UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Commission file number 000-32837

United Surgical Partners International, Inc.

(Exact name of registrant as specified in its charter)

(972) 713-3500

(Registrant’s telephone number, including area code)

      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 þ          No o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes þ          No o

      At April 25, 2005 there were 28,827,623 shares of Common Stock outstanding.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX

Note: Items 2, 3, 4 and 5 of Part II are omitted because they are not applicable.

PART I. FINANCIAL INFORMATION

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited — in thousands, except per share amounts)

See accompanying notes to consolidated financial statements.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited — in thousands, except per share amounts)

See accompanying notes to consolidated financial statements.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited — in thousands)

See accompanying notes to consolidated financial statements.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited — in thousands)

See accompanying notes to consolidated financial statements

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

      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 surgery centers, private surgical hospitals and related businesses in the United States and Europe. At March 31, 2005, USPI, headquartered in Dallas, Texas, operated 86 short-stay surgical facilities. Of these 86 facilities, USPI consolidates the results of 42, accounts for 43 under the equity method, and holds no ownership in the remaining facility, which is operated by USPI under a management contract. USPI operates in two countries, with 83 of its 86 facilities located in the United States of America; the remaining three facilities are located in the United Kingdom. Most 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 March 31, 2005, the Company had agreements with not-for-profit healthcare systems providing for joint ownership of 48 of the Company’s 83 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.

      Through its majority-owned subsidiary Global Healthcare Partners Limited (Global), incorporated in England, USPI manages and wholly owns three private surgical hospitals in the greater London area.

      During September 2004, the Company completed the sale of its Spanish operations. At the time of the sale, the Company managed and owned a majority interest in eight private surgical hospitals and one ambulatory surgery center in Spain. The results of the Spanish operations for the quarter ended March 31, 2004 have been reclassified to discontinued operations.

      USPI 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.

      USPI 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 (GAAP). The accompanying consolidated financial statements and notes should be read in conjunction with the Company’s Form 10-K. It is management’s opinion that the accompanying consolidated financial statements reflect all adjustments (which are normal recurring adjustments) necessary for a fair presentation of the results for the interim period and the comparable period presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

      As discussed in Note 19 to USPI’s 2004 financial statements on Form 10-K, USPI had planned to adopt a new accounting standard regarding its accounting for some types of equity-based compensation effective July 1, 2005. During April 2005, the Securities and Exchange Commission deferred the implementation date of this accounting standard. As a result, USPI now plans to adopt the new accounting standard effective January 1, 2006. Until that date USPI will continue to follow its historic policy in accounting for its equity-based compensation, as discussed below.

      USPI applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option grants to employees. Accordingly, USPI generally does not record compensation expense related to stock option grants because USPI generally issues options for which the option exercise price equals the current market price of the underlying stock on the date of grant. SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

Disclosure, established accounting and disclosure requirements using a fair value based method of accounting for stock-based employee compensation plans. As permitted under SFAS No. 123, the Company has elected to continue to apply the intrinsic value based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148. Had USPI determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, USPI’s net income would have been the pro forma amounts indicated below (in thousands, except per share amounts):

      The fair values in the table above were estimated at the date of grant using the Black-Scholes valuation model with the following assumptions: risk-free interest rates ranging from 2.1% to 4.9%, expected dividend yield of zero, expected volatility of the market price of the Company’s common stock of 40%, and an expected life of the option ranging from three to five years.

      Total stock-based employee compensation expense included in net income, as reported, primarily consists of expense under the Company’s Deferred Compensation Plan, grants of restricted stock to employees, and continued amortization of expense related to a December 2000 grant of stock options at a price lower than the current market price at the date of grant. The compensation amounts related to these grants are being amortized into expense over the estimated service periods.

      The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.

      Effective January 1, 2005, the Company acquired a controlling interest in an ambulatory surgery center in Westwood, California in which the Company had previously owned a noncontrolling interest, for $7.4 million in cash.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

      Following are the unaudited pro forma results for the three months ended March 31, 2004 as if this acquisition had occurred on January 1, 2004 (in thousands, except per share amounts):

      The Company also engages in investing transactions that are not business combinations. 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 three months ended March 31, 2005, these transactions resulted in a net cash outflow of $13.6 million. The most significant of these transactions were the Company’s acquisition of additional ownership in eight facilities it operates in the Dallas/ Fort Worth market, which, together with the Company selling a portion of a ninth facility in this market, resulted in a net cash outflow of approximately $13.4 million.

      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 (income statement amounts are in thousands and reflect 100% of the investees’ results on an aggregated basis):

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

      Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding options, warrants and restricted stock, except where such effect would be antidilutive. The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 2005 and 2004 (in thousands, except per share amounts):

      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. USPI’s business is the operation of surgery centers, private surgical hospitals and related businesses in the United States and the United Kingdom. USPI’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, USPI’s reportable segments consist of (1) U.S. based facilities and (2) United Kingdom based facilities. Prior to the Company’s September 2004 sale of its Spanish operations, the Company operated in two segments: the United States and Western Europe. The Western Europe segment consisted of operations in Spain and the United Kingdom. As a result of the sale of its Spanish operations, the Company’s non-U.S. segment now consists solely of its operations in the United Kingdom. Accordingly, all amounts related to the Spanish operations have been removed from all periods presented in the Company’s segment disclosures (amounts in thousands).

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

      The following information is presented as required by regulations of the Securities and Exchange Commission in connection with the Company’s publicly traded Senior Subordinated Notes. This information is not 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 $150 million 10% Senior Subordinated Notes due 2011 were issued in a private offering on December 19, 2001 and subsequently registered as publicly traded securities through a Form S-4 effective January 15, 2002 by USPI’s wholly owned finance subsidiary, United Surgical Partners Holdings, Inc. (USPH), which was formed in 2001. The notes are guaranteed by USPI, which does not have independent assets or operations, and USPI’s wholly owned subsidiaries domiciled in the United States. USPI’s investees in the United Kingdom are not guarantors of the obligation, nor were USPI’s investees in Spain. 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, except for the Company’s Spanish operations, which have been classified as discontinued operations in the condensed consolidated statements of income shown below.

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

Condensed Consolidating Balance Sheets:

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

Condensed Consolidating Balance Sheets:

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

Condensed Consolidating Statements of Income:

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

Condensed Consolidating Statements of Cash Flows:

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

      As discussed in Note 2, the Company regularly engages in purchases and sales of ownership interests in its facilities. During the first quarter of 2005, the Company sold a portion of one of its facilities in the Dallas / Fort Worth market to a hospital system whose Chief Executive Officer is a member of the Company’s board of directors. This transaction represented a net sale of approximately $0.5 million. The Company believes the sale was on an arms length basis, with the sales price derived using the same methodology as that used in similar transactions with unrelated parties.

      As of March 31, 2005, 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 $57.7 million. Of the total, $23.9 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 $33.8 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

UNITED SURGICAL PARTNERS INTERNATIONAL, INC.

AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) — (Continued)

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 2022, and (e) provide no recourse for the Company to recover any amounts from third parties.

      As discussed more fully in Note 16 to the Company’s 2004 financial statements on Form 10-K, the Company sold its Spanish operations in September 2004 and indemnified the buyers with respect to taxes and other contingencies of the entities sold. There have been no material changes in those contingencies or in the Company’s assessment of their probability or amount since the Company filed its Form 10-K.

      In addition, from time to time the Company may be 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, other than those discussed above, that might have a material adverse impact on the Company.

      The Company 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.

      The following discussion should be read in conjunction with the Company’s unaudited Consolidated Financial Statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.

Forward-Looking Statements

      Certain statements contained or incorporated by reference in this Quarterly Report on Form 10-Q, 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: general economic and business conditions, both nationally and regionally; foreign currency fluctuations; demographic changes; changes in, or the failure to comply with, laws and governmental regulations; the ability to enter into or renew managed care provider arrangements on acceptable terms; changes in Medicare, Medicaid and other government funded payments or reimbursement in the United States and the United Kingdom; liability and other claims asserted against us; the highly competitive nature of the healthcare industry; changes in business strategy or development plans of healthcare systems with which we partner; the ability to attract and retain qualified physicians and personnel, including nurses and other health care professionals; our significant indebtedness; 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 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 Quarterly Report on Form 10-Q. 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.

Overview

      We operate ambulatory surgery centers and private surgical hospitals in the United States and the United Kingdom. As of March 31, 2005, we operated 86 facilities, consisting of 83 in the United States and three in the United Kingdom. During September 2004, we sold our operations in Spain, where we had operated nine short-stay surgical facilities. A majority of our 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 March 31, 2004, we had agreements with not-for-profit healthcare systems providing for the joint ownership of 48 of our 83 U.S. facilities and also providing a framework for the planning and construction of additional facilities in the future. All of our U.S. facilities include physician owners.

      Our U.S. facilities, consisting of ambulatory surgery centers and private surgical hospitals (each are generally referred to herein as “short-stay surgical facilities”), specialize in non-emergency surgical cases, the volume of which has steadily increased over the past two decades due in part to advancements in medical technology. These 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 with not-for-profit healthcare system partners (“hospital partners”). From December 31, 2001 to March 31, 2005, the number of facilities we own jointly with hospital partners more than doubled, increasing from 19 to 48. Of the 18 facilities we are currently developing, 17 include a hospital partner.

      In the United Kingdom we operate private hospitals, which supplement the services provided by the government-sponsored healthcare systems. 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, 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 continued growth and success depends on our ability to continue to grow volumes at our existing facilities, to successfully open new facilities we develop, 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 amount 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, income taxes, and intangible assets.

      Our determination of whether to consolidate an entity in which we hold an investment, account for it under the equity method, or carry it at cost has a significant impact on our financial statements because of the typical business model under which we operate, particularly in the United States, where the majority of the facilities we operate are partially owned by not-for-profit hospital systems, physicians, and other parties. These quarterly financial statements have been prepared using the same consolidation policy as that used in the Company’s latest audited financial statements.

      We also consider our accounting policy regarding intangible assets to be a critical accounting policy given the significance of intangible assets as compared to the total assets of the Company. There have been no significant changes in our application of GAAP to intangible assets since the preparation of the Company’s latest audited financial statements.

      Our revenue recognition and accounts receivable policy and our method of accounting for income taxes involve significant judgments and estimates. There have been no significant changes in assumptions, estimates, and judgments in the preparation of these quarterly financial statements from the assumptions, estimates, and judgments used in the preparation of the Company’s latest audited financial statements.

Acquisitions, Equity Investments and Development Projects

      Effective January 1, 2005, we acquired a controlling interest in an ambulatory surgery center in Westwood, California, in which we had previously owned a noncontrolling interest, for $7.4 million in cash.

      We also engage in purchases and sales of noncontrolling interests in facilities we already operate and invest additional cash in surgical facilities under development. These transactions resulted in a net cash outflow of $13.6 million during the three months ended March 31, 2005. The most significant of these transactions were the acquisition of additional ownership in eight facilities we operate in the Dallas/ Fort Worth, Texas market, which, together with our selling a portion of a ninth facility in this market, resulted in a net cash outflow of approximately $13.4 million.

Sources of Revenue

      Revenues primarily include the following:

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

      Net patient service revenue consists of the revenues earned by facilities we consolidate for financial reporting purposes. These revenues increased as a percentage of our total revenues in the three months ended March 31, 2005, as compared to the corresponding prior year period, primarily as a result of our increasing the number of facilities we consolidate for financial reporting purposes by ten from March 31, 2004 to March 31, 2005. While we also added eleven unconsolidated facilities during this time period, the revenues we derive from unconsolidated facilities are limited to fees we earn for managing their operations and thus adding an unconsolidated facility generally increases our revenues by far less than adding a consolidated facility.

      Our management and administrative services revenues are earned from the following types of activities (dollars in thousands):

      The following table summarizes our revenues by operating segment:

      The number of facilities we operate (excluding the discontinued Spanish operations) increased by 21 from March 31, 2004 to March 31, 2005. All of these additional facilities are in the United States. Accordingly, the proportion of our total revenues that is derived from the United States is higher for the three months ended March 31, 2005 than in the corresponding prior year period.

Equity in Earnings of Unconsolidated Affiliates

      The following table reflects the summarized results of the unconsolidated facilities that we account for under the equity method of accounting (dollars in thousands):

Results of Operations

      The following table summarizes certain statement of income items expressed as a percentage of revenues for the periods indicated:

Executive Summary

      We continue to grow our existing facilities, develop new facilities, and add others selectively through acquisition. On an overall basis, we continue to experience increases in the volume of services provided and in the average rates at which our facilities are reimbursed for those services, resulting in revenue growth at the facilities we owned during the first quarter of both 2004 and 2005 (“same store facilities”).

      However, slower revenue growth, driven by reductions in reimbursement levels in some markets, and the performance of two facilities we opened during the second quarter of 2004, have continued to adversely impact our operating margins in 2005, resulting in an overall decline in our operating margins as compared to the three months ended March 31, 2004.

      We continue to pursue the strategy of having a hospital partner, where practical, in addition to physician partners in each local U.S. market, which we believe improves the long-term potential of our surgical facilities. The overall proportion of our facilities that have a hospital partner continues to grow, and all but one of the 18 facilities we are currently developing include a hospital partner.

Revenues

      Increases in the volume of surgical cases in the U.S. and of patient admissions for our hospitals in the United Kingdom continue to drive increases in our revenues, as does an increase in the average rate of reimbursement for the surgeries performed at our U.S. facilities. During the first quarter of 2005, our domestic case volumes and average rate of reimbursement grew at slower rates than we have historically experienced, continuing the trend noted during the second half of 2004. Our case volume was adversely affected by several factors. First, the lapse of a managed care contract in one market during the third quarter of 2004 has resulted in our performing fewer cases at certain surgery centers. Second, both countries in which we operate, but most significantly our U.K. facilities, were affected by the timing of the Easter holiday, which adversely impacts revenues and fell in the first quarter in 2005 versus the second quarter in 2004. Our average rate of reimbursement continues to be adversely impacted by lower rates of reimbursement for workers compensation cases performed at our surgery centers in Texas and by the lapse of the managed care contract described above, both of which began impacting our business during the third quarter of 2004 and thus continue to affect

our year-over-year comparisons. The growth of our same store facilities’ revenues is summarized in the following table:

Joint Ventures With Not-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. The following table summarizes our facilities as of March 31, 2005 and 2004, excluding our nine Spanish facilities, which were sold during September 2004:

Facility Operating Margins

      As noted above, factors we began to experience during the second and third quarters of 2004 have continued to adversely impact our revenues in some markets in 2005. Revenues were also impacted in 2005 by the timing of the Easter holiday, as noted above. These factors adversely affecting revenues have not had the same impact on our facility and personnel expenses, and accordingly we have experienced a decrease in our same store operating margins in 2005 as compared to the first quarter of 2004. In addition, our year-over-year operating margin comparisons continue to be adversely impacted by the ramp-up of the two surgical hospitals we opened during the second quarter of 2004. Almost all of the facilities impacted by these factors have a hospital partner, which caused our same store operating margins to decrease by more for this group than for our other facilities. While some of the factors involved, such as the ramp-up of the two surgical hospitals and the timing of the Easter holiday, are not expected to be permanently significant factors, it is not known to what extent we will continue to experience downward pressure on reimbursement. Reductions in reimbursement due to factors such as the workers compensation rate decreases in Texas and the lapse of the managed care contract discussed above could occur elsewhere in the future. The following table summarizes our same store operating margins (see footnote 1 below), comparing the three months ended March 31, 2005 to the three months ended March 31, 2004:

Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004

      Revenues increased by $25.3 million, or 28.0%, to $115.7 million for the three months ended March 31, 2005 from $90.4 million for the three months ended March 31, 2004. This increase consisted primarily of revenues of newly constructed or acquired facilities and additionally through growth of our same store facilities and a small amount of exchange rate fluctuation. The addition of 21 facilities from March 31, 2004 to March 31, 2005 caused an increase of approximately $19 million of revenues. Revenue from same store facilities drove most of the remaining $6 million of revenue growth, consisting primarily of U.S. facilities, which performed approximately 4% more surgical cases and received an average of approximately 3% more per case during the three months ended March 31, 2005 than in the corresponding prior year period. The revenues of same store United Kingdom facilities, when measured using 2004 exchange rates for both periods, were $1.0 million higher during the three months ended March 31, 2005 than in the corresponding prior year period. The growth in U.K. revenues would have been greater had revenues for the first quarter of 2005 not been adversely impacted by the Easter holiday, which occurred during the second quarter of 2004. The U.S. dollar being weaker relative to the British pound in 2005 than in the corresponding prior year period resulted in a $0.6 million increase in revenues.

      Equity in earnings of unconsolidated affiliates decreased by $0.2 million, or 3.9% to $5.1 million for the three months ended March 31, 2005 from $5.3 million for the three months ended March 31, 2004. While the revenues of our unconsolidated affiliates continue to grow, some facilities added during 2004 are not yet profitable, and a significant number of unconsolidated facilities continue to be adversely impacted by the third quarter 2004 lapse of a managed care contract in a major market.

      Operating expenses, excluding depreciation and amortization, increased by $19.0 million, or 30.4%, to $81.6 million for the three months ended March 31, 2005 from $62.6 million for the three months ended March 31,2004. Operating expenses, excluding depreciation and amortization, as a percentage of revenues, increased to 70.6% for the three months ended March 31, 2005 from 69.3% for the three months ended March 31, 2004. This increase as a percentage of revenues is partially attributable to lower than average margins earned at two surgical hospitals we opened during the second quarter of 2004. Our new and newly expanded facilities hire staff and become fully equipped for a relatively high number of surgical cases in their initial months of operations, but the case volumes are not high enough initially to result in operating margins that are as favorable as those generated by our more mature facilities. In addition, we experienced slower revenue growth than in prior periods due to decreases in rates of reimbursement for workers compensation cases in Texas and due to the lapse of a managed care contract in a major market.

      Operating income increased $4.7 million, or 17.6%, to $31.4 million for the three months ended March 31, 2005 from $26.7 million for the three months ended March 31, 2004. Operating income, as a percentage of revenues, decreased to 27.2% for the three months ended March 31, 2005 from 29.6% for the three months ended March 31, 2004, primarily as a result of the lower margins generated at our recently opened facilities and the slower growth of revenues discussed above.

      Depreciation and amortization increased $1.4 million, or 21.6%, to $7.7 million for the three months ended March 31, 2005 from $6.4 million for the three months ended March 31, 2004, primarily as a result of additional depreciation on tangible assets added through acquisitions and expansions of our facilities. Depreciation and amortization, as a percentage of revenues, decreased to 6.7% for the three months ended March 31, 2005 from 7.0% for the three months ended March 31, 2004 due to our increased revenue.

      Interest expense, net of interest income, decreased 3.8% to $6.0 million for the three months ended March 31, 2005 from $6.2 million for the three months ended March 31, 2004 primarily as a result of additional interest income earned on our increased cash balance, which resulted from the sale of our Spanish operations during 2004, more than offsetting our borrowing a portion of the costs of developing and expanding facilities.

      Net income from continuing operations was $10.8 million for the three months ended March 31, 2005 compared to $7.8 million for the three months ended March 31, 2004. This $3.0 million improvement primarily results from the increased revenues discussed above.

      Effective September 9, 2004 we sold our Spanish operations. As a result, our 2004 income statement reflects the historical results of our Spanish operations in discontinued operations.

Liquidity and Capital Resources

      During the three months ended March 31, 2005, the Company generated $41.9 million of cash flows from operating activities as compared to $30.9 million during the three months ended March 31, 2004. Cash flows from operating activities increased $11.0 million, or 36%, from the prior year period, primarily as a result of the increase in income from continuing operations and a decrease in other receivables.

      During the three months ended March 31, 2005, the Company’s net cash used in investing activities was $27.5 million, consisting primarily of $13.4 million for the acquisition of additional ownership of eight facilities in the Dallas/ Fort Worth market, $7.4 million to acquire a majority interest in a surgery center in California, and $5.5 million used for purchases of property and equipment. Approximately $1.3 million of the property and equipment purchases related to ongoing development projects, and the remaining $4.2 million represents purchases of equipment at existing facilities. Net cash used in financing activities for the three months ended March 31, 2005 totaled $5.5 million, which was funded with cash flows from operating activities. Cash and cash equivalents were $102.4 million at March 31, 2005 as compared to $93.5 million at December 31, 2004, and net working capital was $79.2 million at March 31, 2005 as compared to $87.2 million at December 31, 2004.

      Our credit agreement in the United Kingdom provides for total borrowings of £52.5 million (approximately $99.2 million as of March 31, 2005) under four separate facilities. At March 31, 2005, total

outstanding borrowings under this credit agreement were approximately $63.8 million which represents total borrowings net of scheduled repayments of $21.5 million that have been made under the agreement, and approximately $13.9 million was available for borrowing, primarily for capital projects specified in the agreement. Borrowings under the United Kingdom credit facility bear interest at rates of 1.50% to 2.00% over LIBOR and mature in April 2010. We pledged the capital stock of our U.K. subsidiaries to secure borrowings under the United Kingdom credit facility. We were in compliance with all covenants under our U.K. credit agreement as of March 31, 2005.

      In addition, the indenture governing our Senior Subordinated Notes contains various restrictive covenants, including covenants that limit our ability and the ability of certain of our subsidiaries to borrow money or guarantee other indebtedness, grant liens on our assets, make investments, use assets as security in other transactions, pay dividends on stock, enter into sale and leaseback transactions or sell assets or capital stock. We were in compliance with all covenants related to our Senior Subordinated Notes as of March 31, 2005.

      Our contractual cash obligations as of March 31, 2005 may be summarized as follows: