total service area, including
the surrounding counties, is approximately 35,000. Established in 1952, the
hospital had been owned by Starke County until we purchased it in October 1996.
The nearest competing hospitals are the 36-bed St. Joe Marshall County
Hospital, which is located 18 miles east in Plymouth, Indiana, and the 307-bed
Porter Memorial Hospital, which is located 32 miles away in Valparaiso,
Indiana.

Teche Regional Medical Centeris a general acute care facility with 142
beds located in Morgan City, Louisiana, approximately 67 miles south of Baton
Rouge, Louisiana. The hospital has a service area of approximately 82,000
people. We acquired the hospital through a long-term lease in December 2001.
Teche Regional Medical Center is the only acute care hospital in the community
it serves. The hospitals nearest competitor is Thibodeaux Regional Medical
Center, located approximately 30 miles away in Thibodeaux, Louisiana.

Vaughan Regional Medical Centerand Selma Regional Medical Center located
in Selma, Alabama, were consolidated in April 2002 into a two-campus, 214-bed
general acute care facility. Selma, Alabama ,which has a service area
population of approximately 90,000, is located approximately 50 miles west of
Montgomery, Alabama and 97 miles south of Birmingham, Alabama. The Parkway
Campus is comprised of the former Selma Regional Medical Center that we
acquired from Baptist Health of Montgomery, Alabama in July 2001. The Dallas
Avenue Campus is comprised of the former Vaughan Regional Medical Center that
we acquired from Vaughan Regional Medical Center, Inc. in October 2001. The
two campuses are located approximately four miles from each other. The
hospitals current nearest competitor is Baptist Medical Center, located
approximately 48 miles away in Montgomery, Alabama.

8



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Operating Statistics

The following table sets forth certain operating statistics for our owned
or leased hospitals for each of the periods presented.

|                                                |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|----------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                |  | Year Ended December 31,
|                                                |  |                        
|                                                |  | 2002                    |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                                |  |                         |         |      |  |      |         |      |  |     
|Hospitals owned or leased at end of period      |  |                         | 20      |      |  |      | 19      |      |  |      | 14      |   |  |   | 14      |   |  |   | 10      |  
|Licensed beds (at end of period)                |  |                         | 2,280   |      |  |      | 2,136   |      |  |      | 1,326   |   |  |   | 1,282   |   |  |   | 723     |  
|Beds in service (at end of period)              |  |                         | 1,993   |      |  |      | 1,899   |      |  |      | 1,228   |   |  |   | 1,186   |   |  |   | 647     |  
|Admissions                                      |  |                         | 72,939  |      |  |      | 55,937  |      |  |      | 47,971  |   |  |   | 32,509  |   |  |   | 21,538  |  
|Average length of stay (days)(1)                |  |                         | 4.3     |      |  |      | 4.3     |      |  |      | 4.5     |   |  |   | 4.8     |   |  |   | 5.2     |  
|Patient days                                    |  |                         | 313,172 |      |  |      | 241,967 |      |  |      | 216,663 |   |  |   | 156,846 |   |  |   | 110,816 |  
|Adjusted patient days(2)                        |  |                         | 542,626 |      |  |      | 397,577 |      |  |      | 372,352 |   |  |   | 273,394 |   |  |   | 195,998 |  
|Occupancy rate (% of licensed beds)(3)          |  |                         | 37.6    | %    |  |      | 31.0    | %    |  |      | 44.6    | % |  |   | 33.4    | % |  |   | 42.0    | %
|Occupancy rate (% of beds in service)(4)        |  |                         | 43.1    | %    |  |      | 34.9    | %    |  |      | 48.0    | % |  |   | 36.2    | % |  |   | 46.9    | %
|Net patient service revenue (in thousands)      |  | $                       | 680,882 |      |  | $    | 509,061 |      |  | $    | 445,772 |   |  | $ | 323,319 |   |  | $ | 217,364 |  
|Gross outpatient service revenue (in thousands) |  | $                       | 627,213 |      |  | $    | 410,785 |      |  | $    | 377,663 |   |  | $ | 257,248 |   |  | $ | 161,508 |  



---

|(1) |  | Average length of stay is calculated based on the number of patient days
divided by the number of admissions.                                                                                                                                                                                                                                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Adjusted patient days have been calculated based on an industry-accepted
revenue-based formula of multiplying actual patient days by the sum of
gross inpatient revenue and gross outpatient revenue and dividing the
result by gross inpatient revenue for each hospital, to reflect an
approximation of the volume of service provided to inpatients and
outpatients by converting total patient revenue to equivalent patient
days.
|   
|(3) |  | Percentages are calculated by dividing average daily census by average
licensed beds.                                                                                                                                                                                                                                                                                                                                                 
|   
|(4) |  | Percentages are calculated by dividing average daily census by average
beds in service.                                                                                                                                                                                                                                                                                                                                               

Sources of Revenue

We receive payments for patient care from private insurance carriers,
federal Medicare programs for elderly and disabled patients, health maintenance
organizations, preferred provider organizations, state Medicaid programs,
TriCare, and from employers and patients directly. See Managements Discussion
and Analysis of Financial Condition and Results of Operations. The
approximate percentages of net patient revenues of our facilities from these
sources during the periods specified below were as follows:

|                          |       |      |                         |       |   |      |      |       |   |  |      |       |  
|------------------------- | ----- | ---- | ----------------------- | ----- | - | ---- | ---- | ----- | - |  | ---- | ----- | -
|                          |       |      | Year Ended December 31,
|                          |       |      |                        
|Source                    |       | 2002 |                         | 2001  |   | 2000
|                          |       |      |                         |       |   |     
|Medicare                  |       |      | 44.5                    | %     |   |      | 39.8 | %     |   |  | 39.7 | %    
|Medicaid                  |       |      | 12.0                    |       |   |      | 10.9 |       |   |  | 9.5  |      
|Private and other sources |       |      | 43.5                    |       |   |      | 49.3 |       |   |  | 50.8 |      
|                          |       |      |                         |       |   |      |      |       |   |  |      |      
|                          | Total |      |                         | 100.0 | % |      |      | 100.0 | % |  |      | 100.0 | %
|                          |       |      |                         |       |   |      |      |       |   |  |      |      

Management Information Systems

Following the acquisition of a hospital, we implement our systematic
procedures to improve the hospitals operating and financial performance. One
of our first steps is to convert the newly-acquired hospital to our broad-based
management information system. Our hospital management information system
contains the primary software required to run an entire hospital, bundled into
one software package. This software generally includes features such as a
general ledger, patient accounting, billing, accounts receivable, payroll,
accounts payable and pharmacy. Our goal is to convert an acquired hospital to
our management information system within 60 days from the date of the
acquisition.

9



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##### Table of Contents



Quality Assurance

Our hospitals implement quality assurance procedures to monitor the level
of care. Each hospital also has a medical executive committee, which reviews
the professional credentials of physicians applying for medical staff
privileges at the hospital. Each facility monitors outcomes along with
procedures performed and the quality of the logistical, medical and
technological support provided to the physician. We survey our patients either
during their stay at the hospital or subsequently by mail to identify potential
areas of improvement. All of our hospitals are accredited by the Joint
Commission on Accreditation of Healthcare Organizations.

Regulatory Compliance Program

We maintain a company-wide compliance program. Our compliance program
focuses on all areas of regulatory compliance, including physician recruitment,
reimbursement, cost reporting practices and laboratory and home healthcare
operations. Each of our hospitals designates a compliance officer and undergoes
an annual risk assessment to determine potential risk issues and develop plans
to correct problems should they arise. In addition, all of our employees are
given a thorough introduction to our ethical and compliance guidelines, as well
as a guide to the proper resources to address any concerns that may arise. We
also conduct annual training to re-emphasize our established guidelines. We
regularly monitor our corporate compliance programs to respond to developments
in healthcare regulation and the industry. We also maintain a toll-free hotline
to permit employees to report compliance concerns on an anonymous basis. In
addition, the hotline is a method of obtaining answers to questions of
compliance encountered during the day-to-day operation of a facility.

Management and Professional Services

Brim Healthcare, Inc., a wholly owned subsidiary, provides management
services to 36 primarily non-urban hospitals in 14 states with a total of 2,896
licensed beds. These services are provided for a fixed monthly fee under three
to seven-year contracts. Brim Healthcare, Inc. generally provides a chief
executive officer, who is an employee of Brim Healthcare, Inc., and may also
provide a chief financial officer. Brim Healthcare, Inc. typically does not
employ other hospital personnel. Management services typically are limited to
strategic planning, operational consulting and assistance with Joint Commission
on Accreditation of Healthcare Organizations accreditation and compliance. To
further promote compliance, Brim Healthcare, Inc. requires that each of the
hospitals that it manages have a compliance officer. In addition, to assist
hospitals and community healthcare, Brim Healthcare, Inc. sometimes establishes
regional provider networks. This subsidiary represented less than 3.0% of the
net operating revenue for the year ended December 31, 2002 and 3.0% of the net
operating revenue for the year ended December 31, 2001.

Competition

The primary bases of competition among hospitals in non-urban markets are
the quality and scope of medical services, strength of referral network,
location, and, to a lesser extent, price. With respect to the delivery of
general acute hospital services, most of our hospitals face less competition in
their immediate patient service areas than would be expected in larger
communities. While our hospitals are generally the primary provider of
healthcare services in their respective communities, our hospitals face
competition from larger tertiary care centers and, in some cases, other
non-urban hospitals and full service outpatient surgery centers. Some of the
hospitals that compete with us are owned by governmental agencies or
not-for-profit entities supported by endowments and charitable contributions,
and can finance capital expenditures on a tax-exempt basis.

One of the most significant factors in the competitive position of a
hospital is the number and quality of physicians affiliated with the hospital.
Although physicians may at any time terminate their affiliation with a hospital
that we operate, our hospitals seek to retain physicians of varied specialties
on the hospitals medical staffs and to recruit other qualified physicians
through our in-house recruiting department overseen by our Vice President of
Medical Staff Development and his staff. We believe physicians refer patients
to a hospital primarily on the basis of the quality of services it renders to
patients and physicians, the quality of other physicians on the medical staff,
the location of the hospital and the quality of the hospitals facilities,
equipment and employees. Accordingly, we strive to maintain high ethical and
professional standards and quality facilities, equipment, employees and
services for physicians and their patients.

10



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##### Table of Contents



Another factor in the competitive position of a hospital is the
managements ability to negotiate service contracts with purchasers of group
healthcare services. Health maintenance organizations and preferred provider
organizations attempt to direct and control the use of hospital services
through managed care programs and to obtain discounts from hospitals
established charges. In addition, employers and traditional health insurers
increasingly are interested in containing costs through negotiations with
hospitals for managed care programs and discounts from established charges.
Generally, hospitals compete on the basis of market reputation, geographic
location, quality and range of services, quality of the medical staff,
convenience and price for service contracts with group healthcare service
purchasers. The importance of obtaining contracts with managed care
organizations varies from market to market, depending on the market strength of
such organizations. Managed care contracts generally are less important in the
non-urban markets served by us than they are in urban and suburban markets
where there is typically a higher level of managed care penetration.

State certificate of need laws, which place limitations on a hospitals
ability to expand hospital services and add new equipment, also may have the
effect of restricting competition. Five states in which we operate, Alabama,
Florida, Mississippi, Nevada and Virginia currently have certificate of need
laws. The application process for approval of covered services, facilities,
changes in operations and capital expenditures is, therefore, highly
competitive. In those states that have no certificate of need laws or that set
relatively high thresholds before expenditures become reviewable by state
authorities, competition in the form of new services, facilities and capital
spending may be more prevalent. We have not experienced, and do not expect to
experience, any material adverse effects from state certificate of need
requirements or from the imposition, elimination or relaxation of such
requirements. SeeItem 1. Business  Healthcare Regulation and Licensing.

We, and the healthcare industry as a whole, face the challenge of
continuing to provide quality patient care while dealing with rising costs,
strong competition for patients and a general reduction of reimbursement rates
by both private and government payors. As both private and government payors
reduce the scope of what may be reimbursed and reduce reimbursement levels for
what is covered, federal and state efforts to reform the healthcare system may
further impact reimbursement rates. Changes in medical technology, existing and
future legislation, regulations and interpretations and competitive contracting
for provider services by private and government payors may require changes in
our facilities, equipment, personnel, rates and/or services in the future.

The hospital industry and some of our hospitals continue to have
significant unused capacity. Inpatient utilization, average lengths of stay and
average inpatient occupancy rates continue to be negatively affected by
payor-required pre-admission authorization, utilization review, and payment
mechanisms to maximize outpatient and alternative healthcare delivery services
for less acutely ill patients. Admissions constraints, payor pressures and
increased competition are expected to continue. We will endeavor to meet these
challenges by expanding our facilities outpatient services, offering
appropriate discounts to private payor groups, upgrading facilities and
equipment, and offering new programs and services.

We also face competition for acquisitions primarily from for-profit
hospital management companies as well as not-for-profit entities. Some of our
competitors have greater financial and other resources than us. Increased
competition for the acquisition of non-urban acute care hospitals could have an
adverse impact on our ability to acquire such hospitals on favorable terms.

Properties

In addition to our owned and leased hospitals, we lease approximately
43,510 square feet of office space for our corporate headquarters in Brentwood,
Tennessee under a seven-year lease that expires on March 31, 2005 and contains
customary terms and conditions. See Item 1. Business  Owned and Leased
Hospitals.

Employees and Medical Staff

As of March 1, 2003, we had 7,478 full-time equivalent employees,
including 75 corporate personnel and 72 management company personnel. The
remaining employees, most of whom are nurses and office personnel, work at the
hospitals. We consider relations with our employees to be good. Approximately
4.72% of our employees are represented by unions.

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##### Table of Contents



We typically do not employ physicians and, as of March 1, 2003, we
employed 14 practicing physicians. Certain of our hospital services, including
emergency room coverage, radiology, pathology and anesthesiology services, are
provided through independent contractor arrangements with physicians.

Environmental Matters

We are subject to various Federal, state and local statutes and ordinances
regulating the discharge of materials into the environment. Our healthcare
operations generate medical waste, such as pharmaceuticals, biological
materials and disposable medical instruments, that must be disposed of in
compliance with federal, state and local environmental laws, rules and
regulations. Our operations, as well as our purchases and sales of facilities,
also are subject to various other environmental laws, rules and regulations.
We do not expect that we will be required to expend any material amounts in
order to comply with these laws and regulations or that compliance will
materially affect our capital expenditures, earnings or competitive position.

Government Reimbursement

Medicare/Medicaid Reimbursement

For the year ended December 31, 2002, approximately 44.5% and 12.0% of our
net patient revenue resulted from Medicare and Medicaid payments, respectively.
The Medicare program pays hospitals on a prospective payment system for acute
inpatient services. Under this prospective payment system, a hospital receives
a fixed amount for inpatient hospital services based on the patients final
diagnosis. These payments do not take into consideration a specific hospitals
costs, but instead are set national rates adjusted for area wage differentials
and case-mix index. Certain sub-acute inpatient services are currently being
converted by Medicare to a prospective payment system. Rehabilitation sub-acute
services were converted to a prospective payment system for cost report periods
beginning on or after January 1, 2002. This system is similar to the acute
inpatient system because it pays a rate based on the type of discharge.
Psychiatric sub-acute services are transitioning to a prospective payment
system for cost reporting periods beginning on or after October 1, 2002.
Skilled nursing sub-acute services are paid based on a prospective per diem,
which is also tied to the patients needs and condition.

For several years, the percentage increases to the prospective payment
rates have been lower than the percentage increases in the cost of goods and
services purchased by general hospitals. The index used to adjust payment rates
is based on a price proxy, known as the hospital market basket index, reduced
by Congressionally-mandated reduction factors. For fiscal year 2003, the
hospital market basket index was rebased and revised based on 1997 data. The
Balanced Budget Act of 1997 set the diagnosis-related group payment rates of
increase for future federal fiscal years at rates that will be based on the
market basket rates less reduction factors of 1.1% in 2001 and 2002. The
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000
(BIPA) amended the Balanced Budget Act of 1997 by giving hospitals a full
market basket increase in fiscal year 2001 and market basket minus 0.55% in
fiscal years 2002 and 2003. In addition, BIPA contains provisions delaying
scheduled reductions in payment for home health agencies and other provisions
designed to lessen the impact on providers of spending reductions contained in
the Balanced Budget Act of 1997.

Most outpatient services provided by general hospitals are reimbursed by
Medicare under the outpatient prospective payment system. The Balanced Budget
Act of 1997 mandated the implementation of the prospective payment system for
Medicare outpatient services. This outpatient prospective payment system is
based on a system of Ambulatory Payment Categories. Each Ambulatory Payment
Category represents a bundle of outpatient services, and each Ambulatory
Payment Category has been assigned a fully prospective reimbursement rate. On
November 1, 2002, the Centers for Medicare and Medicaid Services (CMS),
formerly the Health Care Financing Administration, announced a final rule
establishing the fiscal year 2003 conversion factor and additional revisions to
Ambulatory Payment Categories for hospital outpatient departments. The fiscal
year 2003 conversion factor was increased by the hospital market basket index
less an adjustment for wage index revisions. The weights assigned to many
Ambulatory Payment Categories were revised based on new data; many weights are
significantly lower than 2002, while others are higher.

Medicare has special payment provisions for Sole Community Hospitals. A
Sole Community Hospital is generally the only hospital in at least a 35-mile
radius or a 45-minute driving time radius. Colorado Plains Medical

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Center, Colorado River Medical Center, Northeastern Nevada Regional
Hospital, Havasu Regional Medical Center, Palo Verde Hospital, Parkview
Regional Hospital and Los Alamos Medical Center qualify as Sole Community
Hospitals under Medicare regulations. Special payment provisions related to
Sole Community Hospitals include the payment of a hospitals specific rate
which may be higher than the Federal DRG payment rate.

Each state has its own Medicaid program that is funded jointly by such
state and the federal government. Federal law governs how each state manages
its Medicaid program, but there is wide latitude for states to customize
Medicaid programs to fit local needs and resources. As a result, each state
Medicaid plan has its own payment formula and recipient eligibility criteria.

The Balanced Budget Act of 1997 also repealed the Boren Amendment. The
Boren Amendment was enacted in 1980 and imposed several requirements on states
in their calculations of Medicaid rates. For example, the Boren Amendment
required states to pay providers rates that are reasonable and adequate to
meet the necessary costs of an economically and efficiently operated facility.
The result is that states have set lower Medicaid reimbursement rates than they
would have under the Boren Amendment.

Program Adjustments

The Medicare, Medicaid and TRICARE programs are subject to statutory and
regulatory changes, administrative rulings, interpretations and determinations,
requirements for utilization review and new governmental funding restrictions,
all of which may materially increase or decrease program payments as well as
affect the cost of providing services and the timing of payments to facilities.
The final determination of amounts earned under the programs often takes many
years because of audits by the program representatives, providers rights of
appeal and the application of numerous technical reimbursement provisions.
Differences between original estimates and subsequent revisions (including
final settlements) are included in consolidated statements of income in the
period in which the revisions are made. Management believes that adequate
provision has been made for such adjustments. Until final adjustment, however,
significant issues remain unresolved and previously determined allowances could
become either inadequate or more than ultimately required.

Because of information technology problems at CMS, prior to May 2002 U.S.
hospitals were unable to file Medicare cost reports for periods ending on or
after August 1, 2000. Between May 2002 and May 2003, we will file two years of
cost reports for our hospitals based on the timetable developed by CMS.
Between May 2002 and December 2002, we filed 31 cost reports. Based on the
timetable developed by CMS, as of April 2003, we will be back to the normal
filing dates.

Healthcare Regulation and Licensing

Background Information

Healthcare, as one of the largest industries in the United States,
continues to attract much legislative interest and public attention. Medicare,
Medicaid, and other public and private hospital cost-containment programs,
proposals to limit healthcare spending, and proposals to limit prices and
industry competitive factors are among the many factors that are highly
significant to the healthcare industry. In addition, the healthcare industry is
governed by a framework of federal and state laws, rules and regulations that
are extremely complex and for which the industry has the benefit of only
limited regulatory or judicial interpretation.

There continue to be federal and state proposals that would, and actions
that do, impose more limitations on government and private payments to
providers such as us. In addition, there are proposals to increase co-payments
and deductibles from program and private patients. Our facilities also are
affected by controls imposed by government and private payors designed to
reduce admissions and lengths of stay. Such controls, including what is
commonly referred to as utilization review, have resulted in a decrease in
certain treatments and procedures being performed.

Many states have enacted, or are considering enacting, measures that are
designed to reduce their Medicaid expenditures and to make changes to private
healthcare insurance. Various states have applied, or are considering

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applying, for a federal waiver from current Medicaid regulations to allow
them to serve some of their Medicaid participants through managed care
providers. These proposals also may attempt to include coverage for some people
who presently are uninsured, and generally could have the effect of reducing
payments to hospitals, physicians and other providers for the same level of
service provided under Medicaid.

Certificate of Need Requirements

Some states require approval for purchase, construction and expansion of
healthcare facilities, including findings of need for additional or expanded
healthcare facilities or services. Certificates of need, which are issued by
governmental agencies with jurisdiction over healthcare facilities, are at
times required for capital expenditures exceeding a prescribed amount, changes
in bed capacity or services and certain other matters. Five states in which we
currently own hospitals, Alabama, Florida, Mississippi, Nevada and Virginia,
have certificate of need laws. In addition, we may in the future buy
additional hospitals in states that require certificates of need. We are unable
to predict whether our hospitals will be able to obtain any certificates of
need that may be necessary to accomplish their business objectives in any
jurisdiction where such certificates of need are required.

Anti-Kickback and Self-Referral Regulations

Sections of the Anti-Fraud and Abuse Amendments to the Social Security
Act, commonly known as the anti-kickback statute, prohibit certain business
practices and relationships that might influence the provision and cost of
healthcare services reimbursable under Medicaid or Medicare or other federal
healthcare programs, including the payment or receipt of remuneration for the
referral of patients whose care will be paid for by Medicare or other
government programs. Sanctions for violating the anti-kickback statute include
criminal penalties and civil sanctions, including fines and possible exclusion
from government programs, such as the Medicare and Medicaid programs. Pursuant
to the Medicare and Medicaid Patient and Program Protection Act of 1987, the
U.S. Department of Health and Human Services issued regulations that create
safe harbors under the anti-kickback statute. A given business arrangement that
does not fall within an enumerated safe harbor is not per se illegal; however,
business arrangements that fail to satisfy the applicable safe harbor criteria
risk increased scrutiny by enforcement authorities. The Health Insurance
Portability and Accountability Act of 1996, which became effective January 1,
1997, added several new fraud and abuse laws. These new laws cover all health
insurance programsprivate as well as governmental. In addition, the Health
Insurance Portability and Accountability Act of 1996 broadened the scope of
certain fraud and abuse laws, such as the anti-kickback statute, to include not
just Medicare and Medicaid services, but all healthcare services reimbursed
under a federal or state healthcare program.

There is increasing scrutiny by law enforcement authorities, the Office of
Inspector General of the Department of Health and Human Services, the courts
and Congress of arrangements between healthcare providers and potential
referral sources to ensure that the arrangements are not designed as a
mechanism to exchange remuneration for patient care referrals and
opportunities. Investigators also have demonstrated a willingness to look
behind the formalities of a business transaction to determine the underlying
purpose of payments between healthcare providers and potential referral
sources. Enforcement actions have increased, as evidenced by recent highly
publicized enforcement investigations of certain hospital activities.

In addition, provisions of the Social Security Act prohibit physicians
from referring Medicare and Medicaid patients to providers of a broad range of
designated health services with which the physicians or their immediate family
members have ownership or certain other financial arrangements. Certain
exceptions are available for employment agreements, leases, physician
recruitment and certain other physician arrangements. These provisions are
known as the Stark law and are named for the legislative sponsor, Rep. Fortney
Pete Stark (R-CA). A person making a referral, or seeking payment for
services referred, in violation of the Stark law would be subject to the
following sanctions:



| |  |  | civil money penalties of up to $15,000 for each service;                                                                                                  
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | restitution of any amounts received for illegally billed claims; and/or                                                                                   
|
| |  |  | exclusion from participation in the Medicare program, which
can subject the person or entity to exclusion from participation in
state healthcare programs.

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Further, if any physician or entity enters into an arrangement or scheme
that the physician or entity knows or should know has the principal purpose of
assuring referrals by the physician to a particular entity, and the physician
directly makes referrals to such entity, then such physician or entity could be
subject to a civil money penalty of up to $100,000. Many states have adopted
or are considering similar legislative proposals, some of which extend beyond
the Medicaid program, to prohibit the payment or receipt of remuneration for
the referral of patients and physician self-referrals regardless of the source
of the payment for the care.

Federal False Claims Act

The government has shown an increasing willingness in recent years to
bring lawsuits against healthcare providers alleging violations of a variety of
healthcare and non-healthcare laws, including, among others, the federal false
claims act (the False Claims Act) and mail fraud and wire fraud. The False
Claims Act, in particular, has been used with increasing frequency and
creativity. The False Claims Act has qui tam or whistleblower provisions
that allow private individuals to bring actions on behalf of the government
alleging that the defendant has defrauded the government. If the action is
successful, the private individual may recover up to one-third of the
governments recovery. The False Claims Act provides for a penalty of up to
three times the amount of the false claim, plus up to $11,000 for each claim
falsely submitted to the government.

Healthcare Facility Licensing Requirements

Our healthcare facilities are subject to extensive federal, state and
local legislation and regulation. In order to maintain their operating
licenses, healthcare facilities must comply with strict standards concerning
medical care, equipment and hygiene. Various licenses and permits also are
required in order to dispense narcotics, operate pharmacies, handle radioactive
materials and operate certain equipment. Our healthcare facilities hold all
required governmental approvals, licenses and permits. All licenses, provider
numbers and other permits or approvals required to perform our business
operations are held by our subsidiaries. All of our hospitals are fully
accredited by the Joint Commission on Accreditation of Healthcare
Organizations.

Utilization Review Compliance and Hospital Governance

Our healthcare facilities are subject to and comply with various forms of
utilization review. In addition, under the Medicare prospective payment system,
each state has a Quality Improvement Organization to carry out federally
mandated systems of review of Medicare patient admissions, treatments and
discharges in hospitals. Medical and surgical services and practices also are
supervised extensively by committees of staff doctors at each healthcare
facility, are overseen by each healthcare facilitys local governing board, the
primary voting members of which are physicians and community members, and are
reviewed by our quality assurance personnel. The local governing boards also:



| |  |  | help maintain standards for quality care;                         
| | - |  | ------------------------------------------------------------------
|
| |  |  | develop long-range plans;                                         
|
| |  |  | establish, review and enforce practices and procedures; and       
|
| |  |  | approve the credentials and disciplining of medical staff members.

Governmental Developments Regarding Sales of Not-For-Profit Hospitals

In recent years, the legislatures and attorneys general of several states
have shown a heightened level of interest in transactions involving the sale of
non-profit hospitals. Although the level of interest varies from state to
state, the trend is to provide for increased governmental review, and in some
cases approval, of transactions in which not-for-profit corporations sell a
healthcare facility. Attorneys general in certain states, including California,
have been especially active in evaluating these transactions.

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Medical Records Privacy Legislation

The Administrative Simplification Provisions of the Health Insurance
Portability and Accountability Act of 1996 (HIPAA) provide that the
Department of Health and Human Services (DHHS) publish regulations requiring
the use of uniform data standards for the exchange of information between
healthcare providers and health plans submitted or received electronically to
carry out financial and administrative activities including healthcare claims
and payment transactions. These provisions are intended to improve the
efficiency and effectiveness of the healthcare industry by enabling the
efficient electronic transmission of certain health information. On August
17, 2000, DHHS published final regulations establishing electronic data
transmission standards that all healthcare providers must use when submitting
or receiving certain healthcare transactions electronically. Compliance with
these regulations is required by October 16, 2003, although the government
required us to submit a plan by October 16, 2002 showing how we plan to meet
the transaction standards. We successfully met this deadline. We cannot
predict the impact that final regulations, when fully implemented, will have on
us.

The Administrative Simplification Provisions also require DHHS to adopt
standards to protect the security and privacy of health-related information.
DHHS promulgated final regulations containing security standards on February
20, 2003, but compliance with these regulations is not required until April 21,
2005. These final security regulations would require healthcare providers to
implement administrative, physical and technical safeguards to protect the
integrity, confidentiality and availability of electronically received,
maintained or transmitted individually identifiable health-related information.
In addition, DHHS released final regulations containing privacy standards in
December 2000, but compliance with these regulations is not required until
April 14, 2003. The privacy regulations will apply to medical records and
other individually identifiable health information used or disclosed by
healthcare providers, hospitals, health plans and healthcare clearinghouses in
any form, whether electronically, on paper, or orally. The privacy regulations:



| |  |  | restrict how we can use a patients health information within
our facilities and when we can disclose a patients health
information to others outside of our facilities;                                                                                                                                                                                                                                    
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | grant patients the right to: access and copy their records;
amend their records; obtain accountings of certain disclosures of
their health information to others; request that we send their
health information to them by alternative means or locations and
request restrictions on the use and disclosure of their health
information in addition to the ones already required by the privacy
regulations;
|
| |  |  | require us to provide our patients a notice outlining the
patients rights under the privacy regulations and our privacy
practices                                                                                                                                                                                                                                                                           
|
| |  |  | appoint a privacy officer and implement a process under which
the patient may file complaints when the privacy regulations are
violated; and                                                                                                                                                                                                                                                                 
|
| |  |  | require us to enter into written contracts extending many of
these requirements to third parties to whom we prove patient health
information in order to perform functions on our behalf.                                                                                                                                                                                                                    

We have implemented privacy policies and procedures to ensure compliance with
the privacy regulations. We cannot predict the impact that these final
regulations, when fully implemented, will have on us. If we violate these
regulations, we could be subject to monetary fines, penalties and criminal
sanctions.

Emergency Medical Treatment and Active Labor Act

All of our facilities are subject to the Emergency Medical Treatment and
Active Labor Act (EMTALA). This federal law requires any hospital that
participates in the Medicare program to conduct an appropriate medical
screening examination of every person who presents to the hospitals emergency
department for treatment and, if the patient is suffering from an emergency
medical condition, to either stabilize that condition or make an appropriate
transfer of the patient to a facility that can handle the condition. The
obligation to screen and stabilize emergency medical conditions exists
regardless of a patients ability to pay for treatment. There are severe
penalties under EMTALA if a hospital fails to screen or appropriately stabilize
or transfer a patient or if the hospital delays appropriate treatment in order
to first inquire about the patients ability to pay. Penalties for violations
of EMTALA include civil monetary penalties and exclusion from participation in
the Medicare program. In addition, an injured

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patient, the patients family or a medical facility that suffers a
financial loss as a direct result of another hospitals violation of the law
can bring a civil suit against the hospital.

In May, 2002 CMS proposed changes to the EMTALA implementing regulations
that would clarify hospitals EMTALA obligations by specifying when a patient
is considered to be on a hospitals property for purposes of treating the
person pursuant to EMTALA, particularly with respect to (a) inpatients, (b)
patients presenting to outpatient departments, off-campus provider-based
entities, locations within the hospital other than the emergency department,
and hospital-owned ambulances. The proposed rule also indicated CMS believed
the requirements for on-call physicians could not be restricted to an objective
standard but should meet the hospitals and community needs. Although CMS
intended to publish final EMTALA revisions on August 1, 2002, due to the
overwhelming amount of comments that CMS received to the proposed rules CMS
indicated that the final EMTALA changes would be published at some later date.
We believe that our facilities comply with EMTALA, but we cannot predict the
final modifications CMS will implement to the EMTALA regulations in the future,
or the cost of implementing changes to comply with such modifications.

California Seismic Standards

California enacted the Alfred E. Alquist Hospital Facilities Seismic
Safety Act in 1973 and substantially amended the Alquist Act in 1983 and 1995.
The Act requires that the California Building Standards Commission adopt
earthquake performance categories, seismic evaluation procedures, standards and
timeframes for upgrading certain facilities, and seismic retrofit building
standards. These regulations require hospitals to meet seismic performance
standards to ensure that they are capable of providing medical services to the
public after an earthquake or other disaster. The Building Standards Commission
completed its adoption of evaluation criteria and retrofit standards in 1998.

The Alquist Act requires that within three years after the Building
Standards Commission has adopted evaluation criteria and retrofit standards:



| |  |  | certain hospitals must conduct seismic evaluations and submit
these evaluations to the Office of Statewide Health Planning and
Development, Facilities Development Division for its review and
approval;                                                                                                   
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | hospitals must identify the most critical nonstructural
systems that represent the greatest risk of failure during an
earthquake and submit timetables for upgrading these systems to
Office of Statewide Health Planning and Development, Facilities
Development Division for its review and approval; and
|
| |  |  | regulated hospitals must prepare a plan and compliance
schedule for each regulated building demonstrating the steps a
hospital will take to bring the hospital buildings into substantial
compliance with the regulations and standards.                                                                   

We are required to conduct engineering studies of our California
facilities to determine whether and to what extent modifications to our
facilities will be required. We have submitted compliance plans for our
California facilities, which were required to be filed with the State of
California by January 1, 2002. Any facilities not currently in compliance with
the applicable seismic regulations and standards must be brought into
compliance by 2008, or 2013 if the facility obtains an extension. We may be
required to make significant capital expenditures to comply with the seismic
standards, which could impact our earnings.

Professional Liability

As part of our business, we are subject to claims of liability for events
occurring as part of the ordinary course of hospital operations. To cover these
claims, we maintain professional malpractice liability insurance and general
liability insurance coverage of approximately $51,000,000, although some claims
may exceed the scope of the coverage in effect. At December 31, 2000, we
purchased a tail policy that provided an unlimited claim reporting period for
our professional liability for claims incurred prior to December 31, 2000.
Effective January 1, 2001, we purchased a claims-made policy and will provide
an accrual for incurred but not reported claims. Recently, the cost of
malpractice and other liability insurance has risen significantly. Therefore,
adequate levels of insurance may not continue to be available at a reasonable
price.

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Through our typical hospital management contract, we attempt to protect
ourselves from such liability by requiring the hospital to maintain certain
specified limits of insurance coverage, including professional liability,
comprehensive general liability, workers compensation and fidelity insurance,
and by requiring the hospital to name Brim Healthcare, Inc., our hospital
management subsidiary, as an additional insured party on the hospitals
professional and comprehensive general liability policies. We also maintain
certain contingent liability policies designed to cover contingent exposure
Brim Healthcare, Inc. could incur under such management contracts. Our
management contracts generally provide for our indemnification by the hospital
against claims that arise out of hospital operations. However, there can be no
assurance the hospitals will maintain such insurance or that such indemnities
will be available.

Available Information

We make available free of charge through our Internet website
(http://www.prhc.net) our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and, if applicable, amendments to those
reports filed or furnished pursuant to Section 13(a) of the Exchange Act of
1934 as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission.
However, the information found on our website is not part of this or any other
report.

Principal Risk Factors that May Affect Our Business and Results of Operations

If government programs reduce the payments we receive as reimbursement for our
services, our revenues may decline.

The Medicare and Medicaid programs are highly regulated and subject to
frequent and substantial changes. The Federal Balanced Budget Act of 1997,
which established a plan to balance the federal budget by fiscal year 2002,
includes significant reductions in spending levels for the Medicare and
Medicaid programs, including:



| |  |  | payment reductions for inpatient and outpatient hospital
services;                                                                                                               
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | establishment of a prospective payment system for hospital
outpatient services, skilled nursing facilities and home health
agencies under Medicare; and                          
|
| |  |  | repeal of the federal payment standard often referred to as
the Boren Amendment for hospitals and nursing facilities, which
could result in lower Medicaid reimbursement rates.

The financial impact of the Federal Balanced Budget Act of 1997, however,
has been lessened somewhat by the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000, although significant revisions in how
hospitals are paid for some services are still proceeding. We cannot predict
the impact of future legislative and regulatory actions which might be taken to
reduce Medicare and Medicaid payment levels.

In the future, Congress and state legislatures could introduce proposals
to make major changes in the health care system. If these proposals are
enacted, we may see a decline in the Medicare and Medicaid reimbursements we
receive for our services; however, at this time, we do not know what health
care reform legislation will be enacted or whether any changes in health care
programs will occur.

The health care cost containment initiatives and the financial condition of
purchasers of health care services may limit our revenue and profitability.

During the past several years, major purchasers of health care, such as
federal and state governments, insurance companies and employers, have
undertaken initiatives to revise payment methodologies and monitor health care
costs. As part of their efforts to contain health care costs, purchasers
increasingly are demanding discounted fee structures or the assumption by
health care providers of all or a portion of the financial risk through prepaid
capitation arrangements. We expect efforts to impose reduced allowances,
greater discounts and more stringent cost controls by government and other
payors to continue. In addition, we anticipate that organizations offering
prepaid and discounted medical services packages may represent an increasing
portion of our patient admissions. An increasing number of managed care
organizations have experienced financial difficulties in recent years, in some
cases resulting in bankruptcy or insolvency. In some instances, organizations
with provider

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agreements with certain of our hospitals have become insolvent, and the
hospitals have been unable to collect the full amounts due from such
organizations. Other managed care organizations with whom we do business may
encounter similar difficulties in paying claims in the future. We believe that
reductions in the payments we receive for our services, coupled with the
increased percentage of patient admissions from organizations offering prepaid
and discounted medical services and difficulty in collecting receivables from
managed care organizations, could reduce our overall revenue and profitability.

If we fail to comply with regulations regarding licenses, ownership and
operation, we could impair our ability to operate or expand our operations in
any state.

All of the states in which we operate require hospitals and most health
care facilities to maintain a license. In addition, some states require prior
approval for the purchase, construction and expansion of health care
facilities, based upon a states determination of need for additional or
expanded health care facilities or services. Such determinations, embodied in
certificates of need issued by governmental agencies with jurisdiction over
health care facilities, may be required for capital expenditures exceeding a
prescribed amount, changes in bed capacity or services and other matters. Five
states in which we currently own hospitals, Alabama, Florida, Mississippi,
Nevada and Virginia, have certificate of need laws. The failure to obtain any
required certificate of need or the failure to maintain a required license
could impair our ability to operate or expand operations in any state.

We are subject to extensive governmental regulation regarding conduct of our
operations and our relationships with physicians. If we fail to comply with
these regulations, we could suffer penalties or be required to make significant
changes to our operations.

The health care industry must comply with many laws and regulations at
federal, state and local governmental levels. These laws and regulations are
extremely complex and, in many instances, the industry does not have the
benefit of significant regulatory or judicial interpretation. In particular,
Medicare and Medicaid anti-fraud and abuse provisions, known as the
anti-kickback statute, prohibit some business practices and relationships
related to items or services reimbursable under Medicare, Medicaid and other
federal health care programs. For instance, the anti-kickback statute prohibits
health care service providers from paying or receiving remuneration to induce
or arrange for the referral of patients or items or services covered by a
federal or state health care program.

If regulatory authorities determine that any of our hospitals arrangements
violate the Anti-Kickback Statute, we could be subject to liabilities under the
Social Security Act, including:



| |  |  | criminal penalties;                                                                                                                                                                              
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | civil monetary penalties; and/or                                                                                                                                                                 
|
| |  |  | exclusion from participation in Medicare, Medicaid or other
federal health care programs, any of which could impair our ability
to operate one or more of our hospitals or to operate profitably.

The Health Insurance Portability and Accountability Act of 1996 required
the Department of Health and Human Services to issue regulations requiring
hospitals and other providers to implement measures to ensure the privacy and
security of patients medical records and use of uniform data standards for the
exchange of information between the hospitals and health plans including claims
and payment transactions. Full compliance with the privacy standard is required
by April 14, 2003 and the transaction standard by October 16, 2003. Full
compliance with the security standard is required by April 21, 2005. We may
incur additional expenses in order to comply with these standards. We cannot
predict the extent of our costs for implementing the requirements at this
stage.

In addition, the portion of the Social Security Act commonly known as the
Stark law prohibits physicians from referring Medicare or Medicaid patients
to particular providers of designated health services if the physician or a
member of the physicians immediate family has an ownership interest or
compensation arrangement with that provider. Sanctions for violating the Stark
law include civil money penalties and possible exclusion from the Medicare
program. Many states have adopted or are considering similar anti-kickback and
physician self-referral legislation. Some of the state physician self-referral
laws are more restrictive than the Stark law, in that they apply to services
reimbursed by all payors, not just by Medicaid or other government payors.

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Moreover, the federal government has shown an increasing willingness to
prosecute providers under a variety of fraud laws, including laws that have not
traditionally been used for health care fraud, such as the federal civil false
claims law and the federal mail and wire fraud laws.

There are heightened coordinated civil and criminal enforcement efforts by
federal and state government agencies relating to the health care industry. we
may become the subject of an investigation in the future.

In recent years, the media and public attention have focused on the
hospital industry due to ongoing investigations related to:



| |  |  | referral, cost reporting and billing practices;            
| | - |  | -----------------------------------------------------------
|
| |  |  | laboratory and home health care services; and              
|
| |  |  | physician ownership and joint ventures involving hospitals.

Both federal and state government agencies have announced heightened and
coordinated civil and criminal enforcement efforts. In addition, the Office of
the Inspector General of the U.S. Department of Health and Human Services and
the Department of Justice have established enforcement initiatives that focus
on specific billing practices or other suspected areas of abuse. Recent
initiatives include a focus on hospital billing for outpatient charges
associated with inpatient services, as well as hospital laboratory billing
practices.

We cannot predict whether we or other hospital operators will be the
subject of future investigations or inquiries. In the event that we become the
subject of an investigation, we will be required to devote management and
financial resources to defending our company in the investigation. In addition,
any negative publicity surrounding the investigation could affect adversely the
price of our common stock and the notes. If we incur significant fines or
penalties or are forced to reimburse amounts as a result of the investigation,
our profitability may decline.

We may need to obtain additional financing in order to fund our
acquisition program and capital expenditures, and additional financing may not
be available when needed.

Our acquisition program requires substantial capital resources. Likewise,
the operations of our existing hospitals require ongoing capital expenditures
for renovation, expansion and the addition of medical equipment and technology
utilized in the hospitals.

For example, if specified operating targets are achieved, we have agreed
to build replacement facilities for Eunice Community Medical Center and Glades
General Hospital. These two facilities are expected to cost approximately $20.0
million and $25.0 million, respectively.

We may need to incur additional indebtedness and may issue, from time to
time, debt or equity securities to fund these expenditures. We may not receive
financing on satisfactory terms. In addition, our existing level of
indebtedness may restrict our ability to borrow additional funds. If we are not
able to obtain financing, then we may not be in a position to consummate
acquisitions or undertake capital expenditures.

Our growth strategy depends on acquisitions, and we may not be able to manage
our growth effectively or acquire hospitals that meet our target criteria. we
also may have difficulties acquiring hospitals from non-profit entities due to
regulatory scrutiny.

A key element of our growth strategy is expansion through the acquisition
of acute care hospitals in attractive non-urban markets. We face competition
for acquisitions primarily from other for-profit health care companies. Some of
our competitors have greater financial and other resources than we do. Even
though we may acquire additional hospitals, we may not be able to acquire a
sufficient number of hospitals that meet our target criteria in order to
implement successfully our growth strategy.

Hospital acquisitions generally require a longer period to complete than
acquisitions in many other businesses and are subject to additional regulatory
uncertainty. In recent years, the legislatures and attorneys general of some
states have shown a heightened level of interest in transactions involving the
sale of hospitals by not-for-

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profit entities. Although the level of interest varies from state to
state, the trend is to provide for increased governmental review, and in some
cases approval, of transactions in which not-for-profit entities sell a health
care facility. Attorneys general in some states have been especially active in
evaluating these transactions. Although we have not yet been adversely affected
as a result of these trends, such increased scrutiny may increase the
difficulty or prevent the completion of transactions with not-for-profit
organizations in some states in the future, and may affect our ability to
exercise existing purchase options for hospitals under current hospital lease
agreements.

We have a concentration of revenue in Texas and Arizona, which makes us
particularly sensitive to regulatory and economic changes in those states.

Palestine Regional Medical Center, Ennis Regional Medical Center and
Parkview Regional Medical Center, each located in Texas, collectively accounted
for 16.4% of our net operating revenue for the year ended December 31, 2002.
This concentration makes us particularly sensitive to economic, competitive and
regulatory conditions in Texas. Any adverse change in these conditions could
reduce significantly our revenues and profitability.

We also own Havasu Regional Medical Center in Lake Havasu City, Arizona,
which accounted for approximately 11.4% of our net operating revenue for the
year ended December 31, 2002. Similarly, this concentration of revenue in
Arizona makes us particularly sensitive to economic, competitive and regulatory
conditions in Arizona. Any adverse change in these conditions could reduce
significantly our revenues and profitability.

Our California hospitals must comply with California seismic standards which
may require us to make significant capital expenditures.

California has a statute and regulations that require hospitals to meet
seismic performance standards. Regulated hospitals that do not meet the
standards may be required to retrofit facilities. California law requires that
owners of regulated hospitals evaluate their facilities and develop a plan and
schedule for complying with the standards. We are required to conduct
engineering studies of our California facilities to determine whether and to
what extent modifications to our facilities will be required. We have submitted
compliance plans for our California facilities. Any facilities not currently in
compliance with the seismic regulations and standards must be brought into
compliance by 2008, or 2013 if the facility obtains an extension. In the event
that our California facilities are found not to be in compliance with the
seismic standards, we may be required to make significant capital expenditures
to bring the California facilities into compliance, which could impact our
earnings.

Our performance depends on our ability to recruit and retain quality
physicians, nurses and other health care professionals at our hospitals.

The success of our owned or leased hospitals depends on:



| |  |  | the number and quality of the physicians on the medical staff
of, or who admit patients to, our hospitals;
| | - |  | ----------------------------------------------------------------------------------------------------------
|
| |  |  | the admissions practices of those physicians; and                                                         
|
| |  |  | the maintenance of good relations between our company and such physicians.                                

Because physicians generally direct the majority of hospital admissions,
our success has been dependent, in part, upon recruiting quality physicians and
maintaining good relations with and retaining our physicians. We generally do
not employ physicians, and many of our staff physicians have admitting
privileges at other hospitals. Only a portion of physicians are interested in
practicing in the non-urban communities in which our hospitals are located. The
departure of physicians from these communities, such as we experienced in 2002,
or our inability to recruit physicians to these communities, could make it more
difficult to attract patients to our hospitals and could affect our
profitability. Also, if we are unable to maintain good relationships with
physicians, our hospitals admissions may decrease and our operating
performance may decline. In addition, hospitals nationwide are experiencing a
shortage of nursing professionals, a trend which many industry observers expect
to continue over the

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next decade. If the supply of qualified nurses or other health care
professionals declines in the markets in which our hospitals operate, it may
result in increased labor expenses and lower operating margins at those
hospitals.

We depend heavily on key personnel, and loss of the services of one or more of
our key executives or a significant portion of our local management personnel
could weaken our management team and our ability to deliver health care
services efficiently.

Our success largely depends on the skills, experience and efforts of our
senior management, particularly Chairman and Chief Executive Officer, Martin S.
Rash; President and Chief Operating Officer, John M. Rutledge; and Senior Vice
President and Chief Financial Officer, Christopher T. Hannon. Our operations
also are dependent on the efforts, ability and experience of key members of our
local management staff. The loss of services of one or more members of our
senior management or of a significant portion of any of our local management
staff could weaken significantly our management expertise and our ability to
deliver health care services efficiently. We do not maintain key man life
insurance policies on any of our officers.

Other hospitals and freestanding outpatient facilities provide services similar
to those offered by our hospitals, which may raise the level of competition
faced by our hospitals.

In all geographical areas in which we operate, there are other health care
providers, including hospitals, outpatient surgery centers and other outpatient
facilities, that provide comparable services to those offered by our hospitals.
Some of the hospitals with which we compete are owned by governmental agencies
and supported by tax revenues, and others are owned by not-for-profit
corporations and may be supported to a large extent by endowments and
charitable contributions. Some of these competitors are larger, may be more
established and may have more capital and other resources than we do. Many of
our hospitals attempt to attract patients from surrounding counties and
communities, including communities in which a competing facility exists. If our
competitors are able to finance capital improvements and expand services at
their facilities, we may be unable to attract patients away from these
facilities.

If we fail to improve the operations of acquired hospitals, we may be unable to
achieve our growth strategy.

Some of the hospitals we have acquired or will acquire had or may have
operating losses prior to the time we acquired them. We may be unable to
operate profitably any hospital or other facility we acquire, effectively
integrate the operations of any acquisitions, or otherwise achieve the intended
benefit of our growth strategy.

We may be subject to liabilities because of claims brought against our owned
and leased hospitals. In addition, if we acquire hospitals with unknown or
contingent liabilities, we could become liable for material obligations.

In recent years, plaintiffs have brought actions against hospitals and
other health care providers, alleging malpractice, product liability or other
legal theories. Many of these actions involved large claims and significant
defense costs. We maintain professional malpractice liability and general
liability insurance coverage of approximately $51,000,000 to cover claims
arising out of the operations of our owned and leased hospitals. Some of the
claims, however, could exceed the scope of the coverage in effect or coverage
of particular claims could be denied. While our professional and other
liability insurance has been adequate in the past to provide for liability
claims, such insurance may not be available for us to maintain adequate levels
of insurance.

In addition, hospitals that we acquire may have unknown or contingent
liabilities, including liabilities for failure to comply with health care laws
and regulations. Although we obtain contractual indemnification from sellers
covering these matters, such indemnification may be insufficient to cover
material claims or liabilities for past activities of acquired hospitals.

We may be subject to liabilities because of claims arising from our hospital
management activities.

We may be subject to liabilities from the acts, omissions and liabilities
of the employees of hospitals we manage or from the actions of our employees in
connection with the management of such hospitals. Our hospital management
contracts generally require the hospitals we manage to indemnify us against
certain claims and to

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maintain specified amounts of insurance. The hospitals, however, may not
maintain such insurance and indemnification may not be available to us.
Recently, other hospital management companies have been subject to complaints
alleging that these companies violated laws on behalf of hospitals they
managed. In some cases, plaintiffs brought actions against the managing company
instead of, or in addition to, their individually managed hospital clients for
these violations. Our managed hospitals or other third parties may not hold us
harmless for any losses we incur arising out of the acts, omissions and
liabilities of the employees of the hospitals we manage. If the courts
determine that we are liable for amounts exceeding the limits of any insurance
coverage or for claims outside the scope of that coverage or any indemnity, or
if any indemnity agreement is determined to be unenforceable, then the
resulting liability could affect adversely our business, results of operations
and financial condition.




ITEM 2.     PROPERTIES

Information with respect to our hospital facilities and other properties
can be found in Item 1 of this report under the captions, Business  Owned and
Leased Hospitals, and Business  Properties.




ITEM 3.     LEGAL PROCEEDINGS

Our company is from time to time, subject to claims and suits arising in
the ordinary course of business, including claims for damages for personal
injuries, breach of management contracts or for wrongful restriction of or
interference with physicians staff privileges. In certain of these actions,
plaintiffs request punitive and other damages that may not be covered by
insurance. We currently are not a party to any proceeding which, in our
opinion, would have a material adverse effect on our business, financial
condition or results of operations.




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

None.

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PART II




ITEM 5.     MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Prior to June 5, 2002, our common stock was quoted on the Nasdaq National
Market under the symbol PRHC. On and subsequent to June 5, 2002, our common
stock has been quoted on the New York Stock Exchange under the symbol PRV.
The following table sets forth the high and low sale prices for our common
stock as reported by the Nasdaq National Market and New York Stock Exchange, as
applicable, for the periods indicated. The prices have been restated to
reflect the effect of the three-for-two stock split effected in the form of a
50% stock dividend on April 30, 2002.

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|2002           |  | High |       | Low
|               |  |      |       |    
|First Quarter  |  | $    | 24.33 |     |  | $ | 18.19 | 
|Second Quarter |  |      | 26.76 |     |  |   | 22.36 | 
|Third Quarter  |  |      | 22.40 |     |  |   | 15.55 | 
|Fourth Quarter |  |      | 19.11 |     |  |   | 9.19  | 

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|2001           |  | High |       | Low
|               |  |      |       |    
|First Quarter  |  | $    | 26.54 |     |  | $ | 16.09 | 
|Second Quarter |  |      | 23.80 |     |  |   | 15.18 | 
|Third Quarter  |  |      | 26.38 |     |  |   | 20.80 | 
|Fourth Quarter |  |      | 25.39 |     |  |   | 17.00 | 

As of March 1, 2003, there were approximately 48,713,946 shares of common
stock outstanding, held by 1,025 record holders.

We historically have retained and currently intend to retain all earnings
to finance the development and expansion of our operations and, therefore, do
not anticipate paying cash dividends or making any other distributions on our
shares of common stock in the foreseeable future. Furthermore, our credit
facilities contain restrictions on our ability to pay dividends. Our future
dividend policy will be determined by our board of directors on the basis of
various factors, including our results of operations, financial condition,
business opportunities, capital requirements and such other factors as the
board of directors may deem relevant.




ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data is qualified by, and should be
read in conjunction with, Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations and our consolidated financial
statements and related notes, appearing elsewhere in this report.

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|                                                    |  |                                       |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|--------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                    |  | Selected Consolidated Financial Data 
|                                                    |  | (In thousands, except per share data)
|                                                    |  |                                      
|                                                    |  | Year Ended December 31,              
|                                                    |  |                                      
|                                                    |  | 2002                                  |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                                    |  |                                       |         |      |  |      |         |      |  |     
|Income Statement Data:                              |  |                                       |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Net operating revenue                               |  | $                                     | 704,347 |      |  | $    | 530,739 |      |  | $    | 469,858 |  |  | $ | 346,692 |  |  | $ | 238,855 | 
|Net income(1)                                       |  |                                       | 36,112  |      |  |      | 32,908  |      |  |      | 19,938  |  |  |   | 14,501  |  |  |   | 10,007  | 
|Net income to common shareholders(2)                |  |                                       | 36,112  |      |  |      | 32,908  |      |  |      | 19,938  |  |  |   | 14,501  |  |  |   | 9,311   | 
|Net income per share to common
shareholdersdiluted |  |                                       | 0.73    |      |  |      | 0.67    |      |  |      | 0.45    |  |  |   | 0.40    |  |  |   | 0.30    | 
|                                                    |  |                                      
|Balance Sheet Data (at end of period):              |  |                                       |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Total assets                                        |  | $                                     | 971,711 |      |  | $    | 759,897 |      |  | $    | 530,852 |  |  | $ | 497,616 |  |  | $ | 339,377 | 
|Long-term obligations, less current
maturities      |  |                                       | 461,576 |      |  |      | 330,838 |      |  |      | 162,086 |  |  |   | 259,992 |  |  |   | 134,301 | 
|Stockholders equity                                |  |                                       | 413,202 |      |  |      | 362,005 |      |  |      | 314,714 |  |  |   | 184,359 |  |  |   | 169,191 | 



---

|(1) |  | The Company adopted Statement of Financial Accounting Standards No. 142
(SFAS No. 142), Goodwill and Other Intangible Assets, effective January
1, 2002. Under SFAS No. 142, goodwill is no longer amortized, but is
subject to annual impairment tests, or more frequently if certain
indicators arise. Had the Company been accounting for its goodwill under
SFAS No. 142 for all periods presented, the Companys pro forma net income
would have been $37,106, $24,285, $18,505, and $12,985, for the years
ended December 31, 2001, 2000, 1999, and 1998 respectively.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Preferred stock dividends and accretion totaled $696 in 1998. The
preferred stock was redeemed in February 1998 at the time of our initial
public offering.                                                                                                                                                                                                                                                                                                                                                                                                                   

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

The following discussion should be read in conjunction with our
consolidated financial statements and related notes, appearing elsewhere in
this report.

Overview

We are a healthcare services company focused on acquiring and operating
hospitals in attractive non-urban markets in the United States. As of December
31, 2002, we owned or leased 20 general acute care hospitals in 13 states with
a total of 2,280 licensed beds, and managed 36 hospitals in 14 states with a
total of 2,897 licensed beds.

Impact of Acquisitions and Divestitures

An integral part of our strategy is to acquire non-urban acute care
hospitals. Because of the financial impact of our recent acquisitions, it is
difficult to make meaningful comparisons between our financial statements for
the fiscal periods presented. In addition, because of the relatively small
number of owned and leased hospitals, each hospital acquisition can materially
affect our overall operating performance. Upon the acquisition of a hospital,
we typically take a number of steps to lower operating costs. The impact of
such actions may be offset by cost increases to expand services, strengthen
medical staff and improve market position. The benefits of these investments
and of other activities to improve operating margins generally do not occur
immediately. Consequently, the financial performance of a newly-acquired
hospital may adversely affect overall operating margins in the near term. As we
make additional hospital acquisitions, we expect that this effect will be
mitigated by the expanded financial base of existing hospitals and the
allocation of corporate overhead among a larger number of hospitals. We also
may divest certain hospitals in the future if we determine a hospital no longer
fits within our strategy.

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Industry Trends

The federal Medicare program accounted for approximately 44.5%, 39.8% and
39.7% of net patient revenue in 2002, 2001 and 2000, respectively. The state
Medicaid programs accounted for approximately 12.0%, 10.9% and 9.5% of net
patient revenue in 2002, 2001 and 2000, respectively. The payment rates under
the Medicare program for inpatients are prospective, based upon the diagnosis
of a patient. The Medicare payment rate increases historically have been less
than actual inflation.

Both federal and state legislatures are continuing to scrutinize the
healthcare industry for the purpose of reducing healthcare costs. While we are
unable to predict what, if any, future healthcare-reform legislation may be
enacted at the federal or state level, we expect continuing pressure to limit
expenditures by governmental healthcare programs. The Balanced Budget Act of
1997 imposed certain limitations on increases in the inpatient Medicare rates
paid to acute care hospitals. As required by the Balanced Budget Act of 1997,
payments for hospital outpatient, psychiatric sub-acute, home health and
rehabilitation sub-acute services have converted to prospective payment
systems, instead of payments being based on costs. Most hospital outpatient
services are now reimbursed under an outpatient prospective payment system
based on a system of Ambulatory Payment Classification. Rehabilitation and
psychiatric sub-acute services began transitioning to a prospective payment
system in 2002. The Balanced Budget Act of 1997 also includes a managed care
option that could direct Medicare patients to managed care organizations. The
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000
(BIPA) amended the Balanced Budget Act of 1997 by giving hospitals a full
market basket increase in fiscal years 2002 and 2003. In addition, BIPA
contains provisions delaying scheduled reductions in payment for home health
agencies and other provisions designed to lessen the impact on providers of
spending reductions contained in the Balanced Budget Act of 1997. Further
changes in the Medicare or Medicaid programs and other proposals to limit
healthcare spending could have a material adverse effect on the healthcare
industry and our company.

The hospital industry and some of our hospitals continue to have
significant unused capacity. The result is substantial competition for patients
and physicians. Inpatient utilization continues to be affected negatively by
payor-required pre-admission authorization and by payor pressure to maximize
outpatient and alternative healthcare delivery services for less acutely ill
patients. We expect increased competition and admission constraints to continue
in the future. The ability to respond successfully to these trends, as well as
spending reductions in governmental healthcare programs, will play a
significant role in determining the ability of our hospitals to maintain their
current rate of net revenue growth and operating margins.

We expect the industry trend towards the provision of more services on an
outpatient basis to continue. This trend is the result of increased focus on
managed care and advances in technology.

The billing and collection of accounts receivable by hospitals are
complicated by a number of factors, including:



| |  |  | the complexity of the Medicare and Medicaid regulations;                      
| | - |  | ------------------------------------------------------------------------------
|
| |  |  | increases in managed care;                                                    
|
| |  |  | hospital personnel turnover;                                                  
|
| |  |  | the dependence of hospitals on physician documentation of medical records; and
|
| |  |  | the subjective judgment involved.                                             

These factors, or any combination of them, may impact our ability to bill
and collect our accounts receivable at the rates we have anticipated, which
could negatively affect our future cash flows.

The federal government and a number of states are increasing the resources
devoted to investigating allegations of fraud and abuse in the Medicare and
Medicaid programs. At the same time, regulatory and law enforcement authorities
are taking an increasingly strict view of the requirements imposed on providers
by the Social Security Act and Medicare and Medicaid regulations. Although we
believe that we are in material compliance with such laws, a determination that
we have violated such laws, or even the public announcement that we were being
investigated concerning possible violations, could have a material adverse
effect on our company.

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Our historical financial trend has been impacted favorably by our success
in acquiring acute care hospitals. While we believe that the healthcare
industry trends described above may create future acquisition opportunities,
our future financial growth rates will be impacted by our ability to acquire
hospitals and to successfully integrate them into our system.

Results of Operations

The following table presents, for the periods indicated, information
expressed as a percentage of net operating revenue. Such information has been
derived from our consolidated statements of income included elsewhere in this
report. The results of operations for the periods presented include hospitals
from their acquisition dates, as previously discussed.

|                              |  |                         |       |      |  |      |       |   |  |  |       |  
|----------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                              |  | Year Ended December 31,
|                              |  |                        
|                              |  | 2002                    |       | 2001 |  | 2000
|                              |  |                         |       |      |  |     
|Net operating revenue         |  |                         | 100.0 | %    |  |      | 100.0 | % |  |  | 100.0 | %
|Operating expenses(1)         |  |                         | (83.5 | )    |  |      | (81.3 | ) |  |  | (82.1 | )
|                              |  |                         |       |      |  |      |       |   |  |  |       |  
|EBITDA(2)                     |  |                         | 16.5  |      |  |      | 18.7  |   |  |  | 17.9  |  
|Depreciation and amortization |  |                         | (4.9  | )    |  |      | (5.7  | ) |  |  | (5.7  | )
|Interest, net                 |  |                         | (3.1  | )    |  |      | (2.3  | ) |  |  | (3.5  | )
|Minority interest             |  |                         | (0.0  | )    |  |      | (0.0  | ) |  |  | (0.0  | )
|Gain (Loss) on sale           |  |                         | 0.0   |      |  |      | (0.0  | ) |  |  | (1.3  | )
|                              |  |                         |       |      |  |      |       |   |  |  |       |  
|Income before income taxes    |  |                         | 8.5   |      |  |      | 10.7  |   |  |  | 7.4   |  
|Provision for income taxes    |  |                         | (3.4  | )    |  |      | (4.5  | ) |  |  | (3.2  | )
|                              |  |                         |       |      |  |      |       |   |  |  |       |  
|Net income(3)                 |  |                         | 5.1   | %    |  |      | 6.2   | % |  |  | 4.2   | %
|                              |  |                         |       |      |  |      |       |   |  |  |       |  

|                                |  |                         |         |      |  |      |         |  |  |   |         | 
|------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                |  | Year Ended December 31,
|                                |  |                        
|                                |  | 2002                    |         | 2001 |  | 2000
|                                |  |                         |         |      |  |     
|Revenues                        |  | $                       | 704,347 |      |  | $    | 530,739 |  |  | $ | 469,858 | 
|Salaries and benefits           |  |                         | 277,843 |      |  |      | 205,628 |  |  |   | 180,881 | 
|Supplies                        |  |                         | 87,473  |      |  |      | 59,341  |  |  |   | 54,465  | 
|Other operating expenses (1)    |  |                         | 165,934 |      |  |      | 117,017 |  |  |   | 106,790 | 
|Provision for doubtful accounts |  |                         | 56,765  |      |  |      | 49,283  |  |  |   | 43,604  | 
|                                |  |                         |         |      |  |      |         |  |  |   |         | 
|                                |  |                         | 588,015 |      |  |      | 431,269 |  |  |   | 385,740 | 
|                                |  |                         |         |      |  |      |         |  |  |   |         | 
|EBITDA (2)                      |  | $                       | 116,332 |      |  | $    | 99,470  |  |  | $ | 84,118  | 
|                                |  |                         |         |      |  |      |         |  |  |   |         | 



---

|(1) |  | Operating expenses represent expenses before depreciation and
amortization, interest expense, minority interest, (gain) loss on sale of
assets and income taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | EBITDA represents the sum of income before income taxes, interest,
depreciation and amortization and minority interest and gain (loss) on
sale of assets. EBITDA is commonly used as an analytical indicator of
operating performance within the healthcare industry and also serves as a
measure of leverage and debt service capacity. Province management
considers EBITDA to be one measure of our ability to service existing
debt, sustain potential increases in debt in the future and to satisfy
capital requirements. EBITDA, however, is not a measure of financial
performance under accounting principles generally accepted in the United
States, and should not be considered an alternative to net income as a
measure of operating performance or to cash flows from operating,
investing or financing activities as a measure of liquidity. Because
EBITDA is not a measurement determined in accordance with accounting
principles generally accepted in the United States and is susceptible to
varying calculations, EBITDA as presented may not be comparable to other
similarly titled measures of other companies.

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|(3) |  | The Company adopted Statement of Financial Accounting Standards No. 142
(SFAS No. 142), Goodwill and Other Intangible Assets, effective January
1, 2002. Under SFAS No. 142, goodwill is no longer amortized, but is
subject to annual impairment tests, or more frequently if certain
indicators arise. Had the Company been accounting for its goodwill under
SFAS No. 142 for all periods presented, the Companys pro forma net
income, as a percentage of net revenue, would have been 7.0% and 5.2%, for
the years ended December 31, 2001 and 2000, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Hospital revenues are received primarily from Medicare, Medicaid and
commercial insurance. The percentage of revenues received from the Medicare
program is expected to increase with the general aging of the population. The
payment rates under the Medicare program for inpatients are based on a
prospective payment system, based upon the diagnosis of a patient. While these
rates are indexed for inflation annually, the increases historically have been
less than actual inflation. In addition, states, insurance companies and
employers are actively negotiating the amounts paid to hospitals as opposed to
paying standard hospital rates. The trend toward managed care, including health
maintenance organizations, preferred provider organizations and various other
forms of managed care, may affect our hospitals ability to maintain their
current rate of net operating revenue growth.

We continuously monitor the cost/benefit relationship of services provided
at our hospitals, and make decisions related to adding new services or
discontinuing existing services.

Net patient service revenue is reported net of contractual adjustments and
policy discounts. The adjustments principally result from differences between
our hospitals customary charges and payment rates under the Medicare, Medicaid
and other third-party payor programs. Customary charges generally have
increased at a faster rate than the rate of increase for Medicare and Medicaid
payments. Operating expenses of our hospitals primarily consist of salaries,
wages and benefits, purchased services, supplies, provision for doubtful
accounts, rentals and leases, and other operating expenses, principally
consisting of utilities, insurance, property taxes, travel, physician
recruiting, telephone, advertising, repairs and maintenance.

Other revenue is comprised of fees from management and professional
consulting services provided to third-party hospitals pursuant to management
contracts and consulting arrangements, reimbursable expenses and miscellaneous
other revenue items. Management and professional services revenue plus
reimbursable expenses total less than 3% of our consolidated net operating
revenue for the year ended December 31, 2002. Operating expenses for the
management and professional services business primarily consist of salaries,
wages and benefits and reimbursable expenses.

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

Net operating revenue increased to $704.3 million in 2002 from $530.7
million in 2001, an increase of $173.6 million, or 32.7%. Cost report
settlements and the filing of cost reports had a minimal effect on net revenue
in 2002, and resulted in a positive revenue adjustment of $0.6 million, or 0.1%
of net operating revenue, in 2001. Net patient service revenue generated by the
17 hospitals owned during both periods increased $3.1 million. Price increases
for these hospitals were offset by a slight decrease in inpatient admissions
(less than 1%) and a decline in surgeries of 6.2%. The decline in admissions
and surgeries were attributable to the departure of 51 physicians at the
hospitals during 2002. Total net patient service revenue increased 33.8%
during 2002, primarily related to the hospitals acquired in the fourth quarter
of 2001 and during 2002.

Our 2002 operations were adversely affected by the loss of physicians.
During 2002, we lost 51 physicians who were major contributors, with the
majority leaving in the last six months of the year. We define a major
contributor as a physician generating $200,000 or more in revenues
annually. All of these physicians left for reasons unrelated to hospital
operations. We recruited 82 physicians in 2002, 59% of whom only started their
practices in the third and fourth quarters of the year. Therefore, the new
practices were unable to generate sufficient volume to replace the lost
revenues generated by the departing physicians. As the new physicians
practices move along the timeline toward full, mature practices, lost revenues
will be replaced. Of the 82 recruited physicians, 76 are admitting physicians.
Based on historic practice patterns of physicians recruited to our hospitals,
to date, these physician practices are tracking in line with historic trends
and our expectations.

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Our 2002 operations were adversely impacted by increased competition from
ambulatory surgery centers in two of our markets. We have been proactive in
the only other markets large enough to support full service ambulatory surgery
centers that currently do not have these services, by either pursuing a
certificate of need for a full service ambulatory surgery center ourselves, or
working with physicians in the market to address the community need for
outpatient surgery services.

Operating expenses increased to $588.0 million, or 83.5% of net operating
revenue, in 2002 from $431.3 million, or 81.3% of net operating revenue, in
2001. The increase in operating expenses of hospitals owned during both
periods resulted primarily from new services and increased physician
recruiting. The consolidated provision for doubtful accounts decreased to 8.1%
of net operating revenue in 2002 from 9.3% of net operating revenue in 2001,
primarily related to improvement in days in accounts receivable and increased
up-front cash collections. The majority of the increase in total operating
expenses was attributable to the acquisition of additional hospitals in the
fourth quarter of 2001 and in 2002.

EBITDA was $116.3 million, or 16.5% of net operating revenue, in 2002,
compared to $99.5 million, or 18.7% of net operating revenue, in 2001.

Depreciation and amortization expense increased to $34.2 million, or 4.9%
of net operating revenue, in 2002 from $30.2 million, or 5.7% of net operating
revenue in 2001. The increase in depreciation and amortization resulted
primarily from the acquisition of additional hospitals in 2002 and 2001, and
capital expenditures at hospitals owned during both periods, offset by
non-amortization of goodwill in 2002, which had an impact of approximately $4.4
million. Interest expense increased to $22.0 million in 2002 from $12.1
million in 2001, an increase of $9.9 million or 81.6%. This was a result of
increased borrowings to finance the acquisition of additional hospitals in the
fourth quarter of 2001 and in 2002, and interest on the $172.0 million, 4 1/2%
Convertible Subordinated Notes issued in October 2001.

Income before provision for income taxes was $60.2 million for the year
ended December 31, 2002, compared to $56.7 million in 2001, an increase of $3.5
million or 6.2%.

Our provision for income taxes was $24.1 million for the year ended
December 31, 2002, compared to $23.8 million in 2001. These provisions reflect
effective income tax rates of 40.0% in 2002 and 42.0% in 2001. See Note 8 of
the notes to our consolidated financial statements for information regarding
differences between effective tax rates and statutory rates.

Net income was $36.1 million, or 5.1% of net operating revenue, in 2002,
compared to $32.9 million, or 6.2% of net operating revenue, in 2001.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Net operating revenue increased from $469.9 million in 2000 to $530.7
million in 2001, an increase of $60.9 million or 13.0%. We divested two
hospitals in the fourth quarter of 2000, which prevents meaningful total
revenue comparisons. Net patient service revenue generated by hospitals owned
during both periods increased $57.9 million, or 14.7%, resulting from inpatient
and outpatient volume increases, new services and price increases. Cost report
settlements and the filing of cost reports resulted in negative revenue
adjustments of $0.7 million, or 0.1% of net operating revenue, in 2000, and a
positive revenue adjustment of $0.6 million, or 0.1% of net revenues in 2001.
The remaining increase was primarily attributable to the acquisitions of
additional hospitals in 2000 and 2001.

Operating expenses increased from $385.7 million, or 82.1% of net
operating revenue, in 2000 to $431.3 million, or 81.3% of net operating revenue
in 2001. The increase in operating expenses of hospitals owned during both
periods resulted primarily from new services, volume increases, changes in case
mix and increased recruiting expenses.

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EBITDA increased from $84.1 million, or 17.9% of net operating revenue, in
2000 to $99.5 million, or 18.7% of net operating revenue, in 2001, primarily as
a result of improved operations at hospitals owned during both periods.

Depreciation and amortization expense increased from $26.6 million, or
5.7% of net operating revenue, in 2000, to $30.2 million, or 5.7% of net
operating revenue in 2001. The increase in depreciation and amortization
resulted primarily from capital expenditures and the acquisitions in 2001, and
a full year of expense for acquisitions made in 2000.

Interest expense as a percent of net operating revenue decreased from 3.5%
in 2000 to 2.3% in 2001. Proceeds from the sale of convertible notes in
November and December 2000 and in October 2001 were used to reduce the higher
rate of indebtedness under the revolving credit facility.

Income before provision for income taxes was $56.7 million in 2001,
compared to $34.7 million in 2000, an increase of $22.0 million or 63.4%. The
increase resulted primarily from improved operations at hospitals owned during
both periods.

Provision for income taxes was $23.8 million in 2001, compared to $14.7
million in 2000. These provisions reflect effective income tax rates of 42.0%
in 2001 compared to 42.5% in 2000. See Note 8 of the notes to our consolidated
financial statements for information regarding differences between effective
tax rates and statutory rates.

Net income was $32.9 million, or 6.2% of net operating revenue, in 2001,
compared to $19.9 million, or 4.2% of net operating revenue in 2000.

Liquidity and Capital Resources

Capital Resources

Total long-term obligations, less current maturities, increased to $461.6
million at December 31, 2002, from $330.8 million at December 31, 2001. The
increase resulted primarily from the borrowings to finance the two hospitals
acquired in the second quarter of 2002.

In November 2001, we reduced the size of our credit facility to $250.0
million, which includes $40.3 million for capital leases and a $209.7 million
revolving line of credit. At December 31, 2002, we had outstanding letters of
credit of $4.3 million, $94.0 million outstanding and $111.4 million available
under our revolving line of credit.

The loans under the credit facility bear interest, at our option, at the
adjusted base rate or at the adjusted LIBOR rate. The interest rate ranged from
3.69% to 5.75% during 2002. We pay a commitment fee, which varies from one-half
to three-eighths of one percent of the unused portion, depending on compliance
with certain financial ratios. The principal amount outstanding under the
revolving credit agreement may be prepaid at any time before the maturity date
of May 31, 2005.

The credit facility contains limitations on our ability to incur
additional indebtedness (including contingent obligations), sell material
assets, retire, redeem or otherwise reacquire our capital stock, acquire the
capital stock or assets of another business, and pay dividends. The credit
facility also requires that we maintain a specified net worth and meet or
exceed certain coverage, leverage, and indebtedness ratios. Indebtedness under
the credit facility is secured by substantially all assets of our company. We
are in compliance with all covenants or other requirements set forth in our
credit agreements or indentures.

Interest rate swap agreements are used to manage our interest rate
exposure under our credit facility. In 1998, we entered into an interest rate
swap agreement that effectively converted for a five-year period $45.0 million
of floating-rate borrowings to fixed-rate borrowings at 5.625%. In September
2002, we amended the swap

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agreement and secured a 4.45% fixed interest rate and extended the term of
the agreement to September 30, 2005. All other terms and conditions of the
swap agreement remain unchanged.

Cash Flows  Year Ended December 31, 2002 Compared to Year Ended December 31,
2001

Working capital decreased to $105.3 million at December 31, 2002, from
$136.2 million at December 31, 2001, resulting primarily from decreased cash,
used for the acquisition of Memorial Hospital of Martinsville and Henry County
in 2002. The ratio of current assets to current liabilities was 2.7 to 1.0 at
December 31, 2002. Our cash flows from operating activities increased by $53.6
million to $92.1 million in 2002 from $38.4 million in 2001. This primarily
related to improvements in our cash collection cycle and an increase in
deferred taxes. The use of our cash in investing activities increased to
$217.5 million in 2002 from $169.8 million in 2001, resulting primarily from
smaller outlays of cash for acquisition of property, plant and equipment and
increased use of cash for hospital acquisitions in 2002, compared to 2001. Our
cash flows provided by financing activities decreased to $100.5 million in 2002
from $170.8 million in 2001, resulting from a decrease in net borrowings.

Cash Flows  Year Ended December 31, 2001 Compared to Year Ended December 31,
2000

Working capital increased to $136.2 million at December 31, 2001 from
$63.4 million at December 31, 2000, resulting primarily from increased business
volumes, growth in accounts receivable from acquired hospitals, and effective
management of our working capital. Our cash flows from operating activities
increased by $5.7 million from $32.7 million provided in 2000 to $38.4 million
provided in 2001. Offsetting our improved profitability was a large increase
in accounts receivable, both at hospitals owned during both periods, resulting
from volume increases, new services and price increases, and a build-up of
accounts receivable at newly-acquired hospitals. The use of our cash in
investing activities increased from $40.7 million in 2000 to $169.8 million in
2001, reflecting more acquisitions during 2001. Our cash flows provided by
financing activities increased $162.8 million from $8.0 million in 2000, to
$170.8 million in 2001, primarily because of increased borrowings related to
acquisitions and the sale of convertible notes.

Capital Expenditures

Capital expenditures, excluding acquisitions, in 2002, 2001 and 2000, were
$46.4 million, $72.2 million, and $44.0 million, respectively, inclusive of
construction projects. Capital expenditures for our owned hospitals may vary
from year to year depending on facility improvements and service enhancements
undertaken by the hospitals. We expect to make total capital expenditures in
2003 of approximately $55.0 million, exclusive of any acquisitions of
businesses. Planned capital expenditures for 2003 consist principally of
capital improvements and revenue-generating capital expenditures to owned and
leased hospitals. We expect to fund these expenditures through cash provided by
operating activities and borrowings under our revolving credit facility.

If pre-determined operating levels are achieved, we have agreed to build
replacement facilities for Eunice Community Medical Center, currently expected
to cost approximately $20.0 million, and Glades General Hospital, currently
expected to cost approximately $25.0 million. We do not know whether and when
each hospital will achieve its individual pre-determined operating levels, but
we believe it will take approximately 36 months to complete construction from
such date. In connection with certain acquisitions we have made, we have
committed and may commit in the future to make specified capital expenditures.

Based upon our current level of operations and anticipated growth, we
believe that cash generated from operations and amounts available under our
credit facility will be adequate to meet our anticipated debt service
requirements, capital expenditures and working capital needs for the next 12
months. We cannot assure you, however, that our business will generate
sufficient cash flow from operations or that future borrowings will be
available under our credit facility, or otherwise, to enable us to grow our
business, service our indebtedness, including the credit facility and our
convertible subordinated notes, or make anticipated capital expenditures. One
element of our business strategy is expansion through the acquisition of
hospitals in existing and new markets. The completion of acquisitions may
result in the incurrence of, or assumption by us, of additional indebtedness.
Our future operating performance, ability to service or refinance the
convertible subordinated notes and ability to service and extend or refinance
the credit facility will be subject to future economic conditions and to
financial, business and other factors, many of which are beyond our control.

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The following table reflects a summary of obligations and commitments
outstanding as of December 31, 2002.

Payments due by periodLess than1 year
        
        1-2 years
        
        3-4 years
        
        Thereafter
        
        Total(In millions)Contractual Cash Obligations:Long-term debt
        
        $
        694
        
        
        $
        245,206
        
        
        $
        
        
        
        $
        172,500
        
        
        $
        418,400Capital lease obligations
        
        
        1,315
        
        
        
        41,742
        
        
        
        997
        
        
        
        2,518
        
        
        
        46,572Operating leases
        
        
        6,690
        
        
        
        9,677
        
        
        
        6,344
        
        
        
        10,863
        
        
        
        33,574Subtotal
        
        $
        8,699
        
        
        $
        296,625
        
        
        $
        7,341
        
        
        $
        185,881
        
        
        $
        498,546


Amount of commitment expiration per periodLess than1 year
        
        1-2 years
        
        3-4 years
        
        Thereafter
        
        Total(In millions)Other Commitments:Letters of credit
        
        $
        4,300
        
        
        $
        
        
        
        $
        
        
        
        $
        
        
        
        $
        4,300Total obligations and commitments
        
        $
        12,999
        
        
        $
        296,625
        
        
        $
        7,341
        
        
        $
        185,881
        
        
        $
        502,846


Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. In
preparing our financial statements, we are required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. We evaluate our estimates and judgments on an ongoing basis.
We base our estimates and judgments on historical experience and on various
other factors that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Our actual results may differ from these estimates, and different assumptions
or conditions may yield different estimates.

Allowance for Doubtful Accounts

Our ability to collect outstanding receivables from third-party payors is
critical to our operating performance and cash flows. The primary collection
risk lies with uninsured patient accounts or patient accounts for which a
balance remains after primary insurance has paid. We estimate the allowance
for doubtful accounts primarily based upon the age of the accounts since
patient discharge date. The allowance for doubtful accounts increased, as a
percentage of accounts receivable net of contractual adjustments, to 36.7% in
2002 from 31.1% in 2001. We continually monitor our accounts receivable
balances and utilize cash collections data and other analytical tools to
support the basis for our estimates of the provision for doubtful accounts.
Significant changes in payor mix or business office operations, or
deterioration in aging accounts receivable could result in a significant
increase in this allowance.

Allowance for Contractual Discounts

The percentage of our patient service revenue derived from Medicare and
Medicaid patients continues to be high. For the year ended December 31, 2002,
Medicare and Medicaid combined was 56.6% of net revenue,

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compared to 50.7% in 2001. The Medicare and Medicaid contracts are often
complex and may include multiple reimbursement mechanisms for different types
of services provided in our hospitals, and cost settlement provisions requiring
complex calculations and assumptions subject to interpretation. We use an
exhibit system to estimate the allowance for contractual discounts on a
payor-specific basis, given our interpretation of the applicable regulations or
contract terms. We have invested significant human resources and information
systems to improve the estimation process; however, the services authorized and
provided and related reimbursement are often subject to interpretation that
could result in payments that differ from our estimates. Additionally, updated
regulations and contract negotiations occur frequently, necessitating our
continual review and assessment of the estimation process.

General and Professional Liability Reserves

We purchased a professional liability claims made reporting policy
effective January 1, 2002. This coverage is subject to a $750,000 deductible
per occurrence for general and professional liability and an additional $2.0
million self-insured retention for professional and general liability. The
policy provides coverage up to $51.0 million for claims incurred during the
annual policy term. We maintain a reserve for the anticipated claims within
these deductible and self-insured retentions. As of January 1, 2003, we
increased our self-insurance retention to $5.0 million. This increase in
retention amount increases our exposure for claims occurring prior to December
31, 2002, and reported in 2003. In 2001 we maintained insurance for individual
malpractice claims exceeding $50,000 per medical incident, subject to an annual
maximum of $500,000 for claims occurring and reported in 2001. We estimate our
self-insured retention portion of the malpractice risks using historical claims
data, demographic factors, severity factors and other actuarial assumptions.
The estimated accrual for malpractice claims could be significantly affected
should current and future occurrences differ from historical claims trends.
The estimation process is also complicated by the relatively short period of
time in which we have owned some of our healthcare facilities, as occurrence
data under previous ownership may not necessarily reflect occurrence data under
our ownership. While management monitors current claims closely and considers
outcomes when estimating our insurance accruals, the complexity of the claims
and wide range of potential outcomes often hampers timely adjustments to the
assumptions used in the estimates.

Workers Compensation Reserves

Workers compensation claims are insured with a large deductible with stop
loss limits of $250,000 per accident and a $6.6 million and $3.0 million
minimum cap on total losses for the 2002 and 2001 years, respectively. Our
arrangement with the insurance provider allows us to prepay the expected
amounts of annual workers compensation claims, which is based upon claims
experience. The claims processor tracks payments for the policy year. At the
end of the policy year, the claims processor compares the total amount prepaid
by us to the actual amount paid by the claims processor. This comparison
ultimately will result in a receivable from or a payable to the claims
processor.

We are fully insured in the commercial marketplace for workers
compensation claims prior to January 1, 1999. We utilize loss run reports
provided by the claims administrator to determine the appropriate range of loss
reserves for the 1999 and subsequent years. Our accruals are calculated to
cover the risk from both reported claims and claims that have been incurred but
not yet reported.

Medical Claims Reserves

We maintain self-insured medical and dental plans for employees. Claims
are accrued under these plans as the incidents that give rise to them occur.
We use a third-party administrator to process all such claims. Unpaid claim
accruals are based on the estimated ultimate cost of settlement, including
claim settlement expenses, in accordance with an average lag time and past
experience. We have entered into a reinsurance agreement with an independent
insurance company to limit our losses on claims. Under the terms of this
agreement, the insurance company will reimburse us a maximum of $800,000 on any
individual claim. While management believes that its estimation methodology
effectively captures trends in medical claims costs, actual payments could
differ significantly from our estimates, given changes in the healthcare cost
structure or adverse experience.

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Goodwill and Long-Lived Assets, Including Impairment

Our consolidated financial statements primarily include the following
types of long-lived assets: property, plant and equipment, goodwill and other
intangible assets. Property, plant and equipment purchased in the normal
course of business are recorded at the cost of the purchase and a useful life
is assigned based upon the nature of the asset in comparison to our companys
policy. We also, in connection with our acquisition of businesses, acquire
property, plant and equipment, goodwill and other intangible assets. We use
outside firms to perform a valuation of these acquired assets for the purpose
of allocating the purchase price of the acquisition. As a result of the
adoption of Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets(SFAS No. 142), we have obtained valuation
reports to identify property, plant and equipment, as well as any intangible
assets purchased in our acquisitions. Based on the valuation reports completed
to date, the only identifiable intangible assets valued have been non-compete
agreements and licenses and accreditations, which have had minimal associated
value; the remainder was goodwill. In accordance with the new standard, we
have not recognized amortization of goodwill during the 2002 year.

Impairment of goodwill is governed by SFAS No. 142. In accordance with
the adoption of SFAS No. 142, we completed our transitional impairment test
prior to June 30, 2002 as of the beginning of 2002. The results of our review
indicated that no impairment was present related to the adoption of this
accounting standard. Additionally, we completed our annual impairment test as
of October 1, 2002. Our annual impairment test is based upon a combination of
market capitalization and projected EBITDA run-rate (adjusted for a multiple of
earnings) for the consolidated Company. The results of this annual impairment
test indicated no impairment has occurred.

Impairment of long-lived assets other than goodwill are governed by SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We
adopted this statement effective January 1, 2002. The adoption of this
statement did not have an impact on our results of operations or financial
condition for the 2002 year.

Inflation

The healthcare industry is labor intensive. Wages and other expenses
increase, especially during periods of inflation and labor shortages. In
addition, suppliers pass along to us rising costs in the form of higher prices.
We generally have been able to offset increases in operating costs by
increasing charges for services, expanding services, and implementing cost
control measures to curb increases in operating costs and expenses. In light of
cost containment measures imposed by government agencies and private insurance
companies, we do not know whether we will be able to offset or control future
cost increases, or be able to pass on the increased costs associated with
providing healthcare services to patients with government or managed care
payors, unless such payors correspondingly increase reimbursement rates.







ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our policy is not to hold or issue derivatives for trading purposes and to
avoid derivatives with leverage features. Our primary market risk involves
interest rate risk. Our interest expense is sensitive to changes in the general
level of interest rates. To mitigate the impact of fluctuations in interest
rates, we generally maintain 50%  75% of our debt at a fixed rate, either by
borrowing on a long-term basis or entering into an interest rate swap. At
December 31, 2002, 76% of our outstanding debt was effectively at a fixed rate.
Our interest rate swap contract allows us to periodically exchange fixed rate
and floating rate payments over the life of the agreement. Floating-rate
payments are based on LIBOR, and fixed-rate payments are dependent upon market
levels at the time the interest rate swap was consummated. Our interest rate
swap is a cash flow hedge, which effectively converted an aggregate notional
amount of $28.5 million of floating rate borrowings to fixed rate borrowings at
December 31, 2002. We are exposed to credit losses in the event of
nonperformance by the counterparty to the financial instrument. We anticipate
that the counterparty will fully satisfy its obligations under the contract.

The carrying amount of our total long-term debt, less current maturities,
of $461.6 million and $330.8 million at December 31, 2002 and 2001,
respectively, approximated fair value. At the December 31, 2002 borrowing
level, a hypothetical 10% adverse change in interest rates, considering the
effect of the interest rate hedge agreement, would have no significant impact
on our net income and cash flows. A hypothetical 10% adverse change in interest
rates on the fixed-rate debt would not have a material impact on the fair value
of such debt.

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements can be found beginning at page F-1 following this report.







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

None

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PART III







ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to the executive officers and directors of our
company is incorporated by reference from our proxy statement relating to the
annual meeting of shareholders to be held on May 1, 2003, except that the
Audit Committee Report included in the proxy statement is expressly not
incorporated herein by reference. Such proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days subsequent to
December 31, 2002.

Information with respect to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated by reference from our proxy
statement relating to the annual meeting of shareholders to be held on May 1,
2003.







ITEM 11.  EXECUTIVE COMPENSATION

Information with respect to the compensation of our executive officers is
incorporated by reference from our proxy statement relating to our annual
meeting of shareholders to be held on May 1, 2003, except that the Comparative
Performance Graph and the Compensation Committee Report on Executive
Compensation included in the proxy statement are expressly not incorporated
herein by reference. Such proxy statement will be filed with the Securities and
Exchange Commission not later than 120 days subsequent to December 31, 2002.







ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information with respect to the security ownership of certain beneficial
owners of our common stock and management and with respect to securities
authorized for issuance under equity compensation plans is incorporated by
reference from our proxy statement relating to the annual meeting of
shareholders to be held on May 1, 2003. Such proxy statement will be filed with
the Securities and Exchange Commission not later than 120 days subsequent to
December 31, 2002.







ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to certain relationships and related transactions
between our company and its executive officers and directors is incorporated by
reference from our proxy statement relating to the annual meeting of
shareholders to be held on May 1, 2003. Such proxy statement will be filed
with the Securities and Exchange Commission not later than 120 days subsequent
to December 31, 2002.







ITEM 14.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Within 90 days prior to the date of this report, our company carried out
an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Exchange Act Rule 13a-14(c)). Based on their
evaluation of such controls and procedures, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by our
company in the reports we file under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission and that such information is accumulated and communicated to
management, including our chief executive officer and chief financial officer,
as appropriate to allow timely decisions regarding required disclosure.

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Changes in Internal Controls

We continue to evaluate our internal controls and procedures and implement
additional procedures to ensure accurate and consistent reporting of results
from period to period. We are implementing a plan to strengthen our internal
controls and procedures for financial reporting during 2003. As a result of
our review and evaluation, we intend to take the following actions to
strengthen our internal controls:



| |  | Require that written documentation of reviews conducted by
our reimbursement department be furnished to specific levels of
management for their use in monitoring and updating the contractual
adjustment percentages within our exhibit system;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Refine our policy related to determining our allowance for
doubtful accounts, to include specific calculations for all
financial classes, based on aging of these accounts;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Substantiate and monitor our policy related to determining
our allowance for doubtful accounts by looking at historical
activity in our allowance for doubtful accounts, and comparing the
actual activity to anticipated activity; and
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Refine our policy related to recording filed cost reports, to
require that cost reports be recorded within 30 days of filing.
Estimates related to cost report items will continue to be
challenged and adjusted, as necessary, on a monthly basis.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We are in the process of implementing the procedures set forth above. We
estimate that these procedures, if implemented during 2002, would not have had,
individually or in the aggregate, a material impact on our reported financial
results. We will continue to evaluate the effectiveness of our internal
controls and procedures on an ongoing basis, and will take further action as
appropriate. Except as noted herein, there have been no significant changes in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referred to above.

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PART IV







ITEM 15.  EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) and (a)(2) List of Financial Statements and Financial Statement Schedule

The Consolidated Financial Statements and Financial Statement Schedule of
our company required to be included in Part II, Item 8 are indexed on Page F-1
and submitted as a separate section of this report.

(a)(3) Exhibits

ExhibitNumber
        
        Description of Exhibit2.1
        
        Agreement and Plan of Merger, dated as of November 27, 1996, among Brim, Inc., Brim
Senior Living, Inc., Encore Senior Living, L.L.C. and Lee Zinsli (b)2.2
        
        Agreement and Plan of Merger, dated as of December 16, 1996, between Brim, Inc. and
Carryco, Inc. (b)2.3
        
        Plan and Agreement of Merger, dated as of December 17, 1996, among Brim, Inc.,
Principal Hospital Company and Principal Merger Company (b)2.4
        
        Amended and Restated Agreement and Plan of Merger, dated as of January 15, 1998,
between Principal Hospital Company and Province Healthcare Company (d)3.1
        
        Amended and Restated Certificate of Incorporation of Province Healthcare Company, as
filed with the Delaware Secretary of State on June 16, 2000 (i)3.2
        
        Certificate of Amendment to the Amended and Restated Certificate of Incorporation of
Province Healthcare Company, as filed with the Delaware Secretary of State on May
22, 2002 (f)3.3
        
        Amended and Restated Bylaws of Province Healthcare Company (n)4.1
        
        Form of Common Stock Certificate (f)4.2
        
        Indenture, dated as of November 20, 2000 between Province Healthcare Company and
National City Bank, including the forms of Province Healthcare Companys 4-1/2%
Convertible Subordinated Notes due 2005 (j)4.3
        
        Registration Rights Agreement, dated as of November 20, 2000, among Province
Healthcare Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Credit Suisse First Boston Corporation, UBS Warburg LLC, First Union
Securities, Inc. and Robertson Stephens, Inc. as Initial Purchasers (j)4.4
        
        Indenture, dated as of October 10, 2001 between Province Healthcare Company and
National City Bank, including the forms of Province Healthcare Companys 4-1/4%
Convertible Subordinated Notes due 2008 (l)4.5
        
        Registration Rights Agreement, dated as of October 10, 2001, among Province
Healthcare Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, First Union Securities, Inc., UBS Warburg LLC and Banc of America
Securities LLC as Initial Purchasers (l)


38



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ExhibitNumber
        
        Description of Exhibit4.6
        
        Rights Agreement, dated as of January 3, 2003, between Province Healthcare Company
and Wachovia Bank, N.A. (r)10.1
        
        Stockholders Agreement, dated as of December 17, 1996, by and among Brim, Inc., GTCR
Fund IV, L.P., Leeway & Co., First Union Corporation of Virginia, AmSouth
Bancorporation, Martin S. Rash, Richard D. Gore, Principal Hospital Company and
certain other stockholders (a)10.2
        
        First Amendment to Stockholders Agreement, dated as of July 14, 1997, by and among
Province Healthcare Company, GTCR Fund IV, L.P., Martin S. Rash, Richard D. Gore and
certain other stockholders (c)10.3
        
        Second Amendment to Stockholders Agreement, dated as of September 30, 1997, between
Province Healthcare Company, GTCR Fund IV, L.P., Martin S. Rash, Richard D. Gore and
certain other stockholders (c)10.4
        
        Registration Agreement, dated as of December 17, 1996, by and among Brim, Inc.,
Principal Hospital Company, GTCR Fund IV, L.P., Leeway & Co., First Union
Corporation of Virginia, AmSouth Bancorporation and certain other stockholders (a)10.5
        
        Senior Management Agreement, dated as of December 17, 1996, between Brim, Inc.,
Martin S. Rash, GTCR Fund IV, L.P., Leeway & Co. and Principal Hospital Company (a)10.6
        
        First Amendment to Senior Management Agreement, dated as of July 14, 1997, between
Province Healthcare Company, Martin S. Rash and GTCR Fund IV, L.P. (c)10.7
        
        Second Amendment to Senior Management Agreement, dated as of October 15, 1997,
between Province Healthcare Company, Martin S. Rash and GTCR Fund IV, L.P. (c)10.8
        
        Executive Severance Agreement by and between Province Healthcare Company and Martin
S. Rash, dated October 18, 1999 (h)**10.9
        
        Executive Severance Agreement by and between Province Healthcare Company and James
Thomas Anderson, dated October 18, 1999 (h)**10.10
        
        Executive Severance Agreement by and between Province Healthcare Company and John M.
Rutledge, dated October 18, 1999 (h)**10.11
        
        Executive Severance Agreement by and between Province Healthcare Company and Howard
T. Wall, III, dated October 18, 1999 (h)**10.12
        
        Executive Severance Agreement by and between Province Healthcare Company and Brenda
B. Rector dated October 18, 1999 (*)**10.13
        
        Executive Severance Agreement by and between Province Healthcare Company and Samuel
H. Moody, dated August 22, 2002 (q)**10.14
        
        Executive Severance Agreement by and between Province Healthcare Company and
Christopher T. Hannon, dated October 23, 2002 (*) **10.15
        
        Province Healthcare Company Amended and Restated Employee Stock Purchase Plan (p)(**)


39



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ExhibitNumber
        
        Description of Exhibit10.16
        
        Province Healthcare Company Amended and Restated 1997 Long-Term Equity Incentive
Plan (p)**10.17
        
        Lease Agreement, dated October 1, 1996, by and between County of Starke, State of
Indiana, and Principal Knox Company (a)10.18
        
        Lease Agreement, dated December 1, 1993, by and between Palo Verde Hospital
Association and Brim Hospitals, Inc. (b)10.19
        
        Lease Agreement, dated May 15, 1986, as amended, by and between Fort Morgan
Community Hospital Association and Brim Hospitals, Inc. (b)10.20
        
        Lease Agreement, dated April 24, 1996, as amended, by and between Parkview Regional
Hospital, Inc. and Brim Hospitals, Inc. (b)10.21
        
        Lease Agreement and Annex, dated June 30, 1997, by and between The Board of Trustees
of Needles Desert Communities Hospital and Principal-Needles, Inc. (a)10.22
        
        Lease and Management Agreement and Annex, dated June 9, 1998, by and between St.
Landry Parish Hospital Service District No. 1 and PHC-Eunice, Inc. (m)10.23
        
        Lease Agreement, dated February 15, 2000, by and between The City of Ennis, Texas,
PRHC-Ennis, L.P. and Province Healthcare Company (m)10.24
        
        Lease Agreement and Annex, dated as of December 7, 2001, by and among Hospital
Service District No. 2 of the Parish of St. Mary, State of Louisiana, PHC-Morgan
City, L.P. and Province Healthcare Company. (m)10.25
        
        Lease Agreement, dated December 17, 1996, between Brim, Inc. and Encore Senior
Living, L.L.C. (b)10.26
        
        Corporate Purchasing Agreement, dated April 21, 1997, between Aligned Business
Consortium Group and Principal Hospital Company (a)10.27
        
        First Amendment to Securities Purchase Agreement, dated as of December 31, 1997,
between Principal Hospital Company and Leeway & Co. (c)10.28
        
        Amended and Restated Agreement of Limited Partnership, dated June 30, 1997, between
PHC of Delaware, Palestine-Principal G.P., Inc., Palestine-Principal, Inc. and
Mother Frances Hospital Regional Healthcare Center (k)10.29
        
        Amended and Restated Participation Agreement, dated as of November 13, 2001, among
Province Healthcare Company, as Construction Agent and Lessee, various parties as
Guarantors, Wells Fargo Bank Northwest, National Association, as the Owner Trustee
under the PHC Real Estate Trust 1998-1, various banks and lending institutions as
Holders, various banks and lending institutions as Lenders, Bank of America, N.A. as
Syndicate Agent, UBS Warburg LLC, as Co-Documentation Agent, Merrill Lynch, as
Co-Documentation Agent, First Union Securities, Inc., as Sole Book-Runner and
Co-Lead Arranger, Bank of America, N.A., as Co-Lead Manager and First Union National
Bank, as Agent (m)


40



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ExhibitNumber
        
        Description of Exhibit10.30
        
        Amendment No. 1 to Certain Operative Agreements dated as of March 29, 2002, among
Province Healthcare Company, as the Lessee and as the Construction Agent, the
various parties thereto from time to time, as guarantors, Wells Fargo Bank
Northwest, National Association (formerly known as First Security Bank, National
Association), as the Owner Trustee, the various banks and other lending institutions
which are parties thereto from time to time, as holders, the various banks and other
lending institutions which are parties thereto from time to time, as lenders and
First Union National Bank, as the agent for the lenders and respecting the Security
Documents, as the agent for the Lenders and the Holders, to the extent of their
interests (o)10.31
        
        Third Amended and Restated Senior Credit Agreement, dated as of November 13, 2001,
among Province Healthcare Company, First Union National Bank, as Agent and Issuing
Bank, and various parties thereto (m)10.32
        
        Asset Purchase Agreement, dated April 29, 1998, between Province Healthcare Company,
PHC-Lake Havasu, Inc. and Samaritan Health System (e)10.33
        
        Asset Sale Agreement, dated July 23, 1999, between Tenet Healthcare Corporation and
Province Healthcare Company (g)10.34
        
        Amendment No. 1 to Asset Sale Agreement, dated September 29, 1999, between Tenet
Healthcare Corporation and Province Healthcare Company (g)21.1
        
        Subsidiaries of the Registrant *23.1
        
        Consent of Ernst & Young LLP *




---

|(a) |  | Incorporated by reference to the exhibits filed with the Registrants
Registration Statement on Form S-1, filed August 27, 1997, Registration
No. 333-34421                          
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Incorporated by reference to the exhibits filed with the Registrants
Registration Statement on Form S-1/A filed October 8, 1997, Registration
No. 333-34421                         
|   
|(c) |  | Incorporated by reference to the exhibits filed with the Registrants
Registration Statement on Form S-1/A filed November 13, 1997, Registration
No. 333-34421                       
|   
|(d) |  | Incorporated by reference to the exhibits filed with the Registrants
Registration Statement on Form S-1/A filed February 5, 1998, Registration
No. 333-34421                        
|   
|(e) |  | Incorporated by reference to the exhibits filed with the Registrants
Current Report on Form 8-K, dated May 14, 1998, Commission File No.
0-23639                                    
|   
|(f) |  | Incorporated by reference to the exhibits filed with the Registrants
Registration Statement on Form S-3/A filed June 11, 2002, Registration No.
333-86578                           
|   
|(g) |  | Incorporated by reference to the exhibits filed with the Registrants
Current Report on Form 8-K, dated October 18, 1999, Commission File No.
0-23639                                
|   
|(h) |  | Incorporated by reference to the exhibits filed with the Registrants
Quarterly Report filed on Form 10-Q, for the quarterly period ended March
31, 2000, Commission File No. 0-23639

41



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##### Table of Contents



|(i)  |  | Incorporated by reference to the exhibits filed with the Registrants
Quarterly Report filed on Form 10-Q, for the quarterly period ended June
30, 2000, Commission File No. 0-23639
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(j)  |  | Incorporated by reference to the exhibits filed with the Registrants
Registration Statement on Form S-3, dated January 24, 2001, Registration
No. 333-54192                        
|    
|(k)  |  | Incorporated by reference to the exhibits filed with the Registrants
Annual Report on Form 10-K, for the fiscal period ended December 31, 2000,
Commission File No. 0-23639        
|    
|(l)  |  | Incorporated by reference to the exhibits filed with the Registrants
Registration Statement on Form S-3, filed December 20, 2001, Registration
No. 333-75646                       
|    
|(m)  |  | Incorporated by reference to the exhibits filed with the Registrants
Annual Report filed on Form 10-K for the fiscal period ended December 31,
2001, Commission File No. 0-23639   
|    
|(n)  |  | Incorporated by reference to the exhibits filed with the Registrants
Current Report on Form 8-K, dated December 12, 2002, Commission File No.
0-23639                              
|    
|(o)  |  | Incorporated by reference to the exhibits filed with the Registrants
Quarterly Report filed on Form 10-Q for the quarterly period ended March
31, 2002, Commission File No. 0-23639
|    
|(p)  |  | Incorporated by reference to the exhibits filed with the Registrants
Definitive Proxy Statement on Schedule 14A, filed on April 26, 2002,
Commission File No. 0-23639              
|    
|(q)  |  | Incorporated by reference to the exhibits filed with the Registrants
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2002, Commission File No. 0-23639  
|    
|(r)  |  | Incorporated by reference to the exhibits filed with the Registrants
Current Report on Form 8-K, dated January 3, 2003, Commission File No.
0-23639                                
|    
|(*)  |  | Filed herewith                                                                                                                                                                      
|    
|(**) |  | Management Compensatory Plan or Arrangement                                                                                                                                         
|    
|(b)  |  | Reports on Form 8-K                                                                                                                                                                 

On October 24, 2002, we filed a Current Report on Form 8-K to report the
appointment of Christopher T. Hannon as Senior Vice President and Chief
Financial Officer.

On December 13, 2002, we filed a Current Report on Form 8-K to report the
adoption of our companys Amended and Restated Bylaws.

42



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

Province Healthcare CompanyBy:
        
        /s/ Brenda B. RectorBrenda B. Rector
Vice President and Controller


POWER OF ATTORNEY

The undersigned directors of Province Healthcare Company, a Delaware
corporation, do hereby constitute and appoint Martin S. Rash their lawful
attorney and agent with full power and authority to do any and all acts and
things and to execute any and all instruments which said attorney and agent may
determine to be necessary or advisable or required to enable said corporation
to comply with the Securities Exchange Act of 1934, as amended, and any rules
or regulations or requirements of the Securities and Exchange Commission in
connection with this Annual Report on Form 10-K. Without limiting the
generality of the foregoing power and authority, the powers granted include the
power and authority to sign the names of the undersigned directors in the
capacities indicated below to this Annual Report on Form 10-K or amendments or
supplements thereto, and each of the undersigned hereby ratifies and confirms
all that said attorney and agent shall do or cause to be done by virtue hereof.

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

/s/ Martin S. Rash
Martin S. Rash
        
        Chairman of the Board and
Chief Executive Officer
        
        March 21, 2003/s/ John M. Rutledge
John M. Rutledge
        
        President, Chief Operating Officer and
Director
        
        March 21, 2003/s/ Winfield C. Dunn
Winfield C. Dunn
        
        Director
        
        March 21, 2003/s/ Paul J. Feldstein
Paul J. Feldstein
        
        Director
        
        March 21, 2003/s/ David R. Klock
David R. Klock
        
        Director
        
        March 17, 2003/s/ Joseph P. Nolan
Joseph P. Nolan
        
        Director
        
        March 21, 2003/s/ David L. Steffy
David L. Steffy
        
        Director
        
        March 21, 2003/s/ Christopher T. Hannon
Christopher T. Hannon
        
        Senior Vice President and
Chief Financial Officer
        
        March 21, 2003


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PROVINCE HEALTHCARE COMPANY

CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Martin S. Rash, certify that:

1. I have reviewed this annual report on Form 10-K of the Registrant,
Province Healthcare Company;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;

4. The Registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant, and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the Registrants disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the Evaluation Date); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The Registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrants auditors and the audit
committee of the Registrants board of directors:

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrants ability
to record, process, summarize and report financial data and have
identified for the Registrants auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrants internal
controls; and

6. The Registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:  March 21, 2003
        
        /s/ Martin S. RashMartin S. Rash
Chief Executive Officer


44



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PROVINCE HEALTHCARE COMPANY

CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Christopher T. Hannon, certify that:

1. I have reviewed this annual report on Form 10-K of the Registrant,
Province Healthcare Company;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;

4. The Registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant, and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the Registrants disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the Evaluation Date); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The Registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrants auditors and the audit
committee of the Registrants board of directors:

a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrants ability
to record, process, summarize and report financial data and have
identified for the Registrants auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrants internal
controls; and

6. The Registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date:  March 21, 2003
        
        /s/ Christopher T. HannonChristopher T. Hannon
Chief Financial Officer


45



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##### Table of Contents



PROVINCE HEALTHCARE COMPANY
FORM 10-K  ITEM 8 AND ITEM 15 (a) (1) AND (2)

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

The following financial statements and financial statement schedule are
included as a separate section of this report:

PageAnnual Financial StatementsReport of Independent Auditors
        
        
        F-2Consolidated Balance Sheets at December 31, 2002 and 2001
        
        
        F-3Consolidated Statements of Income for the Years Ended December 31, 2002, 2001 and 2000
        
        
        F-4Consolidated Statements of Changes in Stockholders Equity for the Years Ended December
31, 2002, 2001 and 2000
        
        
        F-5Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000
        
        
        F-6Notes to Consolidated Financial Statements
        
        
        F-7Schedule II  Valuation and Qualifying Accounts
        
        
        S-1


All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and, therefore,
have been omitted.

F-1



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

Board of Directors
Province Healthcare Company

We have audited the accompanying consolidated balance sheets of Province
Healthcare Company and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, changes in stockholders equity, and
cash flows for each of the three years in the period ended December 31, 2002.
Our audits also included the financial statement schedule listed in the Index
at Item 15(a). These financial statements and schedule are the responsibility
of the Companys management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Province
Healthcare Company and subsidiaries at December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the
Company changed, in 2002, its method of accounting for goodwill and other
intangible assets, and in 2001, its method of accounting for business
combinations.



| | /s/ Ernst & Young LLP
| | ---------------------

Nashville, Tennessee
February 21, 2003

F-2



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##### Table of Contents



PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,2002
        
        2001(In thousands)ASSETSCurrent assets:Cash and cash equivalents
        
        $
        14,417
        
        
        $
        39,375Accounts receivable, less allowance for doubtful accounts of
$68,158 in 2002 and $49,678 in 2001
        
        
        117,431
        
        
        
        109,826Inventories
        
        
        19,835
        
        
        
        15,926Prepaid expenses and other
        
        
        14,071
        
        
        
        21,515Total current assets
        
        
        165,754
        
        
        
        186,642Property, plant and equipment, net
        
        
        447,379
        
        
        
        306,494Goodwill
        
        
        319,390
        
        
        
        180,497Unallocated purchase price
        
        
        466
        
        
        
        49,013Other
        
        
        38,722
        
        
        
        37,251$
        971,711
        
        
        $
        759,897LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
        
        $
        20,162
        
        
        $
        17,515Accrued salaries and benefits
        
        
        25,380
        
        
        
        18,867Accrued expenses
        
        
        13,198
        
        
        
        12,139Current maturities of long-term obligations
        
        
        1,668
        
        
        
        1,879Total current liabilities
        
        $
        60,408
        
        
        $
        50,400Long-term obligations, less current maturities
        
        
        461,576
        
        
        
        330,838Other liabilities
        
        
        33,913
        
        
        
        14,000Minority interest
        
        
        2,612
        
        
        
        2,654Stockholders equity:Preferred stock $0.01 par value, 100,000 shares
authorized, none issued and outstanding
        
        
        
        
        
        
        Common stock$0.01 par value; 150,000,000 and 50,000,000
shares authorized at December 31, 2002 and 2001,
respectively; issued and outstanding 48,581,549 and
47,488,984 shares at December 31, 2002 and 2001,
respectively
        
        
        486
        
        
        
        475Additional paid-in-capital
        
        
        304,102
        
        
        
        288,948Retained earnings
        
        
        109,567
        
        
        
        73,455Accumulated other comprehensive loss
        
        
        (953
        )
        
        
        (873
        )413,202
        
        
        
        362,005$
        971,711
        
        
        $
        759,897


See accompanying notes.

F-3



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##### Table of Contents



PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,2002
        
        2001
        
        2000(In thousands, except per share data)Revenue:Net patient service revenue
        
        $
        680,882
        
        
        $
        509,061
        
        
        $
        445,772Other
        
        
        23,465
        
        
        
        21,678
        
        
        
        24,086Net operating revenue
        
        
        704,347
        
        
        
        530,739
        
        
        
        469,858Expenses:Salaries, wages and benefits
        
        
        277,843
        
        
        
        205,628
        
        
        
        180,881Purchased services
        
        
        74,498
        
        
        
        50,723
        
        
        
        48,573Supplies
        
        
        87,473
        
        
        
        59,341
        
        
        
        54,465Provision for doubtful accounts
        
        
        56,765
        
        
        
        49,283
        
        
        
        43,604Other operating expenses
        
        
        82,394
        
        
        
        58,758
        
        
        
        51,053Rentals and leases
        
        
        9,042
        
        
        
        7,536
        
        
        
        7,164Depreciation and amortization
        
        
        34,231
        
        
        
        30,179
        
        
        
        26,629Interest expense
        
        
        21,957
        
        
        
        12,090
        
        
        
        16,657Minority interest
        
        
        34
        
        
        
        267
        
        
        
        178(Gain) loss on sale of assets
        
        
        (77
        )
        
        
        196
        
        
        
        5,979Total expenses
        
        
        644,160
        
        
        
        474,001
        
        
        
        435,183Income before income taxes
        
        
        60,187
        
        
        
        56,738
        
        
        
        34,675Income taxes
        
        
        24,075
        
        
        
        23,830
        
        
        
        14,737Net income
        
        $
        36,112
        
        
        $
        32,908
        
        
        $
        19,938Earnings per share:Basic
        
        $
        0.75
        
        
        $
        0.70
        
        
        $
        0.47Diluted
        
        $
        0.73
        
        
        $
        0.67
        
        
        $
        0.45


See accompanying notes.



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##### Table of Contents



PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY(Dollars in thousands)

AccumulatedCommon Stock
        
        Additional
        
        
        
        OtherPaid-In
        
        Retained
        
        ComprehensiveShares
        
        Amount
        
        Capital
        
        Earnings
        
        Loss
        
        TotalBalance at December 31, 1999
        
        
        35,419,608
        
        
        $
        354
        
        
        $
        163,396
        
        
        $
        20,609
        
        
        $
        
        
        
        $
        184,359Exercise of stock options
        
        
        1,393,908
        
        
        
        13
        
        
        
        10,198
        
        
        
        
        
        
        
        
        
        
        
        10,211Income tax benefit from stock options exercised
        
        
        
        
        
        
        
        
        
        
        4,991
        
        
        
        
        
        
        
        
        
        
        
        4,991Issuance of common stock from employee stock
purchase plan
        
        
        48,732
        
        
        
        
        
        
        
        350
        
        
        
        
        
        
        
        
        
        
        
        350Issuance of common stock from offering
        
        
        9,500,634
        
        
        
        96
        
        
        
        94,668
        
        
        
        
        
        
        
        
        
        
        
        94,764Other
        
        
        
        
        
        
        
        
        
        
        101
        
        
        
        
        
        
        
        
        
        
        
        101Net income
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        19,938
        
        
        
        
        
        
        
        19,938Balance at December 31, 2000
        
        
        46,362,882
        
        
        
        463
        
        
        
        273,704
        
        
        
        40,547
        
        
        
        
        
        
        
        314,714Exercise of stock options
        
        
        844,339
        
        
        
        9
        
        
        
        9,966
        
        
        
        
        
        
        
        
        
        
        
        9,975Income tax benefit from stock options exercised
        
        
        
        
        
        
        
        
        
        
        3,287
        
        
        
        
        
        
        
        
        
        
        
        3,287Treasury stock
        
        
        (2,319
        )
        
        
        
        
        
        
        (45
        )
        
        
        
        
        
        
        
        
        
        
        (45
        )Issuance of common stock from employee stock
purchase plan
        
        
        284,082
        
        
        
        3
        
        
        
        2,036
        
        
        
        
        
        
        
        
        
        
        
        2,039Net income
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        32,908
        
        
        
        
        
        
        
        32,908Cumulative effect of change in accounting for
derivative financial instruments net of tax
of $42
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (58
        )
        
        
        (58
        )Change in fair value of derivatives, net of tax
of $504
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (815
        )
        
        
        (815
        )Comprehensive income
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        32,035Balance at December 31, 2001
        
        
        47,488,984
        
        
        
        475
        
        
        
        288,948
        
        
        
        73,455
        
        
        
        (873
        )
        
        
        362,005Exercise of stock options
        
        
        1,031,998
        
        
        
        10
        
        
        
        9,949
        
        
        
        
        
        
        
        
        
        
        
        9,959Income tax benefit from stock options exercised
        
        
        
        
        
        
        
        
        
        
        4,003
        
        
        
        
        
        
        
        
        
        
        
        4,003Treasury stock
        
        
        1,545
        
        
        
        
        
        
        
        45
        
        
        
        
        
        
        
        
        
        
        
        45Issuance of common stock from employee stock
purchase plan
        
        
        59,022
        
        
        
        1
        
        
        
        1,032
        
        
        
        
        
        
        
        
        
        
        
        1,033Other
        
        
        
        
        
        
        
        
        
        
        125
        
        
        
        
        
        
        
        
        
        
        
        125Net income
        
        
        
        
        
        
        
        
        
        
        
        
        
        36,112
        
        
        
        
        
        
        
        36,112Change in fair value of derivatives, net of tax
of $53
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (80
        )
        
        
        (80
        )Comprehensive income
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        36,032Balance at December 31, 2002
        
        
        48,581,549
        
        
        $
        486
        
        
        $
        304,102
        
        
        $
        109,567
        
        
        $
        (953
        )
        
        $
        413,202




| | See accompanying notes.
| | -----------------------

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##### Table of Contents



PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,2002
        
        2001
        
        2000(In thousands)OPERATING ACTIVITIESNet income
        
        $
        36,112
        
        
        $
        32,908
        
        
        $
        19,938Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
        
        
        34,231
        
        
        
        30,179
        
        
        
        26,629Provision for doubtful accounts
        
        
        56,765
        
        
        
        49,283
        
        
        
        43,604Deferred income taxes
        
        
        9,299
        
        
        
        6,469
        
        
        
        (5,316
        )Provision for professional liability
        
        
        7,209
        
        
        
        200
        
        
        
        15(Gain) loss on sale of assets
        
        
        (77
        )
        
        
        196
        
        
        
        5,979Changes in operating assets and liabilities, net of
effects from acquisitions and disposals:Accounts receivable
        
        
        (51,266
        )
        
        
        (62,299
        )
        
        
        (51,319
        )Inventories
        
        
        (1,258
        )
        
        
        (1,574
        )
        
        
        (1,610
        )Prepaid expenses and other
        
        
        6,548
        
        
        
        (15,357
        )
        
        
        1,498Other assets
        
        
        493
        
        
        
        (935
        )
        
        
        (11,207
        )Accounts payable and accrued expenses
        
        
        (5,956
        )
        
        
        (2,563
        )
        
        
        435Accrued salaries and benefits
        
        
        (42
        )
        
        
        993
        
        
        
        3,514Other liabilities
        
        
        18
        
        
        
        930
        
        
        
        471Other
        
        
        
        
        
        
        
        
        
        
        34Net cash provided by operating activities
        
        
        92,076
        
        
        
        38,430
        
        
        
        32,665INVESTING ACTIVITIESPurchase of property, plant and equipment
        
        
        (46,328
        )
        
        
        (72,207
        )
        
        
        (44,045
        )Purchase of acquired hospitals, net of cash received
        
        
        (171,157
        )
        
        
        (97,607
        )
        
        
        (31,399
        )Proceeds from sale of hospitals
        
        
        
        
        
        
        
        
        
        
        30,630Proceeds from sale of assets
        
        
        
        
        
        
        
        
        
        
        4,121Net cash used in investing activities
        
        
        (217,485
        )
        
        
        (169,814
        )
        
        
        (40,693
        )FINANCING ACTIVITIESProceeds from long-term debt
        
        
        134,321
        
        
        
        337,939
        
        
        
        252,462Repayments of debt
        
        
        (44,907
        )
        
        
        (179,149
        )
        
        
        (349,860
        )Issuance of common stock
        
        
        11,037
        
        
        
        11,969
        
        
        
        105,325Other
        
        
        
        
        
        
        
        
        
        
        101Net cash provided by financing activities
        
        
        100,451
        
        
        
        170,759
        
        
        
        8,028Net increase (decrease) in cash and cash equivalents
        
        
        (24,958
        )
        
        
        39,375
        
        
        
        Cash and cash equivalents at beginning of period
        
        
        39,375
        
        
        
        
        
        
        
        Cash and cash equivalents at end of period
        
        $
        14,417
        
        
        $
        39,375
        
        
        $
        SUPPLEMENTAL CASH FLOW INFORMATIONInterest paid during the period
        
        $
        19,958
        
        
        $
        9,742
        
        
        $
        16,913Income taxes paid during the period
        
        $
        14,848
        
        
        $
        28,185
        
        
        $
        9,870ACQUISITIONSAssets acquired
        
        $
        181,268
        
        
        $
        109,014
        
        
        $
        35,925Liabilities assumed
        
        
        (10,111
        )
        
        
        (11,407
        )
        
        
        (4,526
        )Cash paid, net of cash acquired
        
        $
        171,157
        
        
        $
        97,607
        
        
        $
        31,399


See accompanying notes.

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##### Table of Contents



PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002

1.  ORGANIZATION

Province Healthcare Company (the Company) was founded on February 2,
1996, and is engaged in the business of owning, leasing and managing hospitals
in non-urban communities throughout the United States. At December 31, 2002,
the Company owned or leased 20 general acute care hospitals in 13 states, with
a total of 2,280 licensed beds that accounted for 97.9%, 97.0% and 96.0% of our
net operating revenue in 2002, 2001, and 2000, respectively. At December 31,
2002, the Company also provided management services to 36 non-urban hospitals
in 14 states, with a total of 2,897 licensed beds.

2.  ACCOUNTING POLICIES

Basis of Consolidation

The consolidated financial statements include the accounts of the Company,
its majority-owned subsidiaries and partnerships in which the Company or one of
its subsidiaries is a general partner and has a majority voting interest. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

Reclassifications

Certain reclassifications have been made to the prior year financial
statements to conform to the 2002 presentation. These reclassifications had no
effect on net income as previously reported.

Use of Estimates

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

Cash Equivalents

Cash equivalents include all highly liquid investments with an original
maturity of three months or less when acquired. The Company places its cash in
financial institutions that are federally insured and limits the amount of
credit exposure with any one financial institution.

Patient Accounts Receivable

The Companys primary concentration of credit risk is patient accounts
receivable, which consist of amounts owed by various governmental agencies,
insurance companies and private patients. The Company manages the receivables
by regularly reviewing its accounts and contracts and by providing appropriate
allowances for uncollectible amounts. The allowance for doubtful accounts
increased, as a percentage of accounts receivable net of contractual
adjustments, to 36.7% in 2002 from 31.1% in 2001. Significant concentrations
of gross patient accounts receivable at December 31, 2002 and 2001, consist of
receivables from Medicare of 21.1% and 26.0%, respectively, and Medicaid of
10.2% and 14.0%, respectively. Concentration of credit risk relating to
accounts receivable is limited to some extent by the diversity and number of
patients and payors.

Inventories

Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market.

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Property, Plant and Equipment

Property, plant and equipment are stated on the basis of cost. Routine
maintenance and repairs are charged to expense as incurred. Expenditures that
increase values, change capacities or extend useful lives are capitalized.
Depreciation is computed by the straight-line method over the estimated useful
lives of the assets, which range from 3 to 40 years. Amortization of equipment
under capital leases is included in the provision for depreciation.

Intangible Assets

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations(SFAS No. 141) and SFAS No. 142, Goodwill and Other Intangible
Assets(SFAS No. 142). SFAS No. 141 was effective July 1, 2001, and SFAS No.
142 was effective January 1, 2002. Under the new rules in SFAS No. 142,
goodwill and indefinite lived intangible assets from acquisitions prior to July
1, 2001, are no longer to be amortized effective January 1, 2002, but are
subject to annual impairment tests. In accordance with the new rules, goodwill
resulting from acquisitions after June 30, 2001, has not been amortized. Other
intangible assets will continue to be amortized over their useful lives. The
Company applied the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. During 2002, the Company
performed the transition and annual impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002 and October 1, 2002,
respectively. These tests had no impact on the earnings and financial position
of the Company. (See Note 3.)

Other Assets

Deferred loan costs are included in other noncurrent assets and are
amortized by the interest method over the term of the related debt. At
December 31, 2002 and 2001, deferred loan costs totaled $20,270,000 and
$19,850,000, respectively, and accumulated amortization totaled $8,537,000 and
$5,577,000, respectively.

Risk Management

The Company purchased a professional liability claims made reporting
policy effective January 1, 2002. This coverage is subject to a $750,000
deductible per occurrence for general and professional liability and an
additional $2.0 million self-insured retention for general and professional
liability. The policy provides coverage up to $51.0 million for claims
incurred during the annual policy term. As of January 1, 2003, the Company
increased our self-insurance retention to $5.0 million. This increase in
retention amount increases our exposure for claims occurring prior to December
31, 2002, and reported in 2003. We maintain a reserve for the anticipated
claims within these deductible and self-insured retentions. In 2001, the
Company maintained insurance for individual malpractice claims exceeding
$50,000 per medical incident, subject to an annual maximum of $500,000 for
claims occurring and reported in 2001. The Company estimates its self-insured
retention portion of the malpractice risks using historical claims data,
demographic factors, severity factors and other actuarial assumptions.

Workers compensation claims are insured with a large deductible with stop
loss limits of $250,000 per accident and a $6.6 million and $3.0 million
minimum cap on total losses for the 2002 and 2001 years, respectively. The
Companys arrangement with the insurance provider allows us to prepay the
expected amounts of annual workers compensation claims, which is based upon
claims experience. The claims processor tracks payments for the policy year.
At the end of the policy year, the claims processor compares the total amount
prepaid by us to the actual amount paid by the claims processor. This
comparison will ultimately result in a receivable from or a payable to the
claims processor.

The Company is fully insured in the commercial marketplace for workers
compensation claims prior to January 1, 1999. The Company utilized loss run
reports provided by the claims administrator to determine the appropriate range
of loss reserves for the 1999 and subsequent years. The Companys accruals are
calculated to cover the risk from both reported claims and claims that have
been incurred but not yet reported.

The Company maintains self-insured medical and dental plans for employees.
Claims are accrued under these plans as the incidents that give rise to them
occur. The Company uses a third-party administrator to process

F-8



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##### Table of Contents



all such claims. Unpaid claim accruals are based on the estimated
ultimate cost of settlement, including claim settlement expenses, in accordance
with an average lag time and past experience. The Company has entered into a
reinsurance agreement with an independent insurance company to limit our losses
on claims. Under the terms of this agreement, the insurance company will
reimburse the Company a maximum of $800,000 on any individual claim.

Other Noncurrent Liabilities

Other noncurrent liabilities consist primarily of insurance liabilities,
supplemental deferred compensation liability, and deferred income taxes.

Patient Service Revenue

Net patient service revenue is reported as services are rendered at the
estimated net realizable amounts from patients, third-party payors, and others
for services rendered, including estimated retroactive adjustments under
reimbursement agreements with third-party payors. Estimated settlements under
third-party reimbursement agreements are accrued in the period the related
services are rendered and adjusted in future periods as final settlements are
determined. (See Note 7.)

Stock Based Compensation

The Company, from time to time, grants stock options for a fixed number of
common shares to employees and directors. The Company accounts for employee
stock option grants using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees(Opinion 25), and related interpretations, and accordingly,
recognizes no compensation expense for the stock option grants when the
exercise price of the options equals, or is greater than, the market price of
the underlying stock on the date of grant.

Had compensation cost for the Companys stock-based compensation plans
been determined based on the fair value at the grant date for awards under
these plans consistent with the methodology prescribed under SFAS No. 123,
Accounting for Stock-Based Compensation(SFAS No. 123), net income and
earnings per share would have been reduced to the pro forma amounts indicated
in the following table.

2002
        
        2001
        
        2000Net income  as reported
        
        $
        36,112
        
        
        $
        32,908
        
        
        $
        19,938Less pro forma effect of stock option grants
        
        
        (10,922
        )
        
        
        (8,452
        )
        
        
        (5,858
        )Pro forma net income
        
        $
        25,190
        
        
        $
        24,456
        
        
        $
        14,080Earnings per share  as reportedBasic
        
        
        $
        0.75
        
        
        $
        0.70
        
        
        $
        0.47Diluted
        
        
        $
        0.73
        
        
        $
        0.67
        
        
        $
        0.45Earnings per share  pro formaBasic
        
        
        $
        0.52
        
        
        $
        0.52
        
        
        $
        0.33Diluted
        
        
        $
        0.51
        
        
        $
        0.50
        
        
        $
        0.31


Interest Rate Swap Agreements

The Company enters into interest rate swap agreements as a means of
managing its interest rate exposure. The differential to be paid or received is
recognized over the life of the agreement as an adjustment to interest expense.

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Effective January 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended (SFAS No. 133).
SFAS No. 133 requires that all derivatives, whether designated in hedging
relationships or not, be recognized on the balance sheet at fair value. If the
derivative is designated as a fair value hedge, the changes in the fair value
of the derivative and the hedged item are recognized in earnings. If the
derivative is designated as a cash flow hedge, changes in the fair value of the
derivative are recorded in other comprehensive income and are recognized in the
income statement when the hedged item affects earnings. In accordance with the
provisions of SFAS No. 133, the Company designated its outstanding interest
rate swap agreement as a cash flow hedge. The Company determined that the
current agreements are highly effective in offsetting the fair value changes in
a portion of the Companys debt. These derivatives and the related hedged debt
amounts have been recognized in the consolidated financial statements at their
respective fair values.

Recently Issued Accounting Pronouncements

SFAS No. 148, Accounting for Stock-Based Compensation

On December 31, 2002, the Financial Accounting Standards Board (FASB)
issued SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure(SFAS No. 148). SFAS No. 148 amends SFAS No. 123, to provide
alternative methods of transition to SFAS No. 123s fair value method of
accounting for stock-based employee compensation. SFAS No. 148 also amends the
disclosure provisions of SFAS No. 123 and APB Opinion No. 28, Interim Financial
Reporting(Opinion 28), to require disclosure in the Companys summary of
significant accounting policies of the effects of an entitys accounting policy
with respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. SFAS No. 148
does not amend SFAS No. 123 to require companies to account for employee stock
options using the fair value method. However, the disclosure provisions of
SFAS No. 148 are applicable to all companies with stock-based employee
compensation, regardless of whether they account for that compensation using
the fair value method under SFAS No. 123 or the intrinsic value method of
Opinion 25. The disclosure provisions are effective for the Company beginning
December 31, 2002.

SFAS No. 148 also amends APB Opinion 28 to require disclosure of the
information described above in condensed consolidated interim financial
information for any period in which stock-based employee awards are outstanding
and accounting for using the intrinsic value method of APB Opinion 25.

SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities

SFAS No. 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity(including Certain Costs Incurred in a Restructuring). The
principal difference between SFAS No. 146 and Issue 94-3 relates to SFAS No.
146s requirements for recognition of a liability for a cost associated with an
exit or disposal activity. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability
is incurred. Under Issue 94-3, a liability for an exit cost, as generally
defined in Issue 94-3, was recognized at the date of an entitys commitment to
an exit plan.

Benefit arrangements that require employees to render future service
beyond a minimum retention period require that a liability be recognized as
employees render service over the future service period, even if the benefit
formula used to calculate an employees termination benefit is based on length
of service. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. Management does not expect the adoption of this statement to have
a material effect on the Companys results of operations or financial position.

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets(SFAS No. 144), which supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of(SFAS No. 121), and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual

F-10



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and Infrequently Occurring Events and Transactions. SFAS No. 144 removes
goodwill from its scope and clarifies other implementation issues related to
SFAS No. 121. SFAS No. 144 also provides a single framework for evaluating
long-lived assets to be disposed of by sale. The provisions of this statement
were adopted effective January 1, 2002 and had no material effect on the
Companys results of operations or financial position.

3.  ACQUISITIONS AND GOODWILL

2000 Acquisitions

During 2000, the Company acquired two hospitals: Ennis Regional Medical
Center, acquired in February 2000, and Bolivar Medical Center, acquired in
April 2000.

2001 Acquisitions

During the last six months of 2001, the Company acquired five hospitals:
Selma Regional Medical Center, acquired in July 2001; Ashland Regional Medical
Center, acquired in August 2001; Vaughan Regional Medical Center, acquired in
October 2001; Medical Center of Southern Indiana, acquired in October 2001; and
Teche Regional Medical Center, acquired in December 2001.

In the second quarter of 2002, the Company consolidated the operations of
Selma Regional Medical Center and Vaughan Regional Medical Center. The
consolidation of the operations of these hospitals resulted in a regional
hospital (Vaughan Regional Medical Center) that provides more intensive
services to the large area it serves.

2002 Acquisitions

In May 2002, the Company acquired Memorial Hospital of Martinsville and
Henry County in Martinsville, Virginia, for approximately $129.2 million,
including working capital. To finance this acquisition, the Company borrowed
$86.0 million under its revolving credit facility and used approximately $43.2
million of available cash. The preliminary allocation of the purchase price
has been determined based upon currently available information and is subject
to further refinement pending final appraisal. This is the Companys first
Virginia hospital and is the only hospital in the county, serving a population
in excess of 100,000.

In June 2002, the Company acquired Los Alamos Medical Center in Los
Alamos, New Mexico, for approximately $39.0 million, including working capital.
To finance this acquisition, the Company borrowed $37.0 million under its
revolving credit facility. The preliminary allocation of the purchase price
has been determined based upon currently available information and is subject
to further refinement pending final appraisal. This is the Companys first New
Mexico hospital and is the only hospital in the community, serving a population
of approximately 50,000.

Other Information

The foregoing acquisitions were accounted for using the purchase method of
accounting. The operating results of the hospitals acquired in 2002, 2001 and
2000 have been included in the accompanying consolidated statements of income
from the respective dates of acquisition.

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The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition for the two
acquisitions completed in 2002 and the five acquisitions completed in 2001 (in
thousands):

2002
        
        2001Accounts receivable
        
        $
        12,913
        
        
        $
        7,652Inventories
        
        
        2,177
        
        
        
        2,547Prepaid expenses and other
        
        
        119
        
        
        
        152Total current assets acquired
        
        
        15,209
        
        
        
        10,351Property, plant and equipment
        
        
        63,457
        
        
        
        49,296Unallocated purchase price
        
        
        466
        
        
        
        49,013Goodwill
        
        
        101,349
        
        
        
        Other
        
        
        787
        
        
        
        354Total assets acquired
        
        
        181,268
        
        
        
        109,014Total liabilities assumed
        
        
        10,111
        
        
        
        11,407Net assets acquired
        
        $
        171,157
        
        
        $
        97,607


In accordance with its stated policy, management of the Company evaluates
all acquisitions independently to determine the appropriate amortization period
for identified intangible assets. Each evaluation includes an analysis of
factors such as historic and projected financial performance, evaluation of the
estimated useful lives of buildings and fixed assets acquired, the indefinite
lives of certificates of need and licenses acquired, the competition within
local markets, and lease terms where applicable. Goodwill on acquisitions
prior to July 1, 2001 is no longer amortized, effective January 1, 2002.
Goodwill resulting from acquisitions after June 30, 2001 has not been
amortized. Identified intangibles with definite lives are being amortized over
their estimated useful lives, which range from 2-3 years. Goodwill resulting
from acquisitions in 2002, 2001 and 2000 is deductible for tax purposes over a
15-year period.

The following pro forma information reflects the operations of the
hospitals acquired in 2002, 2001 and 2000, as if the respective transactions
had occurred as of the first day of the fiscal year immediately preceding the
year of the acquisitions (in thousands, except per share data):

2002
        
        2001
        
        2000Net operating revenue
        
        $
        747,935
        
        
        $
        732,169
        
        
        $
        608,424Net income
        
        
        38,112
        
        
        
        35,454
        
        
        
        16,302Earnings per share:Basic
        
        $
        0.79
        
        
        $
        0.75
        
        
        $
        0.38Diluted
        
        $
        0.77
        
        
        $
        0.73
        
        
        $
        0.37


The pro forma results of operations do not purport to represent what the
Companys results would have been had such transactions in fact occurred at the
beginning of the periods presented or to project the Companys results of
operations in any future period.

The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002. Under SFAS No. 142, goodwill is no longer
amortized, but is subject to annual impairment tests, or more frequently if
certain indicators arise. The transitional and annual impairment tests have
been completed, and the results of the tests had no effect on the operations or
financial position of the Company. Had the Company been accounting for its
goodwill under SFAS No. 142 for all periods presented, the Companys pro forma
net income and earnings per share would have been as follows:

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Year Ended December 31,2002
        
        2001
        
        2000Reported net income
        
        $
        36,112
        
        
        $
        32,908
        
        
        $
        19,938Add: Goodwill amortization, net of tax
        
        
        
        
        
        
        4,198
        
        
        
        4,347Pro forma adjusted net income
        
        $
        36,112
        
        
        $
        37,106
        
        
        $
        24,285Basic earnings per share:Reported net income
        
        $
        0.75
        
        
        $
        0.70
        
        
        $
        0.47Add: Goodwill amortization, net of tax
        
        
        
        
        
        
        0.09
        
        
        
        0.10Pro forma adjusted net income
        
        $
        0.75
        
        
        $
        0.79
        
        
        $
        0.57Diluted earnings per share:Reported net income
        
        $
        0.73
        
        
        $
        0.67
        
        
        $
        0.45Add: Goodwill amortization, net of tax
        
        
        
        
        
        
        0.09
        
        
        
        0.10Pro forma adjusted net income
        
        $
        0.73
        
        
        $
        0.76
        
        
        $
        0.55


At December 31, 2002, and December 31, 2001, goodwill totaled $319.4
million and $180.5 million, respectively. The $138.9 million increase in
goodwill resulted primarily from the allocation of amounts recorded in
unallocated purchase price at December 31, 2001, for the five hospitals
acquired in the last six months of 2001, and the goodwill resulting from the
Memorial Hospital of Martinsville and Henry County and Los Alamos Medical
Center acquisitions in 2002.

4.  PROPERTY, PLANT AND EQUIPMENT

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

December 31,2002
        
        2001Land
        
        $
        28,163
        
        
        $
        16,430Leasehold improvements
        
        
        17,337
        
        
        
        8,334Buildings and improvements
        
        
        317,675
        
        
        
        175,070Equipment
        
        
        167,050
        
        
        
        132,762530,225
        
        
        
        332,596Less accumulated allowances for depreciation and amortization
        
        
        (91,736
        )
        
        
        (57,768
        )438,489
        
        
        
        274,828Construction-in-progress (estimated cost to complete at
December 31, 2002 - $28,265)
        
        
        8,890
        
        
        
        31,666$
        447,379
        
        
        $
        306,494


Depreciation expense totaled approximately $34,122,000, $23,657,000 and
$19,980,000 in 2002, 2001 and 2000, respectively. Assets under capital leases
were $71,144,923 and $19,873,000, net of accumulated amortization of
$11,965,000 and $8,130,000 at December 31, 2002 and 2001, respectively.
Interest is capitalized in connection with construction projects at the
Companys facilities. The capitalized interest is recorded as part of the asset
to which it relates and is depreciated over the assets estimated useful life.
In 2002 and 2001, $942,000 and $1,348,000 of interest cost, respectively, was
capitalized.

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5.  LONG-TERM OBLIGATIONS

Long-term obligations consist of the following (in thousands):

December 31,2002
        
        2001Revolving line of credit
        
        $
        94,000
        
        
        $
        Convertible subordinated notes
        
        
        322,500
        
        
        
        322,500Other debt obligations
        
        
        1,900
        
        
        
        4,367418,400
        
        
        
        326,867Obligations under capital leases (see Note 10)
        
        
        44,844
        
        
        
        5,850463,244
        
        
        
        332,717Less current maturities
        
        
        (1,668
        )
        
        
        (1,879
        )$
        461,576
        
        
        $
        330,838


In October 2001, the Company reduced the size of its credit facility to
$250,000,000. At December 31, 2002, the Company had outstanding letters of
credit of $4,320,000, $94,000,000 outstanding under its revolving line of
credit and $111,412,000 available.

The loans under the credit facility bear interest, at the Companys
option, at the adjusted base rate or at the adjusted LIBOR rate. The interest
rate ranged from 3.69% to 5.75% during 2002. The Company pays a commitment fee,
which varies from one-half to three-eighths of one percent of the unused
portion, depending on the Companys compliance with certain financial ratios.
The Company may prepay the principal amount outstanding under the credit
facility at any time before the maturity date of May 31, 2005.

The credit facility contains limitations on the Companys ability to incur
additional indebtedness (including contingent obligations), sell material
assets, retire, redeem or otherwise reacquire its capital stock, acquire the
capital stock or assets of another business, and pay dividends. The credit
facility also requires the Company to maintain a specified net worth and meet
or exceed certain coverage, leverage, and indebtedness ratios. Indebtedness
under the credit facility is secured by substantially all assets of the
Company.

In November and December 2000, the Company sold $150,000,000 of
Convertible Subordinated Notes due November 20, 2005. Net proceeds of
approximately $145,000,000 were used to reduce the outstanding balance on the
revolving line of credit. The notes bear interest from November 20, 2000 at
the rate of 4-1/2% per year, payable semi-annually on May 20 and November 20,
beginning on May 20, 2001. The notes are convertible at the option of the
holder at any time on or prior to maturity into shares of the Companys common
stock at a conversion price of $26.45 per share. The conversion price is
subject to adjustment. The Company may redeem all or a portion of the notes on
or after November 20, 2003, at the then current redemption prices, plus accrued
and unpaid interest. Note holders may require the Company to repurchase all of
the holders notes at 100% of their principal amount plus accrued and unpaid
interest in some circumstances involving a change of control. The notes are
unsecured obligations and rank junior in right of payment to all of the
Companys existing and future senior indebtedness. The indenture does not
contain any financial covenants. A total of 5,672,160 shares of common stock
have been reserved for issuance upon conversion of the notes.

In October 2001, the Company sold $172,500,000 of Convertible Subordinated
Notes due October 10, 2008. Net proceeds of approximately $166,400,000 were
used to reduce the outstanding balance on the revolving line of credit and for
acquisitions. The notes bear interest from October 10, 2001 at the rate of
4-1/4% per year, payable semi-annually on April 10 and October 10, beginning on
April 10, 2002. The notes are convertible at the option of the holder at any
time on or prior to maturity into shares of the Companys common stock at a
conversion price of $27.70 per share. The conversion price is subject to
adjustment. The Company may redeem all or a portion of the notes on or after
October 10, 2004, at the then current redemption prices, plus accrued and
unpaid interest. Note holders may require the Company to repurchase all of the
holders notes at 100% of their principal amount plus accrued and unpaid
interest in some circumstances involving a change of control. The notes are
unsecured and subordinated to the Companys existing and future senior
indebtedness and senior subordinated indebtedness. The notes are ranked equal
in right of payment to the Companys 4-1/2% notes due in 2005. The notes rank
junior to the

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##### Table of Contents



Companys subsidiary liabilities. The indenture does not contain any
financial covenants. A total of 6,226,767 shares of common stock have been
reserved for issuance upon conversion of the notes.

Interest rate swap agreements are used to manage the Companys interest
rate exposure under the credit facility. In 1998, the Company entered into an
interest rate swap agreement, which effectively converted for a five-year
period $45,000,000 of floating-rate borrowings to fixed-rate borrowings. In
January 2001, the Company terminated $16,500,000 of the $45,000,000 swap
agreement, leaving a notional amount of $28,500,000 converted to fixed-rate
borrowings. The Company secured a 5.625% fixed interest rate on the swap
agreement, which was subsequently amended to a 4.45% fixed interest rate during
2002. The outstanding agreement exposes the Company to credit losses in the
event of non-performance by the counterparty. The Company anticipates that the
counterparty will fully satisfy its obligation under the contract.

Aggregate maturities of long-term obligations at December 31, 2002,
excluding capital leases, are as follows (in thousands):

2003
        
        $
        6942004
        
        
        1,2062005
        
        
        244,0002006
        
        
        2007
        
        
        Thereafter
        
        
        172,500$
        418,400


6.  STOCKHOLDERS EQUITY

Common Stock

In April 2000, the Company completed its public offering of 9,500,634
shares of common stock at an offering price of $10.62 per share. The net
proceeds from the offering of approximately $94,800,000 were used to reduce
debt.

On September 28, 2000, the Company distributed a three-for-two split of
its outstanding common stock, effected in the form of a 50% stock dividend to
stockholders of record on September 15, 2000. The stock split resulted in the
issuance of 10.3 million shares of common stock and a transfer between
additional paid-in capital and common stock of $103,000.

On April 30, 2002, the Company effected a three-for-two stock split, in
the form of a 50% stock dividend, to stockholders of record on April 20, 2002.
The stock split resulted in the issuance of 15.9 million shares of common stock
and a transfer between additional paid-in capital and common stock of $159,000.

All historical references to common share and earnings per share amounts
included in the consolidated financial statements and notes thereto have been
restated to reflect both three-for-two splits.

Preferred Share Purchase Rights

To establish a new shareholders rights plan, on December 30, 2002, the
Board of Directors declared a dividend distribution of one Preferred Share
Purchase Rights (Rights) on each outstanding share of the Companys common
stock. The dividend distribution was payable to shareholders of record on
January 10, 2003. Under certain circumstances, each Right will entitle
shareholders to buy one ten-thousandth of a share of newly created Series A
Junior Participating Preferred Stock of the Company at an exercise price of
$75.00. The Rights are redeemable at $.01 per Right at any time before a
person has acquired 15% or more of the outstanding common stock. The Rights
Plan will expire on December 31, 2012.

The Rights have certain anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not determined by the Board of Directors to be in the best

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##### Table of Contents



interest of all shareholders. The Rights should not interfere with any
merger or other business combination approved by the Board of Directors.

Stock Options

In March 1997, the Companys Board of Directors and shareholders approved
the 1997 Long-Term Equity Incentive Plan (the Plan). The Company has
reserved 12,620,286 shares for issuance under the Plan. Under the Plan,
options to purchase shares may be granted to officers, employees, and
directors. The options have a maximum term of ten years and generally vest in
five equal annual installments. Options are generally granted at not less than
market price on the date of grant.

The following is a summary of option transactions during 2002, 2001 and
2000:

Number of
        
        OptionOptions
        
        Price RangeBalance at December 31, 1999
        
        
        2,903,775
        
        
        $
        2.03 - $12.47Options granted
        
        
        2,497,020
        
        
        
        8.95 - 19.95Options exercised
        
        
        (1,393,908
        )
        
        
        2.03 - 12.47Options forfeited
        
        
        (195,420
        )
        
        
        2.03 - 19.95Balance at December 31, 2000
        
        
        3,811,467
        
        
        
        2.03 - 19.95Options granted
        
        
        2,710,550
        
        
        
        16.05 - 23.00Options exercised
        
        
        (844,340
        )
        
        
        2.03 - 19.95Options forfeited
        
        
        (457,799
        )
        
        
        2.03 - 19.95Balance at December 31, 2001
        
        
        5,219,878
        
        
        
        2.03 - 23.00Options granted
        
        
        2,492,327
        
        
        
        10.80 - 23.50Options exercised
        
        
        (1,031,997
        )
        
        
        2.03 - 23.50Options forfeited
        
        
        (1,008,489
        )
        
        
        2.03 - 23.50Balance at December 31, 2002
        
        
        5,671,719
        
        
        $
        2.03 - $23.50


The following table summarizes information concerning outstanding and
exercisable options at December 31, 2002:

Options Outstanding
        
        Options ExercisableWeighted AverageRemainingNumber
        
        Contractual Life
        
        Weighted Average
        
        Number
        
        Weighted AverageRange of Exercise Prices
        
        Outstanding
        
        (years)
        
        Exercise Price
        
        Exercisable
        
        Exercise Price$2.03 - $7.17
        
        703,670
        
        
        
        5.9
        
        
        $
        6.72
        
        
        
        345,169
        
        
        $
        6.488.95 - 10.80
        
        578,313
        
        
        
        8.0
        
        
        
        9.66
        
        
        
        308,563
        
        
        
        8.9811.50 - 11.50
        
        
        749,142
        
        
        
        7.3
        
        
        
        11.50
        
        
        
        262,253
        
        
        
        11.5011.56 - 16.05
        
        
        86,089
        
        
        
        7.5
        
        
        
        14.76
        
        
        
        30,651
        
        
        
        13.9416.40 - 16.40
        
        
        574,303
        
        
        
        8.4
        
        
        
        16.40
        
        
        
        99,034
        
        
        
        16.4016.67 - 16.71
        
        
        806,850
        
        
        
        8.5
        
        
        
        16.69
        
        
        
        551,409
        
        
        
        16.7018.20 - 18.20
        
        
        680,304
        
        
        
        9.6
        
        
        
        18.20
        
        
        
        
        
        
        
        18.67 - 21.08
        
        
        715,505
        
        
        
        8.9
        
        
        
        20.04
        
        
        
        344,144
        
        
        
        20.6723.00 - 23.00
        
        
        43,466
        
        
        
        8.6
        
        
        
        23.00
        
        
        
        13,492
        
        
        
        23.0023.50 - 23.50
        
        
        734,077
        
        
        
        9.4
        
        
        
        23.50
        
        
        
        682,838
        
        
        
        23.50$2.03 - $23.50
        
        5,671,719
        
        
        
        8.2
        
        
        $
        15.53
        
        
        
        2,637,553
        
        
        $
        16.21


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At December 31, 2001 and 2000, respectively, 1,751,881 and 928,145 options
were exercisable. At December 31, 2002, the Company had options representing
3,597,486 shares available for future grant.

Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, Accounting for Stock Based Compensation, and has been
determined as if the Company had accounted for its employee stock options under
the fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 2002, 2001 and 2000,
respectively: risk-free interest rate of 4.11%, 4.89% and 6.45%; dividend yield
of 0%; volatility factor of the expected market price of the Companys common
stock of .594, .603 and .740; and a weighted-average expected life of the
option of 3.9 years for 2002, 4.2 years for 2001 and 5 years for 2000. The
estimated weighted average fair values of shares granted during 2002, 2001 and
2000, using the Black-Scholes option pricing model, were $9.46, $9.51 and
$6.84, respectively.

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

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The Companys
pro forma information is summarized in Note 2.

Employee Stock Purchase Plan

In May 1998 the Companys Board adopted, and in June 1998 the stockholders
approved, the Province Healthcare Company Employee Stock Purchase Plan (the
ESPP). Under the ESPP, employees may purchase shares of common stock at 85%
of market price on the first day of the year or 85% of the market price on the
last day of the year, whichever is lower. The shares are purchased each year
with funds withheld from employees through payroll deductions from January 1
through December 31. A total of 1,125,000 shares of Common Stock have been
reserved for issuance under the ESPP. Participation in the ESPP commenced June
1, 1998. Shares issued under the ESPP totaled 59,022, 284,082 and 48,732 in
2002, 2001 and 2000, respectively.

7.  PATIENT SERVICE REVENUE

The Company has agreements with third-party payors that provide for
payments to the Company at amounts different from its established rates. A
summary of the payment arrangements with major third-party payors follows:



| |  | MedicareInpatient acute hospital services rendered to
Medicare program beneficiaries are paid at prospectively determined
rates per diagnosis related group (DRG). These DRG rates vary
according to a patient classification system that is based on
clinical, diagnostic, and other factors. Outpatient services are
generally reimbursed under the outpatient prospective payment
system, which pays a fixed rate for a given bundle of outpatient
services. These bundles are known as Ambulatory Payment
Classifications or APCs. Inpatient nonacute services, related to
Medicare beneficiaries are paid based on a cost reimbursement
methodology subject to various cost limits. The Company is
reimbursed for cost-based services at a tentative rate, with final
settlement determined after submission of annual cost reports by the
Company and audits thereof by the Medicare fiscal intermediary. The
Companys classification of patients under the Medicare program and
the appropriateness of their admission are subject to an independent
review. The majority of the Companys Medicare cost reports have
been audited by the Medicare fiscal intermediary through December
31, 1998.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | MedicaidInpatient services rendered to the recipients under
the Medi-Cal program (Californias medicaid program) are reimbursed
either under contracted rates or reimbursed for cost reimbursable
items at a tentative rate with final settlement determined after
submission of annual cost reports by the Company and audits thereof
by Medi-Cal. The Company leases two hospitals in California, and its
Medi-Cal cost reports have been audited by the Medi-Cal fiscal
intermediary through December 31,
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 1998. The Medicaid programs of the other states in which the Company
owns or leases hospitals are prospective payment systems which
generally do not have retroactive cost report settlement procedures.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | OtherThe Company also has entered into payment agreements
with certain commercial insurance carriers, health maintenance
organizations and preferred provider organizations. The basis for
payment to the Company under these agreements includes prospectively
determined rates per discharge, discounts from established charges,
and prospectively determined daily rates.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Approximately 56.5%, 50.7% and 49.2% of net patient revenue for the years
ended December 31, 2002, 2001 and 2000, respectively, are derived from Medicare
and state-sponsored Medicaid programs.

In 2002, 2001 and 2000, the Company owned or leased three hospitals in
Texas, which accounted for 16.4%, 23.9% and 21.4% of net operating revenues,
respectively. In 2002, 2001 and 2000, the Company owned one hospital in
Arizona, which accounted for 11.4%, 15.0% and 15.4% of net operating revenues,
respectively.

Final determination of amounts earned under the Medicare and Medicaid
programs often occur in subsequent years because of audits by the 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 consolidated statements of income in the
period in which the revisions are made, and resulted in an increase in net
patient service revenue of $43,000 in 2002, an increase in net patient service
revenue of $628,000 in 2001, and a decrease in net patient service revenue of
$722,000 in 2000.

8.  INCOME TAXES

The provision for income taxes consists of the following amounts (in
thousands):

2002
        
        2001
        
        2000Current:Federal
        
        $
        13,281
        
        
        $
        15,167
        
        
        $
        17,995State
        
        
        1,442
        
        
        
        1,647
        
        
        
        2,05814,723
        
        
        
        16,814
        
        
        
        20,053Deferred:Federal
        
        
        8,436
        
        
        
        6,329
        
        
        
        (4,968
        )State
        
        
        916
        
        
        
        687
        
        
        
        (348
        )9,352
        
        
        
        7,016
        
        
        
        (5,316
        )$
        24,075
        
        
        $
        23,830
        
        
        $
        14,737


The differences between the Companys effective income tax rate of 40%,
42%, and 42.5% for 2002, 2001 and 2000, respectively, and the statutory federal
income tax rate of 35.0% are as follows (in thousands):

2002
        
        2001
        
        2000Statutory federal rate
        
        $
        21,065
        
        
        
        35.0
        %
        
        $
        19,858
        
        
        
        35.0
        %
        
        $
        12,136
        
        
        
        35.0
        %State income taxes, net of federal income tax benefit
        
        
        1,533
        
        
        
        2.5
        %
        
        
        1,517
        
        
        
        2.7
        %
        
        
        1,112
        
        
        
        3.2
        %Permanent differences
        
        
        243
        
        
        
        0.4
        %
        
        
        508
        
        
        
        0.9
        %
        
        
        576
        
        
        
        1.7
        %Other
        
        
        1,234
        
        
        
        2.1
        %
        
        
        1,947
        
        
        
        3.4
        %
        
        
        913
        
        
        
        2.6
        %$
        24,075
        
        
        
        40.0
        %
        
        $
        23,830
        
        
        
        42.0
        %
        
        $
        14,737
        
        
        
        42.5
        %


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##### Table of Contents



The components of the Companys deferred tax assets and (liabilities) are
as follows (in thousands):

December 31,2002
        
        2001Depreciation and amortization
        
        $
        (18,608
        )
        
        $
        (9,409
        )Accounts receivable
        
        
        (114
        )
        
        
        (1,350
        )Accruals and reserves
        
        
        3,107
        
        
        
        1,870Insurance reserves
        
        
        105
        
        
        
        143Third party settlements
        
        
        1,311
        
        
        
        2,090Operating leases
        
        
        (1,893
        )
        
        
        (1,570
        )Capital lease interest
        
        
        665
        
        
        
        643Other
        
        
        (1,312
        )
        
        
        143Net deferred tax liability
        
        $
        (16,739
        )
        
        $
        (7,440
        )


In the accompanying consolidated balance sheets, net current deferred tax
assets of $3,052,000 and $2,032,000 and net noncurrent deferred tax liabilities
of $19,791,000 and $9,472,000 at December 31, 2002 and 2001, respectively, are
included in prepaid expenses and other, and other liabilities, respectively.

The Company recorded a deferred tax asset of $53,000 related to interest
rate swap agreements during 2002. The benefit of the deferred taxes is recorded
in Comprehensive Income.

The Internal Revenue Service has selected tax years 1998 through 2000 for
examination. Finalization of the examination is not expected to have a
significant impact on the financial condition or results of operation of the
Company.

9.  EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):

2002
        
        2001
        
        2000Numerator for basic and diluted income per share:Net income
        
        $
        36,112
        
        
        $
        32,908
        
        
        $
        19,938Denominator:Denominator for basic income per share
weighted-average shares
        
        
        48,146
        
        
        
        47,091
        
        
        
        42,987Effect of dilutive securities:Employee stock options
        
        
        1,307
        
        
        
        1,795
        
        
        
        1,704Denominator for diluted income per share
adjusted weighted-average shares
        
        
        49,453
        
        
        
        48,886
        
        
        
        44,691Basic net income per share
        
        $
        0.75
        
        
        $
        0.70
        
        
        $
        0.47Diluted net income per share
        
        $
        0.73
        
        
        $
        0.67
        
        
        $
        0.45


The effect of the convertible notes to purchase 5,672,160 and 6,226,767
shares of common stock, and related interest expense, were not included in the
computation of diluted earnings per share because their effect would have been
anti-dilutive.

10.  LEASES

The Company leases various buildings, office space and equipment. The
leases expire at various times and have various renewal options. These leases
are classified as either capital leases or operating leases based on the terms
of the respective agreements.

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Future minimum payments at December 31, 2002, by year and in the
aggregate, under capital leases and noncancellable operating leases with terms
of one year or more consist of the following (in thousands):

Capital
        
        OperatingLeases
        
        Leases2003
        
        $
        1,315
        
        
        $
        6,6902004
        
        
        964
        
        
        
        5,5852005
        
        
        40,778
        
        
        
        4,0922006
        
        
        466
        
        
        
        3,3172007
        
        
        531
        
        
        
        3,027Thereafter
        
        
        2,518
        
        
        
        10,863Total minimum lease payments
        
        
        46,572
        
        
        $
        33,574Amount representing interest
        
        
        (1,728
        )Present value of net minimum lease
payments (including $974 classified as
current)
        
        $
        44,844


11.  COMMITMENTS AND CONTINGENCIES

Commitments

The Company is obligated under the asset purchase agreement for Teche
Regional Medical Center to spend approximately $8,000,000 for capital
improvements during the first 18 months of operations. At December 31, 2002,
approximately $4,300,000 remains to be spent under this commitment. In
addition, the Company is obligated to construct two new facilities at its
Eunice, Louisiana and Belle Glade, Florida locations contingent upon both
existing facilities meeting specified operating targets. The Eunice and Belle
Glade replacement facilities are currently estimated to cost approximately
$20,000,000 and $25,000,000, respectively.

General Liability Claims

The Company is subject to claims and suits arising in the ordinary course
of business, including claims for damages for personal injuries,
employment-related claims, breach of management contracts and for wrongful
restriction of, or interference with, physicians staff privileges. In certain
of these actions, plaintiffs may seek punitive or other damages against the
Company, which are generally not covered by insurance. In managements opinion,
the Company is currently not a party to any proceeding that would have a
material adverse effect on the Companys results of operations or financial
condition.

Acquisitions

The Company has acquired and will continue to acquire, hospitals with
prior operating histories. The hospitals that the Company acquires may have
unknown or contingent liabilities, including liabilities for failure to comply
with healthcare laws and regulations. Although the Company obtains contractual
indemnification from sellers covering these matters, such indemnification may
be insufficient to cover material claims or liabilities for past activities of
acquired hospitals.

Physician Commitments

In order to recruit and retain physicians to the communities it serves,
the Company has committed to provide certain financial assistance in the form
of recruiting agreements with various physicians. In consideration for a
physician relocating to one of its communities and agreeing to engage in
private practice for a specified period of time, the Company may loan certain
amounts of money to a physician, generally not to exceed a period of one year,
to assist in establishing his or her practice. The actual amount of such
commitments to be advanced to physicians is generally based on the physicians
net income during the guarantee period. Amounts advanced under the recruiting
agreements are generally forgiven pro rata over a period of 36 months
contingent upon the physician continuing to practice in the respective
community.

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12.  RETIREMENT PLANS

The Company sponsors defined contribution employee benefit plans which
cover substantially all employees. Employees may contribute a percentage of
eligible compensation subject to Internal Revenue Service limits. The plans
call for the Company to make matching contributions, based on either a
percentage of employee contributions or a discretionary amount as determined by
the Company. Contributions by the Company to the plans totaled $3,004,000,
$2,255,000 and $2,442,000 for the years ended December 31, 2002, 2001 and
2000, respectively.

The Company sponsors a nonqualified supplemental deferred compensation
plan for selected management employees. As determined by the Board of
Directors, the plan provides a benefit of 1% to 3% of the employees
compensation. The participants amount is fully vested, except in those
instances where the participants employment terminates for any reason other
than retirement, death or disability, in which case the participant forfeits a
portion of the employers contribution depending on length of service. Plan
expenses totaled $227,000, $381,000 and $175,000 for the years ended December
31, 2002, 2001 and 2000, respectively.

13.  FAIR VALUES OF FINANCIAL INSTRUMENTS

Cash and Cash EquivalentsThe carrying amount reported in the balance
sheets for cash and cash equivalents approximates fair value.

Accounts Receivable and Accounts PayableThe carrying amount reported in
the balance sheets for accounts receivable and accounts payable approximates
fair value.

Long-Term ObligationsThe carrying amount reported in the balance sheets
for long-term obligations approximates fair value. The fair value of the
Companys long-term obligations is estimated using discounted cash flow
analyses, based on the Companys current incremental borrowing rates for
similar types of borrowing arrangements.

Interest Rate Swap AgreementThe fair value of the Companys interest
rate swap agreement is $1,550,000 at December 31, 2002, based on quoted market
prices for similar debt issues.

14.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Quarterly financial information for the years ended December 31, 2002 and
2001 is summarized below (in thousands, except per share data):

QuarterFirst
        
        Second
        
        Third
        
        Fourth2002Net operating revenue
        
        $
        165,601
        
        
        $
        174,000
        
        
        $
        183,962
        
        
        $
        180,784Income before income taxes
        
        
        19,486
        
        
        
        18,251
        
        
        
        15,710
        
        
        
        6,740Net income
        
        
        11,692
        
        
        
        10,951
        
        
        
        9,426
        
        
        
        4,044Basic net income per share
        
        
        0.25
        
        
        
        0.23
        
        
        
        0.19
        
        
        
        0.08Diluted net income per share
        
        
        0.23
        
        
        
        0.22
        
        
        
        0.19
        
        
        
        0.082001Net operating revenue
        
        $
        122,436
        
        
        $
        123,528
        
        
        $
        131,770
        
        
        $
        153,004Income before income taxes
        
        
        14,669
        
        
        
        13,331
        
        
        
        11,888
        
        
        
        16,850Net income
        
        
        8,508
        
        
        
        7,732
        
        
        
        6,895
        
        
        
        9,773Basic net income per share
        
        
        0.18
        
        
        
        0.17
        
        
        
        0.15
        
        
        
        0.21Diluted net income per share
        
        
        0.17
        
        
        
        0.16
        
        
        
        0.14
        
        
        
        0.20


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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

(In thousands)

Col. A
        
        Col. B
        
        Col. C
        
        Col. D
        
        Col. EAdditions(1)Balance at
        
        Charged to Costs
        
        Charged to Other
        
        (2)
        
        Balance at End ofDescription
        
        Beginning of Period
        
        and Expenses
        
        Accounts-Describe
        
        Deductions-Describe
        
        PeriodFor the year ended December 31, 2000
Allowance for doubtful accounts
        
        $
        16,494
        
        
        $
        43,604
        
        
        $
        4,693
        
        
        $
        (56,470
        )
        
        $
        8,321For the year ended December 31, 2001
Allowance for doubtful accounts
        
        $
        8,321
        
        
        $
        49,283
        
        
        $
        11,899
        
        
        $
        (19,825
        )
        
        $
        49,678For the year ended December 31, 2002
Allowance for doubtful accounts
        
        $
        49,678
        
        
        $
        56,765
        
        
        $
        10,729
        
        
        $
        (49,014
        )
        
        $
        68,158




---

|(1) |  | Allowances as a result of acquisitions, and working capital settlement
for a prior year acquisition.
|--- |  | ----------------------------------------------------------------------------------------------------
|   
|(2) |  | Uncollectible accounts written off, net of recoveries.                                              

F-22