ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION TO MANAGEMENT'S DISCUSSION AND ANALYSIS

The purpose of this section, Management's Discussion and Analysis of Financial Condition and Results of Operations, is to provide a narrative explanation of our financial statements that enables investors to better understand our business, to enhance our overall financial disclosures, to provide the context within which financial information may be analyzed, and to provide information about the quality of, and potential variability of, our financial condition, results of operations and cash flows. Unless otherwise indicated, all financial and statistical information included herein relates to our continuing operations, with dollar amounts expressed in millions (except per-share amounts). This information should be read in conjunction with the accompanying Condensed Consolidated Financial Statements. It includes the following sections:

†          Executive Overview

†          Forward-Looking Statements

†          Sources of Revenue

†          Results of Operations

†          Liquidity and Capital Resources

†          Off-Balance Sheet Arrangements

†          Critical Accounting Estimates

EXECUTIVE OVERVIEW

KEY DEVELOPMENTS

During 2007, we continue to focus on the execution of our turnaround strategies. While we have seen certain areas of improvement, we are still facing several industry and company-specific challenges that continue to negatively affect our progress. We are dedicated to improving our patients', shareholders' and other stakeholders' confidence in us. We still believe we will do that by providing quality care and generating positive growth and earnings at our hospitals.

Recent key developments include the following events:

† Realignment of Regions - Effective August 1, 2007, we streamlined our regional operating structure to further reduce our overhead costs. Our Central-Northeast region was eliminated, and our hospitals in Missouri and Tennessee are now part of the renamed Central region (formerly, the Texas region). Our two Philadelphia hospitals now form a separate market reporting directly to our chief operating officer. We do not expect this realignment to result in any impairment of our goodwill.

† Sale of Two Pennsylvania Hospitals - In July 2007, we completed the previously disclosed sale of Roxborough Memorial Hospital in Philadelphia and Warminster Hospital in Warminster, two of the 10 hospitals we identified for divestiture in June 2006. Pre-tax proceeds from the sale were approximately $25.5 million, consisting of $15.5 million in cash, which will be used for general corporate purposes, and a $10 million note due in December 2009.

† Acquisition of Coastal Carolina Medical Center - In June 2007, we purchased Coastal Carolina Medical Center, a 41-bed acute care hospital in Hardeeville, South Carolina, for approximately $36 million. The hospital is located 27 miles from our Hilton Head Regional Medical Center. We intend to continue to operate Coastal Carolina as a full service community hospital and will seek to enhance services to meet the community's needs, in coordination with our nearby Hilton Head facility.

SIGNIFICANT CHALLENGES

Our June 2006 global civil settlement with the federal government and other previously announced settlements have resolved several material threats to our company and should help us move forward in our turnaround strategy. However, there are still significant challenges, both company-specific and industry-wide, that will impact the timing of our turnaround. Below is a summary of these items.

Company-Specific Challenge

Volumes-We believe the reasons for declines in our patient volumes include, but are not limited to, decreases in the demand for invasive cardiac procedures, increased competition, physician attrition, managed care contract negotiations or terminations, population trends in Florida, and the impact of our litigation and government investigations. We are taking a number of steps to address the problem of volume decline; however, due to the concentration of our hospitals in California, Florida and Texas, we may not be able to mitigate some factors contributing to volume declines. One of our initiatives is our Physician Sales and Service Program, which is centered around understanding the needs of physicians who admit patients both to our hospitals and to our competitors' hospitals and responding to those needs with changes and improvements in our hospitals and operations. We have targeted capital spending in order to address specific needs or growth opportunities of our hospitals, which is expected to have a positive impact on their volumes. We are also completing clinical service line market demand analysis and profitability assessments to determine which services are highly valued that can be emphasized and marketed to improve results. This Targeted Growth Initiative has resulted in some reductions in unprofitable service lines in several locations, which have had a slightly negative impact on our volumes. However, the elimination of these unprofitable service lines will allow us to focus more resources on services that are highly valued and more profitable.

Our Commitment to Quality initiative, which we launched in 2003, is further helping position us to competitively meet the volume challenge. We are working with physicians to implement the most current evidence-based techniques to improve the way we provide care. Our hospitals have improved substantially in quality metrics reported by the government and have been recognized by several managed care companies for their quality of care. We believe that quality of care improvements will continue to have the effect of increasing physician and patient satisfaction, potentially improving our volumes as a result.

Significant Industry Trends

Bad Debt-Like other organizations in the health care industry, we continue to provide services to a high volume of uninsured patients and more patients than in prior years with an increased burden of co-payments and deductibles as a result of changes in their health care plans. Although the discounting components of our Compact with Uninsured Patients ("Compact") reduce our provision for doubtful accounts recorded in our Condensed Consolidated Financial Statements, they are not expected to mitigate the net economic effects of treating uninsured or underinsured patients. We continue to experience a high level of uncollectible accounts. Our collection efforts have improved, and we continue to focus, where applicable, on placement of patients in various government programs such as Medicaid. However, unless our business mix shifts toward a greater number of insured patients or the trend of higher co-payments and deductibles reverses, we anticipate this high level of uncollectible accounts to continue.

Cost Pressures-Labor, benefits and supply costs remain a significant cost pressure facing us as well as the industry in general. Controlling labor costs in an environment of fluctuating patient volumes and increased labor union activity will continue to be a challenge. Also, inflation and technology improvements are driving supply costs higher, and our efforts to control supplies expense through product standardization, bulk purchases and improved utilization are constantly challenged.

RESULTS OF OPERATIONS-OVERVIEW

Our turnaround timeframe has been and continues to be influenced by company-specific challenges, such as decreasing volumes and demand for inpatient cardiac procedures, and by industry trends, such as bad debt levels, that continue to negatively affect our revenue growth and operating expenses. We believe our future profitability will be achieved through volume growth, appropriate reimbursement levels and cost control across our portfolio of hospitals, as none of our individual hospitals represented more than 5% of our net operating revenues or more than 5% of our total assets, excluding goodwill at June 30, 2007. Below are some of the financial highlights for the three months ended June 30, 2007 compared to the three months ended June 30, 2006:

† Net inpatient revenue per patient day and per admission increased by 3.2% and 3.0%, respectively, primarily due to the effect of negotiated levels of reimbursement from our managed care contracts.

† Net outpatient revenue per visit increased 8.9%, while outpatient visits declined 3.1%. The increase in revenue per visit is primarily due to the effect of higher negotiated levels of reimbursement under our managed care contracts and a shift in patient service mix.

† Favorable net adjustments for prior-year cost reports and related valuation allowances, primarily related to Medicare and Medicaid, were $13 million in the current period compared to favorable net adjustments of $4 million in the prior-year period.

† Loss per diluted share from continuing operations was $(0.06) in the current period compared to $(0.95) in the prior-year period.

The table below shows the pretax and after-tax impact on continuing operations for the three and six months ended June 30, 2007 and 2006 of the following items:

                                                      Three Months Ended       Six Months Ended
                                                           June 30,                June 30,
                                                       2007         2006       2007        2006
                                                                  (Expense) Income
Impairment of long lived assets and goodwill, and
restructuring charges                               $      (10 )  $    (27 ) $     (13 )  $   (56 )
Litigation and investigation costs (benefit)                 1        (728 )         2       (744 )
Hurricane insurance recoveries, net of costs                 -          13           -         10
Pretax impact                                       $       (9 )  $   (742 ) $     (11 )  $  (790 )
Deferred tax asset valuation allowance              $      (16 )  $     (2 ) $     (14 )  $    (1 )
Change in reserves for uncertain tax positions      $       (2 )  $      7   $      91          7
State tax credit adjustment for recent
legislation                                         $       11    $      -   $      11    $     -
Total after-tax impact                              $      (13 )  $   (474 ) $      81    $  (502 )
Diluted per-share impact of above items             $    (0.03 )  $  (1.01 ) $    0.17    $ (1.07 )
Diluted earnings (loss) per share, including
above items                                         $    (0.06 )  $  (0.95 ) $    0.13    $ (0.95 )

LIQUIDITY AND CAPITAL RESOURCES-OVERVIEW

Net cash provided by operating activities was $131 million in the six months ended June 30, 2007 compared to $641 million net cash used in operating activities in the six months ended June 30, 2006. The principal reasons for the change were lower payments for restructuring and litigation costs and settlements and income tax refunds received in 2007.

Purchases of property and equipment were $234 million and $243 million during the six months ended June 30, 2007 and 2006, respectively. Proceeds from the sales of facilities during the six months ended June 30, 2007 and 2006 aggregated $47 million and $15 million, respectively. In addition, in the six months ended June 30, 2007, we spent approximately $36 million to purchase a hospital in South Carolina and $27 million for construction of a hospital in El Paso, Texas.

In November 2006, we entered into a five-year, $800 million senior secured revolving credit facility that replaced our $250 million letter of credit facility. The revolving credit facility is collateralized by patient accounts receivable at our acute care and specialty hospitals, and bears interest at our option based on the London Interbank Offered Rate ("LIBOR") plus 175 basis points or Citigroup's base rate, as defined in the credit agreement, plus 75 basis points. The letters of credit outstanding under our previous letter of credit facility were transferred into the revolving credit facility, which reduced the amount available for cash borrowings, but eliminated a restriction on $263 million of cash pledged under the letter of credit facility. At June 30, 2007, there were no cash borrowings under the revolving credit facility.

We are currently in compliance with all covenants and conditions in our revolving credit agreement and the indentures governing our senior notes. (See Note 5 to the Condensed Consolidated Financial Statements.)

At June 30, 2007, we had approximately $185 million of letters of credit outstanding under our revolving credit facility. In addition, we had $675 million of cash and cash equivalents on hand and borrowing capacity of $601 million under our revolving credit facility as of June 30, 2007.

FORWARD-LOOKING STATEMENTS

The information in this report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical or present facts, that address activities, events, outcomes, business strategies and other matters that we plan, expect, intend, assume, believe, budget, predict, forecast, project, estimate or anticipate (and other similar expressions) will, should or may occur in the future are forward-looking statements. These forward-looking statements represent management's current belief, based on currently available information, as to the outcome and timing of future events. They involve known and unknown risks, uncertainties and other factors-many of which we are unable to predict or control-that may cause our actual results, performance or achievements, or health care industry results, to be materially different from those expressed or implied by forward-looking statements. Such factors include, but are not limited to, the following risks, many of which are described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006 ("Annual Report"):

† A reduction in the payments we receive from managed care payers as reimbursement for the health care services we provide and difficulties we may encounter collecting amounts owed from managed care payers;

† Changes in the Medicare and Medicaid programs or other government health care programs, including modifications to patient eligibility requirements, funding levels or the method of calculating payments or reimbursements;

† The volume of uninsured and underinsured patients, and our ability to satisfactorily and timely collect our patient accounts receivable;

†          Competition;

†          The ultimate resolution of claims, lawsuits and investigations;

†          Our ability to attract and retain employees, physicians and other

†          The geographic concentration of our licensed hospital beds;

†          Changes in, or our ability to comply with, laws and government
regulations;

†          The cost and future availability of insurance, as well as the effects
of insurance policy limits;

†          Our ability to execute our turnaround strategy and the impact of
other factors on our turnaround timeframe;

†          Trends affecting our actual or anticipated results that lead to
charges adversely affecting our results of operations;

†          Our relative leverage and the amount and terms of our indebtedness;

†          Our ability to identify and execute on measures designed to save or
control costs or streamline operations;

†          The availability and terms of debt and equity financing sources to
fund the requirements of our businesses;

†          Changes in our business strategies or development plans;

†          The impact of natural disasters, including our ability to reopen
facilities affected by such disasters;

†          Technological and pharmaceutical improvements that increase the cost
of providing, or reduce the demand for, health care services;

†          Various factors that may increase the cost of supplies;

†          National, regional and local economic and business conditions;

†          Demographic changes; and

†          Other factors and risk factors referenced in this report and our

When considering forward-looking statements, a reader should keep in mind the risk factors and other cautionary statements in our Annual Report. Should one or more of the risks and uncertainties described above, elsewhere in this report or in Item 1A, Risk Factors, of our Annual Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically disclaim all responsibility to publicly update any information contained in a forward-looking statement or any forward-looking statement in its entirety and, therefore, disclaim any resulting liability for potentially related damages.

All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

SOURCES OF REVENUE

We receive revenues for patient services from a variety of sources, primarily managed care payers and the federal Medicare program, as well as state Medicaid programs, indemnity-based health insurance companies and self-pay patients (patients who do not have health insurance and are not covered by some other form of third-party arrangement).

The table below shows the sources of net patient revenues for our general hospitals, expressed as percentages of net patient revenues from all sources:

                                            Three Months Ended June 30,               Six Months Ended June 30,
                                                                 Increase                                  Increase
Net Patient Revenues from:               2007        2006      (Decrease)(1)      2007        2006      (Decrease) (1)
Medicare                                   25.1 %      26.8 %           (1.7 )%     26.2 %      27.5 %            (1.3 )%
Medicaid                                    8.9 %       9.3 %           (0.4 )%      7.9 %       8.7 %            (0.8 )%
Managed care - governmental                11.4 %      10.8 %            0.6 %      12.1 %      10.6 %             1.5 %
Managed care - commercial                  41.7 %      41.6 %            0.1 %      41.6 %      41.4 %             0.2 %
Indemnity, self-pay and other              12.9 %      11.5 %            1.4 %      12.2 %      11.8 %             0.4 %

Our payer mix on an admissions basis for our general hospitals, expressed as a percentage of total admissions from all sources, is shown below:

                                      Three Months Ended June 30,             Six Months Ended June 30,
                                                          Increase                                Increase
Admissions from:                   2007       2006      (Decrease)(1)     2007       2006      (Decrease) (1)
Medicare                             31.2 %     32.4 %           (1.2 )%    32.1 %     33.2 %            (1.1 )%
Medicaid                             12.3 %     12.5 %           (0.2 )%    11.9 %     12.5 %            (0.6 )%
Managed care - governmental          18.3 %     16.9 %            1.4 %     18.4 %     16.7 %             1.7 %
Managed care - commercial            29.4 %     29.4 %              -       28.8 %     29.1 %            (0.3 )%
Indemnity, self-pay and other         8.8 %      8.8 %              -        8.8 %      8.5 %             0.3 %

GOVERNMENT PROGRAMS

The Medicare program, the nation's largest health insurance program, is administered by the Centers for Medicare and Medicaid Services ("CMS") of the U.S. Department of Health and Human Services. Medicare is a health insurance program primarily for individuals 65 years of age and older, certain younger people with disabilities, and people with end-stage renal disease, and is provided without regard to income or assets. Medicaid is a program that pays for medical assistance for certain individuals and families with low incomes and resources, and is jointly funded by the federal government and state governments. Medicaid is the largest source of funding for medical and health-related services for the nation's poorest and most vulnerable populations.

These government programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review, and federal and state funding restrictions, all of which could materially increase or decrease payments from these government programs in the future, as well as affect the cost of providing services to our patients and the timing of payments to our facilities. We are unable to predict the effect of future government health care funding policy changes on our operations. If the rates paid by governmental payers are reduced, if the scope of services covered by governmental payers is limited, or if we or one or more of our subsidiaries' hospitals are excluded from participation in the Medicare or Medicaid program or any other government health care program, there could be a material adverse effect on our business, financial condition, results of operations or cash flows.

Medicare

Medicare offers beneficiaries different ways to obtain their medical benefits. One option, the Original Medicare Plan, is a fee-for-service payment system. The other option, called Medicare Advantage, includes managed care, preferred provider organization, private fee-for-service and specialty plans. The major components of our net patient revenues for services provided

                          TENET HEALTHCARE CORPORATION

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                   OPERATIONS

to patients enrolled in the Original Medicare Plan for the three and six months
ended June 30, 2007 and 2006 are set forth in the table below:

                                                                      Three Months Ended        Six Months Ended
                                                                           June 30,                 June 30,
Revenue Descriptions                                                  2007         2006          2007        2006
Diagnosis-related group - operating                                 $     302    $     315    $      640    $   662
Diagnosis-related group - capital                                          30           32            63         66
Outlier                                                                    19           19            40         41
Outpatient                                                                 96           95           195        189
Disproportionate share                                                     53           52           108        106
Direct Graduate and Indirect Medical Education                             27           27            55         53
Psychiatric, rehabilitation and skilled nursing facilities and
other(1)                                                                   14           31            38         47
Adjustments for prior year cost reports and related valuation
allowances                                                                  9            6            20         30
Total Medicare net patient revenues                                 $     550    $     577    $    1,159    $ 1,194

Medicaid

Medicaid programs are funded by both the federal government and state governments. These programs and the reimbursement methodologies are administered by the states and vary from state to state and from year to year.

Estimated payments under various state Medicaid programs, excluding state-funded managed care programs, constituted approximately 7.9% and 8.7% of net patient revenues for the six months ended June 30, 2007 and 2006, respectively. These payments are typically based on fixed rates determined by the individual states. We also receive disproportionate share payments under various state Medicaid programs. For the six months ended June 30, 2007 and 2006, our revenue attributable to disproportionate share payments and other state-funded subsidy payments was approximately $84 million and $85 million, respectively. However, there are proposed changes to the Medicaid system that could materially reduce the amount of Medicaid payments we receive in the future.

Many states in which we operate are facing budgetary challenges that pose a threat to Medicaid funding levels to hospitals and other providers. We expect these challenges to continue; in particular, proposed funding changes may adversely impact our Georgia hospitals effective January 1, 2008. However, at this time, we cannot predict the extent of the impact of states' budget reductions, if any, on our hospitals.

Regulatory and Legislative Changes

There have been no material changes to the information in our Annual Report about the Medicare and Medicaid programs, except as set forth below:

Payment and Policy Changes to the Medicare Inpatient Prospective Payment System

. . .