Edgar Filing: COMMUNITY HEALTH SYSTEMS INC

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Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

Community Health Systems, Inc.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2008

Commission file number 001-15925

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


Delaware (State or other jurisdiction of incorporation or organization)		13-3893191 (I.R.S. Employer Identification Number)

4000 Meridian Boulevard Franklin, Tennessee (Address of principal executive offices)		37067 (Zip Code)

615-465-7000
(Registrant’s telephone number)

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 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” in Rule 12b-2 of the Exchange Act. (Check one):

Indicated by check mark whether the registrant is a shell company (as defined in Rule 126-2 of the Exchange Act). Yes o No þ

As of July 25, 2008, there were outstanding 95,884,621 shares of the Registrant’s Common Stock, $.01 par value.

Community Health Systems, Inc.

Form 10-Q

For the Three and Six Months Ended June 30, 2008


			Page

PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Condensed Consolidated Balance Sheets — June 30, 2008 and December 31, 2007 (Unaudited)		2
		Condensed Consolidated Statements of Income — Three and Six Months Ended June 30, 2008 and June 30, 2007 (Unaudited)		3
		Condensed Consolidated Statements of Cash Flows — Six Months Ended June 30, 2008 and June 30, 2007 (Unaudited)		4
		Notes to Condensed Consolidated Financial Statements (Unaudited)		5
	Item 2.	Management’s Discussion and Analysis of Financial Condition And Results of Operations		37
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		53
	Item 4.	Controls and Procedures		54

		PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings		54
	Item 1A.	Risk Factors		58
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		58
	Item 3.	Defaults Upon Senior Securities		58
	Item 4.	Submission of Matters to a Vote of Security Holders		59
	Item 5.	Other Information		59
	Item 6.	Exhibits		59
Signatures				60
Index to Exhibits				61
	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		62
	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		63
	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		64
	32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		65
EX-31.1 Section 302 Certification of the CEO
EX-31.2 Section 302 Certification of the CFO
EX-32.1 Section 906 Certification of the CEO
EX-32.2 Section 906 Certification of the CFO

PART I FINANCIAL INFORMATION


Item 1.	*Financial Statements*

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30,			December 31,
	2008			2007
	(Unaudited)
	(In thousands, except share data)

ASSETS
Current assets
Cash and cash equivalents	$	264,072		$	132,874
Patient accounts receivable, net of allowance for doubtful accounts of $1,052,811 and $1,033,516 at June 30, 2008, and December 31, 2007, respectively		1,603,702			1,533,798
Supplies		266,403			262,903
Prepaid income taxes		—			99,417
Deferred income taxes		88,531			113,741
Prepaid expenses and taxes		89,724			70,339
Other current assets		191,226			339,826

Total current assets		2,503,658			2,552,898

Property and equipment		6,639,690			6,310,240
Less accumulated depreciation and amortization		(1,017,936	)		(797,666	)

Property and equipment, net		5,621,754			5,512,574

Goodwill		4,165,041			4,247,714

Other assets, net		1,069,055			1,180,457

Total assets	$	13,359,508		$	13,493,643


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt	$	24,279		$	20,710
Accounts payable		438,518			492,693
Current income taxes payable		12,224			—
Accrued interest		147,451			153,832
Accrued liabilities		691,406			780,700

Total current liabilities		1,313,878			1,447,935

Long-term debt		8,889,915			9,077,367

Deferred income taxes		429,934			407,947

Other long-term liabilities		571,085			483,459

Minority interests in equity of consolidated subsidiaries		320,587			366,131

Stockholders’ equity
Preferred stock, $.01 par value per share, 100,000,000 shares authorized, none issued		—			—
Common stock, $.01 par value per share, 300,000,000 shares authorized; 96,944,770 shares issued and 95,969,221 shares outstanding at June 30, 2008, and 96,611,085 shares issued and 95,635,536 shares outstanding at December 31, 2007		969			966
Additional paid-in capital		1,251,746			1,240,308
Treasury stock, at cost, 975,549 shares at June 30, 2008 and December 31, 2007		(6,678	)		(6,678	)
Accumulated other comprehensive income		(77,893	)		(81,737	)
Retained earnings		665,965			557,945

Total stockholders’ equity		1,834,109			1,710,804

Total liabilities and stockholders’ equity	$	13,359,508		$	13,493,643

See accompanying notes to the condensed consolidated financial statements.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2008			2007		2008			2007
	(Unaudited)
	(In thousands, except share and per share data)

Net operating revenues	$	2,690,600		$	1,197,865	$	5,418,154		$	2,352,143

Operating costs and expenses:
Salaries and benefits		1,079,376			472,846		2,167,146			935,611
Provision for bad debts		291,045			141,820		588,125			269,874
Supplies		377,586			140,348		763,995			274,642
Other operating expenses		526,098			246,980		1,052,265			481,145
Rent		58,479			26,966		118,336			51,722
Depreciation and amortization		124,942			51,982		247,657			100,479

Total operating costs and expenses		2,457,526			1,080,942		4,937,524			2,113,473

Income from operations		233,074			116,923		480,630			238,670
Interest expense, net		154,361			29,184		320,063			57,617
Loss from early extinguishment of debt		—			—		1,328			—
Minority interest in earnings		8,317			625		17,999			818
Equity in earnings of unconsolidated affiliates		(10,508	)		—		(23,392	)		—

Income from continuing operations before income taxes		80,904			87,114		164,632			180,235
Provision for income taxes		31,148			33,556		63,383			69,388

Income from continuing operations		49,756			53,558		101,249			110,847

Discontinued operations, net of taxes:
Income (loss) from operations of hospitals sold and hospital held for sale		(1,854	)		205		(2,837	)		(2,760	)
Gain (loss) on sale of hospitals, net		(9	)		—		9,608			—

Income (loss) on discontinued operations		(1,863	)		205		6,771			(2,760	)

Net income	$	47,893		$	53,763	$	108,020		$	108,087

Income from continuing operations per common share:
Basic	$	0.53		$	0.57	$	1.08		$	1.19

Diluted	$	0.52		$	0.57	$	1.06		$	1.17

Net income per common share:
Basic	$	0.51		$	0.57	$	1.15		$	1.16

Diluted	$	0.50		$	0.57	$	1.14		$	1.14

Weighted-average number of shares outstanding:
Basic		94,192,295			93,518,991		94,017,435			93,373,357

Diluted		95,513,127			94,647,870		95,127,523			94,422,000

See accompanying notes to the condensed consolidated financial statements.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	June 30,
	2008			2007
	(Unaudited)
	(In thousands)

Cash flows from operating activities
Net income	$	108,020		$	108,087
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		247,426			104,619
Minority interest in earnings		17,999			818
Stock-based compensation expense		26,681			14,295
Gain on sale of hospitals, net		(13,211	)		—
Excess tax benefits relating to stock-based compensation		947			(2,295	)
Loss on early extinguishment of debt		1,328			—
Other non-cash expenses (gains), net		2,041			(1,542	)
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:
Patient accounts receivable		(74,786	)		(47,415	)
Supplies, prepaid expenses and other current assets		13,570			(13,458	)
Accounts payable, accrued liabilities and income taxes		83,868			46,353
Other		2,900			6,526

Net cash provided by operating activities		416,783			215,988

Cash flows from investing activities
Acquisitions of facilities and other related equipment		(6,646	)		(187,955	)
Purchases of property and equipment		(275,605	)		(108,849	)
Proceeds from disposition of hospitals and other ancillary operations		365,913			12,662
Proceeds from sale of property and equipment		12,889			234
Increase in other assets		(144,380	)		(25,362	)

Net cash used in investing activities		(47,829	)		(309,270	)

Cash flows from financing activities
Proceeds from exercise of stock options		1,357			6,693
Excess tax benefits relating to stock-based compensation		(947	)		2,295
Stock buy-back		(10,194	)		—
Deferred financing costs		(2,444	)		(367	)
Proceeds from minority investors in joint ventures		11,214			1,105
Redemption of minority investments in joint ventures		(53,485	)		(1,369	)
Distributions to minority investors in joint ventures		(14,916	)		(1,705	)
Borrowings under credit agreement		22,657			132,000
Repayments of long-term indebtedness		(190,998	)		(64,579	)

Net cash (used in) provided by financing activities		(237,756	)		74,073

Net change in cash and cash equivalents		131,198			(19,209	)
Cash and cash equivalents at beginning of period		132,874			40,566

Cash and cash equivalents at end of period	$	264,072		$	21,357

See accompanying notes to the condensed consolidated financial statements.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.	BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements of Community Health Systems, Inc. and its subsidiaries (the “Company”) as of June 30, 2008 and for the three and six month periods ended June 30, 2008 and June 30, 2007, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. All intercompany transactions and balances have been eliminated. The results of operations for the three and six months ended June 30, 2008, are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2008. Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted as permitted by the rules and regulations of the Securities and Exchange Commission (“SEC”). The Company believes the disclosures are adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2007, contained in the Company’s Annual Report on Form 10-K.

The presentation of gross property and equipment and accumulated depreciation and amortization at December 31, 2007 has been corrected to reflect certain assets acquired from Triad Hospitals, Inc. (“Triad”). This correction increased both gross property and equipment and accumulated depreciation and amortization by the same amount and did not impact the net balance of property and equipment as previously presented on the balance sheet.


2.	ACCOUNTING FOR STOCK-BASED COMPENSATION

Stock-based compensation awards are granted under the Community Health Systems, Inc. Amended and Restated 2000 Stock Option and Award Plan (the “2000 Plan”). The 2000 Plan allows for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code, as well as stock options which do not so qualify, stock appreciation rights, restricted stock, performance units and performance shares, phantom stock awards and share awards. Persons eligible to receive grants under the 2000 Plan include the Company’s directors, officers, employees and consultants. To date, the options granted under the 2000 Plan have all been “nonqualified” stock options for tax purposes. Generally, vesting of these granted options occurs in one-third increments on each of the first three anniversaries of the award date. Options granted prior to 2005 have a 10 year contractual term, options granted in 2005 through 2007 have an 8 year contractual term and options granted in 2008 have a 10 year contractual term. The exercise price of all options granted to employees under the 2000 Plan is equal to the fair value of the Company’s common stock on the option grant date. As of June 30, 2008, 3,529,664 shares of unissued common stock remain reserved for future grants under the 2000 Plan.

The Company has also awarded restricted stock under the 2000 Plan to its directors and employees. The restrictions on these shares generally lapse in one-third increments on each of the first three anniversaries of the award date, except for restricted stock granted on July 25, 2007, which restrictions lapse equally on the first two anniversaries of the award date. Certain of the restricted stock awards granted to the Company’s senior executives contain a performance objective that must be met in addition to any vesting requirements. If the performance objective is not attained, the awards will be forfeited in their entirety. Once the performance objective has been attained, restrictions will lapse in one-third increments on each of the first three anniversaries of the award date with the exception of the July 25, 2007 restricted stock awards, which have no additional time vesting restrictions once the performance restrictions are met. Notwithstanding the above mentioned performance objectives and vesting requirements, the restrictions will lapse earlier in the event of death, disability, or termination of employment of the holder of the restricted stock by the Company for any reason other than for cause or change in control of the Company. Restricted stock awards subject to

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

performance standards are not considered outstanding for purposes of determining earnings per share until the performance objectives have been satisfied.

The following table reflects the impact of total compensation expense related to stock-based equity plans under the Statement of Financial Accounting Standards (“SFAS”) No. 123(R), on the reported operating results for the respective periods (in thousands, except per share data):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007

Effect on income from continuing operations before income taxes	$	(13,435	)	$	(7,965	)	$	(26,681	)	$	(14,295	)

Effect on net income	$	(8,162	)	$	(4,839	)	$	(16,209	)	$	(8,684	)

Effect on net income per share-diluted	$	(0.09	)	$	(0.05	)	$	(0.17	)	$	(0.09	)

At June 30, 2008, $84.2 million of unrecognized stock-based compensation expense from all outstanding unvested stock options and restricted stock is expected to be recognized over a weighted-average period of 19 months.

The fair value of stock options was estimated using the Black Scholes option pricing model during the three and six months ended June 30, 2008 and 2007, with the following assumptions:


	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2008	2007	2008	2007

Expected volatility	24.5%	24.6%	24.1%	25.5%
Expected dividends	0	0	0	0
Expected term	4 years	4 years	4 years	4 years
Risk-free interest rate	2.80%	4.77%	2.59%	4.50%

In determining expected return, the Company examined concentrations of option holdings, historical patterns of option exercises and forfeitures, as well as forward looking factors, in an effort to determine if there were any discernable employee populations. From this analysis, the Company identified two employee populations, one consisting primarily of certain senior executives and the other consisting of all other recipients.

The expected volatility rate was estimated based on historical volatility. In determining expected volatility, the Company also reviewed the market-based implied volatility of actively traded options of its common stock and determined that historical volatility did not differ significantly from the implied volatility.

The expected life computation is based on historical exercise and cancellation patterns and forward looking factors, where present, for each population identified. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The pre-vesting forfeiture rate is based on historical rates and forward looking factors for each population identified. The Company adjusts the estimated forfeiture rate to its actual experience.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

Options outstanding and exercisable under the 2000 Plan as of June 30, 2008, and changes during the three and six months then ended were as follows (in thousands, except share and per share data):


						Weighted-
						Average
				Weighted-		Remaining		Aggregate
				Average		Contractual		Intrinsic
				Exercise		Term		Value as of
	Shares			Price		(In Years)		June 30, 2008

Outstanding at December 31, 2007		8,439,015		$	30.90
Granted		996,500			32.28
Exercised		(11,666	)		23.26
Forfeited and cancelled		(172,600	)		35.02

Outstanding at March 31, 2008		9,251,249			30.98
Granted		95,500			35.75
Exercised		(36,998	)		29.69
Forfeited and cancelled		(142,836	)		33.98

Outstanding at June 30, 2008		9,166,915		$	30.99		6.1 years	$	40,150

Exercisable at June 30, 2008		4,794,980		$	25.68		5.2 years	$	39,446

The weighted-average grant date fair value of stock options granted during the six months ended June 30, 2008 and 2007, was $7.64 and $10.36, respectively. The aggregate intrinsic value (the number of in-the-money stock options multiplied by the difference between the Company’s closing stock price on the last trading day of the reporting period ($32.98) and the exercise price of the respective stock options) in the table above represents the amount that would have been received by the option holders had all option holders exercised their options on June 30, 2008. This amount changes based on the market value of the Company’s common stock. The aggregate intrinsic value of options exercised during the three months ended June 30, 2008 and 2007 was $0.3 million and $1.5 million, respectively, and the aggregate intrinsic value of options exercised during the six months ended June 30, 2008 and 2007 was $0.4 million and $2.9 million, respectively. The aggregate intrinsic value of options vested and expected to vest approximates that of the outstanding options.

Restricted stock outstanding under the 2000 Plan as of June 30, 2008, and changes during the three and six months then ended are as follows:


				Weighted-
				Average
				Fair
	Shares			Value

Unvested at December 31, 2007		1,956,543		$	38.04
Granted		748,500			32.38
Vested		(592,505	)		36.09
Forfeited		(3,000	)		37.20

Unvested at March 31, 2008		2,109,538			36.58
Granted		25,000			35.33
Vested		(17,832	)		38.81
Forfeited		(3,500	)		32.88

Unvested at June 30, 2008		2,113,206			36.55

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

As of June 30, 2008, there was $55.8 million of unrecognized stock-based compensation expense related to unvested restricted stock expected to be recognized over a weighted-average period of 18 months.

Under the Director’s Fee Deferral Plan, the Company’s outside directors may elect to receive share equivalent units in lieu of cash for their directors’ fee. Share equivalent units are calculated by dividing the deferred directors’ fees by the closing market price of the Company’s common stock on the last trading day of the reporting period. These units are held in the plan until the director electing to receive the share equivalent units retires or otherwise terminates his/her directorship with the Company. Share equivalent units are converted to shares of common stock of the Company at the time of distribution. The following table represents the amount of directors’ fees which were deferred and the equivalent units into which they converted for each of the respective periods:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007

Directors’ fees earned and deferred into plan	$	17,000	$	29,375	$	57,875	$	65,250

Equivalent units		515.464		726.205		1,733.069		1,743.936

At June 30, 2008, there are a total of 15,141.601 units deferred in the plan with an aggregate fair value of $0.5 million, based on the closing market price of the Company’s common stock on the last trading day of the reporting period of $32.98.


3.	COST OF REVENUE

The majority of the Company’s operating costs and expenses are “cost of revenue” items. Operating costs that could be classified as general and administrative by the Company would include the Company’s corporate office costs at the Company’s Franklin, Tennessee office, which were $43.0 million and $23.9 million for the three months ended June 30, 2008 and 2007, respectively, and $81.1 million and $47.0 million for the six months ended June 30, 2008 and 2007, respectively. Included in these amounts is stock-based compensation expense of $13.4 million and $8.0 million for the three months ended June 30, 2008 and 2007, respectively, and $26.7 million and $14.3 million for the six months ended June 30, 2008 and 2007, respectively.


4.	USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from these estimates.


5.	ACQUISITIONS AND DIVESTITURES

Triad Acquisition

On July 25, 2007, the Company completed its acquisition of Triad. Triad owned and operated 50 hospitals in non-urban and middle market communities in 17 states, as well as the Republic of Ireland. Immediately following the acquisition, on a combined basis, the Company owned and operated 128 hospitals in 28 states, as well as the Republic of Ireland. As of December 31, 2007, two hospitals acquired from Triad had been sold and six hospitals acquired from Triad were classified as held for sale. During the six months ended June 30, 2008, the Company completed the sale of five of the six former Triad hospitals held for sale at December 31, 2007. The Company also provides management and consulting services on a contract basis to independent hospitals, through its subsidiary, Quorum Health Resources, LLC, which was acquired as part of the

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

acquisition of Triad. The Company acquired Triad for approximately $6.857 billion, including the assumption of $1.686 billion of existing indebtedness.

In connection with the consummation of the acquisition of Triad, the Company obtained $7.215 billion of senior secured financing under a new credit facility (the “New Credit Facility”) and its wholly-owned subsidiary CHS/Community Health Systems, Inc. (“CHS”) issued $3.021 billion aggregate principal amount of 8.875% senior notes due 2015 (the “Notes”). The Company used the net proceeds of $3.000 billion from the Notes offering and the net proceeds of $6.065 billion of term loans under the New Credit Facility to acquire the outstanding shares of Triad, to refinance certain of Triad’s indebtedness and the Company’s indebtedness, to complete certain related transactions, to pay certain costs and expenses of the transactions and for general corporate uses. This New Credit Facility also provides an additional $750 million revolving credit facility and a $300 million delayed draw term loan facility for future acquisitions, working capital and general corporate purposes. The delayed draw term loan was reduced from $400 million to $300 million at the request of the Company in the fourth quarter of 2007.

The total cost of the Triad acquisition has been allocated to the assets acquired and liabilities assumed based upon their respective preliminary estimated fair values in accordance with SFAS No. 141. The purchase price represented a premium over the fair value of the net tangible and identifiable intangible assets acquired for reasons such as:


	•	strategically, Triad had operations in five states in which the Company previously had no operations;

	•	the combined company has smaller concentrations of credit risk through greater geographic diversification;

	•	many support functions will be centralized; and

	•	duplicate corporate functions will be eliminated.

The allocation process requires the analysis of acquired fixed assets, contracts, contractual commitments, and legal contingencies to identify and record the fair value of all assets acquired and liabilities assumed. The values of certain assets and liabilities are based on preliminary valuations and are subject to adjustment as additional information is obtained. Such additional information includes, but is not limited to, valuations of property and equipment, valuation of equity investments, valuation of contractual commitments, and review of open cost report settlement periods. The Company is also negotiating the termination of certain assumed contracts it deems unfavorable, such as various physician and service contracts. Under GAAP, the Company has up to twelve months from the closing of the acquisition to complete its valuations and complete contract terminations in order for these terminations to be considered in the allocation process. The Company expects to complete the allocation of the total cost of the Triad acquisition in the third quarter of 2008. Material adjustments to goodwill may result upon the completion of these matters.

Other Acquisitions

Effective April 1, 2007, the Company completed its acquisition of Lincoln General Hospital (157 licensed beds), located in Ruston, Louisiana. The total consideration for this hospital was approximately $49.4 million, of which $44.7 million was paid in cash and $4.7 million was assumed in liabilities. On May 1, 2007, the Company completed its acquisition of Porter Health (301 licensed beds), located in Valparaiso, Indiana, with a satellite campus in Portage, Indiana and outpatient medical campuses located in Chesterton, Demotte, and Hebron, Indiana. As part of this acquisition, the Company has agreed to construct a 225-bed replacement facility for the Valparaiso hospital no later than April 2011. The total consideration for Porter Health was approximately $113.2 million, of which $88.9 million was paid in cash and $24.3 million was assumed in

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

liabilities. The Company’s purchase price allocation relating to these acquisitions resulted in approximately $8.1 million of goodwill being recorded.

Effective June 30, 2008, the Company acquired the 35% minority interest in Affinity Health Systems, LLC which indirectly owns and operates Trinity Medical Center (560 licensed beds) in Birmingham, Alabama, from Baptist Health Systems, Inc. of Birmingham, Alabama (“Baptist”), giving the Company 100% ownership of that facility. The purchase price for this minority interest was $51.5 million in cash and the cancellation of a promissory note issued by Baptist and held by Affinity Health Systems, LLC in the original principal amount of $32.8 million.

Discontinued Operations

Effective March 1, 2008, the Company sold Woodland Medical Center (100 licensed beds) located in Cullman, Alabama; Parkway Medical Center (108 licensed beds) located in Decatur, Alabama; Hartselle Medical Center (150 licensed beds) located in Hartselle, Alabama; Jacksonville Medical Center (89 licensed beds) located in Jacksonville, Alabama; National Park Medical Center (166 licensed beds) located in Hot Springs, Arkansas; St. Mary’s Regional Medical Center (170 licensed beds) located in Russellville, Arkansas; Mineral Area Regional Medical Center (135 licensed beds) located in Farmington, Missouri; Willamette Valley Medical Center (80 licensed beds) located in McMinnville, Oregon; and White County Community Hospital (60 licensed beds) located in Sparta, Tennessee, to Capella Healthcare, Inc., headquartered in Franklin, Tennessee. The proceeds from this sale were $315 million in cash.

Effective February 21, 2008, the Company sold THI Ireland Holdings Limited, a private limited company incorporated in the Republic of Ireland, which leased and managed the operations of Beacon Medical Center (122 licensed beds) located in Dublin, Ireland, to Beacon Medical Group Limited, headquartered in Dublin, Ireland. The proceeds from this sale were $1.5 million in cash.

Effective February 1, 2008, the Company sold Russell County Medical Center (78 licensed beds) located in Lebanon, Virginia to Mountain States Health Alliance, headquartered in Johnson City, Tennessee. The proceeds from this sale were $48.6 million in cash.

Effective November 30, 2007, the Company sold Barberton Citizens Hospital (312 licensed beds) located in Barberton, Ohio to Summa Health System of Akron, Ohio. The proceeds from this sale were $53.8 million in cash.

Effective October 31, 2007, the Company sold its 60% membership interest in Northeast Arkansas Medical Center, a 104 bed facility in Jonesboro, Arkansas to Baptist Memorial Health Care (“Baptist”), headquartered in Memphis, Tennessee, for $16.8 million. In connection with this transaction, the Company also sold real estate and other assets to a subsidiary of Baptist for $26.2 million in cash.

Effective September 1, 2007, the Company sold its partnership interest in River West L.P., which owned and operated River West Medical Center (80 licensed beds) located in Plaquemine, Louisiana, to an affiliate of Shiloh Health Services, Inc. of Lubbock, Texas. The proceeds from this sale were $0.3 million in cash.

As of June 30, 2008, the Company had one hospital classified as held for sale.

In connection with the above actions and in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has classified the results of operations of the above mentioned hospitals as discontinued operations in the accompanying condensed consolidated statements of income.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

Net operating revenues and income (loss) on discontinued operations for the respective periods are as follows (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007

Net operating revenues	$	18,485		$	51,263		$	125,118		$	100,982

Income (loss) from operations of hospitals sold or held for sale before income taxes		(3,422	)		306			(4,211	)		(4,483	)
Gain (loss) on sale of hospitals, net		(9	)		—			17,715			—

Income (loss) from discontinued operations, before taxes		(3,431	)		306			13,504			(4,483	)
Income tax expense (benefit)		1,568			(101	)		(6,733	)		1,723

Income (loss) from discontinued operations, net of tax	$	(1,863	)	$	205		$	6,771		$	(2,760	)

The computation of income (loss) from discontinued operations, before taxes, for the three months and six months ended June 30, 2008 includes the net write-off of $96.3 million of tangible assets and $32.5 million of goodwill (including $21.3 million of goodwill included in non-current assets held for sale at December 31, 2007) at the hospitals sold during the six months ended June 30, 2008.

Interest expense was allocated to discontinued operations based on estimated sale proceeds available for debt repayment.

The assets and liabilities of one hospital held for sale as of June 30, 2008 are included in the accompanying condensed consolidated balance sheet as follows: current assets of $17.1 million, included in other current assets; net property and equipment of $33.9 million and other long-term assets of $0.1 million, included in other assets; and current liabilities of $22.1 million, included in other accrued liabilities.

The assets and liabilities of the hospitals held for sale as of December 31, 2007 are included in the accompanying condensed consolidated balance sheet as follows: current assets of $118.9 million, included in other current assets; net property and equipment of $331.1 million and other long-term assets of $31.4 million, included in other assets; and current liabilities of $67.6 million, included in accrued liabilities.


6.	INCOME TAXES

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on January 1, 2007. The total amount of unrecognized benefit that would affect the effective tax rate, if recognized, is approximately $6.2 million as of June 30, 2008. It is the Company’s policy to recognize interest and penalties accrued related to unrecognized benefits in its condensed consolidated statements of income as income tax expense. During the three months ended June 30, 2008, the Company recorded approximately $0.2 million in interest and penalties related to prior state income tax returns through its income tax provision from continuing operations and which are included in its FIN 48 liability at June 30, 2008. A total of approximately $2.2 million of interest and penalties is included in the amount of FIN 48 liability at June 30, 2008.

The Company’s unrecognized tax benefits consist primarily of state exposure items. The Company believes that it is reasonably possible that approximately $1.2 million of its current unrecognized tax benefit may decrease within the next twelve months as a result of a lapse of the statute of limitations and settlements with taxing authorities.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state income tax examinations for years prior to 2003.

The IRS has concluded an examination of the federal income tax returns of Triad for the short taxable years ended April 27, 2001, June 30, 2001 and December 31, 2001, and the taxable years ended December 31, 2002 and 2003. The Company has received a closing letter from the IRS with respect to the examination for those tax years. The settlement was not material to the Company’s consolidated results of operations or consolidated financial position.

Cash paid for income taxes, net of refunds received, resulted in a net cash refund of $46.5 million and $49.3 million for the three and six months ended June 30, 2008, respectively, and net cash paid of $16.2 million and $29.4 million for the three and six months ended June 30, 2007, respectively.


7.	GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the six months ended June 30, 2008, are as follows (in thousands):


Balance as of December 31, 2007	$	4,247,714
Goodwill acquired as part of acquisitions during 2008		4,109
Consideration adjustments and purchase price allocation adjustments for acquisitions in 2007		(75,441	)
Goodwill written-off as part of disposals		(11,341	)

Balance as of June 30, 2008	$	4,165,041

Goodwill related to the former Triad hospitals of $2.825 billion has not been allocated to the reporting unit level (hospital operations, home health and management services) as of June 30, 2008 because the final purchase price allocation has not been completed (see Note 5).

The Company completed its most recent annual goodwill impairment test as required by SFAS No. 142, “Goodwill and Other Intangible Assets,” during 2007, using a measurement date of September 30, 2007. Based on the results of the impairment test, the Company was not required to recognize an impairment of goodwill in 2007.

The gross carrying amount of the Company’s other intangible assets was $207.9 million at June 30, 2008 and $194.6 million at December 31, 2007, and the net carrying amount was $195.4 million at June 30, 2008 and $181.0 million at December 31, 2007. Other intangible assets are included in other assets, net on the Company’s condensed consolidated balance sheets.

The weighted-average amortization period for the intangible assets subject to amortization is approximately ten years. There are no expected residual values related to these intangible assets. Amortization expense on these intangible assets during the three months ended June 30, 2008 and 2007 was $0.8 million and $0.5 million, respectively. Amortization expense on these intangible assets during the six months ended June 30, 2008 and 2007 was $3.2 million and $1.0 million, respectively. Amortization expense on intangible assets is estimated to be $5.4 million for the remainder of 2008, $14.0 million in 2009, $12.2 million in 2010, $7.0 million in 2011, $6.6 million in 2012, and $22.7 million in 2013 and thereafter.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)


8.	EARNINGS PER SHARE

The following table sets forth the components of the numerator and denominator for the computation of basic and diluted income from continuing operations per share (in thousands, except share data):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007

Numerator:
Numerator for basic earnings per share —
Income from continuing operations available to common stockholders — basic	$	49,756	$	53,558	$	101,249	$	110,847

Numerator for diluted earnings per share —
Income from continuing operations available to common stockholders — diluted	$	49,756	$	53,558	$	101,249	$	110,847

Denominator:
Weighted-average number of shares outstanding — basic		94,192,295		93,518,991		94,017,435		93,373,357
Effect of dilutive securities:
Non-employee director options		—		—		—		5,913
Restricted stock awards		399,975		181,183		871,373		111,539
Employee options		920,857		947,696		238,715		931,191

Weighted-average number of shares outstanding — diluted		95,513,127		94,647,870		95,127,523		94,422,000

Dilutive securities outstanding not included in the computation of earning per share because their effect is antidilutive:
Employee options		3,540,068		1,032,071		3,950,600		1,479,319


9.	STOCKHOLDERS’ EQUITY

Authorized capital shares of the Company include 400,000,000 shares of capital stock consisting of 300,000,000 shares of common stock and 100,000,000 shares of preferred stock. Each of the aforementioned classes of capital stock has a par value of $0.01 per share. Shares of preferred stock, none of which are outstanding as of June 30, 2008, may be issued in one or more series having such rights, preferences and other provisions as determined by the Board of Directors without approval by the holders of common stock.

On January 14, 2006, the Company commenced an open market repurchase program for up to 5,000,000 shares of the Company’s common stock, not to exceed $200 million in repurchases. Under this program, the Company repurchased the entire 5,000,000 shares at a weighted-average price of $35.23. This program concluded on November 8, 2006 when the maximum number of shares had been repurchased. This repurchase plan followed a prior repurchase plan for up to 5,000,000 shares which concluded on January 13, 2006. The Company repurchased 3,029,700 shares at a weighted-average price of $31.20 per share under this program.

On December 13, 2006, the Company commenced another open market repurchase program for up to 5,000,000 shares of the Company’s common stock, not to exceed $200 million in repurchases. This program will conclude at the earlier of three years or when the maximum number of shares has been repurchased.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

During the period from June 1, 2008 to June 30, 2008, the Company repurchased 305,400 shares at a weighted-average price of $33.34 per share under this program.


10.	COMPREHENSIVE INCOME

The following table presents the components of comprehensive income, net of related taxes. The net change in fair value of interest rate swap agreements is a function of the spread between the fixed interest rate of each swap and the underlying variable interest rate under the Company’s New Credit Facility, the change in fair value of available for sale securities is the unrealized gain (losses) on the related investments and the amortization of unrecognized pension cost components is the amortization of prior service costs and credits and actuarial gains and losses (in thousands):


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2008			2007		2008			2007

Net income	$	47,893		$	53,763	$	108,020		$	108,087
Net change in fair value of interest rate swaps		109,368			13,670		4,814			9,800
Net change in fair value of available for sale securities		(105	)		237		(858	)		24
Amortization of unrecognized pension components		880			—		(112	)		—

Comprehensive income	$	158,036		$	67,670	$	111,864		$	117,911

The net change in fair value of the interest rate swaps, the net change in fair value of available for sale securities and amortization of unrecognized pension cost components are included in accumulated other comprehensive income on the accompanying condensed consolidated balance sheets.


11.	EQUITY INVESTMENTS

The Company owns equity interests of 27.5% in four hospitals in Las Vegas, Nevada, and 26.1% in one hospital in Las Vegas, Nevada in which Universal Health Systems, Inc. owns the majority interest; an equity interest of 38.0% in three hospitals in Macon, Georgia in which HCA, Inc. owns the majority interest; and an equity interest of 50.0% in a hospital in El Dorado, Arkansas in which the SHARE Foundation, a not-for-profit foundation, owns the remaining 50.0%. These equity investments were acquired as part of the acquisition of Triad. The Company uses the equity method of accounting for its investments in these entities. During the three months ended June 30, 2008, the Company adjusted the carrying amount of these equity investments based on the preliminary Triad asset valuations. The difference between the fair value of these equity investments and the estimated underlying equity in net assets is approximately $128.1 million and represents goodwill under the equity method of accounting. The Company’s investment in unconsolidated affiliates is $419.2 million and $267.8 million at June 30, 2008 and December 31, 2007, respectively, and is included in other assets in the accompanying condensed consolidated balance sheets. The Company’s investment in unconsolidated affiliates at December 31, 2007 has been corrected from amounts previously disclosed to eliminate amounts related to discontinued operations; the correction did not affect the amounts reported in other assets in the accompanying condensed consolidated balance sheet. Included in the Company’s results of operations for the three and six months ended June 30, 2008, is $10.5 million and $23.4 million, respectively, representing the Company’s equity in pre-tax earnings from investments in unconsolidated affiliates.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

Summarized combined financial information for the three months and six months ended June 30, 2008, for the unconsolidated entities in which the Company owns an equity interest is as follows (in thousands):


	For the Three		For the Six
	Months Ended		Months Ended
	June 30, 2008		June 30, 2008

Revenues	$	359,695	$	723,362
Operating costs and expenses		322,151		641,914
Net income		37,578		88,277


12.	LONG-TERM DEBT

Terminated Credit Facility and Notes

On August 19, 2004, CHS entered into a $1.625 billion senior secured credit facility with a consortium of lenders which was subsequently amended on December 16, 2004, July 8, 2005 and December 13, 2006 (the “Terminated Credit Facility”). The purpose of the Terminated Credit Facility was to refinance and replace the Company’s previous credit agreement, repay specified other indebtedness, and fund general corporate purposes, including amending the credit facility to permit declaration and payment of cash dividends, to repurchase shares or make other distributions, subject to certain restrictions. The Terminated Credit Facility consisted of a $1.2 billion term loan that was due to mature in 2011 and a $425 million revolving credit facility that was due to mature in 2009. The First Incremental Facility Amendment, dated as of December 13, 2006, increased the Company’s term loans by $400 million (the “Incremental Term Loan Facility”) and also gave the Company the ability to add up to $400 million of additional term loans. The full amount of the Incremental Term Loan Facility was funded on December 13, 2006, and the proceeds were used to repay the full outstanding amount (approximately $326 million) of the revolving credit facility under the Terminated Credit Agreement and the balance was available to be used for general corporate purposes. The Company was able to elect from time to time an interest rate per annum for the borrowings under the term loan, including the incremental term loan, and revolving credit facility equal to (a) an alternate base rate, which would have been equal to the greatest of (i) the Prime Rate (as defined) in effect and (ii) the Federal Funds Effective Rate (as defined), plus 50 basis points, plus (1) 75 basis points for the term loan and (2) the Applicable Margin (as defined) for revolving credit loans or (b) the Eurodollar Rate (as defined) plus (1) 175 basis points for the term loan and (2) the Applicable Margin for Eurodollar revolving credit loans. The Company also paid a commitment fee for the daily average unused commitments under the revolving credit facility. The commitment fee was based on a pricing grid depending on the Applicable Margin for Eurodollar revolving credit loans and ranged from 0.250% to 0.500%. The commitment fee was payable quarterly in arrears and on the revolving credit termination date with respect to the available revolving credit commitments. In addition, the Company paid fees for each letter of credit issued under the credit facility.

On December 16, 2004, the Company issued $300 million 6.50% senior subordinated notes due 2012. On April 8, 2005, the Company exchanged these notes for notes having substantially the same terms as the outstanding notes, except the exchanged notes were registered under the Securities Act of 1933, as amended (the “1933 Act”). The debt was repaid in 2007.

New Credit Facility and Notes

On July 25, 2007, the New Credit Facility was entered into with a syndicate of financial institutions led by Credit Suisse, as administrative agent and collateral agent. The New Credit Facility consists of a $6.065 billion funded term loan facility with a maturity of seven years, a $400 million delayed draw term loan facility with a maturity of seven years and a $750 million revolving credit facility with a maturity of six years. As of December 31, 2007, the $400 million delayed draw term loan had been reduced to $300 million at the

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

request of the Company. The revolving credit facility also includes a subfacility for letters of credit and a swingline subfacility. As previously disclosed, in connection with the consummation of the acquisition of Triad, the Company used a portion of the net proceeds from its New Credit Facility and the Notes offering to repay its outstanding debt under the Terminated Credit Facility, the 6.50% Notes and certain of Triad’s existing indebtedness. During the third quarter of 2007, the Company recorded a pre-tax write-off of approximately $13.9 million in deferred loan costs relative to the early extinguishment of the debt under the Terminated Credit Facility and incurred tender and solicitation fees of approximately $13.4 million on the early repayment of the Company’s $300 million aggregate principal amount of 6.50% Senior Subordinated Notes due 2012 through a cash tender offer and consent solicitation.

The New Credit Facility requires quarterly amortization payments of each term loan facility equal to 0.25% of the outstanding amount of the term loans, if any, with the outstanding principal balance payable on July 25, 2014.

The term loan facility must be prepaid in an amount equal to (1) 100% of the net cash proceeds of certain asset sales and dispositions by the Company and its subsidiaries, subject to certain exceptions and reinvestment rights, (2) 100% of the net cash proceeds of issuances of certain debt obligations or receivables based financing by the Company and its subsidiaries, subject to certain exceptions, and (3) 50%, subject to reduction to a lower percentage based on the Company’s leverage ratio (as defined in the New Credit Facility generally as the ratio of total debt on the date of determination to the Company’s EBITDA, as defined, for the four quarters most recently ended prior to such date), of excess cash flow (as defined) for any year, commencing in 2008, subject to certain exceptions. Voluntary prepayments and commitment reductions are permitted in whole or in part, without any premium or penalty, subject to minimum prepayment or reduction requirements.

The obligor under the New Credit Facility is CHS. All of the obligations under the New Credit Facility are unconditionally guaranteed by the Company and certain existing and subsequently acquired or organized domestic subsidiaries. All obligations under the New Credit Facility and the related guarantees are secured by a perfected first priority lien or security interest in substantially all of the assets of the Company, CHS and each subsidiary guarantor, including equity interests held by the Company, CHS or any subsidiary guarantor, but excluding, among others, the equity interests of non-significant subsidiaries, syndication subsidiaries, securitization subsidiaries and joint venture subsidiaries.

The loans under the New Credit Facility will bear interest on the outstanding unpaid principal amount at a rate equal to an applicable percentage plus, at the Company’s option, either (a) an Alternate Base Rate (as defined) determined by reference to the greater of (1) the Prime Rate (as defined) announced by Credit Suisse or (2) the Federal Funds Effective Rate (as defined) plus one-half of 1.0%, or (b) a reserve adjusted London interbank offered rate for dollars (Eurodollar Rate) (as defined). The applicable percentage for term loans is 1.25% for Alternate Base Rate loans and 2.25% for Eurodollar rate loans. The applicable percentage for revolving loans is initially 1.25% for Alternate Base Rate revolving loans and 2.25% for Eurodollar revolving loans, in each case subject to reduction based on the Company’s leverage ratio. Loans under the swingline subfacility bear interest at the rate applicable to Alternate Base Rate loans under the revolving credit facility.

CHS has agreed to pay letter of credit fees equal to the applicable percentage then in effect with respect to Eurodollar rate loans under the revolving credit facility times the maximum aggregate amount available to be drawn under all letters of credit outstanding under the subfacility for letters of credit. The issuer of any letter of credit issued under the subfacility for letters of credit will also receive a customary fronting fee and other customary processing charges. CHS is initially obligated to pay commitment fees of 0.50% per annum (subject to reduction based upon the Company’s leverage ratio) on the unused portion of the revolving credit facility. For purposes of this calculation, swingline loans are not treated as usage of the revolving credit facility. CHS is also obligated to pay commitment fees of 0.50% per annum for the first six months after the

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

closing of the New Credit Facility, 0.75% per annum for the next three months thereafter and 1.0% per annum thereafter, in each case on the unused amount of the delayed draw term loan facility. The Company paid arrangement fees on the closing of the New Credit Facility and will pay an annual administrative agent fee.

The New Credit Facility contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting, subject to certain exceptions, the Company’s and its subsidiaries’ ability to, among other things (1) declare dividends, make distributions or redeem or repurchase capital stock, (2) prepay, redeem or repurchase other debt, (3) incur liens or grant negative pledges, (4) make loans and investments and enter into acquisitions and joint ventures, (5) incur additional indebtedness or provide certain guarantees, (6) make capital expenditures, (7) engage in mergers, acquisitions and asset sales, (8) conduct transactions with affiliates, (9) alter the nature of the Company’s businesses, (10) grant certain guarantees with respect to physician practices, (11) engage in sale and leaseback transactions or (12) change the Company’s fiscal year. The Company is also required to comply with specified financial covenants (consisting of a leverage ratio and an interest coverage ratio) and various affirmative covenants.

Events of default under the New Credit Facility include, but are not limited to, (1) the Company’s failure to pay principal, interest, fees or other amounts under the credit agreement when due (taking into account any applicable grace period), (2) any representation or warranty proving to have been materially incorrect when made, (3) covenant defaults subject, with respect to certain covenants, to a grace period, (4) bankruptcy events, (5) a cross default to certain other debt, (6) certain undischarged judgments (not paid within an applicable grace period), (7) a change of control, (8) certain ERISA-related defaults and (9) the invalidity or impairment of specified security interests, guarantees or subordination provisions in favor of the administrative agent or lenders under the New Credit Facility.

The Notes were issued by CHS in connection with the Triad acquisition in the principal amount of $3.021 billion. These Notes will mature on July 15, 2015. The Notes bear interest at the rate of 8.875% per annum, payable semiannually in arrears on January 15 and July 15, commencing January 15, 2008. Interest on the Notes accrue from the date of original issuance. Interest will be calculated on the basis of 360-day year comprised of twelve 30-day months.

Except as set forth below, CHS is not entitled to redeem the Notes prior to July 15, 2011.

On and after July 15, 2011, CHS is entitled, at its option, to redeem all or a portion of the Notes upon not less than 30 nor more than 60 days notice, at the redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on July 15 of the years set forth below:


	Redemption
Period	Price

2011		104.438	%
2012		102.219	%
2013 and thereafter		100.000	%

In addition, any time prior to July 15, 2010, CHS is entitled, at its option, on one or more occasions to redeem the Notes (which include additional Notes (the “Additional Notes”), if any which may be issued from time to time under the indenture under which the Notes were issued) in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the Notes (which includes Additional Notes, if any) originally issued at a redemption price (expressed as a percentage of principal amount) of 108.875%, plus accrued and unpaid interest to the redemption date, with the Net Cash Proceeds (as defined) from one or more Public Equity Offerings (as defined) (provided that if the Public Equity Offering is an offering by the

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

Company, a portion of the Net Cash Proceeds thereof equal to the amount required to redeem any such Notes is contributed to the equity capital of CHS); provided, however, that:

1) at least 65% of such aggregate principal amount of Notes originally issued remains outstanding immediately after the occurrence of each such redemption (other than the Notes held, directly or indirectly, by the Company or its subsidiaries); and

2) each such redemption occurs within 90 days after the date of the related Public Equity Offering.

CHS is entitled, at its option, to redeem the Notes, in whole or in part, at any time prior to July 15, 2011, upon not less than 30 or more than 60 days notice, at a redemption price equal to 100% of the principal amount of Notes redeemed plus the Application Premium (as defined), and accrued and unpaid interest, if any, as of the applicable redemption date.

Pursuant to a registration rights agreement entered into at the time of the issuance of the Notes, as a result of an exchange offer made by CHS, substantially all of the Notes issued in July 2007 were exchanged in November 2007 for new notes (the “Exchange Notes”) having terms substantially identical in all material respects to the Notes (except that the Exchange Notes were issued under a registration statement pursuant to the 1933 Act). References to the Notes shall also be deemed to include Exchange Notes unless the context provides otherwise.

During the six months ended June 30, 2008, the Company repurchased on the open market and cancelled $62.7 million of principal amount of the Notes. This resulted in a loss from early extinguishment of debt of $1.3 million with an after-tax impact of $0.9 million.

As of June 30, 2008, the availability for additional borrowings under the New Credit Facility was $1.050 billion (consisting of a $750 million revolving credit facility and a $300 million delayed draw term loan facility), of which $78.8 million was set aside for outstanding letters of credit. CHS also has the ability to add up to $300 million of borrowing capacity from receivable transactions (including securitizations) under the New Credit Facility which has not yet been accessed. CHS also has the ability to amend the New Credit Facility to provide for one or more tranches of term loans in an aggregate principal amount of $600 million, which CHS has not yet accessed. As of June 30, 2008, the weighted-average interest rate under the New Credit Facility was 5.2%.

Cash paid for interest, net of interest income, was $97.4 million and $34.6 million during the three months ended June 30, 2008 and 2007, respectively, and $326.4 million and $60.3 million during the six months ended June 30, 2008 and 2007, respectively.


13.	RECENT ACCOUNTING PRONOUNCEMENTS

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 No. 159”). SFAS No. 159 expands the use of fair value accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. SFAS No. 159 permits an entity, on a contract-by-contract basis, to make an irrevocable election to account for certain types of financial instruments and warranty and insurance contracts at fair value, rather than historical cost, with changes in the fair value, whether realized or unrealized, recognized in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 159 as of January 1, 2008 and did not elect to re-measure any assets or liabilities. The adoption of this statement has not had a material effect on the Company’s consolidated results of operations or consolidated financial position.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

acquired, liabilities assumed, and noncontrolling interests in business combinations. This standard will require more assets and liabilities to be recorded at fair value and will require expense recognition (rather than capitalization) of certain pre-acquisition costs. This standard also will require any adjustments to acquired deferred tax assets and liabilities occurring after the related allocation period to be made through earnings. Furthermore, this standard requires this treatment of acquired deferred tax assets and liabilities also be applied to acquisitions occurring prior to the effective date of this standard. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008 and is required to be adopted prospectively with no early adoption permitted. SFAS No. 141(R) will be adopted by the Company in the first quarter of 2009. The Company is currently assessing the potential impact that SFAS No. 141(R) will have on its consolidated results of operations and consolidated financial position.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 addresses the accounting and reporting framework for noncontrolling ownership interests in consolidated subsidiaries of the parent. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent company and the interests of the noncontrolling owners and that require minority ownership interests be presented separately within equity in the consolidated financial statements. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, and will be adopted by the Company in the first quarter of 2009. The Company is currently assessing the potential impact that SFAS No. 160 will have on its consolidated results of operations and consolidated financial position.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 expands the disclosure requirements for derivative instruments and for hedging activities in order to provide additional understanding of how an entity uses derivative instruments and how they are accounted for and reported in an entity’s financial statements. The new disclosure requirements for SFAS No. 161 are effective for fiscal years beginning after November 15, 2008, and will be adopted by the Company in the first quarter of 2009.


14.	SEGMENT INFORMATION

The Company operates in three distinct operating segments, represented by the hospital operations (which includes its general acute care hospitals and related healthcare entities that provide inpatient and outpatient health care services), the home health agencies operations (which provide in-home outpatient care), and its hospital management services business (which provides executive management and consulting services to non-affiliated acute care hospitals). Only the hospital operations segment meets the criteria in SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information” (“SFAS No. 131”), as a separate reportable segment. The financial information for the home health agencies and management services segments do not meet the quantitative thresholds defined in SFAS No. 131 and are combined into the corporate and all other reportable segment.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

The distribution between reportable segments of our revenues and income from continuing operations before income taxes is summarized in the following tables (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007

Revenues:
Hospital operations	$	2,630,281		$	1,153,583		$	5,294,297		$	2,283,790
Corporate and all other		60,319			44,282			123,857			68,353

	$	2,690,600		$	1,197,865		$	5,418,154		$	2,352,143

Income from continuing operations before income taxes:
Hospital operations	$	118,572		$	105,824		$	236,464		$	219,354
Corporate and all other		(37,668	)		(18,710	)		(71,832	)		(39,119	)

	$	80,904		$	87,114		$	164,632		$	180,235


15.	FAIR VALUE

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, provides a framework for measuring fair value, and expands disclosures required for fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require fair value measurement; it does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and was adopted by the Company as of January 1, 2008. The adoption of this statement has not had a material effect on the Company’s consolidated results of operations or consolidated financial position.

In February 2008, the FASB issued FASB Statement of Position No. 157-2, “Effective Date of FASB Statement No. 157,” (“FSP 157-2”). FSP 157-2 deferred the effective date of the provisions of SFAS No. 157 for all non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008, and will be adopted by the Company in the first quarter of 2009. The Company is currently assessing the potential impact of SFAS No. 157 for non-financial assets and non-financial liabilities on its consolidated statements of financial position and consolidated results of operations.

Fair Value Hierarchy

SFAS No. 157 classifies the inputs used to measure fair value into the following hierarchy:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Level 3 includes values determined using pricing models, discounted cash flow methodologies, or similar techniques reflecting the Company’s own assumptions.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

The following table sets forth, by level within the fair value hierarchy, the financial assets and liabilities recorded at fair value on a recurring basis as of June 30, 2008 (in thousands):


	June 30,
	2008		Level 1		Level 2		Level 3

Available-for-sale securities	$	8,081	$	8,081	$	—	$	—
Trading securities		32,317		32,317		—		—

Total assets	$	40,398	$	40,398	$	—	$	—

Fair value of interest rate swap agreements	$	121,598	$	—	$	121,598	$	—

Total liabilities	$	121,598	$	—	$	121,598	$	—

Available-for-sale securities and trading securities classified as Level 1 are measured using quoted market prices. The fair value of the Company’s interest rate swap agreements are classified as Level 2, and are estimated using an income approach based on the LIBOR swap rate, which is observable at commonly quoted intervals for the full term of the swap.


16.	CONTINGENCIES

The Company is a party to various legal proceedings incidental to its business. In the opinion of management, any ultimate liability with respect to these actions will not have a material adverse effect on the Company’s consolidated financial position, cash flows or results of operations. In addition, in connection with the closing of the Triad acquisition on July 25, 2007, the Company has assumed both recorded and unrecorded contingencies of Triad. The Company’s management is not aware of any unrecorded contingencies assumed in connection with the Triad acquisition, whose ultimate outcome will have a material adverse effect on the Company’s consolidated financial position, cash flows or results of operations.

In a letter dated October 4, 2007, the Civil Division of the Department of Justice notified the Company that, as a result of an investigation into the way in which different state Medicaid programs apply to the federal government for matching or supplemental funds that are ultimately used to pay for a small portion of the services provided to Medicaid and indigent patients, it believes the Company and three of its New Mexico hospitals have caused the State of New Mexico to submit improper claims for federal funds in violation of the federal False Claims Act. In a letter dated January 22, 2008, the Civil Division notified the Company that based on its investigation, it has calculated that these three hospitals received ineligible federal participation payments from August 2000 to June 2006 of approximately $27.5 million. The Civil Division also advised the Company that were it to proceed to trial, it would seek treble damages plus an appropriate penalty for each of the violations of the False Claims Act. On May 28, 2008, the Company received a letter from the Office of the U.S. Attorney for the State of New Mexico requesting additional information. The Company is in the process of providing the requested information. The Company continues to believe that it has not violated the False Claims Act, and is continuing discussions with the Civil Division in an effort to resolve this matter.


17.	SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

In connection with the consummation of the Triad acquisition in July, 2007, the Company obtained $7.215 billion of senior secured financing under the New Credit Facility and CHS issued the Notes in the aggregate principal amount of $3.021 billion. The Notes are senior unsecured obligations of CHS and are guaranteed on a senior basis by the Company and by certain existing and subsequently acquired or organized 100% owned domestic subsidiaries.

The Notes are fully and unconditionally guaranteed on a joint and several basis. The following condensed consolidating financial statements present the Company (as parent guarantor), CHS (as the issuer), the

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

subsidiary guarantors, the subsidiary non-guarantors and eliminations. These supplemental condensed consolidating financial statements have been prepared and presented in accordance with SEC Regulation S-X Rule 3-10 “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered”.

The presentation of intercompany balances and allocated income tax expense in the Company’s previously issued supplemental condensed consolidating financial statements is being corrected as follows:


	•	Intercompany receivables and payables are presented gross in the supplemental consolidating balance sheets; the intercompany balances were previously reported net as “intercompany (receivable) payable”. In addition, a portion of the intercompany (receivable) payable was netted against “long-term debt payable (receivable)” of the Issuer and other guarantors.

	•	Cash flows from intercompany transactions are presented in cash flows from financing activities, as changes in intercompany balances with affiliates, net; these cash flows were previously reported in cash flows from operating activities as “advances to subsidiaries, net of return of investment” and “other” operating cash flows.

	•	Income tax expense is allocated from the parent guarantor to the income producing operations (other guarantors and non-guarantors) and the Issuer through shareholders’ equity; income tax expense was previously allocated entirely to the Parent Guarantor, which is the tax paying entity. As this approach represents an allocation, the income tax expense allocation is considered non-cash for statement of cash flow purposes.

	•	Interest expense, net has been presented to reflect net interest expense and interest income from outstanding long-term debt and intercompany balances; these interest expense and interest income amounts were previously netted within certain subsidiaries.

The Company’s intercompany activity consists primarily of daily cash transfers for purposes of cash management, the allocation of certain expenses and expenditures paid for by the parent on behalf of its subsidiaries, and the push down of investment in its subsidiaries. The Company’s subsidiaries generally do not purchase services from one another and therefore the intercompany transactions do not represent revenue generating transactions. All intercompany transactions eliminate in consolidation. Therefore, the aforementioned corrections do not impact the Company’s consolidated balance sheet, consolidated statement of income or consolidated statement of cash flows for any period presented. Management believes the effects of these corrections are not material to the Company’s previously issued consolidated financial statements and intends, for those prior period supplemental condensed consolidating financial statements not presented as part of this footnote, to reflect these corrections in future filings whenever such supplemental condensed consolidating financial statements are included.

The tables on pages 23 to 28 disclose the impact of these corrections on each of the respective line items of the supplemental condensed consolidating financial statements as of and for the periods ending March 31, 2008, June 30, 2007, and December 31, 2007, 2006 and 2005 (in thousands).

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)


	Parent						Other			Non-
	Guarantor			Issuer			Guarantors			Guarantors			Eliminations			Consolidated

Condensed Consolidating Balance Sheet
As of March 31, 2008
As reported
Prepaid expenses and taxes	$	—		$	58		$	180,024		$	13,930		$	—		$	194,012
Total current assets		113,741			448			1,709,370			832,359			(49,526	)		2,606,392
Intercompany receivables (non-current)		—			—			—			—			—			—
Goodwill		21,126			—			2,435,773			1,918,394			—			4,375,293
Net investment in subsidiaries		1,506,013			1,234,270			3,680,406			—			(6,420,689	)		—
Total Assets		1,640,880			1,420,794			11,656,624			5,084,266			(6,470,215	)		13,332,349
Long-term debt		4			4,325,296			4,509,849			51,206			—			8,886,355
Intercompany payables (non-current)		(438,836	)		(4,698,000	)		4,841,662			4,101,680			(3,806,506	)		—
Additional paid-in capital		1,247,241			—			—			—			—			1,247,241
Retained earnings		618,072			1,694,047			1,232,700			(118,796	)		(2,807,951	)		618,072
Total stockholders’ equity		1,671,570			1,506,010			1,226,967			(118,794	)		(2,614,183	)		1,671,570
Total liabilities and stockholders’ equity		1,640,880			1,420,794			11,656,624			5,084,266			(6,470,215	)		13,332,349
As adjusted
Prepaid expenses and taxes		110,160			58			69,864			13,930			—			194,012
Total current assets		223,901			448			1,599,210			832,359			(49,526	)		2,606,392
Intercompany receivables (non-current)		928,673			9,198,002			10,361,699			1,937,602			(22,425,976	)		—
Goodwill		—			—			2,456,899			1,918,394			—			4,375,293
Net investment in subsidiaries		1,473,779			4,194,870			2,380,982			—			(8,049,631	)		—
Total Assets		2,626,352			13,579,396			20,629,866			7,021,868			(30,525,133	)		13,332,349
Long-term debt		4			8,825,296			54,667			6,388			—			8,886,355
Intercompany payables (non-current)		546,636			2,992,839			18,370,619			6,084,099			(27,994,193	)		—
Additional paid-in capital		1,247,241			639,797			435,885			—			(1,075,682	)		1,247,241
Retained earnings		618,072			1,022,014			696,282			(118,796	)		(1,599,500	)		618,072
Total stockholders’ equity		1,671,570			1,473,774			1,126,434			(118,794	)		(2,481,414	)		1,671,570
Total liabilities and stockholders’ equity		2,626,352			13,579,396			20,629,866			7,021,868			(30,525,133	)		13,332,349

Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 2008
As reported
Net cash provided by (used in) operating activities		853			164,026			321,361			(427,836	)		(49,526	)		8,878
Changes in intercompany balances with affiliates, net		—			—			—			—			—			—
Net cash provided by (used in) financing
activities		(853	)		(164,026	)		(123,280	)		126,688			—			(161,471	)
As adjusted
Net cash provided by (used in) operating activities		(45,719	)		(102,699	)		319,923			(113,101	)		(49,526	)		8,878
Changes in intercompany balances with affiliates, net		46,572			266,725			(43,381	)		(269,916	)		—			—
Net cash provided by (used in) financing activities		45,719			102,699			(121,843	)		(188,046	)		—			(161,471	)

Condensed Consolidating Statement of Income
For the three months ended March 31, 2008
As reported
Interest expense, net		—			72,577			75,937			17,188			—			165,702
Equity in earnings of unconsolidated affiliates		(92,362	)		(166,267	)		(20,967	)		—			266,712			(12,884	)
Income (loss) from continuing operations before income taxes		92,362			92,362			166,029			(313	)		(266,712	)		83,728
Provision for income taxes		32,235			—			—			—			—			32,235
Income (loss) from continuing operations		60,127			92,362			166,029			(313	)		(266,712	)		51,493
Net income		60,127			92,362			166,029			8,321			(266,712	)		60,127
As adjusted
Interest expense, net		—			12,924			135,590			17,188			—			165,702
Equity in earnings of unconsolidated affiliates		(60,127	)		(65,733	)		(21,088	)		—			134,064			(12,884	)
Income (loss) from continuing operations before income taxes		60,127			51,481			106,496			(312	)		(134,064	)		83,728
Provision for income taxes		—			(8,646	)		41,001			(120	)		—			32,235
Income (loss) from continuing operations		60,127			60,127			65,495			(192	)		(134,064	)		51,493
Net income	$	60,127		$	60,127		$	65,495		$	8,442		$	(134,064	)	$	60,127

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)


	Parent						Other			Non-
	Guarantor			Issuer			Guarantors			Guarantors			Eliminations			Consolidated

Condensed Consolidating Balance Sheet
As of June 30, 2007
As reported
Prepaid expenses and taxes	$	—		$	—		$	44,099		$	(7,812	)	$	—		$	36,287
Total current assets		13,249			1,000			875,500			242,564			—			1,132,313
Intercompany receivables (non-current)		—			—			—			—			—			—
Goodwill		—			—			1,184,171			160,785			—			1,344,956
Net investment in subsidiaries		1,265,254			1,242,139			415,423			—			(2,922,816	)		—
Total Assets		1,278,503			1,279,256			4,356,882			801,286			(2,922,816	)		4,793,111
Income taxes payable		—			—			49,010			—			—			49,010
Total current liabilities		867			22,971			486,955			100,231			—			611,024
Long-term debt		300,000			1,626,000			47,886			354			—			1,974,240
Intercompany payables (non-current)		(1,024,803	)		(1,634,966	)		2,420,325			722,874			(483,430	)		—
Additional paid-in capital		1,215,321			—			—			—			—			1,215,321
Retained earnings		635,743			1,249,629			1,244,075			(62,450	)		(2,431,254	)		635,743
Total stockholders’ equity		1,860,967			1,265,251			1,236,583			(62,448	)		(2,439,386	)		1,860,967
Total liabilities and stockholders’ equity		1,278,503			1,279,256			4,356,882			801,286			(2,922,816	)		4,793,111

As adjusted(1)
Prepaid expenses and taxes		—			—			32,150			4,137			—			36,287
Total current assets		13,249			1,000			821,752			296,311			—			1,132,312
Intercompany receivables (non-current)		1,235,247			2,165,424			3,654,627			291,969			(7,347,267	)		—
Goodwill		—			—			1,165,653			179,303			—			1,344,956
Net investment in subsidiaries		1,197,054			1,790,793			469,040			—			(3,456,887	)		—
Total Assets		2,445,550			3,993,334			7,904,544			1,253,837			(10,804,154	)		4,793,111
Income taxes payable		49,010			—			—			—			—			49,010
Total current liabilities		49,877			23,322			416,758			121,067			—			611,024
Long-term debt		300,000			1,627,000			22,937			24,303			—			1,974,240
Intercompany payables (non-current)		88,494			1,145,962			6,129,544			1,131,143			(8,495,143	)		—
Additional paid-in capital		1,215,321			452,487			451,060			—			(903,547	)		1,215,321
Retained earnings		640,484			728,941			726,642			(62,993	)		(1,397,331	)		635,743
Total stockholders’ equity		1,865,708			1,197,050			1,170,211			(62,991	)		(2,309,011	)		1,860,967
Total liabilities and stockholders’ equity		2,445,550			3,993,334			7,904,544			1,253,837			(10,804,154	)		4,793,111

Condensed Consolidating Statement of Cash Flows
For the six months ended June 30, 2007
As reported
Net cash provided by (used in) operating activities		(9,039	)		(71,000	)		188,772			107,255			—			215,988
Changes in intercompany balances with affiliates, net		—			—			—			—			—			—
Net cash provided by (used in) financing activities		9,039			71,000			(2,628	)		(3,338	)		—			74,073

As adjusted(1)
Net cash provided by (used in) operating activities		(31,955	)		(4,182	)		269,777			(17,652	)		—			215,988
Changes in intercompany balances with affiliates, net		22,916			(57,951	)		(83,304	)		118,339			—			—
Net cash provided by (used in) financing activities		31,955			11,682			(86,449	)		116,885			—			74,073

Condensed Consolidating Statement of Income
For the six months ended June 30, 2007
As reported
Interest expense, net		—			—			51,995			9,564			—			61,559
Equity in earnings of unconsolidated affiliates		(175,752	)		(175,752	)		3,955			—			347,549			—
Income (loss) from continuing operations before income taxes		175,752			175,752			174,939			(3,142	)		(347,549	)		175,752
Provision for income taxes		67,665			—			—			—			—			67,665
Income (loss) from continuing operations		108,087			175,752			174,939			(3,142	)		(347,549	)		108,087
Net income		108,087			175,752			174,939			(3,142	)		(347,549	)		108,087
As adjusted(1)
Interest expense, net		—			3,774			40,410			13,433			—			57,617
Equity in earnings of unconsolidated affiliates		(108,087	)		(114,657	)		10,138			—			212,606			—
Income (loss) from continuing operations before income taxes		108,087			110,883			184,511			(10,640	)		(212,606	)		180,235
Provision for income taxes		—			2,795			70,668			(4,075	)		—			69,388
Income (loss) from continuing operations		108,087			108,088			113,843			(6,565	)		(212,606	)		110,847
Net income	$	108,087		$	108,088		$	113,843		$	(9,325	)	$	(212,606	)	$	108,087


(1)		Includes effects of reclassification for discontinued operations and for conforming corrections as applied to other periods presented.

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)


	Parent						Other			Non-
	Guarantor			Issuer			Guarantors			Guarantors			Eliminations			Consolidated

Condensed Consolidating Balance Sheet
As of December 31, 2007
As reported
Prepaid expenses and taxes	$	—		$	102		$	156,733		$	12,921		$	—		$	169,756
Total current assets		113,741			102			1,518,022			921,033			—			2,552,898
Intercompany receivables (non-current)		—			—			—			—			—			—
Goodwill		96,671			—			2,162,601			1,988,442			—			4,247,714
Net investment in subsidiaries		1,519,952			1,464,944			4,968,905			—			(7,953,801	)		—
Total Assets		1,730,364			1,654,186			12,593,604			5,469,290			(7,953,801	)		13,493,643
Long-term debt		4			4,487,090			4,633,801			(43,528	)		—			9,077,367
Intercompany payables (non-current)		(385,872	)		(4,627,439	)		5,956,358			4,562,215			(5,505,262	)		—
Other long-term liabilities		(2,519	)		121,482			188,316			176,180			—			483,459
Additional paid-in capital		1,240,308			—			—			—			—			1,240,308
Retained earnings		557,945			1,601,686			1,066,671			(134,094	)		(2,534,263	)		557,945
Total stockholders’ equity		1,710,804			1,519,949			1,062,682			(134,092	)		(2,448,539	)		1,710,804
Total liabilities and stockholders’ equity		1,730,364			1,654,186			12,593,604			5,469,290			(7,953,801	)		13,493,643
As adjusted
Prepaid expenses and taxes		99,417			102			57,316			12,921			—			169,756
Total current assets		213,158			102			1,418,605			921,033			—			2,552,898
Intercompany receivables (non-current)		1,085,684			9,129,859			18,854,467			884,296			(29,954,306	)		—
Goodwill		—			—			2,259,113			1,988,601			—			4,247,714
Net investment in subsidiaries		957,750			4,168,316			2,485,035			—			(7,611,101	)		—
Total Assets		2,256,592			13,487,417			28,961,296			6,353,745			(37,565,407	)		13,493,643
Long-term debt		4			8,987,090			62,792			27,481			—			9,077,367
Intercompany payables (non-current)		137,837			3,267,993			27,008,767			5,378,021			(35,792,618	)		—
Other long-term liabilities		—			121,482			188,316			173,661			—			483,459
Additional paid-in capital		1,240,308			434,505			398,338			—			(832,843	)		1,240,308
Retained earnings		557,945			604,980			554,624			(133,935	)		(1,025,669	)		557,945
Total stockholders’ equity		1,710,804			957,748			948,974			(133,933	)		(1,772,789	)		1,710,804
Total liabilities and stockholders’ equity		2,256,592			13,487,417			28,961,296			6,353,745			(37,565,407	)		13,493,643

Condensed Consolidating Statement of Cash Flows
For the year ended December 31, 2007
As reported
Net cash provided by (used in) operating activities		290,438			(326,264	)		707,127			16,437			—			687,738
Changes in intercompany balances with affiliates, net		—			—			—			—			—			—
Net cash provided by (used in) financing activities		(290,438	)		7,196,560			(137,159	)		134,465			—			6,903,428
As adjusted
Net cash provided by (used in) operating activities		(85,881	)		141,137			417,930			214,552			—			687,738
Changes in intercompany balances with affiliates, net		376,319			(468,160	)		360,206			(268,365	)		—			—
Net cash provided by (used in) financing activities		85,881			6,728,400			152,038			(62,891	)		—			6,903,428

Condensed Consolidating Statement of Income
For the year ended December 31, 2007
As reported
Interest expense, net		—			(160,144	)		455,541			69,136			—			364,533
Equity in earnings of unconsolidated affiliates		(73,292	)		59,464			74,773			—			(86,077	)		(25,132	)
Income (loss) from continuing operations before income taxes		73,292			73,292			(59,464	)		(70,297	)		86,077			102,900
Provision for income taxes		43,003			—			—			—			—			43,003
Income (loss) from continuing operations		30,289			73,292			(59,464	)		(70,297	)		86,077			59,897
Net income	$	30,289		$	73,292		$	(59,464	)	$	(99,905	)	$	86,077		$	30,289

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)


	Parent						Other		Non-
	Guarantor			Issuer			Guarantors		Guarantors			Eliminations			Consolidated

As adjusted
Interest expense, net	$	—		$	67,495		$	227,902	$	69,136		$	—		$	364,533
Equity in earnings of unconsolidated affiliates		(30,289	)		(114,008	)		43,066		—			76,099			(25,132	)
Income (loss) from continuing operations before income taxes		30,289			19,125			199,880		(70,295	)		(76,099	)		102,900
Provision for income taxes		—			(11,164	)		83,550		(29,383	)		—			43,003
Income (loss) from continuing operations		30,289			30,289			116,330		(40,912	)		(76,099	)		59,897
Net income	$	30,289		$	30,289		$	116,330	$	(70,520	)	$	(76,099	)	$	30,289

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)


	Parent						Other			Non-
	Guarantor			Issuer			Guarantors			Guarantors			Eliminations			Consolidated

Condensed Consolidating Balance Sheet
As of December 31, 2006
As reported
Intercompany receivables (non-current)	$	—		$	—		$	—		$	—		$	—		$	—
Net investment in subsidiaries		1,085,218			1,071,903			420,246			—			(2,577,367	)		—
Total Assets		1,098,467			1,092,707			4,064,626			828,146			(2,577,367	)		4,506,579
Current income taxes payable		—			—			7,626			—			—			7,626
Total current liabilities		867			21,866			443,751			108,799			—			575,283
Long-term debt		300,000			1,556,000			24,942			24,839			—			1,905,781
Intercompany payables (non-current)		(1,067,545	)		(1,570,373	)		2,403,385			709,118			(474,585	)		—
Additional paid-in capital		1,195,947			—			—			—			—			1,195,947
Retained earnings		527,656			1,079,416			1,074,675			(49,594	)		(2,104,497	)		527,656
Total stockholders’ equity		1,723,673			1,085,214			1,067,160			(49,592	)		(2,102,782	)		1,723,673
Total liabilities and stockholders’ equity		1,098,467			1,092,707			4,064,626			828,146			(2,577,367	)		4,506,579
As adjusted
Intercompany receivables (non-current)		1,360,530			5,620,834			5,590,489			275,417			(12,847,270	)		—
Net investment in subsidiaries		975,063			1,650,140			415,506			—			(3,040,709	)		—
Total Assets		2,348,842			7,291,778			9,650,375			1,103,563			(15,887,979	)		4,506,579
Current income taxes payable		7,626			—			—			—			—			7,626
Total current liabilities		8,493			21,866			436,125			108,799			—			575,283
Long-term debt		300,000			1,556,000			24,942			24,839			—			1,905,781
Intercompany payables (non-current)		175,204			4,738,853			8,083,418			984,535			(13,982,010	)		—
Additional paid-in capital		1,195,947			371,227			375,072			—			(746,299	)		1,195,947
Retained earnings		527,656			598,034			612,946			(49,594	)		(1,161,386	)		527,656
Total stockholders’ equity		1,723,673			975,059			980,502			(49,592	)		(1,905,969	)		1,723,673
Total liabilities and stockholders’ equity		2,348,842			7,291,778			9,650,375			1,103,563			(15,887,979	)		4,506,579

Condensed Consolidating Statement of Cash Flows
For the year ended December 31, 2006
As reported
Net cash provided by (used in) operating activities		155,052			(387,000	)		487,607			94,596			—			350,255
Changes in intercompany balances with affiliates, net		—			—			—			—			—			—
Net cash provided by (used in) financing activities		(155,052	)		387,000			(5,734	)		246			—			226,460
As adjusted
Net cash provided by (used in) operating activities		(151,205	)		(20,514	)		522,332			(358	)		—			350,255
Changes in intercompany balances with affiliates, net		306,257			(366,486	)		(34,727	)		94,956			—			—
Net cash provided by (used in) financing activities		151,205			20,514			(40,460	)		95,201			—			226,460

Condensed Consolidating Statement of Income
For the year ended December 31, 2006
As reported
Interest expense, net		—			—			71,797			22,618			—			94,415
Equity in earnings of unconsolidated affiliates		(278,415	)		(278,415	)		53,778			—			503,052			—
Income (loss) from continuing operations before income taxes		278,415			278,415			273,103			(39,034	)		(503,052	)		287,847
Provision for income taxes		110,152			—			—			—			—			110,152
Income (loss) from continuing operations		168,263			278,415			273,103			(39,034	)		(503,052	)		177,695
Net income		168,263			278,415			273,103			(48,466	)		(503,052	)		168,263
As adjusted
Interest expense, net		—			14,130			57,667			22,618			—			94,415
Equity in earnings of unconsolidated affiliates		(168,263	)		(191,759	)		38,829			—			321,193			—
Income (loss) from continuing operations before income taxes		168,263			177,629			302,182			(39,034	)		(321,193	)		287,847
Provision for income taxes		—			9,366			115,736			(14,950	)		—			110,152
Income (loss) from continuing operations		168,263			168,263			186,446			(24,084	)		(321,193	)		177,695
Net income	$	168,263		$	168,263		$	186,446		$	(33,516	)	$	(321,193	)	$	168,263

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)


	Parent						Other			Non-
	Guarantor			Issuer			Guarantors			Guarantors			Eliminations			Consolidated

Condensed Consolidating Statement of Cash Flows
For the year ended December 31, 2005
As reported
Net cash provided by (used in) operating activities	$	30,571		$	12,000		$	333,376		$	35,102		$	—		$	411,049
Changes in intercompany balances with affiliates, net		—			—			—			—			—			—
Net cash provided by (used in) financing activities		(30,571	)		(12,000	)		(13,122	)		(6,474	)		—			(62,167	)
As adjusted
Net cash provided by (used in) operating activities		(67,739	)		(38,924	)		469,028			48,684			—			411,049
Changes in intercompany balances with affiliates, net		98,309			50,924			(135,653	)		(13,580	)		—			—
Net cash provided by (used in) financing activities		67,739			38,924			(148,774	)		(20,056	)		—			(62,167	)

Condensed Consolidating Statement of Income
For the year ended December 31, 2005
As reported
Interest expense, net		—			(9	)		67,927			19,267			—			87,185
Equity in earnings of unconsolidated affiliates		(287,348	)		(287,499	)		15,315			—			559,532			—
Income (loss) from continuing operations before income taxes		287,348			287,508			287,499			5,351			(559,532	)		308,174
Provision for income taxes		119,804			—			—			—			—			119,804
Income (loss) from continuing operations		167,544			287,508			287,499			5,351			(559,532	)		188,370
Net income		167,544			287,508			287,499			(15,475	)		(559,532	)		167,544
As adjusted
Interest expense, net		—			34,930			32,988			19,267			—			87,185
Equity in earnings of unconsolidated affiliates		(167,544	)		(195,805	)		17,143			—			346,206			—
Income (loss) from continuing operations before income taxes		167,544			160,875			320,610			5,351			(346,206	)		308,174
Provision for income taxes		—			(6,669	)		124,397			2,076			—			119,804
Income (loss) from continuing operations		167,544			167,544			196,213			3,275			(346,206	)		188,370
Net income	$	167,544		$	167,544		$	196,213		$	(17,551	)	$	(346,206	)	$	167,544

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

Condensed Consolidating Balance Sheet
June 30, 2008


	Parent						Other			Non-
	Guarantor			Issuer			Guarantors			Guarantors			Eliminations			Consolidated
	(In thousands, except share data)


ASSETS
Current assets
Cash and cash equivalents	$	—		$	—		$	264,514		$	—		$	(442	)	$	264,072
Patient accounts receivable, net of allowance for doubtful accounts		—			—			1,005,103			598,599			—			1,603,702
Supplies		—			—			164,395			102,008			—			266,403
Deferred income taxes		88,531			—			—			—			—			88,531
Prepaid expenses and taxes		—			15			106,088			(16,379	)		—			89,724
Other current assets		—			610			115,069			75,547			—			191,226

Total current assets		88,531			625			1,655,169			759,775			(442	)		2,503,658

Intercompany receivable		903,283			9,533,225			11,486,044			2,777,775			(24,700,327	)		—

Property and equipment, net		—			—			3,509,232			2,112,522			—			5,621,754

Goodwill		—			—			2,633,866			1,531,175			—			4,165,041

Other assets, net		—			183,525			102,849			782,681			—			1,069,055

Net investment in subsidiaries		1,631,815			4,567,686			2,435,096			—			(8,634,597	)		—

Total assets	$	2,623,629		$	14,285,061		$	21,822,256		$	7,963,928		$	(33,335,366	)	$	13,359,508


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt	$	—		$	—		$	20,856		$	3,423		$	—		$	24,279
Accounts payable		—			92			349,822			88,162			442			438,518
Current income taxes payable		12,224			—			—			—			—			12,224
Accrued liabilities		12,126			—			417,221			262,059			—			691,406
Interest payable (receivable)		—			146,644			1,984			(1,177	)		—			147,451

Total current liabilities		24,350			146,736			789,883			352,467			442			1,313,878

Long-term debt payable		4			8,825,296			54,969			9,646			—			8,889,915

Intercompany payable		334,140			3,567,256			19,505,014			7,235,026			(30,641,436	)		—

Deferred income taxes		429,934			—			—			—			—			429,934

Other long-term liabilities		1,092			113,960			279,640			176,393			—			571,085

Minority interests in equity of
consolidated subsidiaries		—			—			7,067			313,520			—			320,587

Stockholders’ equity
Preferred stock		—			—			—			—			—			—
Common stock		969			—			1			2			(3	)		969
Additional paid-in capital		1,251,746			658,237			458,396			—			(1,116,633	)		1,251,746
Treasury stock, at cost, 975,549 shares		(6,678	)		—			—			—			—			(6,678	)
Accumulated other comprehensive
income (loss)		(77,893	)		(77,893	)		(4,959	)		—			82,852			(77,893	)
Retained earnings		665,965			1,051,469			732,245			(123,126	)		(1,660,588	)		665,965

Total stockholders’ equity		1,834,109			1,631,813			1,185,683			(123,124	)		(2,694,372	)		1,834,109

Total liabilities and stockholders’ equity	$	2,623,629		$	14,285,061		$	21,822,256		$	7,963,928		$	(33,335,366	)	$	13,359,508

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

Condensed Consolidating Balance Sheet
December 31, 2007


	Parent						Other			Non-
	Guarantor			Issuer			Guarantors			Guarantors			Eliminations			Consolidated
	(In thousands, except share data)

ASSETS
Current assets
Cash and cash equivalents	$	—		$	—		$	114,075		$	18,799		$	—		$	132,874
Patient accounts receivable, net of allowance for doubtful accounts		—			—			954,106			579,692			—			1,533,798
Supplies		—			—			163,961			98,942			—			262,903
Deferred income taxes		113,741			—			—			—			—			113,741
Prepaid expenses and taxes		99,417			102			57,316			12,921			—			169,756
Other current assets		—			—			129,147			210,679			—			339,826

Total current assets		213,158			102			1,418,605			921,033			—			2,552,898

Intercompany receivable		1,085,684			9,129,859			18,854,467			884,296			(29,954,306	)		—

Property and equipment, net		—			—			3,667,487			1,845,087			—			5,512,574

Goodwill		—			—			2,259,113			1,988,601						4,247,714

Other assets, net		—			189,140			276,589			714,728						1,180,457

Net investment in subsidiaries		957,750			4,168,316			2,485,035			—			(7,611,101	)		—

Total assets	$	2,256,592		$	13,487,417		$	28,961,296		$	6,353,745		$	(37,565,407	)	$	13,493,643


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt	$	—		$	—		$	16,603		$	4,107		$	—		$	20,710
Accounts payable		—			19			276,503			216,171			—			492,693
Current income taxes payable		—			—			—			—			—			—
Deferred income taxes — current		—			—			—			—			—			—
Accrued liabilities		—			—			437,808			342,892			—			780,700
Interest payable (receivable)		—			153,085			8,042			(7,295	)		—			153,832

Total current liabilities		—			153,104			738,956			555,875			—			1,447,935

Long-term debt payable (receivable)		4			8,987,090			62,792			27,481			—			9,077,367

Intercompany payable		137,837			3,267,993			27,008,767			5,378,021			(35,792,618	)		—

Deferred income taxes		407,947			—			—			—			—			407,947

Other long-term liabilities		—			121,482			188,316			173,661			—			483,459

Minority interests in equity of consolidated subsidiaries		—			—			13,491			352,640			—			366,131

Stockholders’ equity
Preferred stock		—			—			—			—			—			—
Common stock		966			—			1			2			(3	)		966
Additional paid-in capital		1,240,308			434,505			398,338			—			(832,843	)		1,240,308
Treasury stock, at cost, 975,549 shares		(6,678	)		—			—			—			—			(6,678	)
Accumulated other comprehensive income (loss)		(81,737	)		(81,737	)		(3,989	)		—			85,726			(81,737	)
Retained earnings		557,945			604,980			554,624			(133,935	)		(1,025,669	)		557,945

Total stockholders’ equity		1,710,804			957,748			948,974			(133,933	)		(1,772,789	)		1,710,804

Total liabilities and stockholders’ equity	$	2,256,592		$	13,487,417		$	28,961,296		$	6,353,745		$	(37,565,407	)	$	13,493,643

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

Condensed Consolidating Statement of Income
Three Months Ended June 30, 2008


	Parent						Other			Non-
	Guarantor			Issuer			Guarantors			Guarantors			Eliminations			Consolidated
	(In thousands)

Net operating revenues	$	—		$	—		$	1,658,492		$	1,032,108		$	—		$	2,690,600

Operating costs and expenses:
Salaries and benefits		—			—			623,124			456,252			—			1,079,376
Provision for bad debts		—			—			184,372			106,673			—			291,045
Supplies		—			—			222,385			155,201			—			377,586
Other operating expenses		—			—			300,853			225,245			—			526,098
Rent		—			—			29,859			28,620			—			58,479
Depreciation and amortization		—			—			77,112			47,830			—			124,942

		—			—			1,437,705			1,019,821			—			2,457,526

Income from operations		—			—			220,787			12,287			—			233,074

Interest expense, net		—			14,598			146,962			(7,199	)		—			154,361
Loss from early extinguishment of debt		—			—			—			—			—			—
Minority interest in earnings		—			—			(491	)		8,808			—			8,317
Equity in earnings of subsidiary		(47,893	)		(59,313	)		(4,164	)		—			100,862			(10,508	)

Income (loss) from continuing operations before income taxes		47,893			44,715			78,480			10,678			(100,862	)		80,904
Provision for income taxes		—			(3,178	)		30,215			4,111			—			31,148

Income (loss) from continuing operations		47,893			47,893			48,265			6,567			(100,862	)		49,756
Discontinued operations, net of taxes:
Income (loss) from operations of hospitals sold and held for sale		—			—			—			(1,854	)		—			(1,854	)
Gain (loss) on sale of hospitals, net		—			—			—			(9	)		—			(9	)

Income (loss) on discontinued operations		—			—			—			(1,863	)		—			(1,863	)

Net income	$	47,893		$	47,893		$	48,265		$	4,704		$	(100,862	)	$	47,893

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

Condensed Consolidating Statement of Income
Three Months Ended June 30, 2007


	Parent						Other		Non-
	Guarantor			Issuer			Guarantors		Guarantors			Eliminations			Consolidated
	(In thousands)

Net operating revenues	$	—		$	—		$	931,026	$	266,839		$	—		$	1,197,865

Operating costs and expenses:
Salaries and benefits		—			—			347,753		125,093			—			472,846
Provision for bad debts		—			—			113,264		28,556			—			141,820
Supplies		—			—			107,429		32,919			—			140,348
Other operating expenses		—			—			185,496		61,484			—			246,980
Rent		—			—			18,008		8,958			—			26,966
Depreciation and amortization		—			—			41,837		10,145			—			51,982

		—			—			813,787		267,155			—			1,080,942

Income from operations		—			—			117,239		(316	)		—			116,923

Interest expense, net		—			3,774			18,729		6,681			—			29,184
Loss from early extinguishment of debt		—			—			—		—			—			—
Minority interest in earnings		—			—			—		625			—			625
Equity in earnings of subsidiary		(53,763	)		(65,367	)		4,795		—			114,335			—

Income (loss) from continuing operations before income taxes		53,763			61,593			93,715		(7,622	)		(114,335	)		87,114
Provision for income taxes		—			582			35,893		(2,919	)		—			33,556

Income (loss) from continuing operations		53,763			61,011			57,822		(4,703	)		(114,335	)		53,558
Discontinued operations, net of taxes:
Income (loss) from operations of hospitals sold and held for sale		—			—			—		205			—			205
Gain (loss) on sale of hospitals, net		—			—			—		—			—			—

Income (loss) on discontinued operations		—			—			—		205			—			205

Net income	$	53,763		$	61,011		$	57,822	$	(4,498	)	$	(114,335	)	$	53,763

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

Condensed Consolidating Statement of Income
Six Months Ended June 30, 2008


	Parent						Other			Non-
	Guarantor			Issuer			Guarantors			Guarantors			Eliminations			Consolidated
	(In thousands)

Net operating revenues	$	—		$	—		$	3,347,235		$	2,070,919		$	—		$	5,418,154

Operating costs and expenses:
Salaries and benefits		—			—			1,261,764			905,382			—			2,167,146
Provision for bad debts		—			—			378,262			209,863			—			588,125
Supplies		—			—			448,515			315,480			—			763,995
Other operating expenses		—			—			601,045			451,220			—			1,052,265
Rent		—			—			61,159			57,177			—			118,336
Depreciation and amortization		—			—			154,897			92,760			—			247,657

		—			—			2,905,642			2,031,882			—			4,937,524

Income from operations		—			—			441,593			39,037			—			480,630

Interest expense, net		—			27,522			267,683			24,858			—			320,063
Loss from early extinguishment of debt		—			1,328			—			—			—			1,328
Minority interest in earnings		—			—			(685	)		18,684			—			17,999
Equity in earnings of subsidiary		(108,020	)		(124,379	)		(26,986	)		—			235,993			(23,392	)

Income (loss) from continuing operations before income taxes		108,020			95,529			201,581			(4,505	)		(235,993	)		164,632
Provision for income taxes		—			(12,491	)		77,608			(1,734	)		—			63,383

Income (loss) from continuing operations		108,020			108,020			123,973			(2,771	)		(235,993	)		101,249
Discontinued operations, net of taxes:
Income (loss) from operations of hospitals sold and held for sale		—			—			—			(2,837	)		—			(2,837	)
Gain (loss) on sale of hospitals, net		—			—			—			9,608			—			9,608

Income (loss) on discontinued operations		—			—			—			6,771			—			6,771

Net income	$	108,020		$	108,020		$	123,973		$	4,000		$	(235,993	)	$	108,020

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

Condensed Consolidating Statement of Income
Six Months Ended June 30, 2007


	Parent						Other		Non-
	Guarantor			Issuer			Guarantors		Guarantors			Eliminations			Consolidated
	(In thousands)

Net operating revenues	$	—		$	—		$	1,852,257	$	499,886		$	—		$	2,352,143

Operating costs and expenses:
Salaries and benefits		—			—			700,235		235,376			—			935,611
Provision for bad debts		—			—			218,804		51,070			—			269,874
Supplies		—			—			214,545		60,097			—			274,642
Other operating expenses		—			—			365,498		115,647			—			481,145
Rent		—			—			35,687		16,035			—			51,722
Depreciation and amortization		—			—			82,429		18,050			—			100,479

		—			—			1,617,198		496,275			—			2,113,473

Income from operations		—			—			235,059		3,611			—			238,670

Interest expense, net		—			3,774			40,410		13,433			—			57,617
Loss from early extinguishment of debt		—			—			—		—			—			—
Minority interest in earnings		—			—			—		818			—			818
Equity in earnings of subsidiary		(108,087	)		(114,657	)		10,138		—			212,606			—

Income (loss) from continuing operations before income taxes		108,087			110,883			184,511		(10,640	)		(212,606	)		180,235
Provision for income taxes		—			2,795			70,668		(4,075	)		—			69,388

Income (loss) from continuing operations		108,087			108,088			113,843		(6,565	)		(212,606	)		110,847
Discontinued operations, net of taxes:
Income (loss) from operations of hospitals sold and held for sale		—			—			—		(2,760	)		—			(2,760	)
Gain (loss) on sale of hospitals, net		—			—			—		—			—			—

Income (loss) on discontinued operations		—			—			—		(2,760	)		—			(2,760	)

Net income	$	108,087		$	108,088		$	113,843	$	(9,325	)	$	(212,606	)	$	108,087

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2008


	Parent						Other			Non-
	Guarantor			Issuer			Guarantors			Guarantors			Eliminations			Consolidated
	(In thousands)

Cash flows from operating activities:
Net cash provided by(used in) operating activities	$	58,738		$	(31,359	)	$	621,921		$	(232,517	)	$	—		$	416,783

Cash flows from investing activities:
Acquisitions of facilities and other related equipment		—			—			(6,464	)		(182	)		—			(6,646	)
Purchases of property and equipment		—			—			(180,745	)		(94,860	)		—			(275,605	)
Proceeds from disposition of hospitals and other ancillary services		—			—			10,693			355,220			—			365,913
Proceeds from sale of property and equipment		—			—			1,094			11,795			—			12,889
Investment in other assets		—			—			(110,380	)		(34,000	)		—			(144,380	)

Net cash provided by (used in) investing activities		—			—			(285,802	)		237,973			—			(47,829	)

Cash flows from financing activities:
Proceeds from exercise of stock options		1,357			—			—			—			—			1,357
Deferred financing costs		—			(2,444	)		—			—			—			(2,444	)
Excess tax benefits relating to stock-based compensation		(947	)		—			—			—			—			(947	)
Stock buy-back		(10,194	)		—			—			—			—			(10,194	)
Proceeds from minority investors in joint ventures		—			—			—			11,214			—			11,214
Redemption of minority investments in joint ventures		—			—			—			(53,485	)		—			(53,485	)
Distributions to minority investors in joint ventures		—			—			—			(14,916	)		—			(14,916	)
Changes in intercompany balances with affiliates, net		(48,954	)		195,597			(100,769	)		(45,432	)		(442	)		—
Borrowings under credit agreement		—			25,000			44,818			(47,161	)		—			22,657
(Repayments) borrowings of long-term indebtedness		—			(186,794	)		(129,729	)		125,525			—			(190,998	)

Net cash provided by (used in) financing activities		(58,738	)		31,359			(185,680	)		(24,255	)		(442	)		(237,756	)

Net change in cash and cash equivalents		—			—			150,439			(18,799	)		(442	)		131,198
Cash and cash equivalents at beginning of period		—			—			114,075			18,799			—			132,874

Cash and cash equivalents at end of period	$	—		$	—		$	264,514		$	—		$	(442	)	$	264,072

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED) — (Continued)

Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2007


	Parent						Other			Non-
	Guarantor			Issuer			Guarantors			Guarantors			Eliminations		Consolidated
	(In thousands)

Cash flows from operating activities:
Net cash provided by(used in) operating activities	$	(31,955	)	$	(4,182	)	$	269,777		$	(17,652	)	$	—	$	215,988

Cash flows from investing activities:
Acquisitions of facilities and other related equipment		—			—			(100,525	)		(87,430	)		—		(187,955	)
Purchases of property and equipment		—			—			(91,443	)		(17,406	)		—		(108,849	)
Proceeds from disposition of hospitals and other ancillary services		—			—			—			12,662			—		12,662
Proceeds from sale of property and equipment		—			—			167			67			—		234
Investment in other assets		—			(7,500	)		(16,563	)		(1,299	)		—		(25,362	)

Net cash provided by (used in) investing activities		—			(7,500	)		(208,364	)		(93,406	)		—		(309,270	)

Cash flows from financing activities:
Proceeds from exercise of stock options		6,693			—			—			—			—		6,693
Deferred financing costs		—			(367	)		—			—			—		(367	)
Excess tax benefits relating to stock-based compensation		2,295			—			—			—			—		2,295
Proceeds from minority investors in joint ventures		51			—			—			1,054			—		1,105
Redemption of minority investments in joint ventures		—			—			—			(1,369	)		—		(1,369	)
Distributions to minority investors in joint ventures		—			—			—			(1,705	)		—		(1,705	)
Changes in intercompany balances with affiliates, net		22,916			(57,951	)		(83,304	)		118,339			—		—
Borrowings under credit agreement		—			132,000			—			—			—		132,000
(Repayments) borrowings of long-term indebtedness		—			(62,000	)		(3,145	)		566			—		(64,579	)

Net cash provided by (used in) financing activities		31,955			11,682			(86,449	)		116,885			—		74,073

Net change in cash and cash equivalents		—			—			(25,036	)		5,827			—		(19,209	)
Cash and cash equivalents at beginning of period		—			—			28,560			12,006			—		40,566

Cash and cash equivalents at end of period	$	—		$	—		$	3,524		$	17,833		$	—	$	21,357


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

You should read this discussion together with our unaudited condensed consolidated financial statements and accompanying notes included herein.

Unless the context otherwise requires, “Community Health Systems,” the “Company,” “we,” “us” and “our” refer to Community Health Systems, Inc. and its consolidated subsidiaries.

Executive Overview

We are the largest publicly traded operator of hospitals in the United States in terms of number of facilities and net operating revenues. We provide healthcare services through these hospitals that we own and operate in non-urban and selected urban markets. We generate revenue primarily by providing a broad range of general hospital healthcare services to patients in the communities in which we are located. We currently have 116 general acute care hospitals included in continuing operations. In addition, we own four home health agencies, located in markets where we do not operate a hospital and through our wholly-owned subsidiary, Quorum Health Resources, LLC (“QHR”), we provide management and consulting services to non-affiliated general acute care hospitals located throughout the United States. We are paid for our services by governmental agencies, private insurers and directly by the patients we serve.

Effective July 25, 2007, we completed our acquisition of Triad Hospitals, Inc., or “Triad,” for an aggregate consideration of $6.857 billion, including $1.686 billion of assumed indebtedness. In connection with this acquisition, one of our subsidiaries issued $3.021 billion principal amount of 8.875% senior notes due 2015 (the “Notes”) and we entered into a new $7.215 billion credit facility (the “New Credit Facility”) consisting of a $6.065 billion term loan, a $750 million revolving credit facility and a $400 million delayed draw term loan facility. The delayed draw term loan facility was reduced in the fourth quarter of 2007, per our request, from $400 million to $300 million. The proceeds of these financings were used to pay the cash consideration under the merger agreement and to refinance substantially all of both the assumed indebtedness and our existing indebtedness and to pay related fees and expenses. The revolving credit facility and the delayed draw term loan facility remain available to us for future acquisitions, working capital, and general corporate purposes. We believe the acquisition of Triad will benefit us since it has expanded the number of markets we serve, expanded our operations into five states where we previously did not operate, and reduced our concentration of credit risk in any one state. We also believe that synergies obtained from eliminating duplicate corporate functions and centralizing many support functions will allow us to improve Triad’s margins. During the three and six months ended June 30, 2008, we have realized approximately $42 million and $77 million, respectively, of our estimated synergies related to the Triad acquisition. We continue to believe our integration is on track and we anticipate recognizing all of the anticipated synergies.

As of December 31, 2007, two of the former Triad hospitals had been sold and six other hospitals formerly owned by Triad along with six hospitals owned by us had been identified as available for sale. During the three months ended March 31, 2008, we completed the sale of eleven of these hospitals that were available for sale as of December 31, 2007. Accordingly, these hospitals have been classified in discontinued operations in the condensed consolidated statements of income for the three and six months ended June 30, 2008 and three and six months ended June 30, 2007 to the extent that the hospitals were owned by us during the respective periods. Additionally, effective June 30, 2008, we acquired the 35% minority interest in Affinity Health Systems, LLC which indirectly owns and operates Trinity Medical Center (560 licensed beds) located in Birmingham, Alabama, from Baptist Health Systems, Inc. of Birmingham, Alabama (“Baptist”), giving us 100% ownership of that facility. The purchase price for this minority interest was $51.5 million in cash and the cancellation of a promissory note issued by Baptist and held by Affinity Health Systems, LLC in the original principal amount of $32.8 million. The Company, prior to the acquisition of the 35% minority interest, consolidated all the operations of Affinity Health Systems, LLC as the majority owner of 65% of the equity.

With the exception of the previously announced definitive agreement to acquire a two hospital system in Spokane, Washington, our focus has remained on the integration of the former Triad hospitals. The acquisition of the two hospital system in Spokane is pending governmental approval and is expected to be completed in

the fourth quarter of 2008. We do not anticipate any further acquisition activity in 2008; however, we intend to begin considering additional acquisitions in 2009.

In the quarter ended June 30, 2008, we were informed that we would not receive the full amount of previously estimated reimbursements under certain Indiana Medicaid programs. These reductions are due partly to the state not receiving a federal waiver for one of its programs and partly as a result of changes to its disproportionate share program which were different from what had previously been communicated to us. This represents an approximate $8.0 million reduction in expected payments from these programs on an annual basis.

For the three months ended June 30, 2008, we generated $2.691 billion in net operating revenues, a growth of 124.6% over the three months ended June 30, 2007, and $47.9 million of net income, a decrease of 10.9% over the three months ended June 30, 2007. For the three months ended June 30, 2008, consolidated admissions increased 101.3% and adjusted admissions increased 93.4% over the three months ended June 30, 2007. The increases in net operating revenue and volume reflect both our acquisition of the former Triad hospitals as well as the benefit from the strong flu season.

For the six months ended June 30, 2008, we generated $5.418 billion in net operating revenues, a growth of 130.3% over the six months ended June 30, 2007, and $108.0 million of net income, consistent with the six months ended June 30, 2007. For the six months ended June 30, 2008, consolidated admissions increased 106.3% and adjusted admissions increased 97.6% over the six months ended June 30, 2007. The increases in net operating revenue and volume reflect both our acquisition of the former Triad hospitals as well as the benefit from the strong flu season.

We believe there continues to be ample opportunity for growth in substantially all of our markets by decreasing the need for patients to travel outside their communities for health care services. Furthermore, we continue to strive to improve operating efficiencies and procedures in order to improve our profitability at all of our hospitals.

Sources of Consolidated Net Operating Revenue

The following table presents the approximate percentages of net operating revenue derived from Medicare, Medicaid, managed care and other third party payors, and self-pay for the periods indicated. The data for the periods presented are not strictly comparable due to the significant effect that hospital acquisitions have had on these statistics.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007

Medicare		27.5	%		29.4	%		28.0	%		30.1	%
Medicaid		8.7	%		11.5	%		8.5	%		10.9	%
Managed Care and other third party payors		52.8	%		46.8	%		52.7	%		46.6	%
Self-pay		11.0	%		12.3	%		10.8	%		12.4	%

Total		100.0	%		100.0	%		100.0	%		100.0	%

Net operating revenues include amounts estimated by management to be reimbursable by Medicare and Medicaid under prospective payment systems and provisions of cost-based reimbursement and other payment methods. In addition, we are reimbursed by non-governmental payors using a variety of payment methodologies. Amounts we receive for treatment of patients covered by these programs are generally less than the standard billing rates. We account for the differences between the estimated program reimbursement rates and the standard billing rates as contractual allowance adjustments, which we deduct from gross revenues to arrive at net operating revenues. Final settlements under some of these programs are subject to adjustment based on administrative review and audit by third parties. We account for adjustments to previous program reimbursement estimates as contractual allowance adjustments and report them in the periods that such adjustments become known. Adjustments related to final settlements that increased revenue were insignificant to both net operating revenue and net income in each of the three and six months ended June 30, 2008 and 2007. In the future, we expect the percentage of revenues received from the Medicare program to increase due to the general aging of the population.

The payment rates under the Medicare program for inpatient acute services are based on a prospective payment system, depending upon the diagnosis of a patient’s condition. These rates are indexed for inflation annually, although increases have historically been less than actual inflation. Reductions in the rate of increase in Medicare reimbursement may cause our net operating revenue growth to decline.

In addition, specified managed care programs, insurance companies, and employers are actively negotiating the amounts paid to hospitals. The trend toward increased enrollment in managed care may adversely affect our net operating revenue growth.

Results of Operations

Our hospitals offer a variety of services involving a broad range of inpatient and outpatient medical and surgical services. These include orthopedics, cardiology, occupational medicine, diagnostic services, emergency services, rehabilitation treatment, home health and skilled nursing. The strongest demand for hospital services generally occurs during January through April and the weakest demand for these services occurs during the summer months. Accordingly, eliminating the effect of new acquisitions, our net operating revenues and earnings are historically highest during the first quarter and lowest during the third quarter.

The following tables summarize, for the periods indicated, selected operating data.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007

Consolidated(a)
Net operating revenues		100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses(b)		(86.7	)		(85.9	)		(86.5	)		(85.6	)
Depreciation and amortization		(4.6	)		(4.3	)		(4.6	)		(4.3	)

Income from operations		8.7			9.8			8.9			10.1
Interest expense, net		(5.8	)		(2.5	)		(5.9	)		(2.4	)
Minority interest in earnings		(0.3	)		—			(0.4	)		—
Equity in earnings of unconsolidated affiliates		0.4			—			0.4			—

Income from continuing operations before income taxes		3.0			7.3			3.0			7.7
Provision for income taxes		(1.2	)		(2.8	)		(1.1	)		(3.0	)

Income from continuing operations		1.8			4.5			1.9			4.7
Income (loss) on discontinued operations		—			—			0.1			(0.1	)

Net income		1.8	%		4.5	%		2.0	%		4.6	%


	Three Months Ended			Six Months Ended
	June 30, 2008			June 30, 2008

Percentage increase (decrease) from same period prior year(a):
Net operating revenues		124.6	%		130.3	%
Admissions		101.3			106.3
Adjusted admissions(c)		93.4			97.6
Average length of stay		2.4			4.9
Net income(d)		(10.9	)		0.0
Same-store percentage increase from same period prior year(a)(e):
Net operating revenues		4.9	%		5.3	%
Admissions		2.3			3.1
Adjusted admissions(c)		2.4			3.1


(a)		Pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we have restated our prior period financial statements and


		statistical results to reflect as discontinued operations the seven hospitals that were in discontinued operations during the three and six months ended June 30, 2008, which were also owned or leased during the three months ended June 30, 2007.

(b)		Operating expenses include salaries and benefits, provision for bad debts, supplies, rent and other operating expenses.

(c)		Adjusted admissions is a general measure of combined inpatient and outpatient volume. We computed adjusted admissions by multiplying admissions by gross patient revenues and then dividing that number by gross inpatient revenues.

(d)		Includes loss from operations of discontinued hospitals and gain on sale of discontinued hospitals.

(e)		Includes former Triad hospitals during the comparable periods and other acquired hospitals to the extent we operated them in both years.

Three months Ended June 30, 2008 Compared to Three months Ended June 30, 2007

Net operating revenues increased $1.493 billion to $2.691 billion for the three months ended June 30, 2008, from $1.198 billion for the three months ended June 30, 2007. On a combined basis, the hospitals acquired in the Triad acquisition and growth from those hospitals owned throughout both periods contributed $1.460 billion of that increase and $32.6 million was contributed by other hospitals acquired in 2007. On a same-store basis, including the former Triad hospitals during the comparable periods, this represents an increase in same-store net revenue of 4.9%. The increase from hospitals that we owned throughout both periods was attributable to volume increases, primarily from flu and respiratory cases, rate increases, payor mix and the acuity level of services provided.

On a consolidated basis, inpatient admissions increased by 101.3% and adjusted admissions increased by 93.4%. With respect to the increase in consolidated admissions, approximately 50.6% of the admissions were contributed from newly acquired hospitals, including those hospitals acquired from Triad, and 49.4% of the admissions were contributed by hospitals we owned throughout both periods. On a same-store basis, which includes the hospitals acquired from Triad, as if we owned them during both periods, admissions increased by 2.3% during the three months ended June 30, 2008.

Operating expenses, excluding depreciation and amortization, as a percentage of net operating revenues, increased to 86.7% for the three months ended June 30, 2008 compared to 85.9% for the three months ended June 30, 2007. Salaries and benefits, as a percentage of net operating revenues, increased 0.6% to 40.1% for the three months ended June 30, 2008, compared to 39.5% for the three months ended June 30, 2007. This increase is primarily the result of an increase in the number of employed physicians as well as certain IT employees who were previously treated as leased employees with related expense previously being included in other operating expense. These increases have offset improvements realized at our other hospitals owned throughout both periods. Provision for bad debts, as a percentage of net operating revenues, decreased 1.0% to 10.8% for the three months ended June 30, 2008 compared to 11.8% for the three months ended June 30, 2007. This decrease is primarily the result of the former Triad hospitals having a self-pay discount program and historically lower provision for bad debts, as well as our phasing in of a discounting program at those hospitals where one previously did not exist. Supplies, as a percentage of net operating revenues, increased 2.3% to 14.0% for the three months ended June 30, 2008, as compared to 11.7% for the three months ended June 30, 2007. This increase is primarily the result of the acquisition of the former Triad hospitals whose higher acuity of services resulted in higher supply costs than our other hospitals taken collectively, offsetting improvements from greater utilization of and improved pricing under our purchasing program. Rent and other operating expenses, as a percentage of net operating revenues, decreased from 22.9% for the three months ended June 30, 2007, to 21.8% for the three months ended June 30, 2008. As part of our acquisition of Triad, we acquired minority investments in certain joint ventures. These investments provided earnings of 0.4% of net operating revenues. Prior to the Triad acquisition, we did not have any material investments in unconsolidated subsidiaries.

Depreciation and amortization increased from 4.3% of net operating revenues for the three months ended June 30, 2007 to 4.6% of net operating revenues for the three months ended June 30, 2008. The increase in

depreciation and amortization as a percentage of net operating revenue is primarily due to the acquisition of the former Triad hospitals which, as a result of a higher level of capital spending, had a higher fair market valuation in relation to their respective revenue than that of our other hospitals in the comparable period.

Interest expense, net, increased by $125.2 million from $29.2 million for the three months ended June 30, 2007 to $154.4 million for the three months ended June 30, 2008. An increase in interest rates during the three months ended June 30, 2008, as compared to the three months ended June 30, 2007, accounted for $4.7 million of this increase, while an increase in our average outstanding debt during the three months ended June 30, 2008, as compared to the three months ended June 30, 2007, accounted for the remaining $120.5 million.

Income from continuing operations margin decreased from 4.5% for the three months ended June 30, 2007 to 1.8% for the three months ended June 30, 2008. Net income margin decreased from 4.5% for the three months ended June 30, 2007 to 1.8% for the three months ended June 30, 2008. The decrease in income from continuing operations margin and net income margin are reflective of the net increases in operating expenses, depreciation expense and interest expense, as discussed above.

The net results of the above mentioned changes resulted in income from continuing operations before income taxes decreasing $6.2 million from $87.1 million for the three months ended June 30, 2007 to $80.9 million for the three months ended June 30, 2008.

Provision for income taxes decreased from $33.6 million for the three months ended June 30, 2007 to $31.1 million for the three months ended June 30, 2008, due primarily to a reduction in taxable income in the comparable period which was the result of higher operating expenses.

Net income was $47.9 million for the three months ended June 30, 2008 compared to $53.8 million for the three months ended June 30, 2007, a decrease of 10.9%.

Six months Ended June 30, 2008 Compared to Six months Ended June 30, 2007

Net operating revenues increased $3.066 billion to $5.418 billion for the six months ended June 30, 2008, from $2.352 billion for the six months ended June 30, 2007. On a combined basis, the hospitals acquired in the Triad acquisition and growth from those hospitals owned throughout both periods contributed $2.945 billion of that increase and $120.8 million was contributed by other hospitals acquired in 2007. On a same-store basis, including the former Triad hospitals during the comparable periods, this represents an increase in same-store net revenue of 5.3%. The increase from hospitals that we owned throughout both periods was attributable to volume increases, primarily from flu and respiratory cases, rate increases, payor mix and the acuity level of services provided. Our revenue and volume increases were benefited by one additional business day because the current year is a leap year.

On a consolidated basis, inpatient admissions increased by 106.3% and adjusted admissions increased by 97.6%. With respect to the increase in consolidated admissions, approximately 51.6% of the admissions were contributed from newly acquired hospitals, including those hospitals acquired from Triad, and 48.4% of the admissions were contributed by hospitals we owned throughout both periods. On a same-store basis, which includes the hospitals acquired from Triad, as if we owned them during both periods, admissions increased by 3.1% during the six months ended June 30, 2008.

Operating expenses, excluding depreciation and amortization, as a percentage of net operating revenues, increased to 86.5% for the six months ended June 30, 2008 compared to 85.6% for the six months ended June 30, 2007. Salaries and benefits, as a percentage of net operating revenues, increased 0.2% to 40.0% for the six months ended June 30, 2008, compared to 39.8% for the six months ended June 30, 2007. This increase is primarily the result of an increase in the number of employed physicians as well as certain IT employees who were previously treated as leased employees with related expense previously being included in other operating expense. These increases have offset improvements realized at our other hospitals owned throughout both periods. Provision for bad debts, as a percentage of net operating revenues, decreased 0.6% to 10.9% for the six months ended June 30, 2008 compared to 11.5% for the six months ended June 30, 2007. This decrease is primarily the result of the former Triad hospitals having a self-pay discount program and

historically lower provision for bad debts, as well as our phasing in of a discounting program at those hospitals where one previously did not exist. Supplies, as a percentage of net operating revenues, increased 2.4% to 14.1% for the six months ended June 30, 2008, as compared to 11.7% for the six months ended June 30, 2007. This increase is primarily the result of the acquisition of the former Triad hospitals whose higher acuity of services resulted in higher supply costs than our other hospitals taken collectively, offsetting improvements from greater utilization of and improved pricing under our purchasing program. Rent and other operating expenses, as a percentage of net operating revenues, decreased from 22.6% for the six months ended June 30, 2007 to 21.5% for the six months ended June 30, 2008. As part of our acquisition of Triad, we acquired minority investments in certain joint ventures. These investments provided earnings of 0.4% of net operating revenues. Prior to the Triad acquisition, we did not have any material investments in unconsolidated subsidiaries.

Depreciation and amortization increased from 4.3% of net operating revenues for the six months ended June 30, 2007 to 4.6% of net operating revenues for the six months ended June 30, 2008. The increase in depreciation and amortization as a percentage of net operating revenue is primarily due to the acquisition of the former Triad hospitals which, as a result of a higher level of capital spending, had a higher fair market valuation in relation to their respective revenue than that of our other hospitals in the comparable period.

Interest expense, net, increased by $262.4 million from $57.6 million for the six months ended June 30, 2007 to $320.1 million for the six months ended June 30, 2008. Since the current year is a leap year, one additional day in the six months resulted in $0.3 million of the increase in interest expense. An increase in interest rates during the six months ended June 30, 2008, as compared to the six months ended June 30, 2007, accounted for $11.3 million of this increase, while an increase in our average outstanding debt during the six months ended June 30, 2008, as compared to the six months ended June 30, 2007, accounted for the remaining $250.8 million.

Income from continuing operations margin decreased from 4.7% for the six months ended June 30, 2007 to 1.9% for the six months ended June 30, 2008. Net income margin decreased from 4.6% for the six months ended June 30, 2007 to 2.0% for the six months ended June 30, 2008. The decrease in income from continuing operations margin and net income margin are reflective of the net increases in operating expenses, depreciation expense and interest expense, as discussed above.

The net results of the above mentioned changes resulted in income from continuing operations before income taxes decreasing $15.6 million from $180.2 million for the six months ended June 30, 2007 to $164.6 million for the six months ended June 30, 2008.

Provision for income taxes decreased from $69.4 million for the six months ended June 30, 2007 to $63.4 million for the six months ended June 30, 2008, due primarily to a reduction in taxable income in the comparable period which was the result of higher operating expenses.

Net income was $108.0 million for the six months ended June 30, 2008 compared to $108.1 million for the six months ended June 30, 2007.

Liquidity and Capital Resources

Net cash provided by operating activities increased $200.8 million from $216.0 million for the six months ended June 30, 2007 to $416.8 million for the six months ended June 30, 2008. The increase in cash flow, in comparison to the prior year period, is from a net cash inflow from accounts payable, accrued liabilities and income taxes of $33.5 million and supplies, prepaid expenses and other assets of $27.0 million. Additionally, there was an increase in cash flow in comparison to the prior year period resulting from an increase in non-cash depreciation expense of $142.8 million and an increase of other non-cash expenses of $34.2 million. These changes in cash were offset by a decrease in cash from the net activity of all other assets and liabilities of $9.3 million and a net cash outflow from accounts receivable of $27.4 million, reflecting the growth in net operating revenues and volume, as compared to the same prior year period. As much of this growth occurred in the latter part of the quarter ended June 30, 2008, the collections of the related cash has not yet occurred as of June 30, 2008. The cash used in investing activities was $47.8 million for the six months ended June 30,

2008 compared to $309.3 million for the six months ended June 30, 2007. This decrease in cash used in investing activities was due to the sale of 11 hospitals, as well as not completing any hospital acquisitions during the six months ended June 30, 2008, offset by an increase in capital expenditures compared to the six months ended June 30, 2007. Increase in other assets used in investing activities includes $40.1 million of proceeds received from the sale of hospitals and land that has been deposited in escrow accounts to be used for the acquisition of like-kind property.

Capital Expenditures

Cash expenditures related to purchases of facilities were $6.6 million for the six months ended June 30, 2008, compared to $188.0 million for the six months ended June 30, 2007. These expenditures during the six months ended June 30, 2008 were for the acquisition of ten physician practices and a clinic. The expenditures during the six months ended June 30, 2007, included $45.5 million related to the acquisition of Triad and $137.1 million for the acquisition of two hospitals, the contingent settlements of working capital items from acquisitions in the prior year and the acquisition of five physician practices and $5.4 million for the purchase of information systems and other equipment to integrate recently acquired hospitals.

Excluding the cost to construct replacement hospitals, our capital expenditures for the six months ended June 30, 2008, totaled $172.2 million, compared to $71.0 million for the six months ended June 30, 2007. Costs to construct replacement hospitals totaled $103.4 million during the six months ended June 30, 2008 compared to $37.8 million during the six months ended June 30, 2007.

Pursuant to hospital purchase agreements in effect as of June 30, 2008, where required certificate of need approval has been obtained, we are required to build replacement facilities in Petersburg, Virginia, by August 2008, Valparaiso, Indiana, by April 2011 and Birmingham, Alabama within three years of receiving a certificate of need. Two previously required replacement hospitals recently opened, one in Clarksville, Tennessee (June 2008) and one in Shelbyville, Tennessee (July 2008). Also, as required by an amendment to a lease agreement entered into in 2005, we agreed to build a replacement hospital at our Barstow, California location. Estimated construction costs, including equipment, are approximately $864.2 million for these six replacement hospitals of which approximately $368.5 million has been incurred to date, including costs incurred by Triad prior to our acquisition. The certificate of need for the hospital in Birmingham, Alabama was received in June, 2008, however, the decision to issue the certificate of need is being appealed.

Capital Resources

Net working capital was $1.190 billion at June 30, 2008, compared to $1.105 billion at December 31, 2007. The $85 million increase was attributable primarily to an increase in cash and accounts receivable and a decrease in accounts payable, which reflects the timing of our cash collections and payments.

In connection with the consummation of the Triad acquisition in July 2007, we obtained $7.215 billion of senior secured financing under a New Credit Facility with a syndicate of financial institutions led by Credit Suisse, as administrative agent and collateral agent. The New Credit Facility consists of a $6.065 billion funded term loan facility with a maturity of seven years, a $300 million delayed draw term loan facility, (reduced from $400 million) with a maturity of seven years and a $750 million revolving credit facility with a maturity of six years. The revolving credit facility also includes a subfacility for letters of credit and a swingline subfacility. The New Credit Facility requires us to make quarterly amortization payments of each term loan facility equal to 0.25% of the initial outstanding amount of the term loans, if any, with the outstanding principal balance of each term loan facility payable on July 25, 2014.

The term loan facility must be prepaid in an amount equal to (1) 100% of the net cash proceeds of certain asset sales and dispositions by us and our subsidiaries, subject to certain exceptions and reinvestment rights, (2) 100% of the net cash proceeds of issuances of certain debt obligations or receivables based financing by us and our subsidiaries, subject to certain exceptions, and (3) 50%, subject to reduction to a lower percentage based on our leverage ratio (as defined in the New Credit Facility generally as the ratio of total debt on the date of determination to our EBITDA, as defined, for the four quarters most recently ended prior to such date), of excess cash flow (as defined) for any year, commencing in 2008, subject to certain

exceptions. Voluntary prepayments and commitment reductions are permitted in whole or in part, without premium or penalty, subject to minimum prepayment or reduction requirements.

The obligor under the New Credit Facility is CHS/Community Health Systems, Inc., or CHS, a wholly-owned subsidiary of Community Health Systems, Inc. All of our obligations under the New Credit Facility are unconditionally guaranteed by Community Health Systems, Inc. and certain existing and subsequently acquired or organized domestic subsidiaries. All obligations under the New Credit Facility and the related guarantees are secured by a perfected first priority lien or security interest in substantially all of the assets of Community Health Systems, Inc., CHS and each subsidiary guarantor, including equity interests held by us or any subsidiary guarantor, but excluding, among others, the equity interests of non-significant subsidiaries, syndication subsidiaries, securitization subsidiaries and joint venture subsidiaries.

The loans under the New Credit Facility will bear interest on the outstanding unpaid principal amount at a rate equal to an applicable percentage plus, at our option, either (a) an Alternate Base Rate (as defined) determined by reference to the greater of (1) the Prime Rate (as defined) announced by Credit Suisse or (2) the Federal Funds Effective Rate (as defined) plus one-half of 1.0%, or (b) a reserve adjusted London interbank offered rate for dollars (Eurodollar rate) (as defined). The applicable percentage for term loans is 1.25% for Alternate Base Rate loans and 2.25% for Eurodollar rate loans. The applicable percentage for revolving loans will initially be 1.25% for Alternate Base Rate revolving loans and 2.25% for Eurodollar revolving loans, in each case subject to reduction based on our leverage ratio. Loans under the swingline subfacility bear interest at the rate applicable to Alternate Base Rate loans under the revolving credit facility.

We have agreed to pay letter of credit fees equal to the applicable percentage then in effect with respect to Eurodollar rate loans under the revolving credit facility times the maximum aggregate amount available to be drawn under all letters of credit outstanding under the subfacility for letters of credit. The issuer of any letter of credit issued under the subfacility for letters of credit will also receive a customary fronting fee and other customary processing charges. We are initially obligated to pay commitment fees of 0.50% per annum (subject to reduction based upon on our leverage ratio), on the unused portion of the revolving credit facility. For purposes of this calculation, swingline loans are not treated as usage of the revolving credit facility. We are also obligated to pay commitment fees of 0.50% per annum for the first six months after the close of the New Credit Facility, 0.75% per annum for the next three months thereafter and 1.0% per annum thereafter, in each case on the unused amount of the delayed draw term loan facility. We also paid arrangement fees on the closing of the New Credit Facility and will pay an annual administrative agent fee.

The New Credit Facility contains customary representations and warranties, subject to limitations and exceptions, and customary covenants restricting our and our subsidiaries’ ability to, among other things and subject to various exceptions, (1) declare dividends, make distributions or redeem or repurchase capital stock, (2) prepay, redeem or repurchase other debt, (3) incur liens or grant negative pledges, (4) make loans and investments and enter into acquisitions and joint ventures, (5) incur additional indebtedness or provide certain guarantees, (6) make capital expenditures, (7) engage in mergers, acquisitions and asset sales, (8) conduct transactions with affiliates, (9) alter the nature of our businesses, (10) grant certain guarantees with respect to physician practices, (11) engage in sale and leaseback transactions or (12) change our fiscal year. We and our subsidiaries are also required to comply with specified financial covenants (consisting of a leverage ratio and an interest coverage ratio) and various affirmative covenants.

Events of default under the New Credit Facility include, but are not limited to, (1) our failure to pay principal, interest, fees or other amounts under the credit agreement when due (taking into account any applicable grace period), (2) any representation or warranty proving to have been materially incorrect when made, (3) covenant defaults subject, with respect to certain covenants, to a grace period, (4) bankruptcy events, (5) a cross default to certain other debt, (6) certain undischarged judgments (not paid within an applicable grace period), (7) a change of control, (8) certain ERISA-related defaults and (9) the invalidity or impairment of specified security interests, guarantees or subordination provisions in favor of the administrative agent or lenders under the New Credit Facility.

As of June 30, 2008, there was approximately $1.050 billion of available borrowing capacity under our New Credit Facility, of which $78.8 million was set aside for outstanding letters of credit. We believe that

these funds, along with internally generated cash and continued access to the bank credit and capital markets, will be sufficient to finance future acquisitions, capital expenditures and working capital requirements through the next 12 months and into the foreseeable future.

During the six months ended June 30, 2008, we repurchased on the open market and cancelled $62.7 million of principal amount of the Notes. This resulted in a loss from early extinguishment of debt of $1.3 million with an after-tax impact of $0.9 million.

As of June 30, 2008, we are currently a party to the following interest rate swap agreements to limit the effect of changes in interest rates on a portion of our long-term borrowings. On each of these swaps, we received a variable rate of interest based on the three-month London Inter-Bank Offer Rate (“LIBOR”), in exchange for the payment by us of a fixed rate of interest. We currently pay, on a quarterly basis, a margin above LIBOR of 225 basis points for revolving credit and term loans under the New Credit Facility.


		Notional
		Amount		Fixed Interest
Swap #		(In 000’s)		Rate			Termination Date

	1		100,000		3.5860	%		August 29, 2008
	2		100,000		3.9350	%		June 6, 2009
	3		100,000		4.3375	%		November 30, 2009
	4		100,000		4.9360	%		October 4, 2010
	5		100,000		4.7090	%		January 24, 2011
	6		300,000		5.1140	%		August 8, 2011
	7		100,000		4.7185	%		August 19, 2011
	8		100,000		4.7040	%		August 19, 2011
	9		100,000		4.6250	%		August 19, 2011
	10		200,000		4.9300	%		August 30, 2011
	11		200,000		4.4815	%		October 26, 2011
	12		200,000		4.0840	%		December 3, 2011
	13		100,000		3.8470	%		January 4, 2012
	14		100,000		3.8510	%		January 4, 2012
	15		100,000		3.8560	%		January 4, 2012
	16		200,000		3.7260	%		January 8, 2012
	17		200,000		3.5065	%		January 16, 2012
	18		250,000		5.0185	%		May 30, 2012
	19		150,000		5.0250	%		May 30, 2012
	20		200,000		4.6845	%		September 11, 2012
	21		125,000		4.3745	%		November 23, 2012
	22		75,000		4.3800	%		November 23, 2012
	23		150,000		5.0200	%		November 30, 2012
	24		100,000		5.0230	%		May 30, 2013
	25		300,000		5.2420	%		August 6, 2013
	26		100,000		5.0380	%		August 30, 2013
	27		100,000		5.0500	%		November 30, 2013	(1)
	28		100,000		5.2310	%		July 25, 2014
	29		100,000		5.2310	%		July 25, 2014
	30		200,000		5.1600	%		July 25, 2014
	31		75,000		5.0405	%		July 25, 2014
	32		125,000		5.0215	%		July 25, 2014


(1)		This swap agreement becomes effective September 2, 2008, after the termination of agreement #1 listed above.

The New Credit Facility and/or the Notes contain various covenants that limit our ability to take certain actions including, among other things, our ability to:


	•	incur, assume or guarantee additional indebtedness;

	•	issue redeemable stock and preferred stock;

	•	repurchase capital stock;

	•	make restricted payments, including paying dividends and making investments;

	•	redeem debt that is junior in right of payment to the notes;

	•	create liens without securing the notes;

	•	sell or otherwise dispose of assets, including capital stock of subsidiaries;

	•	enter into agreements that restrict dividends from subsidiaries;

	•	merge, consolidate, sell or otherwise dispose of substantial portions of our assets;

	•	enter into transactions with affiliates; and

	•	guarantee certain obligations.

In addition, our New Credit Facility contains restrictive covenants and requires us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet these restricted covenants and financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those tests. A breach of any of these covenants could result in a default under our New Credit Facility and/or the Notes. Upon the occurrence of an event of default under our New Credit Facility or the Notes, all amounts outstanding under our New Credit Facility and the Notes may become due and payable and all commitments under the New Credit Facility to extend further credit may be terminated.

We believe that internally generated cash flows, availability for additional borrowings under our New Credit Facility of $1.050 billion (consisting of a $750 million revolving credit facility and a $300 million delayed draw term loan facility) and our ability to add up to $300 million of borrowing capacity from receivable transactions (including securitizations) and continued access to the bank credit and capital markets will be sufficient to finance acquisitions, capital expenditures and working capital requirements through the next 12 months. We believe these same sources of cash flows, borrowings under our credit agreement as well as access to bank credit and capital markets will be available to us beyond the next 12 months and into the foreseeable future.

Off-balance sheet arrangements

Excluding the hospitals whose leases terminated in conjunction with our sale of interests in the partnerships holding the leases and whose operating results are included in discontinued operations, our consolidated operating results for the six months ended June 30, 2008 and 2007, included $139.0 million and $136.4 million, respectively, of net operating revenue and $7.4 million and $9.9 million, respectively, of income from operations generated from six hospitals operated by us under operating lease arrangements. In accordance with accounting principles generally accepted in the United States of America, or GAAP, the respective assets and the future lease obligations under these arrangements are not recorded on our condensed consolidated balance sheet. Lease payments under these arrangements are included in rent expense when paid and totaled approximately $8.2 million for the six months ended June 30, 2008, compared to $7.4 million for the six months ended June 30, 2007. The current terms of these operating leases expire between June 2010 and December 2019, not including lease extension options. If we allow these leases to expire, we would no longer generate revenue nor incur expenses from these hospitals.

In the past, we have utilized operating leases as a financing tool for obtaining the operations of specified hospitals without acquiring, through ownership, the related assets of the hospital and without a significant outlay of cash at the front end of the lease. We utilize the same management and operating strategies to

improve operations at those hospitals held under operating leases as we do at those hospitals that we own. We have not entered into any operating leases for hospital operations since December 2000.

Joint Ventures

We have sold minority interests in certain of our subsidiaries or acquired subsidiaries with existing minority interest ownership positions. Triad implemented this strategy to a greater extent than we did. In conjunction with the acquisition of Triad, we acquired 19 hospitals containing minority ownership interests ranging from less than 1% to 35%. As of June 30, 2008, 20 of our hospitals were owned by physician joint ventures, of which two also had non-profit entities as partners. In addition, five other hospitals had non-profit entities as partners. Effective June 30, 2008, we acquired the 35% minority interest in Affinity Health Systems, LLC which indirectly owns and operates Trinity Medical Center (560 licensed beds) in Birmingham, Alabama, from Baptist, giving us 100% ownership of that facility. The purchase price for this minority interest was $51.5 million in cash and the cancellation of a promissory note issued by Baptist and held by Affinity Health Systems, LLC in the original principal amount of $32.8 million. Minority interests in equity of consolidated subsidiaries was $320.6 million and $366.1 million as of June 30, 2008 and December 31, 2007, respectively, and the amount of minority interest in earnings was $8.3 million and $0.6 million for the three months ended June 30, 2008 and 2007, respectively, and $18.0 million and $0.8 million for the six months ended June 30, 2008 and 2007, respectively.

Reimbursement, Legislative and Regulatory Changes

Legislative and regulatory action has resulted in continuing change in the Medicare and Medicaid reimbursement programs which will continue to limit payment increases under these programs and in some cases implement payment decreases. Within the statutory framework of the Medicare and Medicaid programs, there are substantial areas subject to administrative rulings, interpretations, and discretion which may further affect payments made under those programs, and the federal and state governments might, in the future, reduce the funds available under those programs or require more stringent utilization and quality reviews of hospital facilities. Additionally, there may be a continued rise in managed care programs and future restructuring of the financing and delivery of healthcare in the United States. These events could cause our future financial results to decline.

Inflation

The healthcare industry is labor intensive. Wages and other expenses increase during periods of inflation and when labor shortages occur in the marketplace. In addition, our suppliers pass along rising costs to us in the form of higher prices. We have implemented cost control measures, including our case and resource management program, to curb increases in operating costs and expenses. We have generally offset increases in operating costs by increasing reimbursement for services, expanding services and reducing costs in other areas. However, we cannot predict our ability to cover or offset future cost increases.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below.

Third Party Reimbursement

Net operating revenues include amounts estimated by management to be reimbursable by Medicare and Medicaid under prospective payment systems and provisions of cost-reimbursement and other payment methods. In addition, we are reimbursed by non-governmental payors using a variety of payment methodologies. Amounts we receive for treatment of patients covered by these programs are generally less than the standard billing rates. Excluding the former Triad hospitals, contractual allowances are automatically calculated and recorded through our internally developed “automated contractual allowance system”. Within the automated system, actual Medicare DRG data, coupled with all payors’ historical paid claims data, is utilized to calculate the contractual allowances. This data is automatically updated on a monthly basis. For the former Triad hospitals, contractual allowances are determined through a manual process wherein contractual allowance adjustments, regardless of payor or method of calculation, are reviewed and compared to actual payment experience. The methodology used is similar to the methodology used within our “automated contractual allowance system”. The former Triad hospitals are being phased into the “automated contractual allowance system”. All hospital contractual allowance calculations are subjected to monthly review by management to ensure reasonableness and accuracy. We account for the differences between the estimated program reimbursement rates and the standard billing rates as contractual allowance adjustments, which we deduct from gross revenues to arrive at net operating revenues. Determining payor classification, proper DRG and other coding of services performed and the relevance of historical paid claims data are the key assumptions in determining the estimate of expected reimbursement. Assuming the aforementioned assumptions changed our estimate of expected reimbursement by 1% of gross accounts receivable, a change in net accounts receivable of approximately $38.8 million and an impact on net income of approximately $23.9 million would have occurred as of and for the six months ended June 30, 2008. However, due to the complexities involved in these estimates, actual payments we receive could be different from the amounts we estimate and record. Final settlements under some of these programs are subject to adjustment based on administrative review and audit by third parties. We account for adjustments to previous program reimbursement estimates as contractual allowance adjustments and report them in the periods that such adjustments become known. Contractual allowance adjustments related to final settlements increased net operating revenue and net income by an insignificant amount in each of the three and six months ended June 30, 2008 and June 30, 2007.

Allowance for Doubtful Accounts

Substantially all of our accounts receivable are related to providing healthcare services to our hospitals’ patients. Collection of these accounts receivable is our primary source of cash and is critical to our operating performance. Our primary collection risks relate to uninsured patients and outstanding patient balances for which the primary insurance payor has paid some but not all of the outstanding balance, with the remaining outstanding balance (generally deductibles and co-payments) owed by the patient. At the point of service, for patients required to make a co-payment, we generally collect less than 15% of the related revenue. For all procedures scheduled in advance, our policy is to verify insurance coverage prior to the date of the procedure. Insurance coverage is not verified in advance of procedures for walk-in and emergency room patients.

We estimate the allowance for doubtful accounts by reserving a percentage of all self-pay accounts receivable without regard to aging category, based on collection history, adjusted for expected recoveries and, if present, anticipated changes in trends. For all other payor categories we reserve 100% of all accounts aging over 365 days from the date of discharge. The percentage used to reserve for all self-pay accounts is based on our collection history. We believe that we collect substantially all of our third-party insured receivables which include receivables from governmental agencies. During the quarter ended December 31, 2007, in conjunction with our ongoing process of monitoring the net realizable value of our accounts receivable, as well as integrating the methodologies, data and assumptions used by the former Triad management, we performed various analyses including updating a review of historical cash collections. As a result of these analyses, we noted deterioration in certain key cash collection indicators. The acquisition of Triad also provided additional data and a comparative and larger population on which to base our estimates. As a result of the lower estimated collectability indicated by the updated analyses, we revised our estimate of contractual allowances for estimated amounts of self-pay accounts receivable that will ultimately qualify as charity care, or that will

ultimately qualify for Medicaid, indigent care or other specific governmental reimbursement resulting in an increase to our contractual reserves of $96.3 million. Previous estimates of uncollectible amounts for such receivables were included in our bad debt reserves for each period. We also recorded an increase to our allowance for doubtful accounts of approximately $70.1 million as of December 31, 2007. The resulting impact, net of taxes, for the year ended December 31, 2007 was a decrease to income from continuing operations of $105.4 million. We believe this lower collectability was primarily the result of an increase in the number of patients qualifying for charity care, reduced enrollment in certain state Medicaid programs and an increase in the number of indigent non-resident aliens. Collections are impacted by the economic ability of patients to pay and the effectiveness of our collection efforts. Significant changes in payor mix, business office operations, economic conditions or trends in federal and state governmental healthcare coverage could affect our collection of accounts receivable. Assuming the aforementioned factors resulted in a hypothetical 1% change in the allowance for doubtful accounts as a percentage of self-pay receivables, a change in net accounts receivable of approximately $17.1 million and net income of approximately $10.5 million would have occurred as of and for the six months ended June 30, 2008. We also continually review our overall reserve adequacy by monitoring historical cash collections as a percentage of trailing net revenue less provision for bad debts, as well as by analyzing current period net revenue and admissions by payor classification, aged accounts receivable by payor, days revenue outstanding, and the impact of recent acquisitions and dispositions.

Our policy is to write-off gross accounts receivable if the balance is under $10.00 or when such amounts are placed with outside collection agencies. We believe this policy accurately reflects our ongoing collection efforts and is consistent with industry practices. We had approximately $1.4 billion and $1.5 billion at June 30, 2008 and December 31, 2007, respectively, being pursued by various outside collection agencies. We expect to collect less than 3%, net of estimated collection fees, of the amounts being pursued by outside collection agencies. As these amounts have been written-off, they are not included in our gross accounts receivable or our allowance for doubtful accounts. Collections on amounts previously written-off are recognized in income when received. However, we take into consideration estimated collections of these future amounts written-off in evaluating the reasonableness of our allowance for doubtful accounts.

Patient accounts receivable from our hospital segment represent approximately 96% of our total consolidated accounts receivable. All of the following information represents that derived from our hospital segment.

Days revenue outstanding was 54 days at June 30, 2008 and December 31, 2007. Our target range for days revenue outstanding is 52 — 58 days.

Total gross accounts receivable (prior to allowance for contractual adjustments and doubtful accounts) was approximately $5.335 billion as of June 30, 2008 and approximately $4.544 billion as of December 31, 2007. The approximate percentage of total gross accounts receivable (prior to allowance for contractual adjustments and doubtful accounts) summarized by aging categories is as follows:


	As of
	June 30,			December 31,
	2008			2007

0 to 60 days		64.2	%		62.7	%
61 to 150 days		17.4	%		18.4	%
151 to 360 days		14.4	%		14.6	%
Over 360 days		4.0	%		4.3	%

Total		100.0	%		100.0	%

The approximate percentage of total gross accounts receivable (prior to allowances for contractual adjustments and doubtful accounts) summarized by payor category is as follows:


	As of
	June 30,			December 31,
	2008			2007

Insured receivables		69.1	%		69.7	%
Self-pay receivables		30.9	%		30.3	%

Total		100.0	%		100.0	%

On a combined basis, as a percentage of gross self-pay receivables, the combined total allowance for doubtful accounts and related allowances for other self-pay discounts and contractuals, was approximately 80% at June 30, 2008 and 82% at December 31, 2007.

Goodwill and Other Intangibles

Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill arising from business combinations is accounted for under the provisions of SFAS No. 141 “Business Combinations” and SFAS No. 142 “Goodwill and Other Intangible Assets” and is not amortized. SFAS No. 142 requires goodwill to be evaluated for impairment at the same time every year and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. We selected September 30th as our annual testing date.

The SFAS No. 142 goodwill impairment model requires a comparison of the book value of net assets to the fair value of the related operations that have goodwill assigned to them. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. We estimated the fair values of the related operations using both a debt free discounted cash flow model as well as an adjusted EBITDA multiple model. These models are both based on our best estimate of future revenues and operating costs and are reconciled to our consolidated market capitalization. The cash flow forecasts are adjusted by an appropriate discount rate based on our weighted-average cost of capital. We performed our initial evaluation, as required by SFAS No. 142, during the first quarter of 2002 and the annual evaluation as of each succeeding September 30. No impairment has been indicated by these evaluations. Estimates used to conduct the impairment review, including revenue and profitability projections or fair values, could cause our analysis to indicate that our goodwill is impaired in subsequent periods and result in a write-off of a portion or all of our goodwill.

Impairment or Disposal of Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, whenever events or changes in circumstances indicate that the carrying values of certain long-lived assets may be impaired, we project the undiscounted cash flows expected to be generated by these assets. If the projections indicate that the reported amounts are not expected to be recovered, such amounts are reduced to their estimated fair value based on a quoted market price, if available, or an estimate based on valuation techniques available in the circumstances.

Professional Liability Insurance Claims

We accrue for estimated losses resulting from professional liability claims. The accrual, which includes an estimate for incurred but not reported claims, is based on historical loss patterns and actuarially determined projections and is discounted to its net present value using a weighted-average risk-free discount rate of 4.1% and 4.6% in 2007 and 2006, respectively. To the extent that subsequent claims information varies from management’s estimates, the liability is adjusted currently. Our insurance is underwritten on a “claims-made” basis. Prior to June 1, 2002, substantially all of our professional and general liability risks were subject to a $0.5 million per occurrence deductible; for claims reported from June 1, 2002 through June 1, 2003, these deductibles were $2.0 million per occurrence. Additional coverage above these deductibles was purchased

through captive insurance companies in which we had a 7.5% minority ownership interest in each and to which the premiums paid by us represented less than 8% of the total premium revenues of each captive insurance company. With the formation of our own wholly-owned captive insurance company in June 2003, we terminated our minority interest relationships in those entities. Substantially all claims reported after June 1, 2003 and before June 1, 2005 are self-insured up to $4 million per claim. Substantially all claims reported on or after June 1, 2005 are self-insured up to $5 million per claim. Management on occasion has selectively increased the insured risk at certain hospitals based upon insurance pricing and other factors and may continue that practice in the future. Excess insurance for all hospitals was purchased through commercial insurance companies and generally covers us for liabilities in excess of the self-insured amount and up to $100 million per occurrence for claims reported on or after June 1, 2003.

Effective January 1, 2008, the former Triad Hospitals are insured on a claims-made basis through a policy purchased through our wholly-owned captive insurance company and commercial insurance companies as described above for substantially all claims occurring on or after January 1, 2007 and reported on or after January 1, 2008. Substantially all losses for the former Triad hospitals in periods prior to May 1999 were insured through a wholly-owned insurance subsidiary of HCA, Inc., or HCA, Triad’s owner prior to that time, and excess loss policies maintained by HCA. HCA has agreed to indemnify the former Triad hospitals in respect of claims covered by such insurance policies arising prior to May 1999. After May 1999 through December 31, 2006, the former Triad hospitals obtained insurance coverage on a claims incurred basis from HCA’s wholly-owned insurance subsidiary with excess coverage obtained from other carriers that is subject to certain deductibles. Effective for claims incurred after December 31, 2006, Triad began insuring its claims from $1 million to $5 million through its wholly-owned captive insurance company, replacing the coverage provided by HCA. Substantially all claims reported during 2007 were self-insured up to $10 million per claim.

There have been no significant changes in our estimate of the reserve for professional liability claims during the six months ended June 30, 2008.

Income Taxes

We must make estimates in recording provision for income taxes, including determination of deferred tax assets and deferred tax liabilities and any valuation allowances that might be required against the deferred tax assets. We believe that future income will enable us to realize these deferred tax assets, subject to the valuation allowance we have established.

On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). The total amount of unrecognized benefit that would affect the effective tax rate, if recognized, is approximately $6.2 million as of June 30, 2008. It is our policy to recognize interest and penalties accrued related to unrecognized benefits in our condensed consolidated statements of income as income tax expense. During the three months ended June 30, 2008, we recorded approximately $0.2 million in interest and penalties related to prior state income tax returns through our income tax provision from continuing operations and which are included in our FIN 48 liability at June 30, 2008. A total of approximately $2.2 million of interest and penalties is included in the amount of FIN 48 liability at June 30, 2008.

Our unrecognized tax benefits consist primarily of state exposure items. We believe it is reasonably possible that approximately $1.2 million of our current unrecognized tax benefit may decrease within the next twelve months as a result of a lapse of the statute of limitations and settlements with taxing authorities.

We or one of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal or state income tax examinations for years prior to 2003.

The IRS has concluded an examination of the federal income tax returns of Triad for the short taxable years ended April 27, 2001, June 30, 2001 and December 31, 2001, and the taxable years ended December 31, 2002 and 2003. We have since received a closing letter with respect to the examination for those tax years. The settlement was not material to our consolidated results of operations or consolidated financial position.

Recent Accounting Pronouncements

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 No. 159”). SFAS No. 159 expands the use of fair value accounting but does not affect existing standards that require assets or liabilities to be carried at fair value. SFAS No. 159 permits an entity, on a contract-by-contract basis, to make an irrevocable election to account for certain types of financial instruments and warranty and insurance contracts at fair value, rather than historical cost, with changes in the fair value, whether realized or unrealized, recognized in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We adopted SFAS No. 159 as of January 1, 2008 and did not elect to re-measure any assets or liabilities. The adoption of this statement has not had a material effect on our consolidated results of operations or consolidated financial position.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141 and addresses the recognition and accounting for identifiable assets acquired, liabilities assumed, and noncontrolling interests in business combinations. This standard will require more assets and liabilities be recorded at fair value and will require expense recognition (rather than capitalization) of certain pre-acquisition costs. This standard will also require any adjustments to acquired deferred tax assets and liabilities occurring after the related allocation period to be made through earnings. Furthermore, this standard requires this treatment of acquired deferred tax assets and liabilities also be applied to acquisitions occurring prior to the effective date of this standard. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008 and is required to be adopted prospectively with no early adoption permitted. We will begin applying SFAS No. 141(R) in the first quarter of 2009. We are currently assessing the potential impact that SFAS No. 141(R) will have on our consolidated results of operations and consolidated financial position.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 addresses the accounting and reporting framework for noncontrolling ownership interests in consolidated subsidiaries of the parent. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent company and the interests of the noncontrolling owners and that require minority ownership interests to be presented separately within equity in the consolidated financial statements. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, and will be adopted by us in the first quarter of 2009. We are currently assessing the potential impact that SFAS No. 160 will have on our consolidated results of operations and consolidated financial position.

FORWARD-LOOKING STATEMENTS

Some of the matters discussed in this report include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “thinks,” and similar expressions are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. These factors include, but are not limited to, the following:


	•	general economic and business conditions, both nationally and in the regions in which we operate;

	•	our ability to successfully integrate any acquisitions or to recognize expected synergies from such acquisitions, including facilities acquired from Triad;


	•	risks associated with our substantial indebtedness, leverage and debt service obligations;

	•	demographic changes;

	•	existing governmental regulations and changes in, or the failure to comply with, governmental regulations;

	•	legislative proposals for healthcare reform;

	•	potential adverse impact of known and unknown government investigations;

	•	our ability, where appropriate, to enter into managed care provider arrangements and the terms of these arrangements;

	•	changes in inpatient or outpatient Medicare and Medicaid payment levels;

	•	increases in the amount and risk of collectability of patient accounts receivable;

	•	increases in wages as a result of inflation or competition for highly technical positions and rising supply costs due to market pressure from pharmaceutical companies and new product releases;

	•	liabilities and other claims asserted against us, including self-insured malpractice claims;

	•	competition;

	•	our ability to attract and retain, without significant employment costs, qualified personnel, key management, physicians, nurses and other healthcare workers;

	•	trends toward treatment of patients in less acute or specialty healthcare settings including ambulatory surgery centers or specialty hospitals;

	•	changes in medical or other technology;

	•	changes in GAAP;

	•	the availability and terms of capital to fund additional acquisitions or replacement facilities;

	•	our ability to successfully acquire additional hospitals and complete the sale of hospitals held for sale;

	•	our ability to obtain adequate levels of general and professional liability insurance; and

	•	timeliness of reimbursement payments received under government programs.

Although we believe that these statements are based upon reasonable assumptions, we can give no assurance that our goals will be achieved. Given these uncertainties, prospective investors are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of this filing. We assume no obligation to update or revise them or provide reasons why actual results may differ.


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

We are exposed to interest rate changes, primarily as a result of our senior secured credit facility which bears interest based on floating rates. In order to manage the volatility relating to the market risk, we entered into interest rate swap agreements described under the heading “Liquidity and Capital Resources” in Item 2. We do not anticipate any material changes in our primary market risk exposures in 2008. We utilize risk management procedures and controls in executing derivative financial instrument transactions. We do not execute transactions or hold derivative financial instruments for trading purposes. Derivative financial instruments related to interest rate sensitivity of debt obligations are used with the goal of mitigating a portion of the exposure when it is cost effective to do so.

A 1% change in interest rates on variable rate debt in excess of that amount covered by interest rate swaps would have resulted in interest expense fluctuating approximately $3.5 million for the three months ended June 30, 2008 and $7.3 million for the six months ended June 30, 2008.


Item 4.	*Controls and Procedures*

Our Chief Executive Officer and Chief Financial Officer, with the participation of other members of management, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a — 15(e) and 15d — 15(e) under the Securities and Exchange Act of 1934, as amended), as of the end of the period covered by this quarterly report. Based on such evaluations, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective (at the reasonable assurance level) to ensure that the information required to be included in this report has been recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and to ensure that the information required to be included in this report was accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

As a result of the completion of the acquisition of Triad on July 25, 2007, our internal controls over financial reporting have changed. Since the Triad acquisition, we have started to analyze the systems of disclosure controls and procedures and internal controls over financial reporting of the former Triad hospitals and other operations acquired in the Triad acquisition and integrate them within our broader framework of controls. The Securities and Exchange Commission’s rules require us to complete this process by the first anniversary of the acquisition. We plan to complete this evaluation and integration within the required time frame and report any changes in internal controls in our first annual report in which our assessment of the former Triad hospitals and other operations is to be included. Although we have not yet identified any material weaknesses in our disclosure controls and procedures or internal control over financial reporting as a result of this acquisition, there can be no assurance that a material weakness will not be identified in the course of this review.

There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2008, that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

PART II OTHER INFORMATION


Item 1.	*Legal Proceedings*

From time to time, we receive various inquiries or subpoenas from state regulators, fiscal intermediaries, the Centers for Medicare and Medicaid Services and the Department of Justice regarding various Medicare and Medicaid issues. In addition, we are subject to other claims and lawsuits arising in the ordinary course of our business. We are not aware of any pending or threatened litigation that is not covered by insurance policies or reserved for in our financial statements or which we believe would have a material adverse impact on us; however, some pending or threatened proceedings against us may involve potentially substantial amounts as well as the possibility of civil, criminal, or administrative fines, penalties, or other sanctions, which could be material. Settlements of suits involving Medicare and Medicaid issues routinely require both monetary payments as well as corporate integrity agreements. Additionally, qui tam or “whistleblower” actions initiated under the civil False Claims Act may be pending but placed under seal by the court to comply with the False Claims Act’s requirements for filing such suits.

Community Health Systems, Inc. Legal Proceedings

In May 1999, we were served with a complaint in U.S. ex rel. Bledsoe v. Community Health Systems, Inc., subsequently moved to the Middle District of Tennessee, Case No. 2-00-0083. This qui tam action sought treble damages and penalties under the False Claims Act against us. The Department of Justice did not intervene in this action. The allegations in the amended complaint were extremely general, but involved Medicare billing at our White County Community Hospital in Sparta, Tennessee. By order entered on September 19, 2001, the U.S. District Court granted our motion for judgment on the pleadings and dismissed the case, with prejudice. The qui tam whistleblower (also referred to as a “relator”) appealed the district court’s ruling to the U.S. Court of Appeals for the Sixth Circuit. On September 10, 2003, the Sixth Circuit

Court of Appeals rendered its decision in this case, affirming in part and reversing in part the district court’s decision to dismiss the case with prejudice. The court affirmed the lower court’s dismissal of certain of plaintiff’s claims on the grounds that his allegations had been previously publicly disclosed. In addition, the appeals court agreed that, as to all other allegations, the relator had failed to include enough information to meet the special pleading requirements for fraud under the False Claims Act and the Federal Rules of Civil Procedure. However, the case was returned to the district court to allow the relator another opportunity to amend his complaint in an attempt to plead his fraud allegations with particularity. In May 2004, the relator in U.S. ex rel. Bledsoe filed an amended complaint alleging fraud involving Medicare billing at White County Community Hospital. We then filed a renewed motion to dismiss the amended complaint. On January 6, 2005, the District Court dismissed with prejudice the bulk of the relator’s allegations. The only remaining allegations involve a small number of 1997-98 charges at White County. After further motion practice between the relator and the United States Government regarding the relator’s right to participate in a previous settlement with the Company, the District Court again dismissed all claims in the case on December 13, 2005. On January 9, 2006, the relator filed a notice of appeal to the U.S. Court of Appeals for the Sixth Circuit and on September 6, 2007, the Court of Appeals issued its 25 page opinion affirming in part, reversing in part (and in doing so, reinstating a number of the allegations claimed by the relator), and remanding the case to the District Court for further proceedings. The relator has filed a motion for rehearing. That motion for rehearing was denied. The relator has amended his complaint to conform to the decision of the Court of Appeals and we have filed an answer. A case management conference is set for August 18, 2008. We will continue to vigorously defend this case.

In August 2004, we were served a complaint in Arleana Lawrence and Robert Hollins v. Lakeview Community Hospital and Community Health Systems, Inc. (now styled Arleana Lawrence and Lisa Nichols vs. Eufaula Community Hospital, Community Health Systems, Inc., South Baldwin Regional Medical Center and Community Health Systems Professional Services Corporation) in the Circuit Court of Barbour County, Alabama (Eufaula Division). This alleged class action was brought by the plaintiffs on behalf of themselves and as the representatives of similarly situated uninsured individuals who were treated at our Lakeview Hospital or any of our other Alabama hospitals. The plaintiffs allege that uninsured patients who do not qualify for Medicaid, Medicare or charity care are charged unreasonably high rates for services and materials and that we use unconscionable methods to collect bills. The plaintiffs seek restitution of overpayment, compensatory and other allowable damages and injunctive relief. In October 2005, the complaint was amended to eliminate one of the named plaintiffs and to add our management company subsidiary as a defendant. In November 2005, the complaint was again amended to add another plaintiff, Lisa Nichols and another defendant, our hospital in Foley, Alabama, South Baldwin Regional Medical Center. After a hearing held on June 13, 2007, on October 29, 2007 the Circuit Court ruled in favor of the plaintiffs’ class action certification request. On summary judgment, the Circuit Court dismissed the case against Community Health Systems, Inc. only. All other parties remain. We disagree with the certification ruling and have pursued our automatic right of appeal to the Alabama Supreme Court. We are vigorously defending this case.

On March 3, 2005, we were served with a complaint in Sheri Rix v. Heartland Regional Medical Center and Health Care Systems, Inc. in the Circuit Court of Williamson County, Illinois. This alleged class action was brought by the plaintiff on behalf of herself and as the representative of similarly situated uninsured individuals who were treated at our Heartland Regional Medical Center. The plaintiff alleges that uninsured patients who do not qualify for Medicaid, Medicare or charity care are charged unreasonably high rates for services and materials and that we use unconscionable methods to collect bills. The plaintiff seeks recovery for breach of contract and the covenant of good faith and fair dealing, violation of the Illinois Consumer Fraud and Deceptive Practices Act, restitution of overpayment, and for unjust enrichment. The plaintiff class seeks compensatory and other damages and equitable relief. The Circuit Court Judge recently granted our motion to dismiss the case, but allowed the plaintiff to re-plead her case. The plaintiff elected to appeal the Circuit Court’s decision in lieu of amending her case. Oral argument was heard on this case on January 9, 2008. On June 16, 2008, the Appellate Court upheld the dismissal of the consumer fraud claim but reversed dismissal of the contract claim. We are preparing a Petition for Leave of Appeal to the Illinois Supreme Court. We are vigorously defending this case.

On April 8, 2005, we were served with a first amended complaint, styled Chronister, et al. v. Granite City Illinois Hospital Company, LLC d/b/a Gateway Regional Medical Center, in the Circuit Court of Madison County, Illinois. The complaint seeks class action status on behalf of the uninsured patients treated at Gateway Regional Medical Center and alleges statutory, common law, and consumer fraud in the manner in which the hospital bills and collects for the services rendered to uninsured patients. The plaintiff seeks compensatory and punitive damages and declaratory and injunctive relief. Our motion to dismiss has been granted in part and denied in part and discovery has commenced. Gateway Regional Medical Center v. Holman is a companion case to the Chronister action, seeking counterclaim recovery on a collections case. Holman has been stayed pending the outcome of the Chronister action. We are vigorously defending these cases.

On February 10, 2006, we received a letter from the Civil Division of the Department of Justice requesting documents in an investigation they are conducting involving the Company. The inquiry relates to the way in which different state Medicaid programs apply to the federal government for matching or supplemental funds that are ultimately used to pay for a small portion of the services provided to Medicaid and indigent patients. These programs are referred to by different names, including “intergovernmental payments,” “upper payment limit programs,” and “Medicaid disproportionate share hospital payments.” The February 10th letter focused on our hospitals in 3 states: Arkansas, New Mexico, and South Carolina. On August 31, 2006, we received a follow up letter from the Department of Justice requesting additional documents relating to the programs in New Mexico and the payments to the Company’s three hospitals in that state. We have provided the Department of Justice with the requested documents. In a letter dated October 4, 2007, the Civil Division notified us that, based on its investigation to date, it preliminarily believes that we and these three New Mexico hospitals have caused the State of New Mexico to submit improper claims for federal funds, in violation of the Civil False Claims Act. The DOJ asserted that these allegedly improper claims and payments began in 2000 and may be ongoing, but provided no information about the amount of any improper claims or the possible damages or penalties it may seek. After a meeting between us and the DOJ held in November 2007, by letter dated January 22, 2008, the Civil Division notified us that they continued to believe that the False Claims Act had been violated and had calculated that the three hospitals received ineligible federal participation payments from August 2000 to June 2006 of approximately $27.5 million. The Civil Division advised us that if they proceeded to trial, they would seek treble damages plus an appropriate penalty for each of the violations of the False Claims Act. Discussions are continuing with the Civil Division in an effort to resolve this matter. On May 28, 2008, we received a letter from the Office of the U.S. Attorney for the state of New Mexico requesting additional information. We are providing the requested information. We continue to believe that we have not violated the Federal False Claims Act in the manner described in the government’s letter of January 22, 2008.

In August 2006, our facility in Petersburg, Virginia (Southside Regional Medical Center) was notified of the pendency of a federal False Claims Act case styled U.S. ex rel. Vuyyuru v. Jadhav et al. filed in the Eastern District of Virginia. In addition to naming the hospital, Community Health Systems Professional Services Corporation, our management subsidiary, has also been named. The suit alleges that Dr. Jadhav, Southside Regional Medical Center, and other healthcare providers performed medically unnecessary procedures and billed federal healthcare programs and also alleges that the defendants defamed Dr. Vuyyuru in the process of terminating his medical staff privileges. Almost all of the allegations pre-date our acquisition of this facility and the seller’s successor-in-interest has agreed to indemnify the Company and its affiliates. We believe that the allegations in this case are without merit and are vigorously defending the case. A motion to dismiss the case has been granted and the relator has appealed the ruling to the U.S. Court of Appeals for the Fourth Circuit.

On August 28, 2007, Texas Health Resources of Arlington, Texas, or THR, notified us of its decision to exercise a call right to acquire our 80% interest in the limited partnership that owns Presbyterian Hospital of Denton, Texas, together with certain land and buildings that we own in Denton (including rights under a lease for such land and buildings). We acquired these interests in connection with the Triad acquisition. This call right became exercisable under the terms of the limited partnership agreement by reasons of our acquisition of Triad. Shortly after we initiated efforts to set the purchase price, which is determined by various formulas set forth in the limited partnership agreement and related documents, THR filed suit in Texas state court seeking

injunctive and declaratory relief to extend the 90-day closing date and to set the purchase price. We removed the case to Federal District Court and proceedings are underway in that court with respect to THR’s renewed motions for relief. Pursuant to the limited partnership agreement, the closing was to occur on or before November 26, 2007. The closing did not occur on November 26, 2007, as THR failed to properly tender adequate closing consideration. The case will proceed and the pre-trial and trial scheduling conference is set for January 5, 2009.

On June 12, 2008, two of our hospitals received letters from the U.S. Attorney’s Office for the Western District of New York requesting documents in an investigation they are conducting into billing practices with respect to kyphoplasty procedures performed during the period January 1, 2002, through June 9, 2008. Kyphoplasty is a surgical spine procedure that returns a compromised vertebrae (either from trauma or osteoporotic disease process) to its previous height, reducing or eliminating severe pain. We have been informed there may be as many as fourteen (14) non-affiliated facilities in Alabama, and possibly other states that have received an identical or substantially similar letter from the same U.S. Attorney’s office. We believe that this investigation is related to a recent qui tam settlement between the same U.S. Attorney’s office and the manufacturer and distributor of the Kyphon product, which is used in performing the kyphoplasty procedure. We intend to cooperate with the investigation by collecting and producing material responsive to the requests. At this early stage, we do not have sufficient information to determine whether its hospitals have engaged in inappropriate billing for kyphoplasty procedures.

Triad Hospitals, Inc. Legal Proceedings

Triad, and its subsidiary, Quorum Health Resources, Inc. are defendants in a qui tam case styled U.S. ex rel. Whitten vs. Quorum Health Resources, Inc. et al., which is pending in the Southern District of Georgia, Brunswick Division. Whitten, a long-term employee of a two hospital system in Brunswick and Camden, Georgia sued both his employer and Quorum Health Resources, Inc. and its predecessors, which had managed the facility from 1989 through September 2000; upon his termination of employment, Whitten signed a release and was paid $124,000. Whitten’s original qui tam complaint was filed under seal in November 2002 and the case was unsealed in 2004. Whitten alleges various charging and billing infractions, including charging for routine equipment supplies and services not separately billable, billing for observation services that were not medically necessary or for which there was no physician order, billing labor and delivery patients for durable medical equipment that was not separately billable, inappropriate preparation of patients’ histories and physicals, billing for cardiac rehabilitation services without physician supervision, performing outpatient dialysis without Medicare certification, and performing mental health services without the proper staff assignments. In October 2005, the district court granted Quorum’s motion for summary judgment on the grounds that his claims were precluded under his severance agreement with the hospital, without reaching two other arguments made by Quorum, which included that a prior settlement agreement between the hospital and the federal government precluded the claims brought by Whitten as well as the doctrine of prior public disclosure. On appeal to the 11th Circuit Court of Appeals, the court reversed the findings of the district court regarding the severance agreement, but remanded the case to the district court for findings on Quorum’s other two defenses. Limited discovery has been conducted and renewed motions by Quorum to dismiss the action and to stay further discovery were filed in September 2007. We await the district court’s ruling on our motion to dismiss. We continue to believe that the relator’s claims are without merit and will continue to vigorously defend this case.

In a case styled U.S. ex rel. Bartlett vs. Quorum Health Resources, Inc., et al., pending in the Western District of Pennsylvania, Johnstown Division, the relator alleges in his second amended complaint, filed in January 2006 (the first amended complaint having been dismissed), that Quorum conspired with an unaffiliated hospital to pay a illegal remuneration in violation of the anti-kickback statute and the Stark laws, thus causing false claims to be filed. A renewed motion to dismiss that was filed in March 2006 asserting that the second amended complaint did not cure the defects contained in the first amended complaint. In September 2006, the hospital and one of the other defendants affiliated with the hospital filed for protection under Chapter 11 of the federal bankruptcy code, which imposed an automatic stay on proceedings in the case. We believe that this case is without merit and should the stay be lifted, will continue to vigorously defend it.

On January 14, 2004, Relator Mark E. Thompson filed a Qui Tam Complaint under seal, styled U.S. ex rel. Mark E. Thompson v. Quorum Health Resources, LLC and Triad Hospitals, Inc., which is pending in the United States District Court, Western District of Kentucky, Bowling Green Division. The Complaint alleges Quorum Health Resources, LLC (“Quorum”) and Triad Hospitals, Inc. (collectively, the “Defendants”) filed or caused to be filed false claims against the United States of America. Relator was the CEO of Monroe County Medical Center (“MCMC”) in Tompkinsville, Kentucky and served as the CEO of MCMC pursuant to a contractual arrangement between MCMC and Quorum. Plaintiff alleges certain activities of Defendants relating to: (1) MCMC’s participation in HealthTrust Purchasing Group, a group purchasing organization (GPO) in which Triad Hospital, Inc. maintained a 20% ownership interest; (2) agreements with strategic service partners (SSPs) acting as vendors of supplies, services and equipment; and (3) encouraging hospitals to employ American Healthcare Facilities Development, LLC (a subsidiary of Quorum) for capital project management services violated the Federal Antikickback Statute. Plaintiff alleges Quorum received certain administrative fees from these arrangements and that Quorum, directly and indirectly, manipulated and/or coerced MCMC to participate in these relationships. The Defendants cooperated with the government’s investigation and on May 5, 2008, the United States of America declined to intervene in the case and the complaint was subsequently unsealed by the Court by order dated May 20, 2008. The Defendants have yet to be served with the complaint. The Defendants will vigorously defend these allegations. In 2006, Plaintiff also filed a wrongful discharge case styled, Mark Thompson v. Quorum Health Resources, LLC and Triad Hospitals, Inc. in the same court, alleging he was wrongfully suspended and subsequently terminated because of his actions regarding his False Claims Act filing. We are vigorously defending these allegations as well.


Item 1A.	*Risk Factors*

There have been no material changes with regard to risk factors previously disclosed in our most recent annual report on Form 10-K.


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

On December 13, 2006, we commenced an open market repurchase program for up to 5,000,000 shares of our common stock not to exceed $200 million in purchases. This purchase program will conclude at the earlier of three years or when the maximum number of shares have been repurchased. During the period from June 1, 2008 to June 30, 2008, the Company repurchased 305,400 shares at a weighted-average price of $33.34 per share under this program.

We have not paid any cash dividends since our inception, and do not anticipate the payment of cash dividends in the foreseeable future. Our New Credit Facility limits our ability to pay dividends and/or repurchase stock to an amount not to exceed $400 million in the aggregate (but not in excess of $200 million unless we receive confirmation from Moody’s and S&P that dividends or repurchases would not result in a downgrade, qualification or withdrawal of the then corporate credit rating). The indenture governing our Notes also limits our ability to pay dividends and/or repurchase stock. As of June 30, 2008, the amount of permitted dividends and/or stock repurchases permitted under the indenture was limited by our New Credit Facility to $400 million.


Item 3.	*Defaults Upon Senior Securities*

None


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

(a) The annual meeting of the stockholders of Community Health Systems, Inc., was held in New York, New York on May 20, 2008, for the purpose of voting on the proposals described below.

(b) Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities and Exchange Act of 1934 and there was no solicitation in opposition to the Governance and Nominating Committee’s nominees for directors. All of the Governance and Nominating Committee’s nominees for directors were elected as set forth in clause (c) below. In addition, the terms of office as a director of Wayne T. Smith, W. Larry Cash, John A. Clerico, Julia B. North, Harvey Klein, M.D. and H. Mitchell Watson, Jr. continued after the meeting.

(1) The stockholders approved the election of the following persons as directors of the Company:


Name	For		Withheld		Abstain

John A. Fry		81,112,899		734,059		7,715
William Norris Jennings, M.D.		81,406,293		440,875		7,505

(2) The Board of Directors appointment of Deloitte & Touche, LLP, as the Company’s independent accountants for 2008 was ratified by the affirmative votes of stockholders:


For		Against		Abstain

	81,606,154		238,672		9,847


Item 5.	*Other Information*

None


Item 6.	*Exhibits*


31	.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31	.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32	.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements 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.

COMMUNITY HEALTH SYSTEMS, INC.

(Registrant)


	By:	/s/ Wayne T. Smith

Wayne T. Smith

Chairman of the Board,

President and Chief Executive Officer

(principal executive officer)


	By:	/s/ W. Larry Cash

W. Larry Cash

Executive Vice President, Chief Financial

Officer and Director

(principal financial officer)


	By:	/s/ T. Mark Buford

T. Mark Buford

Vice President and Corporate Controller

(principal accounting officer)

Date: August 1, 2008

Index to Exhibits


No.			Description

	31	.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.