United Surgical Partners International 10K 2008 Annual report

United Surgical Partners International (USPI) Inactive 10-K2008 FY Annual report

Content analysis

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2008

Commission fileNo. 333-144337

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)


Delaware (State of Incorporation)		75-2749762 (I.R.S. Employer Identification No.)

15305 Dallas Parkway, Suite 1600 Addison, Texas (Address of principal executive offices)		75001 (Zip Code)

(972) 713-3500

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

None

Securities Registered Pursuant to Section 12(g) of the Act:

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 Section 15(d) of the Exchange 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 such filing requirements for the past 90 days. Yes o No þ

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

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

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No þ

None of the registrant’s common stock is held by non-affiliates.

As of February 25, 2009, 100 shares of the Registrant’s common stock were outstanding.

Documents Incorporated by Reference

None.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
2008 ANNUAL REPORT ONFORM 10-K

TABLE OF CONTENTS


PART I
	Item 1.	Business	3
	Item 1A.	Risk Factors	26
	Item 1B.	Unresolved Staff Comments	39
	Item 2.	Properties	39
	Item 3.	Legal Proceedings	39
	Item 4.	Submission of Matters to a Vote of Security Holders	39

PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	39
	Item 6.	Selected Financial Data	40
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	72
	Item 8.	Financial Statements and Supplementary Data	72
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	73
	Item 9A(T).	Controls and Procedures	73
	Item 9B.	Other Information	74

PART III
	Item 10.	Directors, Executive Officers and Corporate Governance	75
	Item 11.	Executive Compensation	77
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	87
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	88
	Item 14.	Principal Accounting Fees and Services	91

PART IV
	Item 15	Exhibits, Financial Statement Schedules	92
EX-10.10
EX-10.11
EX-21.1
EX-24.1
EX-24.2
EX-24.3
EX-24.4
EX-24.5
EX-24.6
EX-24.7
EX-24.8
EX-24.9
EX-31.1
EX-31.2
EX-32.1
EX-32.2

FORWARD LOOKING STATEMENTS

Certain statements contained in this Annual Report onForm 10-K, including, without limitation, statements containing the words “believes”, “anticipates”, “expects”, “continues”, “will”, “may”, “should”, “estimates”, “intends”, “plans” and similar expressions, and statements regarding the Company’s business strategy and plans, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management’s current expectations and involve known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause the Company’s actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Such factors include, among others, the following: our significant indebtedness; general economic and business conditions, including without limitation the condition of the financial markets, both nationally and internationally; foreign currency fluctuations; demographic changes; changes in, or the failure to comply with, laws and governmental regulations; the ability to enter into and retain managed care provider arrangements on acceptable terms; changes in Medicare, Medicaid and other government funded payments or reimbursement in the U.S. and the United Kingdom (U.K.); liability and other claims asserted against us; the highly competitive nature of healthcare; changes in business strategy or development plans of healthcare systems with which we partner; the ability to attract and retain qualified physicians, nurses, other health care professionals and other personnel; the availability of suitable acquisition and development opportunities and the length of time it takes to accomplish acquisitions and developments; our ability to integrate new and acquired businesses with our existing operations; the availability and terms of capital to fund the expansion of our business, including the acquisition and development of additional facilities and certain additional factors, risks and uncertainties discussed in this Annual Report onForm 10-K. Given these uncertainties, investors and prospective investors are cautioned not to rely on such forward-looking statements. We disclaim any obligation and make no promise to update any such factors or forward-looking statements or to publicly announce the results of any revisions to any such factors or forward-looking statements, whether as a result of changes in underlying factors, to reflect new information as a result of the occurrence of events or developments or otherwise.

PART I


Item 1.	*Business*

General

United Surgical Partners International, Inc. (together with its subsidiaries, “we”, the “Company” or “USPI”) owns and operates short stay surgical facilities including surgery centers and hospitals in the United States and the United Kingdom. We focus on providing high quality surgical facilities that meet the needs of patients, physicians and payors better than hospital-based and other outpatient surgical facilities. We believe that our facilities (1) enhance the quality of care and the healthcare experience of patients, (2) offer significant administrative, clinical and economic benefits to physicians, (3) offer a strategic approach for our health system partners to expand capacity and access within the markets they serve, and (4) offer an efficient and low cost alternative for payors. We acquire and develop our facilities through the formation of strategic relationships with physicians andnot-for-profit healthcare systems to better access and serve the communities in our markets. Our operating model is efficient and scalable, and we have adapted it to each of our markets. We believe that our acquisition and development strategy and operating model enable us to continue to grow by taking advantage of highly-fragmented markets and an increasing demand for short stay surgery.

Since physicians are critical to the direction of healthcare in the U.S. and U.K., we have developed our operating model to encourage physicians to affiliate with us and to use our facilities as an extension of their practices. We operate our facilities, structure our strategic relationships and adopt staffing, scheduling and clinical systems and protocols with the goal of increasing physician productivity. We believe that our focus on physician satisfaction, combined with providing high quality healthcare in a friendly and convenient environment for patients, will continue to increase the number of procedures performed at our facilities each year.

Donald E. Steen, who is our chairman, formed USPI with the private equity firm Welsh, Carson, Anderson & Stowe in February 1998. As of December 31, 2008, we operated 164 facilities, consisting of 161 in the United States

and three in the United Kingdom. Of the 161 U.S. facilities, 99 are jointly owned with majornot-for-profit healthcare systems. Overall, as of December 31, 2008, we held ownership interests in 162 of the facilities and operated the remaining two under service and management contracts. Our revenues for 2008 and 2007 were $642.2 million and $643.8 million, respectively. The total revenues of facilities we operate, some of which we account for under the equity method, were $1.6 billion and $1.4 billion for 2008 and 2007, respectively.

The Merger Transaction

USPI had publicly traded equity securities from June 2001 until April 2007. Pursuant to an Agreement and Plan of Merger (the merger) dated as of January 7, 2007, with an affiliate of Welsh, Carson, Anderson & Stowe X, L.P. (Welsh Carson), we became a wholly owned subsidiary of USPI Holdings, Inc. on April 19, 2007. USPI Holdings, Inc. is a wholly owned subsidiary of USPI Group Holdings, Inc., which is owned by an investor group that includes affiliates of Welsh Carson, members of our management and other investors. As a result of the merger, we no longer have publicly traded equity securities.

In thisForm 10-K, we have reported our operating results and financial position for the period subsequent to the merger date of April 19, 2007, as the “Successor Period” and all periods prior to April 19, 2007, as “Predecessor Periods.” For the purposes of presenting a comparison of our 2007 results to our 2008 and 2006 results, we have presented our 2007 results as the sum of our operating results from the Predecessor Period from January 1, 2007 through April 18, 2007 and our operating results for the Successor Period from April 19, 2007 to December 31, 2007. We believe that this presentation provides the most meaningful information about our operating results. This approach is not consistent with GAAP and may yield results that are not strictly comparable on aperiod-to-period basis. Even on a combined basis, our results of operations for the year ended December 31, 2007 is neither comparable with prior periods nor indicative of results to be expected in future periods given our incurrence of merger-related expenses and indebtedness in 2007.

Available Information

We file annual, quarterly and current reports with the Securities and Exchange Commission. You may read and copy any document that we file at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. You may also call the Securities and Exchange Commission at1-800-SEC-0330 for information on the operation of the public reference room. Our SEC filings are also available to you free of charge at the SEC’s web site athttp://www.sec.gov.We also maintain a web site athttp://www.unitedsurgical.comthat includes links to our annual reports onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K and any amendments to those reports. These reports are available on our website without charge as soon as reasonably practicable after such reports are filed with or furnished to the SEC. Information on our web site is not deemed incorporated by reference into thisForm 10-K.

Industry Background

We believe many physicians prefer surgery centers and surgical hospitals over general acute care hospitals. We believe that this is due to the non-emergency nature of the procedures performed at our surgery centers and surgical hospitals, which allows physicians to schedule their time more efficiently and therefore increase the number of surgeries they can perform in a given amount of time. In addition, outpatient facilities usually provide physicians with greater scheduling flexibility, more consistent nurse staffing and faster turnaround time between cases. While surgery centers and surgical hospitals generally perform scheduled surgeries, acute care hospitals and national health service facilities generally provide a broad range of services, including high priority and emergency procedures. Medical emergencies often demand the unplanned use of operating rooms and result in the postponement or delay of scheduled surgeries, disrupting physicians’ practices and inconveniencing patients. Surgery centers and surgical hospitals in the United States and the United Kingdom are designed to improve physician work environments and improve physician efficiency. In addition, many physicians choose to perform surgery in facilities like ours because their patients prefer the comfort of a less institutional atmosphere and the convenience of simplified admissions and discharge procedures.

United States

New surgical techniques and technology, as well as advances in anesthesia, have significantly expanded the types of surgical procedures that are being performed in surgery centers and have helped drive the growth in outpatient surgery. Lasers, arthroscopy, enhanced endoscopic techniques and fiber optics have reduced the trauma and recovery time associated with many surgical procedures. Improved anesthesia has shortened recovery time by minimizing post-operative side effects such as nausea and drowsiness, thereby avoiding the need for overnight hospitalization in many cases. In addition, some states in the United States permit surgery centers to keep a patient for up to 23 hours. This allows more complex surgeries, previously only performed in an inpatient setting, to be performed in a surgery center.

In addition to these technological and other clinical advancements, a changing payor environment has contributed to the rapid growth in outpatient surgery in recent years. Government programs, private insurance companies, managed care organizations and self-insured employers have implemented cost containment measures to limit increases in healthcare expenditures, including procedure reimbursement. These cost containment measures have contributed to the significant shift in the delivery of healthcare services away from traditional inpatient hospitals to more cost-effective alternate sites, including surgery centers. We believe that surgery performed at a surgery center is generally less expensive than hospital-based outpatient surgery because of lower facility development costs, more efficient staffing and space utilization and a specialized operating environment focused on quality of care and cost containment.

Today, large healthcare systems in the United States generally offer both inpatient and outpatient surgery on site. In addition, a number ofnot-for-profit healthcare systems have begun to expand their portfolios of facilities and services by entering into strategic relationships with specialty operators of surgery centers in order to expand capacity and access in the markets they serve. These strategic relationships enablenot-for-profit healthcare systems to offer patients, physicians and payors the cost advantages, convenience and other benefits of outpatient surgery in a freestanding facility. Further, these relationships allow thenot-for-profit healthcare systems to focus their attention and resources on their core business without the challenge of acquiring, developing and operating these facilities.

United Kingdom

The United Kingdom provides government-funded healthcare to all of its residents through a national health service. However, due to funding and capacity limitations, the demand for healthcare services exceeds the public system’s capacity. In response to these shortfalls, private healthcare networks and private insurance companies have developed in the United Kingdom. Approximately 12% of the U.K. population has private insurance to cover elective surgical procedures, and another rapidly growing segment of the population pays for elective procedures from personal funds. For the combined year ended December 31, 2008, in the United Kingdom, we derived 60% of our revenues from private insurance, 28% from self-pay patients, who typically arrange for payment prior to surgery being performed, 8% from government payors, and 4% from other payors.

Our Business Strategy

Our goal is to steadily increase our revenues and cash flows. The key elements of our business strategy are to:


	•	attract and retain top quality surgeons and other physicians;

	•	expand our presence in existing markets;

	•	pursue strategic relationships withnot-for-profit healthcare systems;

	•	expand selectively in new markets; and

	•	enhance operating efficiencies.

Attract and retain top quality surgeons and other physicians

practices. We believe we attract physicians because we design our facilities, structure our strategic relationships and adopt staffing, scheduling and clinical systems and protocols to increase physician productivity and promote their professional and financial success. We believe this focus on physicians, combined with providing high quality healthcare in a friendly and convenient environment for patients, will continue to increase case volumes at our facilities. In addition, in the United States, we generally offer physicians the opportunity to purchase equity interests in the facilities they use as an extension of their practices. We believe this opportunity attracts quality physicians to our facilities and ownership increases the physicians’ involvement in facility operations, enhancing quality of patient care, increasing productivity and reducing costs.

Pursue strategic relationships withnot-for-profit healthcare systems

Through strategic relationships with us,not-for-profit healthcare systems can benefit from our operating expertise and create a new cash flow opportunity with limited capital expenditures. We believe that these relationships also allownot-for-profit healthcare systems to attract and retain physicians and improve their hospital operations by focusing on their core business. We also believe that strategic relationships with these healthcare systems help us to more quickly develop relationships with physicians, communities, and payors. Generally, the healthcare systems with which we develop relationships have strong local market positions and excellent reputations that we use in branding our facilities. In addition, our relationships withnot-for-profit healthcare systems enhance our acquisition and development efforts by (1) providing opportunities to acquire facilities the systems may own, (2) providing access to physicians already affiliated with the systems, (3) attracting additional physicians to affiliate with newly developed facilities, and (4) encouraging physicians who own facilities to consider a strategic relationship with us.

Expand our presence in existing markets

Our primary strategy is to grow selectively in markets in which we already operate facilities. We believe that selective acquisitions and development of new facilities in existing markets allow us to leverage our existing knowledge of these markets and to improve operating efficiencies. In particular, our experience has been that newly developed facilities in markets where we already have a presence and anot-for-profit hospital partner are the best use of our invested capital.

Expand selectively in new markets

We may continue to enter targeted markets by acquiring and developing surgical facilities. In the United States, we expect to do this primarily in conjunction with a localnot-for-profit healthcare system or hospital. We typically target the acquisition or development of multi-specialty centers that perform high volume, non-emergency, lower risk procedures requiring lower capital and operating costs than hospitals. In addition, we will also consider the acquisition of multi-facility companies.

In determining whether to enter a new market, we examine numerous criteria, including:


	•	the potential to achieve strong increases in revenues and cash flows;

	•	whether the physicians, healthcare systems and payors in the market are receptive to surgery centersand/or surgical hospitals;

	•	the demographics of the market;

	•	the number of surgical facilities in the market;

	•	the number and nature of outpatient surgical procedures performed in the market;

	•	the case mix of the facilities to be acquired or developed;

	•	whether the facility is or will be well-positioned to negotiate agreements with insurers and other payors; and

	•	licensing and other regulatory considerations.

Upon identifying a target facility, we conduct financial, legal and compliance, operational, technology and systems reviews of the facility and conduct interviews with the facility’s management, affiliated physicians and staff. Once we acquire or develop a facility, we focus on upgrading systems and protocols, including implementing our proprietary methodology of defined processes and information systems, to increase case volume and improve operating efficiencies.

Enhance operating efficiencies

Once we acquire a new facility in the U.S., we integrate it into our existing network by implementing a specific action plan to support the local management team and incorporate the new facility into our group purchasing contracts. We also implement our systems and protocols to improve operating efficiencies and contain costs. Our most important operational tool is our management system “Every Day Giving Excellence,” which we refer to as USPI’s EDGE. This proprietary measurement system allows us to track our clinical, service and financial performance, best practices and key indicators in each of our facilities. Our goal is to use USPI’s EDGE to ensure that we provide each of the patients using our facilities with high quality healthcare, offer physicians a superior work environment and eliminate inefficiencies. Using USPI’s EDGE, we track and monitor our performance in areas such as (1) providing surgeons the equipment, supplies and surgical support they need, (2) starting cases on time, (3) minimizing turnover time between cases, and (4) providing efficient case and personnel schedules. USPI’s EDGE compiles and organizes the specified information on a daily basis and is easily accessed over the Internet by our facilities on a secure basis. The information provided by USPI’s EDGE enables our employees, facility administrators and management to analyze trends over time and share processes and best practices among our facilities. In addition, the information is used as an evaluative tool by our administrators and as a budgeting and planning tool by our management. USPI’s EDGE is now deployed in substantially all of our U.S. facilities. In addition to USPI’s EDGE, we are currently investing in other tools that will allow us to better manage our facilities in challenging economic conditions.

Recent Developments

In January 2009, we acquired ownership interests in two facilities in Denver, Colorado and an additional facility in the Dallas/Fort Worth area. Each of these facilities is associated with anot-for-profit hospital partner. Also, in January 2009, we finalized the sales of facilities in Las Cruces, New Mexico and East Brunswick, New Jersey. In February 2009, we acquired ownership in a surgical facility in Stockton, California, which is also associated with anot-for-profit hospital partner.

Operations

Operations in the United States

Our operations in the United States consist primarily of our ownership and management of surgery centers. As of December 31, 2008, we have ownership interests in 146 surgery centers and 13 surgical hospitals and operate, through long-term service agreements, two additional surgery centers. We also own interests in and expect to operate four more surgery centers that are currently under construction and have four projects under development, and numerous other potential projects in various stages of consideration, which may result in our adding additional facilities during 2009. All of the facilities under construction and in the earlier stages of development, include anot-for-profit hospital partner. Approximately 6,800 physicians have privileges to use our facilities. Our surgery centers are licensed outpatient surgery centers, and our surgical hospitals are licensed as hospitals. Each of our facilities is generally equipped and staffed for multiple surgical specialties and located in freestanding buildings or medical office buildings. Our average surgery center has approximately 12,000 square feet of space with four operating rooms, as well as ancillary areas for preparation, recovery, reception and administration. Our surgery center facilities range from a 4,000 square foot, one operating room facility to a 39,000 square foot, nine operating room facility. Our surgery centers are normally open weekdays from 7:00 a.m. to approximately 5:00 p.m. or until the last patient is discharged. We estimate that a surgery center with four operating rooms can accommodate up to 6,000 procedures per year. Our surgical hospitals average 50,000 square feet of space with six operating rooms, ranging in size from 18,000 to 156,000 square feet and having from four to eleven operating rooms.

Our surgery center support staff typically consists of registered nurses, operating room technicians, an administrator who supervises theday-to-day activities of the surgery center, and a small number of office staff. Each center also has appointed a medical director, who is responsible for and supervises the quality of medical care provided at the center. Use of our surgery centers is generally limited to licensed physicians, podiatrists and oral surgeons who are also on the medical staff of a local accredited hospital. Each center maintains a peer review committee consisting of physicians who use our facilities and who review the professional credentials of physicians applying for surgical privileges.

All of our U.S. surgical facilities are accredited by either the Joint Commission on Accreditation of Healthcare Organizations or by the Accreditation Association for Ambulatory Healthcare or are in the process of applying for such accreditation. We believe that accreditation is the quality benchmark for managed care organizations. Many managed care organizations will not contract with a facility until it is accredited. We believe that our historical performance in the accreditation process reflects our commitment to providing high quality care in our surgical facilities.

Generally, our surgical facilities are limited partnerships, limited liability partnerships or limited liability companies in which ownership interests are also held by local physicians who are on the medical staff of the centers. Our ownership interests in the facilities range from 9% to 99%. Our partnership and limited liability company agreements typically provide for the monthly or quarterly pro rata distribution of cash equal to net profits from operations, less amounts held in reserve for expenses and working capital. Our facilities derive their operating cash flow by collecting a fee from patients, insurance companies, or other payors in exchange for providing the facility and related services a surgeon requires in order to perform a surgical case. Our billing systems estimate revenue and generate contractual adjustments based on a fee schedule for over 80% of the total cases performed at our facilities. For the remaining cases, the contractual allowance is estimated based on the historical collection percentages of each facility by payor group. The historical collection percentage is updated quarterly for each facility. We estimate each patient’s financial obligation prior to the date of service. We request payment of that obligation at the time of service. Any amounts not collected at the time of service are subject to our normal collection and reserve policy. We also have a management agreement with each of the facilities under which we provideday-to-day management services for a management fee that is typically a percentage of the net revenues of the facility.

Our business depends upon the efforts and success of the physicians who provide medical services at our facilities and the strength of our relationships with these physicians. Our business could be adversely affected by the loss of our relationship with, or a reduction in use of our facilities by, a key physician or group of physicians. The physicians that affiliate with us and use our facilities are not our employees. However, we generally offer the physicians the opportunity to purchase equity interests in the facilities they use.

Strategic Relationships

A key element of our business strategy is to pursue strategic relationships withnot-for-profit healthcare systems (hospital partners) in selected markets. Of our 161 U.S. facilities, 99 are jointly-owned withnot-for-profit healthcare systems. Our strategy involves developing these relationships in three primary ways. One way is by adding new facilities in existing markets with our existing hospital partners. An example of this is our relationship with the Baylor Health Care System in Dallas, Texas. Our joint ventures with Baylor own a network of 21 surgical facilities that serve the approximately six million people in the Dallas / Fort Worth area. These joint ventures have added new facilities each year since their inception in 1999, including one during 2008. Another example of a growing single-market relationship is our network of facilities in Houston, Texas with Memorial Hermann Healthcare System, with whom we opened our first facility in 2003 and with whom we now operate 16 facilities, including four added during 2008.

Another way we develop these relationships is through expansion into new markets, both with existing hospital partners and with new partners. A good long-term example of this strategy is our relationship with Ascension Health, with whom we initially owned a single facility in Nashville, Tennessee and now have a total of eleven facilities in four states. Similarly, with Catholic Healthcare West (CHW) we began with one facility, which was in a suburb of Las Vegas, Nevada. This relationship has expanded to a total of 12 facilities, including six in various California markets and four in the Phoenix, Arizona market. Our newest facility with CHW is located in suburban

Las Vegas and opened in December 2008. We also continue to grow our relationship with Bon Secours Health System, where we now operate five facilities in four different Virginia cities. During 2008, we entered into a new partnership with Legacy Health in Portland, Oregon where we now have ownership in and manage one surgical facility. Also during 2008, we entered into a new partnership with Centura Health in Denver, Colorado where we now have ownership in and manage three surgical facilities, two of which were added in January 2009.

A third way we develop our strategic relationships withnot-for-profit healthcare systems is through the contribution of our ownership interests in existing facilities to a joint venture relationship. For example, during 2007, we added a hospital partner, CHRISTUS Spohn, to two of our facilities in Corpus Christi, Texas. We engaged in similar transactions with existing partners, Memorial Hermann and CHW, during 2008. We expect to add anot-for-profit hospital partner in the future to some of the remaining 62 facilities that do not yet have such a partner.

Operations in the United Kingdom

We operate three hospitals in greater London. We acquired Parkside Hospital and Holly House Hospital in 2000 and Highgate Hospital in 2003. Parkside Hospital, located in Wimbledon, a suburb southwest of London, has 70 registered acute care beds, including four high dependency beds and four operating theatres, one of which is a dedicated endoscopy suite and an outpatient surgery unit. Parkside also has its ownon-site pathology laboratory which provides services to theon-site cancer treatment center. The imaging department, which has been extensively upgraded in the past four years, has an MRI scanner, CT scanner, and two X-ray screening rooms, plus mammography, dental and ultrasound services available. Over 500 surgeons, anesthesiologists, and physicians have admitting privileges to the hospital. Parkside’s key specialties include orthopedics, oncology, gynecology, neurosurgery, ear-nose-throat, endoscopy and general surgery.

Parkside Oncology Clinic opened in August 2003 and has state of the art equipment designed to provide a wide range of cancer treatments. The pre-treatment and planning suite houses a dedicated CT scanner, which, along with the linear accelerators and virtual simulation software, is linked to the department’s planning system. The clinic provides inverse planned intensity-modulated radiation therapy (IMRT). The clinic has its own pharmacy aseptic suite which provides chemotherapy to the day case unit at the hospital. The clinic also has a nuclear medicine unit.

Holly House Hospital, located in a suburb northeast of London near Essex, has 55 registered acute care beds, including the ability to provide high dependency care. The hospital has three operating theatres and its ownon-site pathology laboratory and pharmacy. A diagnostic suite houses MRI and CT scanners, X-ray screening rooms, mammography, ultrasound, and other imaging services. Approximately 300 surgeons, anesthesiologists, and physicians have admitting privileges at the hospital, and there are well-established orthopedic, cosmetic, in vitro fertilization, and general surgery practices.

Highgate Hospital is a 32 bed acute care hospital located in the affluent Highgate area of London. The hospital has an established cosmetic surgery business and additional practices including endoscopy and general surgery. Approximately 200 surgeons, anesthesiologists, and physicians have admitting privileges at the hospital.

Case Mix

The following table sets forth the percentage of the internally reported case volume of our U.S. facilities and internally reported revenue from our U.K. facilities for the year ended December 31, 2008 from each of the following specialties:


Specialty	U.S.			U.K.

Orthopedic		22	%		24	%
Pain management		19			2
Gynecology		4			7	(1)
General surgery		5			14
Ear, nose and throat		8			3
Gastrointestinal		18			2
Cosmetic surgery		3			18
Ophthalmology		11			2
Other		10			28

Total		100	%		100	%


(1)		Also includes in vitro fertilization.

Payor Mix

The following table sets forth the percentage of the internally reported case volume of our U.S. surgical facilities and internally reported revenue from our U.K. facilities for the year ended December 31, 2008 from each of the following payors:


Payor	U.S.			U.K.

Private insurance		66	%		60	%
Self-pay		3			28
Government		26	(1)		8
Other		5			4

Total		100	%		100	%


(1)		Based solely on case volume. Because government payors typically pay less than private insurance, the percentage of our U.S. revenue attributable to government payors is approximately 11% for Medicare and 1% for Medicaid.

The following table sets forth information relating to thenot-for-profit healthcare systems with which we were affiliated as of December 31, 2008:


		Number of
		Facilities
	Healthcare System’s	Operated
Healthcare System	Geographical Focus	with USPI

Single Market Systems:
Baylor Health Care System	Dallas/Fort Worth, Texas		21
Centura Health	Colorado		1	(a)
Covenant Health:	Eastern Tennessee		2
INTEGRIS Health	Oklahoma		3
Legacy Health System	Portland, Oregon		1
McLaren Health Care Corporation	Michigan		4
Memorial Hermann Healthcare System	Houston, Texas		16
Meridian Health System	New Jersey		5
Mountain States Health Alliance	Northeast Tennessee		1
North Kansas City Hospital	Kansas City, Missouri		3
NorthShore University Health System	Chicago, Illinois		4
Scripps Health	San Diego, California		1
Multi-Market Systems:
Adventist Health System:	10 states(b)		2
Adventist Hinsdale Hospital	Hinsdale, Illinois
Huguley Memorial Medical Center	Fort Worth, Texas
Ascension Health:	17 states and D.C.(c)		11
Carondelet Health System (1 facility)	Blue Springs, Missouri
St. Thomas Health Services System (7 facilities)	Middle Tennessee
St. Vincent Health (1 facility)	Indiana
Seton Healthcare Network (2 facilities)	Austin, Texas
Bon Secours Health System:	Seven states(d)		5
Bon Secours Health Center at Virginia Beach	Virginia Beach, Virginia
Mary Immaculate Hospital	Newport News, Virginia
Maryview Medical Center	Suffolk, Virginia
Memorial Regional Medical Center	Richmond, Virginia
St. Mary’s Hospital	Richmond, Virginia
	California, Arizona,
Catholic Healthcare West:	Nevada		12
Mercy Hospital of Folsom (1 facility)	Sacramento, California
Mercy Medical Center (3 facilities)	Redding, California
Mercy San Juan Medical Center (1 facility)	Roseville, California
St. John’s Regional Medical Center (1 facility)	Oxnard, California
St. Joseph’s Hospital and Medical Center (2 facilities) and Arizona Orthopedic Surgical Hospital (2 facilities)	Phoenix, Arizona
St. Rose Dominican Hospital (2 facilities)	Las Vegas, Nevada
CHRISTUS Health:	Seven states(e)		5
CHRISTUS Health Central Louisiana (1 facility)	Alexandria, Louisiana
CHRISTUS Santa Rosa Health Corporation (2 facilities)	San Antonio, Texas
CHRISTUS Spohn Health System (2 facilities)	Corpus Christi, Texas
Providence Health System:	Five western states(f)		2
Providence Holy Cross Health Center	Santa Clarita, California
Providence Holy Cross Medical Center	Mission Hills, California

Totals			99


(a)		We acquired ownership in two additional facilities with Centura effective in January 2009.


(b)		Colorado, Florida, Georgia, Illinois, Kansas, Kentucky, North Carolina, Tennessee, Texas and Wisconsin.

(c)		Alabama, Arkansas, Arizona, Connecticut, District of Columbia, Florida, Idaho, Illinois, Indiana, Louisiana, Maryland, Michigan, Missouri, New York, Tennessee, Texas, Washington, and Wisconsin.

(d)		Florida, Kentucky, Maryland, New York, Pennsylvania, South Carolina, and Virginia.

(e)		Arkansas, Georgia, Louisiana, Missouri, New Mexico, Texas, and Utah.

(f)		Alaska, California, Montana, Oregon, and Washington.

Facilities

The following table sets forth information relating to the facilities that we operated as of December 31, 2008:

Date of

Number

Acquisition

Percentage

Operating

Owned by

Facility

Affiliation

Rooms

USPI

United States

Atlanta

East West Surgery Center, Austell, Georgia

9/1/00

(2)

Lawrenceville Surgery Center, Lawrenceville, Georgia

8/1/01

Northwest Georgia Surgery Center, Marietta, Georgia

11/1/00

(2)

Orthopaedic South Surgical Center, Morrow, Georgia

11/28/03

Resurgens Surgical Center, Atlanta, Georgia

10/1/98

(2)

Roswell Surgery Center, Roswell, Georgia

10/1/00

(2)

Austin

Cedar Park Surgery Center, Cedar Park, Texas

11/22/05

Northwest Surgery Center, Austin, Texas(1)

5/30/07

Texan Surgery Center, Austin, Texas

6/1/03

Chicago

Hinsdale Surgical Center, Hinsdale, Illinois

5/1/06

Same Day Surgery 25 East, Chicago, Illinois

10/15/04

Same Day Surgery Elmwood Park, Elmwood Park, Illinois

10/15/04

Same Day Surgery North Shore, Evanston, Illinois

10/15/04

Same Day Surgery River North, Chicago, Illinois

10/15/04

Cleveland

Northeast Ohio Surgery Center, Cleveland, Ohio

4/19/06

(5)

The Surgery Center Pearl, Middleburg Heights, Ohio

1/28/08

Corpus Christi

Corpus Christi Outpatient Surgery Center, Corpus Christi, Texas(1)

5/1/02

Shoreline Surgery Center, Corpus Christi, Texas

7/1/06

Dallas/Fort Worth

Baylor Medical Center at Frisco, Frisco, Texas(3)

9/30/02

Baylor Surgicare at Bedford, Bedford, Texas(1)

12/18/98

Baylor Surgicare, Dallas, Texas(1)

6/1/99

Baylor Surgicare at Denton, Denton, Texas(1)

2/1/99

Baylor Surgicare at Garland, Garland, Texas

2/1/99

Baylor Surgicare at Grapevine, Grapevine, Texas

2/16/02

Baylor Surgicare at Lewisville, Lewisville, Texas(1)

9/16/02

Baylor Surgicare at Plano, Plano, Texas

10/1/07

Date of

Number

Acquisition

Percentage

Operating

Owned by

Facility

Affiliation

Rooms

USPI

Baylor Surgicare at North Garland, Garland, Texas

5/1/05

Baylor Surgicare at Trophy Club, Trophy Club, Texas(3)

5/3/04

Bellaire Surgery Center, Fort Worth, Texas

10/15/02

Doctor’s Surgery Center at Huguley, Burleson, Texas

2/14/06

Heath Surgicare, Rockwall, Texas(1)

11/1/04

Irving-Coppell Surgical Hospital, Irving, Texas(3)

10/20/03

Mary Shiels Hospital, Dallas, Texas(3)

4/1/03

Medical Centre Surgical Hospital, Fort Worth, Texas(3)

12/18/98

North Central Surgery Center, Dallas, Texas

12/12/05

North Texas Surgery Center, Dallas, Texas(1)

12/18/98

Park Cities Surgery Center, Dallas, Texas(1)

6/9/03

Physicians Day Surgery Center, Dallas, Texas

10/12/00

Physicians Surgical Center of Fort Worth, Fort Worth, Texas

7/13/04

Physicians Surgical Center of Fort Worth — Campus II, Fort Worth, Texas

5/1/07

Rockwall Surgery Center, Rockwall, Texas

09/1/06

Surgery Center of Arlington, Arlington, Texas(1)

2/1/99

Texas Surgery Center, Dallas, Texas(1)

6/1/99

Valley View Surgery Center, Dallas, Texas

12/18/98

Houston

Doctors Outpatient Surgicenter, Pasadena, Texas(1)

9/1/99

Kingsland Surgery Center, Katy, Texas

12/31/08

KSF Orthopaedic Surgery Center, Houston, Texas(1)

5/1/07

Memorial Hermann Specialty Hospital Kingwood, Kingwood, Texas(3)

9/1/07

Memorial Hermann Surgery Center — Katy, Katy, Texas(1)

1/19/07

Memorial Hermann Surgery Center — Northwest, Houston, Texas(1)

9/1/04

Memorial Hermann Surgery Center — Red Oak, Houston, Texas(1)

4/19/06

(5)

Memorial Hermann Surgery Center — Southwest, Houston, Texas(1)

9/21/06

Memorial Hermann Surgery Center — Sugar Land, Sugar Land, Texas(1)

9/21/06

Memorial Hermann Surgery Center — Texas Medical Center, Houston, Texas(1)

1/17/07

Memorial Hermann Surgery Center — The Woodlands, The Woodlands, Texas

8/9/05

North Houston Endoscopy and Surgery, Houston, Texas

10/1/08

Sugar Land Surgical Hospital, Sugar Land, Texas(3)

12/28/02

TOPS Surgical Specialty Hospital, Houston, Texas(3)

7/1/99

United Surgery Center — Southeast, Houston, Texas(1)

9/1/99

West Houston Ambulatory Surgical Associates, Houston, Texas

4/19/06

(5)

Kansas City

Briarcliff Surgery Center, Kansas City, Missouri

6/1/05

Creekwood Surgery Center, Kansas City, Missouri(1)

7/29/98

Date of

Number

Acquisition

Percentage

Operating

Owned by

Facility

Affiliation

Rooms

USPI

Liberty Surgery Center, Liberty, Missouri

6/1/05

Saint Mary’s Surgical Center, Blue Springs, Missouri

5/1/05

Knoxville

Parkwest Surgery Center, Knoxville, Tennessee

7/26/01

Physician’s Surgery Center of Knoxville, Knoxville, Tennessee

1/1/08

Lansing

Genesis Surgery Center, Lansing, Michigan

11/1/06

Lansing Surgery Center, Lansing, Michigan

11/1/06

Las Vegas

Durango Outpatient Surgery Center, Las Vegas, Nevada

12/9/08

Parkway Surgery Center, Henderson, Nevada

8/3/98

Los Angeles

Coast Surgery Center of South Bay, Torrance, California(1)

12/18/01

Pacific Endo-Surgical Center, Torrance, California

8/1/03

San Fernando Valley Surgery Center, Mission Hills, California

11/1/04

San Gabriel Valley Surgical Center, West Covina, California

11/16/01

Santa Clarita Ambulatory Surgery Center, Santa Clarita, California(1)

3/7/06

The Center for Ambulatory Surgical Treatment, Los Angeles, California(1)

11/14/02

Nashville

Baptist Ambulatory Surgery Center, Nashville, Tennessee

3/1/98

(2)

Baptist Plaza Surgicare, Nashville, Tennessee

12/3/03

Center for Spinal Surgery, Nashville, Tennessee(3)

12/31/08

Middle Tennessee Ambulatory Surgery Center, Murfreesboro, Tennessee

7/29/98

Northridge Surgery Center, Nashville, Tennessee

4/19/06

(5)

Physicians Pavilion Surgery Center, Smyrna, Tennessee

7/29/98

Saint Thomas Surgicare, Nashville, Tennessee

7/15/02

New Jersey

Central Jersey Surgery Center, Eatontown, New Jersey

11/1/04

Northern Monmouth Regional Surgery Center, Manalapan, New Jersey

7/10/06

University SurgiCenter, East Brunswick, New Jersey

6/26/02

Shore Outpatient Surgicenter, Lakewood, New Jersey

11/1/04

Shrewsbury Surgery Center, Shrewsbury, New Jersey

4/1/99

Suburban Endoscopy Services, Verona, New Jersey

4/19/06

(5)

Toms River Surgery Center, Toms River, New Jersey

3/15/02

Oklahoma City

Oklahoma Center for Orthopedic MultiSpecialty Surgery, Oklahoma City, Oklahoma(3)

8/2/04

Southwest Orthopaedic Ambulatory Surgery Center, Oklahoma City, Oklahoma

8/2/04


		Date of			Number
		Acquisition			of		Percentage
		or			Operating		Owned by
Facility		Affiliation			Rooms		USPI

*	Specialists Surgery Center, Oklahoma City, Oklahoma(1)		3/27/02			3		25
Orlando
	Sand Lake Surgery Center, Orlando, Florida		2/18/08			3		33
	University Surgical Center, Winter Park, Florida		10/15/98			3		40
Phoenix
*	Arizona Orthopedic Surgical Hospital, Chandler, Arizona(3)		5/19/04			6		35
*	Desert Ridge Outpatient Surgery Center, Phoenix, Arizona		3/30/07			4		33
	Metro Surgery Center, Phoenix, Arizona		4/19/06	(5)		4		77
	Physicians Surgery Center of Tempe, Tempe, Arizona		4/19/06	(5)		2		10
*	St. Joseph’s Outpatient Surgery Center, Phoenix, Arizona(1)		9/2/03			8		31
	Surgery Center of Peoria, Peoria, Arizona		4/19/06	(5)		3		55
	Surgery Center of Scottsdale, Scottsdale, Arizona		4/19/06	(5)		4		53
	Surgery Center of Gilbert, Gilbert, Arizona		4/19/06	(5)		3		21
*	Warner Outpatient Surgery Center, Chandler, Arizona		7/1/99			4		28
Redding
*	Court Street Surgery Center, Redding, California		4/19/06	(5)		2		31
*	Mercy Surgery Center, Redding, California		3/1/08			4		31
*	Redding Surgery Center, Redding, California		4/19/06	(5)		2		31
Richmond
*	Memorial Ambulatory Surgery Center, Mechanicsville, Virginia		12/30/05			5		23
*	St. Mary’s Ambulatory Surgery Center, Richmond, Virginia		11/29/06			4		20
Sacramento
*	Folsom Outpatient Surgery Center, Folsom, California		6/1/05			2		33
*	Roseville Surgery Center, Roseville, California		7/1/06			2		31
San Antonio
*	Alamo Heights Surgery Center, San Antonio, Texas(1)		12/1/04			3		59
*	CHRISTUS Santa Rosa Surgery Center, San Antonio, Texas(1)		5/3/04			5		31
	San Antonio Endoscopy Center, San Antonio, Texas		5/1/05			1		54
St. Louis
	Advanced Surgical Care, Creve Coeur, Missouri(1)		1/1/06			2		64
	Chesterfield Surgery Center, Chesterfield, Missouri(1)		1/1/06			2		66
	Frontenac Surgery and Spine Care Center, Frontenac, Missouri(1)		5/1/07			2		32
	Manchester Surgery Center, St. Louis, Missouri		2/1/07			3		66
	Mason Ridge Surgery Center, St. Louis, Missouri(1)		2/1/07			2		57
	Mid Rivers Surgery Center, Saint Peters, Missouri		1/1/06			2		66
	Old Tesson Surgery Center, St. Louis, Missouri		8/1/08			3		63
	Olive Surgery Center, St. Louis, Missouri		1/1/06			2		62
	Riverside Ambulatory Surgery Center, Florissant, Missouri		8/1/06			2		65
	South County Outpatient Endoscopy Services, St. Louis, Missouri		10/1/08			2		25
	Sunset Hills Surgery Center, St. Louis, Missouri		1/1/06			2		66
	The Ambulatory Surgical Center of St. Louis, Bridgeton, Missouri		8/1/06			2		66
	Twin Cities Ambulatory Surgery Center, St. Louis, Missouri		9/1/08			2		65


		Date of			Number
		Acquisition			of		Percentage
		or			Operating		Owned by
Facility		Affiliation			Rooms		USPI

	Webster Surgery Center, Webster Groves, Missouri(1)		3/1/07			2		30
Additional Markets
	Austintown Ambulatory Surgery Center, Austintown, Ohio		4/12/02			5		65
*	Beaumont Surgical Affiliates, Beaumont, Texas(1)		4/19/06	(5)		6		25
*	Bon Secours Surgery Center at Harbour View, Suffolk, Virginia		11/12/07			6		19
*	Bon Secours Surgery Center at Virginia Beach, Virginia Beach, Virginia		5/30/07			2		30
	Chico Surgery Center, Chico, California		4/19/06	(5)		3		89
*	CHRISTUS Cabrini Surgery Center, Alexandria, Louisiana		6/22/07			4		25
*	Crown Point Surgical Center, Parker, Colorado		10/1/08			4		40
	Day-Op Center of Long Island, Mineola, New York(4)		12/4/98			4		99
	Destin Surgery Center, Destin, Florida		9/25/02			2		30
	Great Plains Surgery Center, Lawton, Oklahoma		4/19/06	(5)		2		49
	Greater Baton Rouge Surgical Hospital, Baton Rouge, Louisiana(3)		10/11/05			4		30
	Idaho Surgery Center, Caldwell, Idaho		4/19/06	(5)		3		19
*	Mary Immaculate Ambulatory Surgical Center, Newport News, Virginia		7/19/04			3		16
*	McLaren ASC of Flint, Flint, Michigan		8/2/07			4		43
*	Mountain Empire Surgery Center, Johnson City, Tennessee		2/20/00	(2)		4		18
	New Horizons Surgery Center, Marion, Ohio		4/19/06	(5)		2		10
	New Mexico Orthopaedic Surgery Center, Albuquerque, New Mexico		2/29/00	(2)		6		51
*	Northwest Surgery Center, Portland, Oregon		12/1/08			3		27
	Reading Surgery Center, Spring Township, Pennsylvania		7/1/04			3		57
	Redmond Surgery Center, Redmond, Oregon		4/19/06	(5)		2		65
*	Saint John’s Outpatient Surgery Center, Oxnard, California		12/5/05			4		34
*	Scripps Encinitas Surgery Center, Encinitas, California		2/6/08			3		18
	Surgi-Center of Central Virginia, Fredericksburg, Virginia		11/29/01			4		80
	Surgery Center of Canfield, Canfield, Ohio(1)		4/19/06	(5)		3		23
	Surgery Center of Columbia, Columbia, Missouri(1)		8/1/06			2		61
	Surgery Center of Fort Lauderdale, Fort Lauderdale, Florida		11/1/04			4		70
	Templeton Surgery Center, Templeton, California		1/20/07			2		65
*	Terre Haute Surgical Center, Terre Haute, Indiana		12/19/07			2		34
	Teton Outpatient Services, Jackson, Wyoming(1)		8/1/98	(2)		2		49
	Tri-City Orthopaedic Center, Richland, Washington(4)		4/19/06	(5)		2		20
	Tulsa Outpatient Surgery Center, Tulsa, Oklahoma		11/1/04			4		30
*	Utica Surgery and Endoscopy Center, Utica, Michigan		4/1/07			3		33
	Victoria Ambulatory Surgery Center, Victoria, Texas		4/19/06	(5)		2		59
United Kingdom
	Parkside Hospital, Wimbledon		4/6/00			4		100
	Holly House Hospital, Essex		4/6/00			3		100
	Highgate Private Clinic, Highgate		4/29/03			3		100


*		Facilities jointly owned withnot-for-profit hospital systems.

(1)		Certain of our surgery centers are licensed and equipped to accommodate23-hour stays.

(2)		Indicates date of acquisition by OrthoLink Physician Corporation. We acquired OrthoLink in February 2001.

(3)		Surgical hospitals, all of which are licensed and equipped for overnight stays.

(4)		Operated through a consulting and administrative agreement.

(5)		Indicates the date of our acquisition of Surgis.

We lease the majority of the facilities where our various surgery centers and surgical hospitals conduct their operations. Our leases have initial terms ranging from one to twenty years and most of the leases contain options to extend the lease period, in some cases for up to ten additional years.

Our corporate headquarters is located in a suburb of Dallas, Texas. We currently lease approximately 70,000 square feet of space at 15305 Dallas Parkway, Addison, Texas. The lease expires in April 2011.

Our administrative office in the United Kingdom is located in London. We currently lease 2,300 square feet. The lease expires in October 2013.

We also lease approximately 40,000 square feet of total additional space in Brentwood, Tennessee; Chicago, Illinois; Houston, Texas; St. Louis, Missouri; Denver, Colorado; and Pasadena, California for regional offices. These leases expire between February 2010 and May 2015.

Acquisitions and Development

The following table sets forth information relating to facilities that are currently under construction:

Expected

Number of

Hospital

Opening

Operating

Facility Location

Partner

Type

Date

Rooms

St. Louis, Missouri

SSM

Surgery Center

Q309

Turnersville, New Jersey

Kennedy

Surgery Center

Q309

Clarkston (Detroit), Michigan

McLaren

Surgery Center

Q209

Arlington, Texas

Baylor

Hospital

Q110

We also have four additional projects under development, all of which involve a hospital partner. It is possible that some of these projects, as well as other projects which are in various stages of negotiation with both current and prospective joint venture partners, will result in our operating additional facilities sometime in 2009. While our history suggests that many of these projects will culminate with the opening of a profitable surgical facility, we can provide no assurance that any of these projects will reach that stage or will be successful thereafter.

Marketing

Our sales and marketing efforts are directed primarily at physicians, who are principally responsible for referring patients to our facilities. We market our facilities to physicians by emphasizing (1) the high level of patient and physician satisfaction with our surgery centers, which is based on surveys we take concerning our facilities, (2) the quality and responsiveness of our services, (3) the practice efficiencies provided by our facilities, and (4) the benefits of our affiliation with our hospital partners, if applicable. We also directly negotiate, together in some instances with our hospital partners, agreements with third-party payors, which generally focus on the pricing, number of facilities in the market and affiliation with physician groups in a particular market. Maintaining access to physicians and patients through third-party payor contracting is essential for the economic viability of most of our facilities.

Competition

In all of our markets, our facilities compete with other providers, including major acute care hospitals and other surgery centers. Hospitals have various competitive advantages over us, including their established managed care

contracts, community position, physician loyalty and geographical convenience for physicians’ inpatient and outpatient practices. However, we believe that, in comparison to hospitals with which we compete, our surgery centers and surgical hospitals compete favorably on the basis of cost, quality, efficiency and responsiveness to physician needs in a more comfortable environment for the patient.

We compete with other providers in each of our markets for patients, physicians and for contracts with insurers or managed care payors. Competition for managed care contracts with other providers is focused on the pricing, number of facilities in the market and affiliation with key physician groups in a particular market. We believe that our relationships with our hospital partners enhance our ability to compete for managed care contracts. We also encounter competition with other companies for acquisition and development of facilities and in the United States for strategic relationships withnot-for-profit healthcare systems and physicians.

There are several companies, both public and private, that acquire and develop freestanding multi-specialty surgery centers and surgical hospitals. Some of these competitors have greater resources than we do. The principal competitive factors that affect our ability and the ability of our competitors to acquire surgery centers and surgical hospitals are price, experience, reputation and access to capital. Further, in the United States many physician groups develop surgery centers without a corporate partner, and this presents a competitive threat to the Company.

In the United Kingdom, we face competition from both the national health service and other privately operated hospitals. Across the United Kingdom, a large number of private hospitals are owned by the four largest hospital operators. In addition, the two largest payors account for over half of the privately insured market. We believe our hospitals can effectively compete in this market due to location and specialty mix of our facilities. Our hospitals also have a higher portion of self pay business than the overall market. Self pay business is not influenced by the private insurers.

Employees

As of December 31, 2008, we employed approximately 6,300 people, 5,600 of whom are full-time employees and 700 of whom are part-time employees. Of these employees, we employ approximately 5,400 in the United States and 900 in the United Kingdom. The physicians that affiliate with us and use our facilities are not our employees. However, we generally offer the physicians the opportunity to purchase equity interests in the facilities they use.

Professional and General Liability Insurance

In the United States, we maintain professional and general liability insurance through a wholly-owned captive insurance company. We make premium payments to the captive insurance company and accrue for claims costs based on actuarially predicted ultimate losses and the captive insurance company then pays administrative fees and the insurance claims. We also maintain umbrella business interruption and property damage insurance with third party providers. The governing documents of each of our surgical facilities require physicians who conduct surgical procedures at those facilities to maintain stated amounts of insurance. In the United Kingdom, we maintain general public insurance, malpractice insurance and property and business interruption insurance. Our insurance policies are generally subject to annual renewals. We believe that we will be able to renew current policies or otherwise obtain comparable insurance coverage at reasonable rates. However, we have no control over the insurance markets and can provide no assurance that we will economically be able to maintain insurance similar to our current policies.

Government Regulation

United States

General

The healthcare industry is subject to extensive regulation by federal, state and local governments. Government regulation affects our business by controlling growth, requiring licensing or certification of facilities, regulating how facilities are used and controlling payment for services provided. Further, the regulatory environment in which we operate may change significantly in the future. While we believe we have structured our agreements and

operations in material compliance with applicable law, there can be no assurance that we will be able to successfully address changes in the regulatory environment.

Every state imposes licensing and other requirements on healthcare facilities. In addition, many states require regulatory approval, including certificates of need, before establishing or expanding various types of healthcare facilities, including ambulatory surgery centers and surgical hospitals, offering services or making capital expenditures in excess of statutory thresholds for healthcare equipment, facilities or programs. In addition, the federal Medicare program imposes additional conditions for coverage and payment rules for services furnished to Medicare beneficiaries. We may become subject to additional regulations as we expand our existing operations and enter new markets.

In addition to extensive existing government healthcare regulation, there have been numerous initiatives on the federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services. We believe that these healthcare reform initiatives will continue during the foreseeable future. If adopted, some aspects of proposed reforms, such as further reductions in Medicare or Medicaid payments, or additional prohibitions on physicians’ financial relationships with facilities to which they refer patients, could adversely affect us.

We believe that our business operations materially comply with applicable law. However, we have not received a legal opinion from counsel or from any federal or state judicial or regulatory authority to this effect, and many aspects of our business operations have not been the subject of state or federal regulatory scrutiny or interpretation. Some of the laws applicable to us are subject to limited or evolving interpretations; therefore, a review of our operations by a court or law enforcement or regulatory authority might result in a determination that could have a material adverse effect on us. Furthermore, the laws applicable to us may be amended or interpreted in a manner that could have a material adverse effect on us. Our ability to conduct our business and to operate profitably will depend in part upon obtaining and maintaining all necessary licenses, certificates of need and other approvals, and complying with applicable healthcare laws and regulations.

Licensure andcertificate-of-need regulations

Capital expenditures for the construction of new facilities, the addition of capacity or the acquisition of existing facilities may be reviewable by state regulators under statutory schemes that are sometimes referred to as certificate of need laws. States with certificate of need laws place limits on the construction and acquisition of healthcare facilities and the expansion of existing facilities and services. In these states, approvals are required for capital expenditures exceeding certain specified amounts and that involve certain facilities or services, including ambulatory surgery centers and surgical hospitals.

State certificate of need laws generally provide that, prior to the addition of new beds, the construction of new facilities or the introduction of new services, a designated state health planning agency must determine that a need exists for those beds, facilities or services. The certificate of need process is intended to promote comprehensive healthcare planning, assist in providing high quality healthcare at the lowest possible cost and avoid unnecessary duplication by ensuring that only those healthcare facilities that are needed will be built.

Typically, the provider of services submits an application to the appropriate agency with information concerning the area and population to be served, the anticipated demand for the facility or service to be provided, the amount of capital expenditure, the estimated annual operating costs, the relationship of the proposed facility or service to the overall state health plan and the cost per patient day for the type of care contemplated. The issuance of a certificate of need is based upon a finding of need by the agency in accordance with criteria set forth in certificate of need laws and state and regional health facilities plans. If the proposed facility or service is found to be necessary and the applicant to be the appropriate provider, the agency will issue a certificate of need containing a maximum amount of expenditure and a specific time period for the holder of the certificate of need to implement the approved project.

Our healthcare facilities are also subject to state and local licensing regulations ranging from the adequacy of medical care to compliance with building codes and environmental protection laws. To assure continued

compliance with these regulations, governmental and other authorities periodically inspect our facilities. The failure to comply with these regulations could result in the suspension or revocation of a healthcare facility’s license.

Our U.S. healthcare facilities receive accreditation from the Joint Commission on Accreditation of Healthcare Organizations or the Accreditation Association for Ambulatory Health Care, Inc., nationwide commissions which establish standards relating to the physical plant, administration, quality of patient care and operation of medical staffs of various types of healthcare facilities. Generally, our healthcare facilities must be in operation for at least six months before they are eligible for accreditation. As of December 31, 2008, all of our eligible healthcare facilities had been accredited by either the Joint Commission on Accreditation of Healthcare Organizations or the Accreditation Association for Ambulatory Health Care, Inc. or are in the process of applying for such accreditation. Many managed care companies and third-party payors require our facilities to be accredited in order to be considered a participating provider under their health plans.

Medicare and Medicaid Participation in Short Stay Surgical Facilities

Medicare is a federally funded and administered health insurance program, primarily for individuals entitled to social security benefits who are 65 or older or who are disabled. Medicaid is a health insurance program jointly funded by state and federal governments that provides medical assistance to qualifying low income persons. Each state Medicaid program has the option to determine coverage for ambulatory surgery center services and to determine payment rates for those services. All of the states in which we currently operate cover Medicaid short stay surgical facility services; however, these states may not continue to cover short stay surgical facility services and states into which we expand our operations may not cover or continue to cover short stay surgical facility services.

Medicare payments for procedures performed at short stay surgical facilities are not based on costs or reasonable charges. Instead, Medicare prospectively determines fixed payment amounts for procedures performed at short stay surgical facilities. These amounts are adjusted for regional wage variations. The various state Medicaid programs also pay us a fixed payment for our services, which amount varies from state to state. A portion of our revenues are attributable to payments received from the Medicare and Medicaid programs. For the year ended December 31, 2008, the combined year ended December 31, 2007, and the year ended December 31, 2006, 26%, 27%, and 28%, respectively, of our domestic case volumes were attributable to Medicare and Medicaid payments, although the percentage of our overall revenues these cases represent is significantly less because government payors typically pay less than private insurers. For example, approximately 11% and 1% of our 2008 domestic patient service revenues were contributed by Medicare and Medicaid, respectively, despite those cases representing a total of 26% of our domestic case volume during 2008.

In order to participate in the Medicare program, our short stay surgical facilities must satisfy a set of regulations known as “conditions of participation.” Each facility can meet this requirement through accreditation with the Joint Commission on Accreditation of Healthcare Organizations or other CMS-approved accreditation organizations, or through direct surveys at the direction of CMS. All of our short stay surgical facilities in the United States are certified or, with respect to newly acquired or developed facilities, are awaiting certification to participate in the Medicare program. We have established ongoing quality assurance activities to monitor and ensure our facilities’ compliance with these conditions of participation. Any failure by a facility to maintain compliance with these conditions of participation as determined by a survey could result in the loss of the facility’s provider agreement with CMS, which would prohibit reimbursement for services rendered to Medicare or Medicaid beneficiaries until such time as the facility is found to be back in compliance with the conditions of participation. This could have a material adverse affect on the individual facility’s billing and collections.

The Department of Health and Human Services and the states in which we perform surgical procedures for Medicaid patients may revise the Medicare and Medicaid payments methods or rates in the future. Any such changes could have a negative impact on the reimbursements we receive for our surgical services from the Medicare program and the state Medicaid programs. We do not know at this time if any such changes will be made, when any changes will occur, and to what extent revisions to such payment methodologies will be implemented.

As with most government programs, the Medicare and Medicaid programs are subject to statutory and regulatory changes, possible retroactive and prospective rate adjustments, administrative rulings, freezes and

funding reductions, all of which may adversely affect the level of payments to our short stay surgical facilities. In late 2005, Congress enacted legislation that limited reimbursement for certain ambulatory surgery center procedures, to the lower of the rate for ambulatory surgery centers or the rate for hospital outpatient departments. CMS implemented this legislative change effective January 1, 2007, resulting in decreased payment for approximately 280 procedures, primarily ophthalmology, dermatology and urology procedures. As part of a Congressional mandate to revise the Medicare payment system for procedures performed in ambulatory surgery centers, CMS, in November 2007, issued a revised payment methodology for services performed in ambulatory surgery centers. The revised system was implemented on January 1, 2008 and is phased in over a four-year period. The revised system expanded the number of procedures that are covered in ambulatory surgery centers and, among other things, set the payment rate at approximately 65% of the payment for procedures that are performed in a hospital outpatient department. Reductions or changes in Medicare or Medicaid funding could significantly affect our results of operations. We cannot predict at this time whether additional healthcare reform initiatives will be implemented or whether there will be other changes in the administration of government healthcare programs or the interpretation of government policies that would adversely affect our business.

Federal Anti-Kickback Law

State and federal laws regulate relationships among providers of healthcare services, including employment or service contracts and investment relationships. These restrictions include a federal criminal law, referred to herein as the Anti-Kickback Statute, that prohibits offering, paying, soliciting or receiving any form of remuneration in return for:


	•	referring patients for services or items payable under a federal healthcare program, including Medicare or Medicaid, or

	•	purchasing, leasing or ordering, or arranging for or recommending purchasing, leasing or ordering, any good, facility, service or item for which payment may be made in whole or in part by a federal healthcare program.

A violation of the Anti-Kickback Statute constitutes a felony. Potential sanctions include imprisonment of up to five years, criminal fines of up to $25,000, civil money penalties of up to $50,000 per act plus three times the remuneration offered or three times the amount claimed and exclusion from all federally funded healthcare programs. The applicability of these provisions to some forms of business transactions in the healthcare industry has not yet been subject to judicial or regulatory interpretation. Moreover, several federal courts have held that the Anti-Kickback Statute can be violated if only one purpose (not necessarily the primary purpose) of the transaction is to induce or reward a referral of business, notwithstanding other legitimate purposes.

Pursuant to the Anti-Kickback Statute, and in an effort to reduce potential fraud and abuse relating to federal healthcare programs, the federal government has announced a policy of increased scrutiny of joint ventures and other transactions among healthcare providers. The Office of the Inspector General of the Department of Health and Human Services closely scrutinizes healthcare joint ventures involving physicians and other referral sources. The Office of the Inspector General published a fraud alert that outlined questionable features of “suspect” joint ventures in 1989 and a Special Advisory Bulletin related to contractual joint ventures in 2003, and the Office of the Inspector General has continued to rely on fraud alerts in later pronouncements.

The Anti-Kickback Statute contains provisions that insulate certain transactions from liability. In addition, pursuant to the provisions of the Anti-Kickback Statute, the Health and Human Services Office of the Inspector General has also published regulations that exempt additional practices from enforcement under the Anti-Kickback Statute. These statutory exceptions and regulations, known as “safe harbors,” if fully complied with, assure participants in particular types of arrangements that the Office of the Inspector General will not treat their participation in that arrangement as a violation of the Anti-Kickback Statute. The statutory exceptions and safe harbor regulations do not expand the scope of activities that the Anti-Kickback Statute prohibits, nor do they provide that failure to satisfy the terms of a safe harbor constitutes a violation of the Anti-Kickback Statute. The Office of the Inspector General has, however, indicated that failure to satisfy the terms of an exception or a safe harbor may subject an arrangement to increased scrutiny. Therefore, if a transaction or relationship does not fit

within an exception or safe harbor, the facts and circumstances as well as intent of the parties related to a specific transaction or relationship must be examined to determine whether or not any illegal conduct has occurred.

Our partnerships and limited liability companies that are providers of services under the Medicare and Medicaid programs, and their respective partners and members, are subject to the Anti-Kickback Statute. A number of the relationships that we have established with physicians and other healthcare providers do not fit within any of the statutory exceptions or safe harbor regulations issued by the Office of the Inspector General. All of the 160 surgical facilities in the United States in which we hold an ownership interest are owned by partnerships or limited liability companies, which include as partners or members physicians who perform surgical or other procedures at the facilities.

On November 19, 1999, the Office of the Inspector General promulgated regulations setting forth certain safe harbors under the Anti-Kickback Statute, including a safe harbor applicable to surgery centers. The surgery center safe harbor generally protects ownership or investment interests in a center by physicians who are in a position to refer patients directly to the center and perform procedures at the center on referred patients, if certain conditions are met. More specifically, the surgery center safe harbor protects any payment that is a return on an ownership or investment interest to an investor if certain standards are met in one of four categories of ambulatory surgery centers (1) surgeon-owned surgery centers, (2) single-specialty surgery centers, (3) multi-specialty surgery centers, and (4) hospital/physician surgery centers.

For multi-specialty ambulatory surgery centers, for example, the following standards, among several others, apply:

(1) all of the investors must either be physicians who are in a position to refer patients directly to the center and perform procedures on the referred patients, group practices composed exclusively of those physicians, or investors who are not employed by the entity or by any of its investors, are not in a position to provide items or services to the entity or any of its investors, and are not in a position to make or influence referrals directly or indirectly to the entity or any of its investors;

(2) at least one-third of each physician investor’s medical practice income from all sources for the previous fiscal year or twelve-month period must be derived from performing outpatient procedures that require an ambulatory surgery center or specialty hospital setting in accordance with Medicare reimbursement rules; and

(3) at least one third of the Medicare-eligible outpatient surgery procedures performed by each physician investor for the previous fiscal year or previous twelve-month period must be performed at the ambulatory surgery center in which the investment is made.

Similar standards apply to each of the remaining three categories of ambulatory surgery centers set forth in the regulations. In particular, each of the four categories includes a requirement that no ownership interests be held by a non-physician or non-hospital investor if that investor is (a) employed by the center or another investor, (b) in a position to provide items or services to the center or any of its other investors, or (c) in a position to make or influence referrals directly or indirectly to the center or any of its investors.

Because one of our subsidiaries is an investor in each partnership or limited liability company that owns one of our ambulatory surgery centers, and since this subsidiary provides management and other services to the surgery center, our arrangements with physician investors do not fit within the specific terms of the ambulatory surgery center safe harbor or any other safe harbor.

In addition, because we do not control the medical practices of our physician investors or control where they perform surgical procedures, it is possible that the quantitative tests described above will not be met, or that other conditions of the surgery center safe harbor will not be met. Accordingly, while the surgery center safe harbor is helpful in establishing that a physician’s investment in a surgery center should be considered an extension of the physician’s practice and not as a prohibited financial relationship, we can give no assurances that these ownership interests will not be challenged under the Anti-Kickback Statute. In an effort to monitor our compliance with the safe harbor’s extension of practice requirement, we have implemented an internal certification process, which tracks each physician’s annual extension of practice certification. While this process provides support for physician

compliance with the safe harbor’s quantitative tests, we can give no assurance of such compliance. However, we believe that our arrangements involving physician ownership interests in our ambulatory surgery centers do not fall within the activities prohibited by the Anti-Kickback Statute.

With regard to our hospitals, the Office of Inspector General has not adopted any safe harbor regulations under the Anti-Kickback Statute for physician investments in hospitals. Each of our hospitals is held in partnership with physicians who are in a position to refer patients to the hospital. There can be no assurances that these relationships will not be found to violate the Anti-Kickback Statute or that there will not be regulatory or legislative changes that prohibit physician ownership of hospitals.

While several federal court decisions have aggressively applied the restrictions of the Anti-Kickback Statute, they provide little guidance regarding the application of the Anti-Kickback Statute to our partnerships and limited liability companies. We believe that our operations do not violate the Anti-Kickback Statute. However, a federal agency charged with enforcement of the Anti-Kickback Statute might assert a contrary position. Further, new federal laws, or new interpretations of existing laws, might adversely affect relationships we have established with physicians or other healthcare providers or result in the imposition of penalties on us or some of our facilities. Even the assertion of a violation could have a material adverse effect upon us.

Federal Physician Self-Referral Law

Section 1877 of the Social Security Act, commonly known as the “Stark Law,” prohibits any physician from referring patients to any entity for the furnishing of certain “designated health services” otherwise payable by Medicare or Medicaid, if the physician or an immediate family member has a financial relationship such as an ownership interest or compensation arrangement with the entity that furnishes services to Medicare beneficiaries, unless an exception applies. Persons who violate the Stark Law are subject to potential civil money penalties of up to $15,000 for each bill or claim submitted in violation of the Stark Law and up to $100,000 for each “circumvention scheme” they are found to have entered into, and potential exclusion from the Medicare and Medicaid programs. In addition, the Stark Law requires the denial (or, refund, as the case may be) of any Medicare and Medicaid payments received for designated health services that result from a prohibited referral.

The list of designated health services under the Stark Law does not include ambulatory surgery services as such. However, some of the ten types of designated health services are among the types of services furnished by our ambulatory surgery centers. The Department of Health and Human Services, acting through the Centers for Medicare and Medicaid Services, has promulgated regulations implementing the Stark Law. These regulations exclude health services provided by an ambulatory surgery center from the definition of “designated health services” if the services are included in the surgery center’s composite Medicare payment rate. Therefore, the Stark Law’s self-referral prohibition generally does not apply to health services provided by an ambulatory surgery center. However, if the ambulatory surgery center is separately billing Medicare for designated health services that are not covered under the ambulatory surgery center’s composite Medicare payment rate, or if either the ambulatory surgery center or an affiliated physician is performing (and billing Medicare) for procedures that involve designated health services that Medicare has not designated as an ambulatory surgery center service, the Stark Law’s self-referral prohibition would apply and such services could implicate the Stark Law. We believe that our operations do not violate the Stark Law, as currently interpreted. However, it is possible that the Centers for Medicare and Medicaid Services will further address the exception relating to services provided by an ambulatory surgery center in the future. Therefore, we cannot assure you that future regulatory changes will not result in our ambulatory surgery centers becoming subject to the Stark Law’s self-referral prohibition.

Thirteen of our U.S. facilities are hospitals rather than ambulatory surgery centers. The Stark Law includes an exception for physician investments in hospitals if the physician’s investment is in the entire hospital and not just a department of the hospital. We believe that the physician investments in our hospitals fall within the exception and are therefore permitted under the Stark Law. However, over the past few years there have been various legislative attempts to change the way the hospital exception applies to physician investments in hospitals and it is possible that there could be another legislative attempt to alter this exception in the future. See “Risk Factors — Future Legislation could restrict our ability to operate our domestic surgical hospitals.”

False and Other Improper Claims

The federal government is authorized to impose criminal, civil and administrative penalties on any person or entity that files a false claim for payment from the Medicare or Medicaid programs. Claims filed with private insurers can also lead to criminal and civil penalties, including, but not limited to, penalties relating to violations of federal mail and wire fraud statutes. While the criminal statutes are generally reserved for instances of fraudulent intent, the government is applying its criminal, civil and administrative penalty statutes in an ever-expanding range of circumstances. For example, the government has taken the position that a pattern of claiming reimbursement for unnecessary services violates these statutes if the claimant merely should have known the services were unnecessary, even if the government cannot demonstrate actual knowledge. The government has also taken the position that claiming payment for low-quality services is a violation of these statutes if the claimant should have known that the care was substandard.

Over the past several years, the government has accused an increasing number of healthcare providers of violating the federal False Claims Act. The False Claims Act prohibits a person from knowingly presenting, or causing to be presented, a false or fraudulent claim to the U.S. government. The statute defines “knowingly” to include not only actual knowledge of a claim’s falsity, but also reckless disregard for or intentional ignorance of the truth or falsity of a claim. Because our facilities perform hundreds of similar procedures a year for which they are paid by Medicare, and there is a relatively long statute of limitations, a billing error or cost reporting error could result in significant penalties. Additionally, Anti-Kickback or Stark Law claims can be “bootstrapped” to claims under the False Claims Act on the theory that, when a provider submits a claim to a federal health care program, the claim includes an implicit certification that the provider is in compliance with the Medicare Act, which would require compliance with other laws, including the Anti-Kickback Statute and the Stark Law. As a result of this “bootstrap” theory, the U.S. government can collect additional civil penalties under the False Claims Act for claims that have been “tainted” by the Anti-Kickback or Stark Law violation.

Under the “qui tam,” or whistleblower, provisions of the False Claims Act, private parties may bring actions on behalf of the federal government. Such private parties, often referred to as relators, are entitled to share in any amounts recovered by the government through trial or settlement. Both direct enforcement activity by the government and whistleblower lawsuits have increased significantly in recent years and have increased the risk that a healthcare company, like us, will have to defend a false claims action, pay fines or be excluded from the Medicare and Medicaid programs as a result of an investigation resulting from a whistleblower case. Although we believe that our operations materially comply with both federal and state laws, they may nevertheless be the subject of a whistleblower lawsuit, or may otherwise be challenged or scrutinized by governmental authorities. A determination that we have violated these laws could have a material adverse effect on us.

State Anti-Kickback and Physician Self-Referral Laws

Many states, including those in which we do or expect to do business, have laws that prohibit payment of kickbacks or other remuneration in return for the referral of patients. Some of these laws apply only to services reimbursable under state Medicaid programs. However, a number of these laws apply to all healthcare services in the state, regardless of the source of payment for the service. Based on court and administrative interpretations of the federal Anti-Kickback Statute, we believe that the federal Anti-Kickback Statute prohibits payments only if they are intended to induce referrals. However, the laws in most states regarding kickbacks have been subjected to more limited judicial and regulatory interpretation than federal law. Therefore, we can give you no assurances that our activities will be found to be in compliance with these laws. Noncompliance with these laws could subject us to penalties and sanctions and have a material adverse effect on us.

A number of states, including those in which we do or expect to do business, have enacted physicianself-referral laws that are similar in purpose to the Stark Law but which impose different restrictions. Some states, for example, only prohibit referrals when the physician’s financial relationship with a healthcare provider is based upon an investment interest. Other state laws apply only to a limited number of designated health services. Some states do not prohibit referrals, but require that a patient be informed of the financial relationship before the referral is made. We believe that our operations are in material compliance with the physician self-referral laws of the states in which our facilities are located.

Health Information Security and Privacy Practices

The regulations promulgated under the Health Insurance Portability and Accountability Act of 1996 contain, among other measures, provisions that require many organizations, including us, to employ systems and procedures designed to protect the privacy and security of each patient’s individual healthcare information. Among the standards that the Department of Health and Human Services has adopted pursuant to the Health Insurance Portability and Accountability Act of 1996 are standards for the following:


	•	electronic transactions and code sets;

	•	unique identifiers for providers, employers, health plans and individuals;

	•	security and electronic signatures;

	•	privacy; and

	•	enforcement.

In August 2000, the Department of Health and Human Services finalized the transaction standards, which we comply with. The transaction standards require us to use standard code sets established by the rule when transmitting health information in connection with some transactions, including health claims and health payment and remittance advices.

The Department of Health and Human Services has also published a rule establishing standards for the privacy of individually identifiable health information, which we comply with. These privacy standards apply to all health plans, all healthcare clearinghouses and many healthcare providers, including healthcare providers that transmit health information in an electronic form in connection with certain standard transactions. We are a covered entity under the final rule. The privacy standards protect individually identifiable health information held or disclosed by a covered entity in any form, whether communicated electronically, on paper or orally. These standards not only require our compliance with rules governing the use and disclosure of protected health information, but they also require us to impose those rules, by contract, on any business associate to whom such information is disclosed. A violation of the privacy standards could result in civil money penalties of $100 per incident, up to a maximum of $25,000 per person per year per standard. The final rule also provides for criminal penalties of up to $50,000 and one year in prison for knowingly and improperly obtaining or disclosing protected health information, up to $100,000 and five years in prison for obtaining protected health information under false pretenses, and up to $250,000 and ten years in prison for obtaining or disclosing protected health information with the intent to sell, transfer or use such information for commercial advantage, personal gain or malicious harm.

Finally, the Department of Health and Human Services has also issued a rule establishing, in part, standards for the security of health information by health plans, healthcare clearinghouses and healthcare providers that maintain or transmit any health information in electronic form, regardless of format. We are an affected entity under the rule. These security standards require affected entities to establish and maintain reasonable and appropriate administrative, technical and physical safeguards to ensure integrity, confidentiality and the availability of the information. The security standards were designed to protect the health information against reasonably anticipated threats or hazards to the security or integrity of the information and to protect the information against unauthorized use or disclosure. Although the security standards do not reference or advocate a specific technology, and affected entities have the flexibility to choose their own technical solutions, the security standards required us to implement significant systems and protocols. We also comply with these regulations.

In addition to the federal Health Insurance Portability and Accountability Act of 1996, many states have enacted their own security and privacy provisions concerning a patient’s health information. These state privacy provisions will control whenever they provide more stringent privacy protections than the federal Health Insurance Portability and Accountability Act. Therefore, a health care facility could be required to meet both federal and state privacy provisions if it is located in a state with strict privacy protections.

European Union and United Kingdom

The European Commission’s Directive on Data Privacy has been implemented in national EU data protection laws (such as the Data Protection Act of 1998). EU data protection legislation prohibits the transfer of personal data to non-EEA countries that do not meet the European “adequacy” standard for privacy protection. The European Union privacy legislation requires, among other things, the creation of government data protection agencies, registration of processing with those agencies, and in some instances prior approval before personal data processing may begin.

The U.S. Department of Commerce, in consultation with the European Commission, developed a “safe harbor” framework to protect data transferred in trans Atlantic businesses like ours. The safe harbor provides a way for us to avoid experiencing interruptions in our business dealings in the European Union. It also provides a way to avoid prosecution by European authorities under European privacy laws. By certifying to the safe harbor, we will notify the European Union organizations that we provide “adequate” privacy protection, as defined by European privacy laws, in relation to international data transfers to the USA. To certify to the safe harbor, we must adhere to seven principles. These principles relate to notice, choice, onward transfer or transfers to third parties, access, security, data integrity and enforcement.

We intend to satisfy the requirements of the safe harbor. Even if we are able to formulate programs that attempt to meet these objectives, we may not be able to execute them successfully, which could have a material adverse effect on our revenues, profits or results of operations.

While there is no specific anti-kickback legislation in the United Kingdom that is unique to the medical profession, general criminal legislation prohibits bribery and corruption. Our hospitals in the United Kingdom do not pay commissions to or share profits with referring physicians who invoice patients or insurers directly for fees relating to the provision of their services. Hospitals in the United Kingdom are required to register with the Healthcare Commission pursuant to the Care Standards Act 2000, as amended by the Health and Social Care (Community Health and Standards) Act 2003, which provides for regular inspections of the facility by representatives of the Healthcare Commission. Beginning April 1, 2009, these registration and inspection functions will transfer to the Care Quality Commission established under the Health and Social Care Act 2008. Hospitals are also required to comply with the Private and Voluntary Health Care (England) Regulations 2001. The operation of a hospital without registration is a criminal offense. Under the Misuse of Drugs Act 1971, the supply, possession or production of controlled drugs without a license from the Secretary of State is a criminal offense. The Data Protection Act 1998 requires hospitals to register as “data controllers.” The processing of personal data, such as patient information and medical records, without prior registration or maintaining an inaccurate registration is a criminal offense. We believe that our operations in the United Kingdom are in material compliance with the laws referred to in this paragraph.


Item 1A.	*Risk Factors*

You should carefully read the risks and uncertainties described below and the other information included in this report. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition or results of operations.

We depend on payments from third party payors, including government healthcare programs. If these payments are reduced, our revenue will decrease.

We are dependent upon private and governmental third party sources of payment for the services provided to patients in our surgery centers and surgical hospitals. The amount of payment a surgical facility receives for its services may be adversely affected by market and cost factors as well as other factors over which we have no control, including Medicare and Medicaid regulations and the cost containment and utilization decisions of third party payors. In the United Kingdom, a significant portion of our revenues result from referrals of patients to our hospitals by the national health system. We have no control over the number of patients that are referred to the private sector annually. Fixed fee schedules, capitation payment arrangements, exclusion from participation in or

inability to reach agreement with managed care programs or other factors affecting payments for healthcare services over which we have no control could also cause a reduction in our revenues.

If we are unable to acquire and develop additional surgical facilities on favorable terms, are not successful in integrating operations of acquired surgical facilities, or are unable to manage growth, we may be unable to execute our acquisition and development strategy, which could limit our future growth.

Our strategy is to increase our revenues and earnings by continuing to acquire and develop additional surgical facilities, primarily in collaboration with our hospital partners. Our efforts to execute our acquisition and development strategy may be affected by our ability to identify suitable candidates and negotiate and close acquisition and development transactions. We are currently evaluating potential acquisitions and development projects and expect to continue to evaluate acquisitions and development projects in the foreseeable future. The surgical facilities we develop typically incur losses in their early months of operation (more so in the case of surgical hospitals) and, until their case loads grow, they generally experience lower total revenues and operating margins than established surgical facilities, and we expect this trend to continue. Historically, most of our newly developed facilities have generated positive cash flow within the first 12 months of operations. We may not be successful in acquiring surgical facilities, developing surgical facilities or achieving satisfactory operating results at acquired or newly developed facilities. Further, the companies or assets we acquire in the future may not ultimately produce returns that justify our related investment. If we are not able to execute our acquisition and development strategy, our ability to increase revenues and earnings through future growth would be impaired.

If we are not successful in integrating newly acquired surgical facilities, we may not realize the potential benefits of such acquisitions. Likewise, if we are not able to integrate acquired facilities’ operations and personnel with ours in a timely and efficient manner, then the potential benefits of the transaction may not be realized. Further, any delays or unexpected costs incurred in connection with integration could have a material adverse effect on our operations and earnings. In particular, if we experience the loss of key personnel or if the effort devoted to the integration of acquired facilities diverts significant management or other resources from other operational activities, our operations could be impaired.

We have acquired interests in or developed all of our surgical facilities since our inception. We expect to continue to expand our operations in the future. Our rapid growth has placed, and will continue to place, increased demands on our management, operational and financial information systems and other resources. Further expansion of our operations will require substantial financial resources and management attention. To accommodate our past and anticipated future growth, and to compete effectively, we will need to continue to implement and improve our management, operational and financial information systems and to expand, train, manage and motivate our workforce. Our personnel, systems, procedures or controls may not be adequate to support our operations in the future. Further, focusing our financial resources and management attention on the expansion of our operations may negatively impact our financial results. Any failure to implement and improve our management, operational and financial information systems, or to expand, train, manage or motivate our workforce, could reduce or prevent our growth.

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our debt obligations.

We have a substantial amount of indebtedness. As of December 31, 2008, we had approximately $1.1 billion of total indebtedness and a total indebtedness to total capitalization percentage ratio of approximately 56%.

Our and our subsidiaries’ high degree of leverage could have important consequences to you. For example, it:


	•	requires us and certain of our subsidiaries to dedicate a substantial portion of cash flow from operations to payments on indebtedness, reducing the availability of cash flow to fund working capital, capital expenditures, development activity, acquisitions and other general corporate purposes;

	•	increases vulnerability to adverse general economic or industry conditions;

	•	limits flexibility in planning for, or reacting to, changes in our business or the industry in which we operate;


	•	makes us and our subsidiaries more vulnerable to increases in interest rates, as borrowings under our senior secured credit facilities are at variable rates;

	•	limits our and our subsidiaries’ ability to obtain additional financing in the future for working capital or other purposes, such as raising the funds necessary to repurchase our senior subordinated notes upon the occurrence of specified changes of control, or

	•	places us at a competitive disadvantage compared to our competitors that have less indebtedness.

Our significant indebtedness could limit our flexibility.

We are significantly leveraged and will continue to have significant indebtedness in the future. Our acquisition and development program requires substantial capital resources, estimated to range from $60 million to $80 million per year over the next three years, although the range could be exceeded if we identify attractive multi-facility acquisition opportunities. The operations of our existing surgical facilities also require ongoing capital expenditures. We believe that our cash on hand, cash flows from operations and available borrowings under our revolving credit facility will be sufficient to fund our acquisition and development activities in 2009, but if we identify favorable acquisition and development opportunities that require additional resources, we may be required to incur additional indebtedness in order to pursue these opportunities. However, we may be unable to obtain sufficient financing on terms satisfactory to us, or at all, especially given the current uncertainty in the credit markets. In that event, our acquisition and development activities would have to be curtailed or eliminated and our financial results could be adversely affected.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

The operating and financial restrictions and covenants in our debt instruments, including our senior secured credit facilities and the indenture governing our senior subordinated notes, may adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our interest. For example, our senior secured credit facility restricts, subject to certain exceptions, our and our subsidiaries’ ability to, among other things:


	•	incur, assume or permit to exist additional indebtedness or guarantees;

	•	incur liens and engage in sale leaseback transactions;

	•	make loans, investments and other advances;

	•	declare dividends, make payments or redeem or repurchase capital stock;

	•	engage in mergers, acquisitions and other business combinations;

	•	prepay, redeem or repurchase certain indebtedness including the notes;

	•	amend or otherwise alter terms of certain subordinated indebtedness including the notes;

	•	enter into agreements limiting subsidiary distributions;

	•	sell assets;

	•	engage in certain transactions with affiliates;

	•	alter the business that we conduct; and

	•	issue and sell capital stock of subsidiaries.

In addition, the senior secured U.K. credit facility restricts, subject to certain exceptions, the ability of certain of our subsidiaries existing in the United Kingdom to, among other things:


	•	incur or permit to exist additional indebtedness;

	•	incur liens;

	•	make loans, investments or acquisitions;


	•	declare dividends or other distributions;

	•	enter into operating leases;

	•	engage in mergers, joint ventures or partnerships;

	•	sell assets;

	•	alter the business that the U.K. borrowers and their subsidiaries conduct; and

	•	incur financial lease expenditures.

The indenture governing our senior subordinated notes includes similar restrictions. Our senior secured credit facility also requires us to comply with a financial covenant with respect to the revolving credit facility that becomes more restrictive over time and the senior secured U.K. credit facility requires certain of our subsidiaries in the United Kingdom to comply with certain financial covenants, including a maximum leverage ratio test, a debt service coverage ratio test and an interest coverage ratio test. Our and our subsidiaries’ ability to comply with these covenants and ratios may be affected by events beyond our control. A breach of any covenant or required financial ratio could result in a default under the senior secured credit facilities. In the event of any default under the senior secured credit facilities, the applicable lenders could elect to terminate borrowing commitments and declare all borrowings outstanding, together with accrued and unpaid interest and other fees, to be due and payable, to require us or the borrower in the United Kingdom to apply all available cash to repay these borrowings or to prevent us from making or permitting subsidiaries in the United Kingdom to make distributions or dividends, the proceeds of which are used by us to make debt service payments on our senior subordinated notes, any of which would be an event of default under the notes.

If we incur material liabilities as a result of acquiring surgical facilities, our operating results could be adversely affected.

Although we conduct extensive due diligence prior to the acquisition of surgical facilities and seek indemnification from prospective sellers covering unknown or contingent liabilities, we may acquire surgical facilities that have material liabilities for failure to comply with healthcare laws and regulations or other past activities. Although we maintain professional and general liability insurance, we do not currently maintain insurance specifically covering any unknown or contingent liabilities that may have occurred prior to the acquisition of surgical facilities. If we incur these liabilities and are not indemnified or insured for them, our operating results and financial condition could be adversely affected.

We depend on our relationships withnot-for-profit healthcare systems. If we are not able to maintain our strategic alliances with thesenot-for-profit healthcare systems, or enter into new alliances, we may be unable to implement our business strategies successfully.

Our domestic business depends in part upon the efforts and success of thenot-for-profit healthcare systems with which we have strategic alliances and the strength of our alliances with those healthcare systems. Our business could be adversely affected by any damage to those healthcare systems’ reputations or to our alliances with them. We may not be able to maintain our existing alliance agreements on terms and conditions favorable to us or enter into alliances with additionalnot-for-profit healthcare systems. Our relationships withnot-for-profit healthcare systems and the joint venture agreements that represent these relationships are structured to comply with current revenue rulings published by the Internal Revenue Service as well as case law relevant to joint ventures between for-profit andnot-for-profit healthcare entities. Material changes in these authorities could adversely affect our relationships withnot-for-profit healthcare systems. If we are unable to maintain our existing arrangements on terms favorable to us or enter into alliances with additionalnot-for-profit healthcare systems, we may be unable to implement our business strategies successfully.

If we and ournot-for-profit healthcare system partners are unable to successfully negotiate contracts and maintain satisfactory relationships with managed care organizations or other third party payors, our revenues may decrease.

Our competitive position has been, and will continue to be, affected by initiatives undertaken during the past several years by major domestic purchasers of healthcare services, including federal and state governments, insurance companies and employers, to revise payment methods and monitor healthcare expenditures in an effort to contain healthcare costs. As a result of these initiatives, managed care companies such as health maintenance and preferred provider organizations, which offer prepaid and discounted medical service packages, represent a growing segment of healthcare payors, the effect of which has been to reduce the growth of domestic healthcare facility margins and revenue. Similarly, in the United Kingdom, most patients at hospitals have private healthcare insurance, either paid for by the patient or received as part of their employment compensation. Our hospitals in the United Kingdom contract with healthcare insurers on an annual basis to provide services to insured patients.

As an increasing percentage of domestic patients become subject to healthcare coverage arrangements with managed care payors, we believe that our success will continue to depend upon our and ournot-for-profit healthcare system partners’ ability to negotiate favorable contracts on behalf of our facilities with managed care organizations, employer groups and other private third party payors. We have structured our ventures withnot-for-profit healthcare system partners in a manner we believe to be consistent with applicable regulatory requirements. If applicable regulatory requirements were interpreted to require changes to our existing arrangements, or if we are unable to enter into these arrangements on satisfactory terms in the future, we could be adversely affected. Many of these payors already have existing provider structures in place and may not be able or willing to change their provider networks. Similarly, if we fail to negotiate contracts with healthcare insurers in the United Kingdom on favorable terms, or if we fail to remain on insurers’ networks of approved hospitals, such failure could have a material adverse effect on us. We could also experience a material adverse effect to our operating results and financial condition as a result of the termination of existing third party payor contracts.

We depend on our relationships with the physicians who use our facilities. Our ability to provide medical services at our facilities would be impaired and our revenues reduced if we are not able to maintain these relationships.

Our business depends upon the efforts and success of the physicians who provide medical and surgical services at our facilities and the strength of our relationships with these physicians. Our revenues would be reduced if we lost our relationship with one or more key physicians or group of physicians or such physicians or groups reduce their use of our facilities. In addition, any failure of these physicians to maintain the quality of medical care provided or to otherwise adhere to professional guidelines at our surgical facilities or any damage to the reputation of a key physician or group of physicians could damage our reputation, subject us to liability and significantly reduce our revenues.

Our surgical facilities face competition for patients from other health care providers.

The health care business is highly competitive, and competition among hospitals and other health care providers for patients has intensified in recent years. Generally, other facilities in the local communities served by our facilities provide services similar to those offered by our surgery centers and surgical hospitals. In addition, the number of freestanding surgical hospitals and surgery centers in the geographic areas in which we operate has increased significantly. As a result, most of our surgery centers and surgical hospitals operate in a highly competitive environment. Some of the hospitals that compete with our facilities are owned by governmental agencies ornot-for-profit corporations supported by endowments, charitable contributionsand/or tax revenues and can finance capital expenditures and operations on a tax-exempt basis. Our surgery centers and surgical hospitals are facing increasing competition from unaffiliated physician-owned surgery centers and surgical hospitals for market share in high margin services and for quality physicians and personnel. If our competitors are better able to attract patients, recruit physicians, expand services or obtain favorable managed care contracts at their facilities than our surgery centers and surgical hospitals, we may experience an overall decline in patient volume.

Current economic conditions may adversely affect our financial condition and results of operations.

The current economic conditions will likely have an impact on our business. We regularly monitor quantitative as well as qualitative measures to identify changes in our business in order to react accordingly. Although we have not seen any significant trends as it relates to our case volume through December 2008, there can be no assurance that we will not be negatively impacted. The most likely impact on us will be lower case volumes as elective procedures may be deferred or cancelled, which could have an adverse effect on our financial condition and results of operations.

Our United Kingdom operations are subject to unique risks, any of which, if they actually occur, could adversely affect our results.

We expect that revenue from our United Kingdom operations will continue to account for a significant percentage of our total revenue. Further, we may pursue additional acquisitions in the United Kingdom, which would require substantial financial resources and management attention. This focus of financial resources and management attention could have an adverse effect on our financial results. In addition, our United Kingdom operations are subject to risks such as:


	•	fluctuations in exchange rates;

	•	competition with government sponsored healthcare systems;

	•	unforeseen changes in foreign regulatory requirements or domestic regulatory requirements affecting our foreign operations;

	•	identifying, attracting, retaining and working successfully with qualified local management;

	•	difficulties in staffing and managing geographically and culturally diverse, multinational operations; and

	•	the possibility of an economic downturn in the United Kingdom, which could adversely affect the ability or willingness of employers and individuals in these countries to purchase private health insurance.

These or other factors could have a material adverse effect on our ability to successfully operate in the United Kingdom and our financial condition and operations.

Our revenues may be reduced by changes in payment methods or rates under the Medicare or Medicaid programs.

The Department of Health and Human Services and the states in which we perform surgical procedures for Medicaid patients may revise the Medicare and Medicaid payment methods or rates in the future. Any such changes could have a negative impact on the reimbursements we receive for our surgical services from the Medicare program and the state Medicaid programs. Notably, as part of a Congressional mandate to revise the Medicare payment system for procedures performed in ambulatory surgery centers, the Center for Medicare and Medicaid Services published proposed rules revising the payment system for ambulatory surgery centers in August 2006. This Congressional mandate required that the new payment system begin no later than January 1, 2008. The final rule expanded the number of procedures that are covered in ambulatory surgery centers and, among other things, set the payment rate at approximately 65% of the payment for the same procedure when performed in a hospital outpatient department. The final rule will be phased in over a four-year period which began in 2008.

Efforts to regulate the construction, acquisition or expansion of healthcare facilities could prevent us from acquiring additional surgical facilities, renovating our existing facilities or expanding the breadth of services we offer.

Many states in the United States require prior approval for the construction, acquisition or expansion of healthcare facilities or expansion of the services they offer. When considering whether to approve such projects, these states take into account the need for additional or expanded healthcare facilities or services. In a number of states in which we operate, we are required to obtain certificates of need for capital expenditures exceeding a prescribed amount, changes in bed capacity or services offered and under various other circumstances. Other states

in which we now or may in the future operate may adopt certificate of need legislation or regulatory provisions. Our costs of obtaining a certificate of need have ranged up to $500,000. Although we have not previously been denied a certificate of need, we may not be able to obtain the certificates of need or other required approvals for additional or expanded facilities or services in the future. In addition, at the time we acquire a facility, we may agree to replace or expand the acquired facility. If we are unable to obtain the required approvals, we may not be able to acquire additional surgery centers or surgical hospitals, expand the healthcare services provided at these facilities or replace or expand acquired facilities.

Failure to comply with federal and state statutes and regulations relating to patient privacy and electronic data security could negatively impact our financial results.

There are currently numerous federal and state statutes and regulations that address patient privacy concerns and federal standards that address the maintenance of the security of electronically maintained or transmitted electronic health information and the format of transmission of such information in common health care financing information exchanges. These provisions are intended to enhance patient privacy and the effectiveness and efficiency of healthcare claims and payment transactions. In particular, the Administrative Simplification Provisions of the Health Insurance Portability and Accountability Act of 1996 required us to implement new systems and to adopt business procedures for transmitting health care information and for protecting the privacy and security of individually identifiable information.

We believe that we are in material compliance with existing state and federal regulations relating to patient privacy, security and with respect to the format for electronic health care transactions. However, if we fail to comply with the federal privacy, security and transactions and code sets regulations, we could incur civil penalties up to $25,000 per calendar year for each violation and criminal penalties with fines up to $250,000 per violation. Failure to comply with state laws related to privacy could, in some cases, also result in civil fines and criminal penalties.

If we fail to comply with applicable laws and regulations, we could suffer penalties or be required to make significant changes to our operations.

We are subject to many laws and regulations at the federal, state and local government levels in the jurisdictions in which we operate. These laws and regulations require that our healthcare facilities meet various licensing, certification and other requirements, including those relating to:


	•	physician ownership of our domestic facilities;

	•	the adequacy of medical care, equipment, personnel, operating policies and procedures;

	•	building codes;

	•	licensure, certification and accreditation;

	•	billing for services;

	•	maintenance and protection of records; and

	•	environmental protection.

We believe that we are in material compliance with applicable laws and regulations. However, if we fail or have failed to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate and our ability to participate in Medicare, Medicaid and other government sponsored healthcare programs. A number of initiatives have been proposed during the past several years to reform various aspects of the healthcare system, both domestically and in the United Kingdom. In the future, different interpretations or enforcement of existing or new laws and regulations could subject our current 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. Current or future legislative initiatives or government regulation may have a material adverse effect on our operations or reduce the demand for our services.

In pursuing our growth strategy, we may expand our presence into new geographic markets. In entering a new geographic market, we will be required to comply with laws and regulations of jurisdictions that may differ from

those applicable to our current operations. If we are unable to comply with these legal requirements in a cost-effective manner, we may be unable to enter new geographic markets.

If a federal or state agency asserts a different position or enacts new laws or regulations regarding illegal remuneration under the Medicare or Medicaid programs, we may be subject to civil and criminal penalties, experience a significant reduction in our revenues or be excluded from participation in the Medicare and Medicaid programs.

The federal Anti-Kickback Statute prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referrals for items or services payable by Medicare, Medicaid, or any other federally funded healthcare program. Additionally, the Anti-Kickback Statute prohibits any form of remuneration in return for purchasing, leasing or ordering, or arranging for or recommending the purchasing, leasing or ordering of items or services payable by Medicare, Medicaid or any other federally funded healthcare program. The Anti-Kickback Statute is very broad in scope and many of its provisions have not been uniformly or definitively interpreted by existing case law or regulations. Moreover, several federal courts have held that the Anti-Kickback Statute can be violated if only one purpose (not necessarily the primary purpose) of a transaction is to induce or reward a referral of business, notwithstanding other legitimate purposes. Violations of the Anti-Kickback Statute may result in substantial civil or criminal penalties, including up to five years imprisonment and criminal fines of up to $25,000 and civil penalties of up to $50,000 for each violation, plus three times the remuneration involved or the amount claimed and exclusion from participation in all federally funded healthcare programs. An exclusion, if applied to our surgery centers or surgical hospitals, could result in significant reductions in our revenues, which could have a material adverse effect on our business.

In July 1991, the Department of Health and Human Services issued final regulations defining various “safe harbors.” Two of the safe harbors issued in 1991 apply to business arrangements similar to those used in connection with our surgery centers and surgical hospitals: the “investment interest” safe harbor and the “personal services and management contracts” safe harbor. However, the structure of the partnerships and limited liability companies operating our surgery centers and surgical hospitals, as well as our various business arrangements involving physician group practices, do not satisfy all of the requirements of either safe harbor. Therefore, our business arrangements with our surgery centers, surgical hospitals and physician groups do not qualify for “safe harbor” protection from government review or prosecution under the Anti-Kickback Statute. When a transaction or relationship does not fit within a safe harbor, it does not mean that an anti-kickback violation has occurred; rather, it means that the facts and circumstances as well as the intent of the parties related to a specific transaction or relationship must be examined to determine whether or not any illegal conduct has occurred.

On November 19, 1999, the Department of Health and Human Services promulgated final regulations creating additional safe harbor provisions, including a safe harbor that applies to physician ownership of or investment interests in surgery centers. The surgery center safe harbor protects four types of investment arrangements: (1) surgeon owned surgery centers; (2) single specialty surgery centers; (3) multi-specialty surgery centers; and (4) hospital/physician surgery centers. Each category has its own requirements with regard to what type of physician may be an investor in the surgery center. In addition to the physician investor, the categories permit an “unrelated” investor, who is a person or entity that is not in a position to provide items or services related to the surgery center or its investors. Our business arrangements with our surgical facilities typically consist of one of our subsidiaries being an investor in each partnership or limited liability company that owns the facility, in addition to providing management and other services to the facility. As a result, these business arrangements do not comply with all the requirements of the surgery center safe harbor, and, therefore, are not immune from government review or prosecution.

Although we believe that our business arrangements do not violate the Anti-Kickback Statute, a government agency or a private party may assert a contrary position. Additionally, new domestic federal or state laws may be enacted that would cause our relationships with the physician investors to become illegal or result in the imposition of penalties against us or our facilities. If any of our business arrangements with physician investors were deemed to violate the Anti-Kickback Statute or similar laws, or if new domestic federal or state laws were enacted rendering these arrangements illegal, our business could be adversely affected.

Also, most of the states in which we operate have adopted anti-kickback laws, many of which apply more broadly to all third-party payors, not just to federal or state healthcare programs. Many of the state laws do not have regulatory safe harbors comparable to the federal provisions and have only rarely been interpreted by the courts or other governmental agencies. We believe that our business arrangements do not violate these state laws. Nonetheless, if our arrangements were found to violate any of these anti-kickback laws, we could be subject to significant civil and criminal penalties that could adversely affect our business.

If physician self-referral laws are interpreted differently or if other legislative restrictions are issued, we could incur significant sanctions and loss of reimbursement revenues.

The U.S. federal physician self-referral law, commonly referred to as the Stark Law, prohibits a physician from making a referral for a “designated health service” to an entity to furnish an item or service payable under Medicare if the physician or a member of the physician’s immediate family has a financial relationship with the entity such as an ownership interest or compensation arrangement, unless an exception applies. The list of designated health services under the Stark Law does not include ambulatory surgery services as such. However, some of the designated health services are among the types of services furnished by our facilities.

The Department of Health and Human Services, acting through the Centers for Medicare and Medicaid Services, has promulgated regulations implementing the Stark Law. These regulations exclude health services provided by an ambulatory surgery center from the definition of “designated health services” if the services are included in the facility’s composite Medicare payment rate. Therefore, the Stark Law’s self-referral prohibition generally does not apply to health services provided by a surgery center. However, if the surgery center is separately billing Medicare for designated health services that are not covered under the surgery center’s composite Medicare payment rate, or if either the surgery center or an affiliated physician is performing (and billing Medicare) for procedures that involve designated health services that Medicare has not designated as an ambulatory surgery center service, the Stark Law’s self-referral prohibition would apply and such services could implicate the Stark Law. We believe that our operations do not violate the Stark Law, as currently interpreted.

In addition, we believe that physician ownership of surgery centers is not prohibited by similar self-referral statutes enacted at the state level. However, the Stark Law and similar state statutes are subject to different interpretations with respect to many important provisions. Violations of these self-referral laws may result in substantial civil or criminal penalties, including large civil monetary penalties and exclusion from participation in the Medicare and Medicaid programs. Exclusion of our surgery centers or surgical hospitals from these programs through future judicial or agency interpretation of existing laws or additional legislative restrictions on physician ownership or investments in healthcare entities could result in significant loss of reimbursement revenues.

Companies within the healthcare industry continue to be the subject of federal and state audits and investigations, which increases the risk that we may become subject to investigations in the future.

Both federal and state government agencies, as well as private payors, have heightened and coordinated audits and administrative, civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare organizations. These investigations relate to a wide variety of topics, including the following:


	•	cost reporting and billing practices;

	•	quality of care;

	•	financial reporting;

	•	financial relationships with referral sources; and

	•	medical necessity of services provided.

In addition, the Office of the Inspector General of the Department of Health and Human Services and the Department of Justice have, from time to time, undertaken national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Moreover, another trend impacting healthcare providers is the increased use of the federal False Claims Act, particularly by individuals who bring actions under that law. Such “qui tam” or “whistleblower” actions allow private individuals to bring actions on behalf of the government alleging

that a healthcare provider has defrauded the federal government. If the government intervenes and prevails in the action, the defendant may be required to pay three times the actual damages sustained by the government, plus mandatory civil monetary penalties of between $5,500 and $11,000 for each false claim submitted to the government. As part of the resolution of a qui tam case, the party filing the initial complaint may share in a portion of any settlement or judgment. If the government does not intervene in the action, the qui tam plaintiff may pursue the action independently. Additionally, some states have adopted similar whistleblower and false claims provisions. Although companies in the healthcare industry have been, and may continue to be, subject to qui tam actions, we are unable to predict the impact of such actions on our business, financial position or results of operations.

If laws governing the corporate practice of medicine change, we may be required to restructure some of our domestic relationships which may result in significant costs to us and divert other resources.

The laws of various domestic jurisdictions in which we operate or may operate in the future do not permit business corporations to practice medicine, exercise control over physicians who practice medicine or engage in various business practices, such as fee-splitting with physicians. The interpretation and enforcement of these laws vary significantly from state to state. We are not required to obtain a license to practice medicine in any jurisdiction in which we own or operate a surgery center or surgical hospital because our facilities are not engaged in the practice of medicine. The physicians who utilize our facilities are individually licensed to practice medicine. In most instances, the physicians and physician group practices performing medical services at our facilities do not have investment or business relationships with us other than through the physicians’ ownership interests in the partnerships or limited liability companies that own and operate our facilities and the service agreements we have with some of those physicians.

Through our OrthoLink subsidiary, we provide consulting and administrative services to a number of physicians and physician group practices affiliated with OrthoLink. Although we believe that our arrangements with these and other physicians and physician group practices comply with applicable laws, a government agency charged with enforcement of these laws, or a private party, might assert a contrary position. If our arrangements with these physicians and physician group practices were deemed to violate state corporate practice of medicine, fee-splitting or similar laws, or if new laws are enacted rendering our arrangements illegal, we may be required to restructure these arrangements, which may result in significant costs to us and divert other resources.

If domestic regulations change, we may be obligated to purchase some or all of the ownership interests of the physicians affiliated with us.

Upon the occurrence of various fundamental regulatory changes, we could be obligated to purchase some or all of the ownership interests of the physicians affiliated with us in the partnerships or limited liability companies that own and operate our surgery centers and surgical hospitals. The regulatory changes that could create this obligation include changes that:


	•	make illegal the referral of Medicare or other patients to our surgical facilities by physicians affiliated with us;

	•	create the substantial likelihood that cash distributions from the limited partnerships or limited liability companies through which we operate our surgical facilities to physicians affiliated with us would be illegal; or

	•	make illegal the ownership by the physicians affiliated with us of interests in the partnerships or limited liability companies through which we own and operate our surgical facilities.

At this time, we are not aware of any regulatory amendments or proposed changes that would trigger this obligation. Typically, our partnership and limited liability company agreements allow us to use shares of our common stock as consideration for the purchase of a physician’s ownership interest. The use of shares of our common stock for that purpose would dilute the ownership interests of our common stockholders. In the event that we are required to purchase all of the physicians’ ownership interests and our common stock does not maintain a sufficient valuation, we could be required to use our cash resources for the acquisitions, the total cost of which we estimate to be up to approximately $399.0 million at December 31, 2008. The creation of these obligations and the possible termination of our affiliation with these physicians could have a material adverse effect on us.

Future legislation could restrict our ability to operate our domestic surgical hospitals.

The Stark Law currently includes an exception relating to physician ownership of a hospital, provided that the physician’s ownership interest is in the whole hospital and the physician is authorized to perform services at the hospital, referred to as the whole hospital exception. Physician investment in our facilities licensed as hospitals meets this requirement.

For the past several years, the whole hospital exception has been the subject of regulatory action and legislative debate. The Medicare Prescription Drug, Improvement and Modernization Act of 2003, or the MMA, amended the Stark Law to provide that the whole hospital exception did not apply to specialty hospitals for a period of 18 months beginning on November 18, 2003, and ending on June 8, 2005. Certain “grandfathered” hospitals that were already in operation or under development were excepted, but physician investment in such hospitals was frozen at then current levels and bed growth was limited. Prior to the moratorium’s expiration, legislation was introduced in Congress which would have made the moratorium permanent. The legislation did not pass prior to the expiration of the original Stark Law moratorium. However, in June 2005, CMS announced the imposition of a six-month moratorium on the Medicare program’s enrollment of specialty hospitals. As part of that moratorium, CMS directed is fiscal intermediaries to refuse to process Medicare enrollment applications for specialty hospitals.

In February 2006, Congress passed the Deficit Reduction Act of 2005. The Deficit Reduction Act, or DRA, (1) required the Secretary of the Department of Health and Human Services to develop a strategic plan to address physician-owned specialty hospital issues such as proportionality of investment return, methods for determining bona fide investments, disclosure of investment interests and the provision of Medicaid and charity care by specialty hospitals and (2) prohibited specialty hospitals from enrolling in the Medicare program until the Secretary’s plan was completed, which, under the DRA, was required to be no later than six months (or eight months if the Secretary applied for an extension) after the date of the enactment of the DRA. The Secretary released his plan in August 2006. In his plan, the Secretary announced that CMS would address the issues surrounding physician-owned specialty hospitals by (1) continuing to reform payment rates for inpatient hospital services through DRG refinements, (2) continuing its efforts to more closely align hospital/physician incentive, (3) clarifying the Emergency Medical Treatment and Active Labor Act and patient care obligations of specialty hospitals, (4) requiring hospitals to disclose their ownership and investment information to CMS and their patients, and (5) increasing enforcement actions against persons and entities that are parties to arrangements involving disproportionate returns and non-bona fide investments. The Secretary also allowed Medicare’s specialty hospital enrollment moratorium to expire and did not recommend that the whole hospital exception be repealed or amended. The Secretary did not, however, rule out such actions in the future. Because many of the Secretary’s recommendations are subject to future rulemaking, we cannot predict the effect that the recommendations will have on our hospitals.

On January 14, 2009, the U.S. House of Representatives passed the Children’s Health Insurance Program Reauthorization Act of 2009 (the “CHIP Act”) that included provisions that would significantly amend the whole hospital exception to the Stark Law. The Senate version of the CHIP Act did not contain amendments to the whole hospital exception and has not been passed. The provisions passed by the House relating to the whole hospital exception would have imposed significant restrictions on physician ownership by: (i) prohibiting a hospital from having any physician ownership unless the hospital already had physician ownership and a Medicare provider agreement in effect on January 1, 2009, (ii) limiting aggregate ownership by physicians to the aggregate percentage owned on the date the legislation would have been enacted; (iii) requiring the return on investment to be proportionate to the investment by each investor; (iv) placing restrictions on preferential treatment of physician versus non-physician investors; and (v) requiring disclosures to patients of physician ownership interests, along with annual reports to the government detailing such ownership. In addition, the provision would put severe limitations on the expansion of the physical plant of any grandfathered physician-owned hospital. Expansion would only be permitted at the discretion of the Secretary, and would only be permitted for those hospitals meeting specified criteria based on Medicaid utilization, average bed occupancy, state bed capacity, and county population growth rates. We do not currently believe that any of our hospitals could have met the specified criteria. If the House legislation would have been enacted, all of our existing hospitals would be grandfathered, but would not be able to expand their physical plants.

Ultimately, the CHIP Act was passed by both the House and Senate on February 4, 2009, without any provision affecting physician ownership of surgical hospitals. However, we cannot predict whether the amendments to the

whole hospital exception will be included in any future legislation, or if Congress will adopt any similar provisions that would prohibit or otherwise restrict physicians from holding ownership interests in hospitals. If legislation were to be enacted by congress that prohibits physician referrals to hospitals in which the physicians own an interest, or that otherwise limits physician ownership in existing facilities or restricts the hospital’s ability to expand, our financial condition and results of operations could be materially adversely affected. If legislation were enacted that required us to purchase the physician owners’ interests in our hospitals, and we did not use shares of our common stock to fund the purchase, we estimate the total cash required to be approximately $40.0 million.

If we become subject to significant legal actions, we could be subject to substantial uninsured liabilities.

In recent years, physicians, surgery centers, hospitals and other healthcare providers have become subject to an increasing number of legal actions alleging malpractice or related legal theories. Many of these actions involve large monetary claims and significant defense costs. We do not employ any of the physicians who conduct surgical procedures at our facilities and the governing documents of each of our facilities require physicians who conduct surgical procedures at our facilities to maintain stated amounts of insurance. Additionally, to protect us from the cost of these claims, we maintain (through a captive insurance company) professional malpractice liability insurance and general liability insurance coverage in amounts and with deductibles that we believe to be appropriate for our operations. If we become subject to claims, however, our insurance coverage may not cover all claims against us or continue to be available at adequate levels of insurance. If one or more successful claims against us were not covered by or exceeded the coverage of our insurance, we could be adversely affected.

If we are unable to effectively compete for physicians, strategic relationships, acquisitions and managed care contracts, our business could be adversely affected.

The healthcare business is highly competitive. We compete with other healthcare providers, primarily other surgery centers and hospitals, in recruiting physicians and contracting with managed care payors in each of our markets. In the United Kingdom, we also compete with their national health system in recruiting healthcare professionals. There are major unaffiliated hospitals in each market in which we operate. These hospitals have established relationships with physicians and payors. In addition, other companies either are currently in the same or similar business of developing, acquiring and operating surgery centers and surgical hospitals or may decide to enter our business. Many of these companies have greater financial, research, marketing and staff resources than we do. We may also compete with some of these companies for entry into strategic relationships withnot-for-profit healthcare systems and healthcare professionals. If we are unable to compete effectively with any of these entities, we may be unable to implement our business strategies successfully and our business could be adversely affected.

Because our senior management has been key to our growth and success, we may be adversely affected if we lose any member of our senior management.

We are highly dependent on our senior management, including Donald E. Steen, who is our chairman, and William H. Wilcox, who is our president and chief executive officer. Although we have employment agreements with Mr. Steen and Mr. Wilcox and other senior managers, we do not maintain “key man” life insurance policies on any of our officers. Because our senior management has contributed greatly to our growth since inception, the loss of key management personnel or our inability to attract, retain and motivate sufficient numbers of qualified management or other personnel could have a material adverse effect on us.

The growth of patient receivables and a deterioration in the collectability of these accounts could adversely affect our results of operations.

The primary collection risks of our accounts receivable relate to patient receivables for which the primary insurance carrier has paid the amounts covered by the applicable agreement but patient responsibility amounts (deductibles and copayments) remain outstanding. The allowance for doubtful accounts relates primarily to amounts due directly from patients.

We provide for bad debts principally based upon the aging of accounts receivable and use specific identification to write-off amounts against our allowance for doubtful accounts, without differentiation between payor sources. Our U.S. doubtful account allowance at December 31, 2008 and 2007, represented approximately 20% and 21% of our U.S. accounts receivable balance, respectively. Due to the difficulty in assessing future trends, we could

be required to increase our provisions for doubtful accounts. A deterioration in the collectability of these accounts could adversely affect our collection of accounts receivable, cash flows and results of operations.

We may have a special legal responsibility to the holders of ownership interests in the entities through which we own surgical facilities, and that responsibility may prevent us from acting solely in our own best interests or the interests of our stockholders.

Our ownership interests in surgery centers and surgical hospitals generally are held through partnerships or limited liability companies. We typically maintain an interest in a partnership or limited liability company in which physicians or physician practice groups also hold interests. As general partner or manager of these entities, we may have a special responsibility, known as a fiduciary duty, to manage these entities in the best interests of the other owners. We also have a duty to operate our business for the benefit of our stockholders. As a result, we may encounter conflicts between our responsibility to the other owners and our responsibility to our stockholders. For example, we have entered into management agreements to provide management services to our domestic facilities in exchange for a fee. Disputes may arise as to the nature of the services to be provided or the amount of the fee to be paid. In these cases, we are obligated to exercise reasonable, good faith judgment to resolve the disputes and may not be free to act solely in our own best interests. Disputes may also arise between us and our affiliated physicians with respect to a particular business decision or regarding the interpretation of the provisions of the applicable partnership or limited liability company agreement. If we are unable to resolve a dispute on terms favorable or satisfactory to us, our business may be adversely affected.

We do not have exclusive control over the distribution of revenues from some of our domestic operating entities and may be unable to cause all or a portion of the revenues of these entities to be distributed.

All of the domestic surgical facilities in which we have ownership interests are partnerships or limited liability companies in which we own, directly or indirectly, ownership interests. Our partnership, and limited liability company agreements, which are typically with the physicians who perform procedures at our surgical facilities, usually provide for the monthly or quarterly pro-rata cash distribution of net profits from operations, less amounts to satisfy obligations such as the entities’ non-recourse debt and capitalized lease obligations, operating expenses and working capital. The creditors of each of these partnerships and limited liability companies are entitled to payment of the entities’ obligations to them, when due and payable, before ordinary cash distributions or distributions in the event of liquidation, reorganization or insolvency may be made. We generally control the entities that function as the general partner of the partnerships or the managing member of the limited liability companies through which we conduct operations. However, we do not have exclusive control in some instances over the amount of net revenues distributed from some of our operating entities. If we are unable to cause sufficient revenues to be distributed from one or more of these entities, our relationships with the physicians who have an interest in these entities may be damaged and we could be adversely affected. We may not be able to resolve favorably any dispute regarding revenue distribution or other matters with a healthcare system with which we share control of one of these entities. Further, the failure to resolve a dispute with these healthcare systems could cause the entity we jointly control to be dissolved.

Welsh Carson controls us and may have conflicts of interest with us or you in the future.

An investor group led by Welsh Carson owns substantially all of the outstanding equity securities of our Parent, USPI Group Holdings, Inc. Welsh Carson controls a majority of the voting power of such outstanding equity securities and therefore ultimately controls all of our affairs and policies, including the election of our board of directors, the approval of certain actions such as amending our charter, commencing bankruptcy proceedings and taking certain corporate actions (including, without limitation, incurring debt, issuing stock, selling assets and engaging in mergers and acquisitions), and appointing members of our management. The interests of Welsh Carson could conflict with your interests.

Additionally, Welsh Carson is in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Welsh Carson may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as investment funds associated with or designated by Welsh Carson continue to indirectly own a significant amount of our capital stock, even if such amount is less than 50% of our outstanding

common stock on a fully-diluted basis, Welsh Carson will continue to be able to strongly influence or effectively control our decisions.


Item 1B.	*Unresolved Staff Comments*

None.


Item 2.	*Properties*

The response to this item is included in Item 1.


Item 3.	*Legal Proceedings*

From time to time, we may be named as a party to legal claims and proceedings in the ordinary course of business. We are not aware of any claims or proceedings against us or our subsidiaries that might have a material adverse impact on us.


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

None.

PART II


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

We are wholly-owned by USPI Holdings, Inc., which is wholly-owned by USPI Group Holdings, Inc., both of which are privately owned corporations. There is no public trading market for our equity securities or those of USPI Holdings, Inc. or USPI Group Holdings, Inc. As of February 23, 2009, there were 102 holders of USPI Group Holdings, Inc. common stock.


Item 6.	*Selected Financial Data*

The selected consolidated statement of operations data set forth below for the year ended December 31, 2008 (Successor), the periods January 1 through April 18, 2007 (Predecessor) and April 19 through December 31, 2007 (Successor) and for the years ended December 31, 2006, 2005, and 2004 (Predecessor), and the consolidated balance sheet data at December 31, 2008 and 2007 (Successor), 2006, 2005, and 2004, (Predecessor) are derived from our consolidated financial statements.

The historical results presented below are not necessarily indicative of results to be expected for any future period. The comparability of the financial and other data included in the table is affected by our merger transaction in 2007, loss on early retirement of debt in 2007, 2006 and 2004 and various acquisitions completed during the years presented. In addition, the results of operations of subsidiaries sold by us have been reclassified to “discontinued operations” for all data presented in the table below except for the “consolidated balance sheet data.” For a more detailed explanation of this financial data, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this report.


	Successor						Predecessor
				Period from			Period from
				April 19			January 1
	Year Ended			through			through
	December 31,			December 31,			April 18,			Years Ended December 31,
	2008			2007			2007			2006			2005			2004
Consolidated Statement of Operations Data:
Total revenues	$	642,223		$	452,488		$	191,355		$	567,374		$	458,569		$	372,324
Equity in earnings of unconsolidated affiliates		47,042			23,867			9,906			31,568			23,998			18,626
Operating expenses excluding depreciation and amortization		(452,752	)		(313,921	)		(162,497	)		(405,467	)		(318,482	)		(259,050	)
Depreciation and amortization		(36,757	)		(26,688	)		(12,426	)		(34,516	)		(30,203	)		(26,038	)

Operating income		199,756			135,746			26,338			158,959			133,882			105,862
Other income (expense):
Interest income		3,228			3,208			933			4,067			4,455			1,591
Interest expense		(85,649	)		(67,862	)		(9,521	)		(32,604	)		(27,391	)		(26,344	)
Loss on early retirement of debt		—			—			(2,435	)		(14,880	)		—			(1,635	)
Other, net		(1,790	)		(442	)		798			1,773			532			247

Income before minority interests		115,545			70,650			16,113			117,315			111,478			79,721
Minority interests in income of consolidated subsidiaries		(55,134	)		(45,120	)		(18,866	)		(54,632	)		(38,405	)		(30,125	)
Income tax expense		(22,334	)		(14,611	)		(4,145	)		(22,712	)		(26,089	)		(17,595	)

Income (loss) from continuing operations		38,077			10,919			(6,898	)		39,971			46,984			32,001
Income (loss) from discontinued operations, net of tax		(563	)		(2,190	)		(251	)		(5,725	)		310			54,174

Net income (loss)	$	37,514		$	8,729		$	(7,149	)	$	34,246		$	47,294		$	86,175

Other Data:
Number of facilities operated as of the end of period(a)		164			155			149			141			99			87
Cash flows from operating activities	$	91,210		$	67,358		$	29,099		$	101,475		$	107,031		$	80,558


	Successor						Predecessor
	As of December 31,						As of December 31,
	2008			2007			2006			2005		2004
Consolidated Balance Sheet Data:
Working capital (deficit)	$	(38,838	)	$	(12,569	)	$	(41,834	)	$	90,946	$	87,178
Cash and cash equivalents		49,435			76,758			31,740			130,440		93,467
Total assets		2,268,163			2,277,393			1,231,856			1,028,841		922,304
Total debt		1,097,947			1,098,062			347,330			286,486		288,485
Total stockholders’ equity		764,137			806,806			599,274			531,050		474,609


(a)		Not derived from audited financial statements.


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and related notes included elsewhere in this report.

Overview

We operate ambulatory surgery centers and surgical hospitals in the United States and the United Kingdom. As of December 31, 2008, we operated 164 facilities, consisting of 161 in the United States and three in the United Kingdom. All 161 of our U.S. facilities include local physician owners, and 99 of these facilities are also partially owned by variousnot-for-profit healthcare systems. In addition to facilitating the joint ownership of the majority of our existing facilities, our agreements with these healthcare systems provide a framework for the planning and construction of additional facilities in the future, including all of the facilities we are currently constructing as well as the additional projects under development.

Our U.S. facilities, consisting of ambulatory surgery centers and surgical hospitals, specialize in short-stay surgical cases. Due in part to advancements in medical technology, the volume and complexity of surgical cases performed in an outpatient setting has steadily increased over the past two decades. Our facilities earn a fee from patients, insurance companies, or other payors in exchange for providing the facility and related services a surgeon requires in order to perform a surgical case. In addition, we earn a monthly fee from each facility we operate in exchange for managing its operations. All but three of our facilities are located in the U.S., where we have focused increasingly on adding facilities withnot-for-profit healthcare system partners (hospital partners), which we believe improves the long-term profitability and potential of our facilities.

In the United Kingdom we operate private hospitals, which supplement the services provided by the government-sponsored healthcare system. Our patients choose to receive care at private hospitals primarily because of waiting lists to receive diagnostic procedures or elective surgery at government-sponsored facilities and pay us either from personal funds or through private insurance, which is offered by an increasing number of employers as a benefit to their employees. Since acquiring our first two facilities in the United Kingdom in 2000, we have expanded selectively by adding a third facility and increasing the capacity and services offered at each facility.

Our growth and success depends on our ability to continue to grow volumes at our existing facilities, to successfully open new facilities we develop, to successfully integrate acquired facilities into our operations, and to maintain productive relationships with our physician and hospital partners. We believe we will have significant opportunities to operate more facilities with hospital partners in the future in existing and new markets.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition, results of operations and liquidity and capital resources are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of consolidated financial statements under GAAP requires our management to make certain estimates and assumptions that impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. These estimates and assumptions also impact the reported amount of net earnings during any period. Estimates are based on information available as of the date financial statements are prepared. Accordingly, actual results could differ from those estimates. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and that require management’s most subjective judgments. Our critical accounting policies and estimates include our policies and estimates regarding consolidation, revenue recognition and accounts receivable, income taxes, and goodwill and intangible assets.

Consolidation

We own less than 100% of each U.S. facility we operate. As discussed in “Results of Operations”, we operate all of our U.S. facilities through joint ventures with physicians. Increasingly, these joint ventures also include a not-for-profit healthcare system as a partner. We generally have a leadership role in these facilities through a significant

voting and economic interest and a contract to manage each facility’s operations, but the degree of control we have varies from facility to facility. Accordingly, as of December 31, 2008, we consolidated the financial results of 62 of the facilities we operate, including one in which we hold no ownership but control through a long-term service agreement, account for 101 under the equity method, and have a contract to manage an additional facility in which we hold no ownership interest.

Our determination of the appropriate consolidation method to follow with respect to our investments in subsidiaries and affiliates is based on the amount of control we have, combined with our ownership level, in the underlying entity. Our consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and other investees over which we have control. Investments in companies we do not control, but over whose operations we have the ability to exercise significant influence (including investments where we have less than 20% ownership), are accounted for under the equity method. We also consider FASB Interpretation No. 46,Consolidation of Variable Interest Entities (as amended)(FIN 46R) to determine if we are the primary beneficiary of (and therefore should consolidate) any entity whose operations we do not control. At December 31, 2008, we consolidated one entity based on the provisions of FIN 46R. This entity controls and consolidates four surgical facilities we operate.

Accounting for an investment as consolidated versus equity method has no impact on our net income (loss) or stockholders’ equity in any accounting period, but it does impact individual statement of operations and balance sheet balances. Under either consolidation or equity method accounting, the investor effectively records its share of the underlying entity’s net income or loss based on its ownership percentage. At December 31, 2008, all of the Company’s investments in unconsolidated affiliates are accounted for using the equity method.

Revenue Recognition and Accounts Receivable

We recognize revenue in accordance with Staff Accounting Bulletin No. 104,Revenue Recognition in Financial Statements, as updated, which has four criteria that must be met before revenue is recognized:


	•	Existence of persuasive evidence that an arrangement exists;

	•	Delivery has occurred or services have been rendered;

	•	The seller’s price to the buyer is fixed or determinable; and

	•	Collectibility is reasonably assured.

Our revenue recognition policies are consistent with these criteria. Approximately 80% of our facilities’ surgical cases are performed under contracted or government mandated fee schedules or discount arrangements. The patient service revenues recorded for these cases are recorded at the contractually defined amount at the time of billing. We estimate the remaining revenue based on historical collections, and adjustments to these estimates in subsequent periods have not had a material impact in any period presented. If the discount percentage used in estimating revenues for the cases not billed pursuant to fee schedules were changed by 1%, our 2008 after-tax net income would change by approximately $0.2 million. The collection cycle for patient services revenue is relatively short, typically ranging from 30 to 60 days depending upon payor and geographic norms, which allows us to evaluate our estimates frequently. Our revenues earned under management and other service contracts are typically based upon objective formulas driven by an entity’s financial performance and are generally earned and paid monthly.

Our accounts receivable are comprised of receivables in both the United Kingdom and the United States. As of December 31, 2008, approximately 21% of our total accounts receivable were attributable to our U.K. business. Because our U.K. facilities only treat patients who have a demonstrated ability to pay, our U.K. patients arrange for payment prior to treatment and our bad debt expense in the U.K. is low. In 2008, U.K. bad debt expense was approximately $0.4 million, as compared to our total U.K. revenues of $122.0 million. Our average days sales outstanding in the U.K. were 46 and 39 as of December 31, 2008 and 2007, respectively. The increase in U.K. days sales outstanding was caused by an increase in business with the National Health Service, which pays less promptly than other payors but has virtually no risk of uncollectibility.

Our U.S. accounts receivable were approximately 79% of our total accounts receivable as of December 31, 2008. In 2008, uninsured or self-pay revenues only accounted for 2% of our U.S. revenue and 7% of our accounts receivable balance was comprised of amounts owed from patients, including the patient portion of amounts covered by insurance. Insurance revenues (including government payors) accounted for 98% of our combined 2008 U.S. revenue and 93% of our accounts receivable balance was comprised of amounts owed from contracted payors. Our U.S. facilities primarily perform surgery that is scheduled in advance by physicians who have already seen the patient. As part of our internal control processes, we verify benefits, obtain insurance authorization, calculate patient financial responsibility and notify the patient of their responsibility, all prior to surgery. The nature of our business is such that we do not have any significant receivables that are pending approval from third party payors. We also focus our collection efforts on aged accounts receivable. However, due to complexities involved in insurance reimbursements and inherent limitations in verification procedures, our business will always have some level of bad debt expense. In 2008 and 2007, our bad debt expense attributable to U.S. revenue was approximately 1% and 2%, respectively. In addition, as of December 31, 2008 and 2007, our average days sales outstanding in the U.S. were 37 and 36 days, respectively. The aging of our U.S. accounts receivable at December 31, 2008 was: 62% less than 60 days old, 15% between 60 and 120 days and 23% over 120 days old. Our U.S. bad debt allowance at December 31, 2008 and 2007 represented approximately 20% and 21% of our U.S. accounts receivable balance, respectively.

Due to the nature of our business, management relies upon the aging of accounts receivable as its primary tool to estimate bad debt expense. Therefore, we reserve for bad debt based principally upon the aging of accounts receivable, without differentiating by payor source. We write off accounts on an individual basis based on that aging. We believe our reserve policy allows us to accurately estimate our allowance for doubtful accounts and bad debt expense.

Income Taxes

We account for income taxes under the asset and liability method. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income by taxing jurisdiction during the periods in which those temporary differences become deductible. If, in our opinion, it is more likely than not that some or all of the deferred tax assets may not be realized, deferred tax assets are reduced by a valuation allowance.

Goodwill and Intangible Assets

Given the significance of our intangible assets as a percentage of our total assets, we also consider our accounting policy regarding goodwill and intangible assets to be a critical accounting policy. Consistent with Statement of Financial Accounting Standards No. 142,Accounting for Goodwill and Intangible Assets(SFAS 142), we do not amortize goodwill or indefinite-lived intangibles but rather test them for impairment annually or more often when circumstances change in a manner that indicates they may be impaired. Impairment tests occur at the reporting unit level for goodwill; our reporting units are defined as our operating segments (United States and United Kingdom). Our intangible assets consist primarily of indefinite-lived rights to manage individual surgical facilities. The values of these rights are tested individually. Intangible assets with definite lives primarily consist of rights to provide management and other contracted services to surgical facilities, hospitals, and physicians. These assets are amortized over their estimated useful lives, and the portfolios are tested for impairment when circumstances change in a manner that indicates their carrying values may not be recoverable.

To determine the fair value of our reporting units, we generally use a present value technique (discounted cash flow) corroborated by market multiples when available and as appropriate. The factor most sensitive to change with respect to our discounted cash flow analyses is the estimated future cash flows of each reporting unit which is, in turn, sensitive to our estimates of future revenue growth and margins for these businesses. If actual revenue growthand/or margins are lower than our expectations, the impairment test results could differ. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. SFAS 142 requires us to compare the fair value of an indefinite-lived intangible asset to its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized. Fair values

for indefinite-lived intangible assets are determined based on market multiples which have been derived based on our experience in acquiring surgical facilities and third party valuations we have obtained with respect to such transactions.

Merger Transaction

Pursuant to an Agreement and Plan of Merger (the merger) dated as of January 7, 2007, between an affiliate of Welsh, Carson, Anderson & Stowe X, L.P. (Welsh Carson), we became a wholly owned subsidiary of USPI Holdings, Inc. on April 19, 2007. USPI Holdings is a wholly owned subsidiary of USPI Group Holdings, Inc. (Parent), which is owned by an investor group that includes affiliates of Welsh Carson, members of our management and other investors.

In the merger, all of our stockholders received $31.05 in cash for each share of common stock owned. Additionally, all of our unvested restricted stock awards, except as otherwise agreed to by the holder and Parent, immediately vested and the holders of restricted stock awards also received $31.05 per share in cash. Holders of stock options issued by us, including unvested stock options, received cash equal to $31.05 per option minus the exercise price of the option multiplied by the number of shares subject to the option.

The transaction was valued at approximately $1.8 billion, including the assumption of $153.6 million of our existing debt. The funds necessary to consummate the transaction were approximately $1.7 billion, including $1.4 billion to pay then current stockholders and equity award holders, approximately $199.4 million to repay certain existing indebtedness and approximately $47.1 million to pay related fees and expenses. The remainder of the net proceeds was remitted to the Company. The transaction was financed by:


	•	an investment of cash and rollover equity in the equity of Parent by Welsh Carson, management and other equity investors of approximately $785.0 million;

	•	borrowings by the Company of $430.0 million in new senior secured credit facilities;

	•	the issuance by the Company of $240.0 million in aggregate principal amount of 87/8% senior subordinated notes, due 2017, and $200.0 million in aggregate principal amount of 91/4%/10% senior subordinated toggle notes, due 2017;

	•	additional borrowings of £10.0 million (approximately $19.7 million) by Global Healthcare Partners Limited, which was repatriated to the U.S.; and

	•	approximately $21.9 million of cash on hand.

Acquisitions, Equity Investments and Development Projects

As a part of our growth strategy, we acquire interests in existing surgical facilities from third parties and invest in new facilities that we develop in partnership with not-for-profit healthcare systems and local physicians. Many of these transactions result in our controlling the acquired entity (business combinations) or increasing our level of ownership in an entity we already controlled (step acquisitions). During 2008, these transactions consisted of the following:


Effective Date	Facility Location	Amount

December 2008	St. Louis, Missouri(1)	$	0.4 million
October 2008	St. Louis, Missouri(2)		1.9 million
September 2008	St. Louis, Missouri(2)		15.8 million
September 2008	St. Louis, Missouri(3)		18.0 million
August 2008	St. Louis, Missouri(2)		3.0 million
June 2008	Dallas, Texas(4)		3.9 million
April 2008	St. Louis, Missouri(5)		14.1 million
Various	Various(6)		6.6 million

Total		$	63.7 million


(1)		We acquired additional ownership in one of our existing facilities.

(2)		We had no previous investment in this facility.

(3)		We acquired additional ownership in two of our existing facilities.

(4)		We purchased all of a healthcare system’s ownership interest in an entity it co-owned with us. This entity has ownership in and manages five facilities in the Dallas/Fort Worth area. This holding company was already a subsidiary of our company and is now wholly owned by us.

(5)		We acquired additional ownership in three of our existing facilities.

(6)		Represents the purchase of additional ownership in various consolidated entities.

As described above, we also engaged in investing transactions that are not business combinations or step acquisitions. These transactions primarily consist of acquisitions and sales of noncontrolling equity interests in surgical facilities and the investment of additional cash in surgical facilities under development. During the year ended December 31, 2008, these transactions resulted in a net cash outflow of approximately $35.6 million, which is summarized below.


Effective Date	Facility Location	Amount

Investments
December 2008	Nashville, Tennessee(1)	$	18.3 million
December 2008	Houston, Texas(1)		5.4 million
December 2008	Portland, Oregon(1)		5.7 million
December 2008	Denver, Colorado(2)		2.2 million
October 2008	Houston, Texas(1)		5.2 million
October 2008	Denver, Colorado(1)		2.1 million
January 2008	Knoxville, Tennessee(1)		1.4 million
January 2008	Las Vegas, Nevada(1)		1.1 million

			41.4 million


Sales
April 2008	Kansas City, Missouri(3)		3.6 million
Various	Various(4)		2.2 million

			5.8 million

Total		$	35.6 million


(1)		Acquisition of a noncontrolling equity interest in and right to manage a surgical facility in which we previously had no involvement. This facility is jointly owned with one of our hospital partners and local physicians.

(2)		Acquisition of a noncontrolling equity interest in and right to manage two surgical facilities in which we previously had no involvement. These facilities are jointly owned with one of our hospital partners and local physicians. The purchase price was paid in December 2008 and our ownership became effective January 1, 2009.

(3)		A not-for-profit hospital partner obtained ownership in a facility.

(4)		Represents the net receipt related to various other purchases and sales of equity interests and contributions of cash to equity method investees.

As further described in the section, “Discontinued Operations and Other Dispositions,” during 2008, we received proceeds of $3.4 million related to our sale of all our ownership interests in five facilities. We also received cash proceeds of $5.2 million related to the sale of noncontrolling interests in five facilities to various not-for-profit hospital partners.

We engaged in the following business combinations and step acquisitions during the combined year ended December 31, 2007:


Effective Date	Facility Location	Amount

September 2007	St. Louis, Missouri(1)	$	34.3 million
May 2007	Houston, Texas(2)		9.0 million
May 2007	St. Louis, Missouri(2)		28.7 million
March 2007	St. Louis, Missouri(2)		7.3 million
February 2007	St. Louis, Missouri(3)		15.9 million

Total		$	95.2 million


(1)		We acquired additional ownership in five of our existing facilities.

(2)		We had no previous investment in this facility.

(3)		We had no previous investment in these two facilities.

During the combined year ended December 31, 2007, investing transactions that were not business combinations or step acquisitions resulted in a net cash outflow of approximately $0.2 million and can be summarized as follows:

Investments


Effective Date	Facility Location	Amount

September 2007	Houston, Texas(1)	$	5.7 million
April 2007	Detroit, Michigan(1)		1.5 million
Various	Various(2)		3.3 million

			10.5 million

Sales
January 2007	Chicago, Illinois		9.8 million
August 2007	Oklahoma City, Oklahoma		0.5 million

			10.3 million

Total		$	0.2 million


(1)		Acquisition of a noncontrolling equity interest in and right to manage a surgical facility in which we previously had no involvement. This facility is jointly owned with one of our hospital partners and local physicians.

(2)		Represents the net payment of approximately $3.3 million related to other purchases and sales of equity interests and contributions of cash to equity method investees.

As further described in the section, “Discontinued Operations and Other Dispositions,” during 2007, we received proceeds of $2.1 million related to our sale of all our ownership interests in five facilities. We also received proceeds of $9.8 million related to the sale of noncontrolling interests in four facilities to various not-for-profit hospital partners.

We engaged in the following business combinations and step acquisitions during the year ended December 31, 2006:


Effective Date	Facility Location	Amount

September 2006	Rockwall, Texas(1)	$	10.9 million
August 2006	St. Louis, Missouri(2)		16.6 million
July 2006	Corpus Christi, Texas(1)		3.8 million
April 2006	Various(3)		193.1 million
January 2006	St. Louis, Missouri(4)		50.6 million

Total		$	275.0 million


(1)		We had no previous investment in this facility.

(2)		We had no previous investment in these three facilities.

(3)		We acquired 100% of the equity interests of Surgis, Inc. a privately-held, Nashville-based owner and operator of surgery centers. We also assumed approximately $15.6 million of debt and other liabilities owed by subsidiaries of Surgis. Surgis operated 24 surgery centers and had three additional facilities under construction, all of which have opened. We sold our interests in a total of four Surgis facilities in 2006 and 2007.

(4)		We had no previous investment in these five facilities. We paid $8.3 million of the purchase price in December 2005.

During the year ended December 31, 2006, investing transactions that were not business combinations or step acquisitions resulted in a net cash inflow of approximately $5.5 million, which can be summarized as follows:

Investments


Effective Date	Facility Location	Amount

July 2006	Sacramento, California(1)	$	4.1 million
November 2006	Lansing, Michigan(1)		3.7 million
Various	Various(2)		6.5 million

			14.3 million

Sales
December 2006	Spain(3)		19.8 million

Total		$	5.5 million


(1)		Acquisition of a noncontrolling equity interest in and right to manage a surgical facility in which we previously had no involvement. This facility is jointly owned with one of our hospital partners and local physicians.

(2)		Includes the payment of $3.1 million to sellers based on certain financial targets or objectives being met for acquired facilities or based upon the resolution of certain contingencies and $3.3 million representing the net payment related to other purchases and sales of equity interests and contributions of cash to equity method investees.

(3)		Represents the final payment from the buyers of our Spanish operations, which we sold in 2004.

As further described in the section, “Discontinued Operations and Other Dispositions,” during 2006, we received proceeds of $3.7 million related to our sale of all our ownership interests in four facilities. We also received proceeds of $4.8 million related to the sale of noncontrolling interests in a facility to a not-for-profit hospital partner.

Discontinued Operations and Other Dispositions

During 2008, 2007, and 2006, we sold all of our ownership interests in 14 facilities as summarized below:


Date	Facility Location	Proceeds		Gain (Loss)

July 2008	Manitowoc, Wisconsin(1)	$	0.8 million	$	—
July 2008	Orlando, Florida(1)		0.5 million		(0.4 million	)
June 2008	Cleveland, Ohio(2)		1.6 million		(1.0 million	)
April 2008	Los Angeles, California(1)		—		—
February 2008	Sarasota, Florida(1)		0.5 million		—

Total		$	3.4 million	$	(1.4 million	)

December 2007	Houston, Texas(2)	$	—	$	(0.6 million	)
December 2007	Decatur, Alabama(2)		0.3 million		(2.2 million	)
November 2007	Canton, Mississippi(2)		—		(0.9 million	)
September 2007	Atlanta, Georgia(1)		1.8 million		0.5 million
September 2007	Baltimore, Maryland(1)		—		(1.2 million	)

Total		$	2.1 million	$	(4.4 million	)

October 2006	Ocean Springs, Mississippi(1)	$	2.0 million	$	—
August 2006	Phoenix, Arizona(1)		1.3 million		—
March 2006	Lyndhurst, Ohio(2)		0.4 million		(7.4 million	)
February 2006	Chicago, Illinois(1)		—		—

Total		$	3.7 million	$	(7.4 million	)


(1)		Because these investments were accounted for under the equity method, the results of operations of these facilities are not reported as discontinued operations. The gain (loss) on the disposal of these facilities is recorded in other income (expense) in the accompanying consolidated statements of operations.

(2)		In accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, we have reclassified our historical results of operations to remove the operations of these facilities from the our revenues and expenses on the accompanying consolidated statements of operations, collapsing the income (loss) related to these facilities’ operations and the our disposal of them into a single line, “Loss from discontinued operations, net of tax.”

In addition to the sales of ownership interests noted above, we sold controlling interests to various hospital partners during 2008, 2007, and 2006 which are described below, as part of our strategy for partnering with these systems. Our continuing involvement as an equity method investor and manager of the facilities precludes classification of these transactions as discontinued operations. Gains and losses are recorded in other income (expense) in the accompanying consolidated statements of operations.


Date	Facility Location	Proceeds		Gain (Loss)

July 2008	Beaumont, Texas	$	1.2 million	$	(0.5 million	)
June 2008	Dallas, Texas(1)		2.3 million		(0.9 million	)
June 2008	Houston, Texas(2)		0.6 million		—
March 2008	Redding, California(3)		1.7 million		—

Total		$	5.8 million	$	(1.4 million	)

July 2007	Dallas, Texas(4)	$	3.7 million	$	—
April 2007	Corpus Christi, Texas(5)		6.1 million		0.9 million

Total		$	9.8 million	$	0.9 million

July 2006	Fort Worth, Texas(1)	$	4.8 million		—


(1)		The hospital partner already had an ownership interest in the facility and acquired a controlling interest from us in this transaction. Additionally, this hospital partner is a related party (Note 10).


(2)		Because we are considered the primary beneficiary of this entity under FASB Interpretation No. 46,Consolidation of Variable Interest Entities (as amended), we consolidate the entity, and continue to consolidate the facility’s operating results. The sales price of $0.6 million was paid in the form of a note receivable from the buyer.

(3)		We sold a controlling interest in two facilities and gained a noncontrolling interest in a third facility in Redding.

(4)		The hospital partner already had an ownership interest in these two facilities and acquired a controlling interest from us in this transaction. Additionally, this hospital partner is a related party (Note 10).

(5)		We sold a controlling interest in two facilities.

Combination of Operating Results

We have reported our operating results and financial position for the period subsequent to April 19, 2007, as the “Successor Period” and all periods prior to April 19, 2007, as “Predecessor Periods.” For the purposes of presenting a comparison of our 2007 results to our 2008 and 2006 results, we have presented our 2007 results as the sum, as shown in the table below, of our operating results from the Predecessor Period from January 1, 2007 through April 18, 2007 and our operating results for the Successor Period from April 19, 2007 to December 31, 2007. We believe that this presentation provides the most meaningful information about our operating results. This approach is not consistent with GAAP and may yield results that are not strictly comparable on a period-to-period basis. Even on a combined basis, our results of operations for the year ended December 31, 2007 are neither comparable with prior periods nor indicative of results to be expected in future periods given our incurrence of merger-related expenses and indebtedness in 2007.


	Predecessor			Successor			Combined
	Period from			Period from			Year Ended
	January 1 through			April 19 through			December 31,
	April 18, 2007			December 31, 2007			2007

Revenues:
Net patient service revenues	$	170,598		$	402,433		$	573,031
Management and contract service revenues		19,142			46,503			65,645
Other revenues		1,615			3,552			5,167

Total revenues		191,355			452,488			643,843
Equity in earnings of unconsolidated affiliates		9,906			23,867			33,773
Operating expenses:
Salaries, benefits, and other employee costs		53,871			125,648			179,519
Medical services and supplies		34,308			77,006			111,314
Other operating expenses		31,744			74,335			106,079
General and administrative expenses		39,277			29,340			68,617
Provision for doubtful accounts		3,297			7,592			10,889
Depreciation and amortization		12,426			26,688			39,114

Total operating expenses		174,923			340,609			515,532

Operating income		26,338			135,746			162,084
Interest income		933			3,208			4,141
Interest expense		(9,521	)		(67,862	)		(77,383	)
Loss on early retirement of debt		(2,435	)		—			(2,435	)
Other, net		798			(442	)		356

Total other expense, net		(10,225	)		(65,096	)		(75,321	)
Income before minority interests		16,113			70,650			86,763
Minority interests in income of consolidated subsidiaries		(18,866	)		(45,120	)		(63,986	)

Income (loss) from continuing operations before income taxes		(2,753	)		25,530			22,777
Income tax expense		(4,145	)		(14,611	)		(18,756	)

Income (loss) from continuing operations		(6,898	)		10,919			4,021
Loss from discontinued operations, net of tax		(251	)		(2,190	)		(2,441	)

Net income (loss)	$	(7,149	)	$	8,729		$	1,580

Sources of Revenue

Revenues primarily include the following:


	•	net patient service revenues of the facilities that we consolidate for financial reporting purposes, which are those in which we have ownership interests of greater than 50% or otherwise maintain effective control;

	•	management and contract service revenues, consisting of the fees that we earn from managing the facilities that we do not consolidate for financial reporting purposes and the fees we earn from providing certain consulting and other contracted services to physicians and hospitals. Our consolidated revenues and expenses do not include the management fees we earn from operating the facilities that we consolidate for financial reporting purposes as those fees are charged to subsidiaries and thus eliminate in consolidation.

The following table summarizes our revenues by type and as a percentage of total revenue for the periods presented:


	Years Ended December 31,
				Combined
	2008			2007			2006

Net patient service revenues		88	%		89	%		90	%
Management and contract service revenues		11			10			9
Other revenues		1			1			1

Total revenues		100	%		100	%		100	%

As a percentage of total revenues, our management and contract service revenues have increased in 2007 and 2008 as compared to prior years. As we execute our strategy of partnering with not-for-profit healthcare systems, more of our business is being conducted through equity method facilities. While our share of equity method facilities’ net income is reflected within equity in earnings of unconsolidated affiliates, our revenues related to these facilities, consisting of fees we earn for managing their operations, are classified within management and contract service revenues rather than net patient service revenues. Accordingly, the former comprises a higher proportion of our overall revenues than in past years. The percentage of our U.S. facilities we account for under the equity method was 63%, 61%, and 58% at December 31, 2008, 2007, and 2006, respectively.

In 2007 this increase was also driven by our owning, for a full year for the first time, an endoscopy services business whose revenues are classified within management and contract service revenues. We acquired this business as part of the Surgis acquisition on April 19, 2006.

Our management and contract service revenues are earned from the following types of activities (in thousands):


	Years Ended December 31,
			Combined
	2008		2007		2006

Management of surgical facilities	$	40,100	$	34,161	$	26,623
Contract services provided to physicians, hospitals and related entities		32,870		31,484		25,614

Total management and contract service revenues	$	72,970	$	65,645	$	52,237

The following table summarizes our revenues by operating segment:


	Years Ended December 31,
				Combined
	2008			2007			2006

United States		81	%		82	%		83	%
United Kingdom		19			18			17

Total		100	%		100	%		100	%

The number of facilities we operate increased by nine from December 31, 2007 to December 31, 2008. All of these additional facilities are in the United States. However, this increase was weighted heavily toward facilities we account for under the equity method (an increase of eight). As described above, our revenues related to equity method facilities are limited to the service fees we earn for managing them; their underlying patient service revenues are not included in ours. This factor, together with strong growth in our U.K. facilities, all of which we consolidate, caused the proportion of our total revenues that is derived from the United States to be slightly lower for the year ended December 31, 2008 than in the corresponding prior year period.

From 2006 to 2007, the number of facilities we operate increased by 14. All of these additional facilities are in the United States. This increase was heavily weighted towards facilities we account for under the equity method (an increase of 13). As described above, our revenues related to equity method facilities are limited to the service fees we earn for managing them. This factor, together with the strong growth during 2007 in the U.K. facilities, all of which we consolidate, as well as the strengthening of the British pound through 2007, caused the proportion of our total revenues that is derived from the U.S. to be slightly lower than in 2006.

Equity in Earnings of Unconsolidated Affiliates

Our business model of partnering with not-for-profit hospitals and physicians results in our accounting for the majority of our surgical facilities under the equity method rather than consolidating their results. The following table reflects the summarized results of the unconsolidated facilities that we account for under the equity method of accounting (amounts are in thousands, except number of facilities, and reflect 100% of the investees’ results on an aggregated basis):


	Years Ended December 31,
	2008			2007			2006

Revenues	$	991,566		$	788,931		$	610,384
Operating expenses:
Salaries, benefits, and other employee costs		245,277			207,154			150,625
Medical services and supplies		210,874			166,229			125,981
Other operating expenses		246,185			203,841			150,108
Depreciation and amortization		48,722			41,057			29,884

Total operating expenses		751,058			618,281			456,598

Operating income		240,508			170,650			153,786
Interest expense, net		(24,107	)		(20,501	)		(14,400	)
Other, net		2,962			1,843			282

Income before income taxes	$	219,363		$	151,992		$	139,668

Long-term debt	$	273,438		$	278,417		$	169,304
USPI’s equity in earnings of unconsolidated affiliates		47,042			33,773			31,568
USPI’s imputed weighted average ownership percentage based on affiliates’ pretax income(1)		21.4	%		22.2	%		22.6	%
USPI’s imputed weighted average ownership percentage based on affiliates’ debt(2)		25.0	%		26.9	%		29.2	%
Unconsolidated facilities operated at period end		101			93			80


(1)		Our weighted average percentage ownership in our unconsolidated affiliates is calculated as USPI’s equity in earnings of unconsolidated affiliates divided by the total net income of unconsolidated affiliates for each respective period. This is a non-GAAP measure but management believes it provides further useful information about its involvement in equity method investments.

(2)		Our weighted average percentage ownership in our unconsolidated affiliates is calculated as the total debt of each unconsolidated affiliate, multiplied by the percentage ownership USPI held in the affiliate as of the end of each respective period, divided by the total debt of all of the unconsolidated affiliates as of the end of each


		respective period. This percentage is lower at December 31, 2007 as compared to prior period as a result of our largest U.S. facility, in which we own a 25% interest, borrowing to finance a major expansion during 2007. This is a non-GAAP measure but management believes it provides further useful information about its involvement in equity method investments.

One of our equity method investments, Texas Health Ventures Group, L.L.C., is considered significant to our consolidated financial statements under regulations of the SEC. As a result, we have filed Texas Health Ventures Group, L.L.C.’s consolidated financial statements with thisForm 10-K for the appropriate periods.

Results of Operations

The following table summarizes certain consolidated statements of operations items expressed as a percentage of revenues for the periods indicated:


	Years Ended December 31,
				Combined
	2008			2007			2006

Total revenues		100	%		100.0	%		100.0	%
Equity in earnings of unconsolidated affiliates		7.3			5.2			5.6
Operating expenses, excluding depreciation and amortization		(70.5	)		(74.0	)		(71.5	)
Depreciation and amortization		(5.7	)		(6.0	)		(6.1	)

Operating income		31.1			25.2			28.0
Minority interests in income of consolidated subsidiaries		(8.6	)		(9.9	)		(9.6	)
Interest and other expense, net		(13.1	)		(11.7	)		(7.4	)

Income from continuing operations before income taxes		9.4			3.6			11.0
Income tax expense		(3.5	)		(2.9	)		(4.0	)

Income from continuing operations		5.9			0.7			7.0
Loss from discontinued operations, net of tax		(0.1	)		(0.4	)		(1.0	)

Net income		5.8	%		0.3	%		6.0	%

Executive Summary

We continue to grow our existing facilities, develop new facilities with our not-for-profit hospital partners, and add others selectively through acquisition. The revenues of the facilities we operate (systemwide), more than half of which are accounted for under the equity method, grew 14% for the year ended December 31, 2008, respectively, as compared to the combined year ended December 31, 2007, and our overall operating income margin increased. Our increases in profit in the U.S. were driven primarily by higher volumes of more complex procedures resulting in an increase in average revenue per procedure, while our U.K. facilities benefited mostly from increases in volume.

We added 14 facilities during 2008 and sold five facilities. Our development pipeline remains active, with eight facilities under development at December 31, 2008, of which four have reached the stage of commencing construction. All of these facilities are being developed with a hospital partner.

While our overall operating income margin increased by 590 basis points compared to the combined year ended December 31, 2007, there were factors significantly affecting the comparability of our results. The most significant was that, in conjunction with Welsh Carson acquiring us in April 2007, we incurred $25.4 million of merger-related expenses during the combined year ended December 31, 2007 that did not recur in 2008. Excluding the net favorable year-over-year impact of these expenses, our operating income margin increased 200 basis points for the year ended December 31, 2008, as compared to the combined year ended 2007. The additional debt we incurred in conjunction with Welsh Carson acquiring us caused our interest expense to be much higher in 2008 than in the periods before the April 19, 2007 merger date.

Our continued focus on conducting business through entities co-owned withnot-for-profit health systems and local physicians is shifting a significant portion of our business into unconsolidated affiliates, whose revenues are

not included in ours for consolidated reporting purposes. While we believe this strategy increases our net income over time, it does not translate to proportionate increases in revenues, as our share of these facilities’ net income is reflected on a net basis within “equity in earnings of unconsolidated affiliates” rather than being grossed up in our revenues and expenses. This phenomenon was reflected in our 2008 operating results: our net income increased 2,274% (72% after excluding $25.4 million in merger-related expenses incurred in 2007), but our revenues actually decreased slightly (less than 1%), as we contributed some of our consolidated facilities into equity method structures and additionally as the impact of the strengthening U.S. dollar manifested itself in revenue reported from our U.K. business, which due to expenses being similarly affected, had an immaterial impact to net income. As described more fully below, the shift of our business into the equity method model is causing us to increasingly analyze our business in terms of the underlying facilities’ results without regard to consolidation treatment, as our net income is driven more by the facilities’ underlying performance than by whether we consolidate them for financial reporting purposes. Accordingly, we analyze our business on a systemwide basis as described more fully in the following section.

Overall, we continue to grow our existing facilities and focus our business development activities primarily in markets where we have a hospital partner or believe that we have the potential to develop such a relationship. This strategy primarily directs where we deploy capital. It also leads us to sell facilities from time to time that do not meet this or other strategic objectives.

Systemwide Operating Results

We conduct the majority of our business through facilities that we account for under the equity method. Of our 164 facilities at December 31, 2008, we account for 101 under the equity method. Since our primary strategy in the U.S. involves three-way joint ventures withnot-for-profit healthcare systems and physicians who perform surgery in our facilities, our growth in earnings is significantly affected by the operations of our equity method facilities.

We incur significant corporate level expenses (including but not limited to costs of corporate level employees) in order to fulfill our contractual duties to manage our facilities (both consolidated and equity method). However, the gross impact to our consolidated statements of operations of the revenues and expenses of the facilities themselves differs based on whether we consolidate a facility versus account for it under the equity method. Consolidated facilities’ revenues and expenses are included in each line item of our consolidated statements of operations. By contrast, accounting for a facility under the equity method of accounting means that its direct impact on our consolidated statements of operations is limited to two lines:


	•	management and administrative services revenues: income we earn in exchange for managing theday-to-day operations of each facility, usually quantified as a percentage of each facility’s net revenues less bad debt expense; and

	•	equity in earnings of unconsolidated affiliates: our share of the net income of each facility, which is based on the facilities’ net income and the percentage of the facility’s outstanding equity interests owned by us.

The differing accounting requirements described above often result in our growth rates for earnings differing significantly from the growth rates of our consolidated revenues. Accordingly, the primary way we analyze our business ignores the distinction between consolidated versus equity method facilities, since our net earnings from a facility are the same whether we consolidate it or not. Viewing our business in this manner provides a more meaningful measurement of the overall growth rate of our business and the operating margins of all the facilities driving our net earnings. The following tables depict our business as though we consolidated all of our facilities, which is a non-GAAP measure, and reconciles these systemwide results to our consolidated statements of operations prepared under GAAP (in thousands):


	Year Ended December 31,
	2008												2007
										USPI as												Combined
	USPI			Unconsolidated			Consolidation			Reported			USPI			Unconsolidated			Consolidation			USPI as
	System-Wide(1)			Affiliates(2)			Adjustments			Under GAAP			System-Wide(1)			Affiliates(2)			Adjustments			Adjusted(7)
Revenues:
Net patient service revenues	$	1,558,760		$	(997,228	)	$	—		$	561,532		$	1,366,154		$	(793,123	)	$	—		$	573,031
Management and administrative services revenues		32,960			—			40,010	(3)		72,970			31,552			—			34,093	(3)		65,645
Other income		9,890			(2,169	)		—			7,721			7,203			(2,036	)		—			5,167

Total revenues		1,601,610			(999,397	)		40,010			642,223			1,404,909			(795,159	)		34,093			643,843
Equity in earnings (loss) of unconsolidated affiliates		13			(13	)		47,042	(4)		47,042			117			(117	)		33,773	(4)		33,773
Operating expenses:
Salaries, benefits and other employee costs		431,943			(247,072	)		—			184,871			387,915			(208,396	)		—			179,519
Medical services and supplies		324,472			(211,973	)		—			112,499			278,359			(167,045	)		—			111,314
Other operating expenses		286,243			(218,594	)		40,010	(3)		107,659			255,109			(183,123	)		34,093	(3)		106,079
General and administrative expenses		40,155			—			—			40,155			43,245			—			—			43,245
Provision for doubtful accounts		37,093			(29,525	)		—			7,568			33,082			(22,193	)		—			10,889
Depreciation and amortization		85,526			(48,769	)		—			36,757			80,130			(41,016	)		—			39,114

Total operating expenses		1,205,432			(755,933	)		40,010			489,509			1,077,840			(621,773	)		34,093			490,160

Operating income (loss)		396,191			(243,477	)		47,042			199,756			327,186			(173,503	)		33,773			187,456
Interest income		4,915			(1,687	)		—			3,228			6,969			(2,828	)		—			4,141
Interest expense		(111,452	)		25,803			—			(85,649	)		(100,701	)		23,318			—			(77,383	)
Other, net		1,172			(2,962	)		—			(1,790	)		2,199			(1,843	)		—			356

Total other expenses, net		(105,365	)		21,154			—			(84,211	)		(91,533	)		18,647			—			(72,886	)

Income (loss) before minority interests		290,826			(222,323	)		47,042			115,545			235,653			(154,856	)		33,773			114,570
Minority interests in (income) loss of consolidated subsidiaries		(224,850	)		—			169,716	(5)		(55,134	)		(179,494	)		—			115,508	(5)		(63,986	)

Income (loss) from continuing operations before income taxes		65,976			(222,323	)		216,758			60,411			56,159			(154,856	)		149,281			50,584
Income tax expense		(27,899	)		5,565			—			(22,334	)		(31,857	)		5,575			—			(26,282	)

Income (loss) from continuing operations(6)	$	38,077		$	(216,758	)	$	216,758		$	38,077		$	24,302		$	(149,281	)	$	149,281		$	24,302


	Year Ended December 31, 2006
	USPI			Unconsolidated			Consolidation			USPI as
	System-Wide(1)			Affiliates(2)			Adjustments			Adjusted(7)

Revenues:
Net patient service revenues	$	1,120,630		$	(613,289	)	$	—		$	507,341
Management and administrative services revenues		25,613			—			26,624	(3)		52,237
Other income		8,885			(1,089	)		—			7,796

Total revenues		1,155,128			(614,378	)		26,624			567,374
Equity in earnings (loss) of unconsolidated affiliates		224			(224	)		31,568	(4)		31,568
Operating expenses:
Salaries, benefits and other employee costs		310,073			(151,397	)		—			158,676
Medical services and supplies		228,455			(126,555	)		—			101,900
Other operating expenses		205,218			(135,669	)		26,624	(3)		96,173
General and administrative expenses		38,338			—			—			38,338
Provision for doubtful accounts		25,454			(15,562	)		—			9,892
Depreciation and amortization		64,400			(29,884	)		—			34,516

Total operating expenses		871,938			(459,067	)		26,624			439,495

Operating income (loss)		283,414			(155,535	)		31,568			159,447
Interest income		5,908			(1,841	)		—			4,067
Interest expense		(48,845	)		16,241			—			(32,604	)
Loss on early retirement of debt		(14,880	)		—			—			(14,880	)
Other, net		2,054			(281	)		—			1,773

Total other expenses, net		(55,763	)		14,119			—			(41,644	)

Income (loss) before minority interests		227,651			(141,416	)		31,568			117,803
Minority interests in (income) loss of consolidated subsidiaries		(163,358	)		—			108,726	(5)		(54,632	)

Income (loss) from continuing operations before income taxes		64,293			(141,416	)		140,2941			63,171
Income tax expense		(23,961	)		1,122			—			(22,839	)

Income (loss) from continuing operations(6)	$	40,332		$	(140,294	)	$	140,294		$	40,332


(1)		Our systemwide statements of operations treat all of our facilities as though they were consolidated subsidiaries. Our consolidated systemwide statement of operations is not a measure defined under GAAP because it includes the revenues and expenses of entities we do not control and thus do not consolidate for financial reporting purposes under GAAP. We believe that systemwide revenues, expenses, and operating margins are important to understanding our business, since these measures include the health of the unconsolidated operating entities that comprise over 60% of our facilities. For example, these facilities’ growth in revenues directly affects our earnings in the form of management fees we earn for operating the facilities, as well as indicating the degree to which we are growing revenues and leveraging costs at these facilities, which are the key drivers of our net income. Our definition of systemwide statement of operations may differ materially from similarly titled measures of other companies. Our systemwide net income is the same as our net income reported under GAAP.

(2)		Subtracts the aggregated revenues and expenses of our unconsolidated affiliates and one facility in which we hold no ownership but operate under a management contract.


(3)		Our systemwide statements of operations include consolidation entries that eliminate management fee revenues (on USPI’s financial records) and expenses (on the facilities’ financial records). Under GAAP, these consolidation entries need to be removed with respect to amounts charged to unconsolidated affiliates, as under GAAP these are not intercompany transactions with consolidated subsidiaries.

(4)		Records our share of the net income of our unconsolidated affiliates.

(5)		Our systemwide statement of operations includes minority interest expense for the portion of investees’ earnings not owned by us. Under GAAP, there is no minority interest expense recorded with respect to unconsolidated affiliates.

(6)		As the net impact of items (2) through (5) is zero, systemwide income from continuing operations equals the income from continuing operations that we report under GAAP.

(7)		As discussed earlier in this document (see “Combination of Operating Results”), the acquisition of our company on April 19, 2007 has required us to divide our operating results into “Predecessor” periods (prior to April 19, 2007) and “Successor” periods (April 19, 2007 and after). While factors such as our increased debt and related interest expense make the Predecessor and Successor periods not comparable, we believe combining these periods is the most meaningful way of comparing our operating results for the year ended December 31, 2008 to the year ended December 31, 2007. In addition, for purposes of this table, we have eliminated expenses we incurred in 2007 as a result of the merger. The following summarizes the impact of these merger-related expenses on our consolidated statement of operations for the combined year ended December 31, 2007, reconciling the amounts reported on a combined basis (see “Combination of Operating Results”) to the combined as adjusted amounts reported in the table above:


				Merger
				Related			Combined
	Combined			Expenses			as Adjusted

General and administrative expenses	$	68,617		$	(25,372	)	$	43,245
Operating income		162,084			25,372			187,456
Loss on early retirement of debt		(2,435	)		2,435			—
Income before minority interests		86,763			27,807			114,570
Income from continuing operations before income taxes		22,777			27,807			50,584
Income tax expense		(18,756	)		(7,526	)		(26,282	)
Income from continuing operations		4,021			20,281			24,302

The following summarizes the impact of these merger-related expenses on our consolidated statement of operations for the year ended December 31, 2006, reconciling the amounts reported on an as reported under GAAP basis to the as adjusted amounts reported in the table above:


	USPI			Merger
	As Reported			Related
	Under GAAP			Expenses			As Adjusted

General and administrative expenses	$	38,826		$	(488	)	$	38,338
Operating income		158,959			488			159,447
Income before minority interests		117,315			488			117,803
Income from continuing operations before income taxes		62,683			488			63,171
Income tax expense		(22,712	)		(127	)		(22,839	)
Income from continuing operations		39,971			361			40,332

Our Ownership Share of Systemwide Results

As described above, our net income is driven heavily by the performance of facilities we operate. Whether we consolidate a facility or account for it under the equity method, our net earnings from each U.S. surgical facility are driven by the facility’s net revenues (in many cases net of its bad debt expense), which form the basis for computing our management service revenues, and by the net income of the facility multiplied by the percentage of the facility’s

equity interests we own (equity in earnings of unconsolidated affiliates), which together comprise a major component of our overall net income and cash flows.

Our average ownership interest in the U.S. surgical facilities we operate is as follows:


	Year Ended			Year Ended			Year Ended
	December 31,			December 31,			December 31,
	2008			2007			2006

Equity method facilities(1)		21.4	%		22.2	%		22.6	%
Consolidated facilities(2)		48.8	%		46.5	%		49.8	%
Total(3)		30.5	%		32.9	%		34.5	%


(1)		Computed for equity method facilities by dividing (a) our total equity in earnings of unconsolidated affiliates by (b) the aggregate net income of U.S. surgical facilities we account for under the equity method.

(2)		Computed for consolidated facilities by dividing (a) the aggregate net income of U.S. surgical facilities we operate less our total minority interests in income of consolidated subsidiaries by (b) the aggregate net income of our consolidated U.S. surgical facilities.

(3)		Computed in total by dividing our share of the facilities’ net income, defined as the sum of (a) in footnotes (1) and (2), by the aggregate net income of our U.S. surgical facilities, defined as the sum of (b) in footnotes (1) and (2).

Our average ownership interest for each group of facilities is determined by many factors, including the ownership levels we negotiate in our acquisition and development activities, the relative performance of facilities in which we own percentages higher or lower than average, and other factors. While our average ownership in each group (equity method facilities and consolidated facilities) has not significantly changed in recent years, the shift of business into the equity method model has caused a decrease in the overall average ownership percentage. This shift is driven by our increased focus on partnering our facilities withnot-for-profit health systems (hospital partners) in addition to physicians, which generally results in our accounting for more facilities under the equity method. Of the 99 facilities we operate with a hospital partner as of December 31, 2008, we account for 79, or 80%, under the equity method. As described more fully below, operating surgical facilities in partnership withnot-for-profit health system partners is a key element in our long-term strategy in the U.S.

Revenues

Our consolidated net revenues decreased approximately 1% during the year ended December 31, 2008, as compared to the combined year ended December 31, 2007. However, our operating income increased 7%, and our net income increased 72%, even after excluding merger-related expenses incurred in 2007, which decreased operating income and net income by $25.4 million and $20.3 million, respectively.

The reason for the discrepancy between revenue growth and income growth is the increased proportion of our business being conducted through equity method facilities. Growing the volume and profits of those facilities has relatively little impact on our consolidated revenues, but our share of their increasing net income (equity in earnings of unconsolidated affiliates, which grew by 39% and 7% in 2008 and 2007, respectively) is reflected in our operating income and net income. Accordingly, as described above, we focus on our systemwide results in order to understand where our growth in income is coming from. Our systemwide revenues, which include revenues of facilities we account for under the equity method as well as facilities we consolidate, grew by rates more commensurate with our overall income growth: 14% during the year ended December 31, 2008, as compared to combined 2007, and 22% for combined 2007 as compared to 2006. As discussed more fully below (see “Facility Operating Margins”), we maintained, on average, margins comparable to prior year with respect to existing facilities, and consequently earned more operating income from our facilities despite the slight decrease in our reported revenues.

The growth in systemwide revenues was driven primarily by our U.S. facilities that have been open for more than one year (same store facilities). This group of facilities experienced revenue growth of 11% during the year ended December 31, 2008, as compared to 10% for the combined year ended December 31, 2007 and 9% for the year ended December 31, 2006. As compared to 2006 and 2007, our revenue growth in 2008 was driven more by

increases in net revenue per case than by increases in volume. While some of this shift reflects increases in rates we negotiate with payors, we believe a more significant portion of the increase is driven by the type of cases we performed. In early 2008, we noted a decrease in the volume of some of our less profitable elective procedures, largely concentrated in pain management and plastic surgery. However, increases in other specialties, such as orthopedics, which generate higher net revenues for our facilities on a per case basis, resulted in our overall same store net revenues increasing at a rate largely consistent with recent years. The increase in net revenue per case was also driven in part by the initial phase of increases to Medicare reimbursement rates for ambulatory surgery centers, announced in July 2007, which went into effect for certain types of cases January 1, 2008.

Excluding the effect of changes in foreign currency exchange rates, our U.K. same store facility revenues grew 11% during the year ended December 31, 2008, respectively, as compared to 13% and 6% for the combined year ended 2007 and the year ended 2006, respectively. The growth achieved during 2008 was driven largely by an increase in admissions referred by the National Health Service, due to government-owned facilities not having adequate capacity to meet demand, and by the continuedramp-up of business resulting from capital projects and operational improvements introduced in 2006 and 2007, which has resulted in higher admissions, more favorable case mix and an increase in revenue per patient.

The following table summarizes our systemwide same store facility growth rates, as compared to the corresponding prior year period:


	Years Ended December 31,
				Combined
	2008			2007			2006

United States facilities:
Net revenue		11	%		10	%		9	%
Surgical cases		2	%		6	%		7	%
Net revenue per case(1)		9	%		3	%		2	%
United Kingdom facilities:
Adjusted admissions		9	%		8	%		(1	)%
Net revenue using actual exchange rates		3	%		23	%		7	%
Net revenue using constant exchange rates(2)		11	%		13	%		6	%
All same store facilities:
Net revenue using actual exchange rates		10	%		11	%		9	%


(1)		Our overall domestic same store growth in net revenue per case for each year was favorably impacted by the growth at our twelve same store surgical hospitals, which on average perform more complex cases and thus earn a higher average net revenue per case than ambulatory surgery centers. We acquired ownership interests in an additional hospital on December 31, 2008. The favorable impact, in the first quarter of 2008, of our collecting amounts related to past patient services in conjunction with our finalizing a new contract with a major payor has been excluded from these growth rates as it relates to dates of service prior to January 1, 2008. The revenue reductions related to two similar, but adverse, settlements in the second quarter of 2008 were excluded for similar reasons.

(2)		Calculated using 2008 exchange rates for both periods. Although this computation represents a non-GAAP measure, we believe that using a constant currency translation rate more accurately reflects the trend of the business.

Joint Ventures withNot-for-Profit Hospitals

The addition of new facilities continues to be more heavily weighted to U.S. surgical facilities with a hospital partner, both as we initiate joint venture agreements with new systems and as we add facilities to our existing arrangements. Facilities have been added to hospital joint ventures both through construction of new facilities (de novos) and through our contribution of our equity interests in existing facilities into a hospital joint venture structure, effectively creating three-way joint ventures by sharing our ownership in these facilities with a hospital partner while leaving the existing physician ownership intact.

Consistent with this strategy, our overall number of facilities increased by nine from December 31, 2007 to December 31, 2008, consisting of a net increase of seven facilities partnered withnot-for-profit hospitals and local physicians. All four facilities under construction at December 31, 2008, involve a hospital partner. In addition, all four of our projects in the earlier stages of development involve a hospital partner, and we continue to explore affiliating more facilities with hospital partners, especially for facilities in markets where we already operate other facilities with a hospital partner.

The following table summarizes the facilities we operated as of December 31, 2008, 2007, and 2006:


	2008			2007			2006

United States facilities(1):
With a hospital partner		99			91			78
Without a hospital partner		62			61			60

Total U.S. facilities		161			152			138
United Kingdom facilities		3			3			3

Total facilities operated		164			155			141

Change from prior year-end:
De novo (newly constructed)		4			11			8
Acquisition		10			9			38
Disposals(2)		(5	)		(6	)		(4	)

Total increase in number of facilities		9			14			42


(1)		At December 31, 2008, physicians own a portion of all of these facilities.

(2)		During 2008, we sold ownership interests in facilities in Sarasota, Florida; Los Angeles, California; Cleveland, Ohio; Manitowoc, Wisconsin; and Las Cruces, New Mexico. During 2007, we sold our ownership interests in facilities in Canton, Mississippi; Atlanta, Georgia; Baltimore, Maryland; Houston, Texas and Decatur, Alabama. Additionally, we ceased operating a facility effective October 1, 2007 although we continued to hold an ownership interest until we sold it in July 2008. During 2006, we sold our ownership interests in facilities in Lyndhurst, Ohio and Chicago, Illinois. We also disposed of Surgis’ interests in two of its facilities, one in Phoenix, Arizona, the other in Ocean Springs, Mississippi.

Facility Operating Margins

After three years of decreases, systemwide same store U.S. facility operating margins increased slightly (10 basis points) in 2008, largely due to improved leveraging of expenses at some of our larger facilities, which underwent expansions in 2007. However, the improvement was broad-based within the group of facilities we co-own with hospital partners. Despite revenue growth rates largely consistent with recent years, the systemwide same store U.S. facility operating income margins for our ambulatory surgery centers, which comprise over 90% of our facilities, increased 60 basis points in 2008, after decreasing in 2006 and 2007.

The facility operating income margins of our larger U.S. facilities, licensed as hospitals and comprising less than 10% of our facilities, finished 2008 down 30 basis points compared to 2007. However, this was a notable improvement over the 470 basis point drop in 2007 and the 560 basis points this group had decreased as of June 30, 2008, largely driven by theramp-up of business at two facilities we expanded in 2007, whose higher expense levels were not accompanied by commensurate increases in revenues until 2008.

The expanded facilities are co-owned with hospital partners as well as local physicians. Consequently, their improved margins in part drove the 170 basis point increase in the group of facilities co-owned with hospital partners. The margins of facilities we operate without a hospital partner did not fare as well, decreasing by 260 basis points. While we believe some of this is indicative of the superiority of our primary strategy of partnering withnot-for-profit healthcare systems, it was also driven in part in 2008 by new contracts affecting a relatively small number of high-volume facilities.

The above factors largely overcame the factors that had affected 2007 and 2006, when the hospital-partnered group’s margins had decreased overall due to the expansions described above as well as an ongoing factor, which is the fact that virtually all of our newly developed facilities have a hospital partner. As theyramp-up their operations, these facilities earn lower margins in their first few years than more mature facilities, which unfavorably impacts the overall margin of the hospital-partnered group of facilities. We have added 27 facilities to the hospital-partnered same store group since December 31, 2006, of which 17 were newly developed facilities. Conversely, with respect to facilities we operate without a hospital partner, we have added nine facilities to the same store group since December 31, 2006, of which only one was developed by us. The other facilities in each group were added through acquisitions. This relationship can change depending on which facilities we succeed in partnering with anot-for-profit hospital.

The following table summarizes ouryear-over-year increases (decreases) in same store operating margins (see footnote 1 below):


	Year Ended December 31,
				Combined
	2008			2007			2006

United States facilities:
With a hospital partner		170	bps		(210	) bps		(50	) bps
Without a hospital partner		(260	)		40			(50	)
Total U.S. facilities		10			(140	)		(50	)
United Kingdom facilities(2)		80	bps		300	bps		(205	) bps


(1)		Operating margin is calculated as operating income divided by total revenues. This table aggregates all of the same store facilities we operate using 100% of their results. This does not represent the overall margin for USPI’s operations in either the U.S. or U.K. because we have a variety of ownership levels in the facilities we operate, and facilities open for less than a year are excluded from same store calculations.

(2)		Calculated using 2008 exchange rates for both periods. Although this computation represents a non-GAAP measure, we believe that using a constant translation rate more accurately reflects the trend of the business.

Year Ended December 31, 2008 compared to Combined Year Ended December 31, 2007

Revenues decreased by $1.6 million to $642.2 million for the year ended December 31, 2008 from $643.8 million for the combined year ended December 31, 2007. This decrease was primarily related to a $10.1 million decrease in consolidated revenues due to the strengthening of the U.S. dollar against the British pound. This decrease was partially offset by the net impact of our acquisition, development, and disposal activity during 2008 which resulted in an increase of approximately $3.9 million in revenues. Increases in revenues we derived from our same store facilities also partially offset this decrease, driven largely by receiving an average of approximately 9% more per case than in the combined year 2007. The revenues of same store United Kingdom facilities, when measured using 2008 exchange rates for both periods, were $13.7 million higher during 2008 as compared to the combined year 2007.

Equity in earnings of unconsolidated affiliates increased by $13.3 million, or 39.3% to $47.0 million for the year ended December 31, 2008 from $33.8 million for the combined year ended December 31, 2007. This increase is primarily driven by same store growth, particularly at the two surgical hospitals we expanded in 2007, and acquisitions of additional facilities we account for under the equity method. The number of facilities we account for under the equity method increased by eight from December 31, 2007 to December 31, 2008, partially from adding facilities and also as a result of our contributing our investments in four consolidated facilities to joint ventures withnot-for-profit hospital partners, which resulted in our accounting for the investments under the equity method going forward.

Operating expenses, excluding depreciation and amortization, decreased by $23.7 million, or 5.0%, to $452.8 million for the year ended December 31, 2008 from $476.4 million for the combined year ended December 31, 2007. Operating expenses, excluding depreciation and amortization, decreased as a percentage of revenues to 70.5% for the year ended 2008, from 74.0% for the combined year ended 2007. This decrease is

primarily attributable to approximately $25.4 million of expenses incurred related to the merger, which did not recur in 2008.

Depreciation and amortization decreased $2.4 million, or 6.0%, to $36.8 million for the year ended December 31, 2008 from $39.1 million for the combined year ended December 31, 2007, primarily as a result of fair value adjustments recorded in conjunction with the merger and additionally as a result of the stronger U.S. dollar impacting our results for a full year in 2008. Depreciation and amortization, as a percentage of revenues, was 5.7% for the year ended December 31, 2008 and 6.0% for the combined year ended December 31, 2007.

Operating income increased $37.7 million, or 23.2%, to $199.8 million for the year ended December 31, 2008 from $162.1 million for the combined year ended December 31, 2007. Operating income, as a percentage of revenues, increased to 31.1% for the year ended December 31, 2008 from 25.2% for the prior year, primarily as a result of the additional $25.4 million of expenses incurred related to the merger in April 2007, which did not recur in 2008. Additionally, operating income was favorably impacted by the $13.3 million increase in equity in earnings as described above.

Interest expense, net of interest income, increased $9.2 million to $82.4 million for the year ended December 31, 2008 from $73.2 million for the combined year ended December 31, 2007 as a result of our significant new borrowings in conjunction with the merger, which affected our results for a full year in 2008, and additional borrowings of $33.0 million during 2008 to finance acquisitions. The impact of higher indebtedness more than offset the effect of reductions in interest rates during 2008.

Other expense, net of other income decreased $0.3 million to $1.8 million of other expense for the year ended December 31, 2008 from $2.1 million of other expense for the combined year ended December 31, 2007. In 2008, other expense was primarily attributable to $1.0 million of other income related to a terminated administrative service contract, offset by a $0.8 million impairment of one of our management contracts, further offset by losses recorded on the sale of interests in various surgical facilities that do not qualify as discontinued operations. In 2007, other expense was primarily attributable to a loss on the early retirement of debt in April 2007 of $2.4 million. The losses on the early retirement of debt represent the excess of payments made to retire the debt over the debt’s carrying value, including writing off the unamortized portion of costs incurred in originally issuing the debt.

Minority interests in income of consolidated subsidiaries decreased $8.9 million, or 13.8%, to $55.1 million for the year ended December 31, 2008 from $64.0 million for the combined year ended December 31, 2007. Over 50% of the decrease was due to our deconsolidation and sales of certain consolidated facilities. The remaining decrease was due to decreased profitability of certain of our existing consolidated facilities, which was partially offset by the increased minority interest expense resulting from our acquisition activities, which primarily involve our acquiring less than 100% ownership.

Provision for income taxes was $22.3 million, representing an effective tax rate of 37.0%, for the year ended December 31, 2008, compared to $18.8 million, representing an effective tax rate of 82.3%, for the combined year ended December 31, 2007. The decrease in effective rate is driven by our increased income, as described above. Higher pretax income levels diminished the impact of the factors that had caused our 2007 effective tax rate to be so much higher than statutory rates, although we still maintain a valuation allowance against all unused U.S. federal net operating loss carryforwards, as it is not considered more likely than not that we will be able to utilize those carryforwards.

Income from continuing operations was $38.1 million for the year ended December 31, 2008 compared to $4.0 million for the combined year ended December 31, 2007. As described above, this increase was primarily caused by merger-related costs and expenses that did not recur in 2008. Additionally, income from continuing operations was favorably impacted by the increase in equity in earnings, partially offset by higher interest costs during 2008. We have significantly higher debt balances as a result of the merger, which greatly increased our interest expense beginning on April 19, 2007 and continuing in 2008, as we borrowed an additional $33.0 million to fund various acquisitions.

In 2008, we classified the operations of a surgery center located in Ohio as discontinued operations. We recorded a loss of approximately $0.6 million, net of tax, related to the sale of this facility. Because this facility has

been classified as discontinued operations, our consolidated statements of operations and the year over year comparisons reflect the historical results of its operations in discontinued operations for all years presented.

Combined Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Revenues increased by $76.5 million, or 13.5%, to $643.8 million for the combined year ended December 31, 2007 from $567.4 million for the year ended December 31, 2006. The primary source of this increase is growth of facilities we operated in both years, which contributed $42.2 million more revenues in the combined twelve months ended December 31, 2007 as compared to the prior year period. This increase was driven by increases in volumes of services and the rates at which we are reimbursed for services. Also included was a positive impact of $9.2 million due to the U.S. dollar weakening against the British pound, whose impact on net income was less than $1 million due to expenses also being impacted. Also affecting the comparability of our revenues were our acquisitions of Surgis in April 2006 and of numerous other facilities in 2006 and 2007; these entities contributed $34.8 million of incremental revenues during the combined twelve months ended December 31, 2007.

Equity in earnings of unconsolidated affiliates increased by $2.2 million, or 7.0% to $33.8 million for the combined year ended December 31, 2007 from $31.6 million for the year ended December 31, 2006. This increase was primarily driven by same store growth, acquisitions of additional facilities we account for under the equity method, and the deconsolidation of three facilities which we now account for under the equity method. The overall increase was reduced by a decrease in equity in earnings from our largest U.S. facility, which is incurring higher expenses as a result of a major expansion.

Operating expenses, excluding depreciation and amortization, increased by $70.9 million, or 17.5%, to $476.4 million for the combined year ended December 31, 2007 from $405.5 million for the year ended December 31, 2006. Operating expenses, excluding depreciation and amortization, increased as a percentage of revenues to 74.0% for the combined year ended 2007, from 71.5% for the year ended 2006. This increase as a percentage of revenues is primarily attributable to approximately $25.4 million of expenses incurred related to the merger being classified within operating expenses.

Depreciation and amortization increased $4.6 million, or 13.3%, to $39.1 million for the combined year ended December 31, 2007 from $34.5 million for the year ended December 31, 2006, primarily as a result of additional depreciation on tangible assets added through acquisitions and expansions of our facilities, and additionally as a result of our recording the fair value of intangibles and fixed assets with respect to the merger. The values of our definite-lived intangibles were adjusted to fair value effective April 19, 2007, resulting in increased carrying values for these assets and increases in amortization. Depreciation and amortization, as a percentage of revenues, was 6.1% for the combined year ended December 31, 2007 and the year ended December 31, 2006.

Operating income increased $3.1 million, or 2.0%, to $162.1 million for the combined year ended December 31, 2007 from $159.0 million for the year ended December 31, 2006. Operating income, as a percentage of revenues, decreased to 25.2% for the combined year ended December 31, 2007 from 28.0% for the prior year, primarily as a result of the additional $25.4 million of expenses incurred related to the merger in April 2007 as discussed above.

Interest expense, net of interest income, increased $44.7 million to $73.2 million for the combined year ended December 31, 2007 from $28.5 million for the year ended December 31, 2006 as a result of our significant new borrowings in conjunction with the merger.

Other expense, net of other income decreased $11.0 million to $2.1 million of other expense for the combined year ended December 31, 2007 from $13.1 million of other expense for the year ended December 31, 2006, primarily due to the August 2006 loss of $14.9 million related to the early retirement of our Senior Subordinated Notes. As a result of the merger, we also recorded a loss on the early retirement of debt in April 2007 of $2.4 million. The losses on the early retirement of debt represent the excess of payments made to retire the debt over the debt’s carrying value, including writing off the unamortized portion of costs incurred in originally issuing the debt.

Minority interests in income of consolidated subsidiaries increased $9.4 million, or 17.1%, to $64.0 million for the combined year ended December 31, 2007 from $54.6 million for the year ended December 31, 2006, primarily due to the increased profitability of our existing consolidated facilities and additionally due to our acquisition activities, which primarily involve our acquiring less than 100% ownership.

Provision for income taxes was $18.8 million, representing an effective tax rate of 82.3%, for the combined year ended December 31, 2007, compared to $22.7 million, representing an effective tax rate of 36.2%, for the year ended December 31, 2006. The increase is driven by two factors, both resulting primarily from the merger. First, due to our higher interest expense after the merger and goodwill amortization deducted for income tax purposes, our U.S. operations are no longer generating federal taxable income, and we are instead generating net operating loss carryforwards. We do not consider it more likely than not that we will be able to utilize these net operating loss carryforwards, and therefore we established a valuation allowance against them resulting in no net federal tax benefit attributable to the losses. Second, our effective state tax rate has increased. While we are generating net operating losses for federal purposes, our operations in individual states continue to generate taxable income, with the resulting state income tax now being compared to lower consolidated pretax income. In addition, we are paying more taxes in Texas, where we operate 49 of our 152 U.S. facilities, as a result of a new gross margin tax that went into effect January 1, 2007.

Income from continuing operations was $4.0 million for the combined year ended December 31, 2007 compared to $40.0 million for the year ended December 31, 2006. As described above, this decrease was primarily caused by merger-related costs and expenses. We have incurred merger-related expenses and a loss on the early retirement of debt in completing the transaction. In addition, we have significantly higher debt balances as a result of the merger, which greatly increased our interest expense beginning on April 19, 2007.

In 2007, we classified the operations of three surgery centers, located in Mississippi, Texas and Alabama, as discontinued operations. We recorded a loss of $2.4 million, net of tax, related to the sale of these facilities. In the first quarter of 2006, we sold our operations in Lyndhurst, Ohio, which competed with a facility operated by Surgis. We recorded a loss on the sale of approximately $5.7 million, net of tax. Because all of these facilities have been classified as discontinued operations, our consolidated statements of operations and the year over year comparisons reflects the historical results of their operations in discontinued operations for all years presented.

Liquidity and Capital Resources


	Years Ended December 31,
				Combined
	2008			2007			2006

Net cash provided by operating activities	$	91,210		$	96,457		$	101,475
Net cash used in investing activities		(127,767	)		(99,433	)		(278,897	)
Net cash provided by financing activities		9,234			47,631			80,157

Overview

At December 31, 2008, we had cash and cash equivalents totaling $49.4 million, as compared to $76.8 million at December 31, 2007. Our borrowings for 2008 can be primarily attributed to our borrowing $33.0 million under the delayed draw feature of our senior secured credit facility to finance acquisitions in the St. Louis area. In March 2008, we borrowed £2.0 million (approximately $2.9 million at December 31, 2008) to acquire property adjacent to one of our hospitals in London. A more detailed discussion of changes in our liquidity follows.

Operating Activities

Our cash flows from operating activities were $91.2 million, $96.5 million, and $101.5 million in the year ended December 31, 2008, the combined year ended December 31, 2007, and the year ended December 31, 2006, respectively. Operating cash flows in 2008 were lower primarily due to higher interest costs during 2008 and the timing of distributions of earnings from our unconsolidated affiliates. Our operating cash flows in 2007 were adversely affected by the payment of merger related expenses and the higher interest expense resulting from the merger, partially offset by more of our income tax expense being deferred as opposed to currently payable, also as a result of the merger.

A significant element of our cash flows from operating activities is the collection of patient receivables and the timing of payments to our vendors and service providers. Collections efforts for patient receivables are conducted primarily by our personnel at each facility or in centralized service centers for some metropolitan areas with

multiple facilities. These collection efforts are facilitated by our patient accounting system, which prompts individual accountfollow-up through a series of phone callsand/or collection letters written 30 days after a procedure is billed and at 30 day intervals thereafter. Bad debt reserves are established in increasing percentages by aging category based on historical collection experience. Generally, the entire amount of all accounts remaining uncollected 180 days after the date of service are written off as bad debt and sent to an outside collection agency. Net amounts received from collection agencies are recorded as recoveries of bad debts. Our operating cash flows, including changes in accounts payable and other current liabilities, are impacted by the timing of payments to our vendors. We typically pay our vendors and service providers in accordance with invoice terms and conditions, and take advantage of invoice discounts when available. In 2008, 2007 and 2006, we did not make any significant changes to our payment timing to our vendors.

Our net working capital deficit was $38.8 million at December 31, 2008 as compared to a net working capital deficit of $12.6 million in the prior year. The overall negative working capital position at December 31, 2008 and 2007 is primarily the result of $57.2 million and $62.5 million due to affiliates associated with our cash management system being employed for our unconsolidated facilities. As discussed further below, we have sufficient availability under our revolving credit agreement, together with our expected future operating cash flows, to service our obligations.

Investing Activities

During the year ended December 31, 2008, the combined year ended December 31, 2007 and the year ended December 31, 2006 our net cash used for investing activities was $127.8 million, $99.4 million and $278.9 million, respectively. The majority of the cash used in our investing activities relates to our purchases of businesses, incremental investment in unconsolidated affiliates and purchases of property and equipment. The cash used in investing activities in 2008 and 2007 was funded primarily from cash on hand as well as draws upon the delayed draw feature of our senior secured credit facility. In 2006, the cash used in investing activities was funded from cash on hand as well as borrowings against our previous revolving credit facility, primarily to fund the acquisition of Surgis in April 2006.

Acquisitions and Sales

During the year ended December 31, 2008, we invested $90.7 million, net of cash received, for the purchase and sales of businesses and investments in unconsolidated affiliates. These 2008 transactions are described earlier in this Item 7 under the captions “Acquisitions, Equity Investments and Development Projects” and “Discontinued Operations and Other Dispositions.” These transactions are summarized below:


Effective Date	Facility Location	Amount

Investments
December 2008	St. Louis, Missouri	$	0.4 million
December 2008	Nashville, Tennessee		18.3 million
December 2008	Houston, Texas		5.4 million
December 2008	Portland, Oregon		5.7 million
December 2008	Denver, Colorado		2.2 million
October 2008	Houston, Texas		5.2 million
October 2008	Denver, Colorado		2.1 million
October 2008	St. Louis, Missouri		1.9 million
September 2008	St. Louis, Missouri		15.8 million
September 2008	St. Louis, Missouri		18.0 million
August 2008	St. Louis, Missouri		3.0 million
June 2008	Dallas, Texas		3.9 million
April 2008	St. Louis, Missouri		14.1 million
January 2008	Knoxville, Tennessee		1.4 million
January 2008	Las Vegas, Nevada		1.1 million
Various	Various		6.6 million

		$	105.1 million

Sales
July 2008	Manitowoc, Wisconsin		0.8 million
July 2008	Orlando, Florida		0.5 million
July 2008	Beaumont, Texas		1.2 million
June 2008	Dallas, Texas		2.3 million
June 2008	Cleveland, Ohio		1.6 million
April 2008	Kansas City, Missouri		3.6 million
March 2008	Redding, California		1.7 million
February 2008	Sarasota, Florida		0.5 million
Various	Various		2.2 million

			14.4 million

Total		$	90.7 million

During the combined year 2007 and 2006, we invested $83.8 million and $252.5 million, respectively (all net of cash acquired) to make similar acquisitions, the most significant of which was our acquisition of Surgis in April 2006 for approximately $193.1 million. These transactions are summarized in this Item 7 under the caption “Acquisitions, Equity Investments and Development Projects.”

As part of our business strategy, we have made, and expect to continue to make, selective acquisitions in existing markets to leverage our existing knowledge of these markets and to improve operating efficiencies. Additionally, we may also make acquisitions in selective new markets. In making such acquisitions, we may use available cash on hand or draw upon our revolving credit facility as discussed below.

Property and Equipment/Facilities under Development

During the year ended December 31, 2008, approximately $17.9 million of the property and equipment purchases related to ongoing development projects, and the remaining $13.3 million primarily represents purchase of equipment at existing facilities. Approximately $8.1 million of the property and equipment purchases was paid to acquire property adjacent to one of our London facilities. We added $17.9 million of property and equipment in the combined year 2007, of which $8.5 million related to ongoing development projects and the remaining $9.4 million related to purchases at existing facilities. Additionally, in 2006, we added $14.7 million of property and equipment for development projects and purchased $13.5 million of property and equipment for existing facilities.

Currently, we and our affiliates have four surgery centers under construction and four additional surgery centers in the development stage in the United States. Costs to develop a short-stay surgical facility, which include construction, equipment and initial operating losses, vary depending on the range of specialties that will be undertaken at the facility. Excluding one project, which has a budgeted cost of $23.0 million, our affiliates have budgeted an average of $4.9 million for development costs for each of the projects under construction. Development costs are typically funded with approximately 50% debt at the entity level with the remainder provided as equity from the owners of the entity. Additionally, as each of these facilities becomes operational, each will have obligations associated with debt and capital lease arrangements.

Generally, we estimate that we will add 12 to 15 facilities per year, with the majority being new facilities developed by us. This program will continue to require substantial capital resources, which for this number of facilities we would estimate to range from $60.0 million to $80.0 million per year over the next three years. If we identify strategic acquisition opportunities that are larger than usual for us, then these costs could increase greatly. For example, in April 2006, we acquired Surgis for approximately $193.1 million, net of cash acquired.

Other than the specific transactions described above, our acquisition and development activities primarily include the development of new facilities, buyups of additional ownership in facilities we already operate, and acquisitions of additional facilities. These activities also include, in some cases, payments of additional purchase price to the sellers of acquired facilities based upon the resolution of certain contingencies or based upon acquired facilities achieving certain financial targets. We currently have no such obligations in place at December 31, 2008. In addition, the operations of our existing surgical facilities will require ongoing capital expenditures. The amount and timing of these purchases and related cash outflows in future periods is difficult to predict and is dependent on a number of factors including hiring of employees, the rate of change in technology/equipment used in our business and our business outlook.

Financing Activities

Cash flows used in financing activities was $9.2 million for the year ended December 31, 2008. Cash flows used in financing activities was $47.6 million and $80.2 million for the combined year ended December 31, 2007 and for the year ended December 31, 2006, respectively. Historically, our cash flows from financing activities have been received through proceeds from long-term debt, offset by payments on long-term debt, as well as proceeds received from the issuance of our common stock. In 2006, we expanded our cash management program to include unconsolidated affiliates, which increased our cash flows from financing activities.

We intend to fund our ongoing capital and working capital requirements through a combination of cash flows from operations and borrowings under our $100.0 million revolving credit facility. However, due to the bankruptcy of one of the lenders, Lehman Brothers, in the credit facility, the amount available under our revolving credit facility is expected to be reduced to $85.0 million. Management does not believe the reduction in the revolving credit facility will have a material impact on our business. We believe that funds generated by operations and funds available under the revolving credit facility will be sufficient to meet working capital requirements over at least the next 12 months. However, in the future, we may have to incur additional debt or issue additional debt or equity securities from time to time. We may be unable to obtain sufficient financing on satisfactory terms or at all.

Debt

Senior secured credit facility

Our senior secured credit facility (credit facility) provides for total borrowings of up to $630.0 million (with a $150.0 million accordion feature described below), consisting of (1) a $100.0 million revolving credit facility with a maturity of six years, including a $20.0 million letter of creditsub-facility, and a $20.0 million swing-line loansub-facility; and (2) a $530.0 million term loan facility (including a $100.0 million delayed draw facility) with a maturity of seven years. On April 19, 2007, we borrowed $430.0 million of the term loan facility concurrent with the merger. During the remainder of 2007, we borrowed an additional $63.5 million under the delayed draw feature of the term loan facility to finance the acquisition of an additional surgery center in St. Louis, Missouri and to finance abuy-up of ownership in five of our existing St. Louis facilities. During the year ended December 31, 2008, we borrowed $31.5 million under the delayed draw facility to finance abuy-up of ownership in five of our existing St. Louis facilities and borrowed $1.5 million to fund the purchase of a new facility in St. Louis. After December 31, 2008, no additional funds can be borrowed under the delayed draw feature.

We may request additional tranches of term loans or additional commitments to the revolving credit facility in an aggregate amount not exceeding $150.0 million, subject to certain conditions. Interest rates on the credit facility are based on LIBOR plus a margin of 2.00% to 2.25%. Additionally, we pay quarterly commitment fees of 1.75% per annum and 0.50% per annum on the daily-unused commitment of the delayed draw facility and revolving credit facility, respectively. We also pay a quarterly participation fee of 2.38% per annum related to outstanding letters of credit. The term loans under the credit facility require principal payments each year in an amount of 1% per annum in equal quarterly installments. No principal payments are required on the revolving credit facility or delayed draw term loan facility during its delayed draw availability period, which ended December 31, 2008. At December 31, 2008, we had $519.0 million of debt outstanding under the credit facility at a weighted average interest rate of approximately 3.8%. At December 31, 2008, we had $98.4 million available for borrowing under the revolving credit facility, representing the facility’s $100.0 million capacity, net of $1.6 million of outstanding letters of credit. The availability on the revolving line of credit will likely be reduced by $15.0 million due to the bankruptcy of one of the lenders.

The credit facility is guaranteed by Holdings and its current and future direct and indirect wholly-owned domestic subsidiaries, subject to certain exceptions, and borrowings under the credit facility are secured by a first priority security interest in all real and personal property of these subsidiaries, as well as a first priority pledge of our capital stock, the capital stock of each of our wholly owned domestic subsidiaries and 65% of the capital stock of certain of our wholly-owned foreign subsidiaries. Additionally, the credit facility contains various restrictive covenants, including financial covenants that limit our ability and the ability of our subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends, enter into sale-leaseback transactions or issue and sell capital stock. We believe we were in compliance with these covenants as of December 31, 2008.

Senior subordinated notes

Also in connection with the merger, we issued $240.0 million of 87/8% senior subordinated notes and $200.0 million of 91/4%/10% senior subordinated toggle notes (together, the Notes), all due in 2017. Interest on the Notes is payable on May 1 and November 1 of each year, which commenced on November 1, 2007. All interest payments on the senior subordinated notes are payable in cash. The initial interest payment on the toggle notes was payable in cash. For any interest period after November 1, 2007 through November 1, 2012, we may pay interest on the toggle notes (i) in cash, (ii) by increasing the principal amount of the outstanding toggle notes or by issuingpayment-in-kind notes (PIK Interest); or (iii) by paying interest on half the principal amount of the toggle notes in cash and half in PIK Interest. PIK Interest is paid at 10% and cash interest is paid at 91/4% per annum. We paid the May 1 and November 1, 2008 interest payments in cash. The Notes are unsecured senior subordinated obligations of our company; however, the Notes are guaranteed by all of our current and future direct and indirect wholly-owned domestic subsidiaries. Additionally, the Notes contain various restrictive covenants, including financial covenants that limit our ability and the ability of our subsidiaries to borrow money or guarantee other indebtedness, grant liens,

make investments, sell assets, pay dividends, enter into sale-leaseback transactions or issue and sell capital stock. We believe we were in compliance with these covenants as of December 31, 2008.

United Kingdom borrowings

In April 2007, we entered into an amended and restated credit agreement, which covered our existing overdraft facility and term loan facility (Term Loan A). This agreement provides a total overdraft facility of £2.0 million, and an additional Term Loan B facility of £10 million, which was drawn in April 2007. In March 2008, we further amended our U.K. Agreement to provide for a £2.0 million Term Loan C facility. We borrowed the entire £2.0 million (approximately $2.9 million at December 31, 2008) in March 2008 to acquire property adjacent to one of our hospitals in London. Excluding availability on the overdraft facility, no additional borrowings can be made under the Term Loan A, B or C facilities. At December 31, 2008, We had approximately £40.5 million (approximately $59.3 million) outstanding under the U.K. credit facility at a weighted average interest rate of approximately 5.4%.

Interest on the borrowings is based on a three-month or six-month LIBOR, or other rate as the bank may agree, plus a margin of 1.25% to 1.50%. Quarterly principal payments are required on the Term Loan A, which began in June 2007, and approximate $4.4 million in the first and second year, $5.8 million in the third and fourth year; $7.3 million in the fifth year, with the remainder due in the sixth year after the April 2007 closing. The Term Loan B does not require any principal payments prior to maturity and matures in 2013. The Term Loan C requires quarterly principal payments of approximately £0.1 million ($0.2 million at December 31, 2008), which began in June 2008 and continue through its maturity date of February 2013 when the final payment of £0.5 million (approximately $0.7 million) is due. The borrowings are guaranteed by certain of our subsidiaries in the United Kingdom with a security interest in various assets, and a pledge of the capital stock of the U.K. borrowers and the capital stock of certain guarantor subsidiaries. The Agreement contains various restrictive covenants, including financial covenants that limit our ability and the ability of certain U.K. subsidiaries to borrow money or guarantee other indebtedness, grant liens on its assets, make investments, use assets as security in other transactions, pay dividends, enter into leases or sell assets or capital stock. We believe we were in compliance with these covenants as of December 31, 2008.

We also have the ability to borrow under a capital asset finance facility in the U.K. of up to £2.5 million (approximately $3.7 million at December 31, 2008). The exact terms and payments are negotiated upon a draw on the facility. No amounts were outstanding at December 31, 2008 or 2007.

Equity Contribution from USPI Group Holdings, Inc. and Payments to Repurchase Stock

In conjunction with the merger in 2007, our parent company, USPI Group Holdings, Inc. made a net equity contribution to us of $779.3 million. We used a substantial amount of these proceeds, along with our new borrowings to pay the former stockholders of USPI approximately $1.4 billion in conjunction with the merger. We also used a portion of the proceeds to pay various merger and other transaction expenses of approximately $47.1 million.

Stock Option and Stock Purchase Plans

Historically, we have received proceeds from common stock through the exercise of stock options and the purchase of common stock through our employee stock purchase plan. Proceeds from the sale of common stock totaled $6.1 million and $7.4 million for the combined year ended December 31, 2007, and for the year ended December 31, 2006, respectively. As a result of the merger, our equity securities are no longer publicly traded and, therefore, we do not expect any material proceeds from the exercise of stock options. Additionally, our employee stock purchase plan was terminated in conjunction with the merger.

Contractual Cash Obligations

Our contractual cash obligations as of December 31, 2008 are summarized as follows:


	Payments Due by Period
			Within		Years		Years		Beyond
Contractual Cash Obligations	Total		1 Year		2 and 3		4 and 5		5 Years
	(In thousands)

Long term debt obligations (principal plus interest)(1):
Senior secured credit facility	$	620,599	$	24,767	$	49,098	$	48,518	$	498,216
Senior subordinated notes, due 2017		419,275		21,300		42,600		42,600		312,775
Senior subordinated toggle notes, due 2017		355,708		18,500		37,000		37,000		263,208
Amended and restated U.K. credit facility		73,454		9,237		19,475		44,742		—
Other debt at operating subsidiaries		42,120		10,660		18,455		6,451		6,554
Capitalized lease obligations		76,174		9,269		16,759		12,057		38,089
Operating lease obligations		73,919		15,248		24,539		15,019		19,113

Total contractual cash obligations	$	1,661,249	$	108,981	$	207,926	$	206,387	$	1,137,955


(1)		Amounts shown for long-term debt obligations and capital lease obligations include the associated interest. For variable rate debt, the interest is calculated using the December 31, 2008 rates applicable to each debt instrument and also gives effect to the interest rate swap designated in a cash flow hedging relationship against portions of the U.K. credit facility and Term B facility in the U.S.

Debt at Operating Subsidiaries

Our operating subsidiaries, many of which have minority interest holders who share in the cash flow of these entities, have debt consisting primarily of capitalized lease obligations. This debt is generally non-recourse to USPI and is generally secured by the assets of those operating entities. The total amount of these obligations, which was $79.7 million at December 31, 2008, is included in our consolidated balance sheet because the borrower or obligated entity meets the requirements for consolidated financial reporting. Our average percentage ownership, weighted based on the individual subsidiary’s amount of debt and capitalized lease obligations, of these consolidated subsidiaries was 46.3% at December 31, 2008. As further discussed below, our unconsolidated affiliates that we account for under the equity method have debt and capitalized lease obligations that are generally non-recourse to USPI and are not included in our consolidated financial statements.

We believe that existing funds, cash flows from operations, borrowings under our credit facilities, and borrowings under capital lease arrangements at newly developed or acquired facilities will provide sufficient liquidity for the next twelve months. We may require additional debt or equity financing for our future acquisitions and development projects. There are no assurances that needed capital will be available on acceptable terms, if at all. If we are unable to obtain funds when needed or on acceptable terms, we will be required to curtail our acquisition and development program.

In connection with our acquisitions of equity interests in three surgery centers in 2007, we have the option to purchase additional ownership in these facilities at any time during the 18 months subsequent to closing. If we do not exercise this purchase option for one or more facilities, we must pay an option termination fee, which is equal to the lesser of an EBITDA calculation, as specified in the purchase agreement, or $1.0 million for each facility for which we elect not to exercise our purchase option. In accordance with the respective purchase agreements, we acquired additional ownership in two of these facilities in September 2008. We acquired an additional facility in 2007 that has a similar option termination fee clause in its purchase agreement, except that the option termination fee is the lesser of an EBITDA calculation, as specified in the purchase agreement, or $2.5 million. We are evaluating our purchase options in the remaining two facilities.

Off-Balance Sheet Arrangements

As a result of our strategy of partnering with physicians andnot-for-profit health systems, we do not own controlling interests in the majority of our facilities. We account for 101 of our 164 surgical facilities under the equity method. Similar to our consolidated facilities, our unconsolidated facilities have debts, including capitalized lease obligations, that are generally non-recourse to USPI. With respect to our unconsolidated facilities, these debts are not included in our consolidated financial statements. At December 31, 2008, the total debt on the balance sheets of our unconsolidated affiliates was approximately $273.4 million. Our average percentage ownership, weighted based on the individual affiliate’s amount of debt, of these unconsolidated affiliates was 25.0% at December 31, 2008. USPI or one of its wholly-owned subsidiaries had collectively guaranteed $10.3 million of the $273.4 million in total debt of our unconsolidated affiliates as of December 31, 2008. In addition, our unconsolidated affiliates have obligations under operating leases, of which USPI or a wholly-owned subsidiary had guaranteed $18.0 million as of December 31, 2008. Some of the facilities we are currently developing will be accounted for under the equity method. As these facilities become operational, they will have debt and lease obligations.

As described above, our unconsolidated affiliates own operational surgical facilities or surgical facilities that are under development. These entities are structured as limited partnerships, limited liability partnerships, or limited liability companies. None of these affiliates provide financing, liquidity, or market or credit risk support for us. They also do not engage in hedging, research and development services with us. Moreover, we do not believe that they expose us to any of their liabilities that are not otherwise reflected in our consolidated financial statements and related disclosures. Except as noted above with respect to guarantees, we are not obligated to fund losses or otherwise provide additional funding to these affiliates other than as we determine to be economically required in order to successfully implement our development plans.

Related Party Transactions

We have entered into agreements with certain majority and minority owned surgery centers to provide management services. As compensation for these services, the surgery centers are charged management fees which are either fixed in amount or represent a fixed percentage of each center’s net revenue less bad debt. The percentages range from 3.0% to 8.0%. Amounts recognized under these agreements, after elimination of amounts from consolidated surgery centers, totaled approximately $39.1 million, $32.8 million, and $25.7 million in 2008, 2007 (combined), and 2006, respectively, and are included in management and contract service revenues in our consolidated statements of operations.

We regularly engage in purchases and sales of ownership interests in our facilities. We operate 21 surgical facilities in partnership with the Baylor Health Care System (Baylor) and local physicians in the Dallas/Fort Worth area. Baylor’s Chief Executive Officer, Joel T. Allison, is a member of our board of directors. In June 2008, Baylor acquired a controlling interest in a facility it already co-owned with us and local physicians, which transferred control of the facility from us to Baylor. As a result, we now account for our investment in this facility under the equity method. The interest was acquired from us in exchange for $2.3 million in cash. A $0.9 million pretax loss was generated on the sale. We believe that the sales price was negotiated on an arms’ length basis, and the price equaled the value assigned by an external appraiser who valued the business immediately prior to the sale. Effective July 1, 2007, Baylor acquired an additional ownership interest in two facilities it already co-owned with us and local physicians, which transferred control of the facilities from us to Baylor. As a result, we now account for our investments in these facilities under the equity method. The interests were acquired for $3.7 million in cash. No gain or loss was recorded upon the sale as the sales price approximated our carrying value. We believe that the sales price was negotiated on an arms’ length basis.

In June 2008, we purchased all of Baylor’s ownership interests in an entity Baylor co-owned with us. This entity has ownership and manages five facilities in the Dallas/Fort Worth area. The purchase price was approximately $3.9 million in cash. This entity is now wholly owned by us. We believe that the sales price was negotiated on an arms’ length basis, and the price equaled the value assigned by an external appraiser who valued the business immediately prior to the sale. As noted above, we still operate 21 surgical facilities with Baylor. After this transaction, we account for all of the facilities we operate with Baylor under the equity method.

We issued warrants with an estimated fair value of $0.3 million to Baylor in January 2008. Similar grants have been made to other healthcare systems with which we operate facilities.

Included in general and administrative expenses of the Successor are management fees payable to an affiliate of Welsh Carson, which holds a controlling interest in our company, in the amount of $2.0 million for the year ended December 31, 2008 and $1.4 million for the period from April 19 through December 31, 2007. Such amounts accrue at an annual rate of $2.0 million.

New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations(SFAS 141R). Under SFAS 141R, a company is required to recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration at their fair value at the acquisition date. It further requires that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. Among other changes, SFAS 141R also requires that “negative goodwill” be recognized in earnings as a gain attributable to the acquisition, and any deferred tax benefits resulting from a business combination be recognized in income from continuing operations in the period of the combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141R will apply to all of the Company’s acquisitions closed on or after January 1, 2009.

In December 2007, the FASB issued SFAS No. 160, NoncontrollingInterests in Consolidated Financial Statements — an amendment of ARB No. 51(SFAS 160). SFAS 160 requires a company to clearly identify and present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the company’s equity. It also requires the amounts of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations; changes in ownership interest to be accounted for as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary must be measured at fair value. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS 160 will apply to the Company’s minority interests beginning on January 1, 2009.

In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133(SFAS 161). SFAS 161 requires enhanced disclosures about an entity’s derivative instruments and hedging activities including: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with earlier application encouraged. We elected to adopt the provisions of SFAS 161 during the first quarter of 2008. The adoption of SFAS 161 did not have any impact on our consolidated financial position, results of operations or cash flows.

In April 2008, the FASB issued FASB Staff Position (FSP)No. 142-3,Determination of the Useful Life of Intangible Assets.FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,Goodwill and Other Intangible Assets. The intent ofFSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007),Business Combinations, and other U.S. generally accepted accounting principles.FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The adoption ofFSP 142-3 is not expected to have a material impact on our consolidated financial position, results of operations, or cash flows.

In November 2008, the FASB ratified Emerging Issues Task Force (EITF) IssueNo. 08-6,Equity Method Investment Accounting Considerations(EITF 08-6).EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments.EITF 08-6 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The adoption ofEITF 08-6 is not expected to have a material impact on our consolidated financial position, results of operations, or cash flows.

Also, in December 2008, the FASB issued FSP FAS 132(R)-1,Employers’ Disclosures about Postretirement Benefit Plan Assets. This FSP amends SFAS 132(R),Employers’ Disclosures about Pensions and Other Postretirement Benefits,to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by this FSP shall be provided for fiscal years ending after December 15, 2009. We do not expect that FSP FAS 132(R)-1 will have a material impact on our consolidated financial statements.


Item 7A.	*Quantitative and Qualitative Disclosures about Market Risk*

Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in interest rates and other relevant market risks. Our primary market risk is a change in interest rates associated with variable-rate borrowings. Historically, we have not held or issued derivative financial instruments other than the use ofvariable-to-fixed interest rate swaps for portions of our borrowings under credit facilities with commercial lenders as required by credit agreements. We do not use derivative instruments for speculative purposes. The interest rate swaps serve to stabilize our cash flow and expense but ultimately may cost more or less in interest than if we had carried all of our debt at a variable rate over the swap term.

As further discussed in Note 8 to the accompanying consolidated financial statements, in order to manage interest rate risk related to a portion of our variable-rate U.K. debt, on February 29, 2008, we entered into an interest rate swap agreement for a notional amount of £20.0 million (approximately $29.2 million at December 31, 2008). The interest rate swap requires us to pay 4.99% and to receive interest at a variable rate of three-month GBP-LIBOR (2.77% at December 31, 2008), which is reset quarterly. The interest rate swap expires in March 2011. No collateral is required under the interest rate swap agreement. As of December 31, 2008, the rate under our swap agreement was unfavorable compared to the market.

Additionally, effective July 24, 2008, in order to manage interest rate risk related to a portion of our variable-rate U.S. Term Loan B, we entered into an interest rate swap agreement for a notional amount of $200.0 million. The interest rate swap requires us to pay 3.6525% and to receive interest at a variable rate of three-month USD-LIBOR (3.54% at December 31, 2008), which is paid and reset on a quarterly basis. The interest rate swap expires in July 2011. No collateral is required under the interest rate swap agreement. As of December 31, 2008, the rate under our swap agreement was unfavorable compared to the market.

At December 31, 2008, the fair values of the U.S. and U.K. interest rate swaps were liabilities of approximately $8.8 million and $1.5 million, respectively. The estimated fair value of the interest rate swaps was determined using present value models of the contractual payments. Inputs to the models were based on prevailing LIBOR market data and incorporate credit data that measure nonperformance risk. The estimated fair value represents the theoretical exit cost we would have to pay to transfer the obligations to a market participant with similar credit risk.

Our financing arrangements with many commercial lenders are based on the spread over Prime or LIBOR. At December 31, 2008, $703.1 million of our outstanding debt was in fixed rate instruments and the remaining $351.0 million was in variable rate instruments. Accordingly, a hypothetical 100 basis point increase in market interest rates would result in additional annual expense of approximately $3.5 million.

Our United Kingdom revenues are a significant portion of our total revenues. We are exposed to risks associated with operating internationally, including foreign currency exchange risk and taxes and regulatory changes. Our United Kingdom facilities operate in a natural hedge to a large extent because both expenses and revenues are denominated in the local currency. Additionally, our borrowings in the United Kingdom are currently denominated in the local currency. Historically, the cash generated from our operations in the United Kingdom has been utilized within that country to finance development and acquisition activity as well as for repayment of debt denominated in the local currency. Accordingly, we have not generally utilized financial instruments to hedge our foreign currency exchange risk.


Item 8.	*Financial Statements and Supplementary Data*

For the financial statements and supplementary data required by this Item 8, see the Index to Consolidated Financial Statements included elsewhere in thisForm 10-K.


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

None.


Item 9A(T).	*Controls and Procedures*

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Commission. Such information is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this Annual Report onForm 10-K, we have carried out an evaluation, under the supervision and with the participation of management, including our principal executive Officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the principal executive officer and principal financial officer concluded that, as of December 31, 2008, our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our reports filed with the Commission. There have been no significant changes in our internal controls which could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Annual Report onForm 10-K.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRules 13a-15(f) and15d-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Our internal control over financial reporting includes those policies and procedures that:


	•	Pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets.

	•	Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and board of directors; and

	•	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control — Integrated Framework. Management’s assessment included an evaluation of the design and testing of the operational effectiveness of the Company’s internal control over financial reporting. USPI acquired several subsidiaries and equity method investments during 2008. Accordingly, management’s evaluation excluded the operations of the following subsidiaries and equity method investments acquired during 2008, with total assets of approximately $81.2 million and total revenues of approximately $11.4 million included in the Company’s consolidated financial statements as of December 31, 2008:


	•	USP Knoxville, Inc.

	•	USP Portland, Inc.

	•	USP St. Louis, Inc.

	•	USP Festus, Inc.

	•	USP Mattis, Inc.


	•	USP Denver, Inc.

	•	USP San Diego, Inc.

	•	USP Houston, Inc. (Investment in Memorial Hermann Endoscopy and Surgery Center North Houston LLC and Kingsland Surgery Center)

	•	USP Tennessee, Inc. (Investment in Baptist Women’s Health Center, LLC)

	•	USP Sacramento, Inc. (Investment in Mercy Surgery Center)

Based on this assessment, management did not identify any material weakness in the Company’s internal control, and management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2008. This Annual Report on Form10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form10-K.

Limitations on the Effectiveness of Controls

Our management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls. For these reasons, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation described above that occurred during our last fiscal quarter 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, Executive Officers and Corporate Governance*

Directors and Executive Officers

Executive officers of USPI are elected annually by the board of directors and serve until their successors are duly elected and qualified. Directors are elected by USPI’s stockholders and serve until their successors are duly elected and qualified. There are no arrangements or understandings between any officer or director and any other person pursuant to which any officer or director was, or is to be, selected as an officer, director, or nominee for officer or director. There are no family relationships among any of our executive officers or directors. The names, ages as of February 23, 2009, and positions of the executive officers and directors of USPI are listed below along with their relevant business experience.


Name	Age		Position(s)

Donald E. Steen		62	Chairman of the Board
William H. Wilcox		57	President, Chief Executive Officer and Director
Brett P. Brodnax		44	Executive Vice President and Chief Development Officer
Mark A. Kopser		44	Executive Vice President and Chief Financial Officer
Niels P. Vernegaard		52	Executive Vice President and Chief Operating Officer
John J. Wellik		47	Senior Vice President, Accounting and Administration, and Secretary
Joel T. Allison		61	Director
Michael E. Donovan		32	Director
John C. Garrett, M.D.		66	Director
D. Scott Mackesy		40	Director
James Ken Newman		65	Director
Boone Powell, Jr.		72	Director
Paul B. Queally		44	Director
Raymond A. Ranelli		61	Director

Donald E. Steenfounded USPI in February 1998 and served as its chief executive officer until April 2004. Mr. Steen continues to serve as chairman of the board of directors and the executive committee. Mr. Steen was chairman of AmeriPath, Inc. and chief executive officer of AmeriPath, Inc. from July 2004 until May 2007. Mr. Steen served as president of the International Group of HCA, Inc. from 1995 until 1997 and as president of the Western Group of HCA from 1994 until 1995. Mr. Steen founded Medical Care International, Inc., a pioneer in the surgery center business, in 1982. Mr. Steen also serves as a director of Kinetic Concepts, Inc.

William H. Wilcoxjoined USPI as its president and a director in September 1998. Mr. Wilcox has served as USPI’s president and chief executive officer since April 2004 and is a member of the executive committee. Mr. Wilcox served as president and chief executive officer of United Dental Care, Inc. from 1996 until joining USPI. Mr. Wilcox served as president of the Surgery Group of HCA and president and chief executive officer of the Ambulatory Surgery Division of HCA from 1994 until 1996. Prior to that time, Mr. Wilcox served as the chief operating officer and a director of Medical Care International, Inc. Mr. Wilcox also serves as a director of Concentra, Inc.

Brett P. Brodnaxserves as the executive vice president and chief development officer of USPI. Prior to joining USPI in December 1999, Mr. Brodnax was an assistant vice president of the Baylor Health Care System (Baylor) from 1990 until 1999. Mr. Brodnax also served as a director of AmeriPath, Inc. from January 2005 until May 2007.

Mark A. Kopserserves as the executive vice president and chief financial officer of USPI. Prior to joining USPI in May 2000, Mr. Kopser served as chief financial officer for the International Division of HCA from 1997 until 2000 and as chief financial officer for the London Division of HCA from 1992 until 1996.

Niels P. Vernegaardjoined USPI as the executive vice president and chief operating officer in June 2006. Prior to joining USPI, Mr. Vernegaard served in various positions with HCA (or predecessors) for 25 years, including as president and chief executive officer of HCA’s Research Medical Center in Kansas City, Missouri, and chief executive officer of the Wellington Hospital in London, England.

John J. Wellikjoined USPI in April 1999 and currently serves as its senior vice president, accounting and administration, and secretary. Prior to joining USPI, Mr. Wellik served in various financial management positions.

Joel T. Allisonhas served on our board since March 2002. Mr. Allison has served as president and chief executive officer of Baylor since 2000 and served as its senior executive vice president from 1993 until 2000.

Michael E. Donovanjoined our board in April 2007 and serves as a member of the executive and audit and compliance committees. Mr. Donovan is currently a principal at Welsh, Carson, Anderson & Stowe. Prior to joining Welsh Carson in 2001, Mr. Donovan worked at Windward Capital Partners and in the investment banking division at Merrill Lynch. He is a member of the board of directors of several private companies.

John C. Garrett, M.D. has served on our board since February 2001 and is a member of the audit and compliance committee. Dr. Garrett had been a director of OrthoLink Physicians Corporation, which was acquired by USPI in February 2001, since July 1997. Dr. Garrett founded Resurgens, P.C. in 1986, where he maintained a specialized orthopedics practice in arthroscopic and reconstructive knee surgery until his retirement in 2007. Dr. Garrett is a Fellow of the American Academy of Orthopedic Surgeons.

D. Scott Mackesyjoined our board, executive committee and compensation committee in April 2007. Mr. Mackesy is a general partner of Welsh, Carson, Anderson & Stowe, where he focuses primarily on investments in the healthcare industry and is a managing member of the general partner of Welsh, Carson, Anderson & Stowe IX, L.P. Prior to joining Welsh Carson in 1998, Mr. Mackesy was a Vice President in the Investment Research Department at Morgan Stanley Dean Witter, where he was a healthcare equity research analyst. He is a member of the board of directors of MedAssets, Inc. and several private companies.

James Ken Newmanhas served on our board since May 2005 and is a member of the audit and compliance committee. Mr. Newman served as president and chief executive officer of Horizon Health Corporation from May 2003 until its sale in June 2007 and as chairman of the board from February 1992 until June 2007. From July 1989 until September 1997, he served as president of Horizon Health and from July 1989 until October 1998, he also served as chief executive officer of Horizon Health.

Boone Powell, Jr. has served on our board since June 1999. Mr. Powell served as the chairman of Baylor until June 2001 and served as its president and chief executive officer from 1980 until 2000. Mr. Powell also serves as a director of Abbott Laboratories and US Oncology, Inc.

Paul B. Queallyhas served as a director of USPI since its inception in February 1998 and serves as the chairman of the compensation committee and a member of the executive committee. Mr. Queally isCo-President of Welsh, Carson, Anderson & Stowe, where he focuses primarily on investments in the healthcare industry and is a managing member of the general partner of Welsh, Carson, Anderson & Stowe IX, L.P. Prior to joining Welsh Carson in 1996, Mr. Queally was a general partner at the Sprout Group, the private equity group of the former Donaldson, Lufkin & Jenrette. He is a member of the boards of directors of AGA Medical Corporation, Aptuit, Inc. and several private companies.

Raymond A. Ranellijoined our board in May 2007 and serves as the chairman of the audit and compliance committee. Mr. Ranelli retired from PricewaterhouseCoopers in 2003 where he was a partner for over 20 years. Mr. Ranelli held several positions at PricewaterhouseCoopers including Vice Chairman and Global Leader of the Financial Advisory Services practice. Mr. Ranelli is also a director of Centennial Communications Corp., Hawaiian Telecom Communications, Inc., and United Components, Inc.

Audit Committee Financial Expert

Our board has determined that Raymond A. Ranelli, a director and chairman of the audit and compliance committee, is a financial expert and is independent as that term is used in the rules of the National Association of Securities Dealers’ listing standards (“NASDAQ Rules”).

Nominations for the Board of Directors

Our board of directors does not have a separately designated, standing nominating committee, a nominating committee charter, or a formal procedure for security holders to recommend nominees to the board of directors. USPI is not listed on a national securities exchange or in an automated inter-dealer quotation system of a national securities association, and we are not subject to either the listing standards of the New York Stock Exchange or the NASDAQ Rules.

Section 16(a) Beneficial Ownership Reporting Compliance

USPI does not have any class of equity securities registered under Section 12 of the Exchange Act. Consequently, Section 16(a) of the Exchange Act is not applicable.

Code of Ethics

We have adopted a Code of Conduct and a Financial Code of Ethics both applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, or other persons performing similar functions. Copies of the Code of Conduct and the Financial Code of Ethics may be obtained, free of charge, by writing to the secretary of the Company at: United Surgical Partners International, Inc., 15305 Dallas Parkway, Suite 1600, Addison, Texas 75001.


Item 11.	*Executive Compensation*

Overview

The compensation committee of our board of directors makes decisions regarding salaries, annual bonuses and equity incentive compensation for our named executive officers. Our named executive officers include our chief executive officer, our chief financial officer and our three most highly compensated executive officers other than our chief executive officer and chief financial officer. The compensation committee is also responsible for reviewing and approving corporate goals and objectives relevant to the compensation of our named executive officers, as well as evaluating their performance in light of those goals and objectives. Based on this evaluation, the compensation committee determines and approves the named executive officers’ compensation. The compensation committee solicits input from our chief executive officer regarding the performance of the company’s other named executive officers. Finally, the compensation committee also administers our equity incentive plan.

The chief executive officer reviews our compensation plan. Based on his analysis, the chief executive officer recommends a level of compensation to the compensation committee, other than for himself, which he views as appropriate to attract, retain and motivate executive talent. The compensation committee determines and approves the chief executive officer’s and other named executive officers’ compensation.

Our Compensation Philosophy and Objectives

We have sought to create an executive compensation program that balances short-term versus long-term payments and awards, cash payments versus equity awards and fixed versus contingent payments and awards in ways that we believe are most appropriate to motivate our executive officers. Our executive compensation program is designed to:


	•	attract and retain superior executive talent in the healthcare industry;

	•	motivate and reward executives to achieve optimum short-term and long-term corporate operating results;


	•	align the interests of our executive officers and stockholders by motivating executive officers to increase stockholder value; and

	•	provide a compensation package that recognizes individual contributions as well as overall business results.

In determining each component of, and the overall, compensation of our named executive officers, the compensation committee does not exclusively use quantitative methods or formulas, but instead considers various factors, including the position of the named executive officer, the compensation of officers of comparable companies within the healthcare industry, the performance of the named executive officer with respect to specific objectives, increases in responsibilities, recommendations of the chief executive officer and other objective and subjective criteria as the compensation committee deems appropriate. The specific objectives for each named executive officer vary each year in accordance with the scope of the officer’s position, the potential inherent in that position for impacting the Company’s operating and financial results and the actual operating and financial contributions produced by the officer in previous years.

Compensation Components

Our compensation consists primarily of three elements: base salary, annual bonus and long-term equity incentives. We describe each element of compensation in more detail below.

Base Salary

Base salaries for our named executive officers are established based on the scope of their responsibilities and their prior relevant experience, taking into account competitive market compensation paid by other companies in our industry for similar positions and the overall market demand for such executives at the time of hire. A named executive officer’s base salary is also determined by reviewing the executive’s other compensation to ensure that the executive’s total compensation is in line with our overall compensation philosophy. Base salaries are reviewed annually and increased for merit reasons, based on the executive’s success in meeting or exceeding individual performance objectives. Additionally, we adjust base salaries as warranted throughout the year for promotions or other changes in the scope or breadth of an executive’s role or responsibilities. See “Employment Arrangements and Agreements.”

Annual Bonus

Our compensation program includes eligibility for an annual incentive cash bonus. The compensation committee assesses the level of the named executive officer’s achievement of meeting individual goals, as well as that officer’s contribution towards our long-term, Company-wide goals. The amount of the cash bonus depends on the level of achievement of the stated corporate, department, and individual performance goals, with a target bonus generally set as a percentage of base salary. See “Employment Arrangements and Agreements.”

Long-Term Equity Incentives

We believe that equity-based awards allow us to reward named executive officers for their sustained contributions to the Company. We also believe that equity awards reward continued employment by a named executive officer, with an associated benefit to us of employee continuity and retention. We believe that equity awards provide management with a strong link to long-term corporate performance and the creation of stockholder value. The compensation committee has the authority to grant shares of restricted stock and options to purchase shares of certain classes of common and preferred equity securities of our Parent. The compensation committee does not award equity awards according to a prescribed formula or target. Instead, the compensation committee takes into account the individual’s position, scope of responsibility, ability to affect profits and the individual’s historic and recent performance and the value of the awards in relation to other elements of the individual executive’s total compensation. See “Restricted Stock and Option Plan.”

Termination Based Compensation

For payments due to our named executive officers upon termination, and the acceleration of vesting of equity-based awards in the event of a change of control under our new equity plan, see “Restricted Stock and Option Plan” and “Employment Arrangements and Agreements” below.

Perquisites

We provide perquisites to our named executive officers that we believe are reasonable and consistent with the perquisites that would be available to them at companies with whom we compete for experienced senior management.

Other Benefits

Other benefits to our named executive officers include vacation time, health care benefits and a 401(k) plan. We maintain a 401(k) plan for our employees, including our named executive officers, because we wish to encourage our employees to save a percentage of their cash compensation, through voluntary deferrals, for their eventual retirement. We match fifty percent of the first six percent of cash compensation contributed by individual employees subject to IRS limitations.

Compensation Committee Report

The compensation committee of USPI has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) ofRegulation S-K with management and, based on such review and discussions, the compensation committee has recommended to the board of directors that the Compensation Discussion and Analysis be included in this Annual Report onForm 10-K.

The Compensation Committee

Paul B. Queally, Chairman

D. Scott Mackesy

Summary Compensation Table for 2008

The following table sets forth the total remuneration paid by us for each of the last three fiscal years to the named executive officers.


														Change in
														Nonqualified
												Non-Equity		Deferred
								Stock		Option		Incentive Plan		Compensation			All Other
Name and Principal Position	Year		Salary		Bonus			Awards(1)		Awards(1)		Compensation		Earnings			Compensation			Total

William H. Wilcox		2008	$	600,000	$	540,000	(2)	$	401,605	$	—		—	$	(129,167	)	$	251,275	(3)	$	1,663,713
President, Chief Executive		2007		575,000		287,500	(4)		280,903		—		—		195,436			250,739	(3)		1,589,578
Officer and Director		2006		566,667		308,810	(5)		2,745,090		—		—		86,361			250,235	(3)		3,957,163
Brett P. Brodnax		2008		379,167		230,000	(6)		160,642		—		—		(100,590	)		32,702	(3)		701,921
Executive Vice President		2007		365,000		136,875	(7)		112,361		—		—		49,850			30,823	(3)		694,909
and Chief Development Officer		2006		346,250		123,661	(5)		1,525,050		—		—		26,440			29,575	(3)		2,050,976
Mark A. Kopser		2008		353,000		205,917	(7)		143,732		—		—		(92,177	)		30,924	(3)		641,396
Executive Vice President		2007		340,000		127,500	(7)		100,534		—		—		37,264			29,238	(3)		634,536
and Chief Financial Officer		2006		327,500		116,964	(5)		1,220,040		—		—		13,295			28,303	(3)		1,706,102
John J. Wellik		2008		257,333		128,500	(7)		16,910		—		—		(78,692	)		23,472	(3)		347,523
Senior Vice President,		2007		247,000		74,100	(7)		11,828		—		—		25,243			22,138	(3)		380,309
Accounting and Administration, and Secretary		2006		237,000		67,714	(5)		406,680		—		—		14,734			21,304	(3)		747,432
Niels P. Vernegaard		2008		421,333		245,778	(7)		143,732		—		—		22,187			110,592	(3)		943,622
Executive Vice President		2007		406,667		152,500	(7)		100,534		—		—		25,634			106,250	(3)		791,585
and Chief Operating Officer		2006		233,333		83,333	(4)		1,870,800		473,000		—		2,995			236,900	(3)(8)		2,900,361


(1)		We account for the cost of stock-based compensation awarded under our 2001 Equity-Based Compensation Plan and the 2007 Equity Incentive Plan adopted by our Parent in accordance with the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004) Share Based Payment (“SFAS 123R”), under which the cost of equity awards to employees is measured by the fair value of the awards on their grant date and is recognized over the vesting periods of the awards, whether or not the awards had any intrinsic value during the period. The 2001 Equity-Based Compensation Plan was cancelled in connection with the merger. Amounts shown in the table above reflect the dollar amount recognized for financial statement reporting purposes for 2006, 2007 and 2008 in accordance with SFAS 123R of awards granted under the 2001 Equity-Based Compensation Plan and the 2007 Equity Incentive Plan and thus may include amounts from awards granted in prior years. No forfeitures occurred during 2006, 2007 or 2008. All 2001 Equity-Based Compensation Plan awards are based on the closing market price of our common stock on the date of grant. The 2007 Equity Incentive Plan awards are valued at $0.32 per share which we determined with the assistance of a third party valuation firm as the value of our Parent’s common stock on the date of grant. Assumptions used in calculation of these amounts are included in Note 12 to our consolidated audited financial statements for the fiscal year ended December 31, 2006, included in our Annual Report onForm 10-K filed with the Securities and Exchange Commission (“SEC”) on February 28, 2007; and in Note 12 to our consolidated audited financial statements for the fiscal year ended December 31, 2008, included in this Annual Report onForm 10-K.

(2)		Seventy-five percent of the amount shown was paid in cash and twenty-five percent was deferred at Mr. Wilcox’s election pursuant to USPI’s Deferred Compensation Plan (the “DCP”).

(3)		Includes discretionary contributions to the named executive officers’ DCP and matching contributions to the named executive officers’ 401(k) and DCP accounts as follows:


	Discretionary		Matching		Matching
	Contribution		Contribution		Contribution
	to DCP		401(k)		DCP

Mr. Wilcox
2008	$	200,000	$	6,900	$	44,375
2007		200,000		6,548		44,191
2006		200,000		6,461		43,774
Mr. Brodnax
2008		—		6,900		25,802
2007		—		6,390		24,433
2006		—		6,079		23,496
Mr. Kopser
2008		—		6,900		24,024
2007		—		6,390		22,848
2006		—		6,079		22,224
Mr. Wellik
2008		—		6,900		16,572
2007		—		6,402		15,736
2006		—		6,068		15,236
Mr. Vernegaard
2008		75,000		6,900		28,692
2007		75,000		6,750		24,500
2006		75,000		2,625		10,000


(4)		Sixty-five percent of the amount shown was paid in cash and thirty-five percent was deferred at our named executive officers’ election pursuant to the DCP.

(5)		Forty percent of the amount shown was paid in cash and sixty percent was deferred at our named officers’ election pursuant to the DCP.

(6)		Fifty percent of the amount shown was paid in cash and fifty percent was deferred at Mr. Brodnax’s election pursuant to the DCP.


(7)		Ninety percent of the amount shown was paid in cash and ten percent was deferred at our named executive officers’ election pursuant to the DCP.

(8)		Also includes relocation expenses of $149,275 paid by USPI on behalf of Mr. Vernegaard.

Grant of Plan-Based Awards

No plan-based awards were granted to the named executive officers during 2008.

Outstanding Equity Awards at Fiscal Year-End

The following table shows all outstanding equity awards held by our named executive officers as of December 31, 2008.


	Stock Awards(1)
	Number of Shares			Fair Value of
	or Units of Stock			Shares or Units of
	That Have Not			Stock That Have
Name	Vested			Not Vested(2)

William H. Wilcox		4,156,250	(3)	$	8,229,375
		495,536	(4)		981,161
Brett P. Brodnax		1,662,500	(3)		3,291,750
		275,853	(4)		546,189
Mark A. Kopser		1,487,500	(3)		2,945,250
		220,683	(4)		436,952
John J. Wellik		175,000	(3)		346,500
		73,561	(4)		145,651
Niels P. Vernegaard		1,487,500	(3)		2,945,250
		245,203	(4)		485,502


(1)		Upon consummation of the merger, our named executive officers received new stock awards under the 2007 Equity Incentive Plan.

(2)		Because there is no active trading market for our common stock, we rely on members of the compensation committee and Welsh Carson to determine in good faith the fair value of our common stock. As of December 31, 2008, this value was determined to be $1.98 per share of common stock. Neither USPI, USPI Holdings, Inc. nor USPI Group Holdings, Inc. has any class of equity securities registered under Section 12 of the Exchange Act.

(3)		The restrictions with respect to 14.29% of such shares will lapse on April 19 of each of 2009, 2010 and 2011. The restrictions with respect to the remaining shares will lapse on April 19, 2015; provided however, that such restrictions may lapse sooner if certain internal rate of return targets are met.

(4)		The restrictions with respect to such shares will lapse upon a change of control or other exit event provided that Welsh Carson shall have disposed of all of its shares of our Parent acquired in connection with the merger and received its cost basis in such shares plus a return of at least 100%.

Option Exercises and Stock Values

The following table shows all stock options exercised during 2008 and the value realized upon exercise, and all stock awards vested during 2008 and the value realized upon vesting.

Option Awards

Stock Awards

Number of

Shares

Value

Shares

Value

Acquired

Realized

Acquired on

Realized

Name

on Exercise

Vesting

on Vesting(1)

William H. Wilcox

N/A

—

593,750

Brett P. Brodnax

N/A

—

237,500

Mark A. Kopser

N/A

—

212,500

John J. Wellik

N/A

—

25,000

Niels P. Vernegaard

N/A

—

212,500


(1)		Because there is no active trading market for our common stock, we rely on members of the compensation committee and Welsh Carson to determine in good faith the fair value of our common stock. As of April 19, 2008, this value was determined to be $1.00 per share of common stock. Neither USPI, USPI Holdings, Inc. nor USPI Group Holdings, Inc. has any class of equity securities registered under Section 12 of the Exchange Act.

Restricted Stock and Option Plan

Our Parent adopted the 2007 Equity Incentive Plan which became effective contemporaneously with the consummation of the merger, which we sometimes refer to as the equity plan. The purposes of the equity plan are to attract and retain the best available personnel, provide additional incentives to our employees, directors and consultants and to promote the success of our business. A maximum of 20,726,523 shares of common stock may be delivered in satisfaction of awards made under the equity plan.

The compensation committee administers the equity plan (the “Administrator”). Participation in the plan is limited to those key employees and directors, as well as consultants and advisors, who in the Administrator’s opinion are in a position to make a significant contribution to the success of USPI and its affiliated corporations and who are selected by the Administrator to receive an award. The plan provides for awards of stock appreciation rights (“SARs”), stock options, restricted stock, unrestricted stock, stock units, including restricted stock units, and performance awards pursuant to the Administrator’s discretion and the provisions set forth in the plan. Eligibility for incentive stock options (“ISOs”) is limited to employees of USPI or of a “parent corporation” or “subsidiary corporation” of USPI as those terms are defined in Section 424 of the United States Internal Revenue Code of 1986, as amended. Each option granted pursuant to the plan will be treated as providing by its terms that it is to be a non-incentive stock option unless, as of the date of grant, it is expressly designated as an ISO.

The exercise price of each stock option and the share value above which appreciation is to be measured in the case of a SAR will be 100% of the fair value of the stock subject to the stock option or SAR, determined as of the date of grant, or such higher amount as the Administrator may determine in connection with the grant.

Neither ISOs nor, except as the Administrator otherwise expressly provides, other awards may be transferred other than by will or by the laws of descent and distribution. During a recipient’s lifetime an ISO and, except as the Administrator may provide, other non-transferable awards requiring exercise may be exercised only by the recipient. Awards permitted by the Administrator to be transferred may be transferred only to a permitted transferee.

No awards may be made after April 18, 2017, but previously granted awards may continue beyond that date in accordance with their terms. The Administrator may at any time amend the equity plan or any outstanding award for any purpose which may at the time be permitted by law, and may at any time terminate the equity plan as to any future grants of awards; provided, that except as otherwise expressly provided in the plan, the Administrator may not, without the participant’s consent, alter the terms of an award so as to affect adversely the participant’s right under the award, unless the Administrator expressly reserved the right to do so at the time of the award.

Upon termination of a named executive officer’s employment for any reason (including, without limitation, as a result of death, disability, incapacity, retirement, resignation, or dismissal with or without cause), then any vested shares as of the date of such termination shall remain vested shares, and no additional shares will become vested after the date of such termination, except if otherwise determined by the Administrator or within 180 days after the executive’s termination, USPI consummates a change of control, in which case, the provisions pertaining to a change of control will apply.

The shares acquired under the equity plan shall vest in full upon a change of control if, as a result of such change of control, Welsh Carson shall have disposed of all of the investor shares and received its cost basis in its investor shares plus an investor return of at least 100%. In the event the shares do not vest on such change of control, such shares shall be forfeited upon the closing of such change of control.

Nonqualified Deferred Compensation

The following table shows certain information regarding the named executive officers’ DCP accounts as of December 31, 2008.


										Aggregate
								Aggregate		Balance at
	Executive		USPI		Aggregate			Withdrawals/		December 31,
Name	Contribution		Contribution		Earnings			Distributions		2008

William H. Wilcox	$	160,625	$	244,375	$	(129,167	)	$	—	$	2,003,342
Brett P. Brodnax		70,563		25,802		(100,590	)		—		384,585
Mark A. Kopser		48,050		24,024		(92,177	)		55,486		229,386
John J. Wellik		33,143		16,572		(78,692	)		—		192,486
Niels P. Vernegaard		57,383		103,692		22,186			—		486,224

Deferred Compensation Plan

USPI has a deferred compensation plan that certain of its directors, executive officers and other employees participate in which allows such participants to defer a portion of their compensation to be paid upon certain specified events (including death, termination of employment, disability or some future date). Under the terms of the DCP, all amounts payable under the DCP would become immediately vested in connection with a change of control of USPI, and as a result, each participant would be entitled to be paid their full account balance upon consummation of such a transaction. Notwithstanding the foregoing, USPI amended the DCP to exclude the merger from the definition of a change of control for purposes of the DCP. As a result, the merger had no effect on the vesting of the account balance of any participant in the deferred compensation plan.

Our board of directors designates those persons who are eligible to participate in the DCP. Currently, each of Messrs. Steen, Wilcox, Brodnax, Vernegaard, Kopser and Wellik are eligible to participate in the DCP. The DCP enables participants to defer all or a portion of their bonus in a calendar year and up to 75% of their base salary, typically by making a deferral election in the calendar year prior to the year in which the bonus relates or the annual salary is otherwise payable.

Although participants are 100% vested in their deferrals of salary and bonus, USPI contributions to the DCP are subject to vesting schedules established by the compensation committee in its sole discretion (which may vary among different contributions). Notwithstanding such vesting schedules, participants will become 100% vested in their accounts under the DCP in the event of (i) retirement on or after the earlier to occur of (a) age 60 following the completion of five years of service with USPI or (b) age 65, (ii) a change in control or (iii) death.

Benefits are payable upon termination of employment. Participants may also elect, at the time they make an annual deferral, to receive a lump sum in-service distribution payable in a calendar year that is three or more years after the calendar year to which the deferral is related. A participant who elects an in-service distribution may defer the distribution for an additional five years from the original payment date so long as such election is made at least 12 months prior to the original payment date. Participants may also make an in-service withdrawal from the DCP on account of an unforeseeable emergency (as defined in the DCP). Amounts under the DCP are distributed in a lump sum cash payment, except as provided below, unless the distribution is on account of retirement at normal

retirement age under the DCP. A participant can elect, at the time of a deferral under the DCP, to receive his retirement benefit in either a lump sum or pursuant to annual installments over five, 10 or 15 years. Participants may change the form of payment of their retirement benefit from a lump sum to an annual installment payment, provided such election is submitted one year prior to the participant’s retirement.

A participant’s account will be credited with earnings and losses based on returns on deemed investment options selected by the participant from a group of deemed investments established by the deferred compensation plan committee.

USPI may make a discretionary contribution on behalf of any or all participants depending upon the financial strength of USPI. The amount of the contribution, if any, is determined in the sole discretion of the compensation committee. Currently, USPI matches fifty percent of any deferral by a named executive officer, subject to a total cap on the matching contribution of five percent of the officer’s compensation.

The DCP is administered by USPI’s compensation committee. The DCP is an “unfunded” arrangement for purposes of ERISA. Accordingly, the DCP consists of a mere promise by USPI to make payments in accordance with the terms of the DCP and participants and beneficiaries have the status of general unsecured creditors of USPI. A participant’s account and benefits payable under the DCP are not assignable. USPI may amend or terminate the DCP provided that no amendment adversely affects the rights of any participant with respect to amounts that have been credited to his account under the DCP prior to the date of such amendment. Upon termination of the DCP, a participant’s account will be paid out as though the participant experienced a termination of employment on the date of the DCP’s termination or, for participants who have attained normal retirement age, in the form of payment elected by the participant.

Employment Arrangements and Agreements

Set forth below is a description of our employment agreements and other compensation arrangements with our named executive officers.

We have employment agreements with William H. Wilcox as President and Chief Executive Officer, Mark A. Kopser as Executive Vice President and Chief Financial Officer, Brett P. Brodnax as Executive Vice President and Chief Development Officer, Niels Vernegaard as Executive Vice President and Chief Operating Officer and John J. Wellik as Senior Vice President, Accounting and Administration, and Secretary.

The initial term of our employment agreement with William H. Wilcox is for two years from April 18, 2007, with an automatic renewal for additional two-year terms unless at least 30 days prior to the end of a two-year term, USPI or Mr. Wilcox gives notice that it or he does not wish to extend the agreement. Mr. Wilcox is paid a base salary of $600,000 per year, subject to increase from time to time with the possibility of a bonus, determined by the compensation committee in its sole discretion.

The initial term of our employment agreements with Mark A. Kopser, Brett P. Brodnax and John J. Wellik was for one year from April 18, 2007 to April 18, 2008. Thereafter, each agreement automatically renews for one-year terms unless at 30 days prior to the end of a one-year term, USPI or the executive gives notice that it or he does not wish to extend the agreement. Mr. Kopser is paid a base salary of $358,000 per year, Mr. Brodnax, $384,000 per year, Mr. Wellik, $261,000 per year and, subject to increase from time to time with the possibility of a bonus, determined by the compensation committee in its sole discretion.

The initial term of our employment agreement with Niels Vernegaard is for two years from April 18, 2007, with an automatic renewal for additional one-year terms unless at 30 days prior to the end of a one-year term, USPI or Mr. Vernegaard gives notice that it or he does not wish to extend the agreement. Mr. Vernegaard is paid a base salary of $428,000 per year, subject to increase from time to time with the possibility of a bonus determined by the compensation committee in its sole discretion.

Each of the employment agreements with our named executive officers also provides that if the executive is terminated for cause, or if he terminates his employment agreement without certain enumerated good reasons, we shall pay to him any accrued or unpaid base salary through the date of his termination. In addition, if we terminate the employment without cause or upon failure to renew his employment agreement, or if he terminates his

employment for certain enumerated good reasons, we will (i) continue to pay him his base salary at the rate in effect on the date of his termination for twelve months; (iii) continue his health insurance benefits for 12 months (24 months for Mr. Wilcox) following his date of termination or the economic equivalent thereof if such continuation is not permissible under the terms of our health insurance plan; and (iii) pay him a good faith estimate of the bonus he would have received had he remained employed through the end of the fiscal year in which his termination occurred. Our obligations set forth in items (i) to (iii) above are conditioned on the executive signing a release of claims and the continued performance of his continuing obligations under his employment agreement.

In connection with the consummation of the merger and the adoption of our Parent’s equity plan, certain of our executive officers, including our named executive officers, were awarded restricted shares of our Parent’s common stock under the equity plan pursuant to an agreement between each such named executive officer and our Parent. Pursuant to these restricted stock award agreements with our named executive officers, upon termination of such named executive officer’s employment for any reason (including, without limitation, as a result of death, disability, incapacity, retirement, resignation, or dismissal with or without cause), any vested shares as of the date of such termination shall remain vested shares and no additional shares will become vested after the date of such termination unless USPI consummates a change of control within 180 days after such named executive officer’s termination, in which case, such unvested shares shall become fully vested if such awards would have become fully vested had such named executive officer not been terminated on the date of such change of control as described below. Additionally, pursuant to such restricted stock award agreements with our named executive officers, all unvested restricted shares vest in full upon a change of control if, as a result of such change of control, Welsh Carson shall have disposed of all of its shares of our Parent acquired in connection with the merger and received its cost basis in such shares plus a return of at least 100%. In the event such restricted shares do not vest on such change of control, then such restricted shares shall be forfeited upon the closing of such change of control.

Potential Payments Upon Termination or Change of Control

The following table sets forth for each named executive officer potential post-employment payments and payments on a change in control and assumes that the triggering event took place on December 31, 2008.


	Cash								Accelerated
	Severance			Accrued					Vesting upon
Name	Payment			Bonus(1)(2)		Benefits(3)			Change of Control(4)

William H. Wilcox	$	1,200,000	(5)	$	540,000	$	14,352	(5)	$	9,210,536
Brett P. Brodnax		384,000	(6)		230,000		6,876	(6)		3,837,939
Mark A. Kopser		358,000	(6)		205,917		8,004	(6)		3,382,202
John J. Wellik		261,000	(6)		128,500		8,004	(6)		492,151
Niels P. Vernegaard		428,000	(6)		245,778		8,004	(6)		3,430,752


(1)		Amounts are based on the bonus amount paid with respect to 2008.

(2)		Amounts will be paid at such time as annual bonuses are payable to other executive and officers of USPI in accordance with USPI’s normal payroll practices.

(3)		Amounts consist of the cost to continue to pay such named executive officer’s health insurance benefits for the designated term or the economic equivalent thereof if such continuation is not permissible under the terms of the USPI’s health insurance plan.

(4)		Pursuant to the restricted stock award agreements with our named executive officers, all unvested restricted shares of our Parent’s common stock will vest in full upon a change of control if, as a result of such change of control, Welsh Carson shall have disposed of all of its shares of our Parent acquired in connection with the merger and received its cost basis in such shares plus a return of at least 100%. A change of control is not defined to include an initial public offering of our stock. In the event such restricted shares do not vest on such change of control, then such restricted shares shall be forfeited upon the closing of such change of control transaction. The results in this column are the result of multiplying the total possible number of restricted shares of our Parent’s common stock that vest upon a change of control by $1.98 per share. Because there is no active trading market for our common stock, we rely on members of the compensation committee and Welsh Carson to determine in good faith the fair value of our common stock. As of December 31, 2008, this value was


		determined to be $1.98 per share of common stock. Neither USPI, USPI Holdings, Inc. nor USPI Group Holdings, Inc. has any class of equity securities registered under Section 12 of the Exchange Act.

(5)		Amounts to be paid over twenty-four months.

(6)		Amounts to be paid over twelve months.

Director Compensation

The chairman and members of our board of directors who are also officers or employees of USPI, affiliates of Welsh Carson and Mr. Allison do not receive compensation for their services as directors. The other directors (“non-employee directors”) receive cash compensation in the amount of $25,000 per year and are eligible to participate in our group insurance benefits. If a non-employee director elects to participate, the director will pay the full cost of such benefits. Non-employee directors also receive the following for all meetings attended: $2,500 per board meeting, $1,250 per telephonic meeting, $1,500 per audit committee meeting and $1,000 per other committee meeting. In addition, the audit committee chairman is paid a retainer of $20,000 per year.

The following table sets forth the compensation paid to our non-employee directors in 2008.

2008 Non-Employee Director Compensation Table


	Fees Earned or		Stock		All Other
Name	Paid in Cash		Awards		Compensation		Total

Joel T. Allison	$	—	$	—		—	$	—
John C. Garrett, M.D.		38,000		10,238		—		48,238
James Ken Newman		45,500		10,238		—		55,738
Boone Powell, Jr.		35,000		10,934		—		45,934
Raymond A. Ranelli		63,000		10,238		—		73,238

Compensation Committee Interlocks and Insider Participation

The compensation committee of the board of directors consists of Messrs. Queally (Chairman) and Mackesy. None of such persons are officers or employees or former officers or employees of the Company. None of the executive officers of the Company served as a member of the compensation committee of any other company during 2008, except that Mr. Wilcox served on the compensation committee of Concentra, Inc. No officer or employee of Concentra, Inc. serves on our board of directors.


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

USPI does not issue any of its equity securities in conjunction with an equity compensation plan. See Item 11, “Executive Compensation- Restricted Stock and Option Plan,” for a discussion of Parent’s equity compensation plan.

All of the issued and outstanding stock of USPI is owned by Holdings, which in turn is wholly-owned by Parent. The following table sets forth information as of February 25, 2009, with respect to the beneficial ownership of the capital stock of our Parent by (i) our chief executive officer and each of the other named executive officers, (ii) each of our directors, (iii) all of our directors and executive officers as a group and (iv) each holder of five percent (5%) or more of any class of our Parent’s outstanding capital stock.


						Participating		Percent of
	Common		Percent of			Preferred		Outstanding
	Shares		Outstanding			Shares		Participating
	Beneficially		Common			Beneficially		Preferred
Name of Beneficial Owner(1)	Owned		Shares			Owned		Shares

Welsh, Carson, Anderson & Stowe(2)		136,448,356		86.6	%		17,326,775		96.3	%
California State Teacher’s Retirement System(3)		22,183,099		14.1	%		2,816,901		15.7	%
CPP Investment Board (USRE II) Inc.(4)		26,619,718		16.9	%		3,380,282		18.8	%
Silvertech Investment PTE Ltd(5)		8,873,239		5.6	%		1,126,761		6.3	%
Donald E. Steen(6)		1,421,127		*			78,873		*
William H. Wilcox(7)		6,488,790		4.1	%		157,746		*
Brett P. Brodnax(8)		2,388,811		1.5	%		27,042		*
Mark A. Kopser(9)		2,364,345		1.5	%		56,338		*
Niels P. Vernegaard(10)		2,007,194		1.3	%		7,872		*
John J. Wellik(11)		317,927		*			5,634		*
Joel T. Allison		—		—			—		—
Michael E. Donovan(12)(13)		40,000		*			—		—
John C. Garrett, M.D.(13)		173,095		*			16,901		*
D. Scott Mackesy(12)(13)		40,000		*			—		—
James K. Newman(13)		217,463		*			22,535		*
Boone Powell, Jr.(13)		111,001		*			9,016		*
Paul B. Queally (12)(14)		215,457		*			22,281		*
Raymond A. Ranelli(13)		91,462		*			6,535		*
All directors and executive officers as a group(15)		15,876,672		10.1	%		410,773		2.3	%


*		Less than one percent

(1)		Unless otherwise indicated, the principal executive offices of each of the beneficial owners identified are located at 15305 Dallas Parkway, Suite 1600, Addison, Texas 77001.

(2)		Represents (A) 54,671,610 common shares and 6,942,423 participating preferred shares held by Welsh Carson over which Welsh Carson has sole voting and investment power, (B) 25,200 common shares and 3,200 participating preferred shares held by WCAS Management Corporation, an affiliate of Welsh Carson, over which WCAS Management Corporation has sole voting and investment power, (C) an aggregate 1,462,785 common shares and 185,752 participating preferred over which individuals who are general partners of WCAS X Associates LLC, the sole general partner of Welsh Carson, and/or otherwise employed by an affiliate of Welsh, Carson, Anderson & Stowe have voting and investment power, and (D) an aggregate 80,288,761 common shares and 10,195,400 participating preferred shares held by other co-investors, over which Welsh Carson has sole voting power. WCAS X Associates LLC, the sole general partner of Welsh Carson and the individuals who serve as general partners of WCAS X Associates LLC, including D. Scott Mackesy, Paul B. Queally and Michael E. Donovan, may be deemed to beneficially own the shares beneficially owned by Welsh Carson. Such persons disclaim beneficial ownership of such shares. The principal executive offices of Welsh, Carson, Anderson & Stowe are located at 320 Park Avenue, Suite 2500, New York, New York 10022.


(3)		Such beneficial owner has granted to Welsh Carson sole voting power over its shares. The principal executive offices of such beneficial owner is 7667 Folsom Blvd., Suite 250, Sacramento, California 95826.


(4)		Such beneficial owner has granted to Welsh Carson sole voting power over its shares. The principal executive offices of such beneficial owner is One Queen Street East, Suite 2600, Toronto, Ontario, M5C 2W5, Canada.

(5)		Such beneficial owner has granted to Welsh Carson sole voting power over its shares. The principal executive offices of such beneficial owner is 255 Shoreline Drive, Suite 600, Redwood City, California 94065.

(6)		Includes 100,000 common shares owned by the Michelle Ann Steen Trust and 100,000 common shares owned by the Marcus Anthony Steen Trust for which, in each case, Mr. Steen acts as a trustee and has voting and investment power over such shares. Such shares are subject to restrictions on transfer set forth in a restricted stock award agreement entered into at the time of the consummation of the merger. Also included are another 600,000 common shares which are subject to restrictions on transfer set forth in a restricted stock award agreement entered into at the time of the consummation of the merger.

(7)		Includes 5,246,536 common shares which are subject to restrictions on transfer set forth in a restricted stock award agreement entered into at the time of the consummation of the merger.

(8)		Includes 2,175,853 common shares which are subject to restrictions on transfer set forth in a restricted stock award agreement entered into at the time of the consummation of the merger.

(9)		Includes 1,920,683 common shares which are subject to restrictions on transfer set forth in a restricted stock award agreement entered into at the time of the consummation of the merger.

(10)		Includes 1,945,203 common shares which are subject to restrictions on transfer set forth in a restricted stock award agreement entered into at the time of the consummation of the merger.

(11)		Includes 273,561 common shares which are subject to restrictions on transfer set forth in a restricted stock award agreement entered into at the time of the consummation of the merger.

(12)		Does not include (A) 54,671,610 common shares or 6,942,423 participating preferred shares owned by Welsh Carson, or (B) 25,200 common shares or 3,200 participating preferred shares owned by WCAS Management Corporation. Messrs Queally, Mackesy and Donovan, as general partners of WCAS X Associates LLC, the sole general partner of Welsh Carson, and officers of WCAS Management Corporation, may be deemed to beneficially own the shares beneficially owned by Welsh Carson and WCAS Management Corporation. Each of Messrs Queally, Mackesy and Donovan disclaims beneficial ownership of such shares. The principal executive offices of Messrs Queally, Mackesy and Donovan are located at 320 Park Avenue, Suite 2500, New York, New York 10022.

(13)		Includes 40,000 common shares which are subject to restrictions on transfer set forth in a restricted stock award agreement.

(14)		Includes (A) an aggregate 3,090 common shares and 393 preferred shares owned by certain trusts established for the benefit of Mr. Queally’s children for which, in each case, Mr. Queally acts as a trustee and has voting and investment power over such shares and (B) 40,000 common shares which are subject to restrictions on transfer set forth in a restricted stock awards agreement.

(15)		Does not include (A) 54,671,610 common shares or 6,942,423 participating preferred shares owned by Welsh Carson, or (B) 25,200 common shares or 3,200 participating preferred shares owned by WCAS Management Corporation. Includes an aggregate 12,361,836 common shares which are subject to restrictions on transfer set forth in restricted stock award agreements entered into at the time of the consummation of the merger.


Item 13.	*Certain Relationships and Related Transactions, and Director Independence*

This Item 13 describes certain relationships and transactions involving us and certain of our directors, executive officers, and other related parties. We believe that all the transactions described in this Item 13 are upon fair and reasonable terms no less favorable than could be obtained in comparable arm’s length transactions with unaffiliated third parties under the same or similar circumstances.

Arrangements with Our Investors

Welsh Carson, its co-investors and the rollover stockholders entered into agreements described below with our Parent. Welsh Carson’s co-investors includes individuals and entities invited by Welsh Carson to participate in our Parent’s financings such as affiliated investment funds, individuals employed by affiliates of Welsh Carson and limited partners of Welsh Carson.

Stockholders Agreement

The stockholders agreement contains certain restrictions on the transfer of equity securities of our Parent and provides certain stockholders with certain preemptive and information rights.

Management Agreement

In connection with the merger, USPI entered into a management agreement with WCAS Management Corporation, an affiliate of Welsh Carson, pursuant to which WCAS Management Corporation will provide management and financial advisory services to us. WCAS Management Corporation receives an annual management fee of $2.0 million, of which $1.0 million will be payable in cash on an annual basis and the remainder will accrue annually over time, and annual reimbursement forout-of-pocket expenses incurred in connection with the provision of such services.

Other Arrangements with Directors and Executive Officers

Restricted Stock and Option Plan

In connection with the merger, our Parent adopted a new restricted stock and option plan. Members of our management, including some of those who are participating in the merger as rollover stockholders, received awards under this plan. See “Compensation Discussion and Analysis — Restricted Stock and Option Plan.”

Employment Agreements

Each of the named executive officers of USPI have employment agreements with us. See “Compensation Discussion and Analysis — Employment Arrangements and Agreements.”

Other Arrangements

We have entered into agreements with certain majority and minority owned surgery centers to provide management services. As compensation for these services, the surgery centers are charged management fees which are either fixed in amount or represent a fixed percentage of each center’s net revenue less bad debt. The percentages range from 3.0% to 8.0%. Amounts recognized under these agreements, after elimination of amounts from consolidated surgery centers, totaled approximately $39.1 million, $32.8 million, and $25.7 million in 2008, 2007 and 2006, respectively, and are included in management and contract service revenue in our consolidated statements of operations.

We regularly engage in purchases and sales of ownership interests in our facilities. We operate 21 surgical facilities in partnership with Baylor and local physicians in the Dallas/Fort Worth area. In June 2008, Baylor acquired a controlling interest in a facility it already co-owned with us and local physicians, which transferred control of the facility from us to Baylor. As a result, we now account for our investment in this facility under the equity method. The interest was acquired from us in exchange for $2.3 million in cash. A $0.9 million pretax loss was generated on the sale. We believe that the sales price was negotiated on an arms’ length basis, and the price equaled the value assigned by an external appraiser who valued the business immediately prior to the sale. Effective July 1, 2007, Baylor acquired an additional ownership interest in two facilities it already co-owned with us and local physicians, which transferred control of the facilities from us to Baylor. As a result, we now account for our investments in these facilities under the equity method. The interests were acquired for $3.7 million in cash. No gain or loss was recorded upon the sale as the sales price approximated our carrying value. We believe that the sales price was negotiated on an arms’ length basis.

approximately $3.9 million in cash. This entity is now wholly owned by us. We believe that the sales price was negotiated on an arms’ length basis, and the price equaled the value assigned by an external appraiser who valued the business immediately prior to the sale. As noted above, we still operate 21 surgical facilities with Baylor. After this transaction, we account for all of the facilities we operate with Baylor under the equity method.

USPI’s Parent issued warrants with an estimated fair value of $0.3 million to Baylor in January 2008. Similar grants have been made to other healthcare systems with which we operate facilities.

In July 2006, Baylor acquired an additional 10.82% interest from us in a facility it already co-owned with us and local physicians, which transferred control of the facility from us to Baylor. As a result, we now account for our investment in this facility under the equity method. The interest was acquired from us in exchange for $4.8 million in cash. As the operations and profitability of this facility have grown since acquiring it in 2001, a $2.0 million pretax gain was generated on the sale. This gain was deferred until a contingency in the purchase agreement was resolved, which was expected to be by December 31, 2007. This deferred gain was reclassified to goodwill in the purchase price allocation for the merger in April 2007, as it had no fair value. Accordingly, this gain will not be recognized in our consolidated statement of operations. We believe that the sales price was negotiated on an arms’ length basis, and the price equaled the value assigned by an external appraiser who valued the business immediately prior to the sale.

Additionally, we derived 3% of our revenues and approximately 50% of our equity in earnings of unconsolidated affiliates in 2008 from our joint ventures with Baylor.

In August 2007, we completed a private placement of shares of our Parent’s common and participating preferred stock to certain of our affiliated physicians, hospital partners, certain employees, directors and other investors at a price of $1.00 for each share of common stock and $36.50 for each share of participating preferred stock. The gross proceeds from this offering were approximately $13.5 million and were contributed to us and used for general working capital purposes.

Marc Steen, the son of Donald E. Steen, is employed by USPI as the market president for Atlanta. During 2008, Marc Steen earned approximately $205,234 in salary and bonus. Additionally, $47,093 of relocation expenses were paid by USPI on behalf of Marc Steen.

USPI does not have a written related party policy, however, the audit and compliance committees will review and approve all related party transactions required to be reported pursuant to item 404(a) ofRegulation S-X.

Neither the Company, UPSI Holdings, Inc. nor Parent are listed on a national securities exchange or in an automated inter-dealer quotation system of a national securities association, and we are not subject to either the listing standards of the New York Stock Exchange or the NASDAQ Rules. For the purposes of the following determinations of director independence, we have chosen to use the NASDAQ Rules. Using such Rules, we have determined that each of the directors on our board of directors are independent for general board service, except Messrs. Steen, Wilcox, Mackesy, Queally, Donovan and Allison.

Our board of directors has a separately designated, standing audit and compliance committee comprised of the following members of the board: Messrs. Ranelli (Chairman), Donovan, Garrett and Newman. Under the NASDAQ Rules, Messrs. Ranelli, Garrett and Newman would be considered independent for the purposes of audit and compliance committee service.

Our board of directors also has a separately designated, standing compensation committee comprised of the following members of the board: Messrs. Queally (Chairman) and Mackesy. Under the NASDAQ Rules, Messrs. Queally and Mackesy would not be considered independent for the purposes of compensation committee service.


ITEM 14.	*Principal Accounting Fees and Services*

The following table shows the aggregate fees billed by KPMG LLP, our independent registered public accounting firm, during the years ended December 31, 2008 and 2007:


Description of Fees	2008		2007

Audit Fees(1)	$	1,340,500	$	1,819,144
Audit Related Fees(2)		—		140,000
Tax Fees(3)		—		—
All Other Fees(4)		155,000		130,480

	$	1,495,500	$	2,089,624


(1)		Audit Fees. Includes fees billed for professional services rendered for the audit of our annual financial statements included in ourForm 10-K, reviews of our quarterly financial statements included inForms 10-Q, reviews of our other filings with the SEC, and other research work necessary to comply with generally accepted accounting standards for the years ended December 31, 2008 and 2007.

(2)		Audit Related Fees. Includes fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.” These services include issuance of consents and other accounting and reporting consultations.

(3)		Tax Fees. Includes fees billed for tax compliance, tax advice, and tax planning.

(4)		All Other Fees. Includes fees billed for assistance with preparation of Medicare cost reports.

The charter of our audit and compliance committee provides that the committee must approve in advance all audit and non-audit services provided by KPMG LLP. The audit and compliance committee approved all of these services.

PART IV


Item 15.	*Exhibits, Financial Statement Schedules*

(a) (1) Financial Statements

The following consolidated financial statements are filed as part of thisForm 10-K:


Reports of Independent Registered Public Accounting Firm			F-1
Consolidated Balance Sheets			F-2
Consolidated Statements of Operations			F-3
Consolidated Statements of Comprehensive Income (loss)			F-4
Consolidated Statements of Stockholders’ Equity			F-5
Consolidated Statements of Cash Flows			F-6
Notes to Consolidated Financial Statements			F-7
2. Financial Statement Schedule — Schedule II			S-1
3. The following consolidated financial statements of Texas Health Ventures Group, L.L.C. and Subsidiaries are presented pursuant toRule 3-09 ofRegulation S-X:
Independent Auditors’ Report			2
Consolidated Balance Sheets as of June 30, 2008 and 2007			3
Consolidated Statements of Income for the year ended June 30, 2008 and 2007			4
Consolidated Statements of Members’ Equity for the year ended June 30, 2008 and 2007			5
Consolidated Statements of Cash Flows for the year ended June 30, 2008 and 2007			6
Notes to the Consolidated Financial Statements			7
Independent Auditors’ Report			20
Consolidated Balance Sheets as of June 30, 2007 and 2006			21
Consolidated Statements of Income for the year ended June 30, 2007 and the six months ended June 30, 2006			22
Consolidated Statements of Members’ Equity for the year ended June 30, 2007 and the six months ended June 30, 2006			23
Consolidated Statements of Cash Flows for the year ended June 30, 2007 and the six months ended June 30, 2006			24
Notes to the Consolidated Financial Statements			25
Unaudited Consolidated Balance Sheets as of December 31, 2005 and 2004			37
Unaudited Consolidated Statements of Income for the years ended December 31, 2005 and 2004			38
Unaudited Consolidated Statements of Members’ Equity for the years ended December 31, 2005 and 2004			39
Unaudited Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004			40
Unaudited Notes to Consolidated Financial Statements			41

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholder

United Surgical Partners International, Inc.:

We have audited the accompanying consolidated balance sheets of United Surgical Partners International, Inc. and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash flows for the year ended December 31, 2008 (Successor), the period from April 19, 2007 through December 31, 2007 (Successor), the period from January 1, 2007 through April 18, 2007 (Predecessor) and the year ended December 31, 2006 (Predecessor). These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Surgical Partners International, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the year ended December 31, 2008 (Successor), the period from April 19, 2007 through December 31, 2007 (Successor), the period from January 1, 2007 through April 18, 2007 (Predecessor) and the year ended December 31, 2006 (Predecessor), in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Dallas, Texas

February 25, 2009

F-1

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Balance Sheets
December 31, 2008 and 2007


	2008			2007
	(In thousands, except share amounts)

ASSETS
Cash and cash equivalents	$	49,435		$	76,758
Accounts receivable, net of allowance for doubtful accounts of $11,544 and $12,721, respectively		57,213			59,557
Other receivables (Note 4)		17,070			8,974
Inventories of supplies		9,079			9,495
Prepaids and other current assets		11,735			20,056

Total current assets		144,532			174,840
Property and equipment, net (Note 5)		201,824			229,039
Investments in affiliates (Note 3)		307,771			267,357
Goodwill (Note 6)		1,270,287			1,274,979
Intangible assets, net (Note 6)		318,852			315,841
Other assets		24,897			15,337

Total assets	$	2,268,163		$	2,277,393


LIABILITIES AND STOCKHOLDER’S EQUITY
Accounts payable	$	22,194		$	22,982
Accrued salaries and benefits		27,241			24,671
Due to affiliates		57,237			62,500
Accrued interest		9,336			13,436
Current portion of long-term debt (Note 7)		24,488			25,311
Other current liabilities		42,874			38,509

Total current liabilities		183,370			187,409

Long-term debt, less current portion (Note 7)		1,073,459			1,072,751
Other long-term liabilities		27,517			17,950
Deferred tax liability, net		125,639			109,414

Total liabilities		1,409,985			1,387,524
Minority interests (Note 3)		94,041			83,063
Commitments and contingencies (Notes 9 and 14)
Stockholder’s equity (Note 12)
Common stock, $0.01 par value; 100 shares authorized, issued and outstanding at December 31, 2008 and 2007
Additional paid-in capital		801,902			799,562
Accumulated other comprehensive loss, net of tax		(84,008	)		(1,485	)
Retained earnings		46,243			8,729

Total stockholder’s equity		764,137			806,806

Total liabilities and stockholder’s equity	$	2,268,163		$	2,277,393

See accompanying notes to consolidated financial statements

F-2

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations


	Successor						Predecessor
				Period from			Period from
				April 19			January 1
	Year Ended			through			through			Year Ended
	December 31,			December 31,			April 18,			December 31,
	2008			2007			2007			2006
	(In thousands)
Revenues:
Net patient service revenues	$	561,532		$	402,433		$	170,598		$	507,341
Management and contract service revenues		72,970			46,503			19,142			52,237
Other revenues		7,721			3,552			1,615			7,796

Total revenues		642,223			452,488			191,355			567,374
Equity in earnings of unconsolidated affiliates		47,042			23,867			9,906			31,568
Operating expenses:
Salaries, benefits, and other employee costs		184,871			125,648			53,871			158,676
Medical services and supplies		112,499			77,006			34,308			101,900
Other operating expenses		107,659			74,335			31,744			96,173
General and administrative expenses		40,155			29,340			39,277			38,826
Provision for doubtful accounts		7,568			7,592			3,297			9,892
Depreciation and amortization		36,757			26,688			12,426			34,516

Total operating expenses		489,509			340,609			174,923			439,983

Operating income		199,756			135,746			26,338			158,959
Interest income		3,228			3,208			933			4,067
Interest expense		(85,649	)		(67,862	)		(9,521	)		(32,604	)
Loss on early retirement of debt		—			—			(2,435	)		(14,880	)
Other, net		(1,790	)		(442	)		798			1,773

Total other expense, net		(84,211	)		(65,096	)		(10,225	)		(41,644	)
Income from continuing operations before minority interests		115,545			70,650			16,113			117,315
Minority interests in income of consolidated subsidiaries		(55,134	)		(45,120	)		(18,866	)		(54,632	)

Income (loss) from continuing operations before income taxes		60,411			25,530			(2,753	)		62,683
Income tax expense		(22,334	)		(14,611	)		(4,145	)		(22,712	)

Income (loss) from continuing operations		38,077			10,919			(6,898	)		39,971
Discontinued operations, net of tax (Note 2):
Income (loss) from discontinued operations		62			236			(251	)		18
Net loss on disposal of discontinued operations		(625	)		(2,426	)		—			(5,743	)

Total loss from discontinued operations		(563	)		(2,190	)		(251	)		(5,725	)

Net income (loss)	$	37,514		$	8,729		$	(7,149	)	$	34,246

See accompanying notes to consolidated financial statements

F-3

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (loss)


	Successor						Predecessor
				Period from			Period from
				April 19			January 1
	Year Ended			through			through			Year Ended
	December 31,			December 31,			April 18,			December 31,
	2008			2007			2007			2006
	(In thousands)
Net income (loss):	$	37,514		$	8,729		$	(7,149	)	$	34,246
Other comprehensive income (loss):
Foreign currency translation adjustments		(71,790	)		(1,646	)		2,169			13,104
Unrealized loss on interest rate swaps, net of tax		(10,051	)		—			—			—
Pension adjustments, net of tax		(682	)		161			—			(434	)

Other comprehensive income (loss)		(82,523	)		(1,485	)		2,169			12,670

Comprehensive income (loss)	$	(45,009	)	$	7,244		$	(4,980	)	$	46,916

See accompanying notes to consolidated financial statements

F-4

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity


															Accumulated
	Common Stock					Additional									Other
	Outstanding					Paid-in			Treasury			Deferred			Comprehensive			Retained
	Shares			Par Value		Capital			Stock			Compensation			Income (Loss)			Earnings			Total
	(In thousands)

Predecessor
Balance, December 31, 2005		44,283		$	443	$	375,656		$	(831	)	$	(14,128	)	$	3,896		$	166,014		$	531,050
Reclassification of deferred compensation upon adoption of SFAS 123R		—			—		(14,128	)		—			14,128			—			—			—
Issuance of common stock and exercise of stock options		480			4		8,825			2,394			—			—			—			11,223
Repurchases of common stock		(53	)		—		—			(1,672	)		—			—			—			(1,672	)
Equity-based compensation		—			—		11,974			—			—			—			—			11,974
Net income		—			—		—			—			—			—			34,246			34,246
Foreign currency translation adjustments		—			—		—			—			—			13,104			—			13,104
Pension liability adjustment, net of tax		—			—		—			—			—			(434	)		—			(434	)
Adjustment to initially apply SFAS 158, net of tax		—			—		—			—			—			(217	)		—			(217	)

Balance, December 31, 2006		44,710			447		382,327			(109	)		—			16,349			200,260			599,274
Issuance of common stock and exercise of stock options		474			5		6,211			—			—			—			—			6,216
Repurchases of common stock		(71	)		—		—			(2,197	)		—			—			—			(2,197	)
Equity-based compensation expense		—			—		17,100			—			—			—			—			17,100
Tax benefit related to increase in value of equity awards		—			—		15,822			—			—			—			—			15,822
Net loss		—			—		—			—			—			—			(7,149	)		(7,149	)
Foreign currency translation adjustments		—			—		—			—			—			2,169			—			2,169

Balance, April 18, 2007		45,113		$	452	$	421,460		$	(2,306	)	$	—		$	18,518		$	193,111		$	631,235


Successor
Capitalization of Successor company at April 19, 2007		—		$	—	$	791,856		$	—		$	—		$	—		$	—		$	791,856
Expenses paid on behalf of USPI Group Holdings, Inc.		—			—		(7,862	)		—			—			—			—			(7,862	)
Additional investment by USPI Group Holdings, Inc.		—			—		13,477			—			—			—			—			13,477
Contribution related to equity award grants by USPI Group Holdings, Inc.		—			—		2,091			—			—			—			—			2,091
Net income		—			—		—			—			—			—			8,729			8,729
Foreign currency translation adjustments		—			—		—			—			—			(1,646	)		—			(1,646	)
Pension liability adjustment, net of tax		—			—		—			—			—			161			—			161

Balance, December 31, 2007		—		$	—	$	799,562		$	—		$	—		$	(1,485	)	$	8,729		$	806,806
Contribution related to equity award grants by USPI Group Holdings, Inc.		—			—		2,340			—			—			—			—			2,340
Net income		—			—		—			—			—			—			37,514			37,514
Foreign currency translation adjustments		—			—		—			—			—			(71,790	)		—			(71,790	)
Unrealized loss on interest rate swaps, net of tax		—			—		—			—			—			(10,051	)		—			(10,051	)
Pension liability adjustment, net of tax		—			—		—			—			—			(682	)		—			(682	)

Balance, December 31, 2008		—		$	—	$	801,902		$	—		$	—		$	(84,008	)	$	46,243		$	764,137

See accompanying notes to consolidated financial statements

F-5

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows


	Successor						Predecessor
				Period from			Period from
				April 19			January 1
	Year Ended			through			through			Year Ended
	December 31,			December 31,			April 18,			December 31,
	2008			2007			2007			2006
	(In thousands)
Cash flows from operating activities:
Net income (loss)	$	37,514		$	8,729		$	(7,149	)	$	34,246
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Loss from discontinued operations		563			2,190			251			5,725
Provision for doubtful accounts		7,568			7,592			3,297			9,892
Depreciation and amortization		36,757			26,688			12,426			34,516
Amortization of debt issue costs and discount		2,860			1,904			202			912
Deferred income taxes		13,860			10,162			1,315			6,294
Loss (gain) on sale of equity interests		1,863			737			(897	)		—
Loss on impairment of intangible asset		831			—			—			—
Loss on early retirement of debt		—			—			2,435			14,880
Equity in earnings of unconsolidated affiliates, net of distributions received		(8,591	)		6,667			4,335			(4,104	)
Minority interests in income of consolidated subsidiaries, net of distributions paid		751			2,554			468			563
Equity-based compensation		2,297			1,810			17,100			11,974
Increases (decreases) in cash from changes in operating assets and liabilities, net of effects from purchases of new businesses:
Accounts receivable		(9,579	)		(6,551	)		(973	)		(13,992	)
Other receivables		(9,976	)		177			509			(4,006	)
Inventories of supplies, prepaids and other assets		7,859			1,906			919			269
Accounts payable and other current liabilities		7,256			3,002			12,060			5,556
Other long-term liabilities		(623	)		(209	)		(1,377	)		1,443
Tax benefit related to increase in value of equity awards		—			—			(15,822	)		(2,693	)

Net cash provided by operating activities		91,210			67,358			29,099			101,475

Cash flows from investing activities:
Purchases of new businesses and equity interests, net of cash received		(105,080	)		(78,928	)		(26,705	)		(280,973	)
Proceeds from sales of businesses and equity interests		14,351			5,879			15,916			28,467
Purchases of property and equipment		(31,163	)		(11,723	)		(6,172	)		(28,222	)
Returns of capital from unconsolidated affiliates		3,039			1,581			556			1,772
(Increase) decrease in deposits and notes receivable		(8,914	)		9,247			(9,084	)		59

Net cash used in investing activities		(127,767	)		(73,944	)		(25,489	)		(278,897	)

Cash flows from financing activities:
Proceeds from long-term debt, net of debt issuance costs		45,090			912,019			20,684			304,922
Payments on long-term debt		(28,318	)		(226,827	)		(7,424	)		(275,200	)
Proceeds from issuance of common stock		—			—			6,135			7,684
Net equity contribution from USPI Group Holdings, Inc.		40			779,279			—			—
Tax benefit related to increase in value of equity awards		—			—			15,822			2,693
Payments to repurchase common stock		—			(1,430,879	)		—			—
(Decrease) increase in cash held on behalf of unconsolidated affiliates		(5,441	)		(23,342	)		13,895			41,161
Expenses paid on behalf of USPI Group Holdings, Inc.		—			(7,862	)		—			—
Returns of capital to minority interest holders		(2,137	)		(2,926	)		(943	)		(1,103	)

Net cash (used in) provided by financing activities		9,234			(538	)		48,169			80,157

Cash flows of discontinued operations:
Operating cash flows		159			982			(761	)		1,187
Investing cash flows		(76	)		2,579			(827	)		(3,250	)
Financing cash flows		(34	)		(2,806	)		1,379			735

Net cash provided by (used in) discontinued operations		49			755			(209	)		(1,328	)

Effect of exchange rate changes on cash		(49	)		(70	)		(113	)		(107	)

Net (decrease) increase in cash and cash equivalents		(27,323	)		(6,439	)		51,457			(98,700	)
Cash and cash equivalents at beginning of period		76,758			83,197			31,740			130,440

Cash and cash equivalents at end of period	$	49,435		$	76,758		$	83,197		$	31,740

Supplemental information:
Interest paid, net of amounts capitalized	$	86,758		$	55,302		$	9,861		$	25,105
Income taxes (refund received) paid, net		(1,906	)		4,690			1,909			17,799
Non-cash transactions:
Predecessor rollover equity	$	—		$	18,192		$	—		$	—
Issuance of common stock to employees		—			—			—			30,455
Assets acquired under capital lease obligations		1,966			7,279			1,677			5,277
Receipt of note receivable for sale of minority interest		601			—			—			—

See accompanying notes to consolidated financial statements

F-6

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 2008 and 2007


(1)	Summary of Significant Accounting Policies and Practices


*(a)*	*Description of Business*

United Surgical Partners International, Inc., a Delaware Corporation, and subsidiaries (USPI or the Company) was formed in February 1998 for the primary purpose of ownership and operation of ambulatory surgery centers, surgical hospitals and related businesses in the United States and Europe. At December 31, 2008 the Company, headquartered in Dallas, Texas, operated 164 short-stay surgical facilities. Of these 164 facilities, the Company consolidates the results of 62, accounts for 101 under the equity method and holds no ownership in the remaining facility, which is operated by the Company under a management agreement. The Company operates in two countries, with 161 of its 164 facilities located in the United States of America; the remaining three facilities are located in the United Kingdom. The majority of the Company’s U.S. facilities are jointly owned with local physicians and a not-for-profit healthcare system that has other healthcare businesses in the region. At December 31, 2008, the Company had agreements with not-for-profit healthcare systems providing for joint ownership of 99 of the Company’s 161 U.S. facilities and also providing a framework for the planning and construction of additional facilities in the future. All of the Company’s U.S. facilities include physician owners.

Global Healthcare Partners Limited (Global), a USPI subsidiary incorporated in England, manages and wholly owns three surgical hospitals in the greater London area.

The Company is subject to changes in government legislation that could impact Medicare, Medicaid and foreign government reimbursement levels and is also subject to increased levels of managed care penetration and changes in payor patterns that may impact the level and timing of payments for services rendered.

The Company maintains its books and records on the accrual basis of accounting, and the consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.

As further described below, the Company had publicly traded equity securities from June 2001 until April 2007. Effective April 19, 2007, the Company no longer has publicly traded equity securities and is controlled by the private equity firm Welsh, Carson, Anderson & Stowe (Welsh Carson). The Company is a wholly owned subsidiary of USPI Holdings, Inc. (Holdings). Holdings is a wholly owned subsidiary of USPI Group Holdings, Inc. (Parent), which in turn is owned by an investor group that includes affiliates of Welsh Carson, members of the Company’s management, and other investors. The Company’s financial position and the results of operations prior to the merger are presented separately in the consolidated financial statements as “Predecessor” financial statements, while the Company’s financial position and results of operations following the merger are presented as “Successor” financial statements. Due to the merger, which generated transaction expenses, substantially increased the Company’s debt and interest expense, and to the revaluation of assets and liabilities as a result of purchase accounting associated with the merger, the pre-merger financial statements are not comparable with those after the merger.


*(b)*	*Merger Transaction*

Pursuant to an Agreement and Plan of Merger (the merger) dated as of January 7, 2007, between an affiliate of Welsh Carson, and the Company, the Company became a wholly owned subsidiary of Holdings on April 19, 2007. In the merger, all of the stockholders of the Company received $31.05 per share in cash for common stock. Additionally, all of the Company’s unvested restricted stock awards, except as otherwise agreed to by the holders and the Company, immediately vested, and the holders of restricted stock awards also received $31.05 per share in cash. Holders of stock options issued by the Company, including unvested stock options, received cash equal to $31.05 per option minus the exercise price of the option multiplied by the number of shares subject to the option.

F-7

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

The merger was valued at approximately $1.8 billion, including the assumption of $153.6 million of the Company’s existing debt. The funds necessary to consummate the transaction were approximately $1.7 billion, including $1.4 billion to pay then current stockholders and equity award holders, approximately $199.4 million to repay certain existing indebtedness and approximately $47.1 million to pay related fees and expenses. The merger was financed by:


	•	an investment of cash and rollover equity of USPI in the equity of Parent by Welsh Carson, management and other equity investors of approximately $785.0 million;

	•	borrowings by the Company of $430.0 million in new senior secured credit facilities;

	•	the issuance by the Company of $240.0 million in aggregate principal amount of 87/8% senior subordinated notes, due 2017, and $200.0 million in aggregate principal amount of 91/4%/10% senior subordinated toggle notes, due 2017;

	•	additional borrowings of £10.0 million (approximately $19.7 million) by Global, which was repatriated to the U.S.; and

	•	approximately $21.9 million of cash on hand.

The merger was accounted for under the purchase method of accounting prescribed in Statement of Financial Accounting Standards No. 141,Business Combinations,” (SFAS 141). The purchase price, including transaction-related fees, was allocated to the Company’s tangible and identifiable intangible assets and liabilities based upon estimates of fair value, with the remainder allocated to goodwill.

F-8

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

A summary of the merger is presented below (in thousands):


Net cash and equity contribution from Holdings	$	791,856
Proceeds from borrowings		889,700
Cash on hand		21,922
Expenses paid on behalf of Parent		(7,862	)

Purchase price allocated	$	1,695,616

Estimated fair value of net tangible assets acquired:
Cash	$	63,497
Accounts receivable		58,435
Other current assets		41,204
Investments in affiliates		263,666
Property and equipment		227,878
Other assets		20,668
Current liabilities		(108,596	)
Due to affiliates		(90,260	)
Long-term debt, excluding current portion		(131,158	)
Deferred tax liability		(97,016	)
Other long-term liabilities		(14,579	)
Minority interests in consolidated subsidiaries		(84,635	)

Net tangible assets acquired		149,104
Capitalized debt issuance costs		29,012
Intangible assets acquired		291,631
Goodwill		1,225,869

	$	1,695,616

Following are the unaudited pro forma results for the year ended December 31, 2007 as if the merger had occurred on January 1 (in thousands):


	Year Ended
	December 31,
	2007

Net revenues	$	643,843
Income from continuing operations		16,576

In connection with the merger, the Predecessor incurred expenses totaling approximately $23.8 million related to the acceleration of the Predecessor’s unvested outstanding stock options and certain restricted stock awards and professional fees. The Successor incurred approximately $29.0 million of fees related to debt issuance costs which are being amortized into interest expense over the term of the debt. None of the goodwill recorded as a result of the merger is deductible for tax purposes.


*(c)*	*Translation of Foreign Currencies*

The financial statements of foreign subsidiaries are measured in local currency and then translated into U.S. dollars. All assets and liabilities have been translated using the current rate of exchange at the balance sheet date. Results of

F-9

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

operations have been translated using the average rates prevailing throughout the year. Translation gains or losses resulting from changes in exchange rates are accumulated in a separate component of stockholder’s equity.


*(d)*	*Principles of Consolidation*

The consolidated financial statements include the financial statements of USPI and its wholly-owned and majority-owned subsidiaries. In addition, the Company consolidates the accounts of certain investees of which it does not own a majority ownership interest because the Company maintains effective control over the investees’ assets and operations. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company also considers FASB Interpretation No. 46,Consolidation of Variable Interest Entities (as amended)(FIN 46R) to determine if it is the primary beneficiary of (and therefore should consolidate) any entity whose operations it does not control with voting rights. At December 31, 2008, the Company consolidated one entity, which operates four surgical facilities, based on the provisions of FIN 46R. Despite not holding a controlling voting interest, the Company is the primary beneficiary because the Company has lent the entity funds to purchase surgical facilities, but the Company does not have full recourse to the entity’s other owner with respect to repayment of the loans. As the entity earns management fees and receives cash distributions of earnings from the surgical facilities, a portion of those proceeds are used to repay the loans prior to being eligible for distribution to the entity’s other owner. At December 31, 2008, $12.8 million of such loans had been made and are included in other long-term assets. The Company has no exposure for the entity’s losses beyond this investment. Accordingly, the Company did not provide any financial or other support to the entity that it was not previously contractually required to provide during the year ended December 31, 2008. At December 31, 2008, total assets and liabilities of this entity were $39.9 million and $32.5 million, respectively. Such amounts are included in the accompanying consolidated balance sheet.


*(e)*	*Use of Estimates*

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


*(f)*	*Cash and Cash Equivalents*

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash and cash equivalents at times may exceed the FDIC limits. The Company believes no significant concentration of credit risk exists with respect to these cash investments.

The Company’s wholly-owned insurance subsidiary maintains certain balances in cash and cash equivalents that are used in connection with its retained professional and general liability risks and are not designated for general corporate purposes. At December 31, 2008, this cash and cash equivalents balance was $2.4 million.


*(g)*	*Inventories of Supplies*

Inventories of supplies are stated at cost, which approximates market, and are expensed as used.

F-10

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


*(h)*	*Property and Equipment*

Property and equipment are stated at cost or, when acquired as part of a business combination, fair value at date of acquisition. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Upon retirement or disposal of assets, the asset and accumulated depreciation accounts are adjusted accordingly, and any gain or loss is reflected in earnings or loss of the respective period. Maintenance costs and repairs are expensed as incurred; significant renewals and betterments are capitalized. Assets held under capital leases are classified as property and equipment and amortized using the straight-line method over the shorter of the useful lives or lease terms, and the related obligations are recorded as debt. Amortization of assets under capital leases and of leasehold improvements is included in depreciation expense. The Company records operating lease expense on a straight-line basis unless another systematic and rational allocation is more representative of the time pattern in which the leased property is physically employed. The Company amortizes leasehold improvements, including amounts funded by landlord incentives or allowances, for which the related deferred rent is amortized as a reduction of lease expense, over the shorter of their economic lives or the lease term.


*(i)*	*Goodwill and Intangible Assets*

Intangible assets consist of costs in excess of net assets acquired (goodwill), costs of acquired management and other contract service rights, and other intangibles, which consist primarily of debt issue costs. Most of the Company’s intangible assets have indefinite lives. Accordingly, these assets, along with goodwill, are not amortized but are instead tested for impairment annually, or more frequently if changing circumstances warrant. Goodwill is tested for impairment at the reporting unit level, which corresponds to the Company’s operating segments, or countries. The Company amortizes intangible assets with definite useful lives over their respective useful lives to their estimated residual values and reviews them for impairment in the same manner as long-lived assets, discussed below.


*(j)*	*Impairment of Long-lived Assets*

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or related groups of assets, may not be fully recoverable from estimated future cash flows. In the event of impairment, measurement of the amount of impairment may be based on appraisal, market values of similar assets or estimates of future discounted cash flows resulting from use and ultimate disposition of the asset.


*(k)*	*Fair Value Measurements*

In accordance with Statement of Financial Accounting Standards (SFAS) No. 157,Fair Value Measurements, the Company uses fair value measurements based on quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2) or unobservable inputs for assets or liabilities (Level 3), depending on the nature of the item being valued. The Company discloses on a yearly basis the valuation techniques and discloses any change in method of such within the body of each applicable footnote.

The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximate fair value because of the short maturity of these instruments.


*(l)*	*Derivative Instruments and Hedging Activities*

The Company accounts for its derivative instruments in accordance with SFAS No. 133 (SFAS 133),Accounting for Derivative Instruments and Hedging Activities, (as amended). The Company records derivatives on its consolidated balance sheet as assets or liabilities, measured at fair value. The Company does not engage in

F-11

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

derivative instruments for speculative purposes. Because the Company’s current derivatives qualify for hedge accounting under SFAS 133, gains or losses resulting from changes in the values of the Company’s derivatives are reported in accumulated other comprehensive loss, a separate component of stockholder’s equity (Note 8).


*(m)*	*Revenue Recognition*

Revenue consists primarily of net patient service revenues, which are based on the facilities’ established billing rates less allowances and discounts, principally for patients covered under contractual programs with private insurance companies. The Company derives approximately 75% of its net patient service revenues from private insurance payors, approximately 11% from governmental payors and approximately 14% from self-pay and other payors.

With respect to management and contract service revenues, amounts are recognized as services are provided. The Company is party to agreements with certain surgical facilities, hospitals and physician practices to provide management services. As compensation for these services each month, the Company charges the managed entities management fees which are either fixed in amount or represent a fixed percentage of each entity’s earnings, typically defined as net revenue less a provision for doubtful accounts or operating income. In many cases the Company also holds equity ownership in these entities (Note 10). Amounts charged to consolidated facilities eliminate in consolidation. Contract service revenues arising from an endoscopy services business the Company acquired as part of the Surgis acquisition in 2006 are recognized at rates defined in renewable multi-year service agreements, based on the volume of services provided each month.


*(n)*	*Concentration of Credit Risk*

Concentration of credit risk with respect to accounts receivable is limited due to the large number of customers comprising the Company’s customer base and their breakdown among geographical locations in which the Company operates. The Company provides for bad debts principally based upon the aging of accounts receivable and uses specific identification to write off amounts against its allowance for doubtful accounts. The Company believes the allowance for doubtful accounts adequately provides for estimated losses as of December 31, 2008 and 2007. The Company has a risk of incurring losses if such allowances are not adequate.


*(o)*	*Investments and Equity in Earnings of Unconsolidated Affiliates*

Investments in unconsolidated companies in which the Company exerts significant influence and owns between 20% and 50% of the investees are accounted for using the equity method. Additionally, investments in unconsolidated companies in which the Company owns less than 20% of an investee but exerts significant influence through board of director representation and, in many cases, an agreement to manage the investee are also accounted for using the equity method. Investments in unconsolidated companies in which the Company owns a majority interest, but does not control due to the substantive participating rights of the minority owners, are also accounted for under the equity method.

These investments are included as investments in affiliates in the accompanying consolidated balance sheets. The carrying amounts of these investments are greater than the Company’s equity in the underlying net assets of many of these companies due in part to goodwill, which is not subject to amortization. This goodwill is evaluated for impairment in accordance with Accounting Principles Board (APB) Opinion No. 18,The Equity Method of Accounting for Investments in Common Stock. The Company monitors its investments for other-than-temporary impairment by considering factors such as current economic and market conditions and the operating performance of the companies and records reductions in carrying values when necessary.

F-12

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

Equity in earnings of unconsolidated affiliates consists of the Company’s share of the profits or losses generated from its noncontrolling equity investments in 101 surgical facilities. Because these operations are central to the Company’s business strategy, equity in earnings of unconsolidated affiliates is classified as a component of operating income in the accompanying consolidated statements of operations. The Company has contracts to manage these facilities, which results in the Company having an active role in the operations of these facilities and devoting a significant portion of its corporate resources to the fulfillment of these management responsibilities.


*(p)*	*Income Taxes*

The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets may not be realized.


*(q)*	*Equity-Based Compensation*

The Company follows the guidance in SFAS No. 123 (revised 2004),Share-Based Payment, (SFAS 123R). Under SFAS 123R, the fair value of equity-based compensation, such as stock options and other stock-based awards to employees and directors, is measured at the date of grant and recognized as expense over the employee’s requisite service period.

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123R and Emerging Issues Task Force (EITF) IssueNo. 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.


*(r)*	*Commitments and Contingencies*

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

F-13

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


(2)	Discontinued Operations and Other Dispositions

During 2008, 2007, and 2006, the Company sold all of its ownership interests in 14 facilities as summarized below:


Date	Facility Location	Proceeds		Gain (Loss)

July 2008	Manitowoc, Wisconsin(1)	$	0.8 million	$	—
July 2008	Orlando, Florida(1)		0.5 million		(0.4 million	)
June 2008	Cleveland, Ohio(2)		1.6 million		(1.0 million	)
April 2008	Los Angeles, California(1)		—		—
February 2008	Sarasota, Florida(1)		0.5 million		—

Total		$	3.4 million	$	(1.4 million	)

December 2007	Houston, Texas(2)	$	—	$	(0.6 million	)
December 2007	Decatur, Alabama(2)		0.3 million		(2.2 million	)
November 2007	Canton, Mississippi(2)		—		(0.9 million	)
September 2007	Atlanta, Georgia(1)		1.8 million		0.5 million
September 2007	Baltimore, Maryland(1)		—		(1.2 million	)

Total		$	2.1 million	$	(4.4 million	)

October 2006	Ocean Springs, Mississippi(1)	$	2.0 million	$	—
August 2006	Phoenix, Arizona(1)		1.3 million		—
March 2006	Lyndhurst, Ohio(2)		0.4 million		(7.4 million	)
February 2006	Chicago, Illinois(1)		—		—

Total		$	3.7 million	$	(7.4 million	)


(1)		Because these investments were accounted for under the equity method, the results of operations of these facilities are not reported as discontinued operations. The gain (loss) on the disposal of these facilities is recorded in other income (expense) in the accompanying consolidated statements of operations.

F-14

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


(2)		In accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the Company has reclassified its historical results of operations to remove the operations of these facilities from the its revenues and expenses on the accompanying consolidated statements of operations, collapsing the income (loss) related to these facilities’ operations and the Company’s disposal of them into a single line, “Income (loss) from discontinued operations” The table below summarizes certain amounts related to the Company’s discontinued operations for the periods presented (in thousands).


	Successor						Predecessor
				Period from			Period from
				April 19			January 1
	Year Ended			through			through			Year Ended
	December 31,			December 31,			April 18,			December 31,
	2008			2007			2007			2006
Revenues	$	3,108		$	8,984		$	3,693		$	12,569
Income (loss) from discontinued operations before income taxes	$	95		$	363		$	(386	)	$	28
Income tax (expense) benefit		(33	)		(127	)		135			(10	)

Income (loss) from discontinued operations	$	62		$	236		$	(251	)	$	18

Loss on sale of discontinued operations before income taxes	$	(963	)	$	(3,732	)	$	—		$	(7,396	)
Income tax benefit		338			1,306			—			1,653

Net loss on sale of discontinued operations	$	(625	)	$	(2,426	)	$	—		$	(5,743	)

In addition to the sales of ownership interests noted above, the Company sold controlling interests to various hospital partners during 2008, 2007, and 2006, which are described below. The Company’s continuing involvement as an equity method investor and manager of the facilities precludes classification of these transactions as discontinued operations. Gains and losses are recorded in other income (expense) in the accompanying consolidated statements of operations.


Date	Facility Location	Proceeds		Gain (Loss)

July 2008	Beaumont, Texas	$	1.2 million	$	(0.5 million	)
June 2008	Dallas, Texas(1)		2.3 million		(0.9 million	)
June 2008	Houston, Texas(2)		0.6 million		—
March 2008	Redding, California(3)		1.7 million		—

Total		$	5.8 million	$	(1.4 million	)

July 2007	Dallas, Texas(4)	$	3.7 million	$	—
April 2007	Corpus Christi, Texas(5)		6.1 million		0.9 million

Total		$	9.8 million	$	0.9 million

July 2006	Fort Worth, Texas(1)	$	4.8 million		—


(1)		The hospital partner already had an ownership interest in the facility and acquired a controlling interest from the Company in this transaction. Additionally, this hospital partner is a related party (Note 10).

F-15

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


(2)		Because the Company is considered the primary beneficiary of this entity under FASB Interpretation No. 46,Consolidation of Variable Interest Entities (as amended), the Company consolidates the entity to which it transferred its interest in the facility, and accordingly continues to consolidate the facility’s operating results. The sales price of $0.6 million was paid in the form of a note receivable from the buyer.

(3)		The Company sold a controlling interest in two facilities and gained a noncontrolling interest in a third facility in Redding.

(4)		The hospital partner already had an ownership interest in these two facilities and acquired a controlling interest from the Company in this transaction. Additionally, this hospital partner is a related party (Note 10).

(5)		The Company sold a controlling interest in two facilities to a hospital partner.


(3)	Acquisitions and Equity Method Investments

As part of its growth strategy, the Company acquires interests in existing surgical facilities from third parties and invests in new facilities the Company develops in partnership with not-for-profit healthcare systems (hospital partners) and local physicians. Many of these transactions result in the Company controlling the acquired entity (business combinations) or increase the Company’s level of ownership in an entity the Company already controlled (step acquisitions). During 2008, these transactions consisted of the following:


Effective Date	Facility Location	Purchase Price

December 2008	St. Louis, Missouri(1)	$	0.4 million
October 2008	St. Louis, Missouri(2)		1.9 million
September 2008	St. Louis, Missouri(2)		15.8 million
September 2008	St. Louis, Missouri(3)		18.0 million
August 2008	St. Louis, Missouri(2)		3.0 million
June 2008	Dallas, Texas(4)		3.9 million
April 2008	St. Louis, Missouri(5)		14.1 million

Total		$	57.1 million


(1)		The Company acquired additional ownership in one of its existing facilities.

(2)		The Company had no previous investment in this facility.

(3)		The Company acquired additional ownership in two of its existing facilities.

(4)		The Company purchased all of a healthcare system’s ownership interest in an entity it co-owned with the Company. This entity has ownership in and manages five facilities in the Dallas/Fort Worth area. This holding company was already a subsidiary of the Company and is now wholly owned by the Company.

(5)		The Company acquired additional ownership in three of its existing facilities.

F-16

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

The financial results of the acquired entities are included in the Company’s consolidated financial statements beginning on the acquisition’s effective closing date. Following are the unaudited pro forma results for the years ended December 31, 2008 and 2007 as if the acquisitions occurred on January 1 of each year (in thousands):

Successor

Predecessor

Period from

April 19

January 1

Year Ended

through

December 31,

April 18,

2008

2007

Net revenues

652,217

461,423

194,490

Income (loss) from continuing operations

41,607

15,302

(5,452

)

These unaudited pro forma results have been prepared for comparative purposes only. The pro forma results do not purport to be indicative of the results of operations which would have actually resulted had the acquisitions been in effect at the beginning of the preceding year, nor are they necessarily indicative of the results of operations that may be achieved in the future.

Additionally, during the year ended December 31, 2008, the Company purchased additional ownership in various consolidated facilities for approximately $6.6 million. The adjustments to arrive at pro forma operating results for these acquisitions are not material.

The terms of certain of the Company’s acquisition agreements provide for additional consideration to be paid to or received from the sellers based on certain financial targets or objectives being met for the acquired facilities or based upon the resolution of certain contingencies. Such additional consideration, which amounted to net payments by the Company of approximately $0.1 million and $3.1 million during 2007 and 2006, respectively, is recorded as an increase or decrease to goodwill at the time the targets or objectives are met or the contingencies are resolved. No such payments were made during 2008.

The Company also engages in investing transactions that are not business combinations or step acquisitions. These transactions primarily consist of acquisitions and sales of noncontrolling equity interests in surgical facilities and the investment of additional cash in surgical facilities under development. During the year ended December 31, 2008, these transactions resulted in a net cash outflow of approximately $35.6 million, which is summarized as follows:


	•	Receipt of $3.6 million from a not-for-profit hospital partner that obtained additional ownership in a facility in the Kansas City, Missouri area;

	•	Investment of $18.3 million in a surgical hospital in Nashville, Tennessee, jointly owned with one of the Company’s not-for-profit hospital partners;

	•	Investment of $10.6 million in a company jointly operated with one of the Company’s hospital partners, which the joint venture used to acquire ownership in two surgical facilities in Houston, Texas;

	•	Investment of $5.7 million in a joint venture with one of the Company’s not-for-profit hospital partners, which the joint venture used to acquire ownership in a surgical facility in Portland, Oregon;

	•	Investment of $4.3 million in a joint venture with one of the Company’s not-for-profit hospital partners, which the joint venture used to acquire ownership in three surgical facilities in Denver, Colorado;

	•	Investment of $1.4 million in a surgical facility in Knoxville, Tennessee, jointly owned with one of the Company’s not-for-profit hospital partners;

	•	Investment of $1.1 million in a joint venture with one of the Company’s not-for-profit hospital partners which the joint venture used to acquire ownership in facility in the Las Vegas, Nevada, area;

F-17

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


	•	Net receipt of approximately $2.2 million related to various other purchases and sales of equity interests and contributions of cash to equity method investees.

The Company controls a significant number of its investees and therefore consolidates their results. Additionally, the Company invests in a significant number of facilities in which the Company has significant influence but does not have control; the Company uses the equity method to account for these investments. The majority of these investees are partnerships or limited liability companies, which require the associated tax benefit or expense to be recorded by the partners or members. Summarized financial information for the Company’s equity method investees on a combined basis was as follows (amounts are in thousands, except number of facilities, and reflect 100% of the investees’ results on an aggregated basis and are unaudited):


	2008			2007			2006

Unconsolidated facilities operated at year-end		101			93			80
Income statement information:
Revenues	$	991,566		$	788,931		$	610,384
Operating expenses:
Salaries, benefits, and other employee costs		245,277			207,154			150,625
Medical services and supplies		210,874			166,229			125,981
Other operating expenses		246,185			203,841			150,108
Depreciation and amortization		48,722			41,057			29,884

Total operating expenses		751,058			618,281			456,598

Operating income		240,508			170,650			153,786
Interest expense, net		(24,107	)		(20,501	)		(14,400	)
Other		2,962			1,843			282

Income before income taxes	$	219,363		$	151,992		$	139,668

Balance sheet information:
Current assets	$	234,535		$	186,518		$	164,715
Noncurrent assets		403,956			399,479			271,447
Current liabilities		137,929			117,276			87,944
Noncurrent liabilities		288,286			291,311			175,119

One of the Company’s equity method investments, Texas Health Ventures Group, L.L.C., is considered significant to the Company’s 2008 consolidated financial statements under regulations of the SEC. As a result, the Company has filed Texas Health Ventures Group, L.L.C.’s consolidated financial statements with thisForm 10-K for the required periods.


(4)	Other Receivables

Other receivables consist primarily of amounts receivable for services performed and funds advanced under management and administrative service agreements. As discussed in Note 10, many of the entities to which the Company provides management and administrative services are related parties, due to the Company being an investor in those facilities. At December 31, 2008 and 2007, the amounts receivable from related parties, which are included in other receivables on the Company’s consolidated balance sheet, totaled $5.4 million and $3.7 million, respectively.

F-18

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


(5)	Property and Equipment

At December 31, property and equipment consisted of the following (in thousands):


	Estimated
	Useful Lives		2008			2007

Land		—	$	29,089		$	28,596
Buildings and leasehold improvements		7-50 years		119,814			123,902
Equipment		3-12 years		94,743			91,385
Furniture and fixtures		4-20 years		8,977			7,540
Construction in progress		—		1,028			1,471

				253,651			252,894
Less accumulated depreciation				(51,827	)		(23,855	)

Net property and equipment			$	201,824		$	229,039

At December 31, 2008 and 2007, assets recorded under capital lease arrangements, included in property and equipment, consisted of the following (in thousands):


	2008			2007

Land and buildings	$	32,728		$	31,363
Equipment and furniture		10,251			9,494

		42,979			40,857
Less accumulated amortization		(7,322	)		(2,570	)

Net property and equipment under capital leases	$	35,657		$	38,287


(6)	Goodwill and Intangible Assets

The Company follows the provisions of SFAS No. 142,Accounting for Goodwill and Other Intangible Assets(SFAS 142). SFAS 142 requires that goodwill and intangible assets with indefinite useful lives not be amortized but instead be tested for impairment at least annually, with tests of goodwill occurring at the reporting unit level (defined as an operating segment or one level below an operating segment). SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective useful lives to their estimated residual values. The Company determined that its reporting units are at the operating segment (country) level. The Company completed the required annual impairment tests during 2008, 2007 and 2006. No impairment losses were identified in any reporting unit as a result of these goodwill impairment tests. As a result of the 2008 impairment testing performed on the Company’s indefinite-lived management contracts, the Company recorded an impairment loss of approximately $0.8 million related to one of its indefinite-lived management contracts. Such expense is recorded in other income (expense) in the accompany consolidated statement of operations.

F-19

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

The following is a summary of changes in the carrying amount of goodwill by operating segment and reporting unit for years ended December 31, 2008 and 2007 (in thousands):


	United			United
	States			Kingdom			Total

Predecessor
Balance at December 31, 2006	$	483,645		$	27,958		$	511,603
Additions		23,410			—			23,410
Disposals		(8,197	)		—			(8,197	)
Other		—			593			593

Balance at April 18, 2007	$	498,858		$	28,551		$	527,409

Successor
April 19, 2007, beginning balance resulting from merger	$	960,281		$	265,588		$	1,225,869
Additions		75,448			—			75,448
Disposals		(24,536	)		—			(24,536	)
Other		—			(1,802	)		(1,802	)

Balance at December 31, 2007		1,011,193			263,786			1,274,979
Additions		82,784			216			83,000
Disposals		(18,368	)		—			(18,368	)
Other		—			(69,324	)		(69,324	)

Balance at December 31, 2008	$	1,075,609		$	194,678		$	1,270,287

The merger resulted in a significant increase to goodwill for both reporting units, which is reflected in the beginning balances of the Successor.

Goodwill additions resulted primarily from business combinations and additionally from purchases of additional interests in subsidiaries. Disposals of goodwill relate to businesses that the Company has sold or the deconsolidation of entities the Company no longer controls. In the United Kingdom, the other changes were primarily due to foreign currency translation adjustments.

Intangible assets with definite useful lives are amortized over their respective estimated useful lives, ranging from approximately one to eleven years, to their estimated residual values. The majority of the Company’s management contracts have indefinite useful lives. Most of these contracts have evergreen renewal provisions that do not contemplate a specific termination date. Some of the contracts have provisions which make it possible for the facility’s other owners to terminate them at certain dates and under certain circumstances. Based on the Company’s history with these contracts, the Company’s management considers the lives of these contracts to be indefinite and therefore does not amortize them unless facts and circumstances indicate that it is no longer considered likely that these contracts can be renewed without substantial cost.

F-20

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

The following is a summary of intangible assets at December 31, 2008 and 2007 (in thousands):


	December 31, 2008
	Gross
	Carrying		Accumulated
	Amount		Amortization			Total

Definite Useful Lives
Management and other service contracts	$	24,618	$	(5,210	)	$	19,408
Other		29,947		(4,857	)		25,090

Total	$	54,565	$	(10,067	)	$	44,498

Indefinite Useful Lives
Management contracts							274,354

Total intangible assets						$	318,852


	December 31, 2007
	Gross
	Carrying		Accumulated
	Amount		Amortization			Total

Definite Useful Lives
Management and other service contracts	$	24,357	$	(2,159	)	$	22,198
Other		29,914		(1,935	)		27,979

Total	$	54,271	$	(4,094	)	$	50,177

Indefinite Useful Lives
Management contracts							265,664

Total intangible assets						$	315,841

Amortization expense from continuing operations related to intangible assets with definite useful lives was $3.1 million for the year ended December 31, 2008, and $0.8 million and $2.2 million for the period from January 1 through April 18, 2007 and the period from April 19 through December 31, 2007, respectively. The amortization of debt issuance costs, which is included within interest expense, was $2.9 million for the year ended December 31, 2008, $0.2 million for the period from January 1 through April 18, 2007, and $1.9 million for the period from April 19 through December 31, 2007. Intangible assets were adjusted to fair value on April 19, 2007 as a result of the merger and, therefore, the historical accumulated amortization balances were eliminated. The weighted average amortization period for intangible assets with definite useful lives is nine years for management and other service contracts, nine years for other intangible assets, and nine years overall.

The following table provides estimated amortization expense, including amounts that will be classified within interest expense, related to intangible assets with definite useful lives for each of the years in the five-year period ending December 31, 2013:


2009	$	6,135
2010		5,708
2011		5,940
2012		6,174
2013		6,066

F-21

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


(7)	Long-term Debt

At December 31, long-term debt consisted of the following (in thousands):


	2008			2007

Senior secured credit facility	$	518,975		$	490,275
U.K. senior credit agreement		59,252			83,519
Senior subordinated notes		440,000			440,000
Notes payable to financial institutions		35,366			37,238
Capital lease obligations (Note 9)		44,354			47,030

Total long-term debt		1,097,947			1,098,062
Less current portion		(24,488	)		(25,311	)

Long-term debt, less current portion	$	1,073,459		$	1,072,751


*(a)*	*Senior secured credit facility*

The Company’s senior secured credit facility (credit facility) provides for borrowings of up to $630.0 million (with a $150.0 million accordion feature described below), consisting of (1) a $100.0 million revolving credit facility with a maturity of six years, including a $20.0 million letter of credit sub-facility, and a $20.0 million swing-line loan sub-facility; and (2) a $530.0 million term loan facility (including a $100.0 million delayed draw facility) with a maturity of seven years. On April 19, 2007, the Company borrowed $430.0 million of the term loan facility concurrent with the merger. In May 2007, the Company borrowed an additional $29.5 million under the delayed draw feature of the term loan facility to finance the acquisition of an additional surgery center in St. Louis, Missouri. In August 2007, the Company borrowed an additional $34.0 million under the delayed draw feature of the term loan facility to finance abuy-up of ownership in five of its existing St. Louis facilities. During the year ended December 31, 2008, the Company borrowed $31.5 million under the delayed draw facility to finance abuy-up of ownership in five of its existing St. Louis facilities and borrowed $1.5 million to fund the purchase of a new facility in St. Louis. After December 31, 2008, no additional funds can be borrowed under the delayed draw feature.

The Company may request additional tranches of term loans or additional commitments to the revolving credit facility in an aggregate amount not exceeding $150.0 million, subject to certain conditions. Interest rates on the credit facility are based on LIBOR plus a margin of 2.00% to 2.25%. Additionally, the Company pays quarterly commitment fees of 1.75% per annum and 0.50% per annum on the daily-unused commitment of the delayed draw facility and revolving credit facility, respectively. The Company also pays a quarterly participation fee of 2.38% per annum related to outstanding letters of credit. The term loans under the credit facility require principal payments each year in an amount of 1% per annum in equal quarterly installments. No principal payments are required on the revolving credit facility or delayed draw term loan facility during its delayed draw availability period. Beginning in March 2009, the Company must pay quarterly principal payments of 0.25% on the outstanding balance of the delayed draw. At December 31, 2008, the Company had $519.0 million of debt outstanding under the credit facility at a weighted average interest rate of approximately 3.8%. At December 31, 2008, the Company had $98.4 million available for borrowing under the revolving credit facility, representing the facility’s $100.0 million capacity, net of $1.6 million of outstanding letters of credit. However, the availability on the revolving line of credit will likely be reduced by $15.0 million due to the bankruptcy of one of the lenders.

F-22

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

stock of certain of its wholly-owned foreign subsidiaries. Additionally, the credit facility contains various restrictive covenants, including financial covenants that limit the Company’s ability and the ability of its subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends, enter into sale-leaseback transactions or issue and sell capital stock. The Company believes it was in compliance with these covenants as of December 31, 2008.

Fees paid for unused portions of the senior secured credit facility were approximately $0.8 million for the year ended December 31, 2008, and $0.9 million for the period from April 19 through December 31, 2007 and are included within interest expense in the Company’s consolidated statements of operations.

At December 31, 2008, the estimated fair value of the Company’s senior secured credit facility was $371.1 million. The fair value was estimated based on recent secondary bank trading prices.


*(b)*	*Senior subordinated notes*

Also in connection with the merger, the Company issued $240.0 million of 87/8% senior subordinated notes and $200.0 million of 91/4%/10% senior subordinated toggle notes (together, the Notes), all due in 2017. Interest on the Notes is payable on May 1 and November 1 of each year, which commenced on November 1, 2007. All interest payments on the senior subordinated notes are payable in cash. The initial interest payment on the toggle notes was payable in cash. For any interest period after November 1, 2007 through November 1, 2012, the Company may pay interest on the toggle notes (i) in cash, (ii) by increasing the principal amount of the outstanding toggle notes or by issuingpayment-in-kind notes (PIK Interest); or (iii) by paying interest on half the principal amount of the toggle notes in cash and half in PIK Interest. PIK Interest is paid at 10% and cash interest is paid at 91/4% per annum. The Company paid the May 1 and November 1, 2008 interest payments in cash. The Notes are unsecured senior subordinated obligations of the Company; however, the Notes are guaranteed by all of its current and future direct and indirect wholly-owned domestic subsidiaries. Additionally, the Notes contain various restrictive covenants, including financial covenants that limit the Company’s ability and the ability of its subsidiaries to borrow money or guarantee other indebtedness, grant liens, make investments, sell assets, pay dividends, enter into sale-leaseback transactions or issue and sell capital stock. The Company believes it was in compliance with these covenants as of December 31, 2008.

At December 31, 2008, the $240.0 million 87/8% senior subordinated notes and the $200.0 million 91/4%/10% senior subordinated toggle notes were considered to have a fair value, based upon recent trading, of approximately $163.2 million and $121.0 million, respectively.


*(c)*	*United Kingdom borrowings*

In April 2007, the Company entered into an amended and restated credit agreement, which covered its existing overdraft facility and term loan facility (Term Loan A). This agreement provides a total overdraft facility of £2.0 million, and an additional Term Loan B facility of £10 million, which was drawn in April 2007. In March 2008, the Company further amended its U.K. Agreement to provide for a £2.0 million Term Loan C facility. The Company borrowed the entire £2.0 million (approximately $2.9 million at December 31, 2008) in March 2008 to acquire property adjacent to one of its hospitals in London. Excluding availability on the overdraft facility, no additional borrowings can be made under the Term Loan A, B or C facilities. At December 31, 2008, the Company had approximately £40.5 million (approximately $59.3 million) outstanding under the U.K. credit facility at a weighted average interest rate of approximately 5.4%.

F-23

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

$7.3 million in the fifth year, with the remainder due in the sixth year after the April 2007 closing. The Term Loan B does not require any principal payments prior to maturity and matures in 2013. The Term Loan C requires quarterly principal payments of approximately £0.1 million ($0.2 million at December 31, 2008), which began in June 2008 and continue through its maturity date of February 2013 when the final payment of £0.5 million (approximately $0.7 million) is due. The borrowings are guaranteed by certain of the Company’s subsidiaries in the United Kingdom with a security interest in various assets, and a pledge of the capital stock of the U.K. borrowers and the capital stock of certain guarantor subsidiaries. The Agreement contains various restrictive covenants, including financial covenants that limit the Company’s ability and the ability of certain U.K. subsidiaries to borrow money or guarantee other indebtedness, grant liens on its assets, make investments, use assets as security in other transactions, pay dividends, enter into leases or sell assets or capital stock. The Company believes it was in compliance with these covenants as of December 31, 2008.

At December 31, 2008, the estimated fair value of the Company’s United Kingdom borrowings was $42.4 million. The fair value was estimated based on recent secondary bank trading prices.

The Company also has the ability to borrow under a capital asset finance facility in the U.K. of up to £2.5 million (approximately $3.7 million at December 31, 2008). The exact terms and payments are negotiated upon a draw on the facility. No amounts were outstanding at December 31, 2008 or 2007.


*(d)*	*Other Long-term Debt*

The Company and its subsidiaries have notes payable to financial institutions and other parties of $35.4 million, which mature at various dates through January 2018 and accrue interest at fixed and variable rates ranging from 4.4% to 11.3%.

Capital lease obligations in the carrying amount of $44.4 million are secured by underlying real estate and equipment and have implicit interest rates ranging from 5.3% to 19.0%.

The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 2008 are as follows (in thousands): 2009, $24,488; 2010, $26,289; 2011, $22,808; 2012, $19,633; 2013, $41,577 and thereafter, $963,152.


(8)	Interest Rate Swaps

The Company does not enter into derivative contracts for speculative purposes but has at times entered into interest rate swaps to fix the rate of interest owed on a portion of its variable rate debt, and such arrangements meet the definition of derivative financial instruments. By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the risk of failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. The Company minimizes the credit risk in derivative instruments by entering into transactions with counterparties who maintain a strong credit rating. Market risk is the risk of an adverse effect on the value of a derivative instrument that results from a change in interest rates. This risk essentially represents the risk that variable interest rates decline to a level below the fixed rate the Company has locked in. The market risk associated with interest rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

As required by SFAS 133, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. The Company also

F-24

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.

In order to manage the Company’s interest rate risk related to a portion of its variable-rate U.K. debt, on February 29, 2008, the Company entered into an interest rate swap agreement for a notional amount of £20.0 million (approximately $29.2 million at December 31, 2008). The interest rate swap requires the Company to pay 4.99% and to receive interest at a variable rate of three-month GBP-LIBOR (2.77% at December 31, 2008), which is reset quarterly. The interest rate swap matures in March 2011. No collateral is required under the interest rate swap agreement.

In order to manage the Company’s interest rate risk related to a portion of its variable-rate senior secured credit facility, effective July 24, 2008, the Company entered into a three-year interest rate swap agreement for a notional amount of $200.0 million. The interest rate swap requires the Company to pay 3.6525% and to receive interest at a variable rate of three-month USD-LIBOR (3.54% at December 31, 2008), which is reset quarterly. No collateral is required under the interest rate swap agreement.

The proceeds from the swaps are used to settle the Company’s interest obligations on the hedged portion of the variable rate debt, which has the overall outcome of the Company paying and expensing a fixed rate of interest on the hedged debt.

SFAS 133 requires the Company to recognize all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheet. In accordance with SFAS 133, the Company designated the interest rate swaps as cash flow hedges of certain of its variable-rate borrowings. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings and would be classified as interest expense in the Company’s consolidated statements of operations. The Company recorded no expense related to ineffectiveness for the year ended December 31, 2008.

At December 31, 2008, the fair value of the U.S. interest rate swap was a liability of approximately $8.8 million and is included in other long-term liabilities in the accompanying consolidated balance sheet, with the offset to other comprehensive loss. The fair value of the U.K. interest rate swap was not material at December 31, 2008. The estimated fair value of the interest rate swaps was determined using present value models of the contractual payments. Inputs to the models were based on prevailing LIBOR market data and incorporate credit data that measure nonperformance risk. The estimated fair value represents the theoretical exit cost the Company would have to pay to transfer the obligations to a market participant with similar credit risk. The interest rate swap agreements are classified within Level 3 of the valuation hierarchy.


(9)	Leases

The Company leases various office equipment and office space under a number of operating lease agreements, which expire at various times through the year 2024. Such leases do not involve contingent rentals, nor do they contain significant renewal or escalation clauses. Office leases generally require the Company to pay all executory costs (such as property taxes, maintenance and insurance).

F-25

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

Minimum future payments under noncancelable leases, with remaining terms in excess of one year as of December 31, 2008 are as follows (in thousands):


	Capital			Operating
	Leases			Leases

Year ending December 31,
2009	$	9,269		$	15,248
2010		8,958			13,444
2011		7,801			11,095
2012		6,662			8,460
2013		5,395			6,559
Thereafter		38,089			19,113

Total minimum lease payments		76,174		$	73,919

Amount representing interest		(31,820	)

Present value of minimum lease payments	$	44,354

Total rent expense from continuing operations under operating leases was $18.6 million for the year ended December 31, 2008, and $5.4 million, $12.8 million, and $15.9 million for the period from January 1 through April 18, 2007, period from April 19 through December 31, 2007 and for the year ended December 31, 2006, respectively.


(10)	Related Party Transactions

The Company has entered into agreements with certain majority and minority owned surgery centers to provide management services. As compensation for these services, the surgery centers are charged management fees which are either fixed in amount or represent a fixed percentage of each center’s net revenue less bad debt. The percentages range from 3.0% to 8.0%. Amounts recognized under these agreements, after elimination of amounts from consolidated surgery centers, totaled approximately $39.1 million for the year ended December 31, 2008, and $9.5 million, $23.3 million, and $25.7 million for the period from January 1 through April 18, 2007, period from April 19 through December 31, 2007, and the year ended December 31, 2006, respectively. Such amounts are included in management and contract service revenues in the accompanying consolidated statements of operations.

As discussed in Note 3, the Company regularly engages in purchases and sales of ownership interests in its facilities. The Company operates 21 surgical facilities in partnership with the Baylor Health Care System (Baylor) and local physicians in the Dallas/Fort Worth area. Baylor’s Chief Executive Officer, Joel T. Allison, is a member of the Company’s board of directors. In June 2008, Baylor acquired an additional 25% interest in a facility it already co-owned with the Company and local physicians, which transferred control of the facility from the Company to Baylor. As a result, the Company now accounts for its investment in this facility under the equity method. The interest was sold by the Company in exchange for $2.3 million in cash. A $0.9 million pretax loss was generated on the sale. The Company undertook similar transactions in July 2007, which transferred control of two facilities to Baylor, and in July 2006, which transferred control of one facility to Baylor. The Company received cash proceeds of $3.7 million and $4.8 million, respectively, and recorded no gain on the 2007 transaction, for which the sales price approximated carrying value, and a $2.0 million gain on the 2006 transaction. The Company believes that the sales prices were negotiated on an arms’ length basis, and the price in each case equaled the value assigned by an external appraiser who valued the business immediately prior to the sale.

F-26

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

Also, as discussed in Note 3, in June 2008, the Company purchased all of Baylor’s ownership interests in an entity Baylor co-owned with the Company. This entity has ownership in and manages five facilities in the Dallas/Fort Worth area. The purchase price was approximately $3.9 million in cash. This entity was already a subsidiary of the Company and is now wholly owned by the Company. As noted above, the Company still operates 21 surgical facilities with Baylor, all of which are now subsidiaries of Baylor. The Company believes that the purchase price was negotiated on an arms’ length basis, and the purchase price equaled the value assigned by an external appraiser who valued the business immediately prior to the sale.

As discussed in Note 12, the Company’s parent issued warrants with an estimated fair value of $0.3 million to Baylor in 2008. Similar grants have been made to other healthcare systems with which the Company operates facilities.

Included in general and administrative expenses are management fees payable to an affiliate of Welsh Carson, which holds a controlling interest in the Company, in the amount of $2.0 million and $1.4 million for the year ended December 31, 2008 and the period from April 19 through December 31, 2007, respectively. Such amounts accrue at an annual rate of $2.0 million.

On October 1, 2007, the Company entered into an agreement with Accuro Healthcare Solutions, Inc. to provide revenue cycle management and other Web-based products and services. Welsh Carson, including certain of its affiliates, owned approximately 80% of the common stock of Accuro on the date of the agreement, and two of the Company’s directors, D. Scott Mackesy and Michael E. Donovan, were directors of Accuro. Under the agreement, Accuro provided approximately $0.1 million in services to the Company in 2007. Accuro Healthcare Solutions, Inc. was sold by Welsh Carson in 2008.


(11)	Income Taxes

The components of income (loss) from continuing operations before income taxes were as follows (in thousands):


	Successor				Predecessor
			Period from		Period from
			April 19		January 1
			through		through
			December 31,		April 18,
	2008		2007		2007			2006
Domestic	$	40,172	$	15,106	$	(6,715	)	$	53,265
Foreign		20,239		10,424		3,962			9,418

	$	60,411	$	25,530	$	(2,753	)	$	62,683

Income tax expense (benefit) attributable to income (loss) from continuing operations consists of (in thousands):


Successor	Current		Deferred		Total

Year ended December 31, 2008:
U.S. federal	$	44	$	13,819	$	13,863
State and local		3,020		—		3,020
Foreign		5,410		41		5,451

Net income tax expense	$	8,474	$	13,860	$	22,334

F-27

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


Successor	Current			Deferred			Total

Period from April 19 through December 31, 2007:
U.S. federal	$	(345	)	$	10,221		$	9,876
State and local		1,334			—			1,334
Foreign		3,460			(59	)		3,401

Net income tax expense	$	4,449		$	10,162		$	14,611


Predecessor	Current		Deferred			Total

Period from January 1 through April 18, 2007:
U.S. federal	$	—	$	1,516		$	1,516
State and local		1,302		(23	)		1,279
Foreign		1,528		(178	)		1,350

Net income tax expense	$	2,830	$	1,315		$	4,145


Predecessor	Current		Deferred			Total

Year ended December 31, 2006:
U.S. federal	$	10,785	$	7,791		$	18,576
State and local		2,902		(441	)		2,461
Foreign		2,731		(1,056	)		1,675

Net income tax expense	$	16,418	$	6,294		$	22,712

F-28

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

Income tax expense differed from the amount computed by applying the U.S. federal income tax rate of 35% to pretax income (loss) from continuing operations is as follows (in thousands):


	Successor						Predecessor
				Period from			Period from
				April 19			January 1
	Year Ended			through			through			Year Ended
	December 31,			December 31,			April 18,			December 31,
	2008			2007			2007			2006
Computed “expected” tax expense (benefit)	$	21,144		$	8,936		$	(963	)	$	21,939
Increase (reduction) in income taxes resulting from:
Differences between U.S. financial reporting and foreign statutory reporting		23			381			200			(1,007	)
State tax expense, net of federal benefit		1,963			874			824			1,445
Removal of foreign tax rate differential		(1,224	)		(628	)		(237	)		(614	)
Transaction costs		—			(453	)		2,250			—
Valuation allowance		(223	)		5,121			1,323			—
Other		651			380			748			949

Total	$	22,334		$	14,611		$	4,145		$	22,712

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at December 31, 2008 and 2007 are presented below (in thousands).


	December 31,
	2008			2007

Deferred tax assets:
Net operating loss and other tax carryforwards	$	17,009		$	16,139
Accrued expenses		11,433			10,340
Bad debts/reserves		8,064			7,135
Capitalized costs and other		2,052			4,208

Total deferred tax assets		38,558			37,822
Valuation allowance		(38,558	)		(37,822	)

Total deferred tax assets, net	$	—		$	—

Deferred tax liabilities:
Basis difference of acquisitions	$	122,582		$	105,425
Accelerated depreciation		2,850			3,730
Capitalized interest and other		207			259

Total deferred tax liabilities	$	125,639		$	109,414

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is

F-29

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

At December 31, 2008, the Company had federal net operating loss carryforwards for U.S. federal income tax purposes of approximately $39.0 million, all of which have been reserved due to restrictions as to their utilization. The Company’s ability to offset future taxable income with these carryforwards would begin to be forfeited in 2022, if unused. While the Successor’s U.S. operations generated $40.2 million of pretax income under generally accepted accounting principles during 2008, these operations generated an immaterial amount of income for tax purposes, primarily as a result of amortizing, for tax purposes, goodwill acquired by the Company in certain business combinations. Due to the magnitude of this amortization expense and other factors, the Company does not believe that it is more likely than not that it will be able to generate taxable U.S. income in future periods to utilize its net operating loss carryforwards and other deferred tax assets. Accordingly, the Successor has established a full valuation allowance against these assets. At December 31, 2008, the Company had state net operating loss carryforwards of approximately $43 million, all of which have a valuation allowance recorded against the deferred asset due to restrictions as to their utilization. Approximately $15.0 million of the total state net operating loss carryforwards were acquired through acquisitions. The Company does not believe that it is more likely than not that it will be able to generate future state taxable income in future periods to utilize its net operating loss carryforwards and other deferred tax assets.

The Successor’s U.K. operations have no net operating loss carryforwards or other deferred tax assets. These operations continued to be profitable in 2008, and the Successor therefore has accrued the related income tax expense.

The Company follows the Financial Accounting Standards Board (FASB) Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(FIN 48), in accounting for uncertainty in tax positions. The Company has analyzed its income tax filing positions in all of the federal and state jurisdictions where it is required to file income tax returns for all open tax years in these jurisdictions. The Company believes, based on the facts and technical merits associated with each of its income tax filing positions and deductions, that each of its income tax filing positions would be sustained on audit. Further, the Company has concluded that to the extent any adjustments to its income tax filing positions were not to be sustained upon an IRS or other audit, such adjustments would not have a material effect on the Company’s consolidated financial statements. As a result, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48. The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income before taxes. The Company has not recorded any material amounts for interest or penalties related to audit or other activity.


(12)	Equity-Based Compensation

As discussed in Note 1(q), the Company follows the guidance of SFAS 123R in accounting for equity-based compensation. Under SFAS 123R, the fair value of equity-based compensation, such as stock options and other stock-based awards to employees and directors, is measured at the date of grant and recognized as expense over the employee’s requisite service period.

Subsequent to the merger, the Company’s parent, USPI Group Holdings, Inc., granted stock options and nonvested share awards to certain employees and members of the board of directors of the Successor. These awards were granted pursuant to the 2007 Equity Incentive Plan (the Plan) which was adopted by USPI Group Holdings, Inc.’s board of directors. The board of directors or a designated administrator has the sole authority to determine which individuals receive grants, the type of grant to be received, the vesting period and all other option terms. Stock options granted generally have a term not to exceed eight years. A maximum of 20,726,523 shares of stock may be

F-30

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

delivered under the Plan. As 1,799,250 shares had been delivered under the Plan at December 31, 2008, 18,927,273 remained available for delivery, with 18,398,207 having been granted at December 31, 2008.

Awards granted by the Predecessor were granted pursuant to its 2001 Equity-Based Compensation Plan, which was adopted by USPI’s board of directors in February 2001. Stock options granted generally had an option price no less than 100% of the fair value of the common stock on the date of grant with the term not to exceed ten years.

Total equity-based compensation included in the consolidated statements of operations, classified by line item, is as follows (in thousands):


	Successor						Predecessor
				Period from			Period from
				April 19			January 1
	Year Ended			through			through			Year Ended
	December 31,			December 31,			April 18,			December 31
	2008			2007			2007			2006
Salaries, benefits and other employee costs	$	983		$	308		$	959		$	2,941
General and administrative expenses		978			643			16,144			9,034
Other operating expenses		336			859			—			—
Equity in earnings of unconsolidated affiliates		—			—			20			78
Minority interests in income of consolidated subsidiaries		—			—			(23	)		(79	)

Expense before income tax benefit		2,297			1,810			17,100			11,974
Income tax benefit(1)		(463	)		(192	)		(5,366	)		(3,684	)

Total equity-based compensation expense, net of tax	$	1,834		$	1,618		$	11,734		$	8,290

Total equity-based compensation, included in the consolidated statements of operations, classified by type of award, is as follows (in thousands):


	Successor						Predecessor
				Period from			Period from
				April 19			January 1
	Year Ended			through			through			Year Ended
	December 31,			December 31,			April 18,			December 31
	2008			2007			2007			2006
Share awards	$	1,150		$	773		$	13,202		$	9,423
Stock options		811			178			3,797			2,253
Warrants		336			859			—			—
ESPP(2)		—			—			101			298

Expense before income tax benefit		2,297			1,810			17,100			11,974
Income tax benefit(1)		(463	)		(192	)		(5,366	)		(3,684	)

Total equity-based compensation expense, net of tax	$	1,834		$	1,618		$	11,734		$	8,290


(1)		There is a tax benefit related to portions of the Company’s equity-based compensation. However, the realizability of this and other deductions is affected by the Company generating net operating losses in its overall U.S. tax computations since the merger. As the Company does not consider it more likely than not that

F-31

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


		these losses will be used to offset future taxable income, the Successor’s overall tax computations include a full valuation allowance against its U.S. net operating loss carryforwards and other deferred tax assets.

(2)		ESPP amounts are net of reimbursements by other owners of the Company’s investees. The ESPP was terminated subsequent to the merger.

Total unrecognized compensation related to Successor nonvested awards of stock options and nonvested shares was $15.0 million at December 31, 2008 of which $6.2 million is expected to be recognized over a weighted average period of four years. The remaining $8.8 million relates to restricted share awards exchanged in conjunction with the merger and will be expensed only upon the occurrence of a change in control or other qualified exit event.

During the year ended December 31, 2008, the Company received immaterial cash proceeds from the exercise of stock options. During the period from January 1 through April 18, 2007 and the year ended December 31, 2006, the Company received cash proceeds of $6.1 million and $7.4 million from the exercise of stock options and issuances of shares under the ESPP, respectively. Exercises of stock options and subsequent stock sales not qualifying for capital gains treatment and the release of restrictions on share awards resulted in a tax benefit of $15.8 million and $3.0 million for the period from January 1 through April 18, 2007, and for the year ended December 31, 2006, respectively. No stock options were exercised in the period from April 19 through December 31, 2007.

Stock Options — Successor

The Company’s parent, USPI Group Holdings, Inc. generally grants stock options vesting 25% per year over four years and having an eight-year contractual life. The fair value of stock options is estimated using the Black-Scholes formula. The expected lives of options are determined using the “simplified method” described in SEC Staff Accounting Bulletin No. 107, which defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. The risk-free interest rates are equal to rates of U.S. Treasury notes with maturities approximating the expected life of the option. Volatility was calculated as a weighted average based on the historical volatility of the Predecessor as well as industry peers. The assumptions are as follows:


				Period from
				April 19
	Year Ended			through
	December 31,			December 31,
	2008			2007

Assumptions:
Expected life in years		4.82			4.82
Risk-free interest rates		2.37-2.75	%		4.47	%
Dividend yield		0.0	%		0.0	%
Volatility		45.16	%		45.16	%
Weighted average grant-date fair value	$	0.55		$	0.25

F-32

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

Stock option activity during the year ended December 31, 2008 was as follows:


						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
Successor	Number of			Exercise		Contractual		Intrinsic
Stock Options	Shares (000)			Price		Life (Years)		Value ($000)

Outstanding at January 1, 2008		3,920		$	0.32		7.11	$	2,666
Additional grants		1,110			1.32		—		—
Exercised		(63	)		0.32		—		—
Forfeited or expired		(615	)		0.37		—		—

Outstanding at December 31, 2008		4,352		$	0.57		6.50	$	6,141

Exercisable at December 31, 2008		830		$	0.32		6.15	$	1,378

Share Awards — Successor

On April 19, 2007, USPI Group Holdings, Inc. granted nonvested share awards to certain Successor company employees. The first tranche (50%) of the share awards vest 25% over four years, while the second tranche (50%) vests 100% in April 2015, but can vest earlier upon the occurrence of a qualified exit event and Company performance. An additional grant was made to USPI Group Holding’s board of directors in August 2007. The nonvested shares granted to the board of directors vests 25% each year over four years. The value of such share awards is equal to the share price on the date of grant.

Additionally, in conjunction with the merger, USPI Group Holdings, Inc. cancelled 379,000 restricted share awards of the Predecessor. These share awards were replaced with 2,212,957 nonvested shares of USPI Group Holdings, Inc. This cancellation and exchange was accounted for as a modification under SFAS 123R. The replacement awards vest only upon the occurrence of a change in control or other exit event as defined in the award agreement and Company performance. As a result of the modification, approximately $8.8 million of unamortized compensation cost related to the Predecessor awards will only be expensed upon the occurrence of a change in control or qualified exit event, and the completion of the derived service period. At December 31, 2008, 2,212,957 of these share awards were outstanding and unvested.

The grants of nonvested share awards, excluding the awards exchanged concurrent with the merger, during the year ended December 31, 2008 are summarized as follows:


				Weighted
				Average
Successor	Number of			Grant-Date
Nonvested Shares	Shares (000)			Fair Value

Nonvested at January 1, 2008		13,570		$	0.46
Additional grants		—			—
Vested		(1,736	)		0.48
Forfeited		—			—

Nonvested at December 31, 2008		11,834		$	0.46

The Company did not grant any nonvested shares during 2008. The weighted average grant-date fair value per share award was $0.46 for the period from April 19 through December 31, 2007. The total fair value of shares which vested during the year ended December 31, 2008 was approximately $1.8 million. No shares vested during the period from April 19 through December 31, 2007.

F-33

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

Warrants — Successor

During 2008, one of the Company’s hospital partners, Baylor Health Care System (Baylor), was granted 666,666 warrants to purchase USPI Group Holdings, Inc., the Company’s parent, common stock for $3.00 per share. The warrants are fully vested and nonforfeitable but contain exercise restrictions. The exercise restrictions on 111,111 warrants lapse each December 31 beginning in 2008 and ending in 2013. The warrants have a contractual life of ten years. The total fair value of the warrants was approximately $0.3 million and was determined using the Black Scholes formula. The assumptions included an expected life equal to the contractual life of the warrants; a risk free interest rate of 3.5%, a dividend yield of 0.0%; and an estimated volatility of approximately 59%. Because the warrants are fully vested, the expense associated with these warrants was recorded upon grant within other operating expenses. Baylor’s Chief Executive Officer, Joel T. Allison, is a member of the Company’s Board of Directors (Note 10).

During the period April 19 through December 31, 2007, USPI Group Holdings, Inc, granted a total of 2,333,328 warrants to purchase its common stock to four of the Company’s hospital partners. The exercise price of the warrants was $3.00 per share. All of the warrants are fully vested and non-forfeitable but contain exercise restrictions. Of the 2,333,328 warrants outstanding at December 31, 2008, 722,221 warrants are exercisable and a portion of the remaining 1,611,107 warrants will become exercisable in 2009 and become fully exercisable by 2013. The warrants have a contractual life of eight to ten years. The total fair value of the warrants was approximately $1.1 million and was determined using the Black Scholes formula. The assumptions included an expected life equal to the contractual life of each warrant; a risk free interest rate of 3.6% to 4.6%; a dividend yield of 0.0%; and an estimated volatility of approximately 59%. Because the warrants are fully vested, the expense associated with these warrants was recorded upon grant within other operating expenses.

Stock Options and Share Awards — Predecessor

Historically, the Predecessor granted stock options with an exercise price equal to the stock price on the date of grant, vesting 25% per year over four years, and having a five-year contractual life. Most awards granted prior to 2003 had a ten-year contractual life. The fair values of stock options were estimated at the date of grant using the Black-Scholes formula. The expected lives of options were determined using the “simplified method” described in SEC Staff Accounting Bulletin No. 107. The risk-free interest rates were equal to rates of U.S. Treasury notes with maturities approximating the expected life of the option. Other assumptions were derived from the Company’s historical experience. The assumptions were as follows:


	Year Ended
	December 31,
	2006

Assumptions:
Expected life in years		3.75
Risk-free interest rates		4.3%-5.0	%
Dividend yield		0.0	%
Volatility		30.0	%
	$	9.52

Approximately 3,296,000 stock options were outstanding on January 1, 2007 with a weighted average exercise price of $15.49. No stock options were granted during the period from January 1 through April 18, 2007. As a result of the merger, all of the Company’s restricted stock awards, except as otherwise agreed by the holders and the Company, and all of its stock options were immediately vested. As a result, the Company recorded pretax expense of approximately $13.8 million related to such acceleration in its Predecessor statement of operations on April 18, 2007.

F-34

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

The total intrinsic value of options exercised during the period from January 1 through April 18, 2007 prior to the acceleration noted above was $8.3 million. The total intrinsic value of options exercised during the year ended December 31, 2006 was $7.4 million.

The Predecessor’s share awards vested based on a combination of service and Company performance. Approximately 1,563,000 nonvested shares were outstanding on January 1, 2007 with a weighted average grant date fair value of $28.59. As a result of the merger, all of the Company’s unvested restricted share awards, except as otherwise agreed to by the holders and the Company, immediately vested and the holders of these restricted share awards received $31.05 per share in cash. As discussed above, 379,000 of the Predecessor’s restricted share awards were exchanged with the Successor’s parent nonvested share awards in conjunction with the merger.

The weighted average grant-date fair value per share award was $33.39 at December 31, 2006. No restricted share awards were granted in the period from January 1 through April 18, 2007. The total fair value of shares whose restrictions were released and units that vested and were converted to unrestricted shares during the period from January 1 through April 18, 2007, prior to the acceleration of vesting, was approximately $8.3 million. The total fair value of shares whose restrictions were released and units that vested and were converted to unrestricted shares during the year ended December 31, 2006 was $3.8 million.

Employee Stock Purchase Plan — Predecessor

The Predecessor adopted the Employee Stock Purchase Plan (ESPP) on February 13, 2001. Any eligible employee could elect to participate in the plan by authorizing the Company’s options and compensation committee to make payroll deductions to pay the exercise price of an option at the time and in the manner prescribed by the Company’s options and compensation committee. The ESPP was terminated after the merger. During the period from January 1 through April 18, 2007, a total of 30,186 shares were issued under the ESPP with an intrinsic value of $0.2 million. During 2006, a total of 85,923 shares were issued under the ESPP, with an intrinsic value of $0.4 million.

The fair value of ESPP awards was estimated at the date of grant using the Black-Scholes formula using the same assumptions as used for the Predecessor’s stock option valuations, except that the ESPP had a three-month term beginning in 2006 and a risk-free rate equal to the risk-free rate on a three-month U.S. Treasury note. The assumptions were as follows:


	Predecessor
	Period from
	January 1
	through			Year Ended
	April 18,			December 31,
	2007			2006

Expected life in years		0.25			0.25
Weighted average interest rate		5.1	%		4.2-5.1	%
Dividend yield		0.0	%		0.0	%
Volatility		30.0	%		30.0	%
Grant-date fair value per share	$	6.05		$	5.25-7.56

F-35

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


(13)	Segment Disclosures

Statement of Financial Accounting Standards No. 131,Disclosures About Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments in financial statements. The Company’s business is the operation of ambulatory surgery centers, surgical hospitals and related businesses in the United States and the United Kingdom. The Company’s chief operating decision maker, as that term is defined in the accounting standard, regularly reviews financial information about its surgical facilities for assessing performance and allocating resources both domestically and abroad. Accordingly, the Company’s reportable segments consist of (1) U.S. based facilities and (2) United Kingdom based facilities. All amounts related to discontinued operations have also been removed from all periods presented (Note 2).


	United			United
Successor	States			Kingdom			Total

Year Ended December 31, 2008
Net patient service revenues	$	439,501		$	122,031		$	561,532
Other revenues		80,691			—			80,691

Total revenues	$	520,192		$	122,031		$	642,223

Depreciation and amortization	$	29,932		$	6,825		$	36,757
Operating income		174,294			25,462			199,756
Net interest expense		(77,248	)		(5,173	)		(82,421	)
Income tax expense		(16,882	)		(5,452	)		(22,334	)
Total assets		1,983,676			284,487			2,268,163
Capital expenditures		16,246			16,883			33,129


	United			United
Successor	States			Kingdom			Total

Period from April 19 through December 31, 2007
Net patient service revenues	$	318,060		$	84,373		$	402,433
Other revenues		50,055			—			50,055

Total revenues	$	368,115		$	84,373		$	452,488

Depreciation and amortization	$	21,591		$	5,097		$	26,688
Operating income		120,821			14,925			135,746
Net interest expense		(60,182	)		(4,472	)		(64,654	)
Income tax expense		(11,210	)		(3,401	)		(14,611	)
Total assets		1,906,471			370,922			2,277,393
Capital expenditures		13,663			5,339			19,002

F-36

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


	United			United
Predecessor	States			Kingdom			Total

Period from January 1 through April 18, 2007
Net patient service revenues	$	136,865		$	33,733		$	170,598
Other revenues		20,757			—			20,757

Total revenues	$	157,622		$	33,733		$	191,355

Depreciation and amortization	$	9,486		$	2,939		$	12,425
Operating income		20,929			5,409			26,338
Net interest expense		(7,150	)		(1,438	)		(8,588	)
Income tax expense		(2,795	)		(1,350	)		(4,145	)
Total assets		1,114,429			209,279			1,323,708
Capital expenditures		5,224			2,625			7,849


	United			United
Predecessor	States			Kingdom			Total

Year Ended December 31, 2006
Net patient service revenues	$	411,347		$	95,994		$	507,341
Other revenues		60,033			—			60,033

Total revenues	$	471,380		$	95,994		$	567,374

Depreciation and amortization	$	26,353		$	8,163		$	34,516
Operating income		145,375			13,584			158,959
Net interest expense		(25,180	)		(3,357	)		(28,537	)
Income tax expense		(21,037	)		(1,675	)		(22,712	)
Total assets		1,027,243			204,613			1,231,856
Capital expenditures		22,383			11,116			33,499


(14)	Commitments and Contingencies


*(a)*	*Financial Guarantees*

As of December 31, 2008, the Company had issued guarantees of the indebtedness and other obligations of its investees to third parties, which could potentially require the Company to make maximum aggregate payments totaling approximately $62.6 million. Of the total, $34.2 million relates to the obligations of consolidated subsidiaries, whose obligations are included in the Company’s consolidated balance sheet and related disclosures. The remaining $28.4 million relates to the obligations of unconsolidated affiliated companies, whose obligations are not included in the Company’s consolidated balance sheet and related disclosures.

In accordance with Financial Accounting Standards Board Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, the Company has recorded long-term liabilities totaling approximately $0.1 million related to the guarantees the Company has issued to unconsolidated affiliates on or after January 1, 2003, and has not recorded any liabilities related to guarantees issued prior to that date. Generally, these arrangements (a) consist of guarantees of real estate and equipment financing, (b) are secured by the related property and equipment, (c) require payments by the Company, when the collateral is insufficient, in the event of a default by the investee primarily obligated under the financing, (d) expire as the underlying debt matures at various dates through 2019, and (e) provide no recourse for the

F-37

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

Company to recover any amounts from third parties. The Company also has $1.6 million of letters of credit outstanding, as discussed in Note 7.


*(b)*	*Litigation*

From time to time the Company is named as a party to legal claims and proceedings in the ordinary course of business. The Company’s management is not aware of any claims or proceedings that are expected to have a material adverse impact on the Company.


*(c)*	*Self Insurance and Professional Liability Claims*

The Company is self-insured for certain losses related to health and workers’ compensation claims, although we obtain third-party insurance coverage to limit our exposure to these claims. The Company estimates its self-insured liabilities using a number of factors including historical claims experience, an estimate of incurred but not reported claims, demographic factors, severity factors and actuarial valuations. The Company believes that the accruals established at December 31, 2008, which were estimated based on actual employee health claim patterns, adequately provide for its exposure under this arrangement. The Company’s potential for losses related to professional and general liability is managed through a wholly-owned insurance captive.


*(d)*	*Employee Benefit Plans*

The Company’s eligible U.S. employees may choose to participate in the United Surgical Partners International, Inc. 401(k) Plan under which the Company may elect to make contributions that match from zero to 100% of participants’ contributions. Charges to expense under this plan for the year ended December 31, 2008 were $2.0 million. Charges to expense for the period January 1 through April 18, 2007, the period April 19 through December 31, 2007 and the year ended December 31, 2006 were $0.5 million, $1.3 million, and $1.5 million, respectively.

One of the Company’s U.K. subsidiaries, which the Company acquired in 2000, has obligations remaining under a defined benefit pension plan that originated in 1991 and was closed to new participants at the end of 1998. At December 31, 2008, the plan had 70 participants, plan assets of $6.9 million, an accumulated pension benefit obligation of $9.4 million, and a projected benefit obligation of $9.4 million. At December 31, 2007, the plan had 74 participants, plan assets of $11.9 million, an accumulated pension benefit obligation of $14.0 million, and a projected benefit obligation of $15.3 million. Pension expense for the year ended December 31, 2008 was $0.3 million. Pension expense was $0.1 million, $0.3 million, and $0.2 million for the period from January 1 through April 18, 2007, the period from April 19 through December 31, 2007, and the year ended December 31, 2006, respectively.

The Company’s Deferred Compensation Plan covers select members of management as determined by its Options and Compensation Committee. Under the plan, eligible employees may contribute a portion of their salary and annual bonus on a pretax basis. The plan is a non-qualified plan; therefore, the associated liabilities are included in the Company’s consolidated balance sheets as of December 31, 2008 and 2007. In addition, the Company maintains an irrevocable grantor’s trust to hold assets that fund benefit obligations under the plan, including corporate-owned life insurance policies. The cash surrender value of such policies is included in the consolidated balance sheets as other noncurrent assets and totaled $7.5 million and $7.6 million at December 31, 2008 and 2007, respectively. The Company’s obligations related to the plan were $7.2 million and $7.3 million, at December 31, 2008 and 2007, respectively, and are included in other long-term liabilities. Total expense under the plan for the year ended December 31, 2008 was $1.2 million. Total expense for the period January 1 through April 18, 2007, the period April 19 through December 31, 2007 and the year ended December 31, 2006 was $0.3 million, $0.6 million, and $0.7 million, respectively.

F-38

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


*(e)*	*Employment Agreements*

The Company entered into employment agreements dated April 19, 2007 with Donald E. Steen and William H. Wilcox. The agreement with Mr. Steen, who serves as the Company’s Chairman provides for annual base compensation of $300,000 (as of December 31, 2008), subject to increases approved by the board of directors, a performance bonus based on the sole discretion of the Company’s Board of Directors, and his continued employment until November 14, 2011.

The agreement with Mr. Wilcox, the Company’s President and Chief Executive Officer provides for annual base compensation of $600,000 (as of December 31, 2008), subject to increases approved by the board of directors, and Mr. Wilcox is eligible for a performance bonus based on the sole discretion of the Company’s Board of Directors. The agreement renews automatically for two-year terms unless terminated by either party.

At December 31, 2008, the Company has employment agreements with 19 other senior managers which include one year terms and renew automatically for additional one year terms unless terminated by either party. The total annual base compensation under these agreements is $5.4 million as of December 31, 2008, subject to increases approved by the board of directors, and performance bonuses of up to a total of $3.4 million per year.


(15)	Subsequent Events

In January 2009, the Company acquired ownership interests in two facilities in Denver, Colorado and an additional facility in the Dallas/Fort Worth area. Each of these facilities is associated with a not-for-profit hospital partner. Also, effective February 1, 2009, the Company finalized the sales of facilities in Las Cruces, New Mexico and East Brunswick, New Jersey. In February 2009, the Company acquired ownership in a surgical facility in Stockton, California, which is also associated with a not-for-profit hospital partner.

The Company has entered into letters of intent with various entities regarding possible joint venture, development or other transactions. These possible joint ventures, developments or other transactions are in various stages of negotiation.


(16)	Condensed Consolidating Financial Statements

The following information is presented as required by regulations of the Securities and Exchange Commission (SEC) in connection with the Company’s senior subordinated notes that have been registered with the SEC. While not required by SEC regulations, additional disclosures have also been presented in this note as required by the Company’s senior secured credit facility’s covenants. None of this information is routinely prepared for use by management. The operating and investing activities of the separate legal entities included in the consolidated financial statements are fully interdependent and integrated. Accordingly, the operating results of the separate legal entities are not representative of what the operating results would be on a stand-alone basis. Revenues and operating expenses of the separate legal entities include intercompany charges for management and other services.

The $240.0 million of 87/8% senior subordinated notes and $200.0 million of 91/4%/10% senior subordinated toggle notes, all due 2017 (the Notes), were issued in a private offering on April 19, 2007 and were subsequently registered as publicly traded securities through aForm S-4 declared effective by the SEC on July 25, 2007. The exchange offer was completed in August 2007. The Notes are unsecured senior subordinated obligations of the Company; however, the Notes are guaranteed by all of the Company’s current and future direct and indirect wholly-owned domestic subsidiaries. USPI, which issued the Notes, does not have independent assets or operations. USPI’s investees in the United Kingdom are not guarantors of the obligation. USPI’s investees in the United States in which USPI owns less than 100% are not guarantors of the obligation. The financial positions and results of operations (below, in thousands) of the respective guarantors are based upon the guarantor relationship at the end of the period presented. Consolidation adjustments include purchase accounting entries for investments in which the Company’s

F-39

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

ownership percentage in non-participating investees is not high enough to permit the application of pushdown accounting.

Condensed Consolidating Balance Sheets:


			Non-Participating		Consolidation			Consolidated
As of December 31, 2008	Guarantors		Investees		Adjustments			Total

Assets
Current assets:
Cash and cash equivalents	$	42,025	$	7,410	$	—		$	49,435
Accounts receivable, net		—		57,172		41			57,213
Other receivables		43,033		39,454		(65,417	)		17,070
Inventories of supplies		109		8,970		—			9,079
Prepaids and other current assets		9,625		2,110		—			11,735

Total current assets		94,792		115,116		(65,376	)		144,532
Property and equipment, net		16,036		184,959		829			201,824
Investments in affiliates		1,022,144		63		(714,436	)		307,771
Goodwill and intangible assets, net		790,491		322,866		475,782			1,589,139
Other assets		97,400		152		(72,655	)		24,897

Total assets	$	2,020,863	$	623,156	$	(375,856	)	$	2,268,163

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	910	$	21,284	$	—		$	22,194
Accrued expenses and other		153,249		46,371		(62,932	)		136,688
Current portion of long-term debt		5,556		20,368		(1,436	)		24,488

Total current liabilities		159,715		88,023		(64,368	)		183,370
Long-term debt, less current portion		954,968		139,445		(20,954	)		1,073,459
Other long-term liabilities		142,043		12,169		(1,056	)		153,156
Minority interests		—		12,184		81,857			94,041
Stockholders’ equity		764,137		371,335		(371,335	)		764,137

Total liabilities and stockholders’ equity	$	2,020,863	$	623,156	$	(375,856	)	$	2,268,163

F-40

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


			Non-Participating		Consolidation			Consolidated
As of December 31, 2007	Guarantors		Investees		Adjustments			Total

Assets
Current assets:
Cash and cash equivalents	$	66,665	$	10,093	$	—		$	76,758
Accounts receivable, net		—		59,796		(239	)		59,557
Other receivables		26,616		43,019		(60,661	)		8,974
Inventories of supplies		—		9,597		(102	)		9,495
Prepaids and other current assets		17,696		2,473		(113	)		20,056

Total current assets		110,977		124,978		(61,115	)		174,840
Property and equipment, net		15,452		212,149		1,438			229,039
Investments in affiliates		951,129		1,565		(685,337	)		267,357
Goodwill and intangible assets, net		834,711		378,619		377,490			1,590,820
Other assets		93,703		1,102		(79,468	)		15,337

Total assets	$	2,005,972	$	718,413	$	(446,992	)	$	2,277,393

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,607	$	21,535	$	(160	)	$	22,982
Accrued expenses and other		152,649		46,282		(59,815	)		139,116
Current portion of long-term debt		3,787		22,831		(1,307	)		25,311

Total current liabilities		158,043		90,648		(61,282	)		187,409
Long-term debt, less current portion		926,519		156,725		(10,493	)		1,072,751
Other long-term liabilities		114,604		14,054		(1,294	)		127,364
Minority interests		—		14,061		69,002			83,063
Stockholders’ equity		806,806		442,925		(442,925	)		806,806

Total liabilities and stockholders’ equity	$	2,005,972	$	718,413	$	(446,992	)	$	2,277,393

F-41

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

Condensed Consolidating Statements of Operations:


				Non-Participating			Consolidation			Consolidated
Year Ended December 31, 2008 — Successor	Guarantors			Investees			Adjustments			Total

Revenues	$	94,119		$	572,029		$	(23,925	)	$	642,223
Equity in earnings of unconsolidated affiliates		113,516			2,465			(68,939	)		47,042
Operating expenses, excluding depreciation and amortization		76,204			400,474			(23,926	)		452,752
Depreciation and amortization		6,993			29,224			540			36,757

Operating income		124,438			144,796			(69,478	)		199,756
Interest expense, net		(70,024	)		(12,493	)		96			(82,421	)
Other income (expense), net		(1,383	)		(97	)		(310	)		(1,790	)

Income before minority interests		53,031			132,206			(69,692	)		115,545
Minority interests in income of consolidated subsidiaries		—			(6,956	)		(48,178	)		(55,134	)

Income from continuing operations before income taxes		53,031			125,250			(117,870	)		60,411
Income tax expense		(14,954	)		(7,384	)		4			(22,334	)

Income from continuing operations		38,077			117,866			(117,866	)		38,077
Loss from discontinued operations, net of tax		(563	)		—			—			(563	)

Net income	$	37,514		$	117,866		$	(117,866	)	$	37,514


Period from April 19 through				Non-Participating			Consolidation			Consolidated
December 31, 2007 — Successor	Guarantors			Investees			Adjustments			Total

Revenues	$	63,009		$	410,684		$	(21,205	)	$	452,488
Equity in earnings of unconsolidated affiliates		71,090			833			(48,056	)		23,867
Operating expenses, excluding depreciation and amortization		52,233			282,881			(21,193	)		313,921
Depreciation and amortization		5,287			20,778			623			26,688

Operating income		76,579			107,858			(48,691	)		135,746
Interest expense, net		(55,180	)		(9,474	)		—			(64,654	)
Other income (expense), net		(574	)		177			(45	)		(442	)

Income before minority interests		20,825			98,561			(48,736	)		70,650
Minority interests in income of consolidated subsidiaries		—			(7,618	)		(37,502	)		(45,120	)

Income from continuing operations before income taxes		20,825			90,943			(86,238	)		25,530
Income tax expense		(9,906	)		(4,881	)		176			(14,611	)

Income from continuing operations		10,919			86,062			(86,062	)		10,919
Loss from discontinued operations, net of tax		(2,190	)		—			—			(2,190	)

Net income	$	8,729		$	86,062		$	(86,062	)	$	8,729
								��

F-42

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


Period from January 1 through				Non-Participating			Consolidation			Consolidated
April 18, 2007 — Predecessor	Guarantors			Investees			Adjustments			Total

Revenues	$	26,714		$	173,575		$	(8,934	)	$	191,355
Equity in earnings of unconsolidated affiliates		28,137			158			(18,389	)		9,906
Operating expenses, excluding depreciation and amortization		51,244			120,371			(9,118	)		162,497
Depreciation and amortization		2,219			9,408			799			12,426

Operating income		1,388			43,954			(19,004	)		26,338
Interest expense, net		(4,996	)		(3,592	)		—			(8,588	)
Loss on early retirement of debt		(2,435	)		—			—			(2,435	)
Other income (expense), net		917			(718	)		599			798

Income (loss) before minority interests		(5,126	)		39,644			(18,405	)		16,113
Minority interests in income of consolidated subsidiaries		—			(4,855	)		(14,011	)		(18,866	)

Income (loss) from continuing operations before income taxes		(5,126	)		34,789			(32,416	)		(2,753	)
Income tax (expense) benefit		(1,772	)		(2,375	)		2			(4,145	)

Income (loss) from continuing operations		(6,898	)		32,414			(32,414	)		(6,898	)
Loss from discontinued operations, net of tax		(251	)		—			—			(251	)

Net income (loss)	$	(7,149	)	$	32,414		$	(32,414	)	$	(7,149	)


				Non-Participating			Consolidation			Consolidated
Year Ended December 31, 2006 — Predecessor	Guarantors			Investees			Adjustments			Total

Revenues	$	84,921		$	508,982		$	(26,529	)	$	567,374
Equity in earnings of unconsolidated affiliates		93,460			2,209			(64,101	)		31,568
Operating expenses, excluding depreciation and amortization		80,279			352,072			(26,884	)		405,467
Depreciation and amortization		8,310			26,178			28			34,516

Operating income		89,792			132,941			(63,774	)		158,959
Interest expense, net		(17,217	)		(11,320	)		—			(28,537	)
Other income (expense), net		(13,017	)		225			(315	)		(13,107	)

Income before minority interests		59,558			121,846			(64,089	)		117,315
Minority interests in income of consolidated subsidiaries		—			(15,353	)		(39,279	)		(54,632	)

Income from continuing operations before income taxes		59,558			106,493			(103,368	)		62,683
Income tax expense		(19,587	)		(3,201	)		76			(22,712	)

Income from continuing operations		39,971			103,292			(103,292	)		39,971
Loss from discontinued operations, net of tax		(5,725	)		—			—			(5,725	)

Net income	$	34,246		$	103,292		$	(103,292	)	$	34,246

F-43

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

Condensed Consolidating Statements of Comprehensive Income (Loss):


				Non-Participating			Consolidation			Consolidated
Year Ended December 31, 2008 — Successor	Guarantor			Investees			Adjustments			Total

Net income (loss)	$	37,514		$	117,866		$	(117,866	)	$	37,514
Other comprehensive income:
Foreign currency translation adjustments		(71,790	)		(71,790	)		71,790			(71,790	)
Unrealized loss on interest rate swaps, net of tax		(10,051	)		(1,280	)		1,280			(10,051	)
Pension adjustments, net of tax		(682	)		(682	)		682			(682	)

Other comprehensive income (loss)		(82,523	)		(73,752	)		73,752			(82,523	)

Comprehensive income (loss)	$	(45,009	)	$	44,114		$	(44,114	)	$	(45,009	)


Period from April 19 through				Non-Participating			Consolidation			Consolidated
December 31, 2007 — Successor	Guarantors			Investees			Adjustments			Total

Net income (loss)	$	8,729		$	86,062		$	(86,062	)	$	8,729
Other comprehensive income:
Foreign currency translation adjustments		(1,646	)		(1,646	)		1,646			(1,646	)
Pension adjustments, net of tax		161			161			(161	)		161

Other comprehensive income (loss)		(1,485	)		(1,485	)		1,485			(1,485	)

Comprehensive income (loss)	$	7,244		$	84,577		$	(84,577	)	$	7,244


Period from January 1 through				Non-Participating		Consolidation			Consolidated
April 18, 2007 — Predecessor	Guarantors			Investees		Adjustments			Total

Net income (loss)	$	(7,149	)	$	32,414	$	(32,414	)	$	(7,149	)
Other comprehensive income:
Foreign currency translation adjustments		2,169			2,169		(2,169	)		2,169

Comprehensive income (loss)	$	(4,980	)	$	34,583	$	(34,583	)	$	(4,980	)

F-44

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

Condensed Consolidating Statements of Stockholders’ Equity:


				Non-Participating			Consolidation			Consolidated
	Guarantors			Investees			Adjustments			Total

Predecessor
Balance, December 31, 2006	$	599,274		$	268,367		$	(268,367	)	$	599,274
Net income (loss)		(7,149	)		32,414			(32,414	)		(7,149	)
Equity-based compensation expense		17,100			—			—			17,100
Acquisitions and contributions		—			36,126			(36,126	)		—
Disposals and deconsolidations		—			(3,628	)		3,628			—
Distributions		—			(55,096	)		55,096			—
Foreign currency translation and other		2,169			2,169			(2,169	)		2,169
Stock issuances and related tax benefit		19,841			—			—			19,841

Balance, April 18, 2007	$	631,235		$	280,352		$	(280,352	)	$	631,235


				Non-Participating			Consolidation			Consolidated
	Guarantors			Investees			Adjustments			Total

Successor
Balance, April 19, 2007	$	—		$	—		$	—		$	—
Net equity contribution from USPI Group Holdings, Inc.		783,994			448,081			(448,081	)		783,994
Net income		8,729			86,062			(86,062	)		8,729
Contribution related to equity award grants by USPI Group Holdings, Inc.		2,091			—			—			2,091
Additional equity contribution from USPI Group Holdings, Inc.		13,477			—			—			13,477
Acquisitions and contributions		—			9,974			(9,974	)		—
Disposals and deconsolidations		—			(8,192	)		8,192			—
Distributions		—			(91,515	)		91,515			—
Foreign currency translation and other		(1,485	)		(1,485	)		1,485			(1,485	)

Balance, December 31, 2007		806,806			442,925			(442,925	)		806,806

Net income		37,514			117,866			(117,866	)		37,514
Contribution related to equity award grants by USPI Group Holdings, Inc.		2,340			513			(513	)		2,340
Acquisitions and contributions		—			12,918			(12,918	)		—
Disposals and deconsolidations		—			(15,675	)		15,675			—
Distributions		—			(113,463	)		113,463			—
Foreign currency translation and other		(82,523	)		(73,749	)		73,749			(82,523	)

Balance, December 31, 2008	$	764,137		$	371,335		$	(371,335	)	$	764,137

F-45

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

Condensed Consolidating Statements of Cash Flows:


				Non-Participating			Consolidation			Consolidated
Year Ended December 31, 2008 — Successor	Guarantor			Investees			Adjustments			Total

Cash flows from operating activities:
Net income (loss)	$	37,514		$	117,866		$	(117,866	)	$	37,514
Loss on discontinued operations		563			—			—			563
Changes in operating and intercompany assets and liabilities and noncash items included in net income (loss)		12,306			35,812			5,015			53,133

Net cash provided by (used in) operating activities		50,383			153,678			(112,851	)		91,210
Cash flows from investing activities:
Purchases of property and equipment, net		(4,189	)		(26,974	)		—			(31,163	)
Purchases of new businesses and equity interests, net		(90,622	)		(107	)		—			(90,729	)
Other items, net		(5,202	)		(3,084	)		2,411			(5,875	)

Net cash used in investing activities		(100,013	)		(30,165	)		2,411			(127,767	)
Cash flows from financing activities:
Long-term borrowings, net		28,700			(13,455	)		1,527			16,772
Net equity contributions from USPI Group Holdings, Inc.		40			—			—			40
Other items, net		(3,799	)		(112,692	)		108,913			(7,578	)

Net cash provided by (used in) financing activities		24,941			(126,147	)		110,440			9,234

Net cash provided by discontinued operations		49			—			—			49
Effect of exchange rate changes on cash		—			(49	)		—			(49	)

Net decrease in cash		(24,640	)		(2,683	)		—			(27,323	)
Cash at the beginning of the period		66,665			10,093			—			76,758

Cash at the end of the period	$	42,025		$	7,410		$	—		$	49,435

F-46

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


Period from April 19 through				Non-Participating			Consolidation			Consolidated
December 31, 2007 — Successor	Guarantors			Investees			Adjustments			Total

Cash flows from operating activities:
Net income (loss)	$	8,729		$	86,062		$	(86,062	)	$	8,729
Loss from discontinued operations		2,190			—			—			2,190
Changes in operating and intercompany assets and liabilities and noncash items included in net income (loss)		24,226			34,739			(2,526	)		56,439

Net cash provided by (used in) operating activities		35,145			120,801			(88,588	)		67,358
Cash flows from investing activities:
Purchases of property and equipment, net		(3,733	)		(7,990	)		—			(11,723	)
Purchases and sales of new businesses and equity interests, net		(73,049	)		—			—			(73,049	)
Other items, net		18,968			12,104			(20,244	)		10,828

Net cash (used in) provided by investing activities		(57,814	)		4,114			(20,244	)		(73,944	)
Cash flows from financing activities:
Long-term borrowings, net		703,031			(20,104	)		2,265			685,192
Net equity contributions from USPI Group Holdings, Inc.		779,279			—			—			779,279
Payments to repurchase common stock		(1,430,879	)		—			—			(1,430,879	)
Other items, net		(43,308	)		(97,389	)		106,567			(34,130	)

Net cash provided by (used in) financing activities		8,123			(117,493	)		108,832			(538	)

Net cash provided by discontinued operations		755			—			—			755
Effect of exchange rate changes on cash		—			(70	)		—			(70	)

Net increase (decrease) in cash		(13,791	)		7,352			—			(6,439	)
Cash at the beginning of the period		80,456			2,741			—			83,197

Cash at the end of the period	$	66,665		$	10,093		$	—		$	76,758

F-47

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


Period from January 1 through				Non-Participating			Consolidation			Consolidated
April 18, 2007 — Predecessor	Guarantors			Investees			Adjustments			Total

Cash flows from operating activities:
Net income (loss)	$	(7,149	)	$	32,414		$	(32,414	)	$	(7,149	)
Loss from discontinued operations		251			—			—			251
Changes in operating and intercompany assets and liabilities and noncash items included in net income (loss)		35,733			21,989			(21,725	)		35,997

Net cash provided by (used in) operating activities		28,835			54,403			(54,139	)		29,099
Cash flows from investing activities:
Purchases of property and equipment, net		(576	)		(5,596	)		—			(6,172	)
Purchases and sales of new businesses and equity interests, net		(10,789	)		—			—			(10,789	)
Other items, net		(4,490	)		(8,411	)		4,373			(8,528	)

Net cash provided by (used in) investing activities		(15,855	)		(14,007	)		4,373			(25,489	)
Cash flows from financing activities:
Long-term borrowings, net		(511	)		9,688			4,083			13,260
Proceeds from issuance of common stock		6,135			—			—			6,135
Change in cash held on behalf of unconsolidated affiliates		22,306			45			(8,456	)		13,895
Other items, net		15,821			(55,081	)		54,139			14,879

Net cash provided by (used in) financing activities		43,751			(45,348	)		49,766			48,169

Net cash used in discontinued operations		(209	)		—			—			(209	)
Effect of exchange rate changes on cash		—			(113	)		—			(113	)

Net increase (decrease) in cash		56,522			(5,065	)		—			51,457
Cash at the beginning of the period		23,934			7,806			—			31,740

Cash at the end of the period	$	80,456		$	2,741		$	—		$	83,197

F-48

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


				Non-Participating			Consolidation			Consolidated
Year Ended December 31, 2006 — Predecessor	Guarantor			Investees			Adjustments			Total

Cash flows from operating activities:
Net income (loss)	$	34,246		$	103,292		$	(103,292	)	$	34,246
Loss from discontinued operations		5,725			—			—			5,725
Changes in operating and intercompany assets and liabilities and noncash items included in net income (loss)		41,468			40,208			(20,172	)		61,504

Net cash provided by (used in) operating activities		81,439			143,500			(123,464	)		101,475
Cash flows from investing activities:
Purchases of property and equipment, net		(3,838	)		(24,384	)		—			(28,222	)
Purchases of new businesses and equity interests, net		(261,734	)		9,228			—			(252,506	)
Other items, net		2,798			6,592			(7,559	)		1,831

Net cash used in investing activities		(262,774	)		(8,564	)		(7,559	)		(278,897	)
Cash flows from financing activities:
Long-term borrowings, net		38,925			(10,060	)		857			29,722
Proceeds from issuance of common stock		7,684			—			—			7,684
Other items, net		37,364			(124,779	)		130,166			42,751

Net cash provided by (used in) financing activities		83,973			(134,839	)		131,023			80,157

Net cash used in discontinued operations		(1,328	)		—			—			(1,328	)
Effect of exchange rate changes on cash		—			(107	)		—			(107	)

Net increase (decrease) in cash		(98,690	)		(10	)		—			(98,700	)
Cash at the beginning of the period		122,624			7,816			—			130,440

Cash at the end of the period	$	23,934		$	7,806		$	—		$	31,740


(17)	New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51(SFAS 160). SFAS 160 requires a company to clearly identify and present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the Company’s equity. It also requires the amounts of

F-49

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007

consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations; changes in ownership interest to be accounted for as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary must be measured at fair value. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS 160 will apply to the Company’s minority interests beginning on January 1, 2009.

In March 2008, the FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires enhanced disclosures about an entity’s derivative instruments and hedging activities including: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations; and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with earlier application encouraged. The Company elected to adopt the provisions of SFAS 161 during the first quarter of 2008. The adoption of SFAS 161 did not have any impact on the Company’s consolidated financial position, results of operations or cash flows.

In April 2008, the FASB issued FASB Staff Position (FSP)No. 142-3,Determination of the Useful Life of Intangible Assets.FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,Goodwill and Other Intangible Assets. The intent ofFSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007),Business Combinations, and other U.S. generally accepted accounting principles.FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The adoption ofFSP 142-3 is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

In November 2008, the FASB ratified EITFNo. 08-6,Equity Method Investment Accounting Considerations(EITF 08-6).EITF 08-6 clarifies the accounting for certain transactions and impairment considerations involving equity method investments.EITF 08-6 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The adoption ofEITF 08-6 is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

Also, in December 2008, the FASB issued FSP FAS 132(R)-1,Employers’ Disclosures about Postretirement Benefit Plan Assets. This FSP amends SFAS 132(R),Employers’ Disclosures about Pensions and Other Postretirement Benefits,to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by this FSP shall be provided for fiscal years ending after December 15, 2009. The Company does not expect that FSP FAS 132(R)-1 will have a material impact on its consolidated financial statements disclosures.

F-50

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)
December 31, 2008 and 2007


(18)	Selected Quarterly Financial Data (Unaudited)


	Successor								Predecessor					Successor
									2007 Quarters
											April 1			April 19
	2008 Quarters										through			through
	First		Second		Third		Fourth		First		April 18			June 30		Third			Fourth
Net revenues	$	165,400	$	162,902	$	153,663	$	160,258	$	159,951	$	31,404		$	131,145	$	154,670		$	166,673
Income (loss) from continuing operations		7,660		7,419		7,447		15,551		8,867		(15,765	)		4,343		(53	)		6,629

Quarterly operating results are not necessarily representative of operations for a full year for various reasons, including case volumes, interest rates, acquisitions, changes in contracts, the timing of price changes, and financing activities. The merger substantially increased the Company’s debt and interest expense, and due to the revaluation of assets and liabilities as a result of purchase accounting associated with the merger, the pre-merger financial statements are not comparable with those after the merger. The Company also incurred substantial transaction costs in conjunction with the merger that also affect comparability between the periods. In addition, the Company has completed acquisitions and opened new facilities throughout 2006 and 2007, all of which significantly affect the comparability of net income (loss) from quarter to quarter. The results from 2007 have been adjusted to reflect the effects of discontinued operations that were reported in 2008.

(2) Financial Statement Schedule

The following financial statement schedule is filed as part of thisForm 10-K:

Schedule II — Valuation and Qualifying Accounts

F-51

SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS

Allowance for Doubtful Accounts


	Balance at		Additions Charged to:									Balance at
	Beginning of		Costs and		Other					Other		End of
	Period		Expenses		Accounts		Deductions(2)			Items(3)		Period
	(In thousands)

Year ended December 31, 2006(1)	$	6,656		10,100		—		(8,530	)		1,729	$	9,955
Period from January 1 through April 18, 2007 (Predecessor)(1)		9,955		3,324		—		(2,269	)		383		11,393
Period from April 19 through December 31, 2007 (Successor)(1)		11,393		7,769		—		(7,946	)		1,505		12,721
Year ended December 31, 2008(1)		12,721		7,568		—		(9,063	)		318		11,544

Valuation allowance for deferred tax assets


	Balance at		Additions Charged to:									Balance at
	Beginning of		Costs and		Other					Other		End of
	Period		Expenses		Accounts(4)			Deductions(2)		Items(3)		Period

Year ended December 31, 2006	$	—	$	—	$	—		$	—	$	2,460	$	2,460
Period from January 1 through April 18, 2007 (Predecessor)(1)		2,460		1,323		—			—		—		3,783
Period from April 19 through December 31, 2007 (Successor)(1)		3,783		5,121		28,918			—		—		37,822
Year ended December 31, 2008		37,822		1,332		(596	)		—		—		38,558


(1)		Includes amounts related to companies disposed of in 2006 through 2008.

(2)		Accounts written off.

(3)		Primarily beginning balances for purchased businesses and entities that were deconsolidated.

(4)		Recorded to goodwill

All other schedules are omitted because they are not applicable or not required or because the required information is included in the financial statements or notes thereto.

S-1

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES
Consolidated Financial Statements
Years Ended June 30, 2008 and 2007
(With Independent Auditors’ Report Thereon)

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Managers

Texas Health Ventures Group, L.L.C.

We have audited the accompanying consolidated balance sheets of Texas Health Ventures Group, L.L.C. and subsidiaries (the Company) as of June 30, 2008 and 2007, and the related consolidated statements of income, members’ equity, and cash flows for the years then ended. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 Texas Health Ventures Group, L.L.C. and subsidiaries at June 30, 2008 and 2007, and the consolidated results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

October 17, 2008
Dallas, Texas

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Consolidated Balance Sheets
June 30, 2008 and 2007


	2008		2007
	(In thousands, except per share amounts)

ASSETS
CURRENT ASSETS:
Cash	$	3,527	$	6,285
Patient receivables, net of allowance for doubtful accounts of $10,448,000 and $6,384,000 at June 30, 2008 and 2007, respectively		45,417		29,293
Due from affiliate (note 9)		30,676		35,606
Inventories of supplies		7,337		5,376
Current portion of notes receivable (note 6)		—		389
Prepaid and other current assets		1,728		1,204

Total current assets		88,685		78,153
PROPERTY AND EQUIPMENT, net (note 2)		148,411		135,571
OTHER LONG-TERM ASSETS:
Investments in unconsolidated affiliates (note 4)		1,618		1,316
Goodwill and intangible assets, net (notes 4 and 5)		131,319		93,516
Notes receivable, net of current portion (note 6)		—		949
Other		652		1,164

Total assets	$	370,685	$	310,669


LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	18,013		13,595
Accrued expenses and other		13,687		9,737
Due to affiliates (notes 6 and 9)		3,216		2,199
Current portion of long-term obligations (note 7)		12,057		7,767

Total current liabilities		46,973		33,298
LONG-TERM OBLIGATIONS, NET OF CURRENT PORTION (note 7)		123,646		109,908
OTHER LIABILITIES		10,238		7,326

Total liabilities		180,857		150,532
MINORITY INTERESTS (note 4)		29,910		25,702
COMMINTMENTS AND CONTINGENCIES(Notes 3, 7, 8 and 10)
MEMBERS’ EQUITY (note 3)		159,918		134,435
Total liabilities and members’ equity	$	370,685	$	310,669

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007


	2008			2007
	(In thousands)

REVENUES:
Net patient service revenue	$	348,203		$	259,716
Management and royalty fee income (note 9)		600			600
Other income		469			120

Total revenues		349,272			260,436
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES		1,059			686
OPERATING EXPENSES:
Salaries, benefits, and other employee costs		82,316			57,051
Medical services and supplies		78,203			58,972
Management and royalty fees (note 9)		14,546			11,657
Professional fees		5,714			1,314
Other operating expenses		52,434			38,918
Provision for doubtful accounts		13,646			8,197
Depreciation and amortization		17,706			13,418

Total operating expenses		264,565			189,527

Operating income		85,766			71,595
NONOPERATING EXPENSES:
Interest expense		(13,570	)		(7,585	)
Interest income (note 9)		1,445			2,199
Other expense, net		(61	)		(85	)

Income before minority interests and income tax		73,580			66,124
MINORITY INTERESTS IN INCOME OF CONSOLIDATED SUBSIDIARIES		(34,341	)		(31,711	)

Income before income taxes		39,239			34,413
INCOME TAX		(3,673	)		(903	)

Net income	$	35,566		$	33,510

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007


	Contributed Capital								Retained Earnings
	USP			BHS			BUMC		USP			BHS			BUMC		Total
	(In thousands)

Balance at July 1, 2007	$	35,889		$	36,033		$	—	$	18,160		$	18,233		$	—	$	108,315
Net income		—			—			—		16,721			16,789			—		33,510
Contribution of capital		11,168			8,590			—		—			—			—		19,758
Distributions of earnings		—			—			—		(13,546	)		(13,602	)		—		(27,148	)
Transfer of equity in accordance with L.L.C. agreement		(1,309	)		1,309			—		—			—			—		—

Balance at June 30, 2007		45,748			45,932			—		21,335			21,420		$	—		134,435
Net income		—			—			—		17,747			17,819			—		35,566
Contributions of capital		14,381			7,457			4,092		—			—			—		25,930
Distributions of earnings		—			—			—		(17,971	)		(18,042	)		—		(36,013	)
Assign BUMC 49% of BHS’ 50.1% interest in THVG, effective 6/29/08		—			(52,983	)		52,983		—			(20,731	)		20,731		—
Transfer of equity in accordance with L.L.C. agreement		(1,442	)		888			554		—			—			—		—

Balance at June 30, 2008	$	58,687		$	1,294		$	57,629	$	21,111		$	466		$	20,731	$	159,918

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007


	2008			2007

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	35,566		$	33,510
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts		13,646			8,197
Depreciation and amortization		17,706			13,418
Amortization of debt issue costs		3			71
Equity in earnings of unconsolidated affiliates, net of distributions received		(230	)		201
Minority interests in income of consolidated subsidiaries, net of distributions paid		2,280			2,199
Changes in operating assets and liabilities, net of acquisitions
Patient receivables		(26,173	)		(13,008	)
Due from (to) affiliates, net		743			(229	)
Inventories of supplies, prepaids, and other assets		(1,704	)		(1,249	)
Accounts payable and accrued expenses		4,295			6,111

Net cash provided by operating activities		46,132			49,221

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equity interests, net of cash received of 291,000 and 11,000 for 2008 and 2007, respectively		(9,476	)		(4,427	)
Sale of equity interests		952			1,417
Purchases of property and equipment		(18,301	)		(18,010	)
Sales of property and equipment		26			27
Cash collections on notes receivable from affiliates		1,338			361
Change in cash management balances with affiliate		7,692			(7,890	)

Net cash used in investing activities		(17,769	)		(28,522	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt	$	19,798		$	11,215
Payments on long-term obligations		(14,089	)		(6,417	)
Returns of capital to minority interest holders		(817	)		(502	)
Distributions to Company members		(36,013	)		(27,148	)

Net cash used in financing activities		(31,121	)		(22,852	)

DECREASE IN CASH		(2,758	)		(2,153	)
CASH, beginning of period		6,285			8,438

CASH, end of period	$	3,527		$	6,285

SUPPLEMENTAL INFORMATION:
Cash paid for interest	$	12,814		$	7,463
Cash paid for taxes		2,375			—
Noncash transactions:
Noncash settlement of note receivable (note 4)		—			4,135
Noncash assets contributed by Members (note 3)		25,930			19,758
Asset acquired under capital leases		1,840			49,817

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007


1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Texas Health Ventures Group, L.L.C. and subsidiaries (THVG or the Company), a Texas limited liability company, was formed on January 21, 1997 for the primary purpose of developing, acquiring, and operating ambulatory surgery centers and related entities. Prior to June 29, 2008, Baylor Health Services (BHS), a Texas nonprofit corporation that is a controlled affiliate of Baylor Health Care System (BHCS), a Texas nonprofit corporation, owned 50.1% interest in THVG. On June 29, 2008, BHS distributed 49% of its existing 50.1% interest in THVG to Baylor University Medical Center (BUMC), a Texas nonprofit corporation whose sole member is BHCS. THVG is ultimately a subsidiary of BHCS through the combined ownership by BUMC and BHS (collectively referred to herein as Baylor). USP North Texas, Inc. (USP), a Texas corporation and subsidiary of United Surgical Partners International, Inc. (USPI), owns 49.9% of THVG. THVG’s fiscal year ends June 30. THVG’s subsidiaries’ fiscal years end December 31; however, the financial information of these subsidiaries included in these consolidated financial statements is as of and for the twelve months ended June 30, 2008 and 2007.

THVG owns equity interests in and operates ambulatory surgery centers, surgical hospitals, and related businesses in the Dallas/Fort Worth, Texas, metropolitan area. At June 30, 2008, THVG operated twenty-one facilities (the Facilities) under management contracts, twenty of which are consolidated for financial reporting purposes, and one of which is accounted for under the equity method. In addition, THVG holds equity method investments in two partnerships that each own the real estate used by two of the Facilities.

THVG has been funded by capital contributions from its members and by cash distributions from the Facilities. The board of managers, which is controlled by Baylor, initiates requests for capital contributions. The Facilities’ operating agreements provide that cash flow available for distribution will be distributed at least quarterly to THVG and other owners of the Facilities.

THVG’s operating agreement provides that the board of managers determine, on at least a quarterly basis, if THVG should make a cash distribution based on a comparison of THVG’s excess cash on hand versus current and anticipated needs, including, without limitation, needs for operating expenses, debt service, acquisitions, and a reasonable contingency reserve. The terms of THVG’s operating agreement provide that any distributions, whether driven by operating cash flows or by other sources, such as the distribution of noncash assets or distributions in the event THVG liquidates, are to be shared according to each member’s overall ownership level in THVG, which is 49% for BUMC, 1.1% for BHS and 49.9% for USP as of June 30, 2008.

Basis of Accounting

THVG maintains its books and records on the accrual basis of accounting, and the financial statements are prepared in accordance with U.S. generally accepted accounting principles.

Principles of Consolidation

The consolidated financial statements include the financial statements of THVG and its wholly owned subsidiaries and other entities THVG controls. THVG consolidates the results of North Central Surgical Center, L.L.P. (North Central) as a result of owning a controlling, majority interest in University Surgical Partners of Dallas, L.L.P., which in turn owns a controlling, majority interest in North Central. All significant intercompany balances and transactions have been eliminated in consolidation.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007

Use of Estimates

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

New Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141(R),Business Combinations(SFAS 141(R)). SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree and recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase. SFAS 141(R) also sets forth disclosures required to be made in the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after fiscal years beginning after December 15, 2008. Accordingly, SFAS 141(R) will be applied by the Company to business combinations occurring on or after July 1, 2009.

In December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51(SFAS 160). SFAS 160 establishes accounting and reporting standards that require noncontrolling interests to be reported as a separate component of equity, and net income attributable to the parent and to the non-controlling interest to be separately identified in the income statement. SFAS 160 also requires changes in a parent’s ownership interest while the parent retains its controlling interest to be accounted for as equity transactions, and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value. SFAS 160 applies prospectively and is effective for fiscal years beginning after December 15, 2008. The Company is evaluating the impact that SFAS 160 will have on its financial statements upon its adoption fiscal year 2010.

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(SFAS 157), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact that SFAS 157 will have on its consolidated financial position, results of operations, and cash flows upon its adoption in fiscal year 2009.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115(SFAS 159), which permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that SFAS 159 will have on its consolidated financial position, results of operations, and cash flows upon its adoption in fiscal year 2009.

Cash Equivalents

For purposes of the consolidated statements of cash flows, THVG considers all highly liquid instruments with original maturities when purchased of three months or less to be cash equivalents. There were no cash equivalents at June 30, 2008 or 2007.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007

Inventories of Supplies

Inventories of supplies, consisting primarily of pharmaceuticals and supplies, are stated at cost, which approximates market value, and are expensed as used.

Property and Equipment

Property and equipment are stated at cost or, when acquired as part of a business combination, at fair value at the date of acquisition. Depreciation is calculated on the straight line method over the estimated useful lives of the assets. Upon retirement or disposal of assets, the asset and accumulated depreciation accounts are adjusted accordingly, and any gain or loss is reflected in earnings or loss of the respective period. Maintenance costs and repairs are expensed as incurred; significant renewals and betterments are capitalized. Assets held under capital leases are classified as property and equipment and amortized using the straight line method over the shorter of the useful lives or the lease terms, and the related obligations are recorded as debt. Amortization of property and equipment held under capital leases and leasehold improvements is included in depreciation and amortization expense. THVG records operating lease expense on a straight-line basis unless another systematic and rational allocation is more representative of the time pattern in which the leased property is physically employed. THVG amortizes leasehold improvements, including amounts funded by landlord incentives or allowances, for which the related deferred rent is amortized as a reduction of lease expense, over the shorter of their economic lives or the lease term.

Investments in Unconsolidated Affiliates

Investments in unconsolidated affiliates in which THVG exerts significant influence, but has less than a controlling ownership, are accounted for under the equity method. THVG exerts significant influence in the operations of its unconsolidated affiliates through representation on the governing bodies of the investees and additionally, with respect to the Facilities, through contracts to manage the operations of the investee.

Intangible Assets and Goodwill

Intangible assets consist of costs in excess of net assets acquired (goodwill), costs associated with the purchase of management service contract rights, and other intangibles. Most of these assets have indefinite lives. Accordingly, these assets are not amortized but are instead tested for impairment annually or more frequently if changing circumstances warrant. Any decrease in fair value identified in a test for impairment would be recorded as an impairment loss in the consolidated statements of income. No such impairment was identified in 2008 or 2007. THVG amortizes intangible assets with definite useful lives over their respective useful lives to the estimated residual values and reviews them for impairment in the same manner as long-lived assets, discussed below.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

Fair Value of Financial Instruments

The carrying amounts of cash, patient receivables, current portion of notes receivable, current portion of long-term debt, and accounts payable approximate fair value because of the short maturity of these instruments. The carrying amounts of the non-current portion of notes receivable and long-term debt approximate fair value.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007

Revenue Recognition

Revenues are recognized as services are performed and consist primarily of net patient service revenues, which are based on the Facilities’ established billing rates less allowances and discounts, principally for patients covered under contractual programs with private insurance companies. The allowances that THVG records for these revenues, including allowances for doubtful accounts, are based on THVG’s best estimates of expected actual reimbursement based primarily on historical collections for similar transactions. During the year ended June 30, 2008, approximately 72%, 19%, and 1% of the cases performed at THVG’s consolidated Facilities were paid by commercial insurers, Medicare, and Medicaid, respectively. The remaining 8% of cases consisted primarily of work-related injuries and services directly paid for by the patients. During the year ended June 30, 2007, approximately 71%, 19%, and 1% of the cases performed at THVG’s consolidated Facilities were paid by commercial insurers, Medicare, and Medicaid, respectively. The remaining 9% of cases for the year ended June 30, 2007 consisted primarily of work-related injuries and services directly paid for by the patients.

The Facilities are subject to changes in government legislation that could impact Medicare and Medicaid reimbursement levels and are also subject to increased levels of managed care penetration and changes in payor patterns that may impact the level and timing of payments for services rendered.

Equity in Earnings of Unconsolidated Affiliates

Equity in earnings of unconsolidated affiliates consists of THVG’s share of the profits and losses generated from its noncontrolling equity investments. Because these operations are central to THVG’s business strategy, equity in earnings of unconsolidated affiliates is classified as a component of operating income in the accompanying consolidated statements of income. THVG has contracts to manage these facilities, which results in THVG having an active role in the operations of these facilities.

Income Taxes

No amounts for federal income taxes have been reflected in the accompanying consolidated financial statements because the federal tax effects of THVG’s activities accrue to the individual members. THVG is subject to the Texas state franchise tax, which is reflected in the accompanying consolidated statements of income.

During May 2006, significant changes were made to the current Texas franchise tax, including but not limited to, modifications to the tax base and tax rate which now applies to most legal entities including partnerships. The Texas franchise tax now applies to all THVG entities for any tax reports filed on or after January 1, 2008. Under the revised law, the tax is calculated on a margin base and is therefore reflected in THVG’s statements of income for the year ended June 30, 2008 as income tax expense.

In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48,“Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109, Accounting for Income Taxes,” or FIN 48, which is effective for the fiscal years beginning after December 15, 2006. FIN 48 creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Under the requirements of FIN 48, tax-exempt organizations could be required to record an obligation as the result of a tax position they have historically taken on various tax exposure items. Prior to FIN 48, the determination of when to record a liability for a tax exposure was based on whether a liability was considered probable and reasonably estimable in accordance with FASB Statement No. 5,“Accounting for Contingencies.” On July 1, 2007, THVG adopted FIN 48. The adoption of FIN 48 did not have a material impact on THVG’s financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007

Commitments and Contingencies


2.	PROPERTY AND EQUIPMENT

At June 30, 2008 and 2007, property and equipment and related accumulated depreciation and amortization consisted of the following (in thousands):


	Estimated
	Useful Lives		2008			2007

Buildings and leasehold improvements		5-25 years	$	110,629		$	96,034
Equipment		3-15 years		68,405			56,563
Furniture and fixtures		5-15 years		8,880			3,859
Construction in progress				124			3,251

				188,038			159,707
Less accumulated depreciation and amortization				(39,627	)		(24,136	)

Net property and equipment			$	148,411		$	135,571

At June 30, 2008 and 2007, assets recorded under capital lease arrangements included in property and equipment consisted of the following (in thousands):


	2008			2007

Buildings	$	81,112		$	82,434
Equipment and furniture		16,163			13,001

		97,275			95,435
Less accumulated amortization		(15,823	)		(8,483	)

Net property and equipment under capital leases	$	81,452		$	86,952


3.	CAPITAL CONTRIBUTIONS BY MEMBERS

As discussed in note 1, THVG receives part of its funding through cash and capital contributions from its members. During 2008 and 2007, THVG received noncash capital contributions consisting primarily of investments in partnerships that operate surgery centers and a surgical hospital in the Dallas/Fort Worth area and a partnership that owns the real estate used by the surgical hospital.

These noncash capital contributions, including THVG’s ownership in the investee, are as follows (in thousands):


	Ownership			Net Assets
Investee	Percentage			Contributed		Effective Date

Fort Worth Surgicare Partners, Ltd. (Fort Worth)		50.1	%	$	19,670	July 1, 2006
MCSH Real Estate Investment, Ltd. (MCSH)		2.0	%		88	July 1, 2006
Arlington Surgicare Partners, Ltd. (Arlington)		50.1	%		12,683	July 1, 2007
Rockwall Ambulatory Surgery Center, L.L.P. (Rockwall)		50.1	%		3,766	July 1, 2007
Metroplex Surgicare Partners, Ltd. (Metroplex)		50.1	%		9,481	June 30, 2008

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007

USP and Baylor previously owned the assets (noted in the table above) through another company they operate, THVG/HealthFirst (HealthFirst), which is a subsidiary of USP. On the effective date listed above, HealthFirst, which held the assets and managed the facilities, distributed the assets to USP and Baylor, who in turn recontributed the majority of the assets to THVG. THVG recorded the contribution from Baylor at Baylor’s carrying value, as this was a contribution between a parent and subsidiary. THVG recorded the contribution from USP at fair value, based on an appraisal, as USP is a non-controlling member. Using these different bases is appropriate under U.S. generally accepted accounting principles and causes USP’s capital account to be greater than 49.9% of THVG’s total capital. However, any distributions of THVG’s assets continue to be allocated according to overall ownership levels, which are 50.1% to Baylor and 49.9% to USP as of June 30, 2008 and 2007, respectively. Accordingly, the impact of the difference has been reallocated on the accompanying consolidated statements of members’ equity to ensure that the capital account balances of THVG’s members correspond to the proportions at which net assets would be distributed. Concurrent with the contributions, THVG began managing the operations of the facility. The results of these transactions are included in THVG’s consolidated statements of income from the date of contribution.

The assets acquired and liabilities assumed resulting from the above contributions are summarized as follows (in thousands):


	Fort Worth
	and MCSH		Arlington		Rockwall		Metroplex

Current assets	$	7,015	$	2,955	$	1,250	$	2,302
Investments in unconsolidated affiliates		88		—		—		—
Property and equipment		12,642		4,196		805		1,436
Goodwill		18,320		11,912		8,254		8,317
Other noncurrent assets		212		164		20		25

Total assets acquired		38,277		19,227		10,329		12,080
Current liabilities		5,293		2,360		905		1,172
Long-term debt		11,838		3,412		5,606		267
Other noncurrent liabilities		42		—		8		—

Total liabilities assumed		17,173		5,772		6,519		1,439
Minority interests payable		1,346		772		44		1,160

Net assets acquired	$	19,758	$	12,683	$	3,766	$	9,481

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007


4.	INVESTMENTS IN SUBSIDIARIES AND UNCONSOLIDATED AFFILIATES

THVG’s investments in consolidated subsidiaries and unconsolidated affiliates consisted of the following:


			Percentage Owned
			June 30,			June 30,
Legal Name	Facility	City	2008			2007

Consolidated subsidiaries(1):
Bellaire Outpatient Surgery Center, L.L.P.	Bellaire Surgery Center	Fort Worth		50.1	%		50.1	%
Dallas Surgical Partners, L.L.P.	Baylor Surgicare	Dallas		56.9			50.1
Dallas Surgical Partners, L.L.P.	Texas Surgery Center	Dallas		56.9			50.1
Dallas Surgical Partners, L.L.P.	Physicians Day Surgery Center	Dallas		56.9			50.1
Denton Surgicare Partners, Ltd.	Baylor Surgicare at Denton	Denton		50.1			50.1
Frisco Medical Center, L.L.P.	Baylor Medical Center at Frisco	Frisco		50.1			50.1
Garland Surgicare Partners, Ltd.	Baylor Surgicare at Garland	Garland		50.1			50.1
Grapevine Surgicare Partners, Ltd.	Baylor Surgicare at Grapevine	Grapevine		50.1			50.1
Lewisville Surgicare Partners, Ltd.	Baylor Surgicare at Lewisville	Lewisville		52.8			51.1
MSH Partners, L.P.	Mary Shiels Hospital	Dallas		56.9			50.1
North Central Surgical Center, L.L.P.	North Central Surgery Center	Dallas		28.9			25.5
North Garland Surgery Center, L.L.P.	North Garland Surgery Center	Garland		52.4			51.1
Rockwall/Heath Surgery Center, L.L.P.	Baylor Surgicare at Heath	Heath		50.1			50.1
Trophy Club Medical Center, L.P.	Trophy Club Medical Center	Fort Worth		50.5			50.1
Valley View Surgicare Partners, Ltd.	Baylor Surgicare at Valley View	Dallas		50.1			50.1
Fort Worth Surgicare Partners, Ltd.	Baylor Surgical Hospital of Fort Worth	Fort Worth		50.1			50.1
Arlington Surgicare Partners, Ltd.	Surgery Center of Arlington	Arlington		50.1			—
Rockwall Ambulatory Surgery Center, L.L.P.	Rockwall Surgery Center	Rockwall		50.1			—
Baylor Surgicare at Plano, L.L.C.	Baylor Surgicare at Plano	Plano		50.1			—
Metroplex Surgicare Partners, Ltd.	Metroplex Surgicare	Bedford		50.1			—
Arlington Orthopedic and Spine Hospitals, LLC	Arlington Hospital	Arlington		50.1			—
Unconsolidated affiliates:
Denton Surgicare Real Estate, Ltd.	(2)	n/a		49.0	%		49.0	%
Irving-Coppell Surgical Hospital, L.L.P.	Irving-Coppell Surgical Hospital	Irving		18.4			17.8
MCSH Real Estate Investors, Ltd.	(2)	n/a		2.0			2.0


(1)		List excludes holding companies, which are wholly owned by the Company and hold the Company’s investments in the Facilities.

(2)		These entities are not surgical facilities and do not have ownership in any surgical facilities.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007

makes additional payments to former owners of the Facilities as certain contingencies are resolved or financial targets met. These transactions are summarized as follows:


	•	Net payments made for the year ended June 30, 2008 for the purchase of noncontrolling interests in University Surgical Partners of Dallas, L. L. P. (USPD) totaling $3,774,215.

	•	Payments made of $1,538,222 and proceeds received of $952,201 for the year ended June 30, 2008, and payments made of $845,150 and proceeds received of $1,417,136 for the year ended June 30, 2007, related to other transactions, primarily purchases and sales of individual partnership units with physicians who invest in the facilities.

Effective October 1, 2007, THVG acquired 501 membership units, a 50.1% equity interest, in Baylor Surgicare at Plano, L. L. C. (Plano), a Texas limited liability company, for a purchase price of $4,163,849. Plano, like the other facilities in which THVG invests, is operated by Baylor and USP through THVG, as described in note 9.

The following table summarizes the recorded values of Plano’s assets acquired and liabilities assumed at the date of acquisition, as determined by internal and third-party valuations (in thousands):


	Baylor
	Surgicare at
	Plano, L.L.C

Current assets	$	372
Property and equipment		923
Goodwill		4,299

Total assets acquired		5,594
Current liabilities		857
Long-term debt		461

Total liabilities assumed		1,318
Minority interests payable		112

Net assets acquired		4,164

The acquisition of Plano was accounted for using the purchase method of accounting, and, accordingly, the purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition. Some of those estimates are preliminary and subject to further adjustment. The results of the acquisition are included in THVG’s consolidated statements of income from the date of acquisition.


5.	GOODWILL AND INTANGIBLE ASSETS

At June 30, 2008 and 2007, goodwill and intangible assets, net of accumulated amortization, consisted of the following (in thousands):


	2008		2007

Goodwill	$	130,137	$	92,332
Other intangible assets		1,182		1,184

Total	$	131,319	$	93,516

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007

The following is a summary of changes in the carrying amount of goodwill for the years ended June 30, 2008 and 2007 (in thousands):


Balance, June 30, 2006	$	69,803
Additions:
Contribution of Fort Worth and MCSH		18,320
Trophy Club purchase price finalization		4,160
Other		49

Balance, June 30, 2007	$	92,332
Additions:
Contribution of Arlington (note 3)		11,912
Contribution of Rockwall (note 3)		8,254
Contribution of Metroplex (note 3)		8,317
Acquisition of Plano		4,299
Purchase of noncontrolling interests in USPD		3,360
Other		1,663

Balance, June 30, 2008	$	130,137

Intangible assets with definite useful lives are amortized over their respective estimated useful lives. THVG records interest expense for intangible debt issue costs on a straight-line basis over the term of the debt obligation, which approximates the effective interest method. The agreements underlying THVG’s management contract assets have no determinable termination date and, consequently, the related intangible assets have indefinite useful lives. Goodwill and intangible assets with indefinite useful lives are not amortized but instead are tested for impairment at least annually.

No impairment was recorded in 2008 or 2007. The following is a summary of intangible assets at June 30, 2008 and 2007 (in thousands):


	June 30, 2008
	Gross Carrying		Accumulated
	Amount		Amortization			Total

Definite useful lives:
Debt issue costs	$	79	$	(47	)	$	32
Indefinite useful lives:
Management contracts		1,150		—			1,150

Total intangible assets	$	1,229	$	(47	)	$	1,182


	June 30, 2007
	Gross Carrying		Accumulated
	Amount		Amortization			Total

Definite useful lives:
Debt issue costs	$	79	$	(45	)	$	34
Indefinite useful lives:
Management contracts		1,150		—			1,150

Total intangible assets	$	1,229	$	(45	)	$	1,184

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007

The carrying amount of debt issue costs, net of accumulated amortization, decreased $63,347 during the year ended June 30, 2007 resulting from the retirement of debt at one of the Facilities. This net decrease is reflected in interest expense. Additionally, amortization of debt issue costs in the amounts of $2,518 and $8,278 are included in interest expense for the years ended June 30, 2008 and 2007, respectively.


6.	NOTES RECEIVABLE

THVG had a promissory note receivable from the Irving-Coppell facility, which accrued interest at 7.5% per annum and provided for sixty monthly principal and interest payments maturing on August 1, 2010. The outstanding principal balance under this agreement was $1,338,324 as of June 30, 2007. THVG collected the outstanding balance on this note during March 2008.


7.	LONG TERM OBLIGATIONS

At June 30, 2008 and 2007, long-term obligations consisted of the following (in thousands):


	2008			2007

Capital lease obligations (note 8)	$	92,044		$	90,669
Notes payable to financial institutions		43,659			27,006

Total long-term obligations		135,703			117,675
Less current portion		(12,057	)		(7,767	)

Long-term obligations, less current portion	$	123,646		$	109,908

Debt increased in 2008 primarily as a result of a conversion of the North Central facility from a surgery center to a hospital and the contribution/acquisition of Arlington, Rockwall and Metroplex as discussed in note 3. The aggregate maturities of long-term obligations for each of the five years subsequent to June 30, 2008 and thereafter are as follows (in thousands):


2009	$	12,057
2010		11,153
2011		10,064
2012		8,679
2013		4,808
Thereafter		88,942

Total long-term obligations	$	135,703

Capital lease obligations are secured by underlying real estate or equipment and have interest rates ranging from 4.86% to 12.66% (note 2).

The Facilities have notes payable to financial institutions which mature at various dates through 2015 and accrue interest at fixed and variable rates ranging from 4.71% to 9.5%. Each note is secured by certain assets of the respective Facility.


8.	LEASES

The Facilities lease various office equipment, medical equipment, and office space under a number of operating lease agreements, which expire at various times through the year 2029. Such leases do not involve contingent rentals, nor do they contain significant renewal or escalation clauses. Office leases generally require the Facilities to pay all executory costs (such as property taxes, maintenance and insurance).

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007

Minimum future payments under noncancelable leases with remaining terms in excess of one year as of June 30, 2008 are as follows (in thousands):


	Capital			Operating
	Leases			Leases

Year ending June 30:
2009	$	12,784		$	9,959
2010		12,253			8,369
2011		11,820			8,088
2012		11,555			8,056
2013		11,573			7,573
Thereafter		163,545			75,559

Total minimum lease payments	$	223,530		$	117,604

Amount representing interest		(131,486	)

Present value of minimum lease payments	$	92,044

Total rent expense under operating leases was $12,163,419 and $9,302,204 for the years ended June 30, 2008 and 2007, respectively, and is included in other operating expenses in the accompanying consolidated statements of income.


9.	RELATED-PARTY TRANSACTIONS

THVG operates the Facilities under management and royalty contracts, and THVG in turn is managed by Baylor and USP, resulting in THVG incurring management and royalty fee expense payable to Baylor and USP in amounts equal to the management and royalty fee income THVG receives from the Facilities. THVG’s management and royalty fee income from the facilities it consolidates for financial reporting purposes eliminates in consolidation with the facilities’ expense and therefore is not included in THVG’s consolidated revenues. THVG’s management and royalty fee income from facilities which are not consolidated was $600,000 and $600,000 for the years ended June 30, 2008 and 2007, respectively, and is included in the consolidated revenues of THVG.

The management and royalty fee expense payable to Baylor and USP was $14,545,612 and $11,656,497 for the years ended June 30, 2008 and 2007, respectively, and is reflected as expense in THVG’s consolidated statements of income for all the Facilities. Of the total, 64.3% and 34.0% represent management fees payable to USP and Baylor, respectively, and 1.7% represents royalty fees payable to Baylor.

Under the management and royalty agreements, the Facilities pay THVG an amount ranging from 4.5% to 7% of their net patient service revenue less provision for doubtful accounts annually, subject, in some cases, to an annual cap. Management and royalty fees and other reimbursable costs owed by THVG and its Facilities to USP and Baylor totaled $3,216,032 and $2,199,392 at June 30, 2008 and 2007, respectively, and are included in due to affiliates in the accompanying consolidated balance sheets.

In addition, a subsidiary of USPI frequently pays bills on behalf of THVG and has custody of substantially all of THVG’s excess cash, paying THVG and the Facilities interest income on the net balance at prevailing market rates. Amounts held by USPI on behalf of THVG totaled $30,676,180 and $35,605,498 at June 30, 2008 and 2007, respectively. The interest income amounted to $1,306,276 and $1,905,255 for the years ended June 30, 2008 and 2007, respectively. As discussed in note 6, THVG also had a note receivable from one of its unconsolidated investees at June 30, 2007 that was received during 2008.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

FOR THE YEARS ENDED JUNE 30, 2008 AND 2007


10.	COMMITMENTS AND CONTINGENCIES

Financial Guarantees

As of June 30, 2008, THVG issued guarantees of portions of the indebtedness of its investees to third-parties, which could potentially require THVG to make maximum aggregate payments totaling approximately $8.5 million. Of the total, $5.8 million relates to the obligations of two consolidated subsidiaries, whose obligations are included in THVG’s consolidated balance sheet and related disclosures, and the remaining $2.7 million relates to the obligations of unconsolidated affiliated companies, whose obligations are not included in THVG’s consolidated balance sheet and related disclosures. These arrangements (a) consist of guarantees of real estate and equipment financing, (b) are secured by all or a portion of the investees’ assets, (c) require payments by THVG in the event of a default by the investee primarily obligated under the financing, (d) expire as the underlying debt matures at various dates through 2021, or earlier if certain performance targets are met, and (e) provide no recourse for THVG to recover any amounts from third-parties. The fair value of the guarantee liability was not material to the consolidated financial statements and, therefore, no amounts were recorded at June 30, 2008 related to these guarantees. When THVG incurs guarantee obligations that are disproportionately greater than the guarantees provided by the investee’s other owners, THVG charges the investee a fair market value fee based on the value of the contingent liability THVG is assuming.

Litigation and Professional Liability Claims

In their normal course of business, the Facilities are subject to claims and lawsuits relating to patient treatment. THVG believes that its liability for damages resulting from such claims and lawsuits is adequately covered by insurance or is adequately provided for in its consolidated financial statements. THVG and each of the Facilities maintain professional liability insurance that provides coverage on a claims-made basis of $1.0 million per incident and $7.5 million in annual aggregate amount with retroactive provisions upon policy renewal. Certain of THVG’s insurance policies have deductibles and contingent premium arrangements. THVG believes that the expense recorded through June 30, 2008, which was estimated based on historical claims, adequately provides for its exposure under these arrangements. Additionally, from time to time, THVG may be named as a party to other legal claims and proceedings in the ordinary course of business. THVG is not aware of any such claims or proceedings that have more than a remote chance of having a material adverse impact on THVG.


11.	SUBSEQUENT EVENTS

THVG has entered into letters of intent with various entities regarding possible joint venture, development, or other transactions. These possible joint ventures, developments of new facilities, or other transactions are in various stages of negotiation.

TEXAS HEALTH VENTURE GROUP, L.L.C.
AND SUBSIDIARIES

Consolidated Financial Statements

Year Ended June 30, 2007 and Six Months Ended June 30, 2006

(With Independent Auditors’ Report Thereon)

Report of Ernst & Young LLP, Independent Auditors

The Board of Managers

Texas Health Ventures Group, L.L.C.

We have audited the accompanying consolidated balance sheets of Texas Health Ventures Group, L.L.C. and subsidiaries (the Company) as of June 30, 2007 and 2006, and the related consolidated statements of income, members’ equity, and cash flows for the year ended June 30, 2007 and for the six months ended June 30, 2006. 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.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Texas Health Ventures Group, L.L.C. and subsidiaries at June 30, 2007 and 2006, and the consolidated results of their operations and their cash flows for the year ended June 30, 2007 and for the six months ended June 30, 2006 in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

October 12, 2007

Dallas, Texas

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Consolidated Balance Sheets


	June 30,
	2007		2006

ASSETS
Current assets:
Cash	$	6,285,079	$	8,437,559
Patient receivables, net of allowance for doubtful accounts of $6,383,717 and $3,817,527 at June 30, 2007 and 2006, respectively		29,292,533		20,388,416
Due from affiliate (note 9)		35,605,498		25,310,228
Inventories of supplies		5,376,034		3,826,730
Current portion of notes receivable (note 6)		388,928		360,910
Prepaid and other current assets		1,204,112		889,039

Total current assets		78,152,184		59,212,882
Property and equipment, net (note 2)		135,570,797		67,927,445
Investments in unconsolidated affiliates (note 4)		1,316,339		1,592,880
Goodwill and intangible assets, net (notes 4 and 5)		93,515,925		71,059,112
Notes receivable, less current portion (note 6)		949,396		5,460,871
Other		1,164,304		1,574,384

Total assets	$	310,668,945	$	206,827,574


LIABILITIES AND MEMBERS’ EQUITY
Current liabilities:
Accounts payable	$	13,595,214	$	6,546,656
Accrued expenses and other		9,736,364		9,948,016
Due to affiliates (notes 6 and 9)		2,199,392		2,054,472
Current portion of long-term obligations (note 7)		7,767,096		5,268,557

Total current liabilities		33,298,066		23,817,701
Long-term obligations (note 7)		109,908,324		45,928,764
Other liabilities		7,325,833		6,554,719

Total liabilities		150,532,223		76,301,184
Minority interests (note 4)		25,701,959		22,211,842
Commitments and contingencies (notes 3, 7, 8, and 10)
Members’ equity (note 3)		134,434,763		108,314,548

Total liabilities and members’ equity	$	310,668,945	$	206,827,574

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Consolidated Statements of Income


	Year Ended			Six Months
	June 30,			Ended June 30,
	2007			2006

Revenues:
Net patient service revenue	$	259,716,347		$	97,054,202
Management and royalty fee income (note 9)		600,000			300,000
Other income		119,451			43,432

Total revenues		260,435,798			97,397,634
Equity in earnings of unconsolidated affiliates		686,372			503,306
Operating expenses:
Salaries, benefits, and other employee costs		57,051,254			21,389,146
Medical services and supplies		58,972,428			19,897,400
Management and royalty fees (note 9)		11,656,497			4,252,477
Professional fees		1,314,082			267,903
Other operating expenses		38,917,762			16,677,859
Provision for doubtful accounts		8,197,418			2,189,256
Depreciation and amortization		13,417,811			4,764,091

Total operating expenses		189,527,252			69,438,132

Operating income		71,594,918			28,462,808
Interest expense		(7,584,751	)		(2,743,402	)
Interest income (note 9)		2,199,426			839,081
Other expense, net		(85,283	)		(11,223	)

Income before minority interests and income tax		66,124,310			26,547,264
Minority interests in income of consolidated subsidiaries		(31,711,272	)		(12,609,642	)

Income before income taxes		34,413,038			13,937,622
Income tax		(903,342	)		—

Net income	$	33,509,696		$	13,937,622

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Consolidated Statements of Members’ Equity
Year Ended June 30, 2007 and Six Months Ended June 30, 2006


	Contributed Capital					Retained Earnings
	USP			Baylor		USP			Baylor			Total

Balance, January 1, 2006	$	35,888,661		$	36,032,503	$	19,150,489		$	19,227,244		$	110,298,897
Net income		—			—		6,954,873			6,982,749			13,937,622
Distributions of earnings		—			—		(7,945,064	)		(7,976,907	)		(15,921,971	)

Balance, June 30, 2006		35,888,661			36,032,503		18,160,298			18,233,086			108,314,548
Net income		—			—		16,721,338			16,788,358			33,509,696
Contributions of capital		11,168,863			8,590,086		—			—			19,758,949
Distributions of earnings		—			—		(13,547,066	)		(13,601,364	)		(27,148,430	)
Transfer of equity in accordance with L.L.C. agreement		(1,309,177	)		1,309,177		—			—			—

Balance, June 30, 2007	$	45,748,347		$	45,931,766	$	21,334,570		$	21,420,080		$	134,434,763

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows


	Year Ended			Six Months
	June 30,			Ended June 30,
	2007			2006

Cash flows from operating activities:
Net income	$	33,509,696		$	13,937,622
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts		8,197,418			2,189,256
Depreciation and amortization		13,417,811			4,764,091
Amortization of debt issue costs		71,625			10,068
Equity in earnings of unconsolidated affiliates, net of distributions received		201,221			(179,369	)
Minority interests in income of consolidated subsidiaries, net of distributions paid		2,199,302			(646,171	)
Changes in operating assets and liabilities, net of acquisitions Patient receivables		(13,008,376	)		(1,155,399	)
Due from (to) affiliates, net		(229,022	)		176,767
Inventories of supplies, prepaids, and other assets		(1,249,313	)		(218,771	)
Accounts payable and accrued expenses		6,111,500			(690,911	)

Net cash provided by operating activities		49,221,862			18,187,183

Cash flows from investing activities:
Purchases of equity interests, net of cash received		(4,427,615	)		(345,943	)
Sales of equity interests		1,417,136			3,098,980
Purchases of property and equipment		(18,009,917	)		(5,185,814	)
Sales of property and equipment		27,347			37,748
Cash collections on notes receivable from affiliates		360,910			170,584
Change in cash management balances with affiliate		(7,889,964	)		(940,793	)

Net cash used in investing activities		(28,522,103	)		(3,165,238	)

Cash flows from financing activities:
Proceeds from long-term debt		11,215,318			406,620
Payments on long-term obligations		(6,416,985	)		(2,289,425	)
Returns of capital to minority interest holders		(502,142	)		—
Distributions to Company members		(27,148,430	)		(15,921,971	)

Net cash used in financing activities		(22,852,239	)		(17,804,776	)

Decrease in cash		(2,152,480	)		(2,782,831	)
Cash, beginning of period		8,437,559			11,220,390

Cash, end of period	$	6,285,079		$	8,437,559

Supplemental information:
Cash paid for interest	$	7,463,407		$	2,906,564
Noncash transactions:
Noncash settlement of note receivable (note 4)		4,135,215			—
Noncash assets contributed by Members (note 3)		19,758,949			—
Asset acquired under capital leases		49,816,688			655,822

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2007 and 2006


(1)	Summary of Significant Accounting Policies


*(a)*	*Description of Business*

Texas Health Ventures Group, L.L.C. and subsidiaries (THVG), a Texas limited liability company, was formed on January 21, 1997 for the primary purpose of developing, acquiring, and operating ambulatory surgery centers and related entities. THVG is a subsidiary of Baylor Health Services (Baylor), a Texas nonprofit corporation, which is a wholly owned subsidiary of the Baylor Health Care System, a Texas nonprofit corporation. Baylor owns 50.1% of THVG. USP North Texas, Inc. (USP), a Texas corporation and subsidiary of United Surgical Partners International, Inc. (USPI), owns 49.9% of THVG. Until January 1, 2005, Baylor and USP each owned 50% of THVG. Effective January 1, 2005, USP and Baylor reorganized THVG and executed the Third Amended and Restated Regulations, whereby Baylor purchased 0.1% of THVG from USP, increasing Baylor’s ownership to 50.1%. THVG’s fiscal year ends June 30. THVG’s subsidiaries’ fiscal years end December 31; however, the financial information of these subsidiaries included in these consolidated financial statements is as of and for the twelve months ended June 30, 2007 and the six months ended June 30, 2006.

THVG owns equity interests in and operates ambulatory surgery centers, surgical hospitals, and related businesses in the Dallas/Fort Worth, Texas, metropolitan area. At June 30, 2007, THVG operated seventeen facilities (the Facilities) under management contracts, sixteen of which are consolidated for financial reporting purposes, and one of which is accounted for under the equity method. In addition, THVG holds equity method investments in two partnerships that each own the real estate used by two of the Facilities.

THVG has been funded by capital contributions from its two members and by cash distributions from the Facilities. The board of managers, which is controlled by Baylor, initiates requests for capital contributions. The Facilities’ operating agreements provide that cash flow available for distribution will be distributed at least quarterly to THVG and other owners of the Facilities.

THVG’s operating agreement provides that the board of managers determine, on at least a quarterly basis, if THVG should make a cash distribution based on a comparison of THVG’s excess cash on hand versus current and anticipated needs, including, without limitation, needs for operating expenses, debt service, acquisitions, and a reasonable contingency reserve. The terms of THVG’s operating agreement provide that any distributions, whether driven by operating cash flows or by other sources, such as the distribution of noncash assets or distributions in the event THVG liquidates, are to be shared according to each member’s overall ownership level in THVG, which is 50.1% for Baylor and 49.9% for USP as of June 30, 2007.


*(b)*	*Basis of Accounting*

THVG maintains its books and records on the accrual basis of accounting, and the financial statements are prepared in accordance with U.S. generally accepted accounting principles.


*(c)*	*Principles of Consolidation*

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

June 30, 2007 and 2006


*(d)*	*Use of Estimates*


*(e)*	*New Accounting Pronouncement*

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. THVG is evaluating what impact, if any, SFAS 157 will have on its consolidated financial position, results of operations, cash flows and disclosures. THVG does not anticipate a material impact on its results of operations or financial position from the adoption of SFAS 157.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The standard requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 157. THVG is currently evaluating whether the adoption of SFAS 159 will have a material effect on its consolidated financial position, results of operations, or cash flows and disclosures. THVG has not evaluated all of the provisions of SFAS 159, but does not anticipate a material impact on its results of operations or financial position from the adoption of SFAS 159.


*(f)*	*Cash Equivalents*

For purposes of the consolidated statements of cash flows, THVG considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. There were no cash equivalents at June 30, 2007 or 2006.


*(g)*	*Inventories of Supplies*

Inventories of supplies, consisting primarily of pharmaceuticals and supplies, are stated at cost, which approximates market, and are expensed as used.


*(h)*	*Property and Equipment*

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

June 30, 2007 and 2006

allocation is more representative of the time pattern in which the leased property is physically employed. THVG amortizes leasehold improvements, including amounts funded by landlord incentives or allowances, for which the related deferred rent is amortized as a reduction of lease expense, over the shorter of their economic lives or the lease term.


*(i)*	*Investments in Unconsolidated Affiliates*


*(j)*	*Intangible Assets and Goodwill*

Intangible assets consist of costs in excess of net assets acquired (goodwill), costs associated with the purchase of management service contract rights, and other intangibles. Most of these assets have indefinite lives. Accordingly, these assets are not amortized but are instead tested for impairment annually or more frequently if changing circumstances warrant. Any decrease in fair value identified in a test for impairment would be recorded as an impairment loss in the consolidated statement of income. No such impairment was identified in 2007 or 2006. THVG amortizes intangible assets with definite useful lives over their respective useful lives to the estimated residual values and reviews them for impairment in the same manner as long-lived assets, discussed below.


*(k)*	*Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of*


*(l)*	*Fair Value of Financial Instruments*


*(m)*	*Revenue Recognition*

Revenues are recognized as services are performed and consist primarily of net patient service revenues, which are based on the Facilities’ established billing rates less allowances and discounts, principally for patients covered under contractual programs with private insurance companies. The allowances that THVG records for these revenues, including allowances for doubtful accounts, are based on THVG’s best estimates of expected actual reimbursement based primarily on historical collections for similar transactions. During the year ended June 30, 2007, approximately 71%, 19%, and 1% of the cases performed at THVG’s consolidated Facilities were paid by commercial insurers, Medicare, and Medicaid, respectively. The remaining 9% of cases consisted primarily of work-related injuries and services directly paid for by the patients.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

June 30, 2007 and 2006


*(n)*	*Equity in Earnings of Unconsolidated Affiliates*


*(o)*	*Income Taxes*

No amounts for federal income taxes have been reflected in the accompanying consolidated financial statements because the federal tax effects of THVG’s activities accrue to the individual members. THVG is subject to Texas state franchise tax, which is reflected in the accompanying consolidated statements of income.

During May 2006, a new law affecting the taxation of Texas entities was enacted. The law modifies the base on which the franchise tax is calculated and applied to THVG effective January 1, 2007. The tax was previously based on capital or earned surplus. Under the new law, the tax is calculated on a margin base and is therefore reflected in THVG’s consolidated statement of income for the year ended June 30, 2007 as income tax expense.


*(p)*	*Commitments and Contingencies*


*(q)*	*Factors Affecting Comparability*

THVG’s consolidated financial statements and related notes presented herein are presented for the year ended June 30, 2007 and the six months ended June 30, 2006. The comparability of these financial statements is affected by the fact that these two periods do not contain the same number of months.


(2)	Property and Equipment

At June 30, 2007 and 2006, property and equipment and related accumulated depreciation and amortization consisted of the following:


	Estimated
	Useful Lives		2007			2006

Buildings and leasehold improvements		5-25 years	$	96,034,308		$	38,494,705
Equipment		3-15 years		56,563,126			36,465,447
Furniture and fixtures		5-15 years		3,858,383			3,489,732
Construction in progress				3,250,788			1,059,267

				159,706,605			79,509,151
Less accumulated depreciation and amortization				(24,135,808	)		(11,581,706	)

Net property and equipment			$	135,570,797		$	67,927,445

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

June 30, 2007 and 2006

At June 30, 2007 and 2006, assets recorded under capital lease arrangements included in property and equipment consisted of the following:


	2007			2006

Buildings	$	82,434,546		$	24,636,190
Equipment and furniture		13,001,066			9,823,508

		95,435,612			34,459,698
Less accumulated amortization		(8,483,264	)		(3,638,275	)

Net property and equipment under capital leases	$	86,952,348		$	30,821,423

(3) Capital Contributions by Members

As discussed in note 1, THVG receives part of its funding through cash contributions from its members. During 2007, THVG received noncash contributions consisting primarily of investments in a partnership that operates a surgical hospital in the Dallas/Fort Worth area and a partnership that owns the real estate used by that surgical hospital. Those contributions, including THVG’s ownership in the investee, are as follows:


	Ownership			Net Assets
Investee	Percentage			Contributed		Effective Date

Fort Worth Surgicare Partners, Ltd. (Fort Worth)		50.1	%	$	19,670,959		July 1, 2006
MCSH Real Estate Investment, Ltd. (MCSH)		2.0	%		87,990		July 1, 2006

USP and Baylor had previously owned the assets through another company they operate, THVG/HealthFirst (HealthFirst), which is a subsidiary of USP. On the effective date listed above, HealthFirst, which held the assets and managed the facility, distributed the assets to USP and Baylor, who in turn recontributed the majority of the assets to THVG. THVG recorded the contribution from Baylor at Baylor’s carrying value, as this was a contribution between a parent and subsidiary. THVG recorded the contribution from USP at fair value, based on an appraisal, as USP is a non-controlling member. Using these different bases is appropriate under U.S. generally accepted accounting principles and causes USP’s capital account to be greater than 49.9% of THVG’s total capital. However, any distributions of THVG’s assets continue to be allocated according to overall ownership levels, which are 50.1% to Baylor and 49.9% to USP as of June 30, 2007. Accordingly, the impact of the difference has been reallocated on the accompanying consolidated statements of members’ equity to ensure that the capital account balances of THVG’s members correspond to the proportions at which assets would be distributed. Concurrent with the contributions, THVG began managing the operations of the facility.

The agreement that Baylor and USP entered into with respect to the Fort Worth transaction has a contingency. If that contingency has a specified outcome by December 31, 2007, Baylor has the right to have the Fort Worth interests distributed from THVG and contributed to HealthFirst, effectively unwinding the contribution transaction that occurred July 1, 2006. Under such an unwind, HealthFirst would also reassume its management duties with respect to the Fort Worth facility.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

June 30, 2007 and 2006

The assets acquired and liabilities assumed resulting from the contributions are summarized as follows:


	THVG Fort
	Worth, L.P.

Current assets	$	7,014,902
Property and equipment		12,642,825
Investments in unconsolidated affiliates		87,990
Goodwill		18,319,919
Other noncurrent assets		211,920

Total assets acquired		38,277,556
Current liabilities		5,292,979
Long-term debt		11,837,885
Other noncurrent liabilities		42,096

Total liabilities assumed		17,172,960
Minority interests payable		1,345,647

Net assets acquired	$	19,758,949

(4) Investments in Subsidiaries and Unconsolidated Affiliates

THVG’s investments in consolidated subsidiaries and unconsolidated affiliates consisted of the following:

Percentage Owned

June 30,

Legal Name

Facility

City

2007

2006

Consolidated subsidiaries(1):

Bellaire Outpatient Surgery Center, L.L.P.

Bellaire Surgery Center

Fort Worth

50.1

Dallas Surgical Partners, L.L.P.

Baylor Surgicare

Dallas

50.1

Dallas Surgical Partners, L.L.P.

Texas Surgery Center

Dallas

50.1

Dallas Surgical Partners, L.L.P.

Physicians Day Surgery Center

Dallas

50.1

Denton Surgicare Partners, Ltd.

Baylor Surgicare at Denton

Denton

50.1

Frisco Medical Center, L.L.P.

Baylor Medical Center at Frisco

Frisco

50.1

Garland Surgicare Partners, Ltd.

Baylor Surgicare at Garland

Garland

50.1

Grapevine Surgicare Partners, Ltd.

Baylor Surgicare at Grapevine

Grapevine

50.1

Lewisville Surgicare Partners, Ltd.

Baylor Surgicare at Lewisville

Lewisville

51.1

50.1

MSH Partners, L.P.

Mary Shiels Hospital

Dallas

50.1

North Central Surgical Center, L.L.P.

North Central Surgery Center

Dallas

25.5

North Garland Surgery Center, L.L.P.

North Garland Surgery Center

Garland

51.1

50.1

Rockwall/Heath Surgery Center, L.L.P.

Baylor Surgicare at Heath

Heath

50.1

59.5

Trophy Club Medical Center, L.P.

Trophy Club Medical Center

Fort Worth

50.1

Valley View Surgicare Partners, Ltd.

Baylor Surgicare at Valley View

Dallas

50.1

Fort Worth Surgicare Partners, Ltd.

Baylor Surgical Hospital of Fort Worth

Fort Worth

50.1

—

Unconsolidated affiliates:

Denton Surgicare Real Estate, Ltd.

n/a

49.0

Irving-Coppell Surgical Hospital, L.L.P.

Irving-Coppell Surgical Hospital

Irving

17.8

18.6

MCSH Real Estate Investors, Ltd.

n/a

2.0

—


(1)		List includes holding companies, which are wholly owned by the Company and hold the Company’s investments in the Facilities.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

June 30, 2007 and 2006

The final determination of the purchase price for Trophy Club Medical Center, L.P. (Trophy Club) was completed and settled in November 2006. The amount was determined to be $7,717,680 and was based on the facility’s financial performance through May 31, 2006. Of this amount, $3,582,465 was paid in cash and $4,135,215 was used to settle a note receivable from the sellers. The amount paid did not materially differ from the $3,558,500 liability included in THVG’s June 30, 2006 balance sheet. This obligation had arisen when Baylor and USP (through HealthFirst) originally acquired Trophy Club from a third-party in 2004, and the obligation was assumed by THVG in 2005 in conjunction with Baylor and USP contributing their investment interests in Trophy Club to THVG.

Additionally, in the ordinary course of business, THVG engages in purchases and sales of individual partnership units with physicians who invest in the Facilities, invests cash in projects under development, and makes additional payments to former owners of the Facilities as certain contingencies are resolved or financial targets met. These transactions are summarized as follows:


	•	Net proceeds received in the six months ended June 30, 2006 of $2,970,000 from sales of noncontrolling interests in Frisco Medical Center, L.L.P (Frisco). These sales were made through a private offering, the proceeds of which were used to fund an expansion of the Frisco facility.

	•	Payments made of $345,943 and proceeds received of $128,980 for the six months ended June 30, 2006 and payments made of $845,150 and proceeds received of $1,417,136 for the year ended June 30, 2007 related to other transactions, primarily purchases and sales of individual partnership units with physicians who invest in the facilities.


(5)	Goodwill and Intangible Assets

At June 30, 2007 and 2006, goodwill and intangible assets, net of accumulated amortization, consisted of the following:


	2007		2006

Goodwill	$	92,331,722	$	69,803,284
Other intangible assets		1,184,203		1,255,828

Total	$	93,515,925	$	71,059,112

The following is a summary of changes in the carrying amount of goodwill for the year ended June 30, 2007:


Balance, June 30, 2006	$	69,803,284
Additions:
Contribution of Fort Worth and MCSH (note 3)		18,319,919
Trophy Club purchase price finalization (note 4)		4,159,180
Other		49,339

Balance, June 30, 2007	$	92,331,722

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

June 30, 2007 and 2006

No impairment was recorded in 2007 or 2006. The following is a summary of intangible assets at June 30, 2007 and 2006:


	June 30, 2007
	Gross Carrying		Accumulated
	Amount		Amortization			Total

Definite useful lives:
Debt issue costs	$	79,061	$	(44,858	)	$	34,203
Indefinite useful lives:
Management contracts							1,150,000

Total intangible assets						$	1,184,203


	June 30, 2006
	Gross Carrying		Accumulated
	Amount		Amortization			Total

Definite useful lives:
Debt issue costs	$	185,602	$	(79,774	)	$	105,828
Indefinite useful lives:
Management contracts							1,150,000

Total intangible assets						$	1,255,828

The carrying amount of debt issue costs, net of accumulated amortization, decreased $63,347 during the year ended June 30, 2007 resulting from the retirement of debt at one of the Facilities. This net decrease is reflected in interest expense. Additionally, amortization of debt issue costs in the amounts of $8,278 and $10,068 is included in interest expense for the year ended June 30, 2007 and the six months ended June 30, 2006, respectively.


(6)	Notes Receivable

As discussed in note 4, effective July 1, 2005, Baylor and USP contributed their ownership in the holding company of the Trophy Club facility, which had a note receivable for $3,500,000 from another owner of Trophy Club. This note accrued interest at 8% per annum and had a maturity date through July 15, 2007. The outstanding balance receivable, including interest, under this agreement was $4,122,547 as of June 30, 2006. As discussed in note 4, THVG settled this note in November 2006 for $4,135,215 in conjunction with the finalization of the purchase price for Trophy Club. As HealthFirst had originally held the note, THVG owed HealthFirst $305,623 of the accrued interest on the note and remitted this in cash upon settling the note with Trophy Club’s original owners. This accrued interest was included in due to affiliates on the June 30, 2006 balance sheet.

THVG has a promissory note receivable from the Irving-Coppell facility, which accrues interest at 7.5% per annum and provides for sixty monthly principal and interest payments maturing on August 1, 2010. The outstanding principal balance receivable under this agreement was $1,338,324 and $1,699,234 at June 30, 2007 and 2006, respectively.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

June 30, 2007 and 2006


(7)	Long Term Obligations

At June 30, 2007 and 2006, long-term obligations consisted of the following:


	2007			2006

Capital lease obligations (note 8)	$	90,668,885		$	38,050,108
Notes payable to financial institutions		27,006,535			13,147,213

Total long-term obligations		117,675,420			51,197,321
Less current portion		(7,767,096	)		(5,268,557	)

Long-term obligations, less current portion	$	109,908,324		$	45,928,764

Debt increased in 2007 primarily as a result of an expansion of the Frisco facility and the contribution of Fort Worth as discussed in note 3. The aggregate maturities of long-term obligations for each of the five years subsequent to June 30, 2007 and thereafter are as follows:


2008	$	7,767,096
2009		8,525,764
2010		6,231,514
2011		5,169,547
2012		4,235,513
Thereafter		85,745,986

Total long-term obligations	$	117,675,420

Capital lease obligations are secured by underlying real estate or equipment and have interest rates ranging from 5.6% to 12.66% (note 2).

The Facilities have notes payable to financial institutions which mature at various dates through 2012 and accrue interest at fixed and variable rates ranging from 7% to 9.5%. Each note is secured by certain assets of the respective Facility.


(8)	Leases

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

June 30, 2007 and 2006

Minimum future payments under noncancelable leases with remaining terms in excess of one year as of June 30, 2007 are as follows:


	Capital			Operating
	Leases			Leases

Year ending June 30:
2008	$	11,166,782		$	8,162,365
2009		11,431,169			8,195,689
2010		11,053,539			7,060,742
2011		10,939,133			6,961,428
2012		11,253,326			6,976,941
Thereafter		180,850,433			77,253,862

Total minimum lease payments	$	236,694,382		$	114,611,027

Amount representing interest		(146,025,497	)

Present value of minimum lease payments	$	90,668,885

Total rent expense under operating leases was $9,302,204 and $4,359,796 for the year ended June 30, 2007 and the six months ended June 30, 2006, respectively, and is included in other operating expenses in the accompanying consolidated statements of income.


(9)	Related-Party Transactions

THVG operates the Facilities under management and royalty contracts, and THVG in turn is managed by Baylor and USP, resulting in THVG incurring management and royalty fee expense payable to Baylor and USP in amounts equal to the management and royalty fee income THVG receives from the Facilities. THVG’s management and royalty fee income from the facilities it consolidates for financial reporting purposes eliminates in consolidation with the facilities’ expense and therefore is not included in THVG’s consolidated revenues. THVG’s management and royalty fee income from facilities which are not consolidated was $600,000 and $300,000 for the year ended June 30, 2007 and the six months ended June 30, 2006, respectively, and is included in the consolidated revenues of THVG.

The management and royalty fee expense payable to Baylor and USP was $11,656,497 and $4,252,477 for the year ended June 30, 2007 and the six months ended June 30, 2006, respectively, and is reflected as expense in THVG’s consolidated statements of income for all the Facilities. Of the total, 64.3% and 34.0% represent management fees payable to USP and Baylor, respectively, and 1.7% represents royalty fees payable to Baylor.

Under the management and royalty agreements, the Facilities pay THVG an amount ranging from 4.5% to 7% of their net patient service revenue less provision for doubtful accounts annually, subject, in some cases, to an annual cap. Management and royalty fees and other reimbursable costs owed by THVG and its Facilities to USP and Baylor totaled $2,199,392 and $1,748,849 at June 30, 2007 and 2006, respectively, and are included in due to affiliates in the accompanying consolidated balance sheets.

In addition, a subsidiary of USPI frequently pays bills on behalf of THVG and has custody of substantially all of THVG’s excess cash, paying THVG and the Facilities interest income on the net balance at prevailing market rates. Amounts held by USPI on behalf of THVG totaled $35,605,498 and $25,310,228 at June 30, 2007 and 2006, respectively. The interest income amounted to $1,905,255 and $551,993 for the year ended June 30, 2007 and the six months ended June 30, 2006, respectively. As discussed in note 6, THVG also had a note receivable from one of its unconsolidated investees at June 30, 2007 and 2006.

TEXAS HEALTH VENTURES GROUP, L.L.C. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

June 30, 2007 and 2006


(10)	Commitments and Contingencies


*(a)*	*Financial Guarantees*

As of June 30, 2007, THVG had issued guarantees of portions of the indebtedness of its investees to third-parties, which could potentially require THVG to make maximum aggregate payments totaling approximately $8.9 million. Of the total, $5.8 million relates to the obligations of two consolidated subsidiaries, whose obligations are included in THVG’s consolidated balance sheet and related disclosures, and the remaining $3.1 million relates to the obligations of unconsolidated affiliated companies, whose obligations are not included in THVG’s consolidated balance sheet and related disclosures. These arrangements (a) consist of guarantees of real estate and equipment financing, (b) are secured by all or a portion of the investees’ assets, (c) require payments by THVG in the event of a default by the investee primarily obligated under the financing, (d) expire as the underlying debt matures at various dates through 2021, or earlier if certain performance targets are met, and (e) provide no recourse for THVG to recover any amounts from third-parties. The fair value of the guarantee liability was not material to the consolidated financial statements and, therefore, no amounts are recorded at June 30, 2007 related to these guarantees. When THVG incurs guarantee obligations that are disproportionately greater than the guarantees provided by the investee’s other owners, THVG charges the investee a fair market value fee based on the value of the contingent liability THVG is assuming.


*(b)*	*North Central Facility Expansion*

North Central has committed to lease space in a newly constructed addition at the site of the existing facility operated by North Central. The increased operating lease commitment is reflected in note 8. In addition, North Central expects to incur approximately $11.7 million in other costs associated with the expansion, primarily for leasehold improvements and equipment, substantially all of which are expected to be financed by the landlord and third-party lenders. The expansion project is scheduled to be completed in 2008. THVG indirectly owns 25.5% of North Central and consolidates it for financial reporting purposes.


*(c)*	*Litigation and Professional Liability Claims*

In their normal course of business, the Facilities are subject to claims and lawsuits relating to patient treatment. THVG believes that its liability for damages resulting from such claims and lawsuits is adequately covered by insurance or is adequately provided for in its consolidated financial statements. THVG and each of the Facilities maintain professional liability insurance that provides coverage on a claims-made basis of $1.0 million per incident and $7.5 million in annual aggregate amount with retroactive provisions upon policy renewal. Certain of THVG’s insurance policies have deductibles and contingent premium arrangements. THVG believes that the expense recorded through June 30, 2007, which was estimated based on historical claims, adequately provides for its exposure under these arrangements.


(11)	Subsequent Events

Effective July 1, 2007, THVG received, from Baylor and USP, a controlling interest in Rockwall Ambulatory Surgery Center, L.L.P. (Rockwall) and Arlington Surgicare Partners, Ltd. (Arlington), which both operate surgery centers in the Dallas/Fort Worth metropolitan area. Prior to July 1, 2007, these interests were held by HealthFirst.

Effective October 1, 2007, THVG’s subsidiary, University Surgical Partners of Dallas, L.L.P. (USPD), repurchased 11.947% of its outstanding ownership interests for $3,744,215 from non-controlling shareholders. USPD wholly owns Dallas Surgical Partners, L.L.P. and MSH Partners, L.P. and owns a 50.8% interest in North Central Surgical Center, L.L.P.

TEXAS HEALTH VENTURES GROUP, L.L.C
AND SUBSIDIARIES

Consolidated Financial Statements
(Unaudited)
December 31, 2005 and 2004

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Consolidated Balance Sheets
December 31, 2005 and 2004


	2005		2004
	(Unaudited)		(Unaudited)

ASSETS
Current assets:
Cash	$	11,220,390		14,657
Patient receivables, net of allowance for doubtful accounts of $3,601,765 and $6,006, respectively		21,422,273		107,591
Due from affiliates (note 9)		24,369,435		12,504,707
Inventories of supplies		3,929,899		17,587
Current portion of notes receivable (note 6)		347,667		220,000
Other		721,911		7,401

Total current assets		62,011,575		12,871,943
Property and equipment, net (note 2)		66,887,648		2,080,505
Investments in unconsolidated affiliates (note 4)		1,137,728		13,341,696
Goodwill and intangible assets, net (note 5)		67,472,871		3,292,200
Notes receivable, less current portion (note 6)		5,484,370		3,324,032
Other		1,579,901		5,000

Total assets	$	204,574,093		34,915,376


LIABILITIES AND MEMBERS’ EQUITY
Current liabilities:
Accounts payable	$	7,696,820		151,495
Accrued expenses and other		6,331,597		64,991
Due to affiliates		1,877,705		2,112,497
Current portion of long-term debt (note 7)		4,823,547		118,753

Total current liabilities		20,729,669		2,447,736
Long-term debt (note 7)		47,653,957		896,247
Other liabilities		6,100,186		—

Total liabilities		74,483,812		3,343,983
Minority interests (note 4)		19,791,384		404,695
Commitments and contingencies (notes 7, 8, and 10)
Members’ equity (note 3)		110,298,897		31,166,698

Total liabilities and members’ equity	$	204,574,093		34,915,376

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Consolidated Statements of Income
Years ended December 31, 2005 and 2004


	2005			2004
	(Unaudited)			(Unaudited)

Revenues:
Net patient service revenue	$	157,714,790			200,187
Management and royalty fee income		610,400			4,533,515
Other income		85,457			—

Total revenues		158,410,647			4,733,702
Equity in earnings of unconsolidated affiliates		310,780			14,806,904
Operating expenses:
Salaries, benefits, and other employee costs		34,979,213			253,733
Medical services and supplies		29,417,676			37,317
Management and royalty fees		6,608,049			4,545,165
Professional fees		1,234,060			316,716
Other operating expenses		24,666,955			475,168
Provision for doubtful accounts		3,718,343			6,006
Depreciation and amortization		7,215,344			19,125

Total operating expenses		107,839,640			5,653,230

Operating income:		50,881,787			13,887,376
Interest expense		(5,147,836	)		(19,340	)
Interest income (note 9)		1,149,601			514,731
Other income		1,249			—

Income before minority interests		46,884,801			14,382,767
Minority interests in (income) loss of consolidated subsidiaries		(22,703,422	)		237,954

Income before state franchise taxes		24,181,379			14,620,721
State franchise tax expense		(154,598	)		(29,873	)

Net income	$	24,026,781			14,590,848

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Consolidated Statements of Members’ Equity
Years ended December 31, 2005 and 2004


	Contributed Capital					Retained Earnings
	USP			Baylor		USP			Baylor			Total
	(Unaudited)

Balance, December 31, 2003	$	3,006,361			3,006,361		7,531,564			7,531,564			21,075,850
Net income		—			—		7,295,424			7,295,424			14,590,848
Distributions of earnings		—			—		(2,250,000	)		(2,250,000	)		(4,500,000	)

Balance, December 31, 2004		3,006,361			3,006,361		12,576,988			12,576,988			31,166,698
Net income		—			—		11,989,364			12,037,417			24,026,781
Transfer of membership interests		(6,013	)		6,013		(25,154	)		25,154			—
Contributions of capital		35,419,158			30,489,284		—			—			65,908,442
Distributions of earnings		—			—		(5,390,709	)		(5,412,315	)		(10,803,024	)
Transfer of equity in accordance with L.L.C. agreement		(2,530,845	)		2,530,845		—			—			—

Balance, December 31, 2005	$	35,888,661			36,032,503		19,150,489			19,227,244			110,298,897

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows
Years ended December 31, 2005 and 2004


	2005			2004
	(Unaudited)			(Unaudited)
				(Revised - note 1)

Cash flows from operating activities:
Net income	$	24,026,781			14,590,848
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts		3,718,343			6,006
Depreciation and amortization		7,215,344			19,125
Amortization of debt issue costs		12,140			—
Equity in earnings of unconsolidated affiliates, net of distributions received		3,096,250			(2,651,571	)
Minority interest in income (loss) of consolidated subsidiaries, net of distributions paid		5,887,220			(237,954	)
Changes in operating assets and liabilities:
Patient receivables		(7,275,705	)		(113,597	)
Due from affiliates, net		649,427			(373,808	)
Inventories of supplies, prepaids, and other assets		(192,217	)		(47,629	)
Accounts payable and accrued expenses		5,737,163			187,486

Net cash provided by operating activities		42,874,746			11,378,906

Cash flows from investing activities:
Purchases of equity interests, net of cash received		(19,535,329	)		(941,235	)
Sales of equity interests		3,097,520			247,000
Purchases of property and equipment		(9,728,631	)		(2,099,630	)
Cash collections on notes receivable from affiliates		110,442			886,424
Returns of capital from unconsolidated affiliates		120,978			—
Change in cash invested with affiliate		(15,026,497	)		(7,473,372	)

Net cash used in investing activities		(40,961,517	)		(9,380,813	)

Cash flows from financing activities:
Proceeds from long-term debt		2,246,831			1,015,000
Payments on long-term debt		(5,973,205	)		—
Capital contributions by Company members		23,821,902			—
Distributions to Company members		(10,803,024	)		(4,500,000	)

Net cash provided by (used in) financing activities		9,292,504			(3,485,000	)

Increase (decrease) in cash		11,205,733			(1,486,907	)
Cash, beginning of year		14,657			1,501,564

Cash, end of year	$	11,220,390			14,657

Supplemental information:
Cash paid for interest	$	5,182,372			19,340
Noncash transactions:
Noncash assets contributed by Company members		42,086,540			—
Equity investment contribution due to an affiliate		—			2,012,500

See accompanying notes to consolidated financial statements.

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Unaudited)

December 31, 2005 and 2004


(1)	Summary of Significant Accounting Policies


*(a)*	*Description of Business*

Texas Health Ventures Group, L.L.C. and subsidiaries (THVG or the Company), a Texas limited liability company, was formed on January 21, 1997 for the primary purpose of developing, acquiring, and operating ambulatory surgery centers and related entities. The Company is a subsidiary of Baylor Health Services (Baylor), a Texas nonprofit corporation and subsidiary of the Baylor Health Care System, a Texas nonprofit corporation. Baylor owns 50.1% of the Company. USP North Texas, Inc. (USP), a Texas corporation and subsidiary of United Surgical Partners International, Inc. (USPI) owns 49.9% of the Company. Until January 1, 2005, Baylor and USP each owned 50% of the Company. Effective January 1, 2005, USP and Baylor reorganized the Company and executed the Third Amended and Restated Regulations, whereby Baylor purchased 0.1% of the Company from USP, increasing Baylor’s ownership to 50.1% and making the Company a consolidated subsidiary of Baylor.

The Company owns equity interests in and operates ambulatory surgery centers, surgical hospitals, and related businesses in the Dallas / Fort Worth, Texas metropolitan area. At December 31, 2005, the Company operated sixteen facilities (the Facilities) under management contracts, fifteen of which are consolidated for financial reporting purposes, and one of which is accounted for under the equity method. In addition, the Company holds an equity method investment in a partnership that owns the real estate used by one of the Facilities.

The Company has been funded by capital contributions from its two members and by cash distributions from the Facilities. The board of managers, which is jointly controlled by Baylor and USP, initiates requests for capital contributions. The Facilities’ operating agreements provide that cash flow available for distribution will be distributed at least quarterly to the Company and other owners of the Facilities.

The Company’s operating agreement provides that the board of managers determine, on at least a quarterly basis, if the Company should make a cash distribution based on a comparison of the Company’s excess cash on hand versus current and anticipated needs, including, without limitation, needs for operating expenses, debt service, acquisitions, and a reasonable contingency reserve. The terms of the Company’s operating agreement provide that any distributions, whether driven by operating cash flows or by other sources, such as the distribution of noncash assets or distributions in the event the Company liquidates, are to be shared according to each member’s overall ownership level in the Company, which is 50.1% for Baylor and 49.9% for USP as of December 31, 2005.


*(b)*	*Basis of Accounting*

The Company maintains its books and records on the accrual basis of accounting, and the financial statements are prepared in accordance with U.S. generally accepted accounting principles.


*(c)*	*Principles of Consolidation*

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

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Unaudited) — (Continued)

December 31, 2005 and 2004


*(d)*	*Use of Estimates*

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


*(e)*	*Revisions to Cash Flow Statement*

The Company has revised its 2004 cash flow statement to classify cash distributions of its facilities’ earnings within operating activities, where they are netted with the related captions under equity in earnings of unconsolidated affiliates and minority interests in income of consolidated subsidiaries. Previously, all such distributions were reported as cash flows from financing activities.

Cash distributions from facilities are either distributions received from equity method investees or distributions from consolidated subsidiaries to minority interest holders. In the ordinary course of business, the Company’s facilities, both consolidated subsidiaries and unconsolidated affiliates, distribute a portion of their operating cash flow each month or quarter to their owners, including the Company. Thus these distributions include the cash effects of transactions of each facility that enter into the determination of the facility’s net income. As such, distributions to minority interest holders have been classified as cash flows from operating activities in the revised cash flow statement. Additionally, since distributions received from unconsolidated affiliates represent a return on the related equity investments, such amounts have also been included in operating activities in the revised cash flow statement.

Where such amounts represent a return of capital, as opposed to distributions of earnings, they are not classified within cash flows from operating activities, but rather are included in investing activities (for amounts received from equity method investees) or financing activities (for amounts paid to minority interest holders). The effects of the above revisions to the 2004 cash flow statement are summarized as follows:


	Year Ended December 31, 2004
	Net Cash Provided by (Used in)
	Operating			Investing			Financing
	Activities			Activities			Activities

Previously reported	$	(776,427	)		(9,380,813	)		8,670,333
Distributions received from equity method investees		12,155,333			—			(12,155,333	)

As revised	$	11,378,906			(9,380,813	)		(3,485,000	)


*(f)*	*Cash Equivalents*


*(g)*	*Inventories of Supplies*

Inventories of supplies, consisting primarily of pharmaceuticals and supplies, are stated at cost, which approximates market, and are expensed as used.


*(h)*	*Property and Equipment*

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Unaudited) — (Continued)

December 31, 2005 and 2004

accordingly, and any gain or loss is reflected in earnings or loss of the respective period. Maintenance costs and repairs are expensed as incurred; significant renewals and betterments are capitalized. Assets held under capital leases are classified as property and equipment and amortized using the straight-line method over the shorter of the useful lives or the lease terms, and the related obligations are recorded as debt. Amortization of property and equipment held under capital leases and leasehold improvements is included in depreciation and amortization expense. The Company records operating lease expense on a straight-line basis unless another systematic and rational allocation is more representative of the time pattern in which the leased property is physically employed. The Company amortizes leasehold improvements, including amounts funded by landlord incentives or allowances, for which the related deferred rent is amortized as a reduction of lease expense, over the shorter of their economic lives or the lease term.


*(i)*	*Investments in Unconsolidated Affiliates*

Investments in unconsolidated companies in which the Company exerts significant influence are accounted for under the equity method. The Company exerts significant influence in the operations of its unconsolidated affiliates through representation on the governing bodies of the investees and additionally, with respect to the Facilities, through contracts to manage the operations of the investee.


*(j)*	*Intangible Assets*

Intangible assets consist of costs in excess of net assets acquired (goodwill), costs associated with the purchase of management service contract rights, and other intangibles. Most of these assets have indefinite lives. Accordingly, these assets, along with goodwill, are not amortized but are instead tested for impairment annually, or more frequently if changing circumstances warrant. Any decrease in fair value identified in a test for impairment would be recorded as an impairment loss in the consolidated statement of income. No such impairment was identified in 2004 or 2005. The Company amortizes intangible assets with definite useful lives over their respective useful lives to the estimated residual values and reviews them for impairment in the same manner as long-lived assets, discussed below.


*(k)*	*Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of*


*(l)*	*Revenue Recognition*

In addition, the Company has entered into agreements with the Facilities to provide management services. As compensation for these services each month, the Company charges the Facilities management and royalty fees

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Unaudited) — (Continued)

December 31, 2005 and 2004

which are either fixed in amount or represent a fixed percentage of each facility’s net revenue less its provision for doubtful accounts, subject, in some cases, to annual caps. The Company in turn is managed by USP and Baylor, as described more fully in note 9.


*(m)*	*Income Taxes*

No amounts for federal income taxes have been reflected in the accompanying consolidated financial statements because the federal tax effects of the Company’s activities accrue to the individual members. The Company is subject to Texas state franchise tax, which is reflected in the accompanying consolidated statements of income.


*(n)*	*Commitments and Contingencies*


(2)	Property and Equipment

At December 31, property and equipment and related accumulated depreciation consisted of the following:


	Estimated
	Useful Lives		2005			2004

Buildings and leasehold improvements		5-25 years	$	35,971,823			90,779
Equipment		3-15 years		35,218,904			1,948,995
Furniture and fixtures		5-15 years		2,929,154			59,856

				74,119,881			2,099,630
Less accumulated depreciation				(7,232,233	)		(19,125	)

Net property and equipment			$	66,887,648			2,080,505

At December 31, assets recorded under capital lease arrangements included in property and equipment consist of the following:


	2005			2004

Buildings	$	24,633,431			—
Equipment and furniture		9,267,182			—
		33,900,613			—
Less accumulated depreciation		(2,080,018	)		—

Net property and equipment under capital leases	$	31,820,595			—

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Unaudited) — (Continued)

December 31, 2005 and 2004


(3)	Capital Contributions by Members

As discussed in note 1, the Company receives part of its funding through cash contributions from its members. During 2005 those contributions totaled $23,821,902 and were primarily used to purchase additional ownership in most of the Facilities, as described in note 4. In addition, the Company received noncash contributions during 2005 (the Contributions), consisting primarily of investments in partnerships that operate two ambulatory surgery centers and one surgical hospital in the Dallas / Fort Worth area. Those contributions, including the Company’s ownership in each investee, were as follows:


	Ownership			Net assets
Investee	Percentage			Contributed		Effective Date

Lewisville Surgicare Partners, Ltd. (Lewisville)		50.1	%	$	28,557,006		May 1, 2005
Trophy Club Medical Center, L.P. (Trophy Club)		50.1	%		4,767,170		July 1, 2005
Garland Surgicare Partners, Ltd. (Garland)		50.1	%		4,600,883		August 1, 2005
Valley View Surgicare Partners, Ltd. (Valley View)		50.1	%		4,161,481		January 1, 2005

With the exception of the Lewisville facility, USP and Baylor had previously owned these assets through another company they operate, THVG/HealthFirst (HealthFirst), which is a subsidiary of USP. On the effective dates listed above, HealthFirst, which held these assets and managed these facilities, distributed the assets to USP and Baylor, who in turn recontributed the majority of the assets to the Company, which recorded the assets and liabilities received at fair value. Concurrent with the Contributions, the Company began managing the operations of these facilities.

HealthFirst had previously managed Lewisville but held no ownership interest. Each of USP and Baylor negotiated and entered into a separate agreement to purchase units of partnership interest in Lewisville. Effective May 1, 2005, USP purchased units representing approximately a 34.9% interest in Lewisville. Effective as of the same date pursuant to a separate agreement, BHS purchased units representing a 25.1% interest in Lewisville. Primarily for competitive reasons, USP was willing to pay a higherper-unit amount for the interests it purchased. That difference is initially reflected in the contributions of capital line within the accompanying consolidated statements of members’ equity. Those contributions have been adjusted on the accompanying consolidated statements of members’ equity to reflect the value at the time of contribution to the Company of the 25.1% interest in Lewisville contributed by Baylor and the 25% interest in Lewisville contributed by USP. Accordingly, distributions continue to be allocated according to overall ownership and adjusted capital accounts, which is 50.1% to Baylor and 49.9% to USP as of December 31, 2005, whether such distributions are driven by operating cash flows, by distributions of noncash assets, or in the event of the Company’s dissolution. Also on May 1, 2005, the Company began managing Lewisville.

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Unaudited) — (Continued)

December 31, 2005 and 2004


(4)	Investments in Subsidiaries and Unconsolidated Affiliates

The Company’s investments in consolidated subsidiaries and unconsolidated affiliates consisted of the following:

Percentage Owned by THVG

as of December 31

Legal Name

Facility

City

2005

2004

Consolidated subsidiaries(1):

Bellaire Outpatient Surgery Center, L.L.P.

Bellaire Surgery Center

Fort Worth

50.1

40.7

Dallas Surgical Partners, L.L.P.

Baylor Surgicare

Dallas

50.1

40.4

Dallas Surgical Partners, L.L.P.

Texas Surgery Center

Dallas

50.1

40.4

Dallas Surgical Partners, L.L.P.

Physicians Day Surgery Center

Dallas

50.1

40.4

Denton Surgicare Partners, Ltd.

Baylor Surgicare at Denton

Denton

50.1

42.7

Frisco Medical Center, L.L.P.

Baylor Medical Center at Frisco

Frisco

50.1

40.0

Garland Surgicare Partners, Ltd.

Premier Ambulatory Surgery Center of Garland

Garland

50.1

—

Grapevine Surgicare Partners, Ltd.

Baylor Surgicare at Grapevine

Grapevine

50.1

21.2

Lewisville Surgicare Partners, Ltd.

Baylor Surgicare at Lewisville

Lewisville

50.1

—

MSH Partners, L.P.

Mary Shiels Hospital

Dallas

50.1

40.4

North Central Surgical Center, L.L.P.

North Central Surgery Center

Dallas

51.4

50.0

North Garland Surgery Center, L.L.P.

North Garland Surgery Center

Garland

50.1

25.0

Rockwall/Heath Surgery Center, L.L.P.

Heath Surgicare

Heath

59.5

55.5

Trophy Club Medical Center, L.P.

Trophy Club Medical Center

Fort Worth

50.1

—

Valley View Surgicare Partners, Ltd.

Valley View Surgery Center

Dallas

50.1

—

Unconsolidated affiliates:

Denton Surgicare Real Estate, Ltd.

n/a

49.0

Irving-Coppell Surgical Hospital, L.L.P.

Irving-Coppell Surgical Hospital

Irving

14.5

19.0


(1)		List excludes holding companies, which are wholly owned by the Company and hold the Company’s investments in the facilities.

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Unaudited) — (Continued)

December 31, 2005 and 2004

During 2005, the Company acquired additional ownership in several facilities previously accounted for under the equity method (the Buyups). As a result of the Buyups, which were accounted for under the purchase method, the Company owned a majority interest in each of these facilities and began consolidating each for financial reporting purposes. The following summarizes the transactions and their effect on the Company’s ownership level in each entity:


	Purchase				Ownership Percentage
Investee	Price			Effective Date	Before			Acquired			After

Frisco Medical Center, L.L.P.	$	8,800,736		January 1, 2005		40.0	%		10.1	%		50.1	%
Grapevine Surgicare Partners, Ltd.		7,199,011		January 1, 2005		21.2			28.9			50.1
University Surgical Partners, L.L.P.		6,092,110		January 1, 2005		40.4			9.7			50.1
Bellaire Outpatient Surgery Center, L.L.P.		931,882		January 1, 2005		40.7			9.4			50.1
Denton Surgicare Partners, Ltd.		798,163		January 1, 2005		42.7			7.4			50.1
North Garland Surgery Center, L.L.P.		429,660		June 1, 2005		25.0			25.1			50.1
Acquired cash		(4,951,859	)

Net cash paid for Buyups	$	19,299,703

The assets acquired and liabilities assumed with respect to the individually material Buyups can be summarized as follows:


				Grapevine			University
	Frisco Medical			Surgicare			Surgical
	Center, L.L.P.			Partners, Ltd.			Partners, L.L.P.

Current assets	$	9,231,896			1,484,263			6,644,549
Property and equipment		22,482,946			6,341,540			6,187,437
Investments in unconsolidated affiliates(1)		(3,015,111	)		(129,072	)		(2,467,116	)
Notes receivable from unconsolidated affiliates(2)		(1,252,316	)		—			(91,455	)
Goodwill		8,117,475			6,909,782			7,094,253
Other noncurrent assets		1,223,491			15,999			37,641

Total assets acquired		36,788,381			14,622,512			17,405,309

Current liabilities		6,129,145			1,127,795			3,421,544
Long-term debt		18,174,891			5,879,075			3,379,391
Other noncurrent liabilities		—			—			—

Total liabilities assumed		24,304,036			7,006,870			6,800,935

Minority interests payable		3,683,609			416,631			4,512,264

Net assets acquired	$	8,800,736			7,199,011			6,092,110


(1)		The Company previously held an equity method investment in this entity.

(2)		The Company’s note receivable from this entity eliminates in consolidation as a result of the Company acquiring a controlling interest in this entity.

In addition, effective May 1, 2005, the Company acquired a controlling interest in a facility in Lewisville, Texas, as discussed more fully in note 3.

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Unaudited) — (Continued)

December 31, 2005 and 2004

The final determination of the purchase price for Trophy Club is expected to be made in June 2006. The amount is based on the earnings of the center through May 2006 and is thus not determinable at December 31, 2005. Any amounts the Company owes will first be used to settle principal and interest due on a $3.5 million note receivable from the seller of the Trophy Club interests. This note was among the assets the Company received in the Contributions. Any remaining amounts due on the note or owed by the Company are, per the terms of the purchase agreement, to be settled in cash in June 2006. The note and accrued interest of $3,962,218 at December 31, 2005 are included in notes receivable on the Company’s consolidated balance sheet. Of this amount, $305,623 was accrued prior to the note being contributed to the Company, and accordingly the Company owes this amount to HealthFirst. This amount is carried in due to affiliates on the Company’s consolidated balance sheet.

Additionally, in the ordinary course of business, the Company engages in purchases and sales of individual partnership units with physicians who invest in the Facilities, invests cash in projects under development, and makes additional payments to former owners of the Facilities as certain contingencies are resolved or financial targets met. During 2005, the most significant of these transactions were the Buyups. Also among these transactions were the following:


	•	Net proceeds of $2,720,647 from sales of noncontrolling interests in North Central Surgical Center, L.L.P. The North Central facility opened in December 2005.

	•	Net proceeds of $141,247 related to other transactions, primarily purchases and sales individual partnership units with physicians who invest in the facilities.


(5)	Goodwill and Intangible Assets

Intangible assets, net of accumulated amortization, consisted of the following:


	December 31
	2005		2004

Goodwill	$	66,206,975		2,142,200
Other intangible assets		1,265,896		1,150,000

Total	$	67,472,871		3,292,200

The following is a summary of changes in the carrying amount of goodwill for year ended December 31, 2005:


Balance, December 31, 2004	$	2,142,200
Additions:
Contributions (note 3)		40,274,826
Buyups (note 4)		23,734,016
Other		55,933

Balance, December 31, 2005	$	66,206,975

Goodwill additions during the year ended December 31, 2005 resulted primarily from the contributions and Buyups, as discussed in notes 3 and 4.

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Unaudited) — (Continued)

December 31, 2005 and 2004

Intangible assets with definite useful lives are amortized over their respective estimated useful lives. The Company records interest expense for intangible debt issue costs on a straight-line basis over the term of the debt obligation. The agreements underlying the Company’s management contract assets have no determinable termination date and consequently, the related intangible assets have indefinite useful lives. Goodwill and intangible assets with indefinite useful lives are not amortized but instead are tested for impairment at least annually. No impairment was recorded in 2004 or 2005. The following is a summary of intangible assets at December 31, 2005 and 2004:


	December 31, 2005
	Gross
	Carrying		Accumulated
	Amount		Amortization			Total

Definite useful lives:
Other	$	185,602		(69,706	)		115,896
Indefinite useful lives:
Management contracts							1,150,000

Total intangible assets						$	1,265,896

December 31, 2004

Gross

Carrying

Accumulated

Amount

Amortization

Total

Definite useful lives:

Other

—

Indefinite useful lives:

Management contracts

1,150,000

Total intangible assets

1,150,000

The addition of intangible assets with definite useful lives during the year ended December 31, 2005 is due to the assets added through the Buyups.

Amortization expense related to intangible assets with definite useful lives was $15,999 for the year ended December 31, 2005. Additionally, accumulated amortization changed as a result of amortization of debt issue costs in the amount of $12,140 during the year ended December 31, 2005, which is reflected in interest expense. There was no amortization expense for the year ended 2004. The remaining $115,896 of unamortized value of intangible assets with definite lives represents debt issue costs whose amortization will be reflected in interest expense.


(6)	Notes Receivable

As discussed in notes 3 and 4, effective July 1, 2005, Baylor and USP contributed their ownership in the holding company of the Trophy Club facility, which has a note receivable for $3,500,000 from another owner of Trophy Club. This note accrues interest at 8% per annum, and the outstanding balance receivable, including interest, under this agreement was $3,962,218 as of December 31, 2005. As discussed in note 4, the Company expects to settle this note in 2006 in conjunction with finalizing the purchase price of Trophy Club.

The Company has a promissory note receivable from the Irving-Coppell facility, which accrues interest at 7.5% per annum and provides for sixty monthly principal and interest payments maturing on August 1, 2010. The outstanding principal balance receivable under this agreement was $1,869,819 and $1,980,050 at December 31, 2005 and 2004, respectively.

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Unaudited) — (Continued)

December 31, 2005 and 2004


(7)	Long-Term Debt

At December 31, 2005 long-term debt consisted of the following:


	2005			2004

Capital lease obligations	$	38,661,268			—
Notes payable to financial institutions		13,816,236			1,015,000

Total long-term debt		52,477,504			1,015,000
Less current portion		(4,823,547	)		(118,753	)

Long-term debt, less current portion	$	47,653,957			896,247

The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 2005 and thereafter are as follows: 2006, $4,823,547; 2007, $5,390,647; 2008, $5,965,534; 2009, $5,551,750; 2010, $2,779,632; and thereafter, $27,966,394.

Capital lease obligations are secured by underlying real estate or equipment and have interest rates ranging from 5.99% to 12.66%.

The Facilities have notes payable to financial institutions which mature at various dates through 2012 and accrue interest at fixed and variable rates ranging from 7.00% to 15.54%. Each note is secured by certain assets of the Facility.


(8)	Leases

The Facilities lease various office equipment, medical equipment and office space under a number of operating lease agreements, which expire at various times through the year 2029. Such leases do not involve contingent rentals, nor do they contain significant renewal or escalation clauses. Office leases generally require the Facilities to pay all executory costs (such as property taxes, maintenance and insurance).

Minimum future payments under noncancelable leases with remaining terms in excess of one year as of December 31, 2005 are as follows:


	Capital			Operating
	Leases			Leases

Year ending December 31:
2006	$	6,490,243			6,171,683
2007		6,395,936			6,032,315
2008		6,399,958			5,642,250
2009		6,425,802			4,644,848
2010		5,187,572			3,854,531
Thereafter		49,774,407			56,721,807

Total minimum lease payments		80,673,918		$	83,067,434

Amount representing interest		(42,012,650	)

Present value of minimum lease payments	$	38,661,268

Total rent expense under operating leases was $5,634,913 and $128,337 for the years ended December 31, 2005 and 2004, respectively, and is included in other operating expenses in the accompanying consolidated statements of income.

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Unaudited) — (Continued)

December 31, 2005 and 2004


(9)	Related-Party Transactions

The Company operates the Facilities under management and royalty contracts, and the Company in turn is managed by Baylor and USP, resulting in the Company incurring management and royalty fee expense payable to Baylor and USP in amounts equal to the management and royalty fee income the Company receives from the Facilities. The Company’s management and royalty fee income from the facilities it consolidates for financial reporting purposes eliminates in consolidation with the facilities’ expense and therefore is not included in the Company’s consolidated revenues. The Company’s management and royalty fee income from facilities which are not consolidated is included in the consolidated revenues of the Company.

The management and royalty fee expense payable to Baylor and USP is reflected as expense in the Company’s consolidated statements of income for all the Facilities. Of the total, 64.3% and 34.0% represent management fees payable to USP and Baylor, respectively, and 1.7% represents royalty fees payable to Baylor.

Under the management and royalty agreements, the Facilities pay the Company an amount ranging from 4.5% to 7% of their net patient service revenue less provision for doubtful accounts annually, subject, in some cases, to an annual cap. Management and royalty fees and other reimbursable costs owed by the Company and its Facilities to USP and Baylor totaled $1,572,082 and $99,997 at December 31, 2005 and 2004, respectively, and are included in due to affiliates in the accompanying consolidated balance sheets.

In addition, a subsidiary of USPI frequently pays bills on behalf of the Company and has custody of substantially all excess Company cash, paying the Company and the Facilities interest income on the net balance at prevailing market rates. This interest income amounted to $650,124 and $155,081 for the years ended December 31, 2005 and 2004, respectively. As discussed in note 6, the Company also had a note receivable from one of its unconsolidated investees at December 31, 2005 and 2004.


(10)	Commitments and Contingencies


*(a)*	*Financial Guarantees*

As of December 31, 2005, the Company had issued guarantees of portions of the indebtedness of its investees to third parties, which could potentially require the Company to make maximum aggregate payments totaling approximately $5.0 million. Of the total, $1.8 million relates to the obligations of consolidated subsidiaries, whose obligations are included in the Company’s consolidated balance sheet and related disclosures, and the remaining $3.2 million relates to the obligations of unconsolidated affiliated companies, whose obligations are not included in the Company’s consolidated balance sheet and related disclosures. These arrangements (a) consist of guarantees of real estate and equipment financing, (b) are secured by all or a portion of the investees’ assets, (c) require payments by the Company in the event of a default by the investee primarily obligated under the financing, (d) expire as the underlying debt matures at various dates through 2021, or earlier if certain performance targets are met, and (e) provide no recourse for the Company to recover any amounts from third parties. The fair value of the guarantee liability was not material to the consolidated financial statements. When the Company incurs guarantee obligations that are disproportionately greater than the guarantees provided by the investee’s other owners, the Company charges the investee a fair market value fee based on the value of the contingent liability the Company is assuming.

TEXAS HEALTH VENTURES GROUP, L.L.C.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Unaudited) — (Continued)

December 31, 2005 and 2004


*(b)*	*Litigation and Professional Liability Claims*

In their normal course of business, the Facilities are subject to claims and lawsuits relating to patient treatment. The Company believes that its liability for damages resulting from such claims and lawsuits is adequately covered by insurance or is adequately provided for in its consolidated financial statements. The Company and each of the Facilities maintain professional liability insurance that provides coverage on a claims made basis of $1.0 million per incident and $7.5 million in annual aggregate amount with retroactive provisions upon policy renewal. Certain of the Company’s insurance policies have deductibles and contingent premium arrangements. The Company believes that the accruals established at December 31, 2005, which were estimated based on historical claims, adequately provide for its exposure under these arrangements.

(3) Exhibits:


Exhibit
Number			Description

	2	.1	Agreement and Plan of Merger dated as of January 27, 2006, by and among United Surgical Partners International, Inc., Peak ASC Acquisition Corp. and Surgis, Inc. (previously filed as Exhibit 10.1 to the Company’s Current Report on From8-K filed with the Commission on January 31, 2006 and incorporated herein by reference).(1)
	2	.2	Agreement and Plan of Merger, dated as of January 7, 2007, by and among the Company, UNCN Holdings, Inc. and UNCN Acquisition Corp. (previously filed as Exhibit 2.1 to the Company’s Current Report onForm 8-K filed with the Commission on January 8, 2007 and incorporated herein by reference).(1)
	3	.1	Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.1(A) to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)
	3	.2	Amended and Restated Bylaws (previously filed as Exhibit 3.1(B) to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)
	4	.1	Indenture governing 87/8% Senior Subordinated Note due 2017 and 91/4%/10% Senior Subordinated Toggle Note due 2017, among the Company, the Guarantors named therein and U.S. Bank National Association, as trustee. (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)
	4	.2	Form of 87/8% Senior Subordinated Note due 2017 and 91/4%/10% Senior Subordinate Toggle Note due 2017 (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)
	10	.1	Credit Agreement, dated as of April 19, 2007, among USPI Holdings, Inc., the Company, as Borrower, the Lenders party thereto, Citibank, N.A., as Administrative Agent and Collateral Agent, Lehman Brothers, Inc., as Syndication Agent, and Bear Stearns Corporate Lending., Inc. and UBS Securities LLC, asCo-Documentation Agents (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)
	10	.2	Guarantee and Collateral Agreement, dated as of April 19, 2007, among USPI Holdings, Inc., the Company, the subsidiaries of the Company identified therein and Citibank, N.A., as Collateral Agent (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)
	10	.3	Employment Agreement, dated as of April 19, 2007, by and between the Company and Donald E. Steen (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)(3)
	10	.4	Employment Agreement, dated as of April 19, 2007, by and between the Company and William H. Wilcox (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)(3)
	10	.5	Employment Agreement dated as of April 19, 2007 by and between the Company and Brett P. Brodnax (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)(3)
	10	.6	Employment Agreement dated as of April 19, 2007 by and between the Company and Niels P. Vernegaard (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)(3)
	10	.7	Employment Agreement dated as of April 19, 2007 by and between the Company and Mark A. Kopser (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)(3)
	10	.8	Employment Agreement dated as of April 19, 2007 by and between the Company and John J. Wellik (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)(3)
	10	.9	USPI Group Holdings, Inc. 2007 Equity Incentive Plan (previously filed as an exhibit to the Company’s Quarterly Report onForm 10-Q(No. 333-144337) and incorporated herein by reference).(1)(3)
	10	.10	First Amendment to the USPI Group Holdings, Inc. 2007 Equity Incentive Plan.(2)(3)
	10	.11	Amended and Restated Deferred Compensation Plan.(2)(3)

IV-1


Exhibit
Number			Description

	10	.12	Form of Indemnification Agreement between United Surgical Partners International, Inc. and its directors and officers (previously filed as an exhibit to Amendment No. 1 to the Company’s Registration Statement onForm S-1(No. 333-55442) and incorporated herein by reference).(1)(3)
	21	.1	List of the Company’s subsidiaries.(2)
	24	.1	Power of Attorney — Donald E. Steen(2)
	24	.2	Power of Attorney — Joel T. Allison(2)
	24	.3	Power of Attorney — Michael E. Donovan(2)
	24	.4	Power of Attorney — John C. Garrett, M.D.(2)
	24	.5	Power of Attorney — D. Scott Mackesy(2)
	24	.6	Power of Attorney — James Ken Newman(2)
	24	.7	Power of Attorney — Boone Powell, Jr.(2)
	24	.8	Power of Attorney — Paul. B. Queally(2)
	24	.9	Power of Attorney — Raymond A. Ranelli(2)
	31	.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)
	31	.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)
	32	.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2)
	32	.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2)


(1)		Previously filed.

(2)		Filed herewith.

(3)		Management contract or compensatory plan or arrangement in which a director or executive officer participates.

IV-2

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.

United Surgical Partners International, Inc.


	By:	/s/ William H. Wilcox

William H. Wilcox

President, Chief Executive Officer and Director

Date: February 25, 2009

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


Signature	Title	Date


* Donald E. Steen	Chairman of the Board	February 25, 2009

/s/ William H. Wilcox William H. Wilcox	President, Chief Executive Officer and Director (Principal Executive Officer)	February 25, 2009

/s/ Mark A. Kopser Mark A. Kopser	Executive Vice President and Chief Financial Officer (Principal Financial Officer)	February 25, 2009

/s/ John J. Wellik John J. Wellik	Senior Vice President, Accounting and Administration, and Secretary (Principal Accounting Officer)	February 25, 2009

* Joel T. Allison	Director	February 25, 2009

* Michael E. Donovan	Director	February 25, 2009

* John C. Garrett, M.D.	Director	February 25, 2009

* D. Scott Mackesy	Director	February 25, 2009

* James Ken Newman	Director	February 25, 2009

* Boone Powell, Jr.	Director	February 25, 2009

IV-3


Signature	Title	Date


* Paul B. Queally	Director	February 25, 2009

* Raymond A. Ranelli	Director	February 25, 2009


*		John J. Wellik, by signing his name hereto, does hereby sign this Annual Report onForm 10-K on behalf of each of the above-named directors and officers of the Company on the date indicated below, pursuant to powers of attorney executed by each of such directors and officers and contemporaneously filed herewith with the Commission.


	By:	/s/ John J. Wellik

John J. Wellik

Attorney-in-fact

Date: February 25, 2009

IV-4

INDEX TO EXHIBITS


Exhibit
Number			Description

	2	.1	Agreement and Plan of Merger dated as of January 27, 2006, by and among United Surgical Partners International, Inc., Peak ASC Acquisition Corp. and Surgis, Inc. (previously filed as Exhibit 10.1 to the Company’s Current Report on From8-K filed with the Commission on January 31, 2006 and incorporated herein by reference).(1)
	2	.2	Agreement and Plan of Merger, dated as of January 7, 2007, by and among the Company, UNCN Holdings, Inc. and UNCN Acquisition Corp. (previously filed as Exhibit 2.1 to the Company’s Current Report onForm 8-K filed with the Commission on January 8, 2007 and incorporated herein by reference).(1)
	3	.1	Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.1(A) to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)
	3	.2	Amended and Restated Bylaws (previously filed as Exhibit 3.1(B) to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)
	4	.1	Indenture governing 87/8% Senior Subordinated Note due 2017 and 91/4%/10% Senior Subordinated Toggle Note due 2017, among the Company, the Guarantors named therein and U.S. Bank National Association, as trustee. (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)
	4	.2	Form of 87/8% Senior Subordinated Note due 2017 and 91/4%/10% Senior Subordinate Toggle Note due 2017 (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)
	10	.1	Credit Agreement, dated as of April 19, 2007, among USPI Holdings, Inc., the Company, as Borrower, the Lenders party thereto, Citibank, N.A., as Administrative Agent and Collateral Agent, Lehman Brothers, Inc., as Syndication Agent, and Bear Stearns Corporate Lending., Inc. and UBS Securities LLC, asCo-Documentation Agents (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)
	10	.2	Guarantee and Collateral Agreement, dated as of April 19, 2007, among USPI Holdings, Inc., the Company, the subsidiaries of the Company identified therein and Citibank, N.A., as Collateral Agent (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)
	10	.3	Employment Agreement, dated as of April 19, 2007, by and between the Company and Donald E. Steen (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)(3)
	10	.4	Employment Agreement, dated as of April 19, 2007, by and between the Company and William H. Wilcox (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)(3)
	10	.5	Employment Agreement dated as of April 19, 2007 by and between the Company and Brett P. Brodnax (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)(3)
	10	.6	Employment Agreement dated as of April 19, 2007 by and between the Company and Niels P. Vernegaard (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)(3)
	10	.7	Employment Agreement dated as of April 19, 2007 by and between the Company and Mark A. Kopser (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)(3)
	10	.8	Employment Agreement dated as of April 19, 2007 by and between the Company and John J. Wellik (previously filed as an exhibit to the Company’s Registration Statement onForm S-4(No. 333-144337) and incorporated herein by reference).(1)(3)
	10	.9	USPI Group Holdings, Inc. 2007 Equity Incentive Plan (previously filed as an exhibit to the Company’s Quarterly Report onForm 10-Q(No. 333-144337) and incorporated herein by reference).(1)(3)
	10	.10	First Amendment to the USPI Group Holdings, Inc. 2007 Equity Incentive Plan.(2)(3)

IV-5


Exhibit
Number			Description

	10	.11	Amended and Restated Deferred Compensation Plan.(2)(3)
	10	.12	Form of Indemnification Agreement between United Surgical Partners International, Inc. and its directors and officers (previously filed as an exhibit to Amendment No. 1 to the Company’s Registration Statement onForm S-1(No. 333-55442) and incorporated herein by reference).(1)(3)
	21	.1	List of the Company’s subsidiaries.(2)
	24	.1	Power of Attorney— Donald E. Steen(2)
	24	.2	Power of Attorney — Joel T. Allison(2)
	24	.3	Power of Attorney — Michael E. Donovan(2)
	24	.4	Power of Attorney — John C. Garrett, M.D.(2)
	24	.5	Power of Attorney— D. Scott Mackesy(2)
	24	.6	Power of Attorney — James Ken Newman(2)
	24	.7	Power of Attorney — Boone Powell, Jr.(2)
	24	.8	Power of Attorney — Paul. B. Queally(2)
	24	.9	Power of Attorney — Raymond A. Ranelli(2)
	31	.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)
	31	.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(2)
	32	.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2)
	32	.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(2)


(1)		Previously filed.

(2)		Filed herewith.

(3)		Management contract or compensatory plan or arrangement in which a director or executive officer participates.

IV-6

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Avg

Large accelerated filer o

Accelerated filer o

Non-accelerated filer þ

Smaller reporting company o

(Do not check if a smaller reporting company)