Iasis Healthcare LLC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 333-117362

IASIS HEALTHCARE LLC

(Exact name of registrant as specified in its charter)


DELAWARE (State or other jurisdiction of incorporation or organization)		20-1150104 (I.R.S. Employer Identification No.)

DOVER CENTRE
117 SEABOARD LANE, BUILDING E
FRANKLIN, TENNESSEE		37067
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (615) 844-2747

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES þ NO o

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 the filing requirements for at least the past 90 days. YES þ NO o

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 the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and non-accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer o Accelerated filer o Non-Accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO þ

As of December 19, 2006, 100% of the registrant’s common interests outstanding (all of which are privately owned and are not traded on any public market) were owned by IASIS Healthcare Corporation, its sole member.

IASIS HEALTHCARE LLC

Item 1. Business.

Company Overview

We are a leading owner and operator of medium-sized acute care hospitals in high-growth urban and suburban markets. We operate our hospitals with a strong community focus by offering and developing healthcare services targeted to the needs of the markets we serve, promoting strong relationships with physicians and working with local managed care plans. As of September 30, 2006, we owned or leased 14 acute care hospitals and one behavioral health hospital with a total of 2,206 beds in service. Our hospitals are located in five regions, each of which has a projected population growth rate in excess of the national average:

	•		Salt Lake City, Utah;

	•		Phoenix, Arizona;

	•		Tampa-St. Petersburg, Florida;

	•		three cities in Texas, including San Antonio; and

	•		Las Vegas, Nevada.

We are currently constructing Mountain Vista Medical Center, a new 172-bed hospital located in Mesa, Arizona, which we expect to be open on June 1, 2007.

Our general, acute care hospitals offer a variety of medical and surgical services commonly available in hospitals, including emergency services, general surgery, internal medicine, cardiology, obstetrics, orthopedics, psychiatry and physical rehabilitation. In addition, our facilities provide outpatient and ancillary services including outpatient surgery, physical therapy, radiation therapy, diagnostic imaging and respiratory therapy.

We also own and operate a Medicaid and Medicare managed health plan in Phoenix called Health Choice Arizona, Inc. (“Health Choice” or the “Plan”), that served over 114,700 members as of September 30, 2006.

For the year ended September 30, 2006, we generated revenue of approximately $1.63 billion, of which approximately 75.0% was derived from our acute care segment.

Our principal executive offices are located at Dover Centre, 117 Seaboard Lane, Building E, Franklin, Tennessee 37067 and our telephone number at that address is (615) 844-2747. Our Internet website address is www.iasishealthcare.com. Information contained on our website is not part of this annual report on Form 10-K.

In this report, unless we indicate otherwise or the context requires, “we,” “us,” “our” or “our company” refers to IASIS Healthcare LLC (“IASIS”) and its consolidated subsidiaries and includes IASIS Healthcare Corporation (“IAS”), our predecessor company.

Business Strategy

Our objective is to provide high-quality, cost-effective healthcare services in the communities we serve. The key elements of our business strategy are:

• Provide High-Quality Services. We strive to provide high-quality services at each of our facilities. This includes improving clinical performance and patient safety, which is a focus of all our hospitals. We believe that the measurement of quality of care has become an increasingly important factor in third-party reimbursement as well as in negotiating preferred managed care contracting rates. Reflecting our commitment to the quality of care and in response to these developments, we have implemented an advanced clinical information system at eight of our 14 acute care hospitals to provide us with more timely availability of key clinical care data. We expect to complete installation at the remaining six hospitals in 2007. We believe that this system will help us enhance patient safety, reduce medical errors through bar coding, increase staff time available for direct patient care and continue to meet or exceed quality of care indicators for reimbursement. Our success at delivering high-quality services can be measured by items such as:

•

dedicated corporate and hospital resources;

	•		on-going training and education of clinical personnel;

	•		focus on information systems;

	•		JCAHO accreditation at all hospitals;

	•		four centers of excellence within our hospitals;

	•		HealthGrades 5 Star ratings and top 5% of Hospitals awards at various hospitals;

	•		Solucient’s Top 100 Hospital Awards for process improvements at two hospitals; and

	•		various other independent ratings.

• Focus on Operational Excellence. Our management team has extensive multi-facility operating experience and focuses on operational excellence at each of our facilities. We intend to continue to improve our operations and profitability by:

	•		using our advanced information systems platform across all of our hospitals to provide us with accurate, real-time and cost-effective financial and clinical information;

	•		expanding our profitable product lines and improving our business mix;

	•		focusing on efficient staffing, outsourcing programs and supply utilization;

	•		capitalizing on purchasing efficiencies and reducing operating costs through monitoring compliance with our national group purchasing contract; and

	•		improving our processes for patient registration, including patient qualification for financial assistance and point-of-service collections, billing, collections, managed care contract compliance and all other aspects of our revenue cycle.

• Strategically Invest in Our Markets to Expand Services and Increase Revenue. Our disciplined approach to investing our capital includes analyzing demographic data, utilizing our advanced information systems to identify the profitability of our product lines and consulting with physicians and payors to prioritize the healthcare needs of the communities we serve. We intend to continue to increase our revenue and local presence by focusing our investment efforts on:

	•		upgrading and expanding specialty services and surgical capacity, including cardiology, orthopedics, women’s services and sub-acute care;

	•		expanding emergency room capacity;

	•		updating our technology in surgery, such as robotic surgery, diagnostic imaging and other medical equipment;

	•		increasing capacity and utilization of inpatient services at certain of our hospitals; and

	•		enhancing the convenience and quality of our outpatient services and expanding outpatient specialty services.

We are continually engaged in strategic investments in our markets to expand services and increase revenue. Over the past two years, we have invested over $200.0 million in capital expenditures at our existing facilities, including construction of The Medical Center of Southeast Texas, a state-of-the-art hospital in Port Arthur, Texas, which we opened in April 2005. The new facility consolidated the operations of our Mid-Jefferson Hospital and Park Place Medical Center facilities. Long-term, we expect this new hospital to enhance our presence and reduce patient out-migration in the Port Arthur area, increasing our future net revenue.

Additionally, we are currently constructing a new hospital, Mountain Vista Medical Center, in the East Valley of our Phoenix, Arizona market. We believe this new hospital will be a leading acute care hospital in the high growth regional service area. We expect this new hospital to open on June 1, 2007 and anticipate spending approximately $100.0 to $105.0 million during the fiscal year 2007 in connection with the construction and equipping of the facility. When complete in June, we expected total costs of the hospital to be $170.0 to $180.0 million.

• Recruit and Retain Quality Physicians. Consistent with community needs and regulatory requirements, we intend to continue to recruit and retain quality physicians for our medical staffs and maintain their loyalty to our facilities by:

	•		dedicating corporate personnel and resources to physician recruitment;

	•		equipping our hospitals with technologically advanced equipment;

	•		enhancing physician convenience and access, including the development of medical office space on or near our medical campuses;

	•		sponsoring training programs to educate physicians on advanced medical procedures;

	•		allowing physicians to remotely access clinical data through our information systems to facilitate convenient and timely patient care; and

	•		employ specialty physicians to meet community needs in certain markets.

• Continue to Develop Favorable Managed Care Relationships. By utilizing a market-based approach, we plan to negotiate favorable terms with managed care plans, enter into contracts with additional managed care plans and continue aligning reimbursement with acuity of services. Additionally, our advanced information systems improve our hospitals’ ability to administer managed care contracts, helping to ensure that claims are adjudicated correctly. We believe that the broad geographic coverage of our hospitals in certain of the regions in which we operate increases our attractiveness to managed care plans in those areas.

• Selectively Pursue Acquisitions and Strategic Alliances. We intend to selectively pursue hospital acquisitions in existing and new markets where we believe we can improve the financial and operational performance of the acquired hospital and enhance our regional presence. We intend to target hospitals with 100 to 400 beds. We will focus our new market development efforts to acquire under-managed and under-capitalized facilities in growing urban and suburban regions with stable or improving managed care environments, as well as other opportunistic acquisitions. We will also continue to identify opportunities to expand our presence through strategic alliances with other healthcare providers.

On July 21, 2006, we announced the signing of a definitive agreement to acquire Glenwood Regional Medical Center located in West Monroe, Louisiana. The purchase price for the hospital is approximately $82.5 million, subject to net working capital and other purchase price adjustments. Additionally, we plan to make capital expenditures on the hospital campus of approximately $30.0 million over the next four years. We expect the acquisition to close during the first calendar quarter of 2007, subject to approval of the Louisiana Attorney General and the satisfaction of other closing conditions.

Although we expect our business strategy to increase our patient volumes, certain risk factors could offset those increases to our net revenue. Please see Item 1A, “Risk Factors” beginning on page 25 for a discussion of risk factors affecting our business.

Our Markets

Our hospitals are located in regions with some of the fastest growing populations in the United States.

Salt Lake City, Utah

We operate four hospitals with a total of 535 licensed beds in the Salt Lake City area. The population in this area is projected to grow by 5.1% from 2006 to 2011, which is approximately 1.1 times above the projected national average growth rate. We believe our hospitals in Utah benefit from attractive strategic locations. We believe the reimbursement environment in Utah is favorable with the majority of our net patient revenue derived from managed care payors. Over the past three fiscal years we have completed expansion projects at our existing facilities in this market totaling $39.0 million. These projects have provided additional capacity for women’s services, inpatient and outpatient surgery, emergency rooms and various diagnostic services, along with upgraded imaging technology. In addition, we expect to spend approximately $40.0 to $45.0 million in fiscal 2007 on new services and various other renovation and expansion projects in the Salt Lake City area, including outpatient services expansion at Jordan Valley Hospital and a market-wide expansion of cardiovascular services. Our significant capital investments in our Salt Lake City area facilities are yielding strong returns. For the year ended September 30, 2006, we generated approximately 29.8% of our total acute care revenue in this market.

Phoenix, Arizona

We operate three acute care hospitals and one behavioral health hospital with a total of 549 licensed beds in the Phoenix area. The population in this area is projected to grow by 13.7% from 2006 to 2011, which is nearly 2.9 times the projected national average growth rate. The population in the primary service area for our Mountain Vista Hospital, which is currently under construction in the East Valley area of Phoenix, is projected to grow 24.6% from 2003 to 2008. The projected population growth in this area provides a strategic basis for construction of our new hospital. In addition, we are planning expansion of cardiovascular services at St. Luke’s Medical Center during fiscal 2007. The population growth, coupled with local nursing shortages, has resulted in greater contract labor utilization compared to our other markets. We have implemented a comprehensive nurse recruiting and retention plan to address this issue. In addition, we have expanded our relationships with local colleges and universities, which included sponsorship of nursing scholarship programs. We believe we can continue to achieve growth in our existing Phoenix facilities through continued focus on profitable product lines and improved managed care contracting rates. For the year ended September 30, 2006, exclusive of Health Choice, we generated approximately 21.9% of our total acute care revenue in this market.

Tampa-St. Petersburg, Florida

We operate three hospitals with a total of 688 licensed beds in the Tampa-St. Petersburg area. The population in this area is projected to grow by 8.3% from 2006 to 2011, which is approximately 1.7 times the projected national average growth rate. Florida has a large Medicare population and high managed care penetration. Certain material capital projects, including the addition of new beds or services, require regulatory approval under Florida’s certificate of need program. Such requirements restrict our ability to expand operations in this market. However, we believe we can achieve growth in our Tampa-St. Petersburg market through increasing patient volume and in expanding into profitable profit lines such as psychiatric and cyberknife services. Two of our Florida facilities have recently completed expansion of their emergency rooms. For the year ended September 30, 2006, we generated approximately 16.6% of our total acute care revenue in this market.

Texas

We operate three hospitals with a total of 649 licensed beds in San Antonio, Odessa, and Port Arthur, Texas. The weighted average projected population growth rate for these cities from 2006 to 2011 is 6.9%, which is approximately 1.4 times the projected national average growth rate. We believe our facilities in Texas benefit from favorable reimbursement rates and the lack of a single dominant competitor in their service areas. We expect to spend approximately $25.0 to $30.0 million during fiscal 2007, which includes the expansion of obstetric, neonatology and surgical services at our Southwest General Hospital and upgrade of imaging and other diagnostic equipment at our other Texas facilities. For the year ended September 30, 2006, we generated approximately 22.9% of our total acute care revenue in this market.

In April 2005, we opened The Medical Center of Southeast Texas, a 212-bed hospital, in Port Arthur, Texas. The hospital consolidated the medical staffs and the operations of Mid-Jefferson Hospital and Park Place Medical Center. We believe that this new state-of-the-art hospital will reduce patient out-migration from, and will be a leading provider of acute care services in, the Port Arthur area. As discussed further in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” this hospital sustained roof and water intrusion damage during Hurricane Rita in September 2005. The majority of services at the hospital became operational during October and November of 2005. Despite reopening of these services, volume at this hospital during our first two fiscal 2006 quarters was adversely impacted by the devastation of Hurricane Rita. Unemployment in Port Arthur remains one of the highest in the state; however, employers and industry in the community appear to be committed to rebuilding the area. We continue to believe this hospital has good opportunity for growth as the community is redeveloped.

Las Vegas, Nevada

Effective February 1, 2004, we acquired North Vista Hospital, with a total of 185 licensed beds, in Las Vegas. The population in this area is projected to grow by 18.9% from 2006 to 2011, at approximately 3.9 times the projected national average growth rate, which would make it one of the fastest growing populations in the United States. We plan to continue improvements in the operating performance of North Vista Hospital by expanding women’s services, investing in profitable product lines and focusing on managed care contracting.

For the year ended September 30, 2006, we generated approximately 8.2% of our total acute care revenue in this market.

Our Properties

We operate 14 acute care hospitals and one behavioral health hospital and have ownership interests in three ambulatory surgery centers. We own 13 and lease two of our hospitals. Five of the acute care hospitals we own and our new hospital under construction have third-party investors. The following table contains information concerning our hospitals.


		Licensed
Hospitals	City	Beds
Utah
Davis Hospital & Medical Center (1)	Layton		136
Jordan Valley Hospital (2)	West Jordan		92
Pioneer Valley Hospital (3)	West Valley City		139
Salt Lake Regional Medical Center	Salt Lake City		168
Arizona
Mesa General Hospital (4)	Mesa		126
St. Luke’s Medical Center (5)	Phoenix		320
Tempe St. Luke’s Hospital	Tempe		103
Florida
Memorial Hospital of Tampa	Tampa		180
Palms of Pasadena Hospital	St. Petersburg		307
Town & Country Hospital	Tampa		201
Nevada
North Vista Hospital	Las Vegas		185
Texas
Odessa Regional Hospital (6)	Odessa		146
Southwest General Hospital (7)	San Antonio		291
The Medical Center of Southeast Texas (8)	Port Arthur		212

Total			2,606


(1)		Owned by a limited partnership in which we own a 97.5% interest.

(2)		Owned by a limited partnership in which we own a 97.4% interest.

(3)		Leased under an agreement that expires on January 31, 2019. We have options to extend the term of the lease through January 31, 2039.

(4)		Leased under an agreement that expires on July 31, 2008.

(5)		Includes St. Luke’s Behavioral Hospital, which has 85 licensed beds.

(6)		Owned by a limited partnership in which we own an 88.8% interest.

(7)		Owned by a limited partnership in which we own a 93.6% interest.

(8)		Owned by a limited partnership in which we own an 87.5% interest.

We also operate and lease medical office buildings in conjunction with our hospitals. These office buildings are occupied primarily by physicians who practice at our hospitals.

In November 2004, we acquired land for $8.5 million in the East Valley area of Phoenix where our new hospital, Mountain Vista Medical Center, is currently under construction. Various third-party investors own 9.0% of the subsidiary which will operate the new hospital.

In September 2005, we invested $3.7 million in a limited partnership which owns land in Las Vegas, Nevada. We are the sole general partner in this limited partnership and intend to hold the land for possible future development for healthcare delivery purposes.

Hospital Operations

Our senior management team has extensive multi-facility operating experience and focuses on maintaining clinical and operational excellence at our facilities. At each hospital we operate, we have implemented policies and procedures to improve the hospital’s operating and financial performance. A hospital’s local management team is generally comprised of a chief executive officer, chief financial officer and chief nursing officer. Local management teams, in consultation with our corporate staff, develop annual operating plans setting forth revenue growth and operating profit strategies. These strategies can include the expansion of services offered by the hospital and the recruitment of physicians in each community, as well as plans to reduce costs by improving operating efficiencies. We believe that the competence, skills and experience of the management team at each hospital is critical to the hospital’s success because of its role in executing the hospital’s operating plan. Our performance-based compensation program for each local management team is based upon the achievement of qualitative and quantitative goals set forth in the annual operating plan. Our hospital management teams are advised by boards of trustees that include members of hospital medical staffs as well as community leaders. Each board of trustees establishes policies concerning medical, professional and ethical practices, monitors such practices and is responsible for ensuring that these practices conform to established standards.

Factors that affect demand for our services include:

	•		the geographic location of our hospitals and their convenience for patients and physicians;

	•		our participation in managed care programs;

	•		utilization management practices of managed care plans;

	•		consolidation of managed care payors;

	•		capital investment at our facilities;

	•		the quality of our medical staff;

	•		competition from other healthcare providers;

	•		the size of and growth in local population;

	•		local economic conditions; and

	•		improved treatment protocols as a result of advances in medical technology and pharmacology.

We believe that the ability of our hospitals to meet the healthcare needs of their communities is determined by the:

	•		level of physician support;

	•		availability of nurses and other healthcare professionals;

	•		quality, skills and compassion of our employees;

	•		breadth of our services;

	•		physical capacity and level of technology at our facilities; and

	•		emphasis on quality of care.

We continuously evaluate our services with a view to expanding our profitable lines of business and improving our business mix. We use our advanced information systems to perform detailed product line margin analyses and monitor the profitability of the services provided at our facilities. We use these analyses to capitalize on price and volume trends through the expansion of certain services. We also use our information systems to monitor patient care and other quality of care assessment activities on a continuing basis.

A large percentage of our hospitals’ net patient revenue consists of fixed payment, discounted sources including Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services is often fixed regardless of the cost incurred or the level of services provided. We expect patient volumes from Medicare to increase over time due to the general aging of the population.

Inpatient care is expanding to include sub-acute care when a less-intensive, lower cost level of care is appropriate. By offering cost-effective sub-acute services in appropriate circumstances, we are able to provide a continuum of care when the demand for such services exists. We have identified opportunities to develop post-acute services within our facilities as appropriate, including inpatient psychiatric and skilled nursing services.

Sources of Revenue

We receive payment for patient services from:

	•		the federal government, primarily under the Medicare program;

	•		state Medicaid programs, including managed Medicaid plans;

	•		managed care payors, including health maintenance organizations, preferred provider organizations and managed Medicare plans; and

	•		individual patients and private insurers.

The following table presents the approximate percentages of net patient revenue from these sources:


	Percentage of Net Patient Revenue
	Years Ended September 30,
Payor Source	2006			2005			2004
Medicare		24.2	%		26.6	%		26.3	%
Medicaid		14.5			13.1			14.1
Managed care		46.0			44.5			43.5
Self-pay and other		15.3			15.8			16.1

Total⁽¹⁾		100.0	%		100.0	%		100.0	%


(1)		For the years ended September 30, 2006, 2005 and 2004, net patient revenue comprised 74.6%, 76.8% and 78.4%, respectively, of our total net revenue.

Most of our hospitals offer discounts from established charges to managed care plans if they are large group purchasers of healthcare services. These discount programs generally limit our ability to increase net patient revenue in response to increasing costs. Patients generally are not responsible for any difference between established hospital charges and amounts reimbursed for such services under Medicare, Medicaid, health maintenance organizations, preferred provider organizations or private insurance plans. Patients generally are responsible for services not covered by these plans, and exclusions, deductibles or co-insurance features of their coverage. Collecting amounts due from patients is more difficult than collecting from governmental programs or managed care plans. Increases in the population of uninsured individuals, changes in the states’ indigent and Medicaid eligibility requirements and continued efforts by employers to pass more out-of-pocket health care costs to employees in the form of increased co-payments and deductibles have resulted in an increase in our provision for bad debts. In fiscal 2005, we expanded our charity care policy to cover uninsured patients with incomes above 200% of the federal poverty level. Under the new program, a sliding scale of reduced rates is offered to uninsured patients, who are not otherwise covered through federal, state or private insurance, with incomes between 200% and 400% of the federal poverty level at all of our hospitals. During the third quarter of fiscal 2006, we implemented a company-wide uninsured discount program offering discounts to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans or charity care.

Competition

Our facilities and related businesses operate in competitive environments. A number of factors affect our competitive position, including:

	•		our managed care contracting relationships;

	•		the number, availability, quality and specialties of physicians, nurses and other healthcare professionals;

	•		the scope, breadth and quality of services;

	•		the reputation of our facilities and physicians;

	•		growth in hospital capacity in markets we serve;

	•		the physical condition of our facilities and medical equipment;

	•		the location of our facilities and availability of physician office space;

	•		certificate of need restrictions, where applicable;

	•		the availability of parking or proximity to public transportation;

	•		accumulation, access and interpretation of publicly reported quality indicators;

	•		growth in outpatient service providers;

	•		charges for services; and

	•		the geographic coverage of our hospitals in the regions in which we operate.

We currently face competition from established, not-for-profit healthcare companies, investor-owned hospital companies, large tertiary care centers, specialty hospitals and outpatient service providers such as surgery centers and imaging centers. In addition, some of our hospitals operate in regions with vertically integrated healthcare providers that include both payors and healthcare providers, which could affect our ability to obtain managed care contracts. We expect to encounter increased competition from specialty hospitals, outpatient service providers and companies, like ours, that consolidate hospitals and healthcare companies in specific geographic markets. Continued consolidation in the healthcare industry will be a leading contributing factor to increased competition in markets in which we already have a presence and in markets we may enter in the future.

Another factor in the competitive position of a hospital is the ability of its management to obtain contracts with purchasers of group healthcare services. The importance of obtaining managed care contracts has increased in recent years and is expected to continue to increase as private and government payors and others turn to managed care organizations to help control rising healthcare costs. Most of our markets have experienced significant managed care penetration, along with consolidation of major managed care plans. The revenue and operating results of our hospitals are significantly affected by our hospitals’ ability to negotiate favorable contracts with managed care plans. Health maintenance organizations and preferred provider organizations use managed care contracts to encourage patients to use certain hospitals in exchange for discounts from the hospitals’ established charges. Traditional health insurers also are interested in containing costs through similar contracts with hospitals.

An additional competitive factor is whether a hospital is part of a local hospital network and the scope and quality of services offered by the network and by competing networks. A hospital that is part of a network offering a broad range of services in a wide geographic area is more likely to obtain more favorable managed care contracts than a hospital that is not. We evaluate changing circumstances in each geographic area in which we operate on an ongoing basis. We may position ourselves to compete in these managed care markets by forming our own, or joining with others to form, local hospital networks.

Employees And Medical Staff

As of September 30, 2006, we had 8,877 employees, including 2,984 part-time employees. We consider our employee relations to be good. In certain markets, there is currently a shortage of nurses and other medical support personnel. We recruit and retain nurses and medical support personnel by creating a desirable, professional work environment, providing competitive wages, benefits and long-term incentives, and providing career development and other training programs. In order to supplement our current employee base, we are expanding our relationship with colleges, universities and other medical education institutions in our markets and recruiting nurses and other medical support personnel from abroad. Our hospitals are staffed by licensed physicians who have been admitted to the medical staff of our individual hospitals. Any licensed physician may apply to be admitted to the medical staff of any of our hospitals, but admission to the staff must be approved by each hospital’s medical staff and the appropriate governing board of the hospital in accordance with established credentialing criteria.

Our employees are not subject to collective bargaining agreements, although nurses at one of the hospitals in our Salt Lake City, Utah market voted in the third quarter of fiscal 2002 regarding union representation. These ballots have been impounded by the National Labor Relations Board (“NLRB”) pending the results of an appeal filed by us. On October 11, 2006, we received a letter from the NLRB advising us that our appeal was being remanded back to the Regional Director in Denver. This remand follows the release of the recent decision involving Oakwood Healthcare where the NLRB attempted to define when a charge nurse becomes a supervisor and therefore becomes ineligible to participate in union activity. The NLRB has instructed the Regional Director to review our appeal in light of the Oakwood Healthcare decision and the role of charge nurses regarding their responsibility to assign, direct and exercise independent judgment. We anticipate a decision from the NLRB regarding our appeal in fiscal 2007. Because we believe that unionization is not in the best interests of the hospital’s employees or patients, we are vigorously opposing the unionization attempt. We do not believe this unionization attempt will be ultimately successful or would have a material effect on our financial condition or results of operations.

Compliance Program

Our compliance program is designed to ensure that we maintain high standards of conduct in the operation of our business and implement policies and procedures so that employees act in compliance with all applicable laws, regulations and company policies. The organizational structure of our compliance program includes a compliance committee of our board of directors, a corporate management compliance committee and local management compliance committees at each of our hospitals. These committees have the oversight responsibility for the effective development and implementation of our program. Our Vice President of Ethics and Business Practices, who reports directly to our Chairman and Chief Executive Officer and to the compliance committee of our board of directors, serves as Chief Compliance Officer and is charged with direct responsibility for the development and implementation of our compliance program. Other features of our compliance program include designating a Facility Compliance Officer for each of our hospitals, periodic ethics and compliance training and effectiveness reviews, the development and implementation of policies and procedures and a mechanism for employees to report, without fear of retaliation, any suspected legal or ethical violations.

Reimbursement

Medicare

Medicare is a federal program that provides hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. All of our hospitals are certified as providers of Medicare services. Under the Medicare program, acute care hospitals receive reimbursement under a prospective payment system for inpatient and outpatient hospital services. Currently, certain types of facilities are exempt or partially exempt from the prospective payment system methodology, including psychiatric hospitals and specially designated units, children’s hospitals and cancer hospitals. Hospitals and units exempt from the prospective payment system are reimbursed on a reasonable cost-based system, subject to cost limits.

Under the inpatient prospective payment system, a hospital receives a fixed payment based on the patient’s assigned diagnosis related group. The diagnosis related group classifies categories of illnesses according to the estimated intensity of hospital resources necessary to furnish care for each principal diagnosis. The diagnosis related group rates for acute care hospitals are based upon a statistically normal distribution of severity. When treatments for patients fall well outside the normal distribution, providers may receive additional payments known as outlier payments. The diagnosis related group payments do not consider a specific hospital’s actual costs but are adjusted for geographic area wage differentials. Inpatient capital costs for acute care hospitals are reimbursed on a prospective system based on diagnosis related group weights multiplied by geographically adjusted federal weights. In the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“Medicare Modernization Act”), Congress equalized the diagnosis related group payment rate for urban and rural hospitals at the large urban rate for all hospitals for discharges on or after April 1, 2003.

The diagnosis related group rates are adjusted each federal fiscal year and have been affected by federal legislation. The index used to adjust the diagnosis related group rates, known as the “market basket index,” gives consideration to the inflation experienced by hospitals and entities outside of the healthcare industry in purchasing goods and services. However, in past years the percentage increases to the diagnosis related group rates have been lower than the percentage increases in the costs of goods and services purchased by hospitals. The Medicare Modernization Act provides for diagnosis related group rate increases for federal fiscal years 2006 and 2007 at the full market basket, if the facility submits data for ten patient care indicators to the Secretary of Health and Human Services. The Deficit Reduction Act of 2005 (“DEFRA”), signed into law on February 8, 2006, expands the number of patient care indicators to 21, beginning with discharges occurring in the third quarter of calendar year 2006. On November 1, 2006, the Centers for Medicare & Medicaid Services (“CMS”) announced a final rule that expands to 26 the number of quality measures that must be reported beginning with discharges occurring in the first quarter of calendar year 2007, and requires that hospitals report the results of a 27-question patient perspectives survey beginning with discharges occurring in the third quarter of calendar year 2007. CMS issued a final rule that provides for an increase in the hospital diagnosis related group payment rates by the full market basket of 3.4% for fiscal year 2007 for those hospitals submitting data on these quality indicators. Under the final rule, those hospitals not submitting the required data will receive an increase in payment equal to the market basket minus two percentage points. We currently have the ability to monitor our compliance with the quality indicators and intend to submit the quality data required to receive the full market basket pricing update when appropriate.

Based on the historical adjustments to the market baskets, future legislation or rulemaking may decrease the future rate of increase for diagnosis related group payments or make other changes to the diagnosis related groups, but we are unable to predict the amount of the reduction. On August 1, 2006, CMS announced a final rule that refines the diagnosis-related group payment system. CMS announced that it is considering additional changes effective in federal fiscal year 2008. We cannot predict the impact that any such changes, if finalized, would have on our net revenue. Other Medicare payment changes may also affect our net revenue.

In 2003, CMS published a final rule modifying the methodology for determining Medicare outlier payments in order to ensure that only the highest cost cases are entitled to receive additional payments under the inpatient prospective payment system. For discharges occurring on or after October 1, 2003, outlier payments are based on either a provider’s most recent tentatively settled cost report or the most recent settled cost report, whichever is from the latest cost reporting period. Previously, outlier payments had been based on the most recent settled cost report, resulting in excessive outlier payments for some hospitals. The final rule requires, in most cases,

On May 7, 2004, CMS issued a final rule modifying the criteria for classification as an inpatient rehabilitation facility as a result of data indicating that most facilities do not meet the existing criteria. Under the previous rules, in order for a facility to be considered an inpatient rehabilitation facility, at least 75% of the facility’s inpatient population during the most recent 12-month cost reporting period must have required intensive rehabilitation services for one or more of ten specified conditions. The new rule expands the list of specified conditions to thirteen and temporarily reduces the percentage of the patient population who must have one of the specified conditions. For cost reporting periods beginning on or after July 1, 2004 to June 30, 2005, 50% of the facility’s inpatient population must have one of the specified conditions in order to meet the criteria. For cost reporting periods beginning on or after July 1, 2005 to June 30, 2006, 60% of the facility’s inpatient population must have one of the specified conditions. For cost reporting periods beginning on July 1, 2006 to June 30, 2007, 65% of

the facility’s inpatient population must have one of the specified conditions. For cost reporting periods beginning on or after July 1, 2007, 75% of the facility’s inpatient population must have one of the specified conditions. In 2004, Congress enacted legislation preventing CMS from enforcing this rule until the Government Accountability Office (“GAO”) completed a study on the rule’s impact on inpatient rehabilitation facilities and patients. The GAO completed its study in April 2005, and in June 2005 CMS announced that it would enforce the May 2004 rule. DEFRA revised the phase-in period for the “75 percent rule” to retain the 60% threshold for cost reporting periods beginning on or after July 1, 2006 and before July 1, 2007, with the threshold increasing to 65% for cost reporting periods beginning on or after July 1, 2007 and 75% for cost reporting periods beginning on or after July 1, 2008. As of September 30, 2006, we operated seven inpatient rehabilitation units within our hospitals.

Currently, Medicare reimburses inpatient psychiatric hospitals and units on a blend of prospective payments and reasonable-cost bases, subject to certain cost limits. In 2004, CMS published a final rule to implement a prospective payment system for these inpatient psychiatric facilities effective for cost report periods beginning on or after January 1, 2005, with a three year transition period. Under this prospective payment system, inpatient psychiatric facilities will receive a federal per diem base rate that is based on the sum of the average routine operating, ancillary and capital costs for each patient day of psychiatric care in an inpatient psychiatric facility, adjusted for budget neutrality. This federal per diem base rate will be further adjusted to reflect certain patient and facility characteristics, including patient age, certain diagnostic related groups, facility wage index adjustment, and facility rural location. The payment rates are adjusted annually on a July 1 update cycle. Inpatient psychiatric facilities receive additional outlier payments for cases in which estimated costs for the case exceed an adjusted threshold amount plus the total adjusted payment amount for the stay. The initial adjusted threshold amount was $5,700. The threshold amount for rate year 2007 (July 1, 2006 to June 30, 2007) is $6,200. CMS updated payments under the blended payment system for rate year 2007 by 4.5% (reflecting the blend of the 4.6% update for the cost-based payment system and the 4.3% update for prospective payment system). The market basket update accounts for moving from a calendar year to a rate year (the annual market basket is estimated to be 3.4%). As of September 30 2006, we operated one behavioral health hospital and four specially designated psychiatric units that will be subject to these rules, as they are implemented.

CMS has established a prospective payment system for Medicare skilled nursing units, under which units are paid a federal per diem rate for virtually all covered services. The effect of the new payment system generally has been to significantly reduce reimbursement for skilled nursing services, which has led many hospitals to close such units. For federal fiscal year 2007, CMS updated the payment rate for skilled nursing units by the full market basket of 3.1%.

On August 8, 2006 CMS announced proposed regulations that, if adopted, would change payment for procedures performed in an ambulatory surgery center (“ASC”) effective January 1, 2008. Under this proposal, ASC payment groups would increase from the current nine clinically disparate payment groups to the 221 APCs used under the outpatient prospective payment system for these surgical services. CMS estimates that the rates for procedures performed in an ASC setting under this proposal would equal 62% of the corresponding rates paid for the same procedures performed in an outpatient hospital setting. Moreover, under the proposed regulations, if CMS determines that a procedure is commonly performed in a physician’s office, the ASC reimbursement for that procedure would be limited to the reimbursement allowable under the Medicare Part B physician fee schedule. In addition, under this proposal, all surgical procedures, other than those that pose a significant safety risk or generally require an overnight stay, which would be listed by CMS, would be payable as ASC procedures. This will expand the number of procedures performed in an ASC for which Medicare will pay. CMS indicates in its discussion of the proposed regulations that it believes that the volumes and service mix of procedures provided in ASCs would change significantly in 2008 under the revised payment system, but that CMS is not able to accurately project those changes. If the proposal is adopted, more Medicare procedures that are now performed in hospitals, such as ours, may be moved to ASCs, reducing surgical volume in our hospitals. ASCs may experience decreased reimbursement depending on their service mix and the final payment rates adopted by CMS. Also, more Medicare procedures that are now performed in ASCs, such as ours, may be moved to physicians’ offices. Commercial third-party payors may adopt policies similar to CMS’ proposal.

Medicaid

Medicaid programs are jointly funded by federal and state governments and are administered by states under an approved plan that provides hospital and other healthcare benefits to qualifying individuals who are unable to afford care. All of our hospitals are certified as providers of Medicaid services. State Medicaid programs may use a prospective payment system, cost-based or other payment methodology for hospital services. Medicaid programs are required to take into account and make additional payments to hospitals serving disproportionate numbers of low income patients with special needs. Some of our hospitals receive such additional payments. The federal government and many states from time to time consider altering the level of Medicaid funding or expanding Medicaid benefits in a manner that could adversely affect future levels of Medicaid reimbursements received by our hospitals. DEFRA, signed into law on February 8, 2006, included Medicaid cuts of approximately $4.8 billion over five years. In addition, proposed regulatory changes would, if implemented, reduce federal Medicaid funding by an additional $12.2 billion over five years. Enrollment in managed Medicaid plans has increased in recent years, as state governments seek to control the cost of Medicaid programs.

Annual Cost Reports

All hospitals participating in the Medicare and Medicaid programs, whether paid on a reasonable cost basis or under a prospective payment system, are required to meet specific financial reporting requirements. Federal regulations require submission of annual cost reports identifying medical costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients. These annual cost reports are subject to routine audits, which may result in adjustments to the amounts ultimately determined to be due to us under these reimbursement programs. The audit process may take several years to reach the final determination of allowable amounts under the programs. Providers also have the right of appeal, and it is common to contest issues raised in audits of prior years’ reports.

Cost reports filed by our facilities generally remain open for three years after the notice of program reimbursement date. If any of our facilities are found to have been in violation of federal or state laws relating to preparing and filing of Medicare or Medicaid cost reports, whether prior to or after our ownership of these facilities, our facilities and we could be subject to substantial monetary fines, civil and criminal penalties and exclusion from participation in the Medicare and Medicaid programs. If an allegation is lodged against one of our facilities for a violation occurring during the time period before we owned the facility, we may have indemnification rights against the former owner of the facility for any damages we may incur based on negotiated indemnification and hold harmless provisions in the transaction documents. We cannot assure you, however, that any such matter would be covered by indemnification, or if covered, that such indemnification would be adequate to cover any potential losses, fines and penalties. Additionally, we cannot assure you that the former owner would have the financial ability to satisfy indemnification claims.

Managed Care

Managed care payors, including health maintenance organizations and preferred provider organizations, are organizations that provide insurance coverage and a network of healthcare providers to members for a fixed monthly premium. To control costs, these organizations typically contract with hospitals and other providers for discounted prices, review medical services to ensure that no unnecessary services are provided, and market providers within their networks to patients. A significant percentage of our overall payor mix is commercial managed care. We generally receive lower payments for similar services from commercial managed care payors than from traditional commercial/indemnity insurers.

The Medicare program allows beneficiaries to choose enrollment in certain managed Medicare plans. The Medicare Modernization Act increases reimbursement to managed Medicare plans and includes provisions limiting, to some extent, the financial risk to the companies offering the plans. Following these changes, the number of beneficiaries choosing to receive their Medicare benefits through such plans has increased.

Commercial Insurance

Our hospitals provide services to a decreasing number of individuals covered by traditional private healthcare insurance. Private insurance carriers make direct payments to hospitals or, in some cases, reimburse their

	•		payment of any incentive by the hospital when a physician refers a patient to the hospital;

	•		use of free or significantly discounted office space or equipment for physicians in facilities usually located close to the hospital;

	•		provision of free or significantly discounted billing, nursing, or other staff services;

	•		free training for a physician’s office staff, including management and laboratory techniques;

	•		guaranties that provide that, if the physician’s income fails to reach a predetermined level, the hospital will pay any portion of the remainder;

	•		low-interest or interest-free loans, or loans which may be forgiven if a physician refers patients to the hospital;

	•		payment of the costs of a physician’s travel and expenses for conferences or a physician’s continuing education courses;

	•		coverage on the hospital’s group health insurance plans at an inappropriately low cost to the physician;

	•		rental of space in physician offices, at other than fair market value terms, by persons or entities to which physicians refer;

	•		payment of services which require few, if any, substantive duties by the physician, or payment for services in excess of the fair market value of the services rendered; or

	•		“gainsharing,” the practice of giving physicians a share of any reduction in a hospital’s costs for patient care attributable in part to the physician’s efforts.

We have a variety of financial relationships with physicians who refer patients to our hospitals. Physicians currently own interests in three of our ambulatory surgery centers, five of our full service acute care hospitals, one hospital currently under construction and one cardiac catheterization laboratory joint venture. We may sell ownership interests in certain other of our facilities to physicians and other qualified investors in the future. We also have other joint venture relationships with physicians and contracts with physicians providing for a variety of financial arrangements, including employment contracts, leases and professional service agreements. We provide financial incentives to recruit physicians to relocate to communities served by our hospitals, including minimum cash collections guaranties and forgiveness of repayment obligations. Although we have established policies and procedures to ensure that our arrangements with physicians comply with current law and available interpretations, we cannot assure you that regulatory authorities that enforce these laws will not determine that some of these

The Social Security Act also includes a provision commonly known as the “Stark Law.” This law prohibits physicians from referring Medicare and Medicaid patients to entities with which they or any of their immediate family members have a financial relationship for the provision of certain designated health services that are reimbursable by Medicare or Medicaid, including inpatient and outpatient hospital services. The law also prohibits the entity from billing the Medicare program for any items or services that stem from a prohibited referral. Sanctions for violating the Stark Law include civil monetary penalties up to $15,000 per item or service improperly billed and exclusion from the federal healthcare programs. There are a number of exceptions to the self-referral prohibition, including an exception for a physician’s ownership interest in an entire hospital as opposed to an ownership interest in a hospital department. There are also exceptions for many of the customary financial arrangements between physicians and providers, including employment contracts, leases, professional services agreements, non-cash gifts having a value less than $329 (effective January 1, 2007) and recruitment agreements.

In 2003, Congress passed legislation that modified the hospital ownership exception to the Stark Law by creating an 18-month moratorium on allowing physicians to own interests in new specialty hospitals. The moratorium applied to hospitals that primarily or exclusively treated cardiac, orthopedic or surgical conditions or any other specialized category of patients or cases designated by regulation, unless the hospitals were in operation or development before November 18, 2003, did not increase the number of physician investors, and met certain other requirements. The moratorium expired on June 8, 2005. In March 2005, the Medicare Payment Advisory Commission issued a report on specialty hospitals, in which it recommended that Congress extend the moratorium until January 1, 2007, modify payments to hospitals to reflect more closely the cost of care and allow certain types of gainsharing arrangements. In May 2005, the Department issued a report of its analysis of specialty hospitals in which it recommended reforming certain inpatient hospital services and ambulatory surgery center services payment rates that may encourage the establishment of specialty hospitals and closer scrutiny of the processes for approving new specialty hospitals for participation in Medicare. Further, the Department of Health and Human Services suspended processing new provider enrollment applications for specialty hospitals until January 2006, creating in effect a moratorium on new specialty

When a defendant is determined by a court of law to be liable under the False Claims Act, the defendant must pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 to $11,000 for each separate false claim. Settlements entered into prior to litigation usually involve a less severe calculation of damages. There are many potential bases for liability under the False Claims Act. Although liability often arises when an entity knowingly submits a false claim for reimbursement to the federal government, the False Claims Act defines the term “knowingly” broadly. Thus, simple negligence will not give rise to liability under the False Claims Act, but submitting a claim with reckless disregard to its truth or falsity can constitute “knowingly” submitting a false claim and result in liability. In some cases, whistleblowers, the federal government and some courts have taken the position that providers who allegedly have violated other statutes, such as the anti-kickback statute or the Stark Law, have thereby submitted false claims under the False Claims Act.

The states in which we operate have laws that prohibit unlicensed persons or business entities, including corporations, from employing physicians or laws that prohibit certain direct or indirect payments or fee-splitting arrangements between physicians and unlicensed persons or business entities. Possible sanctions for violations of these restrictions include loss of a physician’s license, civil and criminal penalties and rescission of business arrangements that may violate these restrictions. These statutes vary from state to state, are often vague and seldom have been interpreted by the courts or regulatory agencies. Although we exercise care to structure our arrangements with healthcare providers to comply with the relevant state law, and believe these arrangements comply with applicable laws in all material respects, we cannot assure you that governmental officials responsible for enforcing these laws will not assert that we, or transactions in which we are involved, are in violation of such laws, or that such laws ultimately will be interpreted by the courts in a manner consistent with our interpretations.

HIPAA requires the use of uniform electronic data transmission standards for healthcare claims and payment transactions submitted or received electronically. These provisions are intended to encourage electronic commerce in the healthcare industry. The Department of Health and Human Services 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 standards became mandatory for our company on October 16, 2003, although the Department of Health and Human Services accepted noncompliant Medicare claims through September 30, 2005. On September 23, 2005, the Department of Health and Human Services proposed a rule that would establish standards for electronic health care claims attachments. In addition, HIPAA requires that each provider apply for and receive a National Provider Identifier by May 2007. We believe that the cost of compliance with these regulations has not had and is not expected to have a material adverse effect on our business, financial position or results of operations.

HIPAA also requires the Department of Health and Human Services to adopt standards to protect the security and privacy of health-related information. The Department of Health and Human Services issued final regulations containing privacy standards, which became mandatory on April 14, 2003. The privacy regulations extensively regulate the use and disclosure of individually identifiable health-related information. The privacy regulations also provide patients with significant new rights related to understanding and controlling how their health information is used or disclosed. The Department of Health and Human Services released final security regulations which became mandatory on April 20, 2005 and require health care providers to implement administrative, physical and technical practices to protect the security of individually identifiable health information that is electronically maintained or transmitted. We have developed and enforce a HIPAA compliance plan, which we believe complies with HIPAA privacy and security requirements. The privacy regulations and security

The Federal Emergency Medical Treatment and Active Labor Act (“EMTALA”) was adopted by Congress in response to reports of a widespread hospital emergency room practice of “patient dumping.” At the time of the enactment, patient dumping was considered to have occurred when a hospital capable of providing the needed care sent a patient to another facility or simply turned the patient away based on such patient’s inability to pay for his or her care. The law imposes requirements upon physicians, hospitals and other facilities that provide emergency medical services. Such requirements pertain to what care must be provided to anyone who comes to such facilities seeking care before they may be transferred to another facility or otherwise denied care. The government broadly interprets the law to cover situations in which patients do not actually present to a hospital’s emergency department, but present to a hospital-based clinic that treats emergency medical conditions on an urgent basis or are transported in a hospital-owned ambulance, subject to certain exceptions. EMTALA does not generally apply to patients admitted for inpatient services. Sanctions for violations of this statute include termination of a hospital’s Medicare provider agreement, exclusion of a physician from participation in Medicare and Medicaid programs and civil money penalties. In addition, the law creates private civil remedies that enable an individual who suffers personal harm as a direct result of a violation of the law, and a medical facility that suffers a financial loss as a direct result of another participating hospital’s violation of the law, to sue the offending hospital for damages and equitable relief. Although we believe that our practices are in material compliance with the law, we can give no assurance that governmental officials responsible for enforcing the law, individuals or other medical facilities will not assert from time to time that our facilities are in violation of this statute.

Significant media and public attention has focused in recent years on the hospital industry. Recently, increased attention has been paid by government investigators as well as private parties pursuing civil lawsuits to the amounts charged by hospitals to uninsured and indigent patients and the related collection practices of hospitals. Other current areas of interest include hospitals with high Medicare outlier payments and recruitment arrangements with physicians. Further, there are numerous ongoing federal and state investigations regarding multiple issues. These investigations have targeted hospital companies as well as their executives and managers. We have substantial Medicare, Medicaid and other governmental billings, which could result in heightened scrutiny of our operations. We continue to monitor these and all other aspects of our business and have developed a compliance program to assist us in gaining comfort that our business practices are consistent with both legal principles and current industry standards. However, because the law in this area is complex and constantly evolving, we cannot assure you that government investigations will not result in interpretations that are inconsistent with industry practices, including ours. In public statements surrounding current investigations, governmental authorities have taken positions on a number of issues, including some for which little official interpretation previously has been available, that appear to be inconsistent with practices that have been common within the industry and that previously have not been challenged in this manner. In some instances, government investigations that have in the past been conducted under the civil provisions of federal law may now be conducted as criminal investigations. Additionally, the federal government has recently indicated that it plans to expand its use of civil monetary penalties and Medicare program exclusions to focus on those in the healthcare industry who accept kickbacks or present false claims, in addition to the federal government’s continuing efforts to focus on the companies that offer or pay kickbacks.

Many current healthcare investigations are national initiatives in which federal agencies target an entire segment of the healthcare industry. One example is the federal government’s initiative regarding hospital providers’ improper requests for separate payments for services rendered to a patient on an outpatient basis within three days prior to the patient’s admission to the hospital, where reimbursement for such services is included as part of the reimbursement for services furnished during an inpatient stay. In particular, the government has targeted all hospital providers to ensure conformity with this reimbursement rule. Further, the federal government continues to investigate Medicare overpayments to prospective payment hospitals that incorrectly report transfers of patients to other prospective payment system hospitals as discharges. We are aware that prior to our acquisition of them, several of our hospitals were contacted in relation to certain government investigations that were targeted at an entire segment of the healthcare industry. Although we take the position that, under the terms of the acquisition agreements, the prior owners of these hospitals retained any liability resulting from these government investigations, we cannot assure you that the prior owners’ resolution of these matters or failure to resolve these matters, in the event that any resolution was deemed necessary, will not have a material adverse effect on our operations.

service that is reimbursed, in whole or in part, by any federal healthcare program. Similar anti-kickback statutes have been adopted in Arizona, which apply regardless of the source of reimbursement. The Department of Health and Human Services has adopted safe harbor regulations specifying the following relationships and activities that are deemed not to violate the federal anti-kickback statute that specifically relate to managed care:

	•		waivers by health maintenance organizations of Medicare and Medicaid beneficiaries’ obligation to pay cost-sharing amounts or to provide other incentives in order to attract Medicare and Medicaid enrollees;

	•		certain discounts offered to prepaid health plans by contracting providers;

	•		certain price reductions offered to eligible managed care organizations; and

	•		certain price reductions offered by contractors with substantial financial risk to managed care organizations.

We believe that the incentives offered by Health Choice to its Medicaid and Medicare enrollees and the discounts it receives from contracting healthcare providers satisfy the requirements of the safe harbor regulations. However, failure to satisfy each criterion of the applicable safe harbor does not mean that the arrangement constitutes a violation of the law; rather the safe harbor regulations provide that the arrangement must be analyzed on the basis of its specific facts and circumstances. We believe that Health Choice’s arrangements comply in all material respects with the federal anti-kickback statute and similar Arizona statutes.

Environmental Matters

We are subject to various federal, state and local environmental laws and regulations, including those relating to the protection of human health and the environment. The principal environmental requirements applicable to our operations relate to:

	•		the proper handling and disposal of medical waste, hazardous waste and low level radioactive medical waste;

	•		the proper use, storage and handling of mercury and other hazardous materials;

	•		underground and above-ground storage tanks;

	•		management of hydraulic fluid or oil associated with elevators, chiller units or other equipment;

	•		management of asbestos-containing materials or lead-based paint present or likely to be present at some locations; and

	•		air emission permits and standards for boilers or other equipment.

We do not expect our obligations under these or other applicable environmental laws and requirements to have a material effect on us. In the course of our operations, we may also identify other circumstances at our facilities, such as water intrusion or the presence of mold or fungus, which warrant action, and we can and do incur additional costs to address those circumstances. Under various environmental laws, we may also be required to clean up or contribute to the cost of cleaning up substances that have been released to the environment either at properties owned or operated by us or our predecessors or at properties to which substances from our operations were sent for off-site treatment or disposal. These remediation obligations may be imposed without regard to fault, and liability for environmental remediation can be substantial. While we cannot predict whether or to what extent we might be held responsible for such cleanup costs in the future, at present we have not identified any significant cleanup costs or liabilities that are expected to have a material effect on us.

Professional and General Liability Insurance

As is typical in the healthcare industry, we are subject to claims and legal actions by patients in the ordinary course of business. To cover these claims, we maintain professional malpractice liability insurance and general liability insurance in amounts that we believe to be sufficient for our operations, although some claims may exceed the scope of the coverage in effect. We also maintain umbrella coverage. Losses up to our self-insured retentions and any losses incurred in excess of amounts maintained under such insurance will be funded from working capital.

The cost of malpractice and other liability insurance, and the premiums and self-retention limits of such insurance, have risen historically. Our experience suggests the rate of growth in professional and general liability insurance costs has generally stabilized, as a result of tort reform legislation in certain states such as Florida and Texas to limit the size of malpractice judgments, as well as improvements in claims experience. For fiscal 2007, our self-insured retention for professional and general liability coverage is unchanged at $5.0 million per claim compared to fiscal 2006. The maximum coverage under our insurance policies also remains unchanged at $75.0 million. Our self-insurance reserves for estimated claims incurred but not yet reported is based upon estimates determined by third-party actuaries. Funding for the self-insured retention of such claims is derived from operating cash flows. We cannot assure you that this insurance will continue to be available at reasonable prices that will allow us to maintain adequate levels of coverage. We also cannot assure you that our cash flow will be adequate to provide for professional and general liability claims in the future.

Our Information Systems

We use a common information systems platform across all of our hospitals. We use McKesson’s HBOC clinical and patient accounting software and Lawson’s financial application and enterprise resource planning software. We use other vendors for specialized information systems needs for our decision support, emergency and radiology departments.

Our information systems are essential to the following areas of our business operations, among others:

	•		patient accounting, including billing and collection of net revenue;

	•		financial, accounting, reporting and payroll;

	•		coding and compliance;

	•		laboratory, radiology and pharmacy systems;

	•		materials and asset management; and

	•		negotiating, pricing and administering our managed care contracts.

Utilizing a common information systems platform across all our hospitals allows us to:

	•		optimize staffing levels according to patient volumes, acuity and seasonal needs at each facility;

	•		perform product line analyses;

	•		track quality of care indicators on a current basis;

	•		effectively monitor registration, billing, collections, managed care contract compliance and all other aspects of our revenue cycle; and

	•		control supply costs by complying with our group purchasing organization contract.

During 2004, we entered into a three-year agreement with McKesson to provide clinical information technology products and services to our hospitals that we believe will enhance patient safety, automate medication administration, increase staff time available for direct patient care and continue to meet or exceed quality of care indicators for reimbursement purposes.

The cost of maintaining our information systems has increased significantly in recent years. Information systems maintenance expense increased $1.1 million to $5.2 million for the fiscal year ending September 30, 2006 as compared to the prior year. We expect the trend of increased maintenance costs in this area to continue in the future. In addition, we expect to spend approximately $21.0 million on hardware and software costs during 2007.

Merger and Related Financing Transactions

On June 22, 2004, an investor group led by Texas Pacific Group, (“TPG”), acquired IAS through a merger. In order to effect the acquisition, the investor group established IASIS Investment LLC (“IASIS Investment”), and a wholly owned subsidiary of IASIS Investment, which merged with and into IAS. In the merger, IAS issued shares of common and preferred stock to IASIS Investment, which is the sole stockholder of IAS after giving effect to the merger. Prior to the merger, IAS contributed substantially all of its assets and liabilities to IASIS in exchange for all of the equity interests in IASIS. As a result, IAS is a holding company, IASIS is a limited

Item 1A. Risk Factors.

Servicing Our Indebtedness Requires A Significant Amount of Cash. Our Ability To Generate Sufficient Cash Depends On Numerous Factors Beyond Our Control, And We May Be Unable To Generate Sufficient Cash Flow To Service Our Debt Obligations, Including Making Payments On Our 8 3/4% Notes.

In connection with the Transactions, we issued $475.0 million in aggregate principal amount of 8 3/4% senior subordinated notes due 2014, that were subsequently exchanged for a like amount of 8 3/4% senior subordinated note due 2014 that have been registered under the Securities Act of 1933, as amended, which we refer to as the 8 3/4% notes. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowing will be available to us under our senior secured credit facilities in an amount sufficient to enable us to pay the principal, premium, if any, and interest on our indebtedness, including the 8 3/4% notes, or to fund our other liquidity needs. Our ability to fund these payments is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may need to refinance all or a portion of our indebtedness, including the 8 3/4% notes, on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including the senior secured credit facilities, on commercially reasonable terms or at all. In addition, the terms of existing or future debt agreements, including the amended and restated credit agreement governing the senior secured credit facilities and the indenture governing the notes, may restrict us from effecting any of these alternatives.

During the next twelve months, we are required to repay $4.3 million in principal under our senior secured credit facilities, $41.6 million in interest under the 8 3/4% notes and $3.0 million in principal under our capital lease obligations. If we cannot make scheduled payments on our debt, we will be in default and, as a result:

	•		our debt holders could declare all outstanding principal and interest to be due and payable;

	•		our secured debt lenders could terminate their commitments and commence foreclosure proceedings against our assets; and

	•		we could be forced into bankruptcy or liquidation.

Our Substantial Level Of Indebtedness Could Adversely Affect Our Financial Condition And Prevent Us From Fulfilling Our Obligations Under The 8 3/4% Notes.

We have a significant amount of indebtedness. At September 30, 2006, we had $475.0 million of outstanding 8 3/4% senior subordinated notes due 2014 and $421.9 million of other indebtedness (of which $415.4 million consisted of borrowings under the senior secured credit facilities, and $6.5 million consisted of capital lease obligations and other debt). All of our other indebtedness ranks senior to the 8 3/4% notes. In addition, subject to restrictions in the indenture governing the 8 3/4% notes and the amended and restated credit agreement governing the senior secured credit facilities, we may incur additional indebtedness.

Our substantial indebtedness could have important consequences to our financial condition and results of operations, including the following:

	•		it may be more difficult for us to satisfy our obligations, including debt service requirements under our outstanding debt;

	•		our ability to obtain additional financing for working capital, acquisitions, capital expenditures, debt service requirements, or other general corporate purposes may be impaired;

	•		we must use a substantial portion of our cash flow to pay principal and interest on our 8 3/4% notes and other indebtedness which will reduce the funds available to us for other purposes;

	•		we are more vulnerable to economic downturns and adverse industry conditions;

	•		our ability to capitalize on business opportunities and to react to competitive pressures as compared to our competitors may be compromised due to our high level of indebtedness; and

	•		our ability to borrow additional funds or to refinance indebtedness may be limited.

Our senior secured credit facilities are rated by Moody’s and Standard & Poor’s. If these ratings were ever downgraded, our access to and cost of future capital could be adversely affected. Furthermore, all of our indebtedness under the senior secured credit facilities bears interest at variable rates. If these rates were to increase significantly the cost of servicing our debt would increase, which could materially reduce our profitability. In addition, our ability to borrow additional funds may be reduced and the risks related to our substantial indebtedness would intensify.

If We Are Unable To Retain And Negotiate Favorable Contracts With Managed Care Plans, Our Net Revenue May Be Reduced.

Our ability to obtain favorable contracts with health maintenance organizations, preferred provider organizations and other managed care plans significantly affects the revenue and operating results of our hospitals. Revenue derived from health maintenance organizations, preferred provider organizations and other managed care plans accounted for 46.0% and 44.5% of our net patient revenue for the years ended September 30, 2006 and 2005, respectively. Our hospitals have over 300 managed care contracts with no one commercial payor representing more than 10.0% of our net patient revenue. In most cases, we negotiate our managed care contracts annually as they come up for renewal at various times during the year. Further, many of these contracts are terminable by either party on relatively short notice. Our future success will depend, in part, on our ability to retain and renew our managed care contracts and enter into new managed care contracts on terms favorable to us. Other healthcare providers, including some with greater geographic coverage or a wider range of services, may impact our ability to enter into managed care contracts or negotiate increases in our reimbursement and other favorable terms and conditions. In one region in which we operate, the largest healthcare provider organization controls one of the largest payor organizations and operates it primarily as a closed network. The patients enrolled in this integrated health system are largely unavailable to us.

Changes In Legislation and Regulations May Significantly Reduce Government Healthcare Spending And Our Revenue.

Governmental healthcare programs, principally Medicare and Medicaid, accounted for 38.7% and 39.7% of our net patient revenue for the years ended September 30, 2006 and 2005, respectively. In recent years, legislative changes have resulted in limitations on and, in some cases, reductions in levels of, payments to healthcare providers for certain services under many of these government programs. Further, legislative and regulatory changes have altered the method of payment for various services under the Medicare and Medicaid programs. Recently, CMS announced proposed regulations that, if adopted, would change payment for procedures performed in an ASC effective January 1, 2008. Under this proposal, ASC payment groups would increase from the current nine clinically disparate payment groups to the 221 ASCs used under the outpatient prospective payment system for these surgical services. CMS estimates that the rates for procedures performed in an ASC setting would equal 62% of the corresponding rates paid for the same procedures performed in an outpatient hospital setting. CMS indicates in its discussion of the proposed regulations that it believes that the volumes and service mix of procedures provided in ASCs would change significantly in 2008 under the revised payment system, but that CMS is not able to accurately project those changes. If the proposal is adopted, more Medicare procedures that are now performed in hospitals, such as ours, may be moved to ASCs, reducing surgical volume in our hospitals. ASCs may experience decreased reimbursement depending on their service mix and the final payment rates adopted by CMS. Also, more Medicare procedures that are now performed in ASCs, such as ours, may be moved to physicians’ offices.

We believe that hospital operating margins across the country, including ours, have been and may continue to be under pressure because of limited pricing flexibility and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. Further, DEFRA, signed into law on February 8, 2006, includes Medicaid cuts of approximately $4.8 billion over five years. In addition, proposed regulatory changes, if implemented, would reduce federal Medicaid funding by an additional $12.2 billion over five years. In addition, a number of states are experiencing budget problems and have adopted or are considering legislation designed to

reduce their Medicaid expenditures and to provide universal coverage and additional care, including enrolling Medicaid recipients in managed care programs and imposing additional taxes on hospitals to help finance or expand states’ Medicaid systems.

Our Hospitals Face Competition For Patients From Other Hospitals And Healthcare Providers That Could Impact Patient Volume.

In general, the hospital industry is highly competitive. Our hospitals face competition for patients from other hospitals in our markets, large tertiary care centers and outpatient service providers that provide similar services to those provided by our hospitals. All of our facilities are located in geographic areas in which at least one other hospital provides services comparable to those offered by our hospitals. Some of the hospitals that compete with ours are owned by governmental agencies or not-for-profit corporations supported by endowments and charitable contributions and can finance capital expenditures and operations on a tax-exempt basis. In addition, the number of freestanding specialty hospitals, outpatient surgery centers and outpatient diagnostic centers has increased significantly in the areas in which we operate. Some of our competitors also have greater geographic coverage, offer a wider range of services or invest more capital or other resources than we do. If our competitors are able to achieve greater geographic coverage, improve access and convenience to physicians and patients, recruit physicians to provide competing services at their facilities, expand or improve their services or obtain more favorable managed care contracts, we may experience a decline in patient volume. In 2005, CMS began making public performance data relating to ten quality measures that hospitals submit in connection with their Medicare reimbursement. DEFRA expands the number of patient care indicators that hospitals must report beginning with discharges occurring in the third quarter of calendar year 2006, and DEFRA requires that CMS further expand the number of patient care indicators in future years. If any of our hospitals should achieve poor results (or results that are lower than our competitors) on these quality criteria, patient volumes could decline. In the future, other trends toward clinical transparency may have an unanticipated impact on our competitive position and patient volume.

If We Continue To Experience Growth In Self-Pay Volume And Revenue, Our Financial Condition Or Results Of Operations Could Be Adversely Affected.

Like others in the hospital industry, we have experienced an increase in our provision for bad debts as a percentage of acute care revenue due to a growth in self-pay volume and revenue resulting in large part from an increase in the number of uninsured patients, along with an increase in the amount of co-payments and deductibles passed on by employers to employees. Although we continue to seek ways of improving point of service collection efforts and implementing appropriate payment plans with our patients, if we continue to experience growth in self-pay volume and revenue, our results of operations could be adversely affected. Further, our ability to improve collections for self-pay patients may be limited by regulatory and investigatory initiatives, including private lawsuits directed at hospital charges and collection practices for uninsured and underinsured patients.

If We Are Unable To Attract And Retain Quality Medical Staffs, Our Financial Condition Or Results Of Operations Could Be Adversely Affected.

The success of our hospitals depends on the following factors, among others:

	•		the number and quality of the physicians on the medical staffs of our hospitals;

	•		the admitting practices of those physicians; and

	•		our maintenance of good relations with those physicians.

Our efforts to attract and retain physicians are affected by our managed care contracting relationships, national shortages in some specialties, such as anesthesiology and radiology, the adequacy of our support personnel, the condition of our facilities and medical equipment, the availability of suitable medical office space and federal and state laws and regulations prohibiting financial relationships that may have the effect of inducing patient referrals. Our efforts to attract physicians have also been impacted by the inability of physicians in certain states to obtain professional liability insurance on acceptable terms. The impact in certain states has been mitigated by the recent enactment of tort reform. We generally require all of the physicians on our medical staffs to maintain professional liability insurance or other financial guaranty as permitted by state law.

Our Hospitals Face Competition For Staffing, Which May Increase Our Labor Costs And Reduce Profitability.

We compete with other healthcare providers in recruiting and retaining qualified management and staff personnel responsible for the day-to-day operations of each of our hospitals, including nurses and other non-physician healthcare professionals. In some markets, the scarce availability of nurses and other medical support personnel has become a significant operating issue. This shortage may require us to enhance wages and benefits to recruit and retain nurses and other medical support personnel, recruit personnel from foreign countries, and hire more expensive temporary personnel. We also depend on the available labor pool of semi-skilled and unskilled employees in each of the markets in which we operate. Because a significant percentage of our revenue consists of fixed, prospective payments, our ability to pass along increased labor costs is constrained. Our failure to recruit and retain qualified management, nurses and other medical support personnel, or to control our labor costs could have a material adverse effect on our financial condition or results of operations.

If We Fail To Continually Enhance Our Hospitals With The Most Recent Technological Advances In Diagnostic And Surgical Equipment, Our Ability To Maintain And Expand Our Markets Will Be Adversely Affected.

Technological advances with respect to computed axial tomography (CT), magnetic resonance imaging (MRI) and positron emission tomography (PET) equipment, as well as other equipment used in our facilities, are continually evolving. In an effort to compete with other healthcare providers, we must constantly be evaluating our equipment needs and upgrading equipment as a result of technological improvements. Such equipment costs typically range from $1.0 million to $3.0 million, exclusive of construction or build-out costs.

If We Fail To Comply With Extensive Laws And Government Regulations, We Could Suffer Penalties, Be Required To Alter Arrangements With Investors In Our Hospitals Or Be Required To Make Significant Changes To Our Operations.

The healthcare industry, including our company, is required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things:

	•		billing for services;

	•		relationships with physicians and other referral sources;

	•		adequacy of medical care;

	•		quality of medical equipment and services;

	•		qualifications of medical and support personnel;

	•		confidentiality, maintenance and security issues associated with health-related information and medical records;

	•		the screening, stabilization and transfer of patients who have emergency medical conditions;

	•		licensure and certification;

	•		operating policies and procedures; and

	•		addition of facilities and services.

Because many of these laws and regulations are relatively new, we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. For that reason and because these laws and regulations are so complex, hospital companies face a risk of inadvertent violations. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses.

If we fail to comply with applicable laws and regulations, we could be subjected to liabilities, including:

	•		criminal penalties;

	•		civil penalties, including the loss of our licenses to operate one or more of our facilities; and

•

exclusion of one or more of our facilities from participation in the Medicare, Medicaid and other federal and state healthcare programs.

Further, Congress, other governmental entities and private entities currently are performing studies or considering recommendations regarding the effects of physician ownership of both specialty and general acute care hospitals. The results of these studies and recommendations may lead to legislative and regulatory changes that could adversely affect our ability to undertake joint ventures with physicians. DEFRA, signed into law on February 8, 2006, directed the Department of Health and Human Services to extend the Department’s temporary suspension on the enrollment of new specialty hospitals in Medicare until the earlier of six months from the enactment of DEFRA or the release of a report by the Department regarding physician-owned specialty hospitals. On August 8, 2006, the Department issued its final report in which it announced that it would resume processing and certifying provider enrollment applications for specialty hospitals. The Department also announced that it will require hospitals to disclose any financial arrangements with physicians, including ownership interests. The Department has not announced when it will begin collecting this data, the specific data that hospitals will be required to submit or which hospitals will be required to provide information.

IAS Has Received A Subpoena From The OIG Regarding Physician Arrangements That, If Ultimately Were Determined Unfavorable To Us, Could Have A Material Adverse Effect On Our Business, Financial Condition And Results of Operations.

In September 2005, IAS received a subpoena from the OIG. The subpoena requests production of documents, dating back to January 1999, primarily related to contractual arrangements between certain physicians and our hospitals, including leases, medical directorships and recruitment agreements. We maintain a comprehensive compliance program designed to ensure that we maintain high standards of conduct in the operation of our business in compliance with all applicable laws. Although we continue to be fully committed to regulatory compliance and will cooperate diligently with governmental authorities regarding this matter, there can be no assurance as to the outcome of this matter. If this matter were to be determined unfavorably to us, it could have a material adverse effect on our business, financial condition and results of operations. Further, the outcome of this matter may result in significant fines, other penalties and adverse publicity. In addition, we have and may continue to incur material fees, costs and expenses in connection with responding to the subpoena.

Providers In The Healthcare Industry Have Been The Subject Of Federal And State Investigations, And We May Become Subject To Additional Investigations In The Future That Could Result In Significant Liabilities Or Penalties To Us.

Both federal and state government agencies have increased their focus on and coordination of civil and criminal enforcement efforts in the healthcare area. As a result, there are numerous ongoing investigations of hospital companies, as well as their executives and managers. The OIG and the Department of Justice have, from time to time, established national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Further, under the federal False Claims Act, private parties have the right to bring “qui tam” whistleblower lawsuits against companies that submit false claims for payments to the government. Some states have adopted similar state whistleblower and false claims provisions.

Federal and state investigations relate to a wide variety of routine healthcare operations including:

	•		cost reporting and billing practices, including for Medicare outliers;

	•		financial arrangements with referral sources;

	•		physician recruitment activities;

	•		physician joint ventures; and

	•		hospital charges and collection practices for self-pay patients.

We engage in many of these and other activities which could be the subject of governmental investigations or inquiries from time to time. For example, we have significant Medicare and Medicaid billings, we have numerous financial arrangements with physicians who are referral sources to our hospitals, we have non-hospital joint venture arrangements involving physician investors and we have five hospitals that have physician investors (with one additional hospital under construction with physician investors). In addition, our executives and managers, many of

whom have worked at other healthcare companies that are or may become the subject of federal and state investigations and private litigation, may be included in governmental investigations or named as defendants in private litigation. Any additional investigations of us, our executives or managers could result in significant liabilities or penalties to us, as well as adverse publicity.

Compliance With Section 404 Of The Sarbanes-Oxley Act May Negatively Impact Our Results Of Operations And Failure To Comply May Subject The Company To Regulatory Scrutiny And A Loss Of Investors’ Confidence In Our Internal Control Over Financial Reporting.

On December 15, 2006, the Securities and Exchange Commission (“SEC”) announced it is adopting an extension that will postpone the date by which non-accelerated filers must comply with Section 404 of the Sarbanes-Oxley Act of 2002. The extension requires us to perform an evaluation of our internal control over financial reporting and file management’s attestation with our annual report beginning with fiscal 2008. The SEC’s extension requires our auditors to attest to management’s assessment on the effectiveness of our internal control over financial reporting beginning with fiscal 2009. Compliance with these requirements, and any changes in our internal control over financial reporting in response to our internal evaluations, may be expensive and time-consuming and may negatively impact our results of operations. In addition, we cannot assure you that we will be able to meet the required deadlines for compliance with Section 404. Any failure on our part to meet the required compliance deadlines may subject us to regulatory scrutiny and a loss of public confidence in our internal control over financial reporting.

A Failure Of Our Information Systems Would Adversely Affect Our Ability To Properly Manage Our Operations.

We rely on our advanced information systems and our ability to successfully use these systems in our operations. These systems are essential to the following areas of our business operations, among others:

	•		patient accounting, including billing and collection of net revenue;

	•		financial, accounting, reporting and payroll;

	•		coding and compliance;

	•		laboratory, radiology and pharmacy systems;

	•		materials and asset management;

	•		negotiating, pricing and administering managed care contracts; and

	•		monitoring quality of care.

If we are unable to use these systems effectively, we may experience delays in collection of net revenue and may not be able to properly manage our operations or oversee the compliance with laws or regulations.

If Any One Of The Regions In Which We Operate Experiences An Economic Downturn Or Other Material Change, Our Overall Business Results May Suffer.

Of our 14 acute care hospitals, four are located in Salt Lake City, three are located in Phoenix, three are located in Tampa-St. Petersburg, three are located in the state of Texas and one is located in Las Vegas. In addition, our health plan, Health Choice, and our behavioral health hospital are located in Phoenix. For the year ended September 30, 2006, our net revenue was generated as follows:


Health Choice	25.0	%
Salt Lake City, Utah	22.5
Phoenix, Arizona (excluding Health Choice)	16.3
Three cities in Texas, including San Antonio	17.3
Tampa-St. Petersburg, Florida	12.6
Las Vegas, Nevada	6.3

Any material change in the current demographic, economic, competitive or regulatory conditions in any of these regions could adversely affect our overall business results because of the significance of our operations in each of these regions to our overall operating performance. Moreover, our business is not as diversified as some competing multi-facility healthcare companies and, therefore, is subject to greater market risks. The projected population growth rates in these regions are based on assumptions beyond our control. Such projected growth may not be realized.

In particular, as a result of Hurricane Rita, the local economy of Port Arthur, Texas and surrounding areas served by our hospital, The Medical Center of Southeast Texas, has been adversely affected. The devastation caused by Hurricane Rita has resulted in a reduction in the availability of habitable housing, an increase in the unemployment rate in Port Arthur and the temporary closure of several local businesses. On an annual basis, this hospital comprises approximately 9.0% of our total acute care revenue.

We May Be Subject To Liabilities Because Of Claims Brought Against Our Facilities.

Plaintiffs frequently bring actions against hospitals and other healthcare providers, alleging malpractice, product liability or other legal theories. Many of these actions involve large claims and significant defense costs.

Certain other hospital companies have been subject to class-action claims in connection with their billing practices relating to uninsured patients. Although we believe that our billing practices with respect to uninsured patients have been and will continue to be in compliance with all applicable legal requirements, we could be subject to similar claims.

We maintain professional malpractice liability insurance and general liability insurance in amounts we believe are sufficient to cover claims arising out of the operations of our facilities. Some of the claims could exceed the scope of the coverage in effect or coverage of particular claims or damages could be denied.

The rising cost of professional liability insurance and, in some cases, the lack of availability of such insurance coverage, for physicians with privileges at our hospitals increases our risk of vicarious liability in cases where both our hospital and the uninsured or underinsured physician are named as co-defendants. As a result, we are subject to greater self-insured risk and may be required to fund claims out of our operating cash flow to a greater extent than during 2006. We cannot assure you that we will be able to continue to obtain insurance coverage in the future or that such insurance coverage, if it is available, will be available on acceptable terms.

Consistent with 2006, our fiscal 2007 self-insured retention for professional and general liability coverage is $5.0 million per claim. Additionally, the maximum coverage under our insurance policies is unchanged at $75.0 million. At September 30, 2006 and 2005, our professional and general liability accrual for asserted and unasserted claims was approximately $38.1 million and $33.4 million, respectively.

Our Hospitals Face Increasing Insurance Costs That May Reduce Our Cash Flows And Net Earnings.

The cost of liability insurance has negatively affected operating results and cash flows throughout the healthcare industry due to pricing pressures on insurers and fewer carriers willing to underwrite professional and general liability insurance. Although the cost of insurance moderated somewhat in fiscal 2006, the high cost of professional liability insurance coverage and, in some cases, the lack of availability of such insurance coverage for physicians with privileges at our hospitals increases our risk of vicarious liability in cases where both our hospital and the uninsured or underinsured physician are named as co-defendants. For the year ended September 30, 2006, our insurance expense was $25.2 million, an increase of $300,000 from the year ended September 30, 2005. Some states, including certain states in which we operate, have recently passed tort reform legislation or are considering such legislation to place limits on non-economic damages, which contributed to the moderation in liability insurance costs in fiscal 2006. However, there is no assurance that the recent moderation in insurance costs will continue. Furthermore, we cannot assure you that we will be able to continue to obtain insurance coverage in the future or that, such insurance coverage, if it is available, will be available on acceptable terms.

Operations At Our Hospitals Have Been And May Be Negatively Impacted By Certain Factors, Including Severe Weather Conditions And The Impact Of Natural Disasters.

Our revenue and volume trends will be based on many factors, including physicians’ clinical decisions on patients, physicians’ availability, the change of payor programs to a more outpatient-based environment, availability of services at our facilities, severe weather conditions and the impact of natural disasters, including hurricanes and tornados. Any of these factors could have a material adverse effect on our operations, including revenue and volume trends, and many of these factors will be outside of our control. Damages incurred by us and other companies with operations in the Gulf Coast area as a result of recent catastrophic hurricanes have resulted in significant property

Health Choice derives its premium revenue, which represents 25.0% of our consolidated net revenue, through a contract with AHCCCS, which is the state agency that administers Arizona’s Medicaid program, and a contract with CMS for the MAPD SNP. For the year ended September 30, 2006, we derived 22.7% of our consolidated net revenue from our contract with AHCCCS, compared to 23.2% in the prior year. AHCCCS and CMS set the capitated rates we receive at Health Choice which, in turn, subcontracts with physicians, hospitals and other healthcare providers to provide services to its enrollees. If we fail to effectively manage healthcare costs, these costs may exceed the payments we receive. Historically, our medical claims expense as a percentage of premium revenue has fluctuated. Our medical loss ratio was 87.2% for the year ended September 30, 2006, compared to 88.0% in the prior year. Relatively small changes in these medical loss ratios can create significant changes in the profitability of Health Choice. Many factors can cause actual healthcare costs to exceed the capitated rates set by AHCCCS and CMS, including:

add time to the closing of an acquisition of a not-for-profit hospital and future actions on the state level could seriously delay or even prevent our ability to acquire not-for-profit hospitals in the future.

Difficulties With The Integration Of Acquisitions May Disrupt Our Ongoing Operations.

On July 21, 2006, we signed a definitive agreement to acquire Glenwood Regional Medical Center located in West Monroe, Louisiana. We expect to close on this acquisition during the first calendar quarter of 2007. If we are able to successfully complete this or other hospital acquisitions, we cannot guarantee that we will be able to effectively integrate the acquired facilities with our existing operations. The process of integrating acquired hospitals may require a disproportionate amount of management’s time and attention, potentially distracting management from its other day-to-day responsibilities. In addition, poor integration of acquired facilities could cause interruptions to our business activities, including those of the acquired facilities. As a result, we may not realize all or any of the anticipated benefits of an acquisition and we may incur significant costs related to the acquisitions or integration of these facilities. In addition, we may acquire hospitals that have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations. Although we seek indemnification from prospective sellers covering these matters, we may nevertheless have material liabilities for past activities of acquired hospitals.

Difficulties With Construction and Opening Of Our New Hospital May Require Unanticipated Capital Expenditures and Start-up Costs And Adversely Affect Our Business.

We are constructing Mountain Vista Medical Center, a new 172-bed hospital in the East Valley of Phoenix, Arizona, which we expect to open on June 1, 2007. The total cost to build and equip the new hospital is currently estimated to be approximately $170.0 to $180.0 million. We expect to incur approximately $100.0 to $105.0 million in capital expenditures during fiscal 2007 related to the construction of this hospital. Our ability to complete construction of the hospital on our anticipated budget and schedule would depend on a number of factors, including, but not limited to:

	•		our ability to control construction costs;

	•		the failure of general contractors or subcontractors to perform under their contracts;

	•		adverse weather conditions;

	•		shortages of labor or materials;

	•		our ability to obtain necessary licensing and other required governmental authorizations; and

	•		other unforeseen problems and delays.

Additionally, we may incur significant start-up costs in the months preceding the opening of the new hospital, in addition to a time period post-opening as operations and volume ramp-up. The process of opening the new hospital may also require a disproportionate amount of management’s time and attention, potentially distracting management from its other day-to-day responsibilities.

We also may experience difficulties with the opening of the new hospital, such as recruiting members to the medical staff of the hospital and attracting patients to the hospital. If patients who we expect to utilize the hospital choose to utilize other facilities, we may experience lower volume and admissions than expected and our business, financial condition and results of operations could be adversely affected.

The Construction Of Additional Hospitals Would Involve Significant Capital Expenditures Which Could Have An Adverse Impact On Our Liquidity.

We may decide to construct an additional hospital or hospitals in the future. Our ability to complete construction of a hospital on our anticipated budget and schedule would depend on a number of factors, including, but not limited to:

	•		our ability to control construction costs;

	•		the failure of general contractors or subcontractors to perform under their contracts;

	•		adverse weather conditions;

	•		shortages of labor or materials;

	•		our ability to obtain necessary licensing and other required governmental authorizations; and

	•		other unforeseen problems and delays.

As a result of these and other factors, we cannot assure you that we will not experience increased construction costs, or that we will be able to construct any new hospitals as originally planned. In addition, the construction of a new hospital would involve a significant commitment of capital with no revenue associated with the hospital during construction, which could have an adverse impact on our liquidity.

If The Costs For Construction Materials And Labor Continue To Rise, Such Increased Costs Could Have An Adverse Impact On The Return On Investment Relating To Our New Hospital And Other Expansion Projects.

The cost of construction materials and labor has significantly increased over the past two years as a result of global and domestic events. We have experienced significant increases in the cost of steel due to the demand in China for such materials and an increase in the cost of lumber and drywall due to multiple catastrophic hurricanes in the United States. As we continue to invest in modern technologies, emergency rooms and operating room expansions, along with the construction of our new hospital in the East Valley of Phoenix, we expend large sums of cash generated from operating activities. We evaluate the financial viability of such projects based on whether the projected cash flow return on investment exceeds the Company’s cost of capital by an acceptable amount. Such returns may not be achieved if the cost of construction continues to rise significantly or anticipated volumes do not materialize.

State Efforts To Regulate The Construction Or Expansion Of Hospitals Could Impair Our Ability To Operate And Expand Our Operations.

Some states require healthcare providers to obtain prior approval, known as certificates of need, for:

	•		the purchase, construction or expansion of healthcare facilities;

	•		capital expenditures exceeding a prescribed amount; or

	•		changes in services or bed capacity.

In giving approval, these states consider the need for additional or expanded healthcare facilities or services. Florida and Nevada are the only states in which we currently own hospitals that have certificate of need laws. The failure to obtain any required certificate of need could impair our ability to operate or expand operations.

We Are Dependent On Key Personnel And The Loss Of One Or More Of Our Senior Management Team Or Local Management Personnel Could Have A Material Adverse Effect On Our Business.

Our business strongly depends upon the services and management experience of our senior management team. We depend on the ability of our senior management team and key employees to manage growth successfully and on our ability to attract and retain skilled employees. If any of our executive officers resign or otherwise are unable to serve, our management expertise and ability to deliver healthcare services efficiently and to effectively execute our business strategy could be diminished. If we fail to attract and retain managers at our hospitals and related facilities, our operations could be adversely effected. Moreover, we do not maintain key man life insurance policies on any of our officers.

Our Hospitals Are Subject To Potential Responsibilities And Costs Under Environmental Laws That Could Lead To Material Expenditures Or Liability.

We are subject to various federal, state and local environmental laws and regulations, including those relating to the protection of human health and the environment. We could incur substantial costs to maintain compliance with these laws and regulations. To our knowledge, we have not been and are not currently the subject of any investigations relating to noncompliance with environmental laws and regulations. We could become the subject of future investigations, which could lead to fines or criminal penalties if we are found to be in violation of these laws and regulations. The principal environmental requirements and concerns applicable to our operations relate to proper management of hazardous materials, hazardous waste and medical waste, above ground and

underground storage tanks, operation of boilers, chillers and other equipment, and management of building conditions, such as the presence of mold, lead-based paint or asbestos. Our hospitals engage independent contractors for the transportation and disposal of hazardous waste, and we require that our hospitals be named as additional insureds on the liability insurance policies maintained by these contractors. In addition, we maintain insurance coverage for third-party liability related to the storage tanks located at our facilities in the amount $5.0 million per claim and $10.0 million in the aggregate.

We also may be subject to requirements related to the remediation of substances that have been released into the environment at properties owned or operated by us or our predecessors or at properties where substances were sent for off-site treatment or disposal. These remediation requirements may be imposed without regard to fault, and liability for environmental remediation can be substantial.

If The Fair Value Of Our Reporting Units Declines, A Material Non-Cash Charge To Earnings From Impairment Of Our Goodwill Could Result.

An investor group led by TPG acquired our predecessor company in fiscal 2004. We recorded a significant portion of the purchase price as goodwill. At September 30, 2006, we had approximately $756.5 million of goodwill recorded on our books. We expect to recover the carrying value of this goodwill through our future cash flows. On an ongoing basis, we evaluate, based on the fair value of our reporting units, whether the carrying value of our goodwill is impaired. If the carrying value of our goodwill is impaired, we may incur a material non-cash charge to earnings.

Item 2. Properties.

Information with respect to our hospitals and other healthcare related properties can be found in Item 1 of this report under the caption, “Business—Our Properties.”

Additionally, our principal executive offices in Franklin, Tennessee are located in approximately 58,000 square feet of office space. This space includes approximately 15,000 square feet occupied by our national call center operations. Our office space is leased pursuant to two contracts which both expire on December 31, 2010. Our principal executive offices, hospitals and other facilities are suitable for their respective uses and generally are adequate for our present needs.

Item 3. Legal Proceedings.

We are involved in other litigation and proceedings in the ordinary course of our business. We do not believe the outcome of any such litigation or proceedings will have a material adverse effect on our business, financial condition or results of operations.

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

No matters were submitted to a vote of security holders during the fourth quarter ended September 30, 2006.

PART II

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

There is no established public trading market for our common interests. At September 30, 2006, all of our common interests were owned by IASIS Healthcare Corporation, a Delaware corporation, referred to as IAS.

See Item 12., “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”, included elsewhere in this report for information regarding our equity compensation plans.

Item 6. Selected Financial Data.

The following tables present selected historical financial data for the fiscal years ended September 30, 2002 and 2003 and the period ended June 22, 2004, derived from the audited consolidated financial statements of IAS, as predecessor to IASIS. The selected financial data for the period from June 23, 2004 through September 30, 2004 and the fiscal years ended September 30, 2005 and 2006 reflects the results of operations of IASIS following the Transactions and was derived from the audited consolidated financial statements of IASIS, as successor to IAS. The selected historical financial data of the combined predecessor and successor for the year ended September 30, 2004 was derived from the audited financial statements for the respective periods in 2004 discussed above.

The audited consolidated financial statements of IAS and IASIS referenced above, together with the related report of the independent registered public accounting firm, are included elsewhere is this report. The selected financial information and other data presented below should be read in conjunction with the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto included elsewhere in this report.


						Combined
	IASIS					Basis		IASIS		IAS
								June 23,		October 1,
								2004		2003
	Year Ended			Year Ended		Year Ended		through		through		Year Ended
	September 30,			September 30,		September 30,		September 30,		June 22,		September 30,
	2006			2005		2004		2004		2004 (1)		2003		2002
	(dollars in thousands)									(dollars in thousands)
Statement of Operations Data:
Net revenue	$	1,625,996		$	1,523,727	$	1,386,634	$	389,474	$	997,160	$	1,088,156	$	949,888
Costs and expenses:
Salaries and benefits		470,171			442,173		424,419		115,538		308,881		375,509		324,713
Supplies and other operating expenses		434,124			396,573		379,239		103,926		275,313		316,681		274,302
Medical claims		343,660			302,204		242,389		74,051		168,338		128,595		116,607
Provision for bad debts		141,774			133,870		126,952		39,486		87,466		86,231		72,238
Rentals and leases		34,956			32,750		31,998		8,840		23,158		33,545		31,998
Interest expense, net		69,687			66,002		59,394		17,459		41,935		57,552		59,664
Depreciation and amortization		71,925			71,037		68,084		19,856		48,228		52,609		41,764
Management fees		4,189			3,791		746		746		—		—		—
Hurricane-related expenses (2)		—			4,762		—		—		—		—		—
Business interruption insurance recoveries (3)		(8,974	)		—		—		—		—		—		—
Loss on early extinguishment of debt		—			—		52,084		232		51,852		3,900		—
Merger expenses (4)		—			—		19,750		—		19,750		—		—
Write-off of debt issue costs		—			—		8,850		—		8,850		—		—
Impairment of assets held for sale (5)		—			—		—		—		—		11,741		—

Total costs and expenses		1,561,512			1,453,162		1,413,905		380,134		1,033,771		1,066,363		921,286


							Combined
	IASIS						Basis			IASIS			IAS
										June 23,			October 1,
										2004			2003
	Year Ended			Year Ended			Year Ended			through			through			Year Ended
	September 30,			September 30,			September 30,			September 30,			June 22,			September 30,
	2006			2005			2004			2004			2004 (1)			2003			2002
Earning (loss) from continuing operations before gain (loss) on disposal of assets, minority interests, income taxes and cumulative effect of a change in accounting principle		64,484			70,565			(27,271	)		9,340			(36,611	)		21,793			28,602

Gain (loss) on disposal of assets, net (5)		899			(231	)		3,624			(107	)		3,731			588			(7	)
Minority interests		(3,546	)		(2,891	)		(4,305	)		(1,207	)		(3,098	)		(1,828	)		(1,042	)


Earnings (loss) from continuing operations before income taxes and cumulative effect of a change in accounting principle		61,837			67,443			(27,952	)		8,026			(35,978	)		20,553			27,553
Income tax expense		22,288			26,851			4,473			3,321			1,152			—			—


Net earnings (loss) from continuing operations before cumulative effect of a change in accounting principle		39,549			40,592			(32,425	)		4,705			(37,130	)		20,553			27,553
Loss from discontinued operations and cumulative effect of a change in accounting principle (6)		—			—			—			—			—			—			(38,525	)

Net earnings (loss)	$	39,549		$	40,592		$	(32,425	)	$	4,705		$	(37,130	)	$	20,553		$	(10,972	)

Balance Sheet Data (at end of period):
Cash and cash equivalents	$	95,415		$	89,097		$	98,805		$	98,805		$	—		$	101,070		$	—
Total assets		1,967,835			1,852,724			1,724,161			1,724,161			—			1,029,999			898,483
Long-term debt and capital lease obligations (including current portion)		896,945			904,808			912,754			912,754			—			664,434			582,943
Stockholders’ equity		—			—			—			—			—			176,099			155,544
Member’s equity		656,496			616,947			573,705			573,705			—			—			—


(1)		The selected financial data includes complete financial data for all of the periods noted with the exception of North Vista Hospital. The results of North Vista Hospital are included from February 1, 2004, the date of acquisition.

(2)		Results for the year ended September 30, 2005 include an adverse financial impact of approximately $4.8 million before income taxes as a result of property damage to our facility in Port Arthur, Texas, resulting from the impact of Hurricane Rita.

(3)		Results for the year ended September 30, 2006 include $9.0 million of business interruption insurance recoveries received in connection with the temporary closure and disruption of operations at The Medical Center of Southeast Texas, in Port Arthur, Texas, as a result of Hurricane Rita.

(4)		Merger expenses include legal and advisory expenses and special bonus compensation of IAS incurred in connection with its acquisition by the investor group led by TPG.

(5)		During 2003, we recorded an impairment charge of $11.7 million on the Rocky Mountain Medical Center net assets held for sale to reflect the estimated net proceeds from sale to potential purchasers who would convert the property’s use to retail. During the quarter ended March 31, 2004, we sold the Rocky Mountain Medical Center property and recorded a gain on the sale of this property of approximately $3.6 million.

(6)		Consists of the cumulative effect of a change in accounting principle of a $39.5 million non-cash transitional impairment charge related to the adoption of Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets, during the fiscal year ended September 30, 2002, and reversal of excess loss accrual on discontinued operations of $1.0 million for the fiscal year ended September 30, 2002.

Selected Operating Data

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


	Year Ended September 30,
	2006			2005			2004
Acute Care (1):
Number of acute care hospitals at end of period (2)		14			14			15
Beds in service at end of period		2,206			2,219			2,267
Average length of stay (days) (3)		4.56			4.43			4.37
Occupancy rates (average beds in service)		50.9	%		48.3	%		49.8	%
Admissions (4)		88,701			88,836			90,236
Adjusted admissions (5)		144,929			145,346			145,035
Patient days (6)		404,292			393,523			395,067
Adjusted patient days (5)		638,192			620,717			612,941
Net patient revenue per adjusted admission (7)	$	8,325		$	7,946		$	7,461

Health Choice (8):
Medicaid covered lives		110,813			113,589			105,372
Dual-eligible lives (9)		3,937			—			—
Medical loss ratio (10)		87.2	%		88.0	%		87.2	%


(1)		Includes North Vista Hospital beginning February 1, 2004.

(2)		Excludes St. Luke’s Behavioral Hospital. Beginning April 1, 2005, includes The Medical Center of Southeast Texas and excludes Mid-Jefferson Hospital and Park Place Medical Center.

(3)		Represents the average number of days that a patient stayed in our hospitals.

(4)		Represents the total number of patients admitted to our hospitals for stays in excess of 23 hours. Management and investors use this number as a general measure of inpatient volume.

(5)		Adjusted admissions and adjusted patient days are general measures of combined inpatient and outpatient volume. We compute adjusted admissions/patient days by multiplying admissions/patient days by gross patient revenue and then dividing that number by gross inpatient revenue.

(6)		Represents the number of days our beds were occupied by inpatients over the period.

(7)		Includes the impact of our company-wide uninsured discount program, which became effective in the third quarter of fiscal 2006. The uninsured discount program offers discounts to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans or charity. The uninsured discount program had the effect of reducing net revenue and the provision for bad debts by generally corresponding amounts.

(8)		Includes our MAPD SNP effective January 1, 2006.

(9)		Represents members eligible for Medicare and Medicaid benefits under Health Choice’s contract with CMS to provide coverage as a MAPD SNP.

(10)		Represents medical claims expense as a percentage of premium revenue, including claims paid to our hospitals.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our audited consolidated financial statements, the notes to our audited consolidated financial statements, and the other financial information appearing elsewhere in this report. We intend for this discussion to provide you with information that will assist you in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes. It includes the following sections:

	•		Forward Looking Statements;

	•		Executive Overview;

	•		Critical Accounting Policies and Estimates;

	•		Results of Operations Summary;

	•		Liquidity and Capital Resources;

	•		Off-Balance Sheet Arrangements; and

	•		Recent Accounting Pronouncements.

To assist in the comparability of our financial results and facilitate an understanding of our results of operations, the following overview and analysis combines the results of operations of IAS for October 1, 2003 to June 22, 2004, with the results of operations of IASIS for June 23, 2004 to September 30, 2004 to discuss results for the year ended September 30, 2004, and compares such combined results with the results of operations of IASIS for the years ended September 30, 2006 and 2005. Data for the fiscal years ended September 30, 2006, 2005 and 2004 has been derived from our audited consolidated financial statements. References herein to “we,” “us,” “our” and “our company” are to IASIS and its subsidiaries and, unless indicated otherwise or the context requires, include IAS.

FORWARD LOOKING STATEMENTS

Some of the statements we make in this annual report on Form 10-K are forward-looking within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations including, but not limited to, the discussions of our operating and growth strategy (including possible acquisitions and dispositions), financing needs, projections of revenue, income or loss, capital expenditures and future operations. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results in future periods to differ materially from those anticipated in the forward-looking statements. Those risks and uncertainties include, among others, the risks and uncertainties discussed under Item 1A, “Risk Factors” in this Annual Report on Form 10-K. Although we believe that the assumptions underlying the forward-looking statements contained in this report are reasonable, any of these assumptions could prove to be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in this report, you should not regard the inclusion of such information as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

EXECUTIVE OVERVIEW

contractual adjustments principally result from differences between the hospitals’ established charges and payment rates under Medicare, Medicaid and various managed care plans. The calculation of appropriate payments from the Medicare and Medicaid programs as well as terms governing agreements with other third-party payors are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount. Premium revenue consists of revenue from Health Choice, our Medicaid and Medicare managed health plan. Other revenue includes medical office building rental income and other miscellaneous revenue.

Net revenue for the year ended September 30, 2006 increased 6.7% to $1.6 billion, compared with $1.5 billion for the prior year. Premium revenue from Health Choice contributed $53.3 million to the total increase in net revenue, of which $37.3 million relates to the new MAPD SNP product.

Net patient revenue per adjusted admission increased 4.8% for the year ended September 30, 2006, compared with the prior year. Excluding the impact of uninsured discounts, net patient revenue per adjusted admission increased 6.5% over the prior year. Admissions and adjusted admissions decreased 0.2% and 0.3%, respectively, for the year ended September 30, 2006, when compared with the prior year. Our overall volumes were impacted in part by Hurricane Rita’s devastation of the Port Arthur area. Excluding The Medical Center of Southeast Texas, admissions and adjusted admissions increased 0.2% and 0.5%, respectively, for the year ended September 30, 2006. While we experienced generally weaker volume in fiscal 2006, our operating results continue to benefit from favorable pricing trends and demonstrate our ability to control certain operating costs. This is in part attributable to our product line focus and capital investments in our facilities.

The following table provides the sources of our net patient revenue by payor for the years ended September 30, 2006, 2005 and 2004.


	Year Ended
	September 30,
	2006			2005			2004
Medicare		24.2	%		26.6	%		26.3	%
Medicaid		14.5			13.1			14.1
Managed care		46.0			44.5			43.5
Self-pay and other		15.3			15.8			16.1

Total		100.0	%		100.0	%		100.0	%

A large percentage of our hospitals’ net patient revenue consists of fixed payment, discounted sources, including Medicare, Medicaid and managed care organizations. Reimbursement for Medicare and Medicaid services are often fixed regardless of the cost incurred or the level of services provided. Similarly, a greater percentage of the managed care companies we contract with have recently begun to reimburse providers on a fixed payment basis regardless of the costs incurred or the level of services provided. Since the implementation of Medicare Part D coverage, we have experienced a shift of traditional Medicare beneficiaries to managed Medicare, which we classify as managed care in the table above. We expect patient volumes from Medicare beneficiaries to continue this shift in coverage, while increasing over the long term due to the general aging of the population and the incentives put into place by the federal government to move more beneficiaries to managed Medicare care plans.

We have experienced an increase in net patient revenue at our hospital operations due to the introduction of new and expanded services at our hospitals, which in part, have driven favorable pricing trends. We continue to benefit from managed care contracting strategies and related price increases that were obtained throughout the past year. However, the consolidation of payors in certain markets may result in reduced reimbursement from managed care organizations in future periods. During the year ended September 30, 2006, changes in patient and service mix have suppressed our overall acuity levels, which have had the effect of reducing, in part, the positive impact of pricing increases. The decline in the self-pay revenue mix for the year ended September 30, 2006 was primarily due to the implementation of the company-wide uninsured discount program. From a service line standpoint, we experienced a decline in certain higher acuity services, including cardiovascular surgical, orthopedic and bariatric cases, while lower acuity obstetric services increased. We have also experienced moderate increases in volume in our neonatal intensive care units and inpatient psychiatric units, which are considered higher margin service lines that generally experience more favorable reimbursement rates. While emergency room visits increased 3.6% and

6.1% for the years ended September 30, 2006 and 2005, respectively, we continue to experience increases in the volume of uninsured patients through our emergency rooms, although at levels which have declined in comparison to the prior year. For the years ended September 30, 2006 and 2005, emergency room visits by uninsured patients increased 4.1% and 9.5%, respectively, over visits in the prior year periods. Self-pay admissions increased 6.8% for the year ended September 30, 2006, when compared to the prior year. Additionally, self-pay admissions as a percentage of total admissions increased 0.3% for the year ended September 30, 2006, when compared to the prior year.

Health Choice is a prepaid Medicaid and Medicare managed health plan that derives most of its revenue through a contract with AHCCCS to provide specified health services to qualified Medicaid enrollees through contracted providers. AHCCCS is the state agency that administers Arizona’s Medicaid program. The contract requires the Plan to arrange for healthcare services for enrolled Medicaid patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates, and supplemental payments from AHCCCS.

Health Choice’s contract with AHCCCS expires September 30, 2007. The contract provides AHCCCS with a one-year renewal option and is terminable without cause on 90 days’ written notice or for cause upon written notice if we fail to comply with any term or condition of the contract or fail to take corrective action as required to comply with the terms of the contract. Additionally, AHCCCS can terminate our contract in the event of the unavailability of state or federal funding.

On October 19, 2005, CMS awarded Health Choice a contract to become a MAPD SNP. Effective January 1, 2006, Health Choice began providing coverage as a MAPD SNP provider pursuant to the contract with CMS. The SNP allows Health Choice to offer Medicare and Part D drug benefit coverage for new and existing dual-eligible members, or those that are eligible for Medicare and Medicaid. Health Choice already served these type members through the AHCCCS Medicaid program. The contract with CMS, which expires on December 31, 2006, has been renewed for calendar 2007 and includes successive one-year renewal options at the discretion of CMS and is terminable without cause on 90 days’ written notice or for cause upon written notice if we fail to comply with any term or condition of the contract or fail to take corrective action as required to comply with the terms of the contract.

Premium revenue growth at Health Choice for the year ended September 30, 2006 has been primarily attributable to the implementation of the MAPD SNP. As a result of the three year contract with AHCCCS and the implementation of the MAPD SNP, Health Choice enrollment increased to over 114,700 enrollees at September 30, 2006. Premium revenue generated under the AHCCCS and CMS contracts with Health Choice represented approximately 25.0%, 23.2% and 20.9% of our consolidated net revenue for the years ended September 30, 2006, 2005 and 2004, respectively.

The Medicare Modernization Act, which was signed into law on December 8, 2003, made a number of significant changes to the Medicare program. The Medicare Modernization Act provides a number of potential benefits to our hospitals including, but not limited to:

	•		a provision allocating $250.0 million per year for federal years 2005-2008 to pay for healthcare costs of undocumented aliens;

	•		provisions generally providing hospitals with more reimbursement for outpatient drugs;

	•		a provision increasing our reimbursement by reducing the labor share percentage from 71% to 62% for hospitals with wage indices less than 1.0; and

	•		a provision eliminating the requirement that hospitals must obtain secondary payment information from all Medicare beneficiaries receiving reference laboratory services.

For federal fiscal years 2006 and 2007, the Medicare Modernization Act provides for hospitals to receive full market basket updates for these years for the provision of inpatient services, but such update amounts are conditioned upon a hospital providing CMS with specific quality data relating to the quality of services provided. Hospitals that fail to provide CMS with the required data specified under the National Voluntary Hospital Reporting Initiative will receive an update equal to the market basket minus 0.4% for federal fiscal year 2006 and the market basket minus 2.0% beginning in federal fiscal year 2007. Our hospitals are currently complying with this reporting requirement.

DEFRA signed into law on February 8, 2006, expands the number of patient care indicators to 21, beginning with discharges occurring in the third quarter of calendar year 2006. On November 1, 2006, CMS announced a final rule that expands to 26 the number of quality measures that must be reported beginning with discharges occurring in the first quarter of calendar year 2007, and requires that hospitals report the results of a 27-question patient perspectives survey beginning with discharges occurring in the third quarter of calendar year 2007.

The Medicare Modernization Act also decreases hospital reimbursement in a few areas, including, but not limited to, a provision denying updates to hospitals with “high-cost” direct medical education programs.

CMS recently released a final rule that will increase payments to hospitals for inpatients by an average of 3.4% in federal fiscal year 2007, conditioned upon the submission of the quality data discussed above. On August 1, 2006, CMS announced a final rule that refines the diagnosis-related group payment system. CMS announced that it is considering additional changes effective in federal fiscal year 2008. We cannot predict the impact that any such changes, if finalized, would have on our net revenue. Other Medicare payment changes may also affect our net revenue.

Recently CMS announced proposed regulations that, if adopted, would change payment for procedures performed in an ASC effective January 1, 2008. Under this proposal, ASC payment groups would increase from the current nine clinically disparate payment groups to the 221 APCs used under the outpatient prospective payment system for these surgical services. CMS estimates that the rates for procedures performed in an ASC setting would equal 62% of the corresponding rates paid for the same procedures performed in an outpatient hospital setting. CMS indicates in its discussion of the proposed regulations that it believes that the volumes and service mix of procedures provided in ASCs would change significantly in 2008 under the revised payment system, but that CMS is not able to accurately project those changes. If the proposal is adopted, more Medicare procedures that are now performed in hospitals, such as ours, may be moved to ASCs, reducing surgical volume in our hospitals. ASCs may experience decreased reimbursement depending on their service mix and the final payment rates adopted by CMS. Also, more Medicare procedures that are now performed in ASCs, such as ours, may be moved to physicians’ offices. Currently, we do not believe that these proposed changes would have a material adverse impact on our results of operations or cash flows.

Significant Industry Trends

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

Growth in Bad Debts Resulting From Increased Self-Pay Volume and Revenue

Like others in the hospital industry, we have experienced increases in self-pay volume that has caused our provision for bad debts to increase. These increases are primarily due to growth in the number of uninsured patients utilizing our emergency rooms, along with an increase in the amount of co-payments and deductibles passed on by employers to employees. Self-pay or uninsured volume through our emergency rooms increased 4.1% for the year ended September 30, 2006, as compared to a 9.5% increase in the prior year. For the year ended September 30, 2006, self-pay admissions as a percentage of total admissions were 4.6%, compared with 4.3% in the prior year. We monitor our self-pay admissions on a daily basis and continue to focus on the efficiency of our emergency rooms through redesigning certain facilities, Medicaid eligibility automation and process-flow improvements. We anticipate that if we experience further growth in self-pay volume and revenue, our provision for bad debts will increase and our results of operations could be adversely affected.

The approximate percentages of gross hospital receivables (prior to allowances for contractual adjustments and doubtful accounts) are summarized as follows:


	September 30,			September 30,
	2006			2005

Insured receivables		60.4	%		60.2	%
Uninsured receivables		39.6	%		39.8	%


Total		100.0	%		100.0	%

The percentages in the table above are calculated using gross receivable balances. Uninsured receivables with service dates after implementation of the uninsured discount program and insured receivables are net of contractual discounts recorded at the time of billing. Included in insured receivables are accounts that are pending approval from Medicaid. These receivables were approximately 3.3% and 6.6% of gross hospital receivables at September 30, 2006 and 2005, respectively.

The approximate percentages of gross hospital receivables in summarized aging categories are as follows:


	September 30,			September 30,
	2006			2005

0 to 90 days		62.7	%		63.1	%
91 to 180 days		17.7	%		18.4	%
Over 180 days		19.6	%		18.5	%

Total		100.0	%		100.0	%

Additional Charity Care and Charges to the Uninsured

We currently record revenue deductions for patient accounts that meet our guidelines for charity care. We have traditionally provided charity care to patients with income levels below 200% of the federal property level and will continue this practice. In fiscal 2005, we expanded our charity care policy to cover uninsured patients with incomes above 200% of the federal poverty level. Under the expanded program, a sliding scale of reduced rates is offered to uninsured patients, who are not covered through federal, state or private insurance, with incomes between 200% and 400% of the federal poverty level at all of our hospitals. Charity care deductions increased $6.5 million for the year ended September 30, 2006, as compared to the prior year.

Sub-Acute Care Services

Inpatient care is expanding to include sub-acute care when a less intensive, lower cost level of care is appropriate. We have been proactive in the development of a variety of sub-acute inpatient services to utilize a portion of our available capacity. By offering cost-effective sub-acute services in appropriate circumstances, we are able to provide a continuum of care when the demand for such services exists. We have identified opportunities to expand sub-acute services within our facilities as appropriate, including inpatient psychiatric and skilled nursing services.

Nursing Shortage

The hospital industry continues to experience a shortage of nurses, which is forecasted to continue. This nursing shortage has created an environment that has required an increased use of nursing contract labor in most of our markets, particularly in our Phoenix, Arizona market. While we have experienced continued difficulty in

retaining and recruiting nurses in the Phoenix market, similar to other providers in the region, we have experienced slight improvement in our nursing contract labor during the recent months. We believe this improvement is a result of our comprehensive recruiting and retention plan for nurses that focus on competitive salaries and benefits as well as employee satisfaction, best practices, tuition assistance, effective training programs and workplace environment. We have expanded our relationships with colleges and universities, which includes our sponsorship of nursing scholarship programs. Finally, we are continuing to recruit qualified nurses from countries outside of the United States, including India. Contract labor expense for nursing services as a percentage of acute care revenue increased 0.2% for the year ended September 30, 2006, as compared to the prior year. Recent identifiable improvements in the Phoenix market, as well as our Nevada market, have been somewhat mitigated by increasing challenges that continue to face the industry. Should we be unsuccessful in our attempts to maintain nursing coverage adequate for our present and future needs, our future operating results could be adversely affected.

Decreased Federal and State Funding for Medicaid Programs

Some of the states in which we operate have experienced budget constraints as a result of increased costs and lower than expected tax collections. Health and human services programs, including Medicaid and similar programs, represent a significant portion of state spending. As a response to these budgetary concerns, some states have proposed and other states may propose decreased funding for these programs or other structural changes. DEFRA, signed into law on February 8, 2006, included Medicaid cuts of approximately $4.8 billion over five years. In addition, proposed regulatory changes would, if implemented, reduce federal Medicaid funding by an additional $12.2 billion over five years. If funding decreases are approved by the states in which we operate, our operating results and cash flows could be adversely affected.

Growth in Outpatient Services

We have experienced an increase in the percentage of healthcare services performed on an outpatient basis and we expect this trend to continue. A number of procedures, including certain cardiology procedures, once performed only on an inpatient basis have been, and will continue to be, converted to outpatient procedures. Additionally, advances in pharmaceutical and medical technologies as well as efforts made by payors to control costs have accelerated the conversion to more procedures performed on an outpatient basis. Generally, the payments we receive for outpatient procedures are less than those for similar procedures performed in an inpatient setting.

Volatility of Insurance Costs

Our fiscal 2006 self-insured retention for professional and general liability coverage was $5.0 million per claim and $55.0 million in the aggregate. Additionally, the maximum coverage under our insurance policies is $75.0 million. The high cost of professional liability insurance coverage and, in some cases, the lack of availability of such insurance coverage for physicians with privileges at our hospitals, increases our risk of vicarious liability in cases in which both our hospital and the uninsured or underinsured physician are named as co-defendants. Our professional liability exposure also increases when our subsidiaries employ physicians. We have continued to experience some moderation in costs during the current year, including favorable claims experience. Some states, including certain states in which we operate, have recently passed tort reform legislation or are considering such legislation to place limits on non-economic damages, which, in part, has resulted in improved loss experience. The valuation from our independent actuary for professional and general liability losses resulted in a change in our related accrual estimates for prior periods which increased our professional and general liability expense by $589,000 during the year ended September 30, 2006.

For the year ended September 30, 2006, our insurance expense as a percentage of acute care revenue declined by 0.1% when compared to the prior year. For the year ended September 30, 2005, our insurance expense decreased 0.3% as a percentage of acute care revenue when compared to the fiscal 2004 year. There is no assurance that insurance costs will continue to moderate. If insurance costs begin to rise again, we cannot be certain that significant increases will not have a material adverse effect on our future operating results and cash flows.

The Merger

On June 22, 2004, an investor group led by TPG acquired IAS through a merger. The total transaction value, including tender premiums, consent fees and other merger-related fees and expenses, was approximately $1.5 billion. The merger has been accounted for as a purchase in accordance with SFAS No. 141, Business Combinations. During the year ended September 30, 2005, we completed the allocation of the merger purchase price. The allocation of the net purchase price of the merger resulted in goodwill of approximately $754.3 million, $45.0 million of other intangible assets and changes to the carrying value of property and equipment based upon information obtained from an independent appraiser.

The following financing transactions occurred in connection with the merger:

	•		an investment made by entities controlled by TPG, such entities referred to as TPG, totaling $434.0 million in cash;

	•		an investment made by an entity controlled by JLL Partners Fund IV, such entity referred to as JLL, totaling $110.0 million in cash;

	•		a contribution of shares of IAS common stock by entities controlled by Trimaran Fund Management, L.L.C., such entities referred to as Trimaran, of $40.0 million;

	•		the execution of an amended and restated credit agreement governing new senior secured credit facilities providing for a $425.0 million term loan, drawn at closing, and a $250.0 million revolving credit facility for working capital and general corporate purposes, which was not drawn at closing; and

	•		the issuance and sale of $475.0 million in aggregate principal amount of 8 3/4% senior subordinated notes due 2014.

The proceeds from the financing transactions were used to:

	•		pay all amounts due to the security holders of IAS under the terms of the merger agreement;

	•		repay all outstanding indebtedness under IAS’s existing senior secured credit facilities;

	•		repurchase IAS’s 13% senior subordinated notes due 2009, or the 13% notes, and 8 1/2% senior subordinated notes due 2009, or the 8 1/2% notes, and pay the related tender premiums and consent fees, pursuant to a tender offer and consent solicitation by IAS;

	•		retire, in October 2004, $3.5 million of IAS’s 13% notes that were not tendered pursuant to the tender offer and consent solicitation; and

	•		pay the fees and expenses related to the merger and the related financing transactions.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In preparing our financial statements, we make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

We have determined an accounting estimate to be critical if: (1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made and (2) changes in the estimate would have a material impact on our financial condition or results of operations. There are other items within our financial statements that require estimation but are not deemed critical as defined herein. Changes in estimates used in these and other items could have a material impact on our financial statements.

Allowance for Doubtful Accounts. Our ability to collect outstanding receivables from third-party payors and patients is critical to our operating performance and cash flows. The primary collection risk lies with uninsured patient accounts or patient accounts for which primary insurance has paid but a patient portion remains outstanding. The provision for bad debts and the allowance for doubtful accounts relate primarily to amounts due directly from patients. Our estimation of the allowance for doubtful accounts is based primarily upon the type and age of the

patient accounts receivable and the effectiveness of our collection efforts. Our policy is to reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges are recorded. We monitor our accounts receivable balances and the effectiveness of our reserve policies on a monthly basis and review various analytics to support the basis for our estimates. These efforts primarily consist of reviewing the following:

	•		Revenue and volume trends by payor, particularly the self-pay components;

	•		Changes in the aging and payor mix of accounts receivable, including increased focus on accounts due from the uninsured and accounts that represent co-payments and deductibles due from patients;

	•		Historical write-off and collection experience using a hindsight or look-back approach;

	•		Cash collections as a percentage of net patient revenue less bad debt expense;

	•		Trending of days revenue in accounts receivable; and

	•		Various allowance coverage statistics.

In addition, we regularly perform hindsight procedures to evaluate historical write-off and collection experience throughout the year to assist in determining the reasonableness of our process for estimating the allowance for doubtful accounts. Due to the implementation of our uninsured discount program, we have modified the methodology used in this analytical tool to account for impact of these uninsured discounts on our accounts receivable. We do not pursue collection of amounts related to patients who qualify for charity care under our guidelines. Charity care accounts are deducted from gross revenue and do not affect the provision for bad debts.

At September 30, 2006, our self-pay receivables, including amounts due from uninsured patients and co-payment and deductible amounts due from insured patients, was $144.5 million and our allowance for doubtful accounts was $109.9 million. Excluding third-party settlement balances, days revenue in accounts receivable were 54 at September 30, 2006, compared with 50 days at September 30, 2005. Impacting our days revenue in accounts receivable this year was the delay in Medicare payments of approximately $6.8 million as mandated by DEFRA, which were subsequently received in October 2006. For the year ended September 30, 2006, the provision for bad debts increased to 11.5% of acute care revenue, compared to 11.4% for the prior year. Adjusting for the uninsured discount program, the provision for bad debts as a percentage of acute care revenue would have been 13.0% for the year ended September 30, 2006. Significant changes in payor mix or business office operations could have a significant impact on our results of operations and cash flows.

Allowance for Contractual Discounts and Settlement Estimates. We derive a significant portion of our net patient revenue from Medicare, Medicaid and managed care payors that receive discounts from our standard charges. For the years ended September 30, 2006, 2005 and 2004, Medicare, Medicaid and managed care revenue accounted for 84.7%, 84.2% and 83.9%, respectively, of net patient revenue.

We estimate contractual discounts and allowances based upon payment terms outlined in our managed care contracts, by federal and state regulations for the Medicare and various Medicaid programs and in accordance with terms of our uninsured discount program. Contractual discounts for most of our patient revenue are determined by an automated process that establishes the discount on a patient-by-patient basis. The payment terms or fee schedules for most payors have been entered into our patient accounting systems. Automated (system-generated) contractual discounts are recorded, at the time a patient account is billed, based upon the system-load payment terms. In certain instances for payors that are not significant or who have not entered into a contract with us, we make manual estimates in determining contractual allowances based upon historical collection rates. At the end of each month, we estimate contractual allowances for all unbilled accounts based on payor-specific six-month average contractual discount rates.

For governmental payors such as Medicare and Medicaid, we determine contractual discounts or allowances based upon the program’s reimbursement (payment) methodology (i.e. either prospectively determined or retrospectively determined based on costs as defined by the government payor). These contractual discounts are determined by an automated process in a manner similar to the process used for managed care revenue. Under prospective payment programs, we record contractual discounts based upon predetermined reimbursement rates. For retrospective cost-based revenues, which are less prevalent, we estimate contractual allowances based upon

historical and current factors which are adjusted as necessary in future periods, when settlements of filed cost reports are received.

Management continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms that result from contract renegotiations and renewals. All contractual adjustments, regardless of type of payor or method of calculation, are reviewed and compared to actual payment experience on an individual patient account basis. Discrepancies between expected and actual payments are reviewed, and as necessary, appropriate corrections to the patient accounts are made to reflect actual payments received. If a discrepancy exists between the payment terms loaded into the contract management system and the actual discount based on payments received, the system is updated accordingly to ensure appropriate discounting of future charges.

Additionally, we rely on other analytical tools to ensure our contractual discounts are reasonably estimated. These include, but are not limited to, monitoring of collection experience by payor, reviewing total patient collections as a percentage of net patient revenue (adjusted for the provision for bad debts) on a trailing twelve-month basis, gross to net patient revenue comparisons, contractual allowance metrics, etc. As well, patient accounts are continually reviewed to ensure all patient accounts reflect either system-generated discounts or estimated contractual allowances, as necessary.

Medicare and Medicaid regulations and various managed care contracts are often complex and may include multiple reimbursement mechanisms for different types of services provided in our healthcare facilities, requiring complex calculations and assumptions subject to interpretation. Additionally, the services authorized and provided and resulting reimbursement are often subject to interpretation. These interpretations sometimes result in payments that differ from our estimates. Additionally, updates to regulations and contract renegotiations occur frequently, necessitating continual review and assessment of the estimation process by management. We have made significant investments in our patient accounting information systems, human resources and internal controls, which we believe greatly reduces the likelihood of a significant variance occurring between the recorded and estimated contractual discounts. Given that most of our contractual discounts are pre-defined or contractually based, continual internal monitoring processes and our use of analytical tools, we believe the aggregate differences between amounts recorded for initial contractual discounts and final contractual discounts resulting from payments received are not significant. Finally, we believe that having a wide variety and large number of managed care contracts that are subject to review and administration on a hospital-by-hospital basis minimizes the impact on the Company’s net revenue of any imprecision in recorded contractual discounts caused by the system-load payment terms of a particular payor. We believe that our systems and processes, as well as other items discussed, provide reasonable assurance that any change in estimate related to contractual discounts are immaterial to our financial position, results of operations and cash flows.

Insurance Reserves. Given the nature of our operating environment, we may become subject to medical malpractice or workers compensation claims or lawsuits. We maintain third-party insurance coverage for individual malpractice and workers compensation claims to mitigate a portion of this risk. In addition, we maintain excess coverage limiting our exposure to an aggregate annual amount for claims. We estimate our reserve for self-insured professional and general liability and workers compensation risks using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis. At September 30, 2006 and 2005, our professional and general liability accrual for asserted and unasserted claims was $38.1 million and $33.4 million, respectively, which is included within other long-term liabilities. For the year ended September 30, 2006, our total premiums and self-insured retention cost for professional and general liability insurance was $25.2 million, compared with $24.9 million in the prior year. Our estimated accrual of the self-insurance risk for workers compensation claims at September 30, 2006 was $8.6 million, compared with $10.1 million in the prior year, which is included in accrued expenses and other current liabilities.

The estimated accrual for malpractice and workers compensation 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 our healthcare facilities, as occurrence data under previous ownership may not necessarily reflect occurrence data under our ownership. While we monitor current claims closely and consider 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.

The valuation from our independent actuary for professional and general liability losses resulted in a change in related accrual estimates for prior periods which increased professional and general liability expense by the following amounts:


Year ended September 30, 2006:	$	589,000
Year ended September 30, 2005:	$	163,000
Year ended September 30, 2004:	$	—

The valuation from our independent actuary for workers’ compensation losses resulted in a change in related accrual estimates for prior periods which increased (decreased) workers’ compensation expense by the following amounts:


Year ended September 30, 2006:	$(3.3 million		)
Year ended September 30, 2005:	$ 1.9 million
Year ended September 30, 2004:	$	—

Medical Claims Payable. Medical claims expense, including claims paid to our hospitals, was $354.5 million, $310.7 million and $253.2 million, or 87.2%, 88.0% and 87.2% of Health Choice premium revenue, for the years ended September 30, 2006, 2005 and 2004, respectively. Our liability for medical claims was $81.8 million at September 30, 2006, compared with $60.2 million in the prior year. We estimate the medical claims payable using historical claims experience (including severity and payment lag time) and other actuarial analysis including number of enrollees, age of enrollees and certain enrollee health indicators to predict the cost of healthcare services provided to enrollees during any given period. 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 healthcare costs or adverse experience. For the years ended September 30, 2006, 2005 and 2004, approximately $10.9 million, $8.5 million and $10.8 million, respectively, of health plan payments made to hospitals and other healthcare entities owned by us for services provided to our enrollees were eliminated in consolidation. Our operating results and cash flows could be materially affected by increased or decreased utilization of our owned healthcare facilities by enrollees of our health plan.

Goodwill and Other Intangibles. The accounting policies and estimates related to goodwill and other intangibles are considered critical because of the significant impact that impairment could have on our operating results. We record all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-lived intangibles, and other intangibles, at fair value as required by SFAS No. 141, Business Combinations. Goodwill, which was $756.5 million at September 30, 2006, is not amortized but is subject to tests for impairment annually or more often if events or circumstances indicate it may be impaired. The initial recording of goodwill and other intangibles requires subjective judgments concerning estimates of the fair value of the acquired assets. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. Other identifiable intangible assets, net of accumulated amortization, were $39.0 million at September 30, 2006. These are amortized over their estimated useful lives and are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangible assets is based on undiscounted cash flow projections. Estimated cash flows may extend far into the future and, by their nature, are difficult to determine over an extended timeframe. Factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates and specific industry or market sector conditions. Other key judgments in accounting for intangibles include useful life and classification between goodwill and indefinite-lived intangibles or other intangibles which require amortization. See “Goodwill and Other Intangibles Assets” in the Notes to Consolidated Financial Statements for additional information regarding intangible assets. To assist in assessing the impact of a goodwill or intangible asset impairment charge at September 30, 2006, we have $795.5 million of goodwill and intangible assets. The impact of a 5% impairment charge would result in a reduction in pre-tax income of approximately $39.8 million.

Income Taxes. Certain tax matters require interpretations of tax law that may be subject to future challenge and may not be upheld under tax audit. Significant judgment is required in determining and assessing the impact of such tax-related contingencies. We establish accruals when, despite our belief that our tax return positions are fully

supportable, it is probable that we have incurred a loss related to tax contingencies and the loss or range of loss can be reasonably estimated. We adjust the accruals related to tax contingencies based upon changing facts and circumstances, including the progress of tax audits and legislative, regulatory or judicial developments. Additionally, we estimate and record a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized in future periods based on all relevant information.

The estimates, judgments and assumptions used by us under “Allowance for Doubtful Accounts,” “Allowance for Contractual Discounts and Settlement Estimates,” “Insurance Reserves,” “Medical Claims Payable,” “Goodwill and Other Intangibles” and “Income Taxes” are, we believe, reasonable, but involve inherent uncertainties as described above, which may or may not be controllable by management. As a result, the accounting for such items could result in different amounts if management used different assumptions or if different conditions occur in future periods.

RESULTS OF OPERATIONS SUMMARY

The following table sets forth, for the periods indicated, results of operations data expressed in dollar terms and as a percentage of net revenue. The table includes information both on a consolidated basis and by reportable business segment.


	Year Ended						Year Ended						Year Ended
Consolidated ($ in thousands):	September 30, 2006						September 30, 2005						September 30, 2004
	Amount			Percentage			Amount			Percentage			Amount			Percentage

Net revenue:
Acute care revenue	$	1,219,474			75.0	%	$	1,170,483			76.8	%	$	1,096,192			79.1	%
Premium revenue		406,522			25.0	%		353,244			23.2	%		290,442			20.9	%

Total net revenue		1,625,996			100.0	%		1,523,727			100.0	%		1,386,634			100.0	%

Costs and expenses:
Salaries and benefits		470,171			28.9	%		442,173			29.0	%		424,419			30.6	%
Supplies		187,799			11.5	%		184,875			12.1	%		176,245			12.7	%
Medical claims		343,660			21.1	%		302,204			19.8	%		242,389			17.5	%
Other operating expenses		246,325			15.2	%		211,698			13.9	%		202,994			14.6	%
Provision for bad debts		141,774			8.7	%		133,870			8.8	%		126,952			9.2	%
Rentals and leases		34,956			2.2	%		32,750			2.1	%		31,998			2.3	%
Interest expense, net		69,687			4.3	%		66,002			4.4	%		59,394			4.3	%
Depreciation and amortization		71,925			4.4	%		71,037			4.7	%		68,084			4.9	%
Management fees		4,189			0.3	%		3,791			0.3	%		746			0.1	%
Hurricane-related expenses		—			—			4,762			0.3	%		—			—
Loss on early extinguishment of debt		—			—			—			—			52,084			3.8	%
Merger expenses		—			—			—			—			19,750			1.4	%
Write-off of debt issue costs		—			—			—			—			8,850			0.6	%
Business interruption insurance recoveries		(8,974	)		(0.6	)%		—			—			—			—

Total costs and expenses		1,561,512			96.0	%		1,453,162			95.4	%		1,413,905			102.0	%

Earnings before gain (loss) on disposal of assets, minority interests and income taxes		64,484			4.0	%		70,565			4.6	%		(27,271	)		(2.0	)%

Gain (loss) on disposal of assets, net		899			0.0	%		(231	)		0.0	%		3,624			0.3	%
Minority interests		(3,546	)		(0.2	)%		(2,891	)		(0.2	)%		(4,305	)		(0.3	)%


Earnings (loss) before income taxes		61,837			3.8	%		67,443			4.4	%		(27,952	)		(2.0	)%

Income tax expense		22,288			1.4	%		26,851			1.7	%		4,473			0.3	%

Net earnings (loss)	$	39,549			2.4	%	$	40,592			2.7	%	$	(32,425	)		(2.3	)%


	Year Ended						Year Ended						Year Ended
Acute Care ($ in thousands):	September 30, 2006						September 30, 2005						September 30, 2004
	Amount			Percentage			Amount			Percentage			Amount			Percentage

Net revenue:
Acute care revenue	$	1,219,474			99.1	%	$	1,170,483			99.3	%	$	1,096,192			99.0	%
Revenue between segments		10,857			0.9	%		8,475			0.7	%		10,821			1.0	%

Total net revenue (1)		1,230,331			100.0	%		1,178,958			100.0	%		1,107,013			100.0	%

Costs and expenses:
Salaries and benefits		457,540			37.2	%		431,609			36.6	%		414,797			37.5	%
Supplies		187,515			15.2	%		184,676			15.7	%		176,031			15.9	%
Other operating expenses		233,041			18.9	%		200,411			17.0	%		193,189			17.4	%
Provision for bad debts		141,774			11.5	%		133,870			11.4	%		126,952			11.5	%
Rentals and leases		33,874			2.8	%		31,849			2.7	%		31,296			2.8	%
Interest expense, net		69,687			5.7	%		66,002			5.6	%		59,394			5.4	%
Depreciation and amortization		68,539			5.6	%		67,840			5.7	%		67,893			6.1	%
Management fees		4,189			0.3	%		3,791			0.3	%		746			0.1	%
Hurricane-related expenses		—			—			4,762			0.4	%		—			—
Business interruption insurance recoveries		(8,974	)		(0.7	)%		—			—			—			—
Loss on early extinguishment of debt		—			—			—			—			52,084			4.7	%
Merger expenses		—			—			—			—			19,750			1.8	%
Write-off of debt issue costs		—			—			—			—			8,850			0.8	%

Total costs and expenses		1,187,185			96.5	%		1,124,810			95.4	%		1,150,982			104.0	%

Earnings before gain (loss) on disposal of assets, minority interests and income taxes		43,146			3.5	%		54,148			4.6	%		(43,969	)		(4.0	)%

Gain (loss) on disposal of assets, net		953			0.1	%		(231	)		0.0	%		3,624			0.3	%
Minority interests		(3,546	)		(0.3	)%		(2,891	)		(0.3	)%		(4,305	)		(0.4	)%

Earnings (loss) before income taxes	$	40,553			3.3	%	$	51,026			4.3	%	$	(44,650	)		(4.1	)%


(1)		Revenue between segments is eliminated in our consolidated results.


	Year Ended						Year Ended					Year Ended
Health Choice ($ in thousands):	September 30, 2006						September 30, 2005					September 30, 2004
	Amount			Percentage			Amount		Percentage			Amount		Percentage

Premium revenue	$	406,522			100.0	%	$	353,244		100.0	%	$	290,442		100.0	%

Costs and expenses:
Salaries and benefits		12,631			3.1	%		10,564		3.0	%		9,622		3.3	%
Supplies		284			0.1	%		199		0.1	%		214		0.1	%
Medical claims (1)		354,517			87.2	%		310,679		88.0	%		253,210		87.2	%
Other operating expenses		13,284			3.3	%		11,287		3.2	%		9,805		3.4	%
Rentals and leases		1,082			0.3	%		901		0.2	%		702		0.2	%
Depreciation and amortization		3,386			0.8	%		3,197		0.9	%		191		0.1	%

Total costs and expenses		385,184			94.8	%		336,827		95.4	%		273,744		94.3	%

Earnings before loss on disposal of assets		21,338			5.2	%		16,417		4.6	%		16,698		5.7	%
Loss of disposal of assets, net		(54	)		0.0	%		—		—			—		—

Earnings before income taxes	$	21,284			5.2	%	$	16,417		4.6	%	$	16,698		5.7	%


(1)		Medical claims paid to our hospitals of $10.9 million, $8.5 million and $10.8 million for the years ended September 30, 2006, 2005 and 2004, respectively, is eliminated in our consolidated results.

Supplemental Non-GAAP Disclosures

During the third quarter of fiscal 2006, we implemented a company-wide uninsured discount program offering discounts to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans or charity care. The results of operations for the year ended September 30, 2006, adjusted for the impact of the company-wide uninsured discount program are as follows:


	Operating Measures Adjusted for Comparative Analysis (Unaudited)
	*(in thousands, except for statistical measures)*
	Year Ended September 30, 2006
						Non-GAAP
	GAAP			Uninsured		Adjusted			GAAP %						Non-GAAP %
	Amounts			Discounts (2)		Amounts (3)			of Revenue						of Revenue (3)
									2006			2005			2006
Acute Care Segment:

Net revenue⁽¹⁾	$	1,230,331		$	20,306	$	1,250,637			100.0	%		100.0	%		100.0	%

Salaries and benefits		457,540			—		457,540			37.2			36.6			36.6
Supplies		187,515			—		187,515			15.2			15.7			15.0
Other operating expenses		233,041			—		233,041			18.9			17.0			18.6
Provision for bad debts		141,774			20,306		162,080			11.5			11.4			13.0
Rentals and leases		33,874			—		33,874			2.8			2.7			2.7

Net patient revenue per adjusted admission	$	8,325		$	140	$	8,465
Percentage change from prior year		4.8	%				6.5	%


⁽¹⁾		Acute care revenue represents total net revenue of the segment prior to the elimination of revenue between segments.

⁽²⁾		Includes the impact of discounts provided to uninsured patients for the period.

⁽³⁾		Acute care revenue, the provision for bad debts and certain operating expense categories as a percentage of acute care revenue have been adjusted to present certain financial measures on a basis comparative with prior periods (non-GAAP financial measures). Management believes these non-GAAP financial measures are useful to investors for the purpose of providing disclosures of our results of operations consistent with those used by management. While management believes these non-GAAP financial measures provide useful information for period-to-period comparisons, investors are encouraged to use GAAP measures when evaluating financial performance or liquidity.

Year Ended September 30, 2006 and 2005

Net revenue — Net revenue for the year ended September 30, 2006 was $1.626 billion, an increase of $102.3 million or 6.7%, compared to $1.524 billion in the prior year. The increase in net revenue was a combination of an increase of $49.0 million in net revenue from hospital operations, which we refer to as our acute care service segment in our financial statements, and an increase of $53.3 million in premium revenue from Health Choice.

Our company-wide uninsured discount program, which became effective during the third quarter of fiscal 2006, resulted in $20.3 million in discounts being provided to uninsured patients during the year ended September 30, 2006. The discounts to the uninsured had the effect of reducing acute care revenue and the provision for bad debts by generally corresponding amounts. The reduction of acute care revenue resulted in an increase in expenses as a percentage of acute care revenue, other than the provision for bad debts, compared to what they would have been if the uninsured discount program had not been implemented.

Before eliminations, net revenue from our hospital operations for the year ended September 30, 2006 was $1.230 billion, an increase of $51.4 million or 4.4%, compared to $1.179 billion in the prior year. Excluding the impact of the $20.3 million in uninsured discounts, net revenue from our hospital operations increased 6.1% over the prior year. For the year ended September 30, 2006, hospitals and other healthcare entities owned by us received approximately $10.9 million in net revenue from Health Choice, compared with $8.5 million for the prior year. This net revenue was eliminated in our consolidated results.

Net patient revenue per adjusted admission increased 4.8% for the year ended September 30, 2006, when compared to the prior year. Excluding the impact of uninsured discounts, net patient revenue per adjusted admission increased 6.5% over the prior year, due primarily to increases in managed care and Medicare rates. Pricing in the year ended September 30, 2006 was partially affected by changes in patient mix and a decline in higher acuity inpatient services such as cardiovascular surgery, orthopedic and bariatric cases. During the year ended September 30, 2006, we experienced a decline in our Medicare revenue mix, partially attributable to a shift from traditional Medicare to managed Medicare products, coupled with an increase in Medicaid and self-pay as compared to the prior year. Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in net revenue of $433,000 for the year ended September 30, 2006, compared to an increase of $2.1 million in the prior year.

Premium revenue from Health Choice was $406.5 million for the year ended September 30, 2006, an increase of $53.3 million or 15.1%, when compared to $353.2 million for the prior year. The increase in premium revenue was primarily the result of the implementation of the MAPD SNP at Health Choice on January 1, 2006. The MAPD SNP resulted in additional covered lives of approximately 3,900, which generated premium revenue of $37.3 million for the year ended September 30, 2006. In addition, annual capitation payment rate increases of 5.0% to 6.0% for the Medicaid business also contributed to the increase in net revenue during the year ended September 30, 2006.

Salaries and benefits — Salaries and benefits expense from our hospital operations for the year ended September 30, 2006 was $457.5 million, or 37.2% of acute care revenue, compared to $431.6 million, or 36.6% of acute care revenue in the prior year. Excluding the impact of uninsured discounts, salaries and benefits as a percentage of acute care revenue would have been 36.6% for the year ended September 30, 2006, which is consistent with the prior year.

Supplies — Supplies expense from our hospital operations was $187.5 million, or 15.2% of acute care revenue, for the year ended September 30, 2006. Excluding the impact of uninsured discounts, supplies expense would have been 15.0% of acute care revenue for the year ended September 30, 2006, compared with 15.7% in the prior year. The decrease in supply cost as a percentage of acute care revenue was primarily driven by the improvement in the mix of implant costs to total supplies, which is reflective of our decrease in acuity levels experienced during the period. In addition, growth in lower acuity and supply utilization services such as obstetrics and psychiatric care has contributed to the decline in supplies as a percentage of acute care revenue.

Medical claims — Medical claims expense before eliminations for Health Choice increased $43.8 million to $354.5 million for the year ended September 30, 2006, compared to $310.7 million for the prior year. Medical claims expense represents the amounts paid by Health Choice for health care services provided to its members.

Medical claims expense as a percentage of premium revenue was 87.2% for the year ended September 30, 2006, compared to 88.0% in the prior year. The improvement in medical claims expense was primarily the result of improvements in pharmacy, dental and outpatient costs. Additionally, the medical claims expense ratio under the SNP is currently more favorable than the traditional Medicaid business.

Other operating expenses — Other operating expenses from our hospital operations for the year ended September 30, 2006 were $233.0 million, or 18.9% of acute care revenue, compared to $200.4 million, or 17.0% of acute care revenue in the prior year. Excluding the impact of uninsured discounts, other operating expenses as a percentage of acute care revenue would have been 18.6% for the year ended September 30, 2006. A portion of the 1.6% increase as a percentage of acute care revenue was due to the continued incurrence of fixed costs at The Medical Center of Southeast Texas during its temporary closure. In addition, during the year ended September 30, 2006, we experienced increases in legal fees, professional fees, physician recruiting costs and utilities expense. During the year ended September 30, 2006, we incurred $8.7 million in legal fees and other expenses associated with responding to the OIG’s request for information, which we received in September 2005. Additionally, professional fees have risen as a result of increases in physician call and anesthesia coverage costs in certain markets. Also contributing to the overall increase in other operating expenses is utility costs, which have increased approximately 17.4% over the prior year.

Provision for bad debts — Provision for bad debts for our hospital operations for the year ended September 30, 2006 was $141.8 million, or 11.5% of acute care revenue, compared to $133.9 million, or 11.4% of acute care revenue in the prior year. Excluding the impact of uninsured discounts, the provision for bad debts as a percentage of acute care revenue would have been 13.0% for the year ended September 30, 2006. Charity discounts were $36.7 million for the year ended September 30, 2006, compared to $30.2 million in the prior year. We continue to experience an increase in the volume of uninsured patients through our emergency rooms, which increased 4.1% for the year ended September 30, 2006, when compared to the prior year. This trend of uninsured volume through our emergency rooms continues to be the main driver behind the increase in our provision for bad debts and charity care.

Interest expense, net — Interest expense, net of interest income, for the year ended September 30, 2006 was $69.7 million, compared to $66.0 million in the prior year. This increase of $3.7 million was primarily due to an increase in interest rates, offset by a $2.8 million decrease in the amortization of loan costs for the year ended September 30, 2006, when compared with the prior year. Borrowings under our senior secured credit facilities are subject to interest at variable rates. The weighted average interest rate of outstanding borrowings under the senior secured credit facilities was approximately 7.0% for the year ended September 30, 2006, compared to 5.0% for the prior year.

Depreciation and amortization — Depreciation and amortization expense for the year ended September 30, 2006 was $71.9 million, compared to $71.0 million in the prior year. The increase of $900,000 was primarily the result of incremental depreciation expense on additions to property and equipment during the period, partially offset by a reduction in depreciation expense related to fully depreciated assets. These additions are the result of the implementation of our operating strategy, pursuant to which we have made substantial investments in our existing facilities.

Income tax expense — We recorded a provision for income taxes of $22.3 million, resulting in an effective tax rate of 36.0% for the year ended September 30, 2006, compared to $26.9 million, for an effective tax rate of 39.8% in the prior year. The decline in our effective tax rate was due to federal tax credits we expect to receive as a result of Hurricane Rita, a change in Texas law that caused a decrease in previously recorded deferred tax liabilities, and a decrease in our effective state income tax rate.

Net earnings — Net earnings decreased $1.1 million for the year ended September 30, 2006 to $39.5 million, compared to $40.6 million for the prior year. Net earnings for the year ended September 30, 2006 include $9.0 million of business interruption insurance recoveries received in connection with the temporary closure and disruption of operations at The Medical Center of Southeast Texas, as a result of Hurricane Rita. Net earnings for the year ended September 30, 2005 include $4.8 million in hurricane-related expenses related primarily to property damage at The Medical Center of Southeast Texas, as a result of Hurricane Rita in September 2005.

Year Ended September 30, 2005 and 2004

Net revenue — Net revenue for the year ended September 30, 2005 was $1.524 billion, an increase of $137.1 million or 9.9%, when compared to $1.386 billion in the prior year. The increase in net revenue was a combination of an increase of $74.3 million in net revenue from hospital operations and an increase of $62.8 million in premium revenue from Health Choice.

Before eliminations, net revenue from our hospital operations for the year ended September 30, 2005 was $1.179 billion, an increase of $71.9 million or 6.5%, when compared to $1.017 billion in the prior year. For the years ended September 30, 2005 and 2004, approximately $8.5 million and $10.8 million, respectively, of net revenue received from Health Choice by hospitals and other healthcare entities owned by us was eliminated in consolidation. On a same facility basis, which excludes the results of North Vista Hospital, net revenue from our hospital operations increased $47.4 million, or 4.6%, which was primarily driven by a 6.8% increase in net patient revenue per adjusted admission. The increase in net patient revenue per adjusted admission is comprised primarily of rate increases and supplemented by increased acuity. Net adjustments to estimated third-party payor settlements, also known as prior year contractuals, resulted in an increase in net revenue of $2.1 million for the year ended September 30, 2005 compared to a decrease in net revenue of $1.1 million for the prior year. Our net patient revenue per adjusted admission on a consolidated basis increased 6.5% for the year ended September 30, 2005 compared to the prior year.

Premium revenue from Health Choice was $353.2 million for the year ended September 30, 2005, an increase of $62.8 million or 21.6%, when compared to $290.4 million in the prior year. Covered lives under this prepaid Medicaid plan increased 7.6% to over 113,000 at September 30, 2005 from 105,000 in the prior year. The increase in covered lives positively impacted Health Choice’s premium revenue for the year ended September 30, 2005 compared to the prior year. The growth in covered lives was due primarily to an increase in the Medicaid eligible population and an increase in our marketshare in the counties where we operate.

Salaries and benefits — Salaries and benefits expense from our hospital operations for the year ended September 30, 2005 was $431.6 million, or 36.6% of acute care revenue, compared to $414.8 million, or 37.5% of acute care revenue in the prior year. On a same facility basis, which excludes North Vista Hospital, salaries and benefits expense was 36.5% of acute care revenue for the year ended September 30, 2005, compared to 37.7% in the prior year. The 1.2% decrease as a percentage of acute care revenue on a same facility basis resulted primarily from the leveraging of growth in net revenue achieved through rate increases during the current period, declining volumes requiring less labor utilization and a decrease in benefits expense, offset by increases in contract labor. Benefits expense from our same facility hospital operations decreased 0.6% as a percentage of acute care revenue for the year ended September 30, 2005, when compared to the prior year, due to changes to our employee healthcare benefit program implemented effective January 1, 2004, which has resulted in lower utilization of medical services.

Supplies — Supplies expense from our hospital operations for the year ended September 30, 2005 was $184.7 million, or 15.7% of acute care revenue, compared to $176.0 million, or 15.9% of acute care revenue in the prior year. On a same facility basis, supplies expense was 15.7% of acute care revenue compared to 15.9% for the prior year. The 0.2% decrease as a percentage of acute care revenue on a same facility basis resulted primarily from a decrease in the volume of certain bariatric and orthopedic cases, which include a higher than average supply costs component.

Medical claims — Medical claims expense before eliminations for Health Choice increased $57.5 million to $310.7 million for the year ended September 30, 2005, compared to $253.2 million for the prior year, as a result of an increase in enrollment from 105,000 members at September 30, 2004 to over 113,000 at September 30, 2005. For the years ended September 30, 2005 and 2004, approximately $8.5 million and $10.8 million, respectively, of medical claims expense paid to our hospitals was eliminated in consolidation. Medical claims expense represents the amounts paid by Health Choice for health care services provided to its members. Medical claims expense as a percentage of premium revenue was 88.0% and 87.2% for the years ended September 30, 2005 and 2004, respectively. The 0.8% increase in medical claims expense as a percentage of premium revenue resulted primarily from higher inpatient and pharmacy costs, coupled with higher utilization in certain of our counties for physician specialty services.

Other operating expenses — Other operating expenses from our hospital operations for the year ended September 30, 2005 was $200.4 million, or 17.0% of acute care revenue, compared to $193.2 million, or 17.4% acute care revenue in the prior year. On a same facility basis, other operating expenses were 17.2% of acute care revenue for the year ended September 30, 2005, compared to 17.7% in the prior year. The 0.5% decrease as a percentage of acute care revenue on a same facility basis was primarily a result of decreases in insurance and legal expenses. Insurance expense on a same facility basis decreased by approximately $2.1 million, or in excess of 8.4%, for the year ended September 30, 2005, compared to the prior year. Legal expense on a same facility basis decreased $3.1 million during fiscal 2005 compared to fiscal 2004. During the year ended September 30, 2004, we incurred $2.9 million in legal expenses related to litigation associated with Rocky Mountain Medical Center, which we settled in June 2004.

Provision for bad debts — Provision for bad debts for our hospital operations for the year ended September 30, 2005 was $133.9 million, or 11.4% of acute care revenue, compared to $127.0 million, or 11.5% of acute care revenue in the prior year. On a same facility basis, the provision for bad debts was $106.7 million, or 9.8% of acute care revenue for the year ended September 30, 2005 compared to 10.2% in the prior year. The 0.4% decrease as a percentage of acute care revenue on a same facility basis was due, in part, to our focus on self-pay cash collections including point-of-service collections which increased 22.0% for the year ended September 30, 2005, when compared to the prior year, coupled with an increase in charity care resulting from our expanded charity care program. We anticipate that growth in self-pay revenue will continue to negatively impact the provision for bad debts. We continue to focus on our emergency rooms through facilities redesign, Medicaid eligibility automation and process-flow improvements.

Interest expense, net — Interest expense, net of interest income, increased $6.6 million from $59.4 million for the year ended September 30, 2004 to $66.0 million for the year ended September 30, 2005, due to an increase in average debt outstanding and an increase in interest rates. Borrowings under our senior secured credit facilities are subject to interest at variable rates. The weighted average interest rate of outstanding borrowings under the senior secured credit facilities was approximately 5.0% for the year ended September 30, 2005, compared to 4.5% in the prior year. Amortization of deferred financing costs increased $1.7 million to $5.8 million for the year ended September 30, 2005.

Depreciation and amortization — The $2.9 million increase in depreciation and amortization expense from $68.1 million for the year ended September 30, 2004 to $71.0 million for the prior year was primarily the result of an additional $3.0 million in amortization incurred during fiscal 2005 associated with Health Choice’s contract with AHCCCS. During the year ended September 30, 2005, we completed the allocation of the purchase price to account for the acquisition of IAS. The allocation included $45.0 million in value assigned to Health Choice’s contract with AHCCCS, which was recorded as other intangible assets and is being amortized over a period of 15 years.

Income tax expense — We recorded a provision for income taxes of $26.9 million, resulting in an effective tax rate of 39.8% for the year ended September 30, 2005, compared to $4.5 million in the prior year. As a result of the Transactions and the related application of the purchase method of accounting, we reduced goodwill, rather than income tax expense upon the reduction of the deferred tax valuation allowance. For the periods prior to the Transactions, the deferred portion of the provision for income taxes was reduced by the use of deferred tax assets that were previously reserved with a valuation allowance.

Net earnings (loss) — Net earnings were $40.6 million for the year ended September 30, 2005, compared to a net loss of $32.4 million in the prior year. Net earnings for the year ended September 30, 2005 include $4.8 million in hurricane-related expenses related primarily to property damage at one of our hospitals as a result of Hurricane Rita in September 2005, and include $3.8 million in management fees. Net loss for the year ended September 30, 2004 includes $51.9 million in loss on early extinguishment of debt and $19.8 million in merger expenses, both incurred in connection with the Transactions, along with a $3.6 million gain on the sale of our Rocky Mountain Medical Center property and $8.9 million in write-off of deferred financing costs.

Summary of Operations by Quarter

The following table presents unaudited quarterly operating results for the years ended September 30, 2006 and 2005. We believe that all necessary adjustments have been included in the amounts stated below to present fairly the quarterly results when read in conjunction with the consolidated financial statements. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods.


	Quarter Ended
	Sept. 30,		June 30,		March 31,		Dec. 31,
	2006(1)		2006(2)		2006(3)		2005
	(in thousands)
Net revenue	$	407,600	$	420,963	$	417,968	$	379,465
Net earnings before income taxes		15,587		25,364		18,927		1,962
Net earnings		11,054		15,912		11,423		1,162


	Quarter Ended
	Sept. 30,		June 30,		March 31,		Dec. 31,
	2005(4)		2005		2005		2004
	(in thousands)
Net revenue	$	373,516	$	389,979	$	390,257	$	369,975
Net earnings before income taxes		7,331		18,201		27,270		17,763
Net earnings		4,371		10,466		15,796		9,960


(1)		Results for the quarter ended September 30, 2006 include $654,000 in business interruption insurance recoveries. Also included is a $3.5 million increase to estimated liabilities for general and professional insurance and a $3.1 million reduction to estimated liabilities for workers compensation insurance as a result of our semi-annual actuarial studies.

(2)		Results for the quarter ended June 30, 2006 include $8.3 million in business interruption insurance recoveries.

(3)		Results for the quarter ended March 31, 2006 include a $2.9 million and a $228,000 reduction to estimated liabilities for general and professional insurance and worker’s compensation insurance, respectively, as a result of our semi-annual actuarial studies.

(4)		Results for the quarter ended September 30, 2005 include $4.8 million in hurricane-related expenses and a $6.8 million reduction to estimated liabilities for general and professional insurance as a result of our semi-annual actuarial study.

LIQUIDITY AND CAPITAL RESOURCES

We rely on cash generated from our internal operations as our primary source of liquidity, as well as available credit facilities, project and bank financings and the issuance of long-term debt. From time to time, we have also utilized operating lease transactions that are sometimes referred to as off-balance sheet arrangements. We expect that our future funding for working capital needs, capital expenditures, long-term debt repayments and other financing activities will continue to be provided from some or all of these sources. Each of our existing and projected sources of cash is impacted by operational and financial risks that influence the overall amount of cash generated and the capital available to us. For example, cash generated by our business operations may be impacted by, among other things, economic downturns, weather-related catastrophes and adverse industry conditions. Our future liquidity will be impacted by our ability to access capital markets, which may be restricted due to our credit ratings, general market conditions, and by existing or future debt agreements. For a further discussion of risks that can impact our liquidity, see Item 1A, “Risk Factors,” beginning on page 25.

At September 30, 2006, we had available liquidity as follows (in millions):


Available cash	$	95.4
Available capacity under our senior secured credit facilities		211.1

Net available liquidity at September 30, 2006	$	306.5

In addition to our available liquidity, we expect to generate significant operating cash flow in fiscal 2007. We will also utilize proceeds from our financing activities as needed.

Our growth strategy requires significant capital expenditures during fiscal 2007 and future years. We expect our capital expenditures for fiscal 2007 to be approximately $230.0 to $240.0 million, including the following significant expenditures:

	•		approximately $100.0 to $105.0 million for the construction of Mountain Vista Medical Center, our new hospital in the East Valley of Phoenix, Arizona, which we plan to open on June 1, 2007;

	•		approximately $70.0 to $75.0 million for other growth and new business projects;

	•		approximately $35.0 to $40.0 million in replacement or maintenance related projects at our hospitals; and

	•		approximately $14.0 million in hardware and software related costs in connection with the implementation of our advanced clinical information system.

At September 30, 2006, we had construction and other various projects in progress with an estimated cost to complete and equip over the next three years of approximately $158.6 million. We plan to finance our proposed capital expenditures with borrowings under our senior credit facilities, as well as with cash generated from operations, cash on hand and other capital sources that may become available.

At September 30, 2006, we had $415.4 million in borrowings outstanding as a term loan and had issued $38.9 million in letters of credit. Additionally, we had $475.0 million aggregate principal amount of 8 3/4% senior subordinated notes due 2014 outstanding at September 30, 2006. For a further discussion of our debt arrangements, see the section below entitled “Debt Instruments and Related Covenants.”

On July 21, 2006, we announced the signing of a definitive agreement to acquire Glenwood Regional Medical Center in West Monroe, Louisiana. The purchase price of the hospital is approximately $82.5 million, subject to net working capital and other purchase price adjustments. Additionally, we plan to make capital expenditures on the hospital campus of approximately $30.0 million over the next four years. Pending approval of the Louisiana Attorney General and the satisfaction of other closing conditions, we expect the transaction to close in the first calendar quarter of 2007. We expect to fund the transaction with cash on hand and available borrowings under our revolving credit facility.

Based upon our current level of operations and anticipated growth, we believe we have sufficient liquidity to meet our cash requirements over the short-term (next 12 months) and over the next three years. In evaluating the sufficiency of our liquidity for both the short-term and long-term, we considered the expected cash flow to be generated by our operations, cash on hand and the available borrowings under our senior secured credit facilities compared to our anticipated cash requirements for debt service, working capital, capital expenditures and the payment of taxes, as well as funding requirements for long-term liabilities. As a result of this evaluation, we believe that we will have sufficient liquidity for the next three years to fund the expenditures set forth in the Tabular Disclosure of Contractual Obligations below, as well as sufficient liquidity to fund cash required for the payment of taxes and the capital expenditures required to maintain our facilities during this period of time. We are unable at this time to extend our evaluation of the sufficiency of our liquidity beyond three years. We cannot assure you, however, that our operating performance will generate sufficient cash flow from operations or that future borrowings will be available under our senior secured credit facilities, or otherwise, to enable us to grow our business, service our indebtedness, including the senior secured credit facilities and the 8 3/4% notes, or make anticipated capital expenditures. See Item 1A, “Risk Factors” beginning on page 25.

One element of our business strategy is to selectively pursue acquisitions and strategic alliances in existing and new markets. Any acquisitions or strategic alliances may result in the incurrence of, or assumption by us, of additional indebtedness. We continually assess our capital needs and may seek additional financing, including debt or equity as considered necessary to fund capital expenditures and potential acquisitions or for other corporate purposes. Our future operating performance, ability to service or refinance our 8 3/4% notes and ability to service and extend or refinance the senior secured credit facilities will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. See Item 1A, “Risk Factors” beginning on page 25.

Overview of Cash Flow Activities for the Years Ended September 30, 2006 and 2005

For the years ended September 30, 2006 and 2005, our cash flows are summarized as follows (in millions):


	2006			2005
Cash flow provided by operating activities	$	157.1		$	149.2
Cash flow used in investing activities		(146.2	)		(151.7	)
Cash flow used in financing activities		(4.6	)		(7.1	)

Operating Activities

Our primary sources of liquidity are cash flow provided by our operations, available cash on hand and our revolving credit facility. At September 30, 2006, we had $134.7 million in net working capital, compared to $166.1 million at September 30, 2005. Changes in working capital were impacted by increased medical claims payable of $15.0 million related to our MAPD SNP at Health Choice and an increase in accounts receivable. Net accounts receivable increased $16.0 million to $182.5 million at September 30, 2006, compared to $166.5 million in the prior year. Excluding third-party settlement balances, our days revenue in accounts receivable were 54 at September 30, 2006, compared to 50 at September 30, 2005. Our cash flow provided by operations was also impacted by the CMS delay in Medicare payments as mandated by DEFRA resulting in the delay of $6.8 million of cash, which was ultimately received in October 2006.

Investing Activities

Capital expenditures for the year ended September 30, 2006 were approximately $146.9 million. Significant items included the following (in millions):

	•		$66.7 million for the construction of Mountain Vista Medical Center;

	•		$28.6 million for various expansion and renovation projects at our hospitals; and

	•		$17.5 million in hardware and software related to our advanced clinicals and other information systems projects.

Financing Activities

During the year ended September 30, 2006, we repaid $4.3 million pursuant to the terms of our senior secured credit facilities and repaid $3.6 million in capital lease obligations and other debt. Sources of financing include net proceeds of $5.7 million received in connection with the sale of ownership interests in one of our hospitals and the formation of a joint venture for an outpatient cardiac catheterization laboratory.

Debt Instruments and Related Covenants

At September 30, 2006, we had two separate debt arrangements:

	•		$675.0 million senior secured credit facilities; and

	•		$475.0 million 8 3/4% senior subordinated notes due 2014.

$675.0 Million Senior Secured Credit Facilities

On June 22, 2004, as part of the Transactions, we entered into an amended and restated senior credit agreement with various lenders and repaid all outstanding indebtedness under our former senior secured credit facilities.

Our senior secured credit facilities consist of:

	•		a senior secured Tranche B term loan of $425.0 million, which we refer to as the Term Facility; and

	•		a senior secured revolving credit facility of up to $250.0 million, referred to as the Revolving Facility, which is available for working capital and other general corporate purposes.

Our amended and restated senior credit agreement also contains an “accordion” feature that permits us to borrow at a later date additional term loans, maturing no earlier than the Term Facility, in an aggregate amount up to $300.0 million, subject to the receipt of commitments and the satisfaction of other conditions (including compliance with the indebtedness covenant under our 8 3/4% notes). No commitments for such increase have been received at this time.

The Term Facility has a maturity of seven years (June 22, 2011), with principal due in 24 consecutive equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the Term Facility during the first six years thereof, with the balance payable in four equal installments in year seven. Unless terminated earlier, the Revolving Facility has a maturity of six years (June 22, 2010). The senior secured credit facilities are subject to mandatory prepayment under specific circumstances, including a portion of excess cash flow, a portion of the net proceeds from an initial public offering, asset sales, debt issuances and specified casualty events, each subject to various exceptions.

The Term Facility bears interest at a rate equal to LIBOR plus 2.25% per annum or, at our option, the base rate plus 1.25% per annum. Loans under the Revolving Facility bear interest at a rate equal to LIBOR plus a margin of 2.00% to 2.50% per annum or, at our option, the base rate plus a margin of 1.00% to 1.50% per annum, such rate in each case depending on our current leverage ratios. A commitment fee equal to 0.50% per annum times the daily average undrawn portion of the Revolving Facility accrues and is payable quarterly in arrears.

Our amended and restated senior credit agreement provides for capital expenditure limitations and requires that we comply with various other financial ratios and tests and contains covenants limiting our ability to, among other things, incur additional indebtedness; sell or dispose of assets; make investments, loans or advances; pay certain restricted payments and dividends; or amend the terms of our 8 3/4% notes. Under our amended and restated credit agreement, we may acquire hospitals and other related businesses upon satisfaction of certain requirements, including demonstrating pro forma compliance with a maximum senior leverage ratio of 3.5 to 1, along with the maximum total leverage and minimum interest coverage ratios discussed below. Financial related covenants under our amended and restated senior credit agreement, applicable to us at September 30, 2006, include the following ratios:


Actual Total Leverage Ratio			3.81
Maximum Total Leverage Ratio			5.50

Actual Interest Coverage Ratio			3.15
Minimum Interest Coverage Ratio			2.30

Consolidated EBITDA is defined by our amended and restated senior credit agreement as earnings (loss) before interest expense, income taxes, depreciation and amortization, management fees, gain (loss) on sale or disposal of assets, minority interests, non-cash expenses and charges, and non-recurring charges and costs, such as hurricane-related expenses. Consolidated EBITDA is used as a basis for the ratios above. Failure to comply with these ratios would constitute an event of default under the senior secured credit facilities, thereby accelerating all amounts outstanding under the Term Facility and Revolving Facility, including all accrued interest thereon, as

due and payable upon demand by the lenders. In addition, the occurrence of an event of default under the senior secured credit facilities would constitute an event of default under the indenture governing our 8 3/4% notes. Such an event would have a material adverse effect on our liquidity and financial condition.

At September 30, 2006, $415.4 million was outstanding under the Term Facility, no amounts were outstanding under the Revolving Facility and we had $38.9 million outstanding in letters of credit. During the next twelve months, we are required to repay $4.3 million in principal under our senior secured credit facilities and $6.5 million in principal under our capital leases and other obligations.

$475.0 Million 8 3/4% Senior Subordinated Notes Due 2014

In connection with the Transactions, IAS retired approximately 98.5% of the outstanding principal amount of its 13% senior subordinated notes due 2009 registered under the Securities Act of 1933, as amended, and 100% of the outstanding principal amount of its 8 1/2% senior subordinated notes due 2009 registered under the Securities Act of 1933, as amended, pursuant to a cash tender offer and consent solicitation. The remaining $3.5 million of the 13% notes were retired in October 2004.

On June 22, 2004, in connection with the Transactions, IASIS and IASIS Capital Corporation, a wholly owned subsidiary of IASIS formed solely for the purpose of serving as a co-issuer, or IASIS Capital, issued $475.0 million aggregate principal amount of 8 3/4% senior subordinated notes due 2014. On December 15, 2004, IASIS and IASIS Capital exchanged all of their outstanding 8 3/4% senior subordinated notes due 2014 for 8 3/4% senior subordinated notes due 2014 registered under the Securities Act. Terms and conditions of the exchange offer were as set forth in the registration statement on Form S-4 filed with the SEC that became effective on November 12, 2004.

Our 8 3/4% notes are general unsecured senior subordinated obligations of the issuers, are subordinated in right of payment to their existing and future senior debt, are pari passu in right of payment with any of their future senior subordinated debt and are senior in right of payment to any of their future subordinated debt. Our existing domestic subsidiaries, other than certain non-guarantor subsidiaries which include Health Choice and our non-wholly owned subsidiaries, are guarantors of our 8 3/4% notes. The indenture governing the notes generally provides that we may designate other subsidiaries as non-guarantors under certain circumstances up to a maximum threshold based on 20% of total consolidated assets. At September 30, 2006, we had approximately $120.0 million available under this threshold to designate other subsidiaries as non-guarantors. Our 8 3/4% notes are effectively subordinated to all of the issuers’ and the guarantors’ secured debt to the extent of the value of the assets securing the debt and are structurally subordinated to all liabilities and commitments (including trade payables and lease obligations) of our subsidiaries that are not guarantors of our 8 3/4% notes. Our 8 3/4% notes require semi-annual interest payments.

As of September 30, 2006, we provided a performance guaranty in the form of a letter of credit in the amount of $20.6 million for the benefit of AHCCCS to support our obligations under the Health Choice contract to provide and pay for healthcare services. The amount of the performance guaranty is based in part upon the membership in the plan and the related capitation revenue paid to us. Additionally, Health Choice maintains a cash balance of $5.0 million and an intercompany demand note with us, which is required under its contract with CMS to provide coverage as a SNP.

Credit Ratings

The following table summarizes our credit ratings at September 30, 2006:

2006

2005

Rating Agency

Moody’s

S&P

Moody’s

S&P

Senior Secured Credit Facility

Ba2

B+

8³/4% Senior Subordinated Notes

B-

OFF-BALANCE SHEET ARRANGEMENTS

We are a party to certain rent shortfall agreements, master lease agreements and other similar arrangements with non-affiliated entities and an unconsolidated entity in the ordinary course of business. We do not believe we have engaged in any transaction or arrangement with an unconsolidated entity that is reasonably likely to materially affect liquidity.

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Tabular Disclosure of Contractual Obligations

The following table reflects a summary of obligations and commitments outstanding including both the principal and interest portions of long-term debt and capital lease obligations at September 30, 2006.


	Payments Due By Period
	Less than						More than
	1 Year		1-3 Years		3-5 Years		5 Years		Total
	(in millions)
Contractual Cash Obligations:
Long-term debt, with interest (1)	$	75.0	$	149.0	$	525.9	$	587.6	$	1,337.5
Capital lease obligations, with interest		3.2		1.5		—		—		4.7
Medical claims		81.8		—		—		—		81.8
Operating leases		27.0		45.1		27.4		63.8		163.3
Estimated self-insurance liabilities		8.7		19.0		14.4		11.0		53.1
Purchase obligations		14.5		6.8		1.0		—		22.3

Subtotal	$	210.2	$	221.4	$	568.7	$	662.4	$	1,662.7


	Amount of Commitment Expiration Per Period
	Less than						More than
	1 Year		1-3 Years		3-5 Years		5 Years		Total
	(in millions)
Other Commitments:
Construction and improvement commitments	$	145.8	$	12.8	$	—	$	—	$	158.6
Guarantees of surety bonds		0.5		—		—		—		0.5
Letters of credit		—		—		38.9		—		38.9
Minimum revenue guarantees		10.7		9.8		7.5		—		28.0
Other commitments		3.9		2.4		0.1		—		6.4

Subtotal		160.9		25.0		46.5		—		232.4

Total obligations and commitments	$	371.1	$	246.4	$	615.2	$	662.4	$	1,895.1


(1)		We used 7.0%, the weighted average interest rate incurred on our senior secured credit facility in fiscal 2006, as the assumed interest rate to be paid on amounts outstanding under the Term Facility which accrues actual interest at a variable rate. Actual interest will vary based on changes in interest rates.

Seasonality

The patient volumes and net revenue at our healthcare operations are subject to seasonal variations and generally are greater during the quarter ended March 31 than other quarters. These seasonal variations are caused by a number of factors, including seasonal cycles of illness, climate and weather conditions in our markets, vacation patterns of both patients and physicians and other factors relating to the timing of elective procedures.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Under SFAS 123(R), we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition method expected to be used is the prospective method. We will adopt SFAS 123(R) on October 1, 2006 and do not believe the adoption of the new standard will have a material effect on our financial condition or results of operations.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 addresses the interaction between SFAS 123(R) and certain SEC rules and regulations and provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. We intend to follow the interpretive guidance set forth in SAB 107 during our adoption of SFAS 123(R).

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of all tax positions accounted for in accordance with SFAS 109. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Earlier application is permitted in certain circumstances. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 should be reported as an adjustment to the opening balance of retained earnings or other appropriate components of equity for that fiscal year. We have not yet determined the potential financial impact of applying FIN 48.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk from exposure to changes in interest rates based on our financing, investing, and cash management activities. We have in place $675.0 million of senior secured credit facilities bearing interest at variable rates at specified margins above either the agent bank’s alternate base rate or its LIBOR rate. The senior secured credit facilities consist of the Term Facility, which is a $425.0 million, seven-year Tranche B term loan, and the Revolving Facility, which is a $250.0 million, six-year revolving credit facility. Although changes in the alternate base rate or the LIBOR rate would affect the cost of funds borrowed in the future, we believe the effect, if any, of reasonably possible near-term changes in interest rates on our consolidated financial position, results of operations or cash flow would not be material. At September 30, 2006, we had variable rate debt of approximately $415.4 million. Holding other variables constant, including levels of indebtedness, a 1.25% increase in interest rates would have had an estimated impact on pre-tax earnings and cash flows for the next twelve month period of $519,000. We have not taken any action to cover interest rate risk and are not a party to any interest rate market risk management activities.

Report of Independent Registered Public Accounting Firm

To the Board of Directors of
IASIS Healthcare Corporation, sole member of IASIS Healthcare LLC

We have audited the accompanying consolidated balance sheets of IASIS Healthcare LLC as of September 30, 2006 and September 30, 2005 and the related consolidated statements of operations, equity and cash flows for the years ended September 30, 2006 and 2005, and the period from June 23, 2004 to September 30, 2004 (Successor) and the related consolidated statements of operations, shareholders’ equity and cash flows for the period from October 1, 2003 to June 22, 2004 (Predecessor). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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 IASIS Healthcare LLC at September 30, 2006 and September 30, 2005, and the consolidated results of their operations and their cash flows for the years ended September 30, 2006 and 2005, and for the period from June 23, 2004 to September 30, 2004 (Successor) and the consolidated results of their operations and their cash flows for the period from October 1, 2003 to June 22, 2004 (Predecessor) in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Nashville, Tennessee
November 13, 2006

IASIS HEALTHCARE LLC

CONSOLIDATED BALANCE SHEETS

(In thousands)


	September 30,		September 30,
	2006		2005
ASSETS
Current assets:
Cash and cash equivalents	$	95,415	$	89,097
Accounts receivable, less allowance for doubtful accounts of $109,900 and $103,600 at September 30, 2006 and 2005, respectively		182,452		166,456
Inventories		34,299		29,866
Deferred income taxes		41,416		56,003
Prepaid expenses and other current assets		41,841		25,236

Total current assets		395,423		366,658

Property and equipment, net		727,048		647,596
Goodwill		756,479		754,375
Other intangible assets, net		39,000		42,000
Other assets, net		49,885		42,095

Total assets	$	1,967,835	$	1,852,724


LIABILITIES AND EQUITY

Current liabilities:
Accounts payable	$	73,351	$	58,684
Salaries and benefits payable		29,082		24,887
Accrued interest payable		19,965		18,489
Medical claims payable		81,822		60,201
Other accrued expenses and other current liabilities		49,087		30,550
Current portion of long-term debt and capital lease obligations		7,432		7,757

Total current liabilities		260,739		200,568

Long-term debt and capital lease obligations		889,513		897,051
Deferred income taxes		81,179		74,883
Other long-term liabilities		47,611		36,801
Minority interest		32,297		26,474

Equity:
Member’s equity		656,496		616,947

Total liabilities and equity	$	1,967,835	$	1,852,724

See accompanying notes.

IASIS HEALTHCARE LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)


										Predecessor
							June 23, 2004
	Year Ended			Year Ended			through			October 1,
	September 30,			September 30,			September 30,			2003 through
	2006			2005			2004			June 22, 2004
Net revenue:
Acute care revenue	$	1,219,474		$	1,170,483		$	301,305		$	794,887
Premium revenue		406,522			353,244			88,169			202,273

Total net revenue		1,625,996			1,523,727			389,474			997,160

Costs and expenses:
Salaries and benefits		470,171			442,173			115,538			308,881
Supplies		187,799			184,875			46,580			129,665
Medical claims		343,660			302,204			74,051			168,338
Other operating expenses		246,325			211,698			57,346			145,648
Provision for bad debts		141,774			133,870			39,486			87,466
Rentals and leases		34,956			32,750			8,840			23,158
Interest expense, net		69,687			66,002			17,459			41,935
Depreciation and amortization		71,925			71,037			19,856			48,228
Management fees		4,189			3,791			746			—
Hurricane-related expenses		—			4,762			—			—
Business interruption insurance recoveries		(8,974	)		—			—			—
Loss on early extinguishment of debt		—			—			232			51,852
Merger expenses		—			—			—			19,750
Write-off of debt issue costs		—			—			—			8,850

Total costs and expenses		1,561,512			1,453,162			380,134			1,033,771

Earnings (loss) before gain (loss) on disposal of assets, minority interests and income taxes		64,484			70,565			9,340			(36,611	)
Gain (loss) on disposal of assets, net		899			(231	)		(107	)		3,731
Minority interests		(3,546	)		(2,891	)		(1,207	)		(3,098	)


Earnings (loss) before income taxes		61,837			67,443			8,026			(35,978	)
Income tax expense		22,288			26,851			3,321			1,152

Net earnings (loss)	$	39,549		$	40,592		$	4,705		$	(37,130	)

See accompanying notes.

IASIS HEALTHCARE LLC

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands except share amounts)


							Additional
	Common Stock						Paid-In			Treasury			Accumulated			Member’s
	Shares			Par Value			Capital			Stock			Deficit			Equity			Total

Balance at September 30, 2003 (Predecessor)		31,956,113		$	320		$	450,720		$	(155,300	)	$	(119,641	)	$	—		$	176,099
Net loss for the period October 1, 2003 to June 22, 2004		—			—			—			—			(37,130	)		—			(37,130	)

Balance at June 22, 2004 (Predecessor)		31,956,113			320			450,720			(155,300	)		(156,771	)		—			138,969
Elimination of the Predecessor’s equity accounts as a result of the merger		(31,956,113	)		(320	)		(450,720	)		155,300			156,771			—			(138,969	)
Initial equity in IASIS Healthcare LLC		—			—			—			—			—			544,000			544,000
Rollover equity investment		—			—			—			—			—			40,000			40,000
Sponsor fees		—			—			—			—			—			(15,000	)		(15,000	)
Net earnings for the period June 23, 2004 to September 30, 2004		—			—			—			—			—			4,705			4,705

Balance at September 30, 2004		—			—			—			—			—			573,705			573,705
Purchase price consideration for vested rollover options		—			—			—			—			—			2,650			2,650
Net earnings		—			—			—			—			—			40,592			40,592

Balance at September 30, 2005		—			—			—			—			—			616,947			616,947
Net earnings		—			—			—			—			—			39,549			39,549

Balance at September 30, 2006		—		$	—		$	—		$	—		$	—		$	656,496		$	656,496

See accompanying notes.

IASIS HEALTHCARE LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


										Predecessor
							June 23, 2004
	Year Ended			Year Ended			through			October 1, 2003
	September 30,			September 30,			September 30,			through
	2006			2005			2004			June 22, 2004
Cash flows from operating activities:
Net earnings (loss)	$	39,549		$	40,592		$	4,705		$	(37,130	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization		71,925			71,037			19,856			48,228
Amortization of loan costs		2,960			5,789			1,792			2,262
Minority interests		3,546			2,891			1,207			3,098
Deferred income taxes		21,002			25,600			3,234			—
Loss (gain) on disposal of assets		(899	)		231			107			(3,731	)
Hurricane-related expenses		—			4,762			—			—
Loss on early extinguishment of debt		—			—			—			14,993
Write-off of debt issue costs		—			—			—			8,850
Changes in operating assets and liabilities, net of acquisition and disposal:
Accounts receivable		(15,996	)		(1,176	)		8,722			(8,542	)
Establishment of accounts receivable of recent acquisition		—			—			—			(11,325	)
Inventories, prepaid expenses and other current assets		(16,566	)		(7,556	)		(1,581	)		(5,656	)
Accounts payable and other accrued liabilities		51,623			6,983			25,978			6,991

Net cash provided by operating activities		157,144			149,153			64,020			18,038


Cash flows from investing activities:
Purchases of property and equipment		(146,928	)		(142,368	)		(44,806	)		(82,265	)
Acquisitions including working capital settlement payments		—			(1,359	)		(1,950	)		(23,032	)
Investment in joint venture		—			(3,732	)		—			—
Proceeds from sale of assets		147			—			—			14,928
Change in other assets		598			(4,275	)		797			(1,650	)

Net cash used in investing activities		(146,183	)		(151,734	)		(45,959	)		(92,019	)


Cash flows from financing activities:
Payment of debt and capital leases		(7,863	)		(10,849	)		(1,852	)		(651,371	)
Proceeds from borrowings		—			2,274			—			900,000
Debt financing costs incurred		—			(487	)		(349	)		(31,469	)
Distribution of minority interests		(2,507	)		(4,092	)		(983	)		(2,510	)
Proceeds received from (costs paid for) sale of partnership interests		5,727			6,027			(15	)		1,784
Proceeds from issuance of common stock, net		—			—			—			529,000
Cash paid to security holders		—			—			—			(677,780	)
Payment of merger costs incurred by members of IASIS Investment LLC		—			—			—			(10,800	)

Net cash provided by (used in) financing activities		(4,643	)		(7,127	)		(3,199	)		56,854


Increase (decrease) in cash and cash equivalents		6,318			(9,708	)		14,862			(17,127	)
Cash and cash equivalents at beginning of period		89,097			98,805			83,943			101,070

Cash and cash equivalents at end of period	$	95,415		$	89,097		$	98,805		$	83,943


Supplemental disclosure of cash flow information:
Cash paid for interest	$	72,271		$	61,363		$	3,285		$	62,069

Cash paid (refund received) for income taxes, net	$	1,082		$	2,421		$	(3	)	$	(105	)

IASIS HEALTHCARE LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

On June 22, 2004, an investor group led by Texas Pacific Group (“TPG”) acquired IASIS Healthcare Corporation (“IAS” or the “Predecessor”) through a merger (the “Merger”). In order to consummate the Merger, the investor group established IASIS Investment LLC, a Delaware limited liability company (“IASIS Investment”), and capitalized it with cash and shares of IAS’s common stock. The initial capital contributed by the investor group was contributed by IASIS Investment to a wholly owned subsidiary of IASIS Investment, which merged with and into IAS. In the Merger, IAS issued shares of common and preferred stock to IASIS Investment, which became the sole stockholder of IAS after giving effect to the Merger.

Prior to the Merger, IAS contributed substantially all of its assets and liabilities to IASIS Healthcare LLC, a newly formed Delaware limited liability company (“IASIS”), in exchange for all of the equity interests in IASIS. As a result, IAS is a holding company and IAS’s operations are conducted by IASIS and its subsidiaries. References herein to the “Company” are to IASIS and its subsidiaries and, unless indicated otherwise or the context requires, include the Predecessor.

For a discussion of the Merger and related financing transactions, see Notes 3 and 4 to these consolidated financial statements. The Merger, the related financing transactions and the use of the proceeds from the financing transactions are referred to herein as the “Transactions.”

The accompanying consolidated financial statements as of and for the period ended June 22, 2004 reflect the financial position, results of operations and cash flows of the Predecessor. The consolidated financial statements as of the dates and for the periods after June 22, 2004, reflect the financial position, results of operations and cash flows of IASIS.

IASIS owns and operates medium-sized acute care hospitals in high-growth urban and suburban markets. At September 30, 2006, the Company owned or leased 14 acute care hospitals and one behavioral health hospital, with a total of 2,206 beds in service, located in five regions:

	•		Salt Lake City, Utah;

	•		Phoenix, Arizona;

	•		Tampa-St. Petersburg, Florida;

	•		three cities in Texas, including San Antonio; and

	•		Las Vegas, Nevada.

On April 16, 2005, the Company opened a new hospital, The Medical Center of Southeast Texas, in Port Arthur, Texas. All of the operations of Mid-Jefferson Hospital in Nederland, Texas, and Park Place Medical Center in Port Arthur, Texas, have moved to the new hospital.

The Company is currently constructing Mountain Vista Medical Center, a new 172-bed hospital located in Mesa, Arizona. The total cost to build and equip is estimated at $170.0 to $180.0 million. The Company currently plans to open the new hospital on June 1, 2007.

The Company also owns and operates a Medicaid and Medicare managed health plan in Phoenix called Health Choice Arizona, Inc. (“Health Choice” or the “Plan”), serving over 114,700 members at September 30, 2006.

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

The consolidated financial statements include all subsidiaries and entities under common control of the Company. Control is generally defined by the Company as ownership of a majority of the voting interest of an entity. In addition, control is demonstrated in instances when the Company is the sole general partner in a limited partnership. Significant intercompany transactions have been eliminated.

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as “general and administrative” by the Company would include the IASIS corporate office costs, which were $43.4 million, $41.1 million, $7.4 million and $25.2 million, respectively, for the years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004.

2. SIGNIFICANT ACCOUNTING POLICIES

Net Revenue

Acute Care Revenue

The Company’s healthcare facilities have entered into agreements with third-party payors, including government programs and managed care health plans, under which the facilities are paid based upon established charges, the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from established charges.

During the third quarter of fiscal 2006, the Company implemented a company-wide uninsured discount program offering discounts to all uninsured patients receiving healthcare services who do not qualify for assistance under state Medicaid, other federal or state assistance plans or charity care. Since implementing the program, the Company has provided uninsured discounts totaling $20.3 million for the year ended September 30, 2006. These discounts to the uninsured had the effect of reducing acute care revenue and the provision for bad debts by generally corresponding amounts.

Net patient revenue is reported at the estimated net realizable amounts from third-party payors and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and are adjusted, if necessary, in future periods when final settlements are determined. Net adjustments to estimated third-party payor settlements (“prior year contractuals”) resulted in an increase in net revenue of $433,000, $2.1 million and $38,000, for the years ended September 30, 2006 and 2005 and for the period ended September 30, 2004, respectively; and a decrease in net revenue of $1.1 million for the period ended June 22, 2004.

In the ordinary course of business, the Company provides care without charge to patients who are financially unable to pay for the healthcare services they receive. Because the Company does not pursue collection of amounts determined to qualify as charity care, they are not reported in net revenue. The Company currently records revenue deductions for patient accounts that meet its guidelines for charity care. The Company has traditionally provided charity care to patients with income levels below 200% of the federal property level and will continue this practice. In fiscal year 2005, the Company expanded its charity care policy to cover uninsured patients with incomes above 200% of the federal poverty level. Under the expanded program, a sliding scale of reduced rates is offered to uninsured patients, who are not covered through federal, state or private insurance, with incomes between 200% and 400% of the federal poverty level at all of the Company’s hospitals. Charity care deductions for the years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004, were $36.7 million, $30.2 million, $7.0 million and $15.3 million, respectively.

Premium Revenue

Health Choice is a prepaid Medicaid and Medicare managed health plan that derives most of its revenue through a contract with the Arizona Health Care Cost Containment System (“AHCCCS”) to provide specified health services to qualified Medicaid enrollees through contracted providers. AHCCCS is the state agency that administers Arizona’s Medicaid program. The contract requires the Plan to arrange for healthcare services for enrolled Medicaid patients in exchange for fixed monthly premiums, based upon negotiated per capita member rates, and supplemental payments from AHCCCS. Capitation payments received by Health Choice are recognized as revenue in the month that members are entitled to healthcare services.

Health Choice’s contract with AHCCCS expires September 30, 2007. The contract provides AHCCCS with a one-year renewal option and is terminable without cause on 90 days’ written notice or for cause upon written notice if the Company fails to comply with any term or condition of the contract or fail to take corrective action as required to

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

comply with the terms of the contract. Additionally, AHCCCS can terminate the contract in the event of the unavailability of state or federal funding.

On October 19, 2005, the Centers for Medicare and Medicaid Services (“CMS”) awarded Health Choice a contract to become a Medicare Advantage Prescription Drug (“MAPD”) Special Needs Plan (“SNP”). Effective January 1, 2006, Health Choice began providing coverage as a MAPD SNP provider pursuant to the contract with CMS. The SNP allows Health Choice to offer Medicare and Part D drug benefit coverage for new and existing dual-eligible members, or those that are eligible for Medicare and Medicaid. The contract with CMS, which expires on December 31, 2006, has been renewed for calendar 2007 and includes successive one-year renewal options at the discretion of CMS and is terminable without cause on 90 days’ written notice or for cause upon written notice if the Company fails to comply with any term or condition of the contract or fail to take corrective action as required to comply with the terms of the contract.

The Plan subcontracts with hospitals, physicians and other medical providers within Arizona and surrounding states to provide services to its Medicaid enrollees in Apache, Coconino, Gila, Maricopa, Mohave, Navajo, Pima and Pinal counties, and to its Medicare enrollees in Maricopa, Pima, Pinal, Coconino, Apache and Navajo counties. These services are provided regardless of the actual costs incurred to provide these services.

The Plan receives reinsurance and other supplemental payments from AHCCCS for healthcare costs that exceed stated amounts at a rate ranging from 75% to 100% of qualified healthcare costs in excess of stated levels of up to $35,000 per claim ($50,000 per claim beginning October 1, 2006), depending on the eligibility classification of the member. Qualified costs must be incurred during the contract year and are the lesser of the amount paid by the Plan or the AHCCCS fee schedule. Reinsurance recoveries are recognized under the contract with AHCCCS when healthcare costs exceed stated amounts as provided under the contract, including estimates of such costs at the end of each accounting period.

Cash and Cash Equivalents

The Company considers highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents balances primarily with high credit quality financial institutions. The Company manages its credit exposure by placing its investments in high quality securities and by periodically evaluating the relative credit standing of the financial institution.

Accounts Receivable

The Company receives payments for services rendered from federal and state agencies (under the Medicare, Medicaid and TRICARE programs), managed care health plans, commercial insurance companies, employers and patients. During the years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004, approximately 38.7%, 39.7%, 42.0% and 39.0%, respectively, of the Company’s net patient revenue related to patients participating in the Medicare and Medicaid programs. The Company recognizes that revenue and receivables from government agencies are significant to its operations, but does not believe that there is significant credit risks associated with these government agencies. The Company believes that concentration of credit risk from other payors is limited due to the number of patients and payors.

Net Medicare settlements estimated at September 30, 2006 and 2005 are included in accounts receivable in the accompanying consolidated balance sheets as a payable of $1.5 million and a receivable of $3.5 million, respectively.

Allowance for Doubtful Accounts

The Company’s estimation of the allowance for doubtful accounts is based primarily upon the type and age of the patient accounts receivable and the effectiveness of the Company’s collection efforts. The Company’s policy is to reserve a portion of all self-pay receivables, including amounts due from the uninsured and amounts related to co-payments and deductibles, as these charges are recorded. The Company monitors its accounts receivable balances and the effectiveness of the Company’s reserve policies on a monthly basis and reviews various analytics to support the basis for its estimates. These efforts primarily consist of reviewing the following:

•

Revenue and volume trends by payor, particularly the self-pay components;

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	•		Changes in the aging and payor mix of accounts receivable, including increased focus on accounts due from the uninsured and accounts that represent co-payments and deductibles due from patients;

	•		Historical write-off and collection experience using a hindsight or look-back approach;

	•		Cash collections as a percentage of net patient revenue less bad debt expense;

	•		Trending of days revenue in accounts receivable; and

	•		Various allowance coverage statistics.

In addition, the Company regularly performs hindsight procedures to evaluate historical write-off and collection experience throughout the year to assist in determining the reasonableness of its process for estimating the allowance for doubtful accounts. Due to the implementation of its uninsured discount program, the Company has modified the methodology used in this analytical tool to account for the impact of these uninsured discounts on its accounts receivable.

Inventories

Inventories, principally medical supplies, implants and pharmaceuticals, are stated at the lower of average cost or market.

Long-lived Assets

The primary components of the Company’s long-lived assets are discussed below. When events, circumstances or operating results indicate that the carrying values of certain long-lived assets and related identifiable intangible assets (excluding goodwill) that are expected to be held and used might be impaired, the Company considers the recoverability of assets to be held and used by comparing the carrying amount of the assets to the undiscounted value of future net cash flows expected to be generated by the assets. If assets are identified as impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets as determined by independent appraisals or estimates of discounted future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Property and Equipment

Property and equipment are stated at cost. Routine maintenance and repairs are charged to expense as incurred. Expenditures that increase capacities or extend useful lives are capitalized. Depreciation expense, including amortization of assets capitalized under capital leases, is computed using the straight-line method and was $68.9 million, $68.0 million, $19.9 million and $48.2 million for the years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004, respectively. Buildings and improvements are depreciated over estimated useful lives ranging generally from 14 to 40 years. Estimated useful lives of equipment vary generally from 3 to 25 years. Leasehold improvements are amortized on a straight-line basis over the lesser of the terms of the respective leases or their estimated useful lives. The Company capitalized interest associated with construction projects totaling $2.8 million, $3.9 million, $800,000 and $1.5 million, respectively, for the years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004.

Goodwill and Other Intangible Assets

During the year ended September 30, 2005, the Company completed the allocation of the Merger purchase price. See Note 7 for the resulting values of goodwill and other intangible assets assigned to each business segment. Other intangible assets consists solely of Health Choice’s contract with AHCCCS, which is amortized over a period of 15 years, the contract’s estimated useful life, including assumed renewal periods. Intangible assets are evaluated for impairment if events and circumstances indicate a possible impairment. Goodwill is not amortized but is subject to annual tests for impairment or more often if events or circumstances indicate they may be impaired. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. The Company completed its annual impairment test of goodwill during fiscal 2006 noting no impairment.

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Assets

Other assets consist primarily of costs associated with the issuance of debt, which are amortized over the life of the related debt, and costs to recruit physicians to the Company’s markets, which are deferred and amortized over the term of expected benefit received from the respective physician recruitment agreement. Amortization of deferred financing costs is included in interest expense and equaled $3.0 million, $5.8 million, $1.8 million and $2.3 million, respectively, for the years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004. Deferred financing costs, net of accumulated amortization, equaled $20.7 million and $23.7 million at September 30, 2006 and 2005, respectively. Amortization of physician recruiting costs is included in other operating expenses and equaled $7.3 million, $5.3 million, $1.9 million and $4.4 million for the years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004, respectively. Net physician recruiting costs at September 30, 2006 and 2005, equaled $12.7 million and $9.1 million, respectively. See Note 8 for more discussion related to costs incurred to recruit physicians.

Insurance Reserves

The Company estimates its reserve for self-insured professional and general liability and workers compensation risks using historical claims data, demographic factors, severity factors, current incident logs and other actuarial analysis.

Income Taxes

The Company accounts for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply when the temporary differences are expected to reverse. The Company assesses the likelihood that deferred tax assets will be recovered from future taxable income to determine whether a valuation allowance should be established.

Minority Interest in Consolidated Entities

The consolidated financial statements include all assets, liabilities, revenue and expenses of less than 100% owned entities controlled by the Company. Accordingly, management has recorded minority interests in the earnings and equity of such consolidated entities.

Medical Claims Payable

Monthly capitation payments made by Health Choice to physicians and other healthcare providers are expensed in the month services are contracted to be performed. Claims expense for non-capitated arrangements is accrued as services are rendered by hospitals, physicians and other healthcare providers during the year.

Medical claims payable related to Health Choice include claims received but not paid and an estimate of claims incurred but not reported. Incurred but not reported claims are estimated using a combination of historical claims experience (including severity and payment lag time) and other actuarial analysis, including number of enrollees, age of enrollees and certain enrollee health indicators, to predict the cost of healthcare services provided to enrollees during any given period. While management believes that its estimation methodology effectively captures trends in medical claims costs, actual payments could differ significantly from estimates given changes in the healthcare cost structure or adverse experience.

The following table shows the components of the change in medical claims payable for the years ended September 30, 2006, 2005 and 2004, respectively (in thousands):

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	Year Ended			Year Ended			Year Ended
	September 30,			September 30,			September 30,
	2006			2005			2004
Medical claims payable as of October 1	$	60,201		$	55,421		$	25,767
Medical claims expense incurred during the year:
Related to current year		362,636			308,157			250,251
Related to prior years		(8,119	)		2,522			2,959

Total expenses		354,517			310,679			253,210

Medical claims payments during the year:
Related to current year		(282,326	)		(248,841	)		(195,621	)
Related to prior years		(50,570	)		(57,058	)		(27,935	)

Total payments		(332,896	)		(305,899	)		(223,556	)

Medical claims payable as of September 30	$	81,822		$	60,201		$	55,421

Stock Based Compensation

Although IASIS has no stock option plan or outstanding stock options, the Company, through its parent, IAS, grants stock options for a fixed number of common shares to employees. Statement of Financial Accounting Standards (“SFAS”) No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based employee compensate plans at fair value. The Company has chosen to account for employee stock option grants in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees 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 value of the underlying stock on the date of grant.

If the Company had measured compensation cost for the stock options granted under the fair value based method prescribed by SFAS 123, net earnings (loss) would have been changed to the pro forma amounts set forth below (in thousands):


							Predecessor
					June 23, 2004
	Year Ended		Year Ended		through		October 1, 2003
	September 30,		September 30,		September 30,		through June 22,
	2006		2005		2004		2004
Net earnings (loss)
As reported	$	39,549	$	40,592	$	4,705	$	(37,130	)
Pro forma	$	38,189	$	39,434	$	4,441	$	(38,227	)

The effect of applying SFAS 123 for providing pro forma disclosure is not likely to be representative of the effect on reported net earnings for future years.

Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are reflected in the accompanying consolidated financial statements at amounts that approximate fair value because of the short-term nature of these instruments. The fair value of the Company’s long-term bank facility debt and capital lease obligations also approximate carrying value as they bear interest at current market rates. The estimated fair value of the Company’s 8 3/4% senior subordinated notes was approximately $460.8 million at September 30, 2006. The estimated fair values of the 8 3/4% senior subordinated notes at September 30, 2006 are based upon quoted market prices at that date.

Management Services Agreement

Upon the consummation of the Transactions, the Company entered into a management services agreement with TPG GenPar III, L.P., TPG GenPar IV, L.P., both affiliates of TPG, JLL Partners Inc. and Trimaran Fund Management, L.L.C. under which we paid those parties a transaction fee equal to $15.0 million in the aggregate. The management services agreement provides that in exchange for consulting and management advisory services that will be provided to us by the investors, the Company will pay an aggregate monitoring fee of 0.25% of budgeted net revenue up to a maximum

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of $5.0 million per fiscal year to these parties (or certain of their respective affiliates) and reimburse them for their reasonable disbursements and out-of-pocket expenses. This monitoring fee is divided among the parties in proportion to their relative ownership percentages in IASIS Investment. The monitoring fee will be subordinated to the senior subordinated notes in the event of a bankruptcy of the company. The management services agreement does not have a stated term. Pursuant to the provisions of the management services agreement, the Company has agreed to indemnify the investors (or certain of their respective affiliates) in certain situations arising from or relating to the agreement, the investors’ investment in the securities of IAS or any related transactions or the operations of the investors, except for losses that arise on account of the investors’ negligence or willful misconduct. For the years ended September 30, 2006 and 2005 and the period from June 23, 2004 through September 30, 2004, the Company paid $4.2 million, $3.8 million and $746,000, respectively, in monitoring fees under the management services agreement.

Reclassifications

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

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). SFAS 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Under SFAS 123(R), the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition method expected to be used is the prospective method. The Company will adopt SFAS 123(R) on October 1, 2006. Management does not believe the adoption of the new standard will have a material effect on the Company’s financial condition or results of operations.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 addresses the interaction between SFAS 123(R) and certain SEC rules and regulations and provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. The Company intends to follow the interpretive guidance set forth in SAB 107 during its adoption of SFAS 123(R).

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of all tax positions accounted for in accordance with SFAS 109. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Earlier application is permitted in certain circumstances. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 should be reported as an adjustment to the opening balance of retained earnings or other appropriate components of equity for that fiscal year. The Company has not yet determined the potential financial impact of applying FIN 48.

3. THE TRANSACTIONS

The Merger

Pursuant to the Merger Agreement, an investor group led by TPG acquired IAS on June 22, 2004. In the Merger, IAS’s security holders received, in the aggregate, $738.0 million less the amount of certain expenses and

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

other adjustments. In addition, approximately $647.6 million of existing indebtedness was refinanced in connection with the Merger. The total transaction value, including tender premiums, consent fees and other fees and expenses, was approximately $1.5 billion.

In order to consummate the Merger, the investor group established IASIS Investment and capitalized it with $544.0 million in cash and a contribution of shares of IAS’s common stock valued at $40.0 million. The cash contributed by the investor group was contributed by IASIS Investment to a wholly owned subsidiary of IASIS Investment, which merged with and into IAS. Prior to the Merger, IAS contributed substantially all of its assets and liabilities to IASIS in exchange for all of the equity interests in IASIS. As a result, IAS is a holding company, IASIS is a wholly-owned subsidiary of IAS, and IAS’s operations are conducted by IASIS.

The following capitalization and financing transactions occurred in connection with the Merger:

	•		a cash investment made by the investor group totaling $544.0 million in cash;

	•		a contribution of shares of IAS common stock of $40.0 million;

	•		the execution of an amended and restated credit agreement governing new senior secured credit facilities providing for a $425.0 million term loan, drawn at closing, and a $250.0 million revolving credit facility for working capital and general corporate purposes, which was not drawn at closing as discussed below; and

	•		the issuance and sale of $475.0 million in aggregate principal amount of the 8 3/4% notes, as discussed below.

The proceeds from the financing transactions were used to:

	•		pay all amounts due to the security holders of IAS under the terms of the Merger Agreement;

	•		repay all outstanding indebtedness under IAS’s existing senior secured credit facilities;

	•		repurchase IAS’s 13% notes and 8 1/2% notes, as discussed below, and pay the related tender premiums and consent fees, pursuant to a tender offer and consent solicitation by IAS; and

	•		pay the fees and expenses related to the Merger and the related financing transactions.

In connection with the Transactions, the Company incurred a loss on early extinguishment of debt of $51.9 million, which includes tender premiums and consent fees totaling $36.9 million and the write-off of deferred financing costs of $15.0 million. In addition, the Company incurred $19.8 million in merger related expenses, which include legal and advisory costs and special bonus compensation to management of IAS. The Company also paid a sponsor fee of $15.0 million to the investor group, which was recorded as a reduction of the equity investment received from them.

4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt and capital lease obligations consist of the following (in thousands):


	September 30,		September 30,
	2006		2005
Senior secured credit facilities	$	415,438	$	419,688
Senior subordinated notes		475,000		475,000
Capital leases and other obligations		6,507		10,120

		896,945		904,808

Less current maturities		7,432		7,757

	$	889,513	$	897,051

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Senior Secured Credit Facilities

As part of the Transactions, the Company entered into an amended and restated senior credit agreement with various lenders and Bank of America, N.A., as administrative agent, and repaid all outstanding indebtedness under IAS’s existing bank credit facility.

The senior secured credit facilities consist of a senior secured term loan of $425.0 million (the “Term Facility”) and a senior secured revolving credit facility of $250.0 million (the “Revolving Facility”). The Term Facility has a maturity of seven years, with principal due in 24 consecutive equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the Term Facility during the first six years thereof, with the balance payable in four equal installments in year seven. Unless terminated earlier, the Revolving Facility has a single maturity of six years. The senior secured credit facilities are also subject to mandatory prepayment under specific circumstances, including a portion of excess cash flow, a portion of the net proceeds from an initial public offering, asset sales, debt issuances and specified casualty events, each subject to various exceptions.

The term loans under the Term Facility bear interest at a rate equal to LIBOR plus 2.25% per annum or, at the Company’s option, the base rate plus 1.25% per annum. Loans under the Revolving Facility bear interest at a rate equal to LIBOR plus a margin of 2.00% to 2.50% per annum or, at the Company’s option, the base rate plus a margin of 1.00% to 1.50% per annum, such rate in each case depending on the Company’s current leverage ratios.

A commitment fee equal to 0.50% per annum times the daily average undrawn portion of the Revolving Facility will accrue and will be payable quarterly in arrears.

All of the obligations under the senior secured credit facilities are guaranteed by IAS and the Company’s existing and subsequently acquired or organized domestic subsidiaries (except Health Choice and Biltmore Surgery Center Limited Partnership).

The senior secured credit facilities are secured by first priority security interests in substantially all assets of the Company and the guarantors thereunder. In addition, the senior secured credit facilities are secured by a first priority security interest in 100% of the common interests of the Company and 100% of the capital stock of each of the Company’s present and future domestic subsidiaries to the extent owned by the Company or a guarantor, and all intercompany debt owed to the Company or any guarantor.

The senior secured credit facilities contain a number of covenants that, among other things, limit the Company’s ability and the ability of its subsidiaries to (i) dispose of assets; (ii) incur additional indebtedness; (iii) incur guarantee obligations; (iv) repay other indebtedness; (v) pay certain restricted payments and dividends; (vi) create liens on assets or prohibit liens securing the senior secured credit facilities; (vii) make investments, loans or advances; (viii) restrict distributions to the Company; (ix) make certain acquisitions; (x) engage in mergers or consolidations; (xi) enter into sale and leaseback transactions; (xii) engage in certain transactions with subsidiaries and affiliates; or (xiii) amend the terms of the 8 3/4% notes, and otherwise restrict corporate activities. In addition, under the senior secured credit facilities, the Company is required to comply with specified financial ratios and tests, including, but not limited to, a minimum interest coverage ratio, a maximum leverage ratio and maximum capital expenditures.

At September 30, 2006, $415.4 million was outstanding under the Term Facility loan and no amounts were outstanding under the Revolving Facility. The Revolving Facility includes a $75.0 million sublimit for letters of credit that may be issued. At September 30, 2006, the Company had $38.9 million in letters of credit outstanding. The weighted average interest rate of outstanding borrowings under the Term Facility was approximately 7.0% and 5.0% for the years ended September 30, 2006 and 2005, respectively.

13% Senior Subordinated Notes and 8 1/2% Senior Subordinated Notes

On October 13, 1999, IAS issued $230.0 million of 13% senior subordinated notes due 2009. On May 25, 2000, IAS exchanged all of its outstanding 13% senior subordinated notes due 2009 for 13% senior subordinated exchange notes due 2009 registered under the Securities Act of 1933, as amended (the “13% notes”).

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On June 6, 2003, IAS issued $100.0 million of 8 1/2% senior subordinated notes due 2009. On August 14, 2003, IAS exchanged all of its outstanding 8 1/2% senior subordinated notes due 2009 for 8 1/2% senior subordinated notes due 2009 registered under the Securities Act (the “8 1/2% notes”).

In connection with the Transactions, on May 6, 2004, IAS commenced a cash tender offer to purchase any and all of the 13% notes and the 8 1/2% notes. IAS also commenced a solicitation of consents to proposed amendments to the indentures governing the notes that would amend or eliminate substantially all of the restrictive covenants contained in the indentures. As of the consent payment deadline, holders of approximately 98.5% of the outstanding principal amount of the 13% notes and 100% of the outstanding principal amount of the 8 1/2% notes had tendered their notes and consented to the applicable proposed amendments. The remaining $3.5 million of the 13% notes were retired in October 2004.

8 3/4% Senior Subordinated Notes

In connection with the Transactions, on June 22, 2004, the Company and IASIS Capital Corporation, a wholly owned subsidiary of IASIS formed solely for the purpose of serving as a co-issuer (“IASIS Capital”) (IASIS and IASIS Capital referred to collectively as the “Issuers”), issued $475.0 million aggregate principal amount of 8 3/4% senior subordinated notes due 2014.

On December 15, 2004, the Issuers exchanged all of their outstanding 8 3/4% senior subordinated notes due 2014 for 8 3/4% senior subordinated notes due 2014 registered under the Securities Act (the “8 3/4% notes”). Terms and conditions of the exchange offer were as set forth in the registration statement on Form S-4 filed with the SEC that became effective on November 12, 2004.

The 8 3/4% notes are general unsecured senior subordinated obligations and are subordinated in right of payment to all existing and future senior debt of the Company. The Company’s existing domestic subsidiaries, other than certain non-guarantor subsidiaries which include Health Choice and the Company’s non-wholly owned subsidiaries, are guarantors of the 8 3/4% notes. The 8 3/4% notes are effectively subordinated to all of the Issuers’ and the guarantors’ secured debt to the extent of the value of the assets securing the debt and are structurally subordinated to all liabilities and commitments (including trade payables and lease obligations) of the Company’s subsidiaries that are not guarantors of the 8 3/4% notes.

Maturities of long-term debt, excluding capital lease obligations, at September 30, 2006 are as follows (in thousands):


2007	$	4,435
2008		4,435
2009		4,402
2010		104,604
2011		299,625
Thereafter		475,000

	$	892,501

5. ACQUISITIONS

Definitive Agreement to Acquire Glenwood Regional Medical Center

On July 21, 2006, the Company announced the signing of a definitive agreement to acquire Glenwood Regional Medical Center located in West Monroe, Louisiana. The purchase price for the hospital is approximately $82.5 million, subject to net working capital and other purchase price adjustments. Additionally, the Company plans to make capital expenditures on the hospital campus of approximately $30.0 million over the next four years. The Company expects the acquisition to close during the first calendar quarter of 2007, subject to the approval of the Louisiana Attorney General and the satisfaction of other closing conditions.

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquisition of IASIS Healthcare Corporation

As previously discussed in Note 3, an investor group led by TPG acquired IAS through the Merger on June 22, 2004. The Merger was accounted for as a purchase in accordance with SFAS No. 141, Business Combinations. During the year ended September 30, 2005, the Company completed the allocation of the Merger purchase price, resulting in the recognition of $512.0 million of additional goodwill, $45.0 million of other intangible assets and changes in the carrying value of property and equipment. The purchase price allocation was based on estimates of the fair value of the assets acquired and liabilities assumed as determined by an independent appraiser. The purchase price for IAS, including direct transaction costs, was $1.5 billion and has been allocated as reflected in the table below. Goodwill resulting from the purchase price allocation did not result in additional deductible goodwill for tax purposes.

The following table summarizes the purchase price allocation to reflect the fair values of the net assets acquired and liabilities assumed at the date of acquisition (in thousands):


Current assets, net	$	122,843
Property and equipment		547,462
Non-current assets, net		6,231
Goodwill (see Note 7)		764,328
Other intangible assets (see Note 7)		45,000

Total net assets acquired	$	1,485,864

Acquisition of North Vista Hospital

Effective as of February 1, 2004, the Predecessor, through a wholly-owned subsidiary, acquired substantially all of the assets of North Vista Hospital in Las Vegas, Nevada (“North Vista”). The Predecessor acquired the 198-bed hospital from a subsidiary of Tenet Healthcare Corporation (“Tenet”). The net consideration paid, after working capital adjustments and including direct transaction costs was $25.0 million, which was funded with cash on hand. The Tenet subsidiary retained the accounts receivable related to the operation of the hospital prior to the acquisition. In addition, the Tenet subsidiary agreed to indemnify the purchaser for all liabilities related to the operation of the hospital prior to closing, other than the assumed liabilities. The subsidiary’s indemnification obligations are guaranteed by Tenet. The results of the operations of North Vista are included in the accompanying consolidated statements of operations from the effective date of the acquisition.

6. PROPERTY AND EQUIPMENT

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


	September 30,			September 30,
	2006			2005
Land	$	97,951		$	98,068
Buildings and improvements		388,200			363,986
Equipment		312,945			262,185

		799,096			724,239
Less accumulated depreciation and amortization		(168,725	)		(102,478	)

		630,371			621,761

Construction-in-progress (estimated cost to complete at September 30, 2006 - $158.6 million)		96,677			25,835

	$	727,048		$	647,596

Included in equipment are assets acquired under capital leases of $6.2 million and $8.5 million, net of accumulated amortization of $6.3 million and $3.5 million, at September 30, 2006 and 2005,

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

respectively. Cost to complete at September 30, 2006 of $158.6 million includes $100.0 to $105.0 million for Mountain Vista Medical Center, currently under construction in Mesa, Arizona.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents the changes in the carrying amount of goodwill from September 30, 2004 through September 30, 2006 (in thousands):


	Acute			Health
	Care			Choice		Total
Balance at September 30, 2004	$	252,204		$	—	$	252,204
Adjustments resulting from purchase price allocation of the Merger (Note 5)		506,367			5,757		512,124
Adjustments for change in deferred tax assets and liabilities existing at the date of the TPG Merger		(9,953	)		—		(9,953	)

Balance at September 30, 2005		748,618			5,757		754,375
Adjustment resulting from change in purchase price allocation		2,104			—		2,104

Balance at September 30, 2006	$	750,722		$	5,757	$	756,479

Other intangible assets consist solely of Health Choice’s contract with AHCCCS, which is amortized over a period of 15 years, the contract’s estimated useful life, including assumed renewal periods. The gross intangible value originally assigned to the contract during the purchase price allocation related to the Transactions was $45.0 million. The Company expects amortization expense for these intangible assets, to approximate $3.0 million per year over the estimated life of the contract. Amortization of intangible assets is included in depreciation and amortization expense and equaled $3.0 million for the year ended September 30, 2006. Net other intangible assets included in the accompanying consolidated balance sheets at September 30, 2006 and 2005 equaled $39.0 million and $42.0 million, respectively.

8. MINIMUM REVENUE GUARANTEES

In order to recruit and retain physicians to meet community needs and to provide specialty coverage necessary for full service hospitals, the Company has committed to certain arrangements in the form of minimum revenue guarantees with various physicians. Amounts advanced under recruiting agreements are generally forgiven pro rata over a period of 24 months, after one year of completed service. Forgiveness of these advances is contingent upon the physician continuing to practice in the respective community. In the event the physician does not fulfill his or her responsibility to maintain a practice in the respective community during the contract period, the physician agrees to repay all outstanding amounts advanced during the guarantee period and to sign a promissory note, with the physician’s accounts receivable serving as collateral for the amounts owed. Certain agreements to provide specialty coverage include provisions to guarantee a minimum monthly collections base over the term of the agreement and do not require repayment.

On January 1, 2006, the Company adopted FASB Staff Position No. FIN 45-3, Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners (“FIN 45-3”). FIN 45-3 requires that a liability for the estimated fair value of minimum revenue guarantees be recorded on new agreements entered into on or after January 1, 2006 and requires disclosure of the maximum amount that could be paid on all minimum revenue guarantees. The Company records an asset for the estimated fair value of the minimum revenue guarantees and amortizes the asset from the beginning of the guarantee payment period through the end of the agreement. At September 30, 2006, the Company had liabilities for the minimum revenue guarantees entered into on or after January 1, 2006 of $10.9 million. At September 30, 2006, the maximum amount of all minimum revenue guarantees that could be paid prospectively was $28.2 million.

For recruiting agreements entered into prior to January 1, 2006, amounts advanced during the guarantee period are amortized to other operating expenses generally over the forgiveness period. At September 30, 2006, advances under recruiting agreements executed prior to January 1, 2006 was $8.2 million, net of accumulated amortization, and are included in other assets in the Company’s consolidated balance sheets. The asset related to

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

these recruiting agreements will continue to be amortized over the remaining forgiveness period, unless the physician does not fulfill his or her responsibility outlined in the agreement, at which point it will be pursued for collection.

9. MEMBER’S EQUITY AND STOCKHOLDERS’ EQUITY

Common Interests of IASIS

As of September 30, 2006, all of the common interests of IASIS were owned by IAS, its sole member. IASIS was formed as a wholly owned subsidiary of IAS in connection with the Transactions.

Shares of Common Stock of IAS

As of June 22, 2004, immediately preceding the Merger, IAS had 31,956,113 shares of common stock outstanding. As discussed in Note 3, in connection with the Merger, holders of shares of common stock of IAS received cash proceeds totaling $655.4 million. Certain shareholders of IAS contributed 1.8 million shares of IAS common stock in connection with the Merger to IASIS Investment. Holders of IAS common stock options received cash proceeds totaling $21.9 million.

10. STOCK OPTIONS

2000 Stock Option Plan

The Predecessor maintained the IASIS Healthcare Corporation 2000 Stock Option Plan (“2000 Stock Option Plan”). The maximum number of shares of common stock reserved for the grant of stock options under the 2000 Stock Option Plan was 7,208,940, subject to adjustment as provided for in the 2000 Stock Option Plan. As a condition to the exercise of an option, optionees agreed to be bound by the terms and conditions of a stockholders’ agreement among the Company, JLL and certain other stockholders, including restrictions on transferability contained therein. The options were exercisable over a period not to exceed five years after the date of grant, subject to earlier vesting provisions as provided for in the 2000 Stock Option Plan.

Information regarding the Predecessor’s stock option activity for the periods indicated is summarized below:


						Weighted
				Option Price Per		Average
	Stock Options			Share		Exercise Price
Balance at September 30, 2003 (Predecessor)		6,833,704		$	9.52 –40.00	$	24.33
Granted		133,856		$	9.52 –40.00	$	24.35
Exercised		(1,792,193	)	$	9.52	$	9.52
Rolled over		(299,900	)	$	9.52	$	9.52
Cancelled/Forfeited		(4,875,467	)	$	9.52 –40.00	$	24.35

Balance at June 22, 2004 (Predecessor)		—

In connection with the Merger, holders of Predecessor common stock options effectively exercised 1,792,193 of in-the-money options, receiving cash proceeds totaling $21.9 million, or $12.24 per share, calculated as the excess of the $21.76 per share Merger consideration over the option exercise price of $9.52. In addition, certain holders of 299,900 of in-the-money Predecessor common stock options (the “Rollover Options”) elected to rollover and convert such options into options to purchase an aggregate 3,263 shares of preferred stock, with an exercise price of $437.48 per share, and 163,152 shares of common stock, with an exercise price of $8.75 per share, of IAS. All remaining outstanding options of the Predecessor were cancelled upon consummation of the Merger.

2004 Stock Option Plan

The IASIS Healthcare Corporation 2004 Stock Option Plan (the “2004 Stock Option Plan”) was established to promote the Company’s interests by providing additional incentives to its key employees, directors, service

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

providers and consultants. The options granted under the plan represent the right to purchase IAS common stock upon exercise. Each option shall be identified as either an incentive stock option or a non-qualified stock option. The plan was adopted by the board of directors and sole stockholder of IAS in connection with the Transactions. The maximum number of shares of IAS common stock that may be issued pursuant to options granted under the 2004 Stock Option Plan is 1,902,650; provided, however, that on each anniversary of the closing of the Transactions prior to an initial public offering, an additional 146,000 shares of common stock will be available for grant. The options become exercisable over a period not to exceed five years after the date of grant, subject to earlier vesting provisions as provided for in the 2004 Stock Option Plan. All options granted under the 2004 Stock Option Plan expire no later than 10 years from the respective dates of grant. At September 30, 2006, there were 307,165 options available for grant.

Information regarding the Company’s stock option activity for the periods indicated is summarized below:


	2004 Stock Option Plan							Rollover Options
						Weighted						Weighted
						Average						Average
				Option Price		Exercise				Option Price		Exercise
	Options			Per Share		Price		Options		Per Share		Price
Balance at June 23, 2004		—			—		—		—		—		—
Granted/Rolled over		1,105,750		$	20.00	$	20.00		166,413	$	8.75 - $437.48	$	17.16
Exercised		—			—		—		—		—		—
Cancelled/Forfeited		—			—		—		—		—		—

Balance at September 30, 2004		1,105,750		$	20.00	$	20.00		166,413	$	8.75 - $437.48	$	17.16

Granted		503,563		$	20.00	$	20.00		—		—		—
Exercised		—			—		—		—		—		—
Cancelled/Forfeited		(98,550	)	$	20.00	$	20.00		—		—		—

Balance at September 30, 2005		1,510,763		$	20.00	$	20.00		166,413	$	8.75 - $437.48	$	17.16
Granted		237,472		$	35.68	$	35.68		—		—		—
Exercised		—			—		—		—		—		—
Cancelled/Forfeited		(152,750	)	$	20.00 - $35.68	$	20.61		—	$	8.75 - $437.48	$	17.16

Balance at September 30, 2006		1,595,485		$	20.00 - $35.68	$	22.28		166,413	$	8.75 - $437.48	$	17.16

The following table summarizes information regarding the options outstanding and exercisable at September 30, 2006:


		Options Outstanding
				Weighted-
		Number		Average		Options
		Outstanding		Remaining		Exercisable at
Exercise		at September 30,		Contractual		September 30,
Price		2006		Life		2006
$	8.75		163,152		4.5		163,152
$	20.00		1,363,553		8.0		496,725
$	35.68		231,932		9.5	—
$	437.48		3,263		4.5		3,263

			1,761,900				663,140

The per share weighted-average fair value of stock options granted at an exercise price of $35.68 during the year ended September 30, 2006 was $11.12. The per share weighted-average fair value of stock options granted at an exercise price of $20.00 during the year ended September 30, 2005 and the period ended September 30, 2004 was $6.23. The per share weighted-average fair value of stock options granted at an exercise price of $9.52 during the period ended June 22, 2004 was $1.63 on the date of grant. All fair value amounts were determined using a minimum value option-pricing model based on the following assumptions:

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


										Predecessor
							June 23, 2004
	Year Ended			Year Ended			through			October 1,
	September 30,			September 30,			September 30,			2003 through
	2006			2005			2004			June 22, 2004
Risk-free interest rate		4.64	%		3.94	%		4.24	%		3.15	%
Expected life	8.1 years			9.5 years			9.8 years			6.0 years
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%

11. INCOME TAXES

Income tax expense on income from continuing operations consists of the following (in thousands):


							Predecessor
					June 23, 2004
	Year Ended		Year Ended		through		October 1,
	September 30,		September 30,		September 30,		2003 through
	2006		2005		2004		June 22, 2004
Current:
Federal	$	1,095	$	1,241	$	—	$	(136	)
State		192		10		87		1,288
Deferred:
Federal		19,718		21,168		2,700		—
State		1,283		4,432		534		—

	$	22,288	$	26,851	$	3,321	$	1,152

A reconciliation of the federal statutory rate to the effective income tax rate applied to earnings (losses) before income taxes for the year ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004 is as follows (in thousands):


									Predecessor
							June 23, 2004
	Year Ended			Year Ended			through		October 1,
	September 30,			September 30,			September 30,		2003 through
	2006			2005			2004		June 22, 2004
Federal statutory rate	$	21,643		$	23,605		$	2,809	$	(12,592	)
State income taxes, net of federal income tax benefit		959			2,887			404		837
Other non-deductible expenses		681			385			78		4,417
Change in valuation allowance charged to federal tax provision		—			—			—		8,097
Other items, net		(995	)		(26	)		30		393

Provision for income taxes	$	22,288		$	26,851		$	3,321	$	1,152

A summary of the items comprising the deferred tax assets and liabilities at September 30, 2006 and 2005 is as follows (in thousands):


	2006					2005
	Assets			Liabilities		Assets			Liabilities
Depreciation and fixed asset basis differences	$	—		$	52,991	$	—		$	58,020
Amortization and intangible asset basis differences		—			47,802		—			39,701
Allowance for doubtful accounts		26,663			—		26,710			—
Professional liability		14,331			—		13,102			—
Accrued expenses and other liabilities		10,581			—		11,337			—
Deductible carryforwards and credits		11,615			—		27,530			—
Other, net		1,238			—		975			—
Valuation allowance		(3,398	)		—		(813	)		—

Total	$	61,030		$	100,793	$	78,841		$	97,721

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net current deferred tax assets of $41.4 million and $56.0 million and net noncurrent deferred tax liabilities of $81.2 million and $74.9 million are included in the accompanying consolidated balance sheets at September 30, 2006 and 2005, respectively. The Company had a net income tax payable of $400,000 and $200,000 at September 30, 2006 and 2005, respectively, which is included in other current liabilities in the accompanying consolidated balance sheets.

The Merger constituted a tax-free transaction to the Company; although the Merger was accounted for as a purchase for financial statement purposes (see Note 5). Whereas the purchase price allocation resulted in changes to the carrying values of assets and liabilities, the respective tax bases were not affected by the Merger. As a result, certain items of deferred tax assets and liabilities were adjusted.

The Company maintains a valuation allowance for deferred tax assets it believes may not be utilized. The deferred tax assets offset by a valuation allowance on the merger date will result in an adjustment to goodwill if realized in the future. During the year ended September 30, 2005, the Company utilized approximately $6.7 million of net deferred tax assets previously reserved by a valuation allowance which resulted in a $6.7 million decrease to goodwill. During the year ended September 30, 2006, the Company created an additional valuation allowance of $2.6 million primarily related to state net operating losses. At September 30, 2006, the Company had a valuation allowance of $3.4 million, of which $800,000 relates to deferred tax assets recorded at the merger date and will result in an adjustment to goodwill if such deferred tax assets are realized in the future.

At September 30, 2006, federal and state net operating loss carryforwards were available to offset future taxable income of approximately $13.0 million. The net operating losses begin to expire in 2019. A portion of the net loss carryforwards is subject to annual usage limitations after the ownership change caused by the Merger. The Company has an alternative minimum tax credit carryforward of $2.4 million at September 30, 2006. State net operating losses in the amount of $114.0 million were also available, but largely offset by a valuation allowance.

During the year ended September 30, 2004, the IRS concluded its examination of the Predecessor’s federal income tax returns for the years ended September 30, 2000 and 2001. The Company consented to the adjustments proposed by the IRS, all of which were temporary differences. As a result of the adjustments, the Company received a refund of approximately $200,000, attributable to an overpayment of alternative minimum tax, offset by interest charges on certain temporary differences. The net tax refund reduced current federal income tax expense for the period October 1, 2003 through June 22, 2004.

During the year ended September 30, 2006, the IRS concluded field work for its examination of the Company’s federal income tax return for the year ended September 30, 2004. The agent proposed several adjustments, all of which the Company is in the process of appealing. Management believes that the ultimate outcome of the examination will not have a material adverse effect on results of operations or financial position.

12. CONTINGENCIES

Net Revenue

The calculation of appropriate payments from the Medicare and Medicaid programs as well as terms governing agreements with other third-party payors are complex and subject to interpretation. Final determination of amounts earned under the Medicare and Medicaid programs often occurs subsequent to the year in which services are rendered because of audits by the programs, rights of appeal and the application of numerous technical provisions. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. In the opinion of management, adequate provision has been made for adjustments that may result from such routine audits and appeals.

Professional, General and Workers Compensation Liability Risks

The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment and personal injuries. To cover these types of claims, the Company maintains general liability and professional liability insurance in excess of self-insured retentions through a commercial insurance

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

carrier in amounts that the Company believes to be sufficient for its operations, although, potentially, some claims may exceed the scope of coverage in effect. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is currently not a party to any such proceedings that, in management’s opinion, would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company expenses an estimate of the costs it expects to incur under the self-insured retention exposure for general and professional liability claims using historical claims data, demographic factors, severity factors, current incident logs and other external actuarial analysis. At September 30, 2006 and 2005, the Company’s professional and general liability accrual for asserted and unasserted claims was $38.1 million and $33.4 million, respectively, which is included within other long-term liabilities in the accompanying consolidated balance sheets. The valuation from the Company’s independent actuary for professional and general liability losses resulted in a change in related accrual estimates for prior periods which increased professional and general liability expense by $589,000 and $163,000 during the years ended September 30, 2006 and 2005, respectively. No change in estimate related to prior year periods was recorded in fiscal year 2004.

The Company is subject to claims and legal actions in the ordinary course of business relative to workers compensation and other labor and employment matters. To cover these types of claims, the Company maintains workers compensation insurance coverage with a self-insured retention. The Company accrues costs of workers compensation claims based upon external actuarial estimates derived from its claims experience. The valuation from the Company’s independent actuary for workers’ compensation losses resulted in a change in related accrual estimate for prior periods which decreased workers’ compensation expense by $3.3 million during the year ended September 30, 2006 and increased worker’s compensation expense by $1.9 million during the year ended September 30, 2005. No change in estimate related to prior year periods was recorded in fiscal year 2004.

Health Choice

Health Choice has entered into capitated contracts whereby the Plan provides healthcare services in exchange for fixed periodic and supplemental payments from AHCCCS and CMS. These services are provided regardless of the actual costs incurred to provide these services. The Company receives reinsurance and other supplemental payments from AHCCCS to cover certain costs of healthcare services that exceed certain thresholds. The Company believes the capitated payments, together with reinsurance and other supplemental payments are sufficient to pay for the services Health Choice is obligated to deliver. As of September 30, 2006, the Company provided a performance guaranty in the form of a letter of credit in the amount of $20.6 million for the benefit of AHCCCS to support its obligations under the Health Choice contract to provide and pay for the healthcare services. The amount of the performance guaranty is generally based in part upon the membership in the Plan and the related capitation revenue paid to Health Choice. Additionally, Health Choice maintains a cash balance of $5.0 million and an intercompany demand note with the Company, which is required under its contract with CMS to provide coverage as a SNP.

Capital Expenditure Commitments

The Company is building a new hospital and is expanding and renovating some of its existing facilities to more effectively deliver patient care and provide a greater variety of services. The Company had incurred approximately $96.7 million in uncompleted projects as of September 30, 2006, which is included in property and equipment in the accompanying consolidated balance sheets. At September 30, 2006, the Company had various construction and other projects in progress with an estimated additional cost to complete and equip of approximately $158.6 million, including $100.0 to $105.0 million for the construction of Mountain Vista Medical Center, the Company’s new hospital in Mesa, Arizona.

Variable Interest Entities

The Company is a party to certain contractual agreements pursuant to which it may be required to make monthly payments to the developers and managers of certain medical office buildings located on its hospital campuses through minimum rent revenue support arrangements. The Company entered into these commercial arrangements to cause developers to commence construction of medical office buildings and manage the buildings upon their completion in order to meet the need for physician office space in the communities served by its

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

hospitals. One of the contracts commenced in 1996. The Company currently is not making payments under this contract, although it could be required to make payments in the future. The remaining contracts were entered into at various times since 2003 and each have a term of seven years starting 30 days after completion of the related building construction. Three of these buildings were complete at September 30, 2006. The Company has determined that it is not the primary beneficiary under any of these contracts. The maximum annual amount the Company would pay in the aggregate under these contracts assuming no changes to current lease levels would be approximately $1.7 million.

Tax Sharing Agreement and Consolidated Group Tax Liabilities

Prior to the consummation of the Transactions, the Predecessor and some of its subsidiaries were included in JLL’s consolidated group for U.S. federal income tax purposes as well as in some consolidated, combined or unitary groups which included JLL for state, local and foreign income tax purposes. The Predecessor and JLL entered into a tax sharing agreement in connection with the recapitalization transaction with Paracelsus Healthcare Corporation (currently known as Clarent Hospital Corporation) and the acquisition of hospitals and related facilities from Tenet that occurred in October 1999. The tax sharing agreement required the Predecessor to make payments to JLL such that, with respect to tax returns for any taxable period in which the Predecessor or any of its subsidiaries were included in JLL’s consolidated group or any combined group including JLL, the amount of taxes to be paid by the Predecessor would be determined, subject to some adjustments, as if it and each of its subsidiaries included in JLL’s consolidated group or a combined group including JLL filed their own consolidated, combined or unitary tax returns. The tax sharing agreement with JLL terminated on June 22, 2004.

IASIS and some of its subsidiaries are included in IAS’s consolidated group for U.S. federal income tax purposes as well as in some consolidated, combined or unitary groups which include IAS for state, local and foreign income tax purposes. With respect to tax returns for any taxable period in which IASIS or any of its subsidiaries are included in IAS’s consolidated group or any combined group including IAS, the amount of taxes to be paid by IASIS is determined, subject to some adjustments, as if it and each of its subsidiaries included in IAS’s consolidated group or a combined group including IAS filed their own consolidated, combined or unitary tax returns.

Each member of a consolidated group for U.S. federal income tax purposes is jointly and severally liable for the federal income tax liability of each other member of the consolidated group. Accordingly, although tax liabilities will be allocated between the Company and its consolidated group parent, the Company could be liable in the event that any federal tax liability was incurred, but not discharged, by any other member of the consolidated group.

Acquisitions

The Company may choose to acquire businesses with prior operating histories. If acquired, such companies may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company has policies designed to conform business practices to its policies following the completion of any acquisitions, there can be no assurance that the Company will not become liable for previous activities of prior owners that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally would seek to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines.

Other

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

continues to be fully committed to regulatory compliance and will cooperate diligently with governmental authorities regarding this matter, there can be no assurance as to the outcome of this matter. If this matter were to be determined unfavorably to the Company, it could have a material adverse effect on the Company’s business, financial condition and results of operations. Further, the outcome of this matter may result in significant fines, other penalties and/or adverse publicity. During the year ended September 30, 2006 and 2005, the Company incurred $8.7 million and $233,000, respectively, in legal fees and other expenses associated with responding to the OIG’s request for information.

The Company believes it is in material compliance with all applicable laws and regulations. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action, including fines, penalties and exclusion from the Medicare and Medicaid programs.

13. LEASES

The Company leases various buildings, office space and equipment under capital and operating lease agreements. The leases expire at various times and have various renewal options.

In April 2005, the Company amended one of its facility lease agreements. The Company exercised an option under the amended lease agreement to extend the lease for an additional three-year term with an annual lease cost of $1.5 million, beginning in July 2005.

The Company is a party to an amended facility lease with a 15 year term that expires in January 31, 2019, and includes options to extend the term of the lease through January 31, 2039. The annual cost under this agreement is $6.4 million, payable in monthly installments.


	Capital		Operating
	Leases		Leases
2007	$	3,167	$	26,991
2008		1,376		25,576
2009		122		19,526
2010		—		15,359
2011		—		12,050
Thereafter		—		63,748

Total minimum lease payments	$	4,665	$	163,250

Amount representing interest (at rates ranging from 5.67% to 10.20%)		215

Present value of net minimum lease payments (including $3.0 million classified as current)	$	4,450

Aggregate future minimum rentals to be received under noncancellable subleases as of September 30, 2006 were approximately $11.1 million.

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. RETIREMENT PLANS

Substantially all employees who are employed by the Company or its subsidiaries, upon qualification, are eligible to participate in a defined contribution 401(k) plan (the “Retirement Plan”). Employees who elect to participate generally make contributions from 1% to 20% of their eligible compensation, and the Company matches, at its discretion, such contributions up to a maximum percentage. Generally, employees immediately vest 100% in their own contributions and vest in the employer portion of contributions in a period not to exceed five years. Company contributions to the Retirement Plan were approximately $3.9 million, $3.8 million, $840,000 and $2.5 million for years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004, respectively.

15. SEGMENT AND GEOGRAPHIC INFORMATION

The Company’s acute care hospitals and related healthcare businesses are similar in their activities and the economic environments in which they operate (i.e., urban and suburban markets). Accordingly, the Company’s reportable operating segments consist of (1) acute care hospitals and related healthcare businesses, collectively, and (2) Health Choice. The following is a financial summary by business segment for the periods indicated (in thousands):


	For the Year Ended September 30, 2006
	Acute Care			Health Choice			Eliminations			Consolidated
Acute care revenue	$	1,219,474		$	—		$	—		$	1,219,474
Premium revenue		—			406,522			—			406,522
Revenue between segments		10,857			—			(10,857	)		—

Net revenue		1,230,331			406,522			(10,857	)		1,625,996

Salaries and benefits		457,540			12,631			—			470,171
Supplies		187,515			284			—			187,799
Medical claims		—			354,517			(10,857	)		343,660
Other operating expenses		233,041			13,284			—			246,325
Provision for bad debts		141,774			—			—			141,774
Rentals and leases		33,874			1,082			—			34,956
Business interruption insurance recoveries		(8,974	)		—			—			(8,974	)

Adjusted EBITDA⁽¹⁾		185,561			24,724			—			210,285

Interest expense, net		69,687			—			—			69,687
Depreciation and amortization		68,539			3,386			—			71,925
Management fees		4,189			—			—			4,189

Earnings before gain (loss) on disposal of assets, minority interests and income taxes		43,146			21,338			—			64,484
Gain (loss) on disposal of assets, net		953			(54	)		—			899
Minority interests		(3,546	)		—			—			(3,546	)

Earnings before income taxes	$	40,553		$	21,284		$	—		$	61,837

Segment assets	$	1,833,737		$	134,098					$	1,967,835

Capital expenditures	$	146,299		$	629					$	146,928

Goodwill	$	750,722		$	5,757					$	756,479

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	For the Year Ended September 30, 2005
	Acute Care			Health Choice		Eliminations			Consolidated
Acute care revenue	$	1,170,483		$	—	$	—		$	1,170,483
Premium revenue		—			353,244		—			353,244
Revenue between segments		8,475			—		(8,475	)		—

Net revenue		1,178,958			353,244		(8,475	)		1,523,727

Salaries and benefits		431,609			10,564		—			442,173
Supplies		184,676			199		—			184,875
Medical claims		—			310,679		(8,475	)		302,204
Other operating expenses		200,411			11,287		—			211,698
Provision for bad debts		133,870			—		—			133,870
Rentals and leases		31,849			901		—			32,750
Hurricane-related expenses		4,762			—		—			4,762

Adjusted EBITDA⁽¹⁾		191,781			19,614		—			211,395

Interest expense, net		66,002			—		—			66,002
Depreciation and amortization		67,840			3,197		—			71,037
Management fees		3,791			—		—			3,791

Earnings before loss on disposal of assets, minority interests and income taxes		54,148			16,417		—			70,565
Loss on disposal of assets, net		(231	)		—		—			(231	)
Minority interests		(2,891	)		—		—			(2,891	)

Earnings before income taxes	$	51,026		$	16,417	$	—		$	67,443

Segment assets	$	1,756,404		$	96,320				$	1,852,724

Capital expenditures	$	141,625		$	743				$	142,368

Goodwill	$	748,618		$	5,757				$	754,375

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	For the Period June 23, 2004 through September 30, 2004
	Acute Care			Health Choice		Eliminations			Consolidated
Acute care revenue	$	301,305		$	—	$	—		$	301,305
Premium revenue		—			88,169		—			88,169
Revenue between segments		2,790			—		(2,790	)		—

Net revenue		304,095			88,169		(2,790	)		389,474

Salaries and benefits		112,702			2,836		—			115,538
Supplies		46,513			67		—			46,580
Medical claims		—			76,841		(2,790	)		74,051
Other operating expenses		54,655			2,691		—			57,346
Provision for bad debts		39,486			—		—			39,486
Rentals and leases		8,602			238		—			8,840

Adjusted EBITDA⁽¹⁾		42,137			5,496		—			47,633

Interest expense, net		17,459			—		—			17,459
Depreciation and amortization		19,795			61		—			19,856
Management fees		746			—		—			746
Loss on early extinguishment of debt		232			—		—			232

Earnings before loss on disposal of assets, minority interests and income taxes		3,905			5,435		—			9,340
Loss on disposal of assets, net		(107	)		—		—			(107	)
Minority interests		(1,207	)		—		—			(1,207	)

Earnings before income taxes	$	2,591		$	5,435	$	—		$	8,026

Capital expenditures	$	44,638		$	168				$	44,806


	For the Period October 1, 2003 through June 22, 2004
Predecessor	Acute Care			Health Choice		Eliminations			Consolidated
Acute care revenue	$	794,887		$	—	$	—		$	794,887
Premium revenue		—			202,273		—			202,273
Revenue between segments		8,031			—		(8,031	)		—

Net revenue		802,918			202,273		(8,031	)		997,160

Salaries and benefits		302,095			6,786		—			308,881
Supplies		129,518			147		—			129,665
Medical claims		—			176,369		(8,031	)		168,338
Other operating expenses		138,534			7,114		—			145,648
Provision for bad debts		87,466			—		—			87,466
Rentals and leases		22,694			464		—			23,158

Adjusted EBITDA⁽¹⁾		122,611			11,393		—			134,004

Interest expense, net		41,935			—		—			41,935
Depreciation and amortization		48,098			130		—			48,228
Loss on early extinguishment of debt		51,852			—		—			51,852
Merger expenses		19,750			—		—			19,750
Write-off of debt issue costs		8,850			—		—			8,850

Earnings (loss) before gain on disposal of assets, minority interests and income taxes		(47,874	)		11,263		—			(36,611	)
Gain on disposal of assets, net		3,731			—		—			3,731
Minority interests		(3,098	)		—		—			(3,098	)

Earnings (loss) before income taxes	$	(47,241	)	$	11,263	$	—		$	(35,978	)

Capital expenditures	$	81,945		$	320				$	82,265


(1)		Adjusted EBITDA represents net earnings (loss) before interest expense, income tax expense, depreciation and amortization, loss on early extinguishment of debt, write-off of debt issue costs, merger expenses, management fees, gain (loss) on disposal of assets, and minority interests. Management fees represent monitoring and advisory fees paid to TPG, the Company’s majority financial sponsor, and certain other members of IASIS Investment. Merger expenses include legal and advisory expenses and special bonus compensation of the Predecessor incurred in connection with the acquisition of IASIS by TPG. Management routinely calculates and communicates adjusted EBITDA and believes that it is useful to investors because it is commonly used as an analytical indicator within the healthcare industry to evaluate hospital performance, allocate resources and measure leverage capacity and debt service ability. In addition, the Company uses adjusted EBITDA as a measure of performance for its business

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


		segments and for incentive compensation purposes. Adjusted EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles (GAAP), and the items excluded from adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to net earnings, cash flows generated by operating, investing, or financing activities or other financial statement data presented in the condensed consolidated financial statements as an indicator of financial performance or liquidity. Adjusted EBITDA, as presented, differs from what is defined under the Company’s senior secured credit facilities and may not be comparable to similarly titled measures of other companies.

16. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

A summary of accrued expenses and other current liabilities consists of the following (in thousands):


	September 30,		September 30,
	2006		2005
Employee health insurance payable	$	8,274	$	6,926
Taxes other than income taxes		8,095		7,718
Workers compensation insurance payable		8,567		10,066
Construction retention payable related to construction of new hospital		5,320		—
Other		18,831		5,840

	$	49,087	$	30,550

17. ALLOWANCE FOR DOUBTFUL ACCOUNTS

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


								Accounts
								Written Off,
	Beginning		Provision for					Net of			Ending
	Balance		Bad Debts		Other (1)			Recoveries			Balance

Period October 1, 2003 to June 22, 2004 (Predecessor)	$	51,255		87,466		4,647			(51,407	)	$	91,961
Period June 23, 2004 to September 30, 2004	$	91,961		39,486		(532	)		(28,434	)	$	102,481
Year Ended September 30, 2005	$	102,481		133,870		(1,560	)		(131,172	)	$	103,619
Year Ended September 30, 2006	$	103,619		141,774		—			(135,516	)	$	109,877


(1)		Included in the allowance for doubtful accounts are amounts representing estimated uncollectible accounts receivable from managed care companies and other third-party payors. Such amounts were recorded as adjustments to revenue during fiscal years 2005 and 2004. Effective October 1, 2005, these adjustments have been recorded as a component of the provision for bad debts.

The provision for bad debts increased $7.9 million during the year end September 30, 2006, primarily as a result of increases in self-pay volume and revenue, particularly related to patients arriving through our emergency rooms. The provision for bad debts increased $6.9 million during the year ended September 30, 2005, as a result of having a full year’s operations for North Vista Hospital in the 2005 fiscal year, compared with only eight months in fiscal 2004.

18. IMPACT OF HURRICANE RITA

The Medical Center of Southeast Texas, the Company’s hospital located in Port Arthur, Texas, which comprises approximately 9.0% of the Company’s acute care revenue, was damaged during Hurricane Rita in September 2005. The hospital sustained roof and water intrusion damage. The majority of services at the hospital became operational during October and November of 2005. The Company’s results from operations for the year ended September 30, 2005 include $4.8 million in hurricane-related costs. These costs were principally for restoration-related costs and property damage. The Company has received $9.0 million in partial business

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

interruption insurance recoveries during the year ended September 30, 2006, net of the deductible of approximately $4.6 million. No additional recoveries are accrued on the Company’s balance sheet at September 30, 2006, as those amounts are not determinable at this time. The Company continues to work with its insurer to process a final settlement for these losses.

19. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The 8 3/4% notes described in Note 4 are fully and unconditionally guaranteed on a joint and several basis by all of the Company’s existing domestic subsidiaries, other than non-guarantor subsidiaries which include Health Choice and the Company’s non-wholly owned subsidiaries.

On February 28, 2006, Southwest General Hospital, LP (“Southwest General”) sold limited partner units representing, in the aggregate, a 6.4% ownership interest in Southwest General. As a result, the Company’s ownership interest in Southwest General was reduced to 93.6%. Southwest General is included in the summarized condensed consolidating financial statements as a subsidiary non-guarantor.

On February 2, 2006, Cardiovascular Specialty Centers of Utah, LP (“CSCU”) sold limited partner units representing, in the aggregate, a 15.6% ownership interest in CSCU. As a result, the Company’s ownership interest in CSCU was reduced to 84.4%. CSCU is included in the summarized condensed consolidating financial statements as a subsidiary non-guanantor.

Summarized condensed consolidating balance sheets at September 30, 2006 and 2005, condensed consolidating statements of operations and cash flows for the years ended September 30, 2006 and 2005 and the periods ended September 30, 2004 and June 22, 2004 for the Company, segregating the parent company issuer, the subsidiary guarantors, the subsidiary non-guarantors and eliminations, are found below. Prior year amounts have been reclassified to conform to the current year presentation.

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

IASIS Healthcare LLC
Condensed Consolidating Balance Sheet
September 30, 2006
(in thousands)


			Subsidiary			Subsidiary					Condensed
	Parent Issuer		Guarantors			Non-Guarantors		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—	$	94,518		$	897	$	—		$	95,415
Accounts receivable, net		—		110,128			72,324		—			182,452
Inventories		—		22,249			12,050		—			34,299
Deferred income taxes		41,416		—			—		—			41,416
Prepaid expenses and other current assets		—		23,767			18,074		—			41,841

Total current assets		41,416		250,662			103,345		—			395,423

Property and equipment, net		—		376,069			350,979		—			727,048
Intercompany		—		(123,864	)		123,864		—			—
Net investment in and advances to subsidiaries		1,479,245		—			—		(1,479,245	)		—
Goodwill		22,008		207,301			527,170		—			756,479
Other intangible assets, net		—		—			39,000		—			39,000
Other assets, net		20,715		22,024			7,146		—			49,885

Total assets	$	1,563,384	$	732,192		$	1,151,504	$	(1,479,245	)	$	1,967,835


Liabilities and Equity
Current liabilities:
Accounts payable	$	—	$	51,806		$	21,545	$	—		$	73,351
Salaries and benefits payable		—		19,314			9,768		—			29,082
Accrued interest payable		19,965		(1,517	)		1,517		—			19,965
Medical claims payable		—		—			81,822		—			81,822
Other accrued expenses and other current liabilities		—		38,050			11,037		—			49,087
Current portion of long-term debt and capital lease obligations		4,402		2,009			7,317		(6,296	)		7,432

Total current liabilities		24,367		109,662			133,006		(6,296	)		260,739

Long-term debt and capital lease obligations		886,188		2,939			242,353		(241,967	)		889,513
Deferred income taxes		81,179		—			—		—			81,179
Other long-term liabilities		—		15,245			32,366		—			47,611
Minority interest		—		32,297			—		—			32,297

Total liabilities		991,734		160,143			407,725		(248,263	)		1,311,339
Member’s equity		571,650		572,049			743,779		(1,230,982	)		656,496

Total liabilities and equity	$	1,563,384	$	732,192		$	1,151,504	$	(1,479,245	)	$	1,967,835

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

IASIS Healthcare LLC
Condensed Consolidating Balance Sheet
September 30, 2005
(in thousands)


			Subsidiary			Subsidiary					Condensed
	Parent Issuer		Guarantors			Non-Guarantors		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—	$	88,597		$	500	$	—		$	89,097
Accounts receivable, net		—		102,127			64,329		—			166,456
Inventories		—		19,343			10,523		—			29,866
Deferred income taxes		56,003		—			—		—			56,003
Prepaid expenses and other current assets		—		11,106			14,130		—			25,236

Total current assets		56,003		221,173			89,482		—			366,658

Property and equipment, net		—		368,821			278,775		—			647,596
Intercompany		—		(83,539	)		83,539		—			—
Net investment in and advances to subsidiaries		1,458,056		—			—		(1,458,056	)		—
Goodwill		22,128		205,151			527,096		—			754,375
Other intangible assets, net		—		—			42,000		—			42,000
Other assets, net		23,675		14,338			4,082		—			42,095

Total assets	$	1,559,862	$	725,944		$	1,024,974	$	(1,458,056	)	$	1,852,724


Liabilities and Equity
Current liabilities:
Accounts payable	$	—	$	39,295		$	19,389	$	—		$	58,684
Salaries and benefits payable		—		17,532			7,355		—			24,887
Accrued interest payable		18,489		(1,070	)		1,070		—			18,489
Medical claims payable		—		—			60,201		—			60,201
Other accrued expenses and other current liabilities		—		25,686			4,864		—			30,550
Current portion of long-term debt and capital lease obligations		4,402		2,241			5,991		(4,877	)		7,757

Total current liabilities		22,891		83,684			98,870		(4,877	)		200,568

Long-term debt and capital lease obligations		890,438		5,198			244,328		(242,913	)		897,051
Deferred income taxes		74,883		—			—		—			74,883
Other long-term liabilities		—		36,801			—		—			36,801
Minority interest		—		26,474			—		—			26,474

Total liabilities		988,212		152,157			343,198		(247,790	)		1,235,777
Member’s equity		571,650		573,787			681,776		(1,210,266	)		616,947

Total liabilities and equity	$	1,559,862	$	725,944		$	1,024,974	$	(1,458,056	)	$	1,852,724

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
(in thousands)


	For the Year Ended September 30, 2006
				Subsidiary			Subsidiary						Condensed
	Parent Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated
Net revenue:
Acute care revenue	$	—		$	753,420		$	476,911		$	(10,857	)	$	1,219,474
Premium revenue		—			—			406,522			—			406,522

Total net revenue		—			753,420			883,433			(10,857	)		1,625,996

Costs and expenses:
Salaries and benefits		—			301,335			168,836			—			470,171
Supplies		—			128,894			58,905			—			187,799
Medical claims		—			—			354,517			(10,857	)		343,660
Other operating expenses		—			158,239			88,086			—			246,325
Provision for bad debts		—			91,063			50,711			—			141,774
Rentals and leases		—			22,500			12,456			—			34,956
Interest expense, net		69,687			—			20,234			(20,234	)		69,687
Depreciation and amortization		—			44,075			27,850			—			71,925
Management fees		4,189			(10,379	)		10,379			—			4,189
Business interruption insurance recoveries		—			—			(8,974	)		—			(8,974	)
Equity in earnings of affiliates		(115,489	)		—			—			115,489			—

Total costs and expenses		(41,613	)		735,727			783,000			84,398			1,561,512

Earnings (loss) before gain (loss) on disposal of assets, minority interests and income taxes		41,613			17,693			100,433			(95,255	)		64,484
Gain (loss) on disposal of assets, net		—			2,162			(1,263	)		—			899
Minority interests		—			(3,546	)		—			—			(3,546	)


Earnings (loss) before income taxes		41,613			16,309			99,170			(95,255	)		61,837
Income tax expense		22,288			—			—			—			22,288

Net earnings (loss)	$	19,325		$	16,309		$	99,170		$	(95,255	)	$	39,549

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
(in thousands)


	For the Year Ended September 30, 2005
				Subsidiary			Subsidiary						Condensed
	Parent Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated
Net revenue:
Acute care revenue	$	—		$	731,021		$	447,937		$	(8,475	)	$	1,170,483
Premium revenue		—			—			353,244			—			353,244

Total net revenue		—			731,021			801,181			(8,475	)	$	1,523,727

Costs and expenses:
Salaries and benefits		—			286,388			155,785			—			442,173
Supplies		—			131,081			53,794			—			184,875
Medical claims		—			—			310,679			(8,475	)		302,204
Other operating expenses		—			134,300			77,398			—			211,698
Provision for bad debts		—			86,112			47,758			—			133,870
Rentals and leases		—			19,873			12,877			—			32,750
Interest expense, net		66,002			—			17,467			(17,467	)		66,002
Depreciation and amortization		—			45,616			25,421			—			71,037
Management fees		3,791			(9,579	)		9,579			—			3,791
Hurricane-related expenses		—			—			4,762			—			4,762
Equity in earnings of affiliates		(119,769	)		—			—			119,769			—

Total costs and expenses		(49,976	)		693,791			715,520			93,827			1,453,162

Earnings (loss) before loss on disposal of assets, minority interests and income taxes		49,976			37,230			85,661			(102,302	)		70,565
Loss on disposal of assets, net		—			(178	)		(53	)		—			(231	)
Minority interests		—			(2,891	)		—			—			(2,891	)


Earnings (loss) before income taxes		49,976			34,161			85,608			(102,302	)		67,443
Income tax expense		26,851			—			—			—			26,851

Net earnings (loss)	$	23,125		$	34,161		$	85,608		$	(102,302	)	$	40,592

100

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
(in thousands)


	For the Period June 23, 2004 through September 30, 2004
				Subsidiary			Subsidiary					Condensed
	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Net revenue:
Acute care revenue	$	—		$	192,772		$	111,321	$	(2,788	)	$	301,305
Premium revenue		—			—			88,169		—			88,169

Total net revenue		—			192,772			199,490		(2,788	)		389,474

Costs and expenses:
Salaries and benefits		—			75,089			40,449		—			115,538
Supplies		—			33,396			13,184		—			46,580
Medical claims		—			—			76,839		(2,788	)		74,051
Other operating expenses		—			37,686			19,660		—			57,346
Provision for bad debts		—			28,645			10,841		—			39,486
Rentals and leases		—			5,484			3,356		—			8,840
Interest expense, net		17,459			—			3,624		(3,624	)		17,459
Depreciation and amortization		—			15,125			4,731		—			19,856
Management fees		—			(2,000	)		2,746		—			746
Loss on early extinguishment of debt		232			—			—		—			232
Equity in earnings of affiliates		(22,093	)		—			—		22,093			—

Total costs and expenses		(4,402	)		193,425			175,430		15,681			380,134

Earnings (loss) before loss on disposal of assets, minority interests and income taxes		4,402			(653	)		24,060		(18,469	)		9,340
Loss on disposal of assets, net		—			(107	)		—		—			(107	)
Minority interests		—			(1,207	)		—		—			(1,207	)


Earnings (loss) before income taxes		4,402			(1,967	)		24,060		(18,469	)		8,026
Income tax expense		3,321			—			—		—			3,321

Net earnings (loss)	$	1,081		$	(1,967	)	$	24,060	$	(18,469	)	$	4,705

101

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
(in thousands)


	For the Period October 1, 2003 through June 22, 2004
				Subsidiary			Subsidiary					Condensed
Predecessor	Parent Issuer			Guarantors			Non-Guarantors		Eliminations			Consolidated
Net revenue:
Acute care revenue	$	—		$	499,326		$	303,592	$	(8,031	)	$	794,887
Premium revenue		—			—			202,273		—			202,273

Total net revenue		—			499,326			505,865		(8,031	)		997,160

Costs and expenses:
Salaries and benefits		—			199,139			109,742		—			308,881
Supplies		—			91,960			37,705		—			129,665
Medical claims		—			—			176,369		(8,031	)		168,338
Other operating expenses		—			94,152			51,496		—			145,648
Provision for bad debts		—			56,611			30,855		—			87,466
Rentals and leases		—			14,189			8,969		—			23,158
Interest expense, net		41,935			—			11,641		(11,641	)		41,935
Depreciation and amortization		—			36,520			11,708		—			48,228
Management fees		—			(7,840	)		7,840		—			—
Write-off of debt issue costs		8,850			—			—		—			8,850
Loss on early extinguishment of debt		51,852			—			—		—			51,852
Merger expenses		19,750			—			—		—			19,750
Equity in earnings of affiliates		(74,767	)		—			—		74,767			—

Total costs and expenses		47,620			484,731			446,325		55,095			1,033,771

Earnings (loss) before gain on disposal of assets, minority interests and income taxes		(47,620	)		14,595			59,540		(63,126	)		(36,611	)
Gain on disposal of assets, net		—			3,731			—		—			3,731
Minority interests		—			(3,098	)		—		—			(3,098	)


Earnings (loss) before income taxes		(47,620	)		15,228			59,540		(63,126	)		(35,978	)
Income tax expense		1,152			—			—		—			1,152

Net earnings (loss)	$	(48,772	)	$	15,228		$	59,540	$	(63,126	)	$	(37,130	)

102

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
(in thousands)


	For the Year Ended September 30, 2006
				Subsidiary			Subsidiary						Condensed
	Parent Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated
Cash flows from operating activities
Net earnings (loss)	$	19,325		$	16,309		$	99,170		$	(95,255	)	$	39,549
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		—			44,075			27,850			—			71,925
Amortization of loan costs		2,960			—			—			—			2,960
Minority interests		—			3,546			—			—			3,546
Deferred income taxes		21,002			—			—			—			21,002
Loss (gain) on disposal of assets		—			(2,162	)		1,263			—			(899	)
Equity in earnings of affiliates		(115,489	)		—			—			115,489			—
Changes in operating assets and liabilities:
Accounts receivable		—			(8,001	)		(7,995	)		—			(15,996	)
Inventories, prepaid expenses and other current assets		—			(11,096	)		(5,470	)		—			(16,566	)
Accounts payable and other accrued liabilities		1,476			32,057			18,090			—			51,623

Net cash provided by (used in) operating activities		(70,726	)		74,728			132,908			20,234			157,144


Cash flows from investing activities
Purchases of property and equipment		—			(52,446	)		(94,482	)		—			(146,928	)
Proceeds from sale of assets		—			147			—			—			147
Change in other assets		—			(55	)		653			—			598

Net cash used in investing activities		—			(52,354	)		(93,829	)		—			(146,183	)


Cash flows from financing activities
Payment of debt and capital leases		(4,402	)		(2,298	)		(1,163	)		—			(7,863	)
Proceeds from sale of partnership interests		—			1,105			4,622			—			5,727
Change in intercompany balances with affiliates, net		75,128			(15,260	)		(39,634	)		(20,234	)		—
Distribution of minority interests		—			—			(2,507	)		—			(2,507	)

Net cash provided by (used in) financing activities		70,726			(16,453	)		(38,682	)		(20,234	)		(4,643	)

Increase (decrease) in cash and cash equivalents		—			5,921			397			—			6,318
Cash and cash equivalents at beginning of period		—			88,597			500			—			89,097

Cash and cash equivalents at end of period	$	—		$	94,518		$	897		$	—		$	95,415

103

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
(in thousands)


	For the Year Ended September 30, 2005
				Subsidiary			Subsidiary						Condensed
	Parent Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated
Cash flows from operating activities
Net earnings (loss)	$	23,125		$	34,161		$	85,608		$	(102,302	)	$	40,592
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		—			45,616			25,421			—			71,037
Amortization of loan costs		5,789			—			—			—			5,789
Minority interests		—			2,891			—			—			2,891
Deferred income taxes		25,600			—			—			—			25,600
Loss on disposal of assets		—			178			53			—			231
Hurricane-related expenses		—			—			4,762			—			4,762
Equity in earnings of affiliates		(119,769	)		—			—			119,769			—
Changes in operating assets and liabilities:
Accounts receivable		—			2,355			(3,531	)		—			(1,176	)
Inventories, prepaid expenses and other current assets		—			(4,841	)		(2,715	)		—			(7,556	)
Accounts payable and other accrued liabilities		4,668			803			1,512			—			6,983

Net cash provided by (used in) operating activities		(60,587	)		81,163			111,110			17,467			149,153


Cash flows from investing activities
Purchases of property and equipment		—			(70,305	)		(72,063	)		—			(142,368	)
Acquisitions including working capital settlement payments		—			(1,359	)		—			—			(1,359	)
Investment in joint venture		—			—			(3,732	)		—			(3,732	)
Change in other assets		—			(4,285	)		10			—			(4,275	)

Net cash used in investing activities		—			(75,949	)		(75,785	)		—			(151,734	)


Cash flows from financing activities
Payment of debt and capital leases		(7,876	)		(1,742	)		(1,231	)		—			(10,849	)
Proceeds from borrowings		2,274			—			—			—			2,274
Debt financing costs incurred		(487	)		—			—			—			(487	)
Proceeds from sale of partnership interests		—			6,027			—			—			6,027
Change in intercompany balances with affiliates, net		66,676			(18,145	)		(31,064	)		(17,467	)		—
Distribution of minority interests		—			—			(4,092	)		—			(4,092	)

Net cash provided by (used in) financing activities		60,587			(13,860	)		(36,387	)		(17,467	)		(7,127	)

Decrease in cash and cash equivalents		—			(8,646	)		(1,062	)		—			(9,708	)
Cash and cash equivalents at beginning of period		—			97,243			1,562			—			98,805

Cash and cash equivalents at end of period	$	—		$	88,597		$	500		$	—		$	89,097

104

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
(in thousands)


	For the Period June 23, 2004 through September 30, 2004
				Subsidiary			Subsidiary						Condensed
	Parent Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated
Cash flows from operating activities
Net earnings (loss)	$	1,081		$	(1,967	)	$	24,060		$	(18,469	)	$	4,705
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		—			15,125			4,731			—			19,856
Amortization of loan costs		1,792			—			—			—			1,792
Minority interests		—			1,207			—			—			1,207
Deferred income taxes		—			3,234			—			—			3,234
Loss on disposal of assets, net		—			107			—			—			107
Equity in earnings of affiliates		(22,093	)		—			—			22,093			—
Changes in operating assets and liabilities:
Accounts receivable		—			9,080			(358	)		—			8,722
Inventories, prepaid expenses and other current assets		—			2,656			(4,237	)		—			(1,581	)
Accounts payable and other accrued liabilities		12,538			(1,347	)		14,787			—			25,978

Net cash provided by (used in) operating activities		(6,682	)		28,095			38,983			3,624			64,020


Cash flows from investing activities
Purchases of property and equipment		—			(4,140	)		(40,666	)		—			(44,806	)
Acquisitions including working capital settlement payments		—			(1,950	)		—			—			(1,950	)
Change in other assets		—			1,067			(270	)		—			797

Net cash used in investing activities		—			(5,023	)		(40,936	)		—			(45,959	)


Cash flows from financing activities
Payment of debt and capital leases		(1,129	)		(578	)		(145	)		—			(1,852	)
Debt financing costs incurred		(349	)		—			—			—			(349	)
Costs paid for sale of partnership interests		—			(15	)		—			—			(15	)
Change in intercompany balances with affiliates, net		8,160			(5,141	)		605			(3,624	)		—
Distribution of minority interests		—			—			(983	)		—			(983	)

Net cash provided by (used in) financing activities		6,682			(5,734	)		(523	)		(3,624	)		(3,199	)

Increase (decrease) in cash and cash equivalents		—			17,338			(2,476	)		—			14,862
Cash and cash equivalents at beginning of period		—			79,905			4,038			—			83,943

Cash and cash equivalents at end of period	$	—		$	97,243		$	1,562		$	—		$	98,805

105

IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
(in thousands)


	For the Period October 1, 2003 through June 22, 2004
				Subsidiary			Subsidiary						Condensed
Predecessor	Parent Issuer			Guarantors			Non-Guarantors			Eliminations			Consolidated
Cash flows from operating activities
Net earnings (loss)	$	(48,772	)	$	15,228		$	59,540		$	(63,126	)	$	(37,130	)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		—			36,520			11,708			—			48,228
Amortization of loan costs		2,262			—			—			—			2,262
Minority interests		—			3,098			—			—			3,098
Gain on disposal of assets, net		—			(3,731	)		—			—			(3,731	)
Loss on early extinguishment of debt		14,993			—			—			—			14,993
Write-off of debt issue costs		8,850			—			—			—			8,850
Equity in earnings of affiliates		(74,767	)		—			—			74,767			—
Changes in operating assets and liabilities:
Accounts receivable		—			(3,980	)		(4,562	)		—			(8,542	)
Establishment of accounts receivable of recent acquisition		—			(11,325	)		—			—			(11,325	)
Inventories, prepaid expenses and other current assets		—			(3,417	)		(2,239	)		—			(5,656	)
Accounts payable and other accrued liabilities		(19,695	)		10,471			16,215			—			6,991

Net cash provided by (used in) operating activities		(117,129	)		42,864			80,662			11,641			18,038


Cash flows from investing activities
Purchase of property and equipment		—			(42,958	)		(39,307	)		—			(82,265	)
Acquisitions including working capital settlement payments		—			(23,032	)		—			—			(23,032	)
Proceeds from sale of assets		—			14,928			—			—			14,928
Change in other assets		—			(1,950	)		300			—			(1,650	)

Net cash used in investing activities		—			(53,012	)		(39,007	)		—			(92,019	)


Cash flows from financing activities
Proceeds from issuance of common stock, net		529,000			—			—			—			529,000
Proceeds from debt borrowings		900,000			—			—			—			900,000
Cash paid to security holders		(677,780	)		—			—			—			(677,780	)
Payment of merger costs incurred by members of IASIS Investment LLC		(10,800	)		—			—			—			(10,800	)
Payment of debt and capital leases		(649,309	)		(1,019	)		(1,043	)		—			(651,371	)
Debt financing costs incurred		(31,469	)		—			—			—			(31,469	)
Proceeds from sale of partnership interests		—			1,784			—			—			1,784
Change in intercompany balances with affiliates, net		57,487			(11,497	)		(34,349	)		(11,641	)		—
Distribution of minority interests		—			—			(2,510	)		—			(2,510	)

Net cash provided by (used in) financing activities		117,129			(10,732	)		(37,902	)		(11,641	)		56,854

Increase (decrease) in cash and cash equivalents		—			(20,880	)		3,753			—			(17,127	)
Cash and cash equivalents at beginning of period		—			100,785			285			—			101,070

Cash and cash equivalents at end of period	$	—		$	79,905		$	4,038		$	—		$	83,943

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluations of Disclosure Controls and Procedures

Under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of September 30, 2006. Based on this evaluation, the principal executive officer and principal accounting officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic reports.

Changes in Internal Control Over Financial Reporting

During the fourth fiscal quarter of the period covered by this report, there has been no change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

The following table sets forth the name, age and position of the directors and executive officers of IAS and executive officers of IASIS. See “Certain Relationships and Related Transactions.”


Name	Age	Position
David R. White	59	Chairman of the Board and Chief Executive Officer
Sandra K. McRee	50	President and Chief Operating Officer
W. Carl Whitmer	42	Chief Financial Officer
Frank A. Coyle	42	Secretary and General Counsel
James Moake	37	Operations Chief Financial Officer
John M. Doyle	46	Vice President and Chief Accounting Officer
Larry D. Hancock	48	President, Utah Market
Brian Dunn	43	President, Arizona Market
Jim McKinney	53	President, Florida, Texas and Nevada Markets
Steve King	40	Chief Financial Officer, Utah Market
Roger Armstrong	57	Chief Financial Officer, Arizona Market
Shane Wells	37	Chief Financial Officer, Florida, Texas and Nevada Markets
Peter Stanos	43	Vice President, Ethics and Business Practices
David Bonderman	64	Director
Jonathan J. Coslet	42	Director
Kirk E. Gorman	56	Director
Curtis S. Lane	49	Director
Todd B. Sisitsky	35	Director
Paul S. Levy	59	Director
Jeffrey C. Lightcap	47	Director
Sharad Mansukani	37	Director

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David R. White was non-executive Chairman of the Board of Directors of IAS from October 1999 until November 30, 2000. Mr. White was appointed Chief Executive Officer of IAS on December 1, 2000. He also served as President of IAS from May 2001 through May 2004. He was appointed Chief Executive Officer of IASIS upon consummation of the Transactions. Mr. White served as President and Chief Executive Officer of LifeTrust, an assisted living company, from November 1998 until November 2000. From June 1994 to September 1998, Mr. White served as President of the Atlantic Group at Columbia/HCA, where he was responsible for 45 hospitals located in nine states. Previously, Mr. White was Executive Vice President and Chief Operating Officer at Community Health Systems, Inc., a for-profit hospital management company that operated approximately 20 acute-care hospitals.

Sandra K. McRee was appointed Chief Operating Officer of IAS in May 2001 and President in May 2004. She was appointed President and Chief Operating Officer of IASIS upon consummation of the Transactions. Ms. McRee was a Regional Vice President for Province Healthcare Corporation from April 1999 until May 2001, where she oversaw the operations of five facilities in Florida, Louisiana and Mississippi. Ms. McRee also served as Vice President, Operations of Province Healthcare Corporation from October 1998 through March 1999. From August 1997 through September 1998, she served as a Division President for Columbia/ HCA. Ms. McRee also served as a Group Vice President, Operations for Columbia/HCA from May 1995 through July 1997. Prior to joining Columbia/HCA, Ms. McRee served as an Assistant Vice President for Community Health Systems Inc. where she oversaw 36 facilities. Ms. McRee has spent her entire professional career in the healthcare industry.

W. Carl Whitmer served as Vice President and Treasurer of IAS from March 2000 through October 2001, and was appointed Chief Financial Officer of IAS effective November 2001. He was appointed Chief Financial Officer of IASIS upon consummation of the Transactions. Prior to joining our company, Mr. Whitmer served as Vice President of Finance and Treasurer of PhyCor Inc., where he was employed from July 1994 through February 2000. Mr. Whitmer’s responsibilities at PhyCor included acquisitions, capital planning and management, investor relations, treasury management and external financial reporting. Prior to joining PhyCor, Inc. Mr. Whitmer served as a Senior Manager with the accounting firm of KPMG LLP, where he was employed from July 1986 to July 1994.

Frank A. Coyle has been Secretary and General Counsel of IAS since October 1999. He was appointed Secretary and General Counsel of IASIS upon consummation of the Transactions. From August 1998 until October 1999, Mr. Coyle served as Secretary and General Counsel of a company formed by members of our management that was merged into one of our subsidiaries. Mr. Coyle served from May 1995 to August 1998 as Assistant Vice President Development in Physician Services and in-house Development Counsel for Columbia/HCA. From May 1990 to May 1995, Mr. Coyle was an attorney with Baker, Worthington, Crossley, Stansberry & Woolf where his work included mergers, acquisitions, securities transactions, not-for-profit representation and formation of Tennessee health maintenance organizations.

James Moake was appointed Operations Chief Financial Officer in February 2005. Previously, he has served as a Division Chief Financial Officer of IASIS since March 2003. From November 2002 to March 2003, Mr. Moake served as Operations Controller of IAS. Prior to joining the company, from March 2000 to November 2002, he served as the Chief Financial Officer for two regional medical centers of Province Healthcare Corporation. Mr. Moake served as the Chief Financial Officer of HMA, Inc.’s Community Hospital of Lancaster (PA) from July 1999 to March 2000 and the Assistant Chief Financial Officer of HMA, Inc.’s Biloxi Regional Medical Center (MS) from June 1998 to June 1999. From December 1994 to May 1998, he served as the Chief Financial Officer of Grant Regional Health Center, Inc. in Wisconsin.

John M. Doyle served as Vice President and Treasurer of IAS from April 2002 and was appointed Vice President and Treasurer of IASIS upon consummation of the Transactions. He was appointed Vice President and Chief Accounting Officer of IASIS effective July 2006. Mr. Doyle was a Senior Manager at Ernst & Young LLP from February 1997 until March 2002 and at KPMG LLP from August 1994 to January 1997, where he specialized in healthcare audit and business advisory services, including mergers and acquisitions. In addition, from October 1991 to August 1994, Mr. Doyle was the Chief Financial Officer for two community hospitals in East Tennessee and North Carolina.

Larry D. Hancock was named President for the Utah Market of IAS in June 2003. He was appointed President of the Utah Market of IASIS upon consummation of the Transactions. He served as President of Altius

108

Health Plans in Salt Lake City, Utah from 1998 to June 2003. Prior to joining Altius, he served as President and Chief Executive Officer of American Family Care of Utah from July 1996 to September 1998. He was Chief Financial Officer of St. Mark’s Hospital in Salt Lake City from 1989 to 1994 and then served as President and Chief Executive Officer of St. Mark’s from 1994 to 1996. Prior to 1989, Mr. Hancock served as Chief Financial Officer and Controller of various hospitals owned and operated by proprietary healthcare organizations.

Brian Dunn was named President of the Arizona Market of IASIS in April 2006. From August 2002 to March 2006, Mr. Dunn was Chief Executive officer for Salt Lake Regional Medical Center, an IASIS Utah hospital. From August 2001 to August 2002, Mr. Dunn was Senior Vice President for Ingenix, Inc., a subsidiary of United Health Group. From October 1995 to August 2001, Mr. Dunn was employed by Community Health Systems, Inc. as Director of Acquisitions and Chief Executive Officer of Lakeway Regional Hospital. Mr. Dunn has also served as Chief Executive Officer and Chief Operating Officer for various hospitals with HCA and HealthTrust. Mr. Dunn received a Bachelor of Arts Degree from the University of Utah and Master of Health Administration Degree from Virginia Commonwealth University.

Jim McKinney was named President of the Texas Market effective April 2006 and the Florida Market effective July 2006 in addition to President of the Nevada Market of IAS and IASIS, which he has held since August 2004. He served as Vice President, Operations and Development from April 2004 to August 2004. Before joining IAS, Mr. McKinney was President/Chief Operating Officer for Leland Medical Centers, a hospital development and management corporation. Prior to joining Leland Medical Centers, Mr. McKinney served as President/CEO of Brim Healthcare, Inc., the nation’s second largest hospital management company. While at Brim Healthcare, Inc., Mr. McKinney was responsible for 60 hospitals representing $700 million in net revenue and over 13,000 employees. Additionally, Mr. McKinney has served in numerous operational, management and development positions in hospital systems for the past 30 years.

Steve King was named Chief Financial Officer of the Utah Market in October 2006. Mr. King served as a Hospital Chief Financial Officer for Baptist Health System in San Antonio, Texas from 2003 to October 2006. From 2000 to 2003, Mr. King worked for Tenet Healthcare Corporation. Mr King has 17 years of experience in the healthcare industry.

Roger Armstrong was named Chief Financial Officer of the Arizona Market in July 2006. Mr. Armstrong was employed by Vanguard Health Systems, Inc. as Chief Financial Officer of Paradise Valley Medical Center from May 2003 to July 2006. Prior to that time, Mr. Armstrong served as a Regional Chief Financial Officer for Brim Healthcare, Inc. from April 2000 to May 2003.

Shane Wells joined IASIS in August 2006 as the market Chief Financial Officer for the Texas and Nevada Markets. On October 1, 2006, Mr. Wells assumed Market Chief Financial Officer responsibility for the Florida market as well. Prior to joining IASIS, Mr. Wells was a hospital Chief Financial Officer with Health Management Associates, Inc.

Peter Stanos served as Regional Director Clinical Operations, Utah Market of IAS from July 2002 until April 2003. Mr. Stanos was appointed Vice President, Ethics & Business Practices of IAS in April 2003. He was appointed Vice President, Ethics & Business Practices of IASIS upon consummation of the Transactions. From May 2000 until July 2002, Mr. Stanos was employed by Province Healthcare Corporation as Chief Quality Officer of Havasu Regional Medical Center and as Regional Director of Quality and Resource Management. From 1997 until 2000, Mr. Stanos was employed by HCA and Triad Hospitals, Inc. as an Associate Administrator and Director of Quality and Resource Management, Materials, Pharmacy and Risk Management. Prior to joining HCA, Mr. Stanos served as Regional Director of several healthcare companies, as well as an independent healthcare consultant.

David Bonderman became a Director of IAS upon the consummation of the Transactions. Mr. Bonderman is a founder of TPG and serves as a principal and general partner of the firm. Prior to forming TPG in 1993, Mr. Bonderman was Chief Operating Officer of the Robert M. Bass Group, Inc. (now doing business as Keystone, Inc.) in Fort Worth, Texas. Mr. Bonderman serves on the boards of directors of the following public companies: Burger King Holdings, Inc., CoStar Group, Inc., Gemalto N.V. and Ryanair Holdings, plc. He also serves on the boards of directors of the Wilderness Society, Grand Canyon Trust, World Wildlife Fund, University of Washington Foundation and the American Himalayan Foundation.

Jonathan J. Coslet became a Director of IAS upon the consummation of the Transactions. Mr. Coslet is a Senior Partner of TPG, responsible for the firm’s generalist and healthcare investment activities. Mr. Coslet is also a member of the firm’s Investment Committee and Management Committee. Prior to joining TPG in 1993, Mr. Coslet

109

was in the Investment Banking department of Donaldson, Lufkin & Jenrette, specializing in leveraged acquisitions and high yield finance from 1991 to 1993. Mr. Coslet serves on the boards of directors of Quintiles Transnational Corp., J.Crew Group, Inc., The Neiman Marcus Group, Inc., and PETCO Animal Supplies, Inc.

Kirk E. Gorman was appointed a Director of IAS in August 2004. Mr. Gorman currently serves as Senior Vice President and Chief Financial Officer of Jefferson Health System, a not-for-profit health system based in Radnor, Pennsylvania, which he joined in October 2003. Prior to joining Jefferson Health System, Mr. Gorman served as Senior Vice President and Chief Financial Officer of Universal Health Services, Inc., a public hospital company based in Pennsylvania, from 1987 to February 2003. Mr. Gorman also has 13 years of experience in the banking industry and served as Senior Vice President of Mellon Bank prior to his work in the healthcare industry. Mr. Gorman serves as a director of Viasys Healthcare Inc.

Curtis S. Lane became a Director of IAS upon the consummation of the Transactions. Mr. Lane is a Senior Managing Director of MTS Health Partners, L.P., a merchant banking firm focused on healthcare advisory and investment opportunities. Prior to forming MTS Health Partners, L.P. in 2000, Mr. Lane founded and managed the healthcare investment banking group at Bear, Stearns & Co. Inc. from its inception in 1986 until 1998.

Todd B. Sisitsky became a Director of IAS upon the consummation of the Transactions. Mr. Sisitsky manages TPG’s health care investment activities. Prior to joining TPG in 2003, Mr. Sisitsky worked at Forstmann Little & Company from 2001 to 2003 and Oak Hill Capital Partners from 1999 to 2001.

Paul S. Levy has been a Director of IAS since October 1999. Mr. Levy is a Senior Managing Director of JLL Partners, Inc., which he founded in 1988. Mr. Levy serves as a director of several companies, including Builders FirstSource, Inc., Fairfield Manufacturing Company, Inc., Lancer Industries Inc., Motor Coach Industries International Inc., Mosaic Sales Solutions and PGT Industries.

Jeffrey C. Lightcap has been a Director of IAS since October 1999. Mr. Lightcap is a Senior Managing Director of HealthCor Group. Prior to HealthCor Group, Mr. Lightcap was a Senior Managing Director at JLL Partners, which he joined in June 1997. From February 1993 to May 1997, Mr. Lightcap was a Managing Director at Merrill Lynch & Co., Inc., where he was the head of leveraged buyout firm coverage for the mergers and acquisitions group.

Sharad Mansukani became a Director of IAS in April 2005. Dr. Mansukani serves as a senior advisor of TPG, and serves on the faculty at both the University of Pennsylvania and Temple University School of Medicine. Dr. Mansukani completed a residency and fellowship in ophthalmology at the University of Pennsylvania School of Medicine and a fellowship in quality management and managed care at the Wharton School of Business.

The certificate of incorporation and by-laws of IAS provide that its board of directors will consist of not less than three nor more than 15 members, the exact number of which shall be determined by the board of directors in a resolution. The directors are elected at the annual meeting of stockholders for one-year terms and until their successors are duly elected and qualified. The executive officers serve at the discretion of the board of directors.

Pursuant to the limited liability company operating agreement of IASIS Investment, JLL is entitled to nominate two directors to IAS’s board of directors. TPG is entitled to nominate the remaining directors. Messrs. Levy and Lightcap serve on IAS’s board of directors as designees of JLL. The remaining directors serve as designees of TPG.

Audit Committee Financial Expert

The current members of our audit committee are Messrs. Lane, Sisitsky, Lightcap and Gorman. IAS’s board of directors has determined that Todd Sisitsky is an “audit committee financial expert” as that term is defined in Item 401(h) of Regulation S-K promulgated by the SEC.

110

Code of Ethics

We have adopted a code of ethics for our principal executive officer, principal accounting and financial officer, controller and persons performing similar functions, which is Exhibit 14 to this annual report on Form 10-K and which also has been posted on our Internet website at www.iasishealthcare.com. Please note that our Internet website address is provided as an inactive textual reference only. We will make any legally required disclosures regarding amendments to, or waivers of, provisions of our code of ethics on our Internet website.

Item 11. Executive Compensation

The following table provides information as to annual, long-term or other compensation during the last three fiscal years for:

	–		the individual serving as Chief Executive Officer of the Company during the fiscal year ended September 30, 2006; and

	–		the four other most highly compensated executive officers of the Company who were serving as executive officers of the Company at September 30, 2006.


	Annual Compensation									Long-Term Compensation Awards
								Other Annual		Securities Underlying		All Other
Name and Principal Position	Year		Salary ($)		Bonus ($)			Compensation ($)(1)		Options (#)		Compensation ($)
David R. White ⁽²⁾		2006	$	740,385	$	370,192		$	—		5,500	$	6,521	⁽⁴⁾
Chairman of the Board		2005		770,000		1,248,940			—		194,000		5,967
& Chief Executive Officer		2004		700,000		4,400,000	⁽³⁾		—		292,000		6,500

Sandra K. McRee ⁽⁵⁾		2006	$	514,800	$	128,700		$	—		3,250	$	7,500	⁽⁴⁾
President &		2005		514,800		417,503			—		85,200		7,000
Chief Operating Officer		2004		468,000		1,968,000	⁽³⁾		—		116,800		6,500

W. Carl Whitmer ⁽⁶⁾		2006	$	458,920	$	114,730		$	—		3,250	$	6,543	⁽⁴⁾
Chief Financial Officer		2005		459,000		372,184			—		85,200		6,055
		2004		417,200		1,917,200	⁽³⁾		—		116,800		4,936

Frank A. Coyle ⁽⁷⁾		2006	$	317,744	$	55,605		$	—		10,000	$	6,435	⁽⁴⁾
Secretary & General Counsel		2005		307,764		107,717			—		30,000		6,093
		2004		274,917		96,221	⁽³⁾		—		30,000		5,628

Larry Hancock ⁽⁸⁾		2006	$	301,913	$	150,956		$	—		10,000	$	4,935	⁽⁴⁾
President, Utah Market		2005		260,738		164,516			—		20,000		7,000
		2004		191,250		34,135			—		20,000		—


(1)		Perquisites and other personal benefits did not exceed the lesser of either $50,000 or 10% of the total of annual salary and bonus for any named executive officer.

(2)		Mr. White served as IAS’s non-executive Chairman of the Board of Directors from October 1999 until November 2000. He was appointed Chief Executive Officer in December 2000 and President in May 2001. He served as President of IAS until May 2004 and continues to serve as Chief Executive Officer of IAS. Mr. White was appointed Chief Executive Officer of IASIS upon consummation of the Transactions.

(3)		Includes annual bonus compensation and special bonus compensation received in connection with the Transactions.

(4)		Contribution on behalf of the employee to 401(k) plan.

(5)		Ms. McRee was appointed IAS’s Chief Operating Officer in May 2001 and President in May 2004. She was appointed President and Chief Operating Officer of IASIS upon consummation of the Transactions.

(6)		Mr. Whitmer served as IAS’s Vice President and Treasurer from March 2000 until October 2001. He was appointed Chief Financial Officer of IAS in November 2001. He was appointed Chief Financial Officer of IASIS upon consummation of the Transactions.

111


(7)		Mr. Coyle has been Secretary and General Counsel of IAS since October 1999. He was appointed Secretary and General Counsel of IASIS upon consummation of the Transactions.

(8)		Mr. Hancock was appointed President, Utah Market for IAS in June 2003. He was appointed President Utah Market for IASIS upon consummation of the Transactions.

OPTION GRANTS IN LAST FISCAL YEAR

The following table provides information concerning individual grants of stock options made during the fiscal year ended September 30, 2006 to each of the named executive officers:


	Number of		Percent of Total						Potential Realizable Value at
	Securities		Options						Assumed Annual Rates of Stock Price
	Underlying		Granted to						Appreciation
	Options		Employees in		Exercise				for Option Term
Name	Granted (#)		Fiscal Year (%)		Price ($)		Expiration Date		5% ($)		10% ($)
David R. White		5,500		2.3%	$	35.68		April 1, 2016	$	123,414	$	312,756
Sandra K. McRee		3,250		1.4%	$	35.68		April 1, 2016	$	72,927	$	184,810
W. Carl Whitmer		3,250		1.4%	$	35.68		April 1, 2016	$	72,927	$	184,810
Frank A. Coyle		10,000		4.2%	$	35.68		April 1, 2016	$	224,390	$	568,647
Larry Hancock		10,000		4.2%	$	35.68		April 1, 2016	$	224,390	$	568,647

The following table summarizes certain information with respect to unexercised options to purchase common and preferred stock of IAS held by the named executive officers at September 30, 2006. The securities underlying unexercised options were valued at $35.68 per common share and $1,000.00 per preferred share.

2006 FISCAL YEAR-END OPTION VALUES


	Number of Securities Underlying				Value of Unexercised
	Unexercised-Options Held at				In-The-Money Options at
	September 30, 2006				September 30, 2006(1)
Name	Exercisable (#)		Unexercisable (#)		Exercisable ($)		Unexercisable ($)
David R. White		256,371		297,000	$	5,743,136	$	4,570,720
Sandra K. McRee		109,151		141,490	$	2,198,180	$	2,167,603
W. Carl Whitmer		99,828		141,490	$	1,952,049	$	2,167,603
Frank A. Coyle		23,549		52,000	$	428,746	$	658,560
Larry Hancock		15,773		38,000	$	287,784	$	439,040


(1)		There is no public market for the common stock of IAS. The dollar values of unexercised in-the-money options to purchase IAS common shares represent the difference between the assumed fair market value of $35.68 per share at September 30, 2006, as determined by the Board of Directors in accordance with IAS’s 2004 Stock Option Plan, and the exercise price of the options. Value of the unexercised in-the-money options to purchase preferred shares of IAS were based on the difference of the preferred stock’s accreted value per share of $1,311.09 and the exercise price of the rollover options of $437.48 per share. The accreted value of IAS preferred stock has been determined based on the initial value of $1,000 per share at date of issuance on June 22, 2004, plus a dividend rate of 11.75% per year accumulated and unpaid since such date.

There were no option exercises during 2006 by the named executive officers in the table above.

We entered into rollover option agreements in connection with the Transactions with each of the named executive officers and other executive officers pursuant to which such individuals agreed to roll over options to purchase an aggregate 299,900 shares of common stock of IAS into options to purchase an aggregate 3,263 shares of preferred stock of IAS, with an exercise price of $437.48 per share, and an aggregate 163,152 shares of new common stock of IAS, with an exercise price of $8.75 per share. These new rollover options are fully vested and shall remain outstanding and exercisable for the remainder of their original term.

In connection with the Transactions, each outstanding option other than the rollover options granted under the IASIS Healthcare Corporation 2000 Stock Option Plan was cancelled in exchange for a per share cash payment equal to the excess of the per share merger consideration over the per share exercise price of such option. In addition, the 2000 Stock Option Plan was terminated in connection with the Transactions.

In addition, in connection with the Transactions, IAS adopted the IASIS Healthcare Corporation 2004 Stock Option Plan. Each of Mr. White, Ms. McRee and Mr. Whitmer were granted options to purchase 292,000, 116,800 and 116,800 shares of common stock of IAS, respectively, at an exercise price of $20.00 per share. Mr. White’s options vest in four equal installments on each anniversary of the closing of the Transactions, and Ms.

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McRee’s and Mr. Whitmer’s options vest in five equal installments on each anniversary of the closing of the Transactions.

Directors’ Compensation

On February 14, 2005, IAS granted Kirk Gorman options to purchase 1,175 shares of IAS’s common stock and committed to grant Mr. Gorman, on each of the first, second, third and fourth anniversaries of the grant date, provided that he is still a director, options to purchase a number of shares valued at $18,750 based on the fair market value of the common stock on each such anniversary. These grants were made pursuant to the Form of Stock Option Grant Agreement under IAS’s 2004 Stock Option Plan. In addition, IAS entered into a Director Compensation and Restricted Share Award Agreement with Mr. Gorman on the grant date. Pursuant to the Director Compensation and Restricted Share Award Agreement, IAS agreed to pay Mr. Gorman cash compensation of $9,375 for the fiscal quarter ended December 31, 2004 and annual cash compensation of $37,500 for the remaining term of the Director Compensation and Restricted Share Award Agreement, payable in equal quarterly installments, in consideration for his services as a member of IAS’s Board of Directors. IAS also granted Mr. Gorman 1,175 shares of restricted common stock on the grant date and committed to grant Mr. Gorman, on each of the first, second, third and fourth anniversaries of the grant date, provided that he is still a director, restricted common stock valued at $18,750 based on the fair market value of the common stock on each such anniversary.

On April 14, 2005, IAS granted Sharad Mansukani options to purchase 938 shares of IAS’s common stock and committed to grant Dr. Mansukani, on each of the first, second, third and fourth anniversaries of the grant date, provided that he is still a director, options to purchase a number of shares of common stock valued at $18,750 based on the fair market value of the common stock on each such anniversary. These grants were made pursuant to the Form of Stock Option Grant Agreement under IAS’s 2004 Stock Option Plan. In addition, IAS entered into a Director Compensation and Restricted Share Award Agreement with Dr. Mansukani on the grant date. Pursuant to the Director Compensation and Restricted Share Award Agreement, IAS agreed to pay Dr. Mansukani annual cash compensation of $37,500 for the term of the Director Compensation and Restricted Share Award Agreement, payable in equal quarterly installments, in consideration for his services as a member of IAS’s Board of Directors. IAS also granted Dr. Mansukani 938 shares of restricted common stock on the grant date and committed to grant Dr. Mansukani, on each of the first, second, third and fourth anniversaries of the grant date, provided that he is still a director, restricted common stock valued at $18,750 based on the fair market value of the common stock on each such anniversary.

Currently, IAS’s other directors do not receive any compensation for their services. IAS does, however, reimburse them for travel expenses and other out-of-pocket costs incurred in connection with attendance at board of directors and committee meetings.

Employment Agreements

On May 4, 2004, we entered into five-year employment agreements that commenced upon the consummation of the Transactions with each of David R. White, under which he serves as Chairman of the Board and Chief Executive Officer, Sandra K. McRee, under which she serves as Chief Operating Officer and President, and W. Carl Whitmer, under which he serves as Chief Financial Officer. Mr. White’s employment agreement provides for an initial base salary of $700,000 each year. Ms. McRee’s employment agreement provides for an initial base salary of $468,000 per year. Mr. Whitmer’s employment agreement provides for an initial base salary of $417,200 each year. Mr. White is entitled to receive an annual target bonus of up to 100% of his base salary and an annual maximum bonus of up to 200% of his base salary based upon the achievement of certain performance objectives set annually by the IAS board of directors. Ms. McRee and Mr. Whitmer also are entitled to receive an annual target bonus of up to 50% of their base salaries and an annual maximum bonus of up to 100% of their base salaries based upon the achievement of certain performance objectives set annually by the IAS board of directors. The base salaries of Mr. White, Ms. McRee and Mr. Whitmer under such employment agreements during fiscal year 2006 were $740,385, $514,800 and $458,920, respectively.

The employment agreements also contain severance provisions regarding compensation upon termination of employment under certain circumstances. If we terminate Mr. White’s, Ms. McRee’s or Mr. Whitmer’s employment without cause or any of them leave our company for “good reason,” such person will be entitled to

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receive a severance payment that includes an amount equal to two times the applicable annual base salary, a lump sum payment equal to the present value of all other benefits such person would have received through two years after the date of termination and, if eligible to receive a pro-rata bonus (such bonus to be determined based on a formula described in such person’s employment agreement) then two-times the pro rata bonus plus an additional pro-rata bonus payment. Additionally, the next tranche of options scheduled to vest will immediately vest and become exercisable and all vested options (other than the rollover options) may be exercised within one year from the date of termination or if eligible to receive a pro-rata bonus, then such options can be exercised within two years of termination. In addition, each of Mr. White and Ms. McRee has the right to terminate their employment one year after a change in control, or six months if the acquirer is in the healthcare facilities business, and receive their severance payments. The agreements contain non-competition and non-solicitation provisions pursuant to which Mr. White, Ms. McRee, and Mr. Whitmer will not compete with IAS or its subsidiaries within 25 miles of the location of any hospital we manage for two years following the date of termination of such person’s employment. The agreements provide that during this time such person will not solicit or recruit our business partners and employees. In certain circumstances following a change in control, IAS has agreed to compensate Mr. White in the event any payment under his employment agreement is subject to an excise tax under Section 4999 of the Internal Revenue Code.

By the terms of their employment agreements, upon the consummation of the Transactions, Mr. White was granted an option to purchase 2% of the total outstanding common stock of IAS, and each of Ms. McRee and Mr. Whitmer were granted options to purchase 0.8% of the total outstanding common stock of IAS under the IASIS Healthcare Corporation 2004 Stock Option Plan. Mr. White’s options vest in four equal installments on each anniversary of the closing of the Transactions and Ms. McRee and Mr. Whitmer’s options vest in five equal installments on each anniversary of the closing of the Transactions. In the event of a change in control, any portion of the stock option that is not vested and exercisable shall immediately vest and become exercisable. Additionally, in the event IAS consummates a merger, business combination or other similar transaction with a company or entity that does not constitute a change in control and immediately following the consummation of such a transaction, the investor group led by TPG, which established IASIS Investment, as of the consummation of the Transactions and their affiliates beneficially own less than 50% of the voting power of such person and Mr. White, Ms. McRee or Mr. Whitmer’s employment is terminated by IAS without cause or by the executive for “good reason,” any portion of the stock option that has not become vested and exercisable as of the date of termination shall become immediately vested and exercisable.

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

During fiscal 2006, IAS’s compensation committee was comprised of Messrs. White, Bonderman and Coslet. Messrs. Bonderman and Coslet have never been officers of IAS.

Non-qualified Executive Savings Plan

We introduced our non-qualified executive savings plan July 1, 2006. The plan is a voluntary, tax-deferred savings vehicle that is available to those employees, including physicians, who have reached a specific level of earnings and who will play a significant role in the long-term strategy of our Company.

An eligible employee must contribute the maximum allowed by law to the IASIS 401(k) Retirement Savings Plan in order to participate in the non-qualified executive savings plan. There are two types of deferrals available under the plan: excess deferrals and additional deferrals.

Excess deferrals are contributions that are deposited into the non-qualified executive savings plan because either (a) the participant’s earnings have exceeded $225,000 and/or (b) the participant’s deferrals into the 401(k) retirement plan have reached a stipulated dollar limit ($15,000 in 2006). Excess deferrals are automatically deposited into the nonqualified executive savings plan if these limits are reached. Physician excess deferrals are not matched. Executive excess deferrals are matched at the same rate as contributions to the 401(k) retirement plan. There is a five-year service requirement for participants to vest in the IASIS excess matching contributions.

Additional deferrals are contributions to the non-qualified executive savings plan that are independent of a participant’s 401(k) contribution election.

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The non-qualified executive savings plan offers a range of investment options that act as “benchmark funds.” Benchmark funds are defined as the investment fund or funds used to represent the performance and current deemed balance of a participant’s non-qualified account, which is considered a notional deferred compensation account. Contributions become part of our general assets.

Stock Option Plan

IAS’s 2004 Stock Option Plan was established to promote our interests by providing our key employees, directors, service providers and consultants with an additional incentive to continue to work for or to perform services for us, and to improve our growth and profitability. The options granted under the plan represent the right to purchase IAS common stock upon exercise. Each option shall be identified as either an incentive stock option or a non-qualified stock option. The plan was adopted by the board of directors and sole stockholder of IAS in connection with the Transactions.

Generally, the exercise price of the options will equal the fair market value of a share of the common stock as of the grant date as determined by the IAS board of directors. Upon a change in control, the options will become 100% vested if the participant’s employment is terminated without “cause” or by the participant for good reason within the 2-year period immediately following such change in control. On a termination of a participant’s employment, unvested options automatically expire and vested options expire on the earlier of (i) the commencement of business on the date the employment is terminated for “cause”; (ii) 90 days after the date employment is terminated for any reason other than cause, death or disability; (iii) one year after the date employment is terminated by reason of death or disability; or (iv) the 10th anniversary of the grant date for such option.

In connection with the plan, each participant is expected to enter into an agreement that will generally provide that for the 90-day period following the later of (i) a termination of employment or (ii) six months and one day following the date that shares of common stock were acquired pursuant to the exercise of the option, we have the right to repurchase each share then owned by the participant at fair value, as determined in good faith by the IAS board of directors.

The plan is designed to comply with the requirements of “performance-based compensation” under Section 162(m) of the Internal Revenue Code, and the conditions for exemption from the short-swing profit recovery rules under Rule 16b-3 under the Securities Exchange Act. Under the terms of this plan, a committee established by the IAS board of directors administers this plan and may grant, in its discretion, incentive stock options and non-qualified stock options to our selected directors, officers, employees and consultants. Among other things, the committee has the power to determine at what time options may be granted as well as the terms, conditions, restrictions and performance criteria, if any, relating to the options. In addition, the plan prohibits the transfer of options, except by will or the laws of descent.

The maximum number of shares of IAS common stock that may be issued pursuant to options granted under the plan is 1,902,650; provided, however, that on each anniversary of the closing of the Transactions prior to an initial public offering, an additional 146,000 shares of common stock will be available for grant.

The terms and conditions applicable to options are set forth by the committee in each individual option agreement. However, no option granted under this plan may expire later than ten years from its date of grant. In addition, the committee may not grant incentive stock options to any person who is not our employee on the date of the grant, and the exercise price of an incentive stock option cannot be less than the fair market value of a share of IAS common stock on the date of its grant. The exercise price of an incentive stock option granted to a stockholder who owns at the time of the grant shares of IAS common stock with more than ten percent of the total combined voting power of all classes of IAS capital stock cannot be less than 110% of the fair market value of a share of IAS common stock on the date of the grant and the exercise period shall not exceed five years from the date of the grant. Furthermore, the aggregate fair market value of the shares of IAS common stock for which incentive stock options granted under this plan or any other stock option plan, determined as of the date of grant, that become exercisable

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for the first time by any person during any calendar year may not exceed $100,000. Any incentive stock options granted in excess of this limitation will be treated for all purposes as non-qualified stock options. As of September 30, 2006, we had no incentive stock options outstanding.

The IAS board of directors may amend this plan at any time for any reason subject to the stockholders approval to the extent necessary to meet the requirements of applicable law. However, no amendment can adversely affect an optionee’s right under a previously granted option without the consent of the optionee. Unless terminated earlier by the board, this plan will terminate by its terms effective June 22, 2014, although previously granted options may be exercised after plan termination in accordance with the terms of the plan as in effect upon termination.

As of September 30, 2006, options to purchase a total of 1,595,485 shares had been granted and were outstanding under this plan, of which 496,725 were then vested and exercisable.

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

Equity Compensation Plans

The table below sets forth the following information as of September 30, 2006 with respect to IAS’s compensation plans (including individual compensation arrangements) under which its equity securities are authorized for issuance, aggregated by (i) all compensation plans previously approved by IAS’s security holders and (ii) all compensation plans not previously approved by IAS’s security holders:

— the number of securities to be issued upon the exercise of outstanding options;

— the weighted-average exercise price of the outstanding options; and

— the number of securities remaining available for future issuance under the plans.

IAS’s 2004 Stock Option Plan has been approved by its stockholders. IAS has not issued any warrants or other rights to purchase its equity securities.


					Remaining Available
					for Future Issuance
	Number of				Under Equity
	Securities to be				Compensation Plans
	Issued Upon		Weighted-average		(excluding securities
	Exercise of		Exercise Price of		reflected in the
Plan Category	Outstanding Options		Outstanding Options		first column)
Equity compensation plans approved by security holders
Preferred stock(1)		3,263	$	437.48		—
Common stock(2)		1,758,637	$	21.02		307,165
Equity compensation plans not approved by security holders		—		—		—

Total		1,761,900	$	21.80		307,165


(1)		Shares of preferred stock to be issued upon exercise of rollover options issued in connection with the Transactions.

(2)		Consists of 163,152 shares of common stock to be issued upon exercise of rollover options issued in connection with the Transactions, with an exercise price of $8.75 per share, and 1,595,485 shares of common stock to be issued upon exercise of options issued under IAS’s 2004 Stock Option Plan, with exercise prices ranging from $20.00 to $35.68 per share. Of the 1,902,650 shares of common stock currently authorized for issuance under the 2004 Stock Option Plan, 307,165 shares remain available for future issuance.

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Beneficial Ownership of Common Stock

After giving effect to the Transactions, IASIS is a limited liability company consisting of 100% common interests owned by IAS. IAS’s outstanding shares consist of one class of common stock and one class of preferred stock, and 100% of the outstanding common and preferred stock is owned by IASIS Investment. In addition, senior members of IAS’s management converted a portion of their in-the-money options into options to purchase IAS’s common and preferred shares in connection with the Transactions. The outstanding equity interest of IASIS Investment is held 74.4% by TPG, 18.8% by JLL and approximately 6.8% by Trimaran.

The following table presents information as of December 19, 2006 regarding ownership of shares of IAS common stock and preferred stock by each person known to be a holder of more than 5% of IAS common stock and preferred stock, the members of the IAS board of directors, each executive officer named in the summary compensation table and all current directors and executive officers as a group.

When reviewing the following table, you should be aware that the amounts and percentage of common stock and preferred stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days.

Unless otherwise indicated, the address of each person listed below is 117 Seaboard Lane, Building E, Franklin, Tennessee 37067.


						Percentage of			Percentage of
	Preferred Shares		Common Shares			Preferred Shares			Common Shares
Beneficial Owners	Beneficially Owned (a)		Beneficially Owned (b)			Beneficially Owned			Beneficially Owned

IASIS Investment (c)		292,000		14,600,000			100.0	%		100.0	%
David R. White		1,213		255,158			*			*
Sandra K. McRee		890		108,261			*			*
W. Carl Whitmer		707		99,121			*			*
Frank A. Coyle		109		23,440			*			*
Larry Hancock		74		15,699			*			*
David Bonderman (d)		—		—			—			—
Jonathan J. Coslet (d)		—		—			—			—
Kirk E. Gorman		—		1,701	(e)		*			*
Curtis Lane		—		—			—			—
Todd B. Sisitsky		—		—			—			—
Paul S. Levy (f)		54,986		2,744,800			18.8	%		18.8	%
Jeffrey C. Lightcap		54,986		2,744,800			18.8	%		18.8	%
Sharad Mansukani		—		1,464	(e)		*			*
Current directors and executive officers as a group (21 persons)		295,067		15,134,613			100.0	%		100.0	%


*		Less than 1%.

(a)		The following shares of preferred stock subject to options converted by management in connection with the Transactions currently exercisable or exercisable within 60 days of December 19, 2006, are deemed outstanding for the purpose of computing the percentage ownership of the person holding such options but are not deemed outstanding for the purpose of computing the percentage ownership of any other person: Mr. White, 1,213; Ms. McRee, 890; Mr. Whitmer, 707; Mr. Coyle, 109; Mr. Hancock, 74; and all current directors and executive officers as a group (21 persons), 3,067.

(b)		The following shares of common stock subject to options converted by management in connection with the Transactions currently exercisable or exercisable within 60 days of December 19, 2006, are deemed outstanding for the purpose of computing the percentage ownership of the person holding such options but are not deemed outstanding for the purpose of computing the percentage ownership of

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		any other person: Mr. White, 255,158; Ms. McRee, 108,261; Mr. Whitmer, 99,121; Mr. Coyle, 23,440; Mr. Hancock, 15,699; and all current directors and executive officers as a group (21 persons), 534,613.

(c)		The membership interests of IASIS Investment are owned as follows: TPG, 74.4%, JLL, 18.8%, and Trimaran, 6.8%. TPG Advisors III, Inc. and TPG Advisors IV, Inc. through their ownership of TPG, which owns a controlling interest in IASIS Investment, may be deemed to beneficially own all of the shares of preferred stock and common stock owned by IASIS Investment.

(d)		David Bonderman, James G. Coulter and William S. Price, III are directors, executive officers and the sole shareholders of TPG Advisors III, Inc. and TPG Advisors IV, Inc. TPG Advisors III, Inc. and TPG Advisors IV, Inc. through their ownership of TPG, which owns a controlling interest in IASIS Investment, may be deemed to beneficially own all of the shares of preferred stock and common stock owned by IASIS Investment. Messrs. Bonderman, Coulter and Price, by virtue of their positions with TPG Advisors III, Inc. and TPG Advisors IV, Inc. may be deemed to have investment powers and beneficial ownership with respect to all of the shares of preferred stock and common stock owned by IASIS Investment. Each of Messrs. Bonderman, Coulter and Price disclaims beneficial ownership of these shares of preferred stock and common stock. None of Messrs. Coslet and Sisitsky has investment power over any of the shares of preferred stock and common stock owned by IASIS Investment.

(e)		Represents shares of restricted stock granted to Messrs. Gorman and Mansukani pursuant to Director Compensation and Restricted Stock Award Agreements.

(f)		Mr. Levy is a senior managing director of JLL Partners, Inc. and Mr. Lightcap is a shareholder of JLL Partners, Inc. which, through its controlling interest in JLL, which owns 18.8% of IASIS Investment, may be deemed to beneficially own 18.8% of the shares of preferred stock and common stock owned by IASIS Investment. Accordingly, Messrs. Levy and Lightcap may be deemed to beneficially own 18.8% of the shares of preferred stock and common stock owned by IASIS Investment.

All of the membership interests in IASIS are pledged to our lenders as security for our obligations under our senior secured credit facilities. In the event of a default under our senior secured credit facilities, our lenders would have the right to foreclose on such membership interests, which would result in a change in control of our company.

Item 13. Certain Relationships and Related Transactions.

IASIS Investment Limited Liability Company Operating Agreement

TPG is party to a limited liability company operating agreement of IASIS Investment with Trimaran and JLL. TPG, JLL and Trimaran hold approximately 74.4%, 18.8% and 6.8%, respectively, of the equity interests of IASIS Investment. TPG is the managing member of IASIS Investment.

Pursuant to this agreement, initially JLL is entitled to nominate two directors to the IAS board of directors, with the remainder of the board of directors to be nominated by TPG. The right of JLL to nominate two directors is subject to its ownership percentage in IASIS Investment remaining at or above 9.4%. In the event JLL’s ownership percentage in IASIS Investment falls below 9.4%, but is at least 4.7%, JLL will have the right to nominate one director. If JLL’s ownership percentage falls below 4.7%, it will not have the right to nominate any directors. The agreement also places certain restrictions on the transfer of membership interests in IASIS Investment. JLL and Trimaran have the right to participate in certain dispositions by TPG and can be required to participate on the same terms in any sale by TPG in excess of a specified percentage of its collective interest.

Investor Rights Agreement

After giving effect to the Transactions, IASIS Investment is the sole stockholder of IAS, which owns 100% of the common interests of IASIS. IASIS Investment is party to an investor rights agreement with IAS. Pursuant to this agreement, IASIS Investment can cause IAS to register its interests in IAS under the Securities Act and to maintain a shelf registration statement effective with respect to such interests. IASIS Investment is also entitled to participate on a pro rata basis in any registration of our equity interests under the Securities Act that IAS may undertake. The agreement also grants IASIS Investment preemptive rights over certain additional issuances of equity securities by IAS.

Management Services Agreement

Upon the consummation of the Transactions, we entered into a management services agreement with TPG GenPar III, L.P., TPG GenPar IV, L.P., both affiliates of TPG, JLL Partners Inc. and Trimaran Fund Management,

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L.L.C. under which we paid those parties a transaction fee equal to $15.0 million in the aggregate. The management services agreement provides that in exchange for consulting and management advisory services that will be provided to us by the investors, we will pay an aggregate monitoring fee of 0.25% of budgeted net revenue up to a maximum of $5.0 million per fiscal year to these parties (or certain of their respective affiliates) and reimburse them for their reasonable disbursements and out-of-pocket expenses. This monitoring fee will be subordinated to the senior subordinated notes in the event of a bankruptcy of the company. For the years ended September 30, 2006 and 2005, we paid $4.2 million and $3.8 million, respectively, in monitoring fees under the management services agreement.

Stockholders Agreement

In connection with the 1999 recapitalization transaction with Paracelsus Healthcare Corporation (currently known as Clarent Hospital Corporation) and acquisition of hospitals and related facilities from Tenet, JLL and the other investors in our company entered into a stockholders agreement dated October 8, 1999, as amended, governing their ownership of our company. We agreed to pay the administrative fees and expenses of JLL during the term of the stockholders agreement. During the year ended September 30, 2004, we paid JLL approximately $165,000 for its administrative fees and expenses. The stockholders agreement terminated on June 22, 2004.

Tax Sharing Agreement and Other Tax Allocations

Prior to the consummation of the Transactions, IAS and some of its subsidiaries were included in JLL’s consolidated group for U.S. federal income tax purposes as well as in some consolidated, combined or unitary groups which included JLL for state, local and foreign income tax purposes. IAS and JLL entered into a tax sharing agreement in connection with the recapitalization that occurred in October 1999. The tax sharing agreement required IAS to make payments to JLL such that, with respect to tax returns for any taxable period in which IAS or any of its subsidiaries were included in JLL’s consolidated group or any combined group including JLL, the amount of taxes to be paid by IAS would be determined, subject to some adjustments, as if it and each of its subsidiaries included in JLL’s consolidated group or a combined group including JLL filed their own consolidated, combined or unitary tax returns. The tax sharing agreement with JLL terminated on June 22, 2004.

Item 14. Principal Accountant Fees and Services

The following table sets forth the aggregate fees for services related to fiscal years 2006 and 2005 provided by Ernst & Young LLP, our principal accountants:


	Fiscal		Fiscal
	2006		2005
Audit Fees (a)	$	1,115,700	$	1,010,400
Audit-Related Fees (b)		315,500		6,400
Tax Fees		12,000		86,700
All Other Fees (c)		64,000		—


(a)		Audit Fees represent fees billed for professional services rendered for the audit of our annual financial statements and review of our quarterly financial statements, and audit services provided in connection with other statutory or regulatory filings.

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(b)		Audit-Related Fees represent fees billed for assurance services related to the audit of our financial statements, as well as certain due diligence projects.

(c)		All Other Fees represent fees for services provided to us not otherwise included in the categories above.

During fiscal 2006, we reviewed our existing practices regarding the use of our independent auditors to provide non-audit and consulting services, to ensure compliance with SEC proposals. Our audit committee pre-approval policy provides that our independent auditors may provide certain non-audit services which do not impair the auditors’ independence. In that regard, our audit committee must pre-approve all audit services provided to our company, as well as all non-audit services provided by our company’s independent auditors. This policy is administered by our senior corporate financial management, which reports throughout the year to our audit committee. Our audit committee pre-approved all audit and non-audit services provided by Ernst & Young LLP during fiscal 2006 and fiscal 2005.

Item 15. Exhibits and Financial Statement Schedules


(a)		1.	Financial Statements: See Item 8

		2.	Financial Statement Schedules: Not Applicable

		3.	Management Contracts and Compensatory Plans and Arrangements

			—	Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and David R. White (1)

			—	Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and Sandra K. McRee (1)

			—	Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and W. Carl Whitmer (1)

			—	Form of Roll-over Option Letter Agreement (1)

			—	IASIS Healthcare Corporation 2004 Stock Option Plan (1)

			—	Form of Management Stockholders Agreement between IAS and each of David R. White, Sandra K. McRee and W. Carl Whitmer (1)

			—	Form of Management Stockholders Agreement under IASIS Healthcare Corporation 2004 Stock Option Plan (1)

			—	Form of Stock Option Grant Agreement under IASIS Healthcare Corporation 2004 Stock Option Plan (1)

			—	Form of Management Stockholders Agreement for Rollover Options (1)

			—	IASIS Corporate Incentive Plan (1)

			—	IASIS Market Executive Incentive Program (1)

			—	Director Compensation and Restricted Share Award Agreement, dated as of February 14, 2005, between IASIS Healthcare Corporation and Kirk Gorman (11)

			—	First Amendment to IASIS Healthcare Corporation 2004 Stock Option Plan (12)

			—	Director Compensation and Restricted Share Award Agreement, dated as of April 14, 2005, between IASIS Healthcare Corporation and Sharad Mansukani (13)

			—	IASIS Healthcare Non-Qualified Deferred Compensation Program

(b)	Exhibits:


Exhibit No.		Description
2.1		Agreement and Plan of Merger, dated as of May 4, 2004, by and among IASIS Investment LLC, Titan Merger Corporation and IASIS Healthcare Corporation (1)

2.2		Indemnification Agreement dated as of May 4, 2004, by and among IASIS Investment LLC, IASIS Healthcare Corporation, and the stockholders and option holders of IASIS Healthcare

120


Exhibit No.		Description
		Corporation listed on the signature pages thereof (2)

2.3		Asset Sale Agreement dated as of January 16, 2004, by and between NLVH, Inc. and IASIS Healthcare Corporation (3)

2.4		Assignment and Assumption of Asset Sale Agreement dated as of January 16, 2004, by and between IASIS Healthcare Corporation and Lake Mead Hospital, Inc. (3)

2.5		Guaranty of Payment and Performance dated as of January 16, 2004, executed by IASIS Healthcare Corporation in favor of NLVH, Inc. (3)

3.1		Certificate of Formation of IASIS Healthcare LLC, as filed with the Secretary of State of the State of Delaware on May 11, 2004 (1)

3.2		Limited Liability Company Agreement of IASIS Healthcare LLC dated as of May 11, 2004 (1)

4.1		Indenture, dated as of June 22, 2004, among IASIS Healthcare LLC, IASIS Capital Corporation, the Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (1)

4.2		Form of Notation of Subsidiary Guarantee (1)

4.3		Form of 8 3/4% Senior Subordinated Exchange Note due 2014 (1)

4.4		Supplemental Indenture, dated as of June 30, 2004, by and between IASIS Finance Texas Holdings, LLC, IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (1)

4.5		Supplemental Indenture, effective as of August 1, 2005, by and among Cardiovascular Specialty Centers of Utah, LP, IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (15)

4.6		Supplemental Indenture, dated as of July 20, 2006, by and among IASIS Glenwood Regional Medical Center, L.P., IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee

4.7		Supplemental Indenture, dated as of July 27, 2006, by and among The Heart Center of Central Phoenix, L.P., IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee

10.1		Lease, dated as of July 29, 1977, by and between Sierra Equities, Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (4)

10.2		Addendum to Lease entered into by and between Sierra Equities, Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (4)

10.3		Conforming Amendment to Lease, dated as of June 10, 1991, by and between Sierra Equities, Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (4)

10.4		Amendment to Hospital Lease, dated as of October 31, 2000, by and between Sierra Equities, Inc., as Landlord, and Mesa General Hospital, L.P., as Tenant (4)

121


Exhibit No.		Description
10.5		Amendment to Lease, dated April 30, 2003, by and between Sierra Equities, Inc. and Mesa General Hospital, L.P. (5)

10.6		Letter Agreement effective May 6, 2005, amending Lease by and between Sierra Equities Inc. and Mesa General Hospital, L.P. (6)

10.7		Amended and Restated Pioneer Hospital Lease, dated as of June 28, 2002, by and between Health Care Property Investors, Inc. and Pioneer Valley Hospital, Inc. (7)

10.8		Lease Agreement, dated as of October 6, 2003, between The Dover Centre, LLC and IASIS Healthcare Corporation (8)

10.9		Form of Indemnification Agreement (1)

10.10		Contract between Arizona Health Care Cost Containment System and Health Choice Arizona (including Amendment No. 1 thereto), effective as of October 1, 2003 (5)

10.11		Amendment No. 2 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)

10.12		Amendment No. 3 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)

10.13		Amendment No. 4 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)

10.14		Amendment No. 5 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)

10.15		Amendment No. 6 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)

10.16		Amendment No. 7 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of April 1, 2004 (1)

10.17		Amendment No. 8 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2004 (1)

10.18		Amendment No. 9 to Contact between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2004 (9)

10.19		Amendment No. 10 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2005 (17)

10.20		Amendment No. 11 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of September 1, 2005 (14)

10.21		Amendment No. 12 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of January 1, 2006 (14)

10.22		Amendment No. 13 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2005 (15)

122


Exhibit No.		Description
10.23		Amendment No. 14 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2005 (15)

10.24		Amendment No. 15 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2006

10.25		Purchase and Sale Agreement dated as of December 15, 2003, by and between Rocky Mountain Medical Center, Inc. and Board of Education of the Granite School District (10)

10.26		Letter Agreement dated as of January 26, 2004 by and among Rocky Mountain Medical Center, Inc., Board of Education of Granite School District and Merrill Title Company (10)

10.27		Information System Agreement, dated February 23, 2000, between McKesson Information Solutions LLC and IASIS Healthcare Corporation, as amended (1)**

10.28		Amended and Restated Credit Agreement, dated June 22, 2004, by and among IASIS Healthcare LLC, IASIS Healthcare Corporation, the Subsidiary Guarantors, Bank of America, N.A., as Administrative Agent, L/C Issuer and Swingline Lender and the other lenders party thereto (1)

10.29		Joinder Agreement, dated as of June 30, 2004, by and between IASIS Finance Texas Holdings, LLC and Bank of America, N.A., as Administrative Agent (1)

10.30		Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and David R. White (1)

10.31		Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and Sandra K. McRee (1)

10.32		Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and W. Carl Whitmer (1)

10.33		Form of Roll-over Option Letter Agreement (1)

10.34		IASIS Healthcare Corporation 2004 Stock Option Plan (1)

10.35		Management Services Agreement dated as of June 22, 2004 by and among IASIS Healthcare LLC, Trimaran Fund II, L.L.C., Trimaran Parallel Fund II, L.P., Trimaran Capital L.L.C., CIBC Employee Private Equity Partners (Trimaran), CIBC MB Inc., JLL Partners Inc., TPG IASIS IV LLC, TPG IASIS III LLC, TPG IASIS Co-Invest I LLC and TPG IASIS Co-Invest II LLC (1)

10.36		Investor Rights Agreement dated as of June 22, 2004, by and between IASIS Investment LLC and IASIS Healthcare Corporation (1)

10.37		Form of Management Stockholders Agreement between IAS and each of David R. White, Sandra K. McRee and W. Carl Whitmer (1)

10.38		Form of Management Stockholders Agreement under IASIS Healthcare Corporation 2004 Stock Option Plan (1)

10.39		Form of Stock Option Grant Agreement under IASIS Healthcare Corporation 2004 Stock Option Plan (1)

123


Exhibit No.		Description
10.40		Form of Management Stockholders Agreement for Rollover Options (1)

10.41		IASIS Corporate Incentive Plan (1)

10.42		IASIS Market Executive Incentive Program (1)

10.43		Director Compensation and Restricted Share Award Agreement, dated as of February 14, 2005, between IASIS Healthcare Corporation and Kirk Gorman (11)

10.44		First Amendment to IASIS Healthcare Corporation 2004 Stock Option Plan (12)

10.45		Director Compensation and Restricted Share Award Agreement, dated as of April 14, 2005, between IASIS Healthcare Corporation and Sharad Mansukani (13)

10.46		Asset Purchase Agreement, dated July 20, 2006, by and among Glenwood Regional Medical Center, Glenwood Health Services, Inc., Hospital Service District No. 1 of the Parish of Ouachita, State of Louisiana, IASIS Glenwood Regional Medical Center, L.P. and IASIS Healthcare, LLC (16)

10.47		IASIS Healthcare Non-Qualified Deferred Compensation Program

10.48		Joinder Agreement, dated as of July 20, 2006, between IASIS Glenwood Regional Medical Center, L.P. and Bank of America, N.A., as Administrative Agent

10.49		Joinder Agreement, dated as of July 27, 2006, between The Heart Center of Central Phoenix, L.P. and Bank of America, N.A., as Administrative Agent

14		Code of Ethics (8)

21		Subsidiaries of IASIS Healthcare Corporation

31.1		Certification of Principal Executive Officer Pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer Pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


**		Portions of this exhibit have been omitted and filed separately with the Commission pursuant to a grant of confidential treatment pursuant to Rule 24(b)-2 promulgated under the Securities Exchange Act of 1934, as amended.

(1)		Incorporated by reference to the Company’s Registration Statement on Form S-4 (Registration No. 333-117362).

(2)		Incorporated by reference to IASIS Healthcare Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004.

(3)		Incorporated by reference to IASIS Healthcare Corporation’s Current Report on Form 8-K filed on February 2, 2004.

(4)		Incorporated by reference to IASIS Healthcare Corporation’s Annual Report on Form 10-K for the fiscal year ended September 30, 2000.

(5)		Incorporated by reference to IASIS Healthcare Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2003.

(6)		Incorporated by reference to the Company’s Current Report on Form 8-K filed on May 12, 2005.

124


(7)		Incorporated by reference to IASIS Healthcare Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002.

(8)		Incorporated by reference to IASIS Healthcare Corporation’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003.

(9)		Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2004.

(10)		Incorporated by reference to IASIS Healthcare Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2003.

(11)		Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 18, 2005.

(12)		Incorporated by reference to the Company’s Current Report on Form 8-K filed on March 22, 2005.

(13)		Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 20, 2005.

(14)		Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2005.

(15)		Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2006.

(16)		Incorporated by reference to the Company’s Current Report on Form 8-K filed on July 24, 2006.

(17)		Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005.

125

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.


	IASIS HEALTHCARE LLC
Date: December 19, 2006	By:	/s/ David R. White
		David R. White
		Chairman of the Board and Chief Executive Officer

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


Signature	Title	Date

/s/ David R. White David R. White	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	December 19, 2006

/s/ W. Carl Whitmer W. Carl Whitmer	Chief Financial Officer (Principal Financial Officer)	December 19, 2006

/s/ John M. Doyle John M. Doyle	Chief Accounting Officer (Principal Accounting Officer)	December 19, 2006

/s/ David Bonderman David Bonderman	Director of IASIS Healthcare Corporation (sole member of IASIS Healthcare LLC)	December 19, 2006

/s/ Jonathan J. Coslet Jonathan J. Coslet	Director of IASIS Healthcare Corporation (sole member of IASIS Healthcare LLC)	December 19, 2006

/s/ Kirk E. Gorman Kirk E. Gorman	Director of IASIS Healthcare Corporation (sole member of IASIS Healthcare LLC)	December 19, 2006

/s/ Curtis Lane Curtis Lane	Director of IASIS Healthcare Corporation (sole member of IASIS Healthcare LLC)	December 19, 2006

/s/ Todd B. Sisitsky Todd B. Sisitsky	Director of IASIS Healthcare Corporation (sole member of IASIS Healthcare LLC)	December 19, 2006

/s/ Paul S. Levy Paul S. Levy	Director of IASIS Healthcare Corporation (sole member of IASIS Healthcare LLC)	December 19, 2006

126

EXHIBIT INDEX


Exhibit No.		Description
2.1		Agreement and Plan of Merger, dated as of May 4, 2004, by and among IASIS Investment LLC, Titan Merger Corporation and IASIS Healthcare Corporation (1)

2.2		Indemnification Agreement dated as of May 4, 2004, by and among IASIS Investment LLC, IASIS Healthcare Corporation, and the stockholders and option holders of IASIS Healthcare Corporation listed on the signature pages thereof (2)

2.3		Asset Sale Agreement dated as of January 16, 2004, by and between NLVH, Inc. and IASIS Healthcare Corporation (3)

2.4		Assignment and Assumption of Asset Sale Agreement dated as of January 16, 2004, by and between IASIS Healthcare Corporation and Lake Mead Hospital, Inc. (3)

2.5		Guaranty of Payment and Performance dated as of January 16, 2004, executed by IASIS Healthcare Corporation in favor of NLVH, Inc. (3)

3.1		Certificate of Formation of IASIS Healthcare LLC, as filed with the Secretary of State of the State of Delaware on May 11, 2004 (1)

3.2		Limited Liability Company Agreement of IASIS Healthcare LLC dated as of May 11, 2004 (1)

4.1		Indenture, dated as of June 22, 2004, among IASIS Healthcare LLC, IASIS Capital Corporation, the Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (1)

4.2		Form of Notation of Subsidiary Guarantee (1)

4.3		Form of 8 3/4% Senior Subordinated Exchange Note due 2014 (1)

4.4		Supplemental Indenture, dated as of June 30, 2004, by and between IASIS Finance Texas Holdings, LLC, IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (1)

4.5		Supplemental Indenture, effective as of August 1, 2005, by and among Cardiovascular Specialty Centers of Utah, LP, IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee (15)

4.6		Supplemental Indenture, dated as of July 20, 2006, by and among IASIS Glenwood Regional Medical Center, L.P., IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee

4.7		Supplemental Indenture, dated as of July 27, 2006, by and among The Heart Center of Central Phoenix, L.P., IASIS Healthcare LLC, IASIS Capital Corporation, the existing Subsidiary Guarantors and The Bank of New York Trust Company, N.A., as Trustee

10.1		Lease, dated as of July 29, 1977, by and between Sierra Equities, Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (4)

10.2		Addendum to Lease entered into by and between Sierra Equities, Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (4)

129


Exhibit No.		Description
10.3		Conforming Amendment to Lease, dated as of June 10, 1991, by and between Sierra Equities, Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (4)

10.4		Amendment to Hospital Lease, dated as of October 31, 2000, by and between Sierra Equities, Inc., as Landlord, and Mesa General Hospital, L.P., as Tenant (4)

10.5		Amendment to Lease, dated April 30, 2003, by and between Sierra Equities, Inc. and Mesa General Hospital, L.P. (5)

10.6		Letter Agreement effective May 6, 2005, amending Lease by and between Sierra Equities Inc. and Mesa General Hospital, L.P. (6)

10.7		Amended and Restated Pioneer Hospital Lease, dated as of June 28, 2002, by and between Health Care Property Investors, Inc. and Pioneer Valley Hospital, Inc. (7)

10.8		Lease Agreement, dated as of October 6, 2003, between The Dover Centre, LLC and IASIS Healthcare Corporation (8)

10.9		Form of Indemnification Agreement (1)

10.10		Contract between Arizona Health Care Cost Containment System and Health Choice Arizona (including Amendment No. 1 thereto), effective as of October 1, 2003 (5)

10.11		Amendment No. 2 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)

10.12		Amendment No. 3 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)

10.13		Amendment No. 4 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)

10.14		Amendment No. 5 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)

10.15		Amendment No. 6 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2003 (8)

10.16		Amendment No. 7 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of April 1, 2004 (1)

10.17		Amendment No. 8 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2004 (1)

10.18		Amendment No. 9 to Contact between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2004 (9)

10.19		Amendment No. 10 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2005 (17)

10.20		Amendment No. 11 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of September 1, 2005 (14)

130


Exhibit No.		Description
10.21		Amendment No. 12 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of January 1, 2006 (14)

10.22		Amendment No. 13 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2005 (15)

10.23		Amendment No. 14 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2005 (15)

10.24		Amendment No. 15 to Contract between Arizona Health Care Cost Containment System and Health Choice Arizona, effective as of October 1, 2006

10.25		Purchase and Sale Agreement dated as of December 15, 2003, by and between Rocky Mountain Medical Center, Inc. and Board of Education of the Granite School District (10)

10.26		Letter Agreement dated as of January 26, 2004 by and among Rocky Mountain Medical Center, Inc., Board of Education of Granite School District and Merrill Title Company (10)

10.27		Information System Agreement, dated February 23, 2000, between McKesson Information Solutions LLC and IASIS Healthcare Corporation, as amended (1)**

10.28		Amended and Restated Credit Agreement, dated June 22, 2004, by and among IASIS Healthcare LLC, IASIS Healthcare Corporation, the Subsidiary Guarantors, Bank of America, N.A., as Administrative Agent, L/C Issuer and Swingline Lender and the other lenders party thereto (1)

10.29		Joinder Agreement, dated as of June 30, 2004, by and between IASIS Finance Texas Holdings, LLC and Bank of America, N.A., as Administrative Agent (1)

10.30		Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and David R. White (1)

10.31		Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and Sandra K. McRee (1)

10.32		Employment Agreement, dated as of May 4, 2004, by and between IASIS Healthcare Corporation and W. Carl Whitmer (1)

10.33		Form of Roll-over Option Letter Agreement (1)

10.34		IASIS Healthcare Corporation 2004 Stock Option Plan (1)

10.35		Management Services Agreement dated as of June 22, 2004 by and among IASIS Healthcare LLC, Trimaran Fund II, L.L.C., Trimaran Parallel Fund II, L.P., Trimaran Capital L.L.C., CIBC Employee Private Equity Partners (Trimaran), CIBC MB Inc., JLL Partners Inc., TPG IASIS IV LLC, TPG IASIS III LLC, TPG IASIS Co-Invest I LLC and TPG IASIS Co-Invest II LLC (1)

10.36		Investor Rights Agreement dated as of June 22, 2004, by and between IASIS Investment LLC and IASIS Healthcare Corporation (1)

10.37		Form of Management Stockholders Agreement between IAS and each of David R. White, Sandra K. McRee and W. Carl Whitmer (1)

131


Exhibit No.		Description
10.38		Form of Management Stockholders Agreement under IASIS Healthcare Corporation 2004 Stock Option Plan (1)

10.39		Form of Stock Option Grant Agreement under IASIS Healthcare Corporation 2004 Stock Option Plan (1)

10.40		Form of Management Stockholders Agreement for Rollover Options (1)

10.41		IASIS Corporate Incentive Plan (1)

10.42		IASIS Market Executive Incentive Program (1)

10.43		Director Compensation and Restricted Share Award Agreement, dated as of February 14, 2005, between IASIS Healthcare Corporation and Kirk Gorman (11)

10.44		First Amendment to IASIS Healthcare Corporation 2004 Stock Option Plan (12)

10.45		Director Compensation and Restricted Share Award Agreement, dated as of April 14, 2005, between IASIS Healthcare Corporation and Sharad Mansukani (13)

10.46		Asset Purchase Agreement, dated July 20, 2006, by and among Glenwood Regional Medical Center, Glenwood Health Services, Inc., Hospital Service District No. 1 of the Parish of Ouachita, State of Louisiana, IASIS Glenwood Regional Medical Center, L.P. and IASIS Healthcare, LLC (16)

10.47		IASIS Healthcare Non-Qualified Deferred Compensation Program

10.48		Joinder Agreement, dated as of July 20, 2006, between IASIS Glenwood Regional Medical Center, L.P. and Bank of America, N.A., as Administrative Agent

10.49		Joinder Agreement, dated as of July 27, 2006, between The Heart Center of Central Phoenix, L.P. and Bank of America, N.A., as Administrative Agent

14		Code of Ethics (8)

21		Subsidiaries of IASIS Healthcare Corporation

31.1		Certification of Principal Executive Officer Pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer Pursuant to Rule 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


**		Portions of this exhibit have been omitted and filed separately with the Commission pursuant to a grant of confidential treatment pursuant to Rule 24(b)-2 promulgated under the Securities Exchange Act of 1934, as amended.

(1)		Incorporated by reference to the Company’s Registration Statement on Form S-4 (Registration No. 333-117362).

(2)		Incorporated by reference to IASIS Healthcare Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2004.

(3)		Incorporated by reference to IASIS Healthcare Corporation’s Current Report on Form 8-K filed on February 2, 2004.

132


(4)		Incorporated by reference to IASIS Healthcare Corporation’s Annual Report on Form 10-K for the fiscal year ended September 30, 2000.

(5)		Incorporated by reference to IASIS Healthcare Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2003.

(6)		Incorporated by reference to the Company’s Current Report on Form 8-K filed on May 12, 2005.

(7)		Incorporated by reference to IASIS Healthcare Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002.

(8)		Incorporated by reference to IASIS Healthcare Corporation’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003.

(9)		Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2004.

(10)		Incorporated by reference to IASIS Healthcare Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2003.

(11)		Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 18, 2005.

(12)		Incorporated by reference to the Company’s Current Report on Form 8-K filed on March 22, 2005.

(13)		Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 20, 2005.

(14)		Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2005.

(15)		Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2006.

(16)		Incorporated by reference to the Company’s Current Report on Form 8-K filed on July 24, 2006.

(17)		Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005.

133


PART I
	Item 1.	Business	1
	Item 1A.	Risk Factors	25
	Item 2.	Properties	35
	Item 3.	Legal Proceedings	35
	Item 4.	Submission of Matters to a Vote of Security Holders	35
PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	36
	Item 6.	Selected Financial Data	36
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	64
	Item 8.	Financial Statements and Supplementary Data	66
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	107
	Item 9A.	Controls and Procedures	107
	Item 9B.	Other Information	107
PART III
	Item 10.	Directors and Executive Officers of the Registrant	107
	Item 11.	Executive Compensation	111
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	116
	Item 13.	Certain Relationships and Related Transactions	118
	Item 14.	Principal Accountant Fees and Services	119
	Item 15.	Exhibits and Financial Statement Schedules	120
Ex-4.6 July 20, 2006 Supplemental Indenture
Ex-4.7 July 27, 2006 Supplemental Indenture
Ex-10.24 Amendment No. 15 to Contract
Ex-10.47 Non-qualified Deferred Compensation Program
Ex-10.48 July 20, 2006 Joinder Agreement
Ex-10.49 July 27, 2006 Joinder Agreement
Ex-21 Subsidiaries of IASIS Healthcare
Ex-31.1 Section 302 Certification
Ex-31.2 Section 302 Certification

	•		our ability to contract with cost-effective healthcare providers;

	•		the increased cost of individual healthcare services;

	•		the type and number of individual healthcare services delivered; and

	•		the occurrence of catastrophes, epidemics or other unforeseen occurrences.


	Page
Report of Independent Registered Public Accounting Firm		67

Consolidated Balance Sheets at September 30, 2006 and 2005		68

Consolidated Statements of Operations for the Years ended September 30, 2006 and 2005 and the periods June 23, 2004 to September 30, 2004 and October 1, 2003 to June 22, 2004 (Predecessor)		69

Consolidated Statements of Equity for the Years ended September 30, 2006 and 2005 and the periods June 23, 2004 to September 30, 2004 and October 1, 2003 to June 22, 2004 (Predecessor)		70

Consolidated Statements of Cash Flows for the Years ended September 30, 2006 and 2005 and the periods June 23, 2004 to September 30, 2004 and October 1, 2003 to June 22, 2004 (Predecessor)		71

Notes to Consolidated Financial Statements		73