NEW ISSUE—BOOK‑ENTRY ONLY Ratings †

In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, nor is it included in adjusted current earnings in calculating federal corporate alternative minimum taxable income. Bond Counsel expresses no opinion regarding any other tax consequences relating to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See “TAX MATTERS” herein.

$120,000,000CaLIfORNIa HEaLTH faCILITIES fINaNCINg aUTHORITY

Revenue Bonds(Scripps Health)

Series 2010aDated: Date of Delivery Due: As shown on page (i) hereof

The Bonds are issuable in fully registered form only in denominations of $5,000 or any integral multiple thereof and, when delivered, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”). Beneficial owners of Bonds will not receive physical certificates representing the Bonds purchased but will receive a credit balance on the books of the nominees of such purchasers. So long as Cede & Co. is the registered owner of the Bonds, principal of and premium, if any, and interest on the Bonds will be paid by U.S. Bank National Association, as trustee, to DTC, which, in turn, will remit such principal, premium, if any, and interest to its participants for subsequent disbursement to the beneficial owners of the Bonds, as described herein. Interest on the Bonds is payable on May 15 and November 15 of each year, commencing May 15, 2010.

The Bonds are limited obligations of the California Health Facilities Financing Authority (the “Authority”), secured under the provisions of an Indenture and a Loan Agreement, as described herein, and will be payable from Loan Repayments made by Scripps Health under the Loan Agreement; from certain funds held under the Indenture; and from payments on an Obligation (the “Series 2010A Obligation”) issued under the Master Indenture, described herein, whereunder the members of the obligated group (the “Obligated Group”) are obligated to make payments on the Series 2010A Obligation in amounts sufficient to pay principal of and premium, if any, and interest on the Bonds when due. At the time of issuance of the Bonds, Scripps Health will be the sole member of the Obligated Group.

The Bonds are subject to optional, mandatory and extraordinary redemption, and purchase in lieu of redemption, prior to their respective maturities, as described herein.

THE BONDS ARE NOT A DEBT OR LIABILITY OF THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF OTHER THAN THE AUTHORITY, OR A PLEDGE OF THE FAITH AND CREDIT OF THE STATE OF CALIFORNIA OR ANY SUCH POLITICAL SUBDIVISION THEREOF, BUT SHALL BE PAYABLE SOLELY FROM THE FUNDS PROVIDED THEREFOR. NEITHER THE STATE OF CALIFORNIA NOR THE AUTHORITY SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF THE BONDS, OR THE INTEREST THEREON, EXCEPT FROM THE FUNDS PROVIDED UNDER THE LOAN AGREEMENT, THE SERIES 2010A OBLIGATION AND THE INDENTURE, AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF, IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR THE INTEREST ON THE BONDS. THE ISSUANCE OF THE BONDS SHALL NOT DIRECTLY OR INDIRECTLY OR CONTINGENTLY OBLIGATE THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF TO LEVY OR TO PLEDGE ANY FORM OF TAXATION WHATEVER THEREFOR OR TO MAKE ANY APPROPRIATION FOR PAYMENT OF THE BONDS. THE AUTHORITY HAS NO TAXING POWER.

This cover page contains certain information for quick reference only. It is not intended to be a summary of the security or terms of the Bonds. Investors should read the entire Official Statement to obtain information essential to the making of an informed investment decision.

The Bonds are offered when, as and if received by the Underwriters, subject to prior sale and to the approval of the validity of the Bonds and certain legal matters by Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority, the approval of certain matters for the Authority by the Attorney General of the State of California, for Scripps Health by Foley & Lardner LLP, and for the Underwriters by their counsel, Sidley Austin llp, San Francisco, California. It is expected that the Bonds in book-entry form will be available for delivery to DTC in New York, New York, on or about February 4, 2010.

Honorable Bill LockyerTreasurer of the State of California

J.P. Morgan BaRCLaYS CaPITaL

Date: January 14, 2010

† For an explanation of the ratings, see “RATINGS” herein.

Oceanside

t NORTH

Carmel Valley

Rancho Bernardo

MEXICO

LEGEND * Corporate Office Locations

Scripps Health Corporate Office * Scripps Shared Services Building

• Scripps Hospital Campus Locations

D Scripps Memorial Hospital Encinitas

H Scripps Green Hospital

• Scripps Center for Integrative Medicine • Scripps Translational Science Institute • Clinical Research Center

D Scripps Memorial Hospital La Jolla

• Scripps McDonald Center • Scripps Whittier Diabetes Institute • Scripps Center for Executive Health • Scripps Polster Breast Care Center • Scripps Mericos Eye Institute

D Scripps Mercy Hospital- San Diego Campus

• Mercy Clinic • Scripps Mercy Surgery Pavilion

Ill Scripps Mercy Hospital- Chula Vista Campus

e Scripps Clinic Locations

fl Carmel Valley (Lab onsite) Q Coronado (Division of Dermatology) 8 Del Mar (Center for Weight Management) 0 Encinitas (Lab onsite) C) La Jolla (Division of OB/GYN) 0 Mission Valley (Lab onsite) 0 Rancho Bernardo (Lab onsite) 0 Rancho San Diego (Lab on site) 0 Santee (Lab onsite) 0 Torrey Pines (Lab onsite)

e Scripps Coastal Medical Center Locations

0 Carlsbad (Lab onsite)

D Eastlake

Gl Encinitas (Lab onsite)

CD Escondido (!) Hillcrest

Q Oceanside (Lab onsite)

0 Oceanside

Q Oceanside (Lab onsite)

0 Vista (Lab onsite)

.A. Well Being Center Locations

A Chula Vista A City Heights A Encinitas J.~~ La Jolla

.A. Other Locations

• i.\. Scripps Home Health Care, and Scripps Center for Learning & Innovation

1-800-SCRIPPS . www.scnpps.org

MaTURITY SCHEDULE

$120,000,000CaLIfORNIa HEaLTH faCILITIES fINaNCINg aUTHORITY

Revenue Bonds(Scripps Health)

Series 2010a

Year(November 15) Principal amount Interest Rate Yield CUSIP† No.

2013 $ 2,640,000 3.0% 1.980% 13033LEZ62014 2,785,000 4.0 2.420 13033LFA02015 2,850,000 5.0 2.910 13033LFB82016 2,975,000 4.0 3.420 13033LFC62017 3,040,000 5.0 3.740 13033LFD42018 3,120,000 5.0 4.020 13033LFE22019 3,230,000 5.0 4.250 13033LFF92020 3,360,000 5.0 4.390†† 13033LFG7

$96,000,000 5.0% Term Bond due November 15, 2036 — Priced to Yield 5.150% CUSIP† No. 13033LFH5

† A registered trademark of The American Bankers Association. CUSIP is provided by Standard & Poor’s CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc. CUSIP numbers are provided for convenience of reference only. None of the Authority, Scripps Health or the Underwriters assume any responsibility for the accuracy of such numbers.

†† Priced to optional redemption date of November 15, 2019.

(i)

(ii)

This Official Statement does not constitute an offer to sell the Bonds or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person in any state or other jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale in such state or jurisdiction. No dealer, broker, salesperson or any other person has been authorized to give any information or to make any representation other than those contained herein in connection with the offering of the Bonds, and, if given or made, such information or representation must not be relied upon.

The information relating to the Authority contained herein under the headings “THE AUTHORITY” and “LITIGATION—The Authority” has been furnished by the Authority. All other information contained herein has been obtained from Scripps Health, DTC and other sources (other than the Authority) that are believed to be reliable. Such other information is not guaranteed as to accuracy or completeness and is not to be relied upon or construed as a promise or representation by the Authority, Scripps Health or the Underwriters. The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with and as part of their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information.

No dealer, broker, salesperson or other person has been authorized by the Authority, Scripps Health or the Underwriters to give any information or to make any representations, other than those contained in this Official Statement, and, if given or made, such information or representation must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any statement nor any sale made hereunder shall create under any circumstances any implication that there has been no change in the affairs of the Authority, Scripps Health or DTC since the date hereof. This Official Statement is submitted in connection with the issuance of securities referred to herein and may not be used, in whole or in part, for any other purpose.

____________________

IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

____________________

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN

THIS OFFICIAL STATEMENT

Certain statements included or incorporated by reference in this Official Statement constitute “forward-looking statements.” Such statements generally are identifiable by the terminology used such as “plan,” “expect,” “estimate,” “budget” or other similar words. Such forward-looking statements include but are not limited to certain statements contained in the information under the captions “BONDHOLDERS’ RISKS” and APPENDIX A – “INFORMATION CONCERNING SCRIPPS HEALTH—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL PERFORMANCE” in this Official Statement. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Scripps Health does not plan to issue any updates or revisions to those forward-looking statements if or when its expectations or events, conditions or circumstances on which such statements are based occur.

(iii)

TABLE OF CONTENTS

Page

INTRODUCTORY STATEMENT .............................................................................................................. 1 Purpose of the Official Statement .................................................................................................... 1 Scripps Health and the Master Indenture ......................................................................................... 1 Security for the Bonds ..................................................................................................................... 2 Plan of Financing ............................................................................................................................. 2 Related Financing ............................................................................................................................ 3 Bondholders’ Risks .......................................................................................................................... 3

THE AUTHORITY ...................................................................................................................................... 3 Organization and Membership ......................................................................................................... 3 Outstanding Indebtedness of the Authority ..................................................................................... 5

THE BONDS ................................................................................................................................................ 6 General ............................................................................................................................................. 6 Redemption ...................................................................................................................................... 6 Book-Entry System .......................................................................................................................... 8

SECURITY FOR THE BONDS ................................................................................................................... 8 General ............................................................................................................................................. 8 The Master Indenture ....................................................................................................................... 9 Security and Enforceability ............................................................................................................ 10 Other .............................................................................................................................................. 13

ANNUAL DEBT SERVICE REQUIREMENTS ....................................................................................... 13 PLAN OF FINANCE .................................................................................................................................. 15 ESTIMATED SOURCES AND USES OF FUNDS .................................................................................. 15 CONTINUING DISCLOSURE .................................................................................................................. 15 BONDHOLDERS’ RISKS ......................................................................................................................... 16

General ........................................................................................................................................... 16 Significant Risk Areas Summarized .............................................................................................. 16 Nonprofit Health Care Environment .............................................................................................. 20 Health Care Reform ....................................................................................................................... 23 Patient Service Revenues ............................................................................................................... 25 Regulatory Environment ................................................................................................................ 29 Business Relationships and Other Business Matters ..................................................................... 34 Tax-Exempt Status and Other Tax Matters .................................................................................... 37 Risks Related to Outstanding Variable Rate Obligations .............................................................. 39 Other Risk Factors ......................................................................................................................... 40

TAX MATTERS ......................................................................................................................................... 42 APPROVAL OF LEGALITY ..................................................................................................................... 44 INDEPENDENT AUDITORS .................................................................................................................... 44 FINANCIAL ADVISOR ............................................................................................................................ 44 LITIGATION .............................................................................................................................................. 44

Scripps Health ................................................................................................................................ 44 The Authority ................................................................................................................................. 45

RATINGS ................................................................................................................................................... 45 UNDERWRITING ..................................................................................................................................... 45 MISCELLANEOUS ................................................................................................................................... 46

(iv)

APPENDIX A – INFORMATION CONCERNING SCRIPPS HEALTH ........................................... A-1 APPENDIX B – FINANCIAL STATEMENTS OF SCRIPPS HEALTH ........................................... B-1 APPENDIX C – SUMMARY OF PRINCIPAL DOCUMENTS ......................................................... C-1 APPENDIX D – FORM OF OPINION OF BOND COUNSEL ........................................................... D-1 APPENDIX E – BOOK-ENTRY ONLY SYSTEM ............................................................................ E-1 APPENDIX F – FORM OF CONTINUING DISCLOSURE CERTIFICATE .................................... F-1

1

OFFICIAL STATEMENT

$120,000,000 California Health Facilities Financing Authority

Revenue Bonds (Scripps Health)

Series 2010A

INTRODUCTORY STATEMENT

The following introductory statement is subject in all respects to the more complete information set forth in this Official Statement. All descriptions and summaries of documents referred to herein do not purport to be comprehensive or definitive and are qualified in their entirety by reference to each such document. Terms used in this Official Statement and not otherwise defined have the same meanings as in the Indenture (as defined below). See APPENDIX C – “SUMMARY OF PRINCIPAL DOCUMENTS—DEFINITIONS OF CERTAIN TERMS.”

Purpose of the Official Statement

This Official Statement, including the cover page, the inside cover page and the appendices hereto, is provided to furnish information in connection with the sale and delivery of $120,000,000 aggregate principal amount of the California Health Facilities Financing Authority (the “Authority”) Revenue Bonds (Scripps Health), Series 2010A (the “Bonds”). The Bonds will be issued pursuant to and secured by a bond indenture (the “Indenture”), dated as of January 1, 2010, between the Authority and U.S. Bank National Association, as trustee (the “Bond Trustee”). The Authority will lend the proceeds of the Bonds to Scripps Health, which loan will be evidenced by a Loan Agreement, dated as of January 1, 2010 (the “Loan Agreement”), between the Authority and Scripps Health, and will be secured by payments under an Obligation issued pursuant to the Master Indenture (defined below).

Scripps Health and the Master Indenture

Scripps Health is the core organization of a community-based health care delivery network located in San Diego County, California, that includes four acute-care hospitals on five campuses, 19 outpatient clinic locations, an extensive ambulatory care network, home health care, associated support services and more than 2,750 affiliated physicians. For a description of Scripps Health, its facilities and financial performance, see APPENDIX A – “INFORMATION CONCERNING SCRIPPS HEALTH.”

As of the date of the issuance of the Bonds, Scripps Health will be the sole member of an Obligated Group (the “Obligated Group”) established under the Amended and Restated Master Indenture, dated as of May 1, 1998, amending and restating the Master Indenture of Trust, dated as of December 1, 1985 (as amended and restated, the “Master Indenture”), between Scripps Health and The Bank of New York Mellon Trust Company, N.A., as successor master trustee (the “Master Trustee”). As the sole member of the Obligated Group, Scripps Health is obligated to pay when due the principal of, premium, if any, and interest on each Obligation issued under the Master Indenture, including the Series 2010A Obligation (as hereinafter defined), which will evidence and secure the loan of the proceeds of the Bonds from the Authority to Scripps Health. Other entities may become members of the Obligated Group (each, a “Member”) or withdraw from the Obligated Group in accordance with the procedures set forth in the Master Indenture.

2

Other entities may also be designated “Obligated Group Affiliates” by Scripps Health, as the initial Obligated Group Representative, and such designation may be rescinded at any time. The accounts of the Members of the Obligated Group and the Obligated Group Affiliates will be combined in determining whether the Members and the Obligated Group Affiliates have complied with the Annual Required Debt Service Coverage Ratio and other covenants required by the Master Indenture, notwithstanding that the Obligated Group Affiliates are not liable for any payment on any Obligation. As of the date of this Official Statement, no Obligated Group Affiliates have been designated by Scripps Health under the Master Indenture. See “SECURITY FOR THE BONDS—The Master Indenture—Obligated Group and Obligated Group Affiliates” herein.

Security for the Bonds

The Bonds will be payable from payments made by Scripps Health under the Loan Agreement (the “Loan Repayments”), from payments made by Scripps Health on the Series 2010A Obligation and from certain funds held under the Indenture.

In order to secure the obligation of Scripps Health to make payments under the Loan Agreement, Scripps Health will deliver to the Bond Trustee an Obligation (the “Series 2010A Obligation”) issued pursuant to the Master Indenture, as supplemented and amended by a supplemental master indenture for the Series 2010A Obligation, dated as of January 1, 2010 (the “Series 2010A Supplement”), between Scripps Health and the Master Trustee. Pursuant to the Master Indenture, Scripps Health and any future Members of the Obligated Group agree to make payments on the Series 2010A Obligation in amounts sufficient to pay, when due, the principal of and premium, if any, and interest on the Bonds. Each Member of the Obligated Group is jointly and severally obligated to make payments on all Obligations issued under the Master Indenture, including the Series 2010A Obligation. The Series 2010A Obligation will entitle the Bond Trustee, as the holder thereof, to the benefit of the covenants, restrictions and other obligations imposed upon the Obligated Group under the Master Indenture. For a discussion of the enforceability of the Master Indenture and Obligations against Members of the Obligated Group, see “SECURITY FOR THE BONDS—Security and Enforceability—Enforceability of the Master Indenture, the Loan Agreement and the Series 2010A Obligation” herein.

The obligations of Scripps Health and any future Member of the Obligated Group to pay amounts due on Obligations, including the Series 2010A Obligation, will be secured by a pledge of the Gross Revenues of each Member. Such security interest is subject, however, to the ability of the Obligated Group to transfer assets outside of the Obligated Group and its ability to place liens on assets, including accounts receivable, in each case subject to the limitations set forth in the Master Indenture. See “SECURITY FOR THE BONDS—The Master Indenture—Pledge of Gross Revenues” herein.

In certain circumstances, Scripps Health or any future Member of the Obligated Group may issue Additional Obligations under the Master Indenture that will be equally and ratably secured with the Series 2010A Obligation by the Master Indenture.

Plan of Financing

Scripps Health will use the proceeds of the Bonds, together with funds of Scripps Health, to finance and refinance, including through reimbursement of prior capital expenditures, a portion of the cost of acquisition, construction, renovation and equipping of the health care facilities owned and operated by Scripps Health (the “Project”) and pay certain costs of issuing the Bonds, as more fully described herein under “PLAN OF FINANCE.”

3

Related Financing

Concurrently with the issuance of the Bonds, Scripps Health anticipates that the Authority will issue two series of variable rate bonds that bear interest at rates established on a weekly basis (the “Variable Rate Bonds”). Scripps Health intends to use the proceeds of the Variable Rate Bonds, together with funds of Scripps Health, to finance a portion of the cost of the Project. The obligations of Scripps Health with respect to the loan of the proceeds of the Variable Rate Bonds will be evidenced by one or more Obligations (collectively, the “Variable Rate Obligation”) issued by Scripps Health under the Master Indenture. The Variable Rate Obligation will rank on a parity with all Obligations issued under the Master Indenture, including the Series 2010A Obligation.

Scripps Health currently anticipates that it will issue approximately $220,000,000 of bonds to finance the cost of the Project on or about the date of issuance of the Bonds. The aggregate principal amount of each series of Bonds and Variable Rate Bonds will be based upon prevailing market conditions at the time each series of bonds is priced. The issuance of the Bonds is not dependent on the issuance of the Variable Rate Bonds. The Bonds and the Variable Rate Bonds collectively are sometimes referred to in this Official Statement as the “Series 2010 Bonds.”

Bondholders’ Risks

There are risks associated with the purchase of the Bonds. See the information under the heading “BONDHOLDERS’ RISKS” in this Official Statement for a discussion of certain of these risks.

THE AUTHORITY

The Authority is a public instrumentality of the State of California (the “State”) organized and existing under and by virtue of the California Health Facilities Financing Authority Act, constituting Part 7.2 of Division 3 of Title 2 of the California Government Code (the “Act”). The intent of the California legislature in enacting the Act was to provide financing to health facilities and to pass along to the consuming public all or part of any savings realized by a participating health institution (as defined in the Act) as a result of tax-exempt financing. Pursuant to the Act, the Authority is authorized to issue its revenue bonds for the purpose of financing (including reimbursing expenditures made or refinancing indebtedness incurred for such purpose) the construction, expansion, remodeling, renovation, furnishing, equipping or acquisition of health facilities operated by participating health institutions. The Treasurer of the State of California is authorized under the Act to sell such revenue bonds on behalf of the Authority.

Organization and Membership

The Act provides that the Authority shall consist of nine members, including the State Treasurer, who shall serve as Chairman, the State Controller, the Director of Finance and two members appointed by each of the Senate Rules Committee, the Speaker of the State Assembly and the Governor. The Chairman of the Authority appoints the Executive Director.

The current members of the Authority are:

BILL LOCKYER, State Treasurer, Chairman and Ex Officio Member of the Authority. Residence: Hayward, California. Background: Mr. Lockyer completed his undergraduate study at the University of California, Berkeley, and earned a law degree from McGeorge School of Law in Sacramento while serving in the State Senate. He also holds a teaching credential from California State University, Hayward. As State Treasurer, Mr. Lockyer draws on leadership, management and policymaking skills developed over a public service career spanning more than three decades. Mr. Lockyer served for 25 years in the California Legislature, culminating his Capitol career with a stint

4

as Senate President pro Tempore. He served eight years, from 1999-2006, as California Attorney General and left a lasting legacy. Among his landmark achievements as Attorney General, Mr. Lockyer revolutionized crime fighting in California by creating and maintaining the nation’s most sophisticated DNA forensic laboratory, established the Megan’s Law website and recovered billions of dollars for defrauded energy ratepayers, consumers and taxpayers.

JOHN CHIANG, State Controller and Ex Officio Member of the Authority. Residence: Torrance, California. Background: Mr. Chiang graduated with honors from the University of South Florida with a degree in Finance, and received his law degree from the Georgetown University Law Center. As State Controller, he presides over 76 boards and commissions, including the Franchise Tax Board, the California Public Employees’ Retirement System Board, and the California State Teachers’ Retirement System Board. Prior to being elected State Controller, he was elected to the Board of Equalization in 1998, leading with innovative taxpayer-friendly services like the State’s free income tax return preparation service, ReadyReturn. Mr. Chiang’s record of public service has been recognized with many awards and distinctions including the Award for Excellence by a Government Official from the Los Angeles County Bar Association.

ANA J. MATOSANTOS, State Director of Finance and Ex Officio Member of the Authority. Ms. Matosantos was appointed State Director of Finance in December 2009. Residence: Sacramento. Background: Ms. Matosantos earned a Bachelor of Arts degree in political science from Stanford University. Ms. Matosantos has served in the Department of Finance as chief deputy director since 2008. Prior to that, she served as deputy legislative secretary for health and human services and veterans affairs in the Office of the Governor from 2007 to 2008. From 2006 to 2007, Ms. Matosantos served as associate secretary for legislative affairs for the Health and Human Services Agency (HHS) and, from 2004 to 2006, she served as assistant secretary for program and fiscal affairs at HHS. Prior to that, she was a consultant to the Senate Committees on Health and Human Services and Budget and Fiscal Review from 1999 to 2004.

HARRY BISTRIN, Vice-Chairman. Term expires March 31, 2012. Residence: Ukiah, California. Background: Bachelor of Arts degree in Business Administration from University of California at Berkeley; currently field representative for State Senate District No. 1; member of the Board of Directors, Northern California American Israel Political Action Committee; former member of the Board of Directors, former President and former Chairman of the Finance Committee of General Hospital in Eureka.

JUDITH N. FRANK, Member. Term expires March 31, 2012. Residence: Santa Monica, California. Background: Masters degree in Finance from University of California at Los Angeles Anderson School of Management, Master of Science degree in City and Regional Planning from the University of Southern California, A.B. degree from the University of California at Berkeley and a California Real Estate Broker’s License. Ms. Frank is the owner of Asset Strategies, a financial and real estate service firm, and currently serves as a consulting appointee to the State’s Real Estate Enhancement Branch. In addition, Ms. Frank currently serves on the Los Angeles County Health Facilities Authority. Ms. Frank previously served on the California Park and Recreation Commission from 1992 to 2000.

OSCAR SABLAN, M.D., Member. Term expires March 31, 2012. Residence: Firebaugh, California. Background: Board Certified in Internal Medicine, Doctor of Medicine from University of Hawaii John A. Burns School of Medicine, Bachelor of Arts in Biology, Saint Louis University. Dr. Sablan is co-owner of the Sablan Medical Clinic in Firebaugh, which he owns and operates with his wife, Dr. Marcia Sablan. Dr. Sablan currently serves as a Commissioner on the First 5 of Fresno County Commission, is a Trustee on the Firebaugh-Las Deltas Unified School District Board of Trustees and is

5

an active member of the California School Board Association. Dr. Sablan is from the island of Saipan, a commonwealth of the United States located approximately 150 miles north of Guam.

RONALD JOSEPH, Member. Term expires March 31, 2012. Residence: Sacramento, California. Background: Bachelor’s degree in Government, California State University, Sacramento. Mr. Joseph currently manages RJAdvisors, a firm specializing in government consulting. From 2004 to 2006, Mr. Joseph served as Director of the California Department of General Services. From 1995 to 2004, he was the Executive Director of the Medical Board of California, and from 1991 to 1995 he was the Chief Deputy Director of the Department of Health Services. His service in California State Government previously included executive level assignments at the State Teachers retirement System and the Department of Economic Opportunity.

SUMI SOUSA, Member. Term expired March 31, 2007, but Ms. Sousa will continue to serve until reappointed or the position otherwise is filled. Residence: Sacramento, California. Background: Ms. Sousa earned a bachelor’s degree in History from the University of California, Los Angeles. She has specialized in state and local budget and policy issues since 1991. She currently serves as Special Assistant to Assembly Speaker Fabian Nuñez, where she is responsible for health policy and health budget issues. Ms. Sousa served as Executive Director of the California Health Facilities Financing Authority from March 1999 through March 2003. She previously served as special assistant to San Francisco Mayor Willie L. Brown, Jr., handling various budget assignments for the City and County of San Francisco. Ms. Sousa also was Deputy Director for Management & Finance to the San Francisco Public Administrator/Public Guardian. She served on the staff of the California Revenue and Taxation Committee from 1992 to 1994 and served on the legislative staff of Assemblyman Phillip Isenberg and Senator Herschel Rosenthal.

JACK BUCKHORN, Member. Term expires March 31, 2010. Residence: Hidden Valley Lake, California. Background: Mr. Buckhorn earned an associate of science degree from Santa Rosa Junior College. He currently serves as the Business Manager and Financial Secretary for the International Brotherhood of Electrical Workers Local Union 551. From 1989 to 1998, he was Training Director for the Redwood Empire Electrical Joint Apprenticeship and Training Committee. Mr. Buckhorn is currently the President of the California State Association of Electrical Workers; Secretary-Treasurer of the Sonoma, Mendocino and Lake Counties Building and Construction Trades Council; Executive Board member of the North Bay Central Labor Council; and a member of the Mendocino County Workforce Investment Board.

Executive Director. Barbara Liebert was appointed Executive Director July 2, 2007. Before then, Ms. Liebert served as general counsel to a Bay Area district hospital and its affiliates, advising them in all areas of health care law. Before starting her own firm in Sacramento, she held positions with Bell, Sheppard & Faria and the Bell Law Corporation, and she also served as staff counsel to the State Department of General Services. Ms. Liebert received her bachelor’s degree in psychology from the University of California at Berkeley and her law degree from Santa Clara University.

Outstanding Indebtedness of the Authority

As of December 31, 2009, the Authority has issued obligations aggregating in excess of $24 billion and has outstanding obligations in an aggregate principal amount greater than $9 billion.

6

THE BONDS

The following is a summary of certain provisions of the Bonds. Reference is made to the Bonds for the complete text thereof and to the Indenture for all of the provisions relating to the Bonds. The discussion herein is qualified by such reference.

General

The Bonds are being issued pursuant to the Indenture in the aggregate principal amount set forth on the cover of this Official Statement. The Bonds will be delivered in fully registered form without coupons. The Bonds will be dated the date of delivery and will be payable as to principal, subject to the redemption provisions set forth herein, on the dates and in the amounts as set forth on page (i) hereof. The Bonds will be transferable and exchangeable as set forth in the Indenture and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York (“DTC”). DTC will act as securities depository for the Bonds. Ownership interests in the Bonds may be purchased in book-entry form only, in denominations of $5,000 or any integral multiple thereof. See “THE BONDS—Book-Entry System.”

The Bonds will bear interest at the rates per annum set forth on page (i) hereof, payable semiannually on November 15 and May 15 of each year, commencing May 15, 2010, to the person whose name appears on the bond registration books of the Bond Trustee as the Holder thereof as of the close of business on the Record Date (which will be the first day of the month, whether or not a Business Day, in which an interest payment date occurs) for each interest payment date (except with respect to interest in default, for which a special record date shall be established). So long as Cede & Co. is the registered owner of the Bonds, principal of and premium, if any, and interest on the Bonds are payable by wire transfer by the Bond Trustee to Cede & Co., as nominee for DTC, which, in turn, will remit such amounts to DTC Participants (as defined herein) for subsequent disbursement to the Beneficial Owners. See APPENDIX E – “BOOK-ENTRY ONLY SYSTEM.”

If the book-entry system for the Bonds is ever discontinued, payment of interest on the Bonds will be made by check mailed by first-class mail on each interest payment date to each Holder as of the Record Date for such interest payment date at its address as it appears on the bond registration books maintained by the Bond Trustee or, at the written request of any Holder of at least one million dollars ($1,000,000) in aggregate principal amount of Bonds, submitted to the Bond Trustee at least one Business Day prior to the Record Date, by wire transfer in immediately available funds to an account within the United States designated by the Holder. Payment of the principal or redemption price of Bonds will then be payable upon presentation and surrender of the Bonds at the corporate trust office of the Bond Trustee.

Redemption

Optional Redemption of the Bonds. The Bonds maturing on or after November 15, 2020, are subject to redemption prior to their respective stated maturities at the option of the Authority (which option shall be exercised upon the request of Scripps Health), in whole or in part and, if in part, in such amounts and maturities as may be specified by Scripps Health (or, if Scripps Health fails to designate such maturities, in inverse order of maturity), and by lot among Bonds with the same maturity, on any date on or after November 15, 2019, at the principal amount of Bonds called for redemption, plus accrued interest to the date fixed for redemption, without premium.

Extraordinary Redemption of Bonds. The Bonds are subject to redemption prior to their respective stated maturities, at the option of the Authority (which option shall be exercised upon the request of Scripps Health), in whole or in part and, if in part, in such amounts and maturities as may be

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specified by Scripps Health (or, if Scripps Health fails to designate such maturities, in inverse order of maturity) and by lot among Bonds with the same maturity, on any date, from certain hazard insurance or condemnation proceeds received with respect to the facilities of Scripps Health and any future Members of the Obligated Group, at the principal amount thereof, together with interest accrued thereon to the date fixed for redemption, without premium.

Mandatory Sinking Account Redemption. The Bonds maturing on November 15, 2036 are subject to redemption prior to their stated maturity in part, by lot, on any November 15 on or after November 15, 2032, from the Mandatory Sinking Account Payments set forth below, at the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium:

Year Amount 2032 $17,705,000 2033 18,610,000 2034 19,560,000 2035 23,415,000 2036* 16,710,000

Notice of Redemption; Effect of Redemption. Notice of redemption will be mailed by first class mail by the Bond Trustee, not less than 30 days and not more than 60 days prior to the redemption date, to the Holders of any Bonds designated for redemption at their addresses appearing on the bond registration books of the Bond Trustee and to the Authority. Each notice of redemption shall state the date of such notice, the date of issuance of the Bonds, the redemption date, the Redemption Price, the place or places of redemption (including the name and appropriate address or addresses of the Bond Trustee), the maturity, the CUSIP number, if any, and, in the case of Bonds to be redeemed in part only, the respective portions of the principal amount thereof to be redeemed. The failure by the Bond Trustee to mail notice of redemption to any one or more of the Holders of any Bonds designated for redemption shall not affect the sufficiency of the proceedings for the redemption of the Bonds with respect to the Holder or Holders to whom such notice was mailed. Notice of redemption having been given in accordance with the Indenture and moneys for payment of the redemption price of, together with interest accrued to the redemption date on, the Bonds (or portions thereof) so called for redemption being held by the Bond Trustee, the Bonds so called for redemption shall become due and payable at the Redemption Price (and accrued interest) specified in such notice, interest on such Bonds shall cease to accrue from and after the redemption date, said Bonds (or portions thereof) shall cease to be entitled to any benefit or security under the Indenture, and the Holders of said Bonds shall have no rights in respect thereof except to receive payment of said Redemption Price and accrued interest to the date fixed for redemption from funds held by the Bond Trustee for such payment.

Rescission of Notice of Redemption. Any notice of optional or extraordinary redemption may be rescinded by written notice given to the Bond Trustee by Scripps Health no later than five Business Days prior to the date specified for redemption. The Bond Trustee shall give notice of such rescission as soon thereafter as practicable in the same manner, and to the same persons, as notice of such redemption was given.

Purchase in Lieu of Redemption. Each Holder or Beneficial Owner, by purchase and acceptance of any Bond, irrevocably grants to Scripps Health the option to purchase such Bond at any time such Bond is subject to optional redemption as described in the Indenture. Such Bond is to be purchased at a purchase price equal to the then applicable redemption price of such Bond. Scripps Health shall deliver a

* Maturity

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Favorable Opinion of Bond Counsel to the Bond Trustee, and shall direct the Bond Trustee to provide notice of mandatory purchase, such notice to be provided, as and to the extent applicable, in accordance with the notice of redemption provisions of the Indenture and to select Bonds subject to mandatory purchase in the same manner as Bonds called for redemption pursuant to the Indenture. On the date fixed for purchase of any Bond in lieu of redemption, Scripps Health shall pay the purchase price of such Bond to the Bond Trustee in immediately available funds, and the Bond Trustee shall pay the same to the Holders of the Bonds being purchased against delivery thereof. No purchase of any Bond in lieu of redemption shall operate to extinguish the indebtedness of Scripps Health evidenced by such Bond. No Holder or Beneficial Owner may elect to retain a Bond subject to mandatory purchase in lieu of redemption.

Book-Entry System

The Bonds will be issued in book-entry form. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee). One fully-registered Bond will be issued for each maturity in the total aggregate principal amount due on such maturity and will be deposited with DTC. See APPENDIX E – “BOOK-ENTRY ONLY SYSTEM.”

Scripps Health and the Authority cannot and do not give any assurances that DTC will distribute to DTC Participants or that DTC Participants or others will distribute to the Beneficial Owners payments of principal of and interest and premium, if any, on the Bonds or any redemption or other notices or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. Neither Scripps Health nor the Authority is responsible or liable for the failure of DTC or any DTC Participant or DTC Indirect Participant to make any payments or give any notice to a Beneficial Owner with respect to the Bonds or any error or delay relating thereto.

SECURITY FOR THE BONDS

General

In the Loan Agreement, Scripps Health agrees to make the Loan Repayments to the Bond Trustee, which payments, in the aggregate, are required to be in amounts sufficient for the payment in full of all amounts payable with respect to the Bonds, including the total interest payable on the Bonds to the date of maturity of such Bonds or earlier redemption, the principal amount of such Bonds, any redemption premiums, and certain other fees and expenses (the “Additional Payments”), less any amounts available for such payment as provided in the Indenture. The Bonds are also payable from payments made on the Series 2010A Obligation, proceeds of the Bonds, investment earnings on proceeds of the Bonds, amounts on deposit under the Indenture (except for any amounts on deposit in the Rebate Fund) and proceeds of insurance or condemnation awards, each in the manner and to the extent set forth in the Indenture.

As security for its obligation to make the Loan Repayments, Scripps Health, concurrently with the issuance of the Bonds, will issue the Series 2010A Obligation to the Bond Trustee pursuant to which Scripps Health and any future Members of the Obligated Group agree to make payments to the Bond Trustee in amounts sufficient to pay, when due, the principal of and premium, if any, and interest on the Bonds. As of the date of issuance and delivery of the Bonds, Scripps Health will be the sole Member of the Obligated Group under the Master Indenture and, consequently, will be the only entity liable for payment of the Obligations issued under the Master Indenture, including the Series 2010A Obligation. See “SECURITY FOR THE BONDS—The Master Indenture” below.

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The Master Indenture

Obligated Group and Obligated Group Affiliates. Upon the issuance of the Bonds, the Obligated Group will consist solely of Scripps Health. Under the Master Indenture, Scripps Health or any future Member of the Obligated Group may be authorized pursuant to a related Supplemental Master Indenture to incur, for itself and on behalf of the other Members of the Obligated Group, Obligations to evidence or secure indebtedness and other obligations of the Members. All Members of the Obligated Group are jointly and severally liable with respect to the payment of each Obligation incurred under the Master Indenture.

The Series 2010A Obligation will be issued by Scripps Health under and pursuant to the Master Indenture, as supplemented and amended by the Series 2010A Supplement. Scripps Health and all future Members of the Obligated Group are required to make payments on the Series 2010A Obligation in an amount sufficient to pay the principal of and premium, if any, and interest on the Bonds when due.

The Master Indenture permits Scripps Health, as the Obligated Group Representative, to designate a Person as an Obligated Group Affiliate at any time, provided that a Member of the Obligated Group serves as the Controlling Member for such Obligated Group Affiliate. So long as a Person is designated as an Obligated Group Affiliate, the Controlling Member of such Obligated Group Affiliate shall either (i) maintain, directly or indirectly, control of such Obligated Group Affiliate, including the power to direct management, policies, disposition of assets and other actions of the Obligated Group Affiliate to the extent necessary to cause such Obligated Group Affiliate to comply with the terms of the Master Indenture, whether through the ownership of voting securities, by contract, corporate membership, reserved powers or the power to appoint corporate members, trustees or directors, or otherwise or (ii) execute and have in effect such contracts or other agreements as are necessary to cause such Obligated Group Affiliate to comply with the terms of the Master Indenture.

Obligated Group Affiliates are not obligated to make any debt service payments on any Obligations. Pursuant to the Master Indenture, however, each Controlling Member covenants that it will cause each of its Obligated Group Affiliates to pay, loan or otherwise transfer to the Obligated Group Representative such amounts as are necessary to enable the Members of the Obligated Group to comply with the terms of the Master Indenture, including the terms of the Master Indenture requiring the Members of the Obligated Group to make payments on all Obligations issued under the Master Indenture.

The Obligated Group Representative at any time may declare that an Obligated Group Affiliate shall no longer be an Obligated Group Affiliate under the Master Indenture, as long as no event of default would result from the withdrawal of such designation. As of the date of this Official Statement, no Obligated Group Affiliates have been designated by Scripps Health under the Master Indenture.

Upon the issuance of the Series 2010A Obligation and the Variable Rate Obligation, the aggregate principal amount of Obligations related to Indebtedness (which does not include Obligations issued to letter of credit banks or interest rate swap counterparties in connection with certain of the Obligated Group’s outstanding variable rate indebtedness) issued and outstanding under the Master Indenture is expected to be approximately $619.5 million. See APPENDIX A – “INFORMATION CONCERNING SCRIPPS HEALTH—FINANCIAL AND OPERATING INFORMATION—Capitalization.”

Financial Covenants. The Master Indenture includes covenants that require Scripps Health, as the sole Member of the Obligated Group, to maintain the Annual Required Debt Service Coverage Ratio and limit its ability to incur indebtedness, dispose of assets or encumber its assets. In determining whether Scripps Health has satisfied such covenants, the Master Indenture requires Scripps Health to

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combine the income and assets of Scripps Health, any other future Members of the Obligated Group and any designated Obligated Group Affiliates in calculating such ratio and in testing for compliance with such covenants, notwithstanding that the Obligated Group Affiliates are not liable for any payment of the Obligations. There are currently no Obligated Group Affiliates. See APPENDIX C – “SUMMARY OF PRINCIPAL DOCUMENTS—MASTER INDENTURE—Covenants of Each Member—Designation of Obligated Group Affiliates.”

Pledge of Gross Revenues. Pursuant to the Master Indenture, Scripps Health has covenanted that all Obligations issued under the Master Indenture, including the Series 2010A Obligation, will be secured (to the extent permitted by law) by a security interest in the Gross Revenues of the Obligated Group. Gross Revenues include all receipts, revenues, income and other moneys of Scripps Health and each future Member of the Obligated Group, including all accounts, as defined in the Uniform Commercial Code, accounts receivable, and all checking, investment and deposit accounts maintained by Scripps Health or a future Member of the Obligated Group, excluding certain restricted moneys. See APPENDIX C – “SUMMARY OF PRINCIPAL DOCUMENTS—MASTER INDENTURE—Covenants of Each Member—Gross Revenue Pledge.” Such security interest is subject, however, to the ability of the Obligated Group to transfer assets outside of the Obligated Group and its ability to place liens on assets, including accounts receivable, in each case subject to the limitations set forth in the Master Indenture. The foregoing grant of a security interest will be perfected to the extent, and only to the extent, that such security interest may be perfected under the Uniform Commercial Code of the state of California. See “Security and Enforceability” herein.

Covenant Against Liens; Permitted Senior Indebtedness. Pursuant to the Master Indenture, each Member of the Obligated Group agrees that it will not, and each Controlling Member agrees not to allow any of its Obligated Group Affiliates to, create, assume or suffer to exist any Lien upon the Property of the Obligated Group, except for Permitted Encumbrances. Each Member further agrees that if a Lien that would not constitute a Permitted Encumbrance is created or assumed by a Member or Obligated Group Affiliate, it will make or cause to be made effective a provision whereby all Obligations will be secured prior to any Indebtedness secured by such Lien.

Permitted Encumbrances include certain limited Liens on Property of the Obligated Group and the Obligated Group Affiliates, including Liens which may be granted to secure additional Obligations and other Indebtedness. Such Liens are not required to secure the Series 2010A Obligation, and the Series 2010A Obligation would be subordinated to such Indebtedness with respect to the Property secured by such Liens. See the definition of “Permitted Encumbrances” in APPENDIX C – “SUMMARY OF PRINCIPAL DOCUMENTS—DEFINITIONS OF CERTAIN TERMS” and “—MASTER INDENTURE—Covenants of Each Member—Against Encumbrances.”

Security and Enforceability

Perfection of a Security Interest. Each Member of the Obligated Group has granted a security interest in all of the Gross Revenues of the Obligated Group and has agreed to perfect the grant of a security interest in the Gross Revenues to the extent, and only to the extent, that such security interest may be perfected under the Uniform Commercial Code of the State of California. It may not be possible to perfect a security interest in any manner whatsoever in certain types of Gross Revenues (e.g., certain insurance proceeds and payments under the Medicare and Medi-Cal programs) prior to actual receipt by any Member. The grant of a security interest in Gross Revenues may be subordinated to the interest and claims of others in several instances. Some examples of cases of subordination of prior interests and claims are (i) statutory liens, (ii) rights arising in favor of the United States of America or any agency thereof, (iii) present or future prohibitions against assignment in any federal statutes or regulations, (iv) constructive trusts, equitable liens or other rights impressed or conferred by any state or federal court

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in the exercise of its equitable jurisdiction, and (v) federal or state bankruptcy laws that may affect the enforceability of the Master Indenture or grant of a security interest in Gross Revenues.

Enforceability of the Master Indenture, the Loan Agreement and the Series 2010A Obligation. The state of the insolvency, fraudulent conveyance and bankruptcy laws relating to the enforceability of guaranties or obligations issued by one corporation in favor of the creditors of another or the obligations of an Obligated Group Member to make debt service payments on behalf of an Obligated Group Member is unsettled, and the ability to enforce the Master Indenture and the Obligations against any Obligated Group Member that would be rendered insolvent thereby could be subject to challenge. In particular, such obligations may be voidable under the federal Bankruptcy Code or applicable state fraudulent conveyance laws if the obligation is incurred without “fair” and/or “fairly equivalent” consideration to the obligor and if the incurrence of the obligation thereby renders the Obligated Group Member insolvent. The standards for determining the fairness of consideration and the manner of determining insolvency are not clear and may vary under the federal Bankruptcy Code, state fraudulent conveyance statutes and applicable cases.

The joint and several obligation described herein of each Member of the Obligated Group to pay debt service on the Series 2010A Obligation may not be enforceable under any of the following circumstances:

(i) to the extent payments on the Series 2010A Obligation are requested to be made from assets of a Member other than Scripps Health which are donor-restricted or which are subject to a direct, express or charitable trust that does not permit the use of such assets for such payments;

(ii) if the purpose of the debt created and evidenced by the Series 2010A Obligation is not consistent with the charitable purposes of the Member (other than Scripps Health) from which such payment is requested or required, or if the debt was incurred or issued for the benefit of an entity other than a nonprofit corporation that is exempt from federal income taxes under Sections 501(a) and 501(c)(3) of the Code and is not a “private foundation” as defined in Section 509(a) of the Code;

(iii) to the extent payments on the Series 2010A Obligation would result in the cessation or discontinuation of any material portion of the health care or related services previously provided by such Member (other than Scripps Health); or

(iv) if and to the extent payments are requested to be made pursuant to any loan violating applicable usury laws.

These limitations on the enforceability of the joint and several obligations of the Members of the Obligated Group on the Series 2010A Obligation also apply to their obligations on all Obligations. If the obligation of a particular Member of the Obligated Group to make payment on an Obligation is not enforceable and payment is not made on such Obligation when due in full, then Events of Default will arise under the Master Indenture.

In addition, common law authority and authority under state statutes exists for the ability of courts in such states to terminate the existence of a nonprofit corporation or undertake supervision of its affairs on various grounds, including a finding that such corporation has insufficient assets to carry out its stated charitable purposes. Such court action may arise on the court’s own motion or pursuant to a petition of the attorney general of such states or such other persons who have interests different from

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those of the general public, pursuant to the common law and statutory power to enforce charitable trusts and to see to the application of their funds to their intended charitable uses.

The legal right and practical ability of the Bond Trustee to enforce its rights and remedies against Scripps Health under the Loan Agreement and related documents and of the Master Trustee to enforce its rights and remedies against the Obligated Group Members under the Series 2010A Obligation may be limited by laws relating to bankruptcy, insolvency, reorganization, fraudulent conveyance or moratorium and by other similar laws affecting creditors’ rights. In addition, the Bond Trustee’s and the Master Trustee’s ability to enforce such terms will depend upon the exercise of various remedies specified by such documents which may in many instances require judicial actions that are often subject to discretion and delay or that otherwise may not be readily available or may be limited.

The various legal opinions delivered concurrently with the issuance of the Bonds are qualified as to the enforceability of the various legal instruments by limitations imposed by state and federal laws, rulings, policy and decisions affecting remedies and by bankruptcy, reorganization or other laws of general application affecting the enforcement of creditors’ rights or the enforceability of certain remedies or document provisions.

For a further description of the provisions of the Indenture, the Loan Agreement and the Master Indenture, including covenants that secure the Bonds, events of default, acceleration and remedies under the Master Indenture, see APPENDIX C – “SUMMARY OF PRINCIPAL DOCUMENTS.”

Bankruptcy. In the event of bankruptcy of an Obligated Group Member, the rights and remedies of the Bondholders are subject to various provisions of the federal Bankruptcy Code. If an Obligated Group Member were to file a petition in bankruptcy, payments made by that Obligated Group Member during the 90 day (or perhaps one-year) period immediately preceding the filing of such petition may be avoidable as preferential transfers to the extent such payments allow the recipients thereof to receive more than they would have received in the event of such Obligated Group Member’s liquidation. Security interests and other liens granted to the Bond Trustee or the Master Trustee and perfected during such preference period also may be avoided as preferential transfers to the extent such security interest or other lien secures obligations that arose prior to the date of such perfection. Such a bankruptcy filing would operate as an automatic stay of the commencement or continuation of any judicial or other proceeding against the Obligated Group Member and its property and as an automatic stay of any act or proceeding to enforce a lien upon or to otherwise exercise control over its property, as well as various other actions to enforce, maintain or enhance the rights of the Bond Trustee and the Master Trustee. If the bankruptcy court so ordered, the property of the Obligated Group Member, including accounts receivable and proceeds thereof, could be used for the financial rehabilitation of such Obligated Group Member despite any security interest of the Bond Trustee therein. The rights of the Bond Trustee and the Master Trustee to enforce their respective security interests and other liens could be delayed during the pendency of the rehabilitation proceeding.

The obligations of Scripps Health under the Loan Agreement and of Scripps Health and any future Members under the Master Indenture are not secured by a lien on or security interest in any assets or revenues of the Members, other than the pledge of Gross Revenues. Notwithstanding the security interest in the Gross Revenues, an Obligated Group Member may file a plan for the adjustment of its debts in a proceeding under the federal Bankruptcy Code which could include provisions modifying or altering the rights of creditors generally, or any class of them, secured or unsecured. The plan, when confirmed by a court, binds all creditors who had notice or knowledge of the plan and, with certain exceptions, discharges all claims against the debtor to the extent provided for in the plan. No plan may be confirmed unless certain conditions are met, among which are conditions that the plan be feasible and that it will have been accepted by each class of claims impaired thereunder. Each class of claims has accepted

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the plan if at least two-thirds in dollar amount and more than one-half in number of the class cast votes in its favor. Even if the plan is not so accepted, it may be confirmed if the court finds that the plan is fair and equitable with respect to each class of non-accepting creditors impaired thereunder and does not discriminate unfairly. In addition, a Bankruptcy Court may, under certain conditions, avoid or strip the liens off of certain of the Obligated Group’s assets, which could include security interests granted to the Master Trustee for the benefit of the owners of Obligations issued under the Master Indenture (including the Series 2010A Obligation).

In the event of bankruptcy of any Member, there is no assurance that certain covenants, including tax covenants, contained in the Loan Agreement and certain other documents would survive. Accordingly, a bankruptcy trustee could take action that would adversely affect the exclusion of interest on the Bonds from gross income of the Bondholders for federal income tax purposes.

Other

THE BONDS ARE NOT A DEBT OR LIABILITY OF THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF OTHER THAN THE AUTHORITY, OR A PLEDGE OF THE FAITH AND CREDIT OF THE STATE OF CALIFORNIA OR ANY SUCH POLITICAL SUBDIVISION THEREOF, BUT SHALL BE PAYABLE SOLELY FROM THE FUNDS PROVIDED THEREFOR. NEITHER THE STATE OF CALIFORNIA NOR THE AUTHORITY SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF THE BONDS, OR THE INTEREST THEREON, EXCEPT FROM THE FUNDS PROVIDED UNDER THE LOAN AGREEMENT, THE SERIES 2010A OBLIGATION AND THE INDENTURE, AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF, IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR THE INTEREST ON THE BONDS. THE ISSUANCE OF THE BONDS SHALL NOT DIRECTLY OR INDIRECTLY OR CONTINGENTLY OBLIGATE THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF TO LEVY OR TO PLEDGE ANY FORM OF TAXATION WHATEVER THEREFOR OR TO MAKE ANY APPROPRIATION FOR PAYMENT OF THE BONDS. THE AUTHORITY HAS NO TAXING POWER.

ANNUAL DEBT SERVICE REQUIREMENTS

The following table sets forth, for each of Scripps Health’s fiscal years ending September 30, the estimated amounts required to be made available for the payment of principal (including Mandatory Sinking Account Payments) due on the Bonds at maturity, for the payment of interest on the Bonds and for the total debt service on the Bonds. The following table also includes the estimated debt service due on the Variable Rate Bonds and on all bonds previously issued for the benefit of Scripps Health that will be outstanding upon the issuance of the Bonds.

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The Bonds

Year Ending September 30, Principal Interest

Total Debt Service on the

Bonds

Total Debt Service on the Variable Rate

Bonds(1)

Total Debt Service on

Outstanding Bonds(2)

Total Debt Service

2010 – $1,652,360 $1,652,360 $1,716,904 $25,971,622 $29,340,8862011 – 5,889,600 5,889,600 2,970,000 26,008,098 34,867,6982012 – 5,889,600 5,889,600 2,973,402 26,032,858 34,895,8602013 – 5,889,600 5,889,600 2,966,598 25,967,639 34,823,8372014 $2,640,000 5,850,000 8,490,000 2,970,000 26,002,349 37,462,3492015 2,785,000 5,754,700 8,539,700 2,970,000 25,948,182 37,457,8822016 2,850,000 5,627,750 8,477,750 2,973,402 26,009,701 37,460,8532017 2,975,000 5,497,000 8,472,000 2,966,598 26,018,893 37,457,4912018 3,040,000 5,361,500 8,401,500 2,970,000 26,088,932 37,460,4322019 3,120,000 5,207,500 8,327,500 2,970,000 26,161,438 37,458,9382020 3,230,000 5,048,750 8,278,750 2,973,402 26,208,348 37,460,5002021 3,360,000 4,884,000 8,244,000 2,966,598 26,246,724 37,457,3222022 – 4,800,000 4,800,000 2,970,000 26,344,252 34,114,2522023 – 4,800,000 4,800,000 2,970,000 26,935,021 34,705,0212024 – 4,800,000 4,800,000 2,973,402 24,850,966 32,624,3682025 – 4,800,000 4,800,000 2,966,598 23,591,850 31,358,4482026 – 4,800,000 4,800,000 2,970,000 23,671,373 31,441,3732027 – 4,800,000 4,800,000 2,970,000 23,639,262 31,409,2622028 – 4,800,000 4,800,000 2,973,402 23,659,663 31,433,0652029 – 4,800,000 4,800,000 2,966,598 25,455,130 33,221,7282030 – 4,800,000 4,800,000 2,970,000 25,500,124 33,270,1242031 – 4,800,000 4,800,000 2,970,000 25,543,403 33,313,4032032 – 4,800,000 4,800,000 2,973,402 24,228,586 32,001,9882033 17,705,000 4,357,375 22,062,375 2,966,598 2,781,521 27,810,4942034 18,610,000 3,449,500 22,059,500 2,970,000 2,780,680 27,810,1802035 19,560,000 2,495,250 22,055,250 2,970,000 2,782,328 27,807,5782036 23,415,000 1,420,875 24,835,875 2,973,402 – 27,809,2772037 16,710,000 417,750 17,127,750 10,679,035 – 27,806,7852038 – – – 24,212,650 – 24,212,6502039 – – – 24,213,331 – 24,213,3312040 – – – 24,214,456 – 24,214,4562041 – – – 24,212,585 – 24,212,5852042 – – – – – – 2043 – – – – – – 2044 – – – – – –

(1) Assumes Variable Rate Bonds issued in the aggregate principal amount of $100,000,000, with interest payable at an average

annual interest rate of 2.97% per annum.

(2) Assumes that interest on the borrowing under the SWEEP Program (a pooled revolving loan program administered by the California Statewide Communities Development Authority) is payable at an average annual interest rate of 2.97% per annum amortized as level debt service with a final maturity of 2035. For outstanding unhedged variable rate bonds, assumes that interest is payable at an average annual interest rate of 2.97% per annum. Assumes that the outstanding variable rate Series 2008G Bonds bear interest at the swap rate of 3.086%, and the hedged portion of all other outstanding variable rate bonds bear interest at the swap rate of 3.21%. Assumes floating rate paid by the swap counterparty is equal to the floating rate paid on all such bonds. Such assumptions do not conform to those required by the Master Indenture to calculate Annual Debt Service. See APPENDIX C – “SUMMARY OF PRINCIPAL DOCUMENTS—DEFINITIONS OF CERTAIN TERMS.”

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PLAN OF FINANCE

The proceeds of the Bonds, together with funds of Scripps Health, will be used to finance a portion of the cost of the Project and pay certain costs of issuing the Bonds.

ESTIMATED SOURCES AND USES OF FUNDS

The following table sets forth the estimated sources and uses of funds related to the Bonds.

Sources of Funds: Bond Proceeds $120,000,000.00 Net Original Issue Discount (541,076.20) Scripps Health Contribution 1,609,184.91

Total Sources of Funds $121,068,108.71 Uses of Funds:

Project Costs $ 119,458,923.80 Costs of Issuance(1) 1,609,184.91

Total Uses of Funds $121,068,108.71

(1) Costs of issuance include legal, printing, rating agency, accounting, Trustee and Authority fees, underwriters’ compensation

and other miscellaneous costs of issuance, which will be paid from funds of Scripps Health.

CONTINUING DISCLOSURE

Because the Bonds are limited obligations of the Authority, payable solely from amounts received from Scripps Health, financial or operating data concerning the Authority is not material to an evaluation of the offering of the Bonds or to any decision to purchase, hold or sell the Bonds, and the Authority is not providing any such information. Scripps Health has undertaken all responsibilities for any continuing disclosure to Holders of the Bonds, as described below, and the Authority shall have no liability to the Holders of the Bonds or any other person with respect to Rule 15c2-12 promulgated by the Securities and Exchange Commission (the “Rule”).

Scripps Health has covenanted for the benefit of holders and beneficial owners of the Bonds to provide certain financial information and operating data relating to Scripps Health (the “Annual Report”) by not later than six months following the end of Scripps Health’s fiscal year (which currently is September 30), commencing with the report for the fiscal year ending September 30, 2010 (due on or before March 31, 2011) and to provide notices of the occurrence of certain enumerated events, if material. The Annual Report and the notices of material events will be filed by Scripps Health, in readable PDF or other acceptable electronic form, with the Electronic Municipal Market Access system (“EMMA”) of the Municipal Securities Rulemaking Board (the “MSRB”). See APPENDIX F – “FORM OF CONTINUING DISCLOSURE CERTIFICATE” for the specific nature of the information to be contained in the Annual Report and the notices of material events. These covenants have been made in order to assist the Underwriters in complying with the Rule. Scripps Health has never failed to comply in all material respects with any previous undertaking with regard to said Rule to provide annual reports or notices of material events.

Scripps Health additionally has covenanted that it will provide (i) not later than 75 days after the end of each fiscal quarter (except the fourth fiscal quarter), unaudited financial information for Scripps Health for such fiscal quarter, including a balance sheet, a cash flow statement and a statement of

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operations, to any Bondholder that requests such information from Scripps Health at least two Business Days prior to the end of such fiscal quarter, and (ii) not later than six months of each year, the Annual Report to any Bondholder that requests such Annual Report not later than two Business Days prior to the date of filing of the Annual Report with the MSRB. Any Bondholder who requests such information will continue to receive the quarterly reports and the Annual Reports until such Bondholder requests to no longer receive such information. See APPENDIX F – “FORM OF CONTINUING DISCLOSURE CERTIFICATE.”

BONDHOLDERS’ RISKS

The purchase of the Bonds involves investment risks that are discussed throughout this Official Statement. Prospective purchasers of the Bonds should evaluate all of the information presented in this Official Statement. This section on Bondholders’ Risks focuses primarily on the general risks associated with hospital or health system operations; whereas Appendix A describes Scripps Health specifically. These should be read together.

General

Except as noted under “SECURITY FOR THE BONDS,” the Bonds are payable from Loan Repayments made pursuant to the Loan Agreement and funds provided under the Series 2010A Obligation and the Indenture. No representation or assurance can be made that revenues will be realized by Scripps Health in amounts sufficient to pay principal of and interest on the Bonds.

Scripps Health is subject to a wide variety of federal and state regulatory actions and legislative and policy changes by those governmental and private agencies that administer Medicare, Medicaid and other payors and are subject to actions by, among others, the National Labor Relations Board, The Joint Commission, the Centers for Medicare and Medicaid Services (“CMS”) of the U.S. Department of Health and Human Services (“DHHS”), the Attorney General of the State of California, and other federal, state and local government agencies. The future financial condition of Scripps Health could be adversely affected by, among other things, changes in the method and amount of payments to Scripps Health by governmental and nongovernmental payors, the financial viability of these payors, increased competition from other health care entities, the costs associated with responding to governmental inquiries and investigations, demand for health care, other forms of care or treatment, changes in the methods by which employers purchase health care for employees, capability of management, changes in the structure of how health care is delivered and paid for (e.g., a public payor option), future changes in the economy, demographic changes, availability of physicians, nurses and other health care professionals, and malpractice claims and other litigation. These factors and others may adversely affect payment by Scripps Health under the Loan Agreement and the Series 2010A Obligation and, consequently, on the Bonds. In addition, the tax-exempt status of Scripps Health and, therefore, of the Bonds, could be adversely affected by, among other things, an adverse determination by a governmental entity, non-compliance with governmental regulations or legislative changes.

Significant Risk Areas Summarized

Certain of the primary risks associated with the operations of Scripps Health are briefly summarized in general terms below and are explained in greater detail in subsequent sections. The occurrence of one or more of these risks could have a material adverse effect on the financial conditions and results of operations of Scripps Health and, in turn, the ability of Scripps Health to make payments under the Loan Agreement and the Series 2010A Obligation.

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Reliance on Medicare. Inpatient hospitals rely to a high degree on payment from the federal Medicare program. Future changes in the underlying law and regulations, as well as in payment policy and timing, create uncertainty and could have a material adverse impact on hospitals’ payment stream from Medicare. With health care and hospital spending reported to be increasing faster than the rate of general inflation, Congress and/or CMS may take action in the future to decrease or restrain Medicare outlays for hospitals.

Rate Pressure from Insurers and Purchasers. Certain health care markets, including many communities in California, are strongly impacted by large health insurers and, in some cases, by major purchasers of health services. In those areas, health insurers may have significant influence over the rates, utilization and competition of hospitals and other health care providers. Rate pressure imposed by health insurers or other major purchasers, including managed care payors, may have a material adverse impact on health care providers, particularly if major purchasers put increasing pressure on payors to restrain rate increases. Business failures by health insurers also could have a material adverse impact on contracted hospitals and other health care providers in the form of payment shortfalls or delay, and/or continuing obligations to care for managed care patients without receiving payment. In addition, disputes with non-contracted payors are increasing and may result in an inability to collect billed charges from these payors.

Nonprofit Health Care Environment. Recently, an increasing number of the operations or practices of health care providers have been challenged or questioned to determine if they are consistent with the regulatory requirements that apply to nonprofit tax-exempt organizations. Areas that have come under examination have included pricing practices, billing and collection practices, charitable care, executive compensation, and exemption of property from real property taxation. These challenges and questions have come from a variety of sources, including state attorneys general, the Internal Revenue Service (the “IRS”), labor unions, Congress, state legislatures and patients, and in a variety of forums, including hearings, audits and litigation. The challenges and examinations, and any resulting legislation, regulations, judgments or penalties, could have a material adverse effect on Scripps Health.

Capital Needs vs. Capital Capacity. Hospital and other health care operations are capital intensive. Regulation, technology and physician/patient expectations require constant and often significant capital investment. In California, seismic requirements mandated by the State of California may require that many hospital facilities be substantially modified, replaced or closed. Nearly all hospitals in California are affected. Estimated construction costs are substantial and actual costs of compliance may exceed estimates. Total capital needs may outstrip capital capacity. Furthermore, capital capacity of hospitals and health systems may be reduced as a result of recent credit market dislocations, and it is uncertain how long those conditions may persist.

Construction Risks. Constructions projects are subject to a variety of risks, including but not limited to delays in issuance of required building permits or other necessary approvals or permits, including environmental approvals, strikes, shortages of materials and labor, and adverse weather conditions. Such events could delay occupancy. Cost overruns may occur due to change orders, delays in the construction schedule, changes in scope of development, scarcity of building materials and labor and other factors. Cost overruns could cause the costs of any project to exceed available funds. Construction costs historically had been inflating in California up to 20% annually, making some projects financially prohibitive, although the rate of inflation recently has slowed significantly. In particular, substantial portions of the Project involve construction of new facilities and rehabilitation and retrofitting of existing health facilities of Scripps Health. In such circumstances, the possibility of cost overruns, scope of work revisions or inadequate initial estimates of cost of completion of the Project is particularly acute. Also, some components of the Project are in early stages of development where costs have been estimated based on architects’ and engineers’ estimates, but plans, specifications and construction drawings have

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not been developed and have not been bid to contractors or resulted in construction contracts. For a description of Scripps Health’s planned construction projects, see APPENDIX A – “INFORMATION CONCERNING SCRIPPS HEALTH – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL PERFORMANCE – Capital Expenditures.”

Government “Fraud” Enforcement. “Fraud” in government funded health care programs is a significant concern of DHHS, CMS and many states and is one of the federal government’s prime law enforcement priorities. The federal government and, to a lesser degree, state governments impose a wide variety of extraordinarily complex and technical requirements intended to prevent over-utilization based on economic inducements, misallocation of expenses, overcharging and other forms of “fraud” in the Medicare and Medicaid programs, as well as other state and federally-funded health care programs. This body of regulation impacts a broad spectrum of hospital and other health care provider commercial activity, including billing, accounting, recordkeeping, medical staff oversight, physician contracting and recruiting, cost allocation, clinical trials, discounts and other functions and transactions.

Violations and alleged violations may be deliberate, but also frequently occur in circumstances where management is unaware of the conduct in question, as a result of mistake, or where the individual participants do not know that their conduct is in violation of law. Violations may occur and be prosecuted in circumstances that do not have the traditional elements of fraud, and enforcement actions may extend to conduct that occurred in the past. Violations carry significant sanctions. The government periodically conducts widespread investigations covering categories of services or certain accounting or billing practices.

The government and/or private “whistleblowers” often pursue aggressive investigative and enforcement actions. The government has a wide array of civil, criminal and monetary penalties, including withholding essential hospital and other health care provider payments from the Medicare or Medicaid programs, or exclusion from those programs. Aggressive investigation tactics, negative publicity and threatened penalties can be, and often are, used to force settlements, payment of fines and prospective restrictions that may have a materially adverse impact on hospital and other health care provider operations, financial condition, results of operations and reputation. Multi-million dollar fines and settlements are common. These risks are generally uninsured. Government enforcement and private whistleblower suits may increase in the hospital and health care sector. Most large hospital and other health care provider systems are likely to be adversely impacted.

Personnel Shortage. Currently, a shortage of physicians (including specialists) and nursing and other technical personnel exists which may have its primary impact on hospitals and health systems. Various studies have predicted that this shortage will become more acute over time and grow to significant proportions. In California, state regulation of nurse staff ratios may intensify the shortage of nursing personnel. In addition, shortages of other professional and technical staff such as pharmacists, therapists, laboratory technicians and others may occur or worsen. Agreements with physicians are subject to renewal risk, which could potentially affect the hospital or health system’s ability to recruit and retain physicians. Hospital operations, patient and physician satisfaction, financial condition and future growth could be negatively affected by physician and nursing and other technical personnel shortages, resulting in material adverse impact to hospitals and health systems.

Technical and Clinical Developments. New clinical techniques and technology, as well as new pharmaceutical and genetic developments and products, may alter the course of medical diagnosis and treatment in ways that are currently unanticipated, and that may dramatically change medical and hospital care. These could result in higher health care costs, reductions in patient populations, lower utilization of hospital service and/or new sources of competition for hospitals.

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Costs and Restrictions from Governmental Regulation. Nearly every aspect of hospital operation and health care delivery is regulated, in some cases by multiple agencies of government. The level and complexity of regulation and compliance audits appear to be increasing, imposing greater operational limitations, higher staffing and training requirements, enforcement and liability risks, and significant and sometimes unanticipated costs.

Proliferation of Competition. Hospitals increasingly face competition from specialty providers of care and ambulatory care facilities. This may cause hospitals to lose essential inpatient or outpatient market share. Competition may be focused on services or payor classifications where hospitals realize their highest margins, thus negatively affecting programs that are economically important to hospitals. Specialty hospitals may attract specialists as investors and may seek to treat only profitable classifications of patients, leaving full-service hospitals with higher acuity and/or lower paying patient populations. These new sources of competition may have a material adverse impact on hospitals, particularly where a group of a hospital’s principal physician admitters may curtail their use of a hospital service in favor of a competitor’s facilities.

Increasing Consumer Choice. Hospitals and other health care providers face increased pressure to be transparent and provide information about cost and quality of services, which may lead to a loss of business as consumers and others make choices about where to receive health care services based upon published information.

Labor Costs and Disruption. The delivery of health care is labor intensive. Labor costs, including salary, benefits and other liabilities associated with the workforce, have significant impact on hospital and health care provider operations and financial condition. Hospital and health care employees are increasingly organized in collective bargaining units and may be involved in work actions of various kinds, including work stoppages and strikes. Overall costs of the hospital workforce are high, and turnover is high. Pressure to recruit, train and retain qualified employees is expected to accelerate. These factors may materially increase hospital costs of operation. Workforce disruption may negatively impact hospital revenues and reputation.

State Medicaid Program. While the California Medicaid program, known as the Medi-Cal program, is rarely as important to hospital and other health care provider financial results as Medicare, it nevertheless constitutes an important payor source to many hospitals, physicians and other health care providers. This program often pays hospitals, physicians and other health care providers at levels that are substantially below the actual cost of the care provided. As Medi-Cal is partially funded by the State of California, the financial condition of the State of California could affect funding levels and/or cause payment delays. This could have a material adverse impact on hospitals and other health care providers.

General Economic Conditions; Bad Debt and Indigent Care. Hospitals and other health care providers are economically influenced by the environment in which they are located. To the extent that state, county or city governments are unable to provide a safety net of medical services, pressure is applied to local hospitals and providers to increase free care. Economic downturns and lower funding of state Medicaid programs may increase the number of patients treated by hospitals and providers who are uninsured, underinsured or otherwise unable to pay for some or all of their care. These conditions may give rise to increased bad debt and higher indigent care utilization. At the same time, nonoperating revenue from investments may be reduced or eliminated. These factors may have a material adverse impact on hospitals and other health care providers.

Health Care Reform. Federal and state legislators have proposed various health care reform plans that, if enacted, would make significant changes in the way health care services are delivered and reimbursed. Some proposals are sweeping and would require conforming and complex changes to both

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federal and state laws addressing perhaps all aspects of hospital and provider operations, health care delivery and reimbursement. These changes could result in lower hospital and provider reimbursement, utilization changes, increased government enforcement and other impacts.

Pension and Benefit Funds. As large employers, health systems may incur significant expenses to fund pension and benefit plans for employees and former employees, and to fund required workers’ compensation benefits. Funding obligations in some cases may be erratic or unanticipated and may require significant commitments of available cash needed for other purposes.

Medical Liability Litigation and Insurance. Medical liability litigation is subject to public policy determinations and legal and procedural rules that may be altered from time to time, with the result that the frequency and cost of such litigation, and resultant liabilities, may increase in the future. Health systems may be affected by negative financial and liability impacts on physicians. Costs of insurance, including self-insurance, may increase dramatically.

Facility Damage. Hospitals and other health care providers are highly dependent on the condition and functionality of their physical facilities. Damage from earthquake, floods, fire other natural causes, deliberate acts of destruction, or various facilities system failures may have a material adverse impact on operations, financial condition and results of operations.

Nonprofit Health Care Environment

As a nonprofit tax-exempt organization, Scripps Health is subject to federal, state and local laws, regulations, rulings and court decisions relating to its organization and operation, including its operation for charitable purposes. At the same time, Scripps Health conducts large-scale complex business transactions and is a large employer in its geographic area. There can often be a tension between the rules designed to regulate a wide range of charitable organizations and the day-to-day operations of a complex health care organization.

An increasing number of the operations or practices of health care providers have been challenged or questioned to determine if they are consistent with the regulatory requirements for nonprofit tax-exempt organizations. These challenges are broader than concerns about compliance with federal and state statutes and regulations, and, in many cases, are examinations of core business practices of the health care organizations. Areas subject to examination have included pricing practices, billing and collection practices, charitable care, methods of providing and reporting community benefit, executive compensation, exemption of property from real property taxation, private use of facilities financed with tax-exempt bonds and others. These challenges and questions have come from a variety of sources, including the IRS, state attorneys general, Congress, labor unions, state legislatures and patients, and in a variety of forums, including hearings, audits and litigation. The challenges and examinations, and any resulting legislation, regulations, judgments or penalties, could have a material adverse effect on Scripps Health. These challenges or examinations include the following, among others:

Congressional Hearings. Since 2004, three Congressional Committees have conducted hearings inquiring into various practices of nonprofit hospitals and health care providers. The House Committee on Energy and Commerce (the “House Committee”) launched a nationwide investigation of hospital billing practices and prices charged to uninsured patients. Twenty large hospital and health care systems were requested by the House Committee to provide detailed historical charge and billing information for acute care services.

Beginning in 2006, the Senate Finance Committee (the “Senate Committee”) also conducted hearings on potential reforms to the nonprofit sector and released a staff discussion

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draft on proposals for reform of tax-exempt organizations, including a proposal for a five-year review of tax-exempt status by the IRS. The Senate Committee has also requested information from a number of nonprofit hospitals and hospital systems regarding their charitable activities, patient billing and ventures with for-profit corporations and hospitals. Such hearings have continued through 2009. In July 2007, the Senate Committee released a Staff Discussion Paper summarizing its findings and recommendations. The Senate Committee’s recommendations have not yet been implemented, but they remain under discussion for potential legislative action.

The House Committee on Ways and Means also held hearings to examine the tax-exempt sector, hospital tax-exemptions and the use of tax-preferred bond financings.

In September 2009, the Senate Finance Committee released proposed additional requirements for tax-exempt hospitals as part of its health care reform bill. The bill proposes additional requirements related to hospital financial assistance policies, community health needs assessments, restrictions on hospital charges and collection practices, and new disclosure and reporting requirements (which include IRS review of hospitals’ community benefits activities every three years).

It is uncertain whether any of these Committees will pursue further investigations or whether Congress will adopt legislative changes negatively impacting tax exemption or tax exempt hospitals. An overarching concern is whether tax exempt hospitals provide charity care at levels that justify the benefits of tax-exemption. Should current federal reform proposals that include universal coverage be enacted, charitable tax-exemption founded on charity care to the uninsured may be jeopardized.

IRS Examination of Compensation Practices and Community Benefit. In 2004, the IRS began a compliance program to measure compliance by tax-exempt organizations with requirements that they not pay excessive compensation and benefits to their officers and other insiders. In February 2009, the IRS issued its Hospital Compliance Project Final Report (the “IRS Final Report”) that examined tax-exempt hospitals’ practices and procedure with regard to compensation and benefits paid to their officers and other defined “insiders.” The IRS Final Report indicates that the IRS (1) will continue to heavily scrutinize tax-exempt organizations; and (2) in certain circumstances, may conduct further investigations or impose fines on such organizations.

The IRS has also undertaken a community benefit initiative directed at hospitals. An IRS report on this initiative determined that a lack of uniformity in definitions of community benefit used by reporting hospitals, including those regarding uncompensated care and various types of community benefit, made it difficult for the IRS to assess whether any particular hospital is in compliance with current law. As a result, the revised IRS Form 990 includes a new schedule, which hospitals must use to report their community benefit activities, including the cost of providing charity care and other tax-exemption related information. Proposals have also been made within Congressional committee use to codify the requirements for hospitals’ tax-exempt status, including requirements to conduct a regular community needs analysis and to provide minimum levels of charity care.

California Attorney General. California nonprofit corporations, including Scripps Health, are subject at all times to examination by the California Attorney General (the “AG”) to ensure that the purposes of the nonprofit corporations are being carried out.

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Financial Assistance and Charity Care. California law requires hospitals to maintain written policies about discount payment and charity care and provide copies of such policies to patients and the Office of Statewide Health Planning and Development (“OSHPD”). California hospitals are also required to follow specific billing and collection procedures.

Indigent Care. Tax-exempt health care providers often treat large numbers of indigent patients who are unable to pay in full for their medical care. Typically, urban, inner-city hospitals and other health care providers may treat significant numbers of indigents. These hospitals and other health care providers may be susceptible to economic and political changes that could increase the number of indigents or their responsibility for caring for this population. General economic conditions that affect the number of employed individuals who have health coverage affects the ability of patients to pay for their care. Similarly, changes in governmental policy, which may result in coverage exclusions under local, county, state and federal health care programs (including Medicare and Medicaid) may increase the frequency and severity of indigent treatment by such hospitals and other providers. It also is possible that future legislation could require that tax-exempt hospitals and other providers maintain minimum levels of indigent care as a condition to federal income tax exemption or exemption from certain state or local taxes.

Class Actions. Hospitals and health systems have long been subject to a wide variety of litigation risks, including liability for care outcomes, employer liability, property and premises liability, and peer review litigation with physicians, among others. In recent years, consumer class action litigation has emerged as a potentially significant source of litigation liability for hospitals and health systems. These class action suits have most recently focused on hospital billing and collections practices, and they may be used for a variety of currently unanticipated causes of action. Since the subject matter of class action suits may involve uninsured risks, and since such actions often involve alleged large classes of plaintiffs, they may have material adverse consequences on hospitals and health systems in the future.

Action by Purchasers of Hospital Services and Consumers. Major purchasers of hospital services also could take action to restrain hospital charges or charge increases. In California, the California Public Employees’ Retirement System, the nation’s third largest purchaser of employee health benefits, has pledged to take action to restrain the rate of growth of hospital charges and has excluded certain California hospitals from serving its covered members. As a result of increased public scrutiny, it is also possible that the pricing strategies of hospitals may be perceived negatively by consumers, and hospitals may be forced to reduce fees for their services. Decreased utilization could result, and hospitals’ revenues may be negatively impacted. In addition, consumers and groups on behalf of consumers are increasing pressure for hospitals and other health care providers to be transparent and provide information about cost and quality of services that may affect future consumer choices about where to receive health care services.

Challenges to Real Property Tax Exemptions. Recently, the real property tax exemptions afforded to certain nonprofit health care providers by state and local taxing authorities have been challenged on the grounds that the health care providers were not engaged in sufficient charitable activities. These challenges have been based on a variety of grounds, including allegations of aggressive billing and collection practices and excessive financial margins.

The foregoing are some examples of the challenges and examinations facing nonprofit health care organizations. They are indicative of a greater scrutiny of the billing, collection and other business practices of these organizations and may indicate an increasingly difficult operating environment for health care organizations, including Scripps Health. The challenges and examinations, and any resulting

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legislation, regulations, judgments, or penalties, could have a material adverse effect on hospitals and health care providers, including the Scripps Health, and, in turn, its ability to make payments under the Loan Agreement and the Series 2010A Obligation.

Health Care Reform

The United States Senate and House of Representatives have each passed their own versions of health care reform legislation. The Senate’s version is known as the Patient Protection and Affordable Care Act. The House of Representative’s version is known as the Affordable Health Care for America Act. The two separate bills will now be subjected to the reconciliation process led by the majority leadership of both houses of Congress. The purpose of the reconciliation process is the development of a single bill that will be acceptable to majorities in both houses, passed and submitted to the President for approval. The reconciliation process, particularly in the context of these two bills, may be contentious and may not necessarily result in legislation that will be passed by both houses of Congress or approved by the President.

The two bills include many provisions that are similar in intent and effect, but with variations in details as well as some dissimilar provisions. The reconciliation process will attempt to resolve those differences. Assuming enactment, some of the provisions will take effect immediately or within a few months of final approval, while others will be phased in over time, ranging from one year to ten years. Because of the complexity of these two bills and, assuming successful reconciliation, the final legislation, additional legislation is likely to be considered over time. Additionally, any finally approved legislation will require the promulgation of substantial regulations with significant effect on the health care industry. Thus, assuming enactment of the current health care reform legislation, the health care industry will be subjected to significant new statutory and regulatory requirements and consequently to structural and operational changes and challenges for a substantial period of time. Various interested parties have also indicated that they are likely to bring lawsuits to challenge certain provisions should they be included in the final legislation, possibly affecting the timing and/or effectiveness of those provisions.

Management of Scripps Health is analyzing the two bills and, if a final bill is approved, will continue to do so in order to assess the effect of the legislation on current and projected operations, financial performance and financial condition. However, management cannot predict with any reasonable degree of certainty or reliability any interim or ultimate effects of the legislation.

A significant component of the proposed legislation is reformation of the sources and methods by which consumers will pay for health care for themselves and their families and by which employers will procure health insurance for their employees and dependents and, as a consequence, expansion of the base of consumers of health care services. One of the primary drivers of health care reform legislation is to provide or make available, or subsidize the premium costs of, health care insurance for the millions of currently uninsured (or underinsured) consumers. The legislation proposes to accomplish that objective through, among other provisions, (i) the creation of active markets (referred to as exchanges) in which individuals and small employers can purchase health care insurance for themselves and their families or their employees and dependents, (ii) mandating that individual consumers obtain and certain employers provide a minimum level of health care insurance, (iii) establishment of insurance reforms that expand coverage generally through such provisions as prohibitions on denials of coverage for pre-existing conditions and elimination of life-time or annual cost caps, (iv) expansion of existing public programs, including Medicaid and CHIP, to cover a substantially larger population of individuals and families, (v) authorization of governmentally owned and operated insurance plans (the “public option”) and (vi) expansion of the program of insurance currently available to federal employees. To the extent all or any of those provisions, as ultimately included in the final bill, produce the intended result, an increase in

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utilization of health care services by those who are currently avoiding or rationing their health care can be expected and bad debt expenses may be reduced.

Some of the specific provisions of the bills that may affect hospital operations, financial performance or the financial condition include the following. This listing is not, is not intended to be, nor should be considered by the reader as comprehensive. The two bills are extraordinarily complex and comprehensive, and include a myriad of new programs and initiatives and changes to existing programs, policies, practices and laws. The reader is encouraged to review in the public media summaries and analysis of the two bills and any final bill that emerges from the reconciliation process.

• With varying effective dates, the annual Medicare market basket updates for many providers, including hospitals, would be reduced, and adjustments to payment for expected productivity gains would be implemented.

• Commencing in 2015 (Senate bill) or 2017 (House bill), Medicare disproportionate share hospital (“DSH”) payments will be reduced to account for reductions in the national rate of consumers who do not have health care insurance. Commencing in 2011 (Senate bill) or 2017 (House bill), a state’s Medicaid DSH allotment from federal funds will also be reduced.

• Commencing in 2012 (Senate bill) or 2011 (House bill), Medicare payments that would otherwise be made to hospitals would be reduced by specified percentages to account for excess and “preventable” hospital readmissions.

• Commencing in 2015 (Senate bill), Medicare payments to certain hospitals for hospital-acquired conditions will be reduced by 1%. Commencing in 2011, federal payments to states for Medicaid services related to health care-acquired conditions will be prohibited

• Effective in 2012 (Senate bill), a value-based purchasing program will be established under the Medicare program designed to pay hospitals based on performance on quality measures.

• With varying effective dates, both bills mandate a reduction of waste, fraud, and abuse in public programs by allowing provider enrollment screening, enhanced oversight periods for new providers and suppliers, and enrollment moratoria in areas identified as being at elevated risk of fraud in all public programs, and by requiring Medicare and Medicaid program providers and suppliers to establish compliance programs. The Senate bill requires the development of a database to capture and share health care provider data across federal health care programs. Both bills provide for increased penalties for fraud and abuse violations, and increased funding for anti-fraud activities.

• Effective for tax years commencing immediately after approval (Senate bill), additional requirements for tax-exemption will be imposed upon tax-exempt hospitals, including obligations to conduct a community needs assessment every three years; adopt an implementation strategy to meet those identified needs; adopt and publicize a financial assistance policy; limit charges to patients who qualify for financial assistance to the lowest amount charged to insured patients; and control the billing and collection processes. Failure to satisfy these conditions may result in the imposition of fines.

• Commencing in 2015 (Senate bill), the establishment of an Independent Payment Advisory Board to develop proposals to improve the quality of care and limitations on cost increases. Those proposals would be automatically implemented if Congress does not act to invalidate them.

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Both bills provide for the implementation of various demonstration programs and pilot projects to test, evaluate, encourage and expand new payment structures and methodologies to reduce health care expenditures while maintaining or improving quality of care, including bundled payments under Medicare and Medicaid, and comparative effectiveness research programs that compare the clinical effectiveness of medical treatments and develop recommendations concerning practice guidelines and coverage determinations. Other provisions encourage the creation of new health care delivery programs, such as accountable care organizations, or combinations of provider organizations, that voluntarily meet quality thresholds to share in the cost savings they achieve for the Medicare program. The outcomes of these projects and programs, including their effect on payments to providers and financial performance, cannot be predicted.

Patient Service Revenues

The Medicare Program. Medicare is the federal health insurance system under which hospitals are paid for services provided to eligible elderly and disabled persons. Medicare is administered by CMS, which delegates to the states the process for certifying hospitals to which CMS will make payment. In order to achieve and maintain Medicare certification, hospitals must meet CMS’ “Conditions of Participation” on an ongoing basis, as determined by the state and/or The Joint Commission. The requirements for Medicare certification are subject to change, and, therefore, it may be necessary for hospitals to effect changes from time to time in their facilities, equipment, personnel, billing, policies and services.

As the U.S. population ages, more people will become eligible for the Medicare program. Current projections indicate that, without some modification of the Medicare program, demographic change may exert significant and negative forces on the overall federal budget. While the Medicare program has been modified significantly in the past, there are no current proposals likely to be adopted to address this budgeting issue. Management cannot project whether or to what extent the Medicare program may be modified in the future, or what impact such modification may have on the financial operations of Scripps Health.

For the fiscal years ended September 30, 2007, September 30, 2008 and September 30, 2009, Medicare payments represented approximately 39.1%, 40.3% and 40.5%, respectively, of Scripps Health’s gross patient service revenue. See APPENDIX A – “INFORMATION CONCERNING SCRIPPS HEALTH—FINANCIAL AND OPERATING INFORMATION—Sources of Revenue.”

Recovery Audit Contractors’ Demonstration Project. In addition to periodic annual audits of Medicare payments, in 2005 CMS announced a new demonstration project using recovery audit contractors (“RACs”) as part of CMS’ further efforts to assure accurate payments. The project uses the RACs to search for potentially improper Medicare payments that may have been made to health care providers in prior years and that were not detected through existing CMS program integrity efforts. The RACs use their own software and their knowledge of Medicare to determine what areas to review. Once a RAC identifies a potentially improper claim as a result of an audit, it makes an assessment from the provider’s Medicare reimbursement in an amount estimated to equal the overpayment from the provider pending resolution of the audit. In 2007, while the RAC project was limited to a five states (including California), it returned $247 million to the Medicare Trust Funds. A nationwide rollout began in March 2008 and is scheduled to be completed in 2010. Such audits may have the effect of slowing future Medicare payments to providers pending an evolving appeals process with the RACs.

Hospital Inpatient Reimbursement. Hospitals are generally paid for inpatient services provided to Medicare beneficiaries based on established categories of treatments or conditions known as diagnosis related groups (“DRGs”). The actual cost of care, including capital costs, may be more or less than the

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DRG rate. DRG rates are subject to adjustment by CMS and are subject to federal budget considerations. There is no guarantee that DRG rates, as they change from time to time, will cover actual costs of providing services to Medicare patients.

In its Prospective Payment Final Rule for 2008 (the “2008 IPPS Rule”), CMS established a new DRG clarification system, the Medicare Severity DRGs (MS-DRGs). There can be no assurance that the changes in the classifications of patient hospitalizations at any of Scripps Health’s facilities will not result in fluctuations or declines in revenue. The MS-DRG coding system was made partially effective as of October 1, 2007 and is expected to be fully phased in 2009.

CMS also enacted provisions preventing hospitals from assigning patient cases to DRGs with higher payments where a secondary diagnosis warranting higher payment is one of several specified health conditions and was acquired in the hospital. Specifically, the 2008 IPPS Rule identifies eight conditions, including certain infections and serious preventable errors (“never events”), for which CMS will not reimburse hospitals unless the conditions were present at the time of admission. CMS has also announced its intent to identify additional conditions for which higher payment will be unavailable. It is anticipated that HMOs and other private insurers will follow suit in refusing to pay for hospital-acquired conditions. There can be no assurance that these future payment limitations will not adversely affect the revenue of Scripps Health. Also, the occurrence of a never event has serious financial consequences. Never events may be more likely to be publicized and may negatively impact a hospital’s reputation, thereby reducing future utilization and potentially increasing the possibility of liability claims.

Hospital Outpatient Reimbursement. Hospitals are generally paid for outpatient services provided to Medicare beneficiaries based on established categories of treatments or conditions known as ambulatory payment classifications (“APC”). The actual cost of care, including capital costs, may be more or less than the considerations. There is no guarantee that APC rates, as they change from time to time, will cover actual costs of providing services to Medicare patients.

Other Medicare Service Payments. Medicare payment for skilled nursing services, psychiatric services, inpatient rehabilitation services, general outpatient services and home health services are based on regulatory formulas or pre-determined rates. There is no guarantee that these rates, as they may change from time to time, will be adequate to cover the actual cost of providing these services to Medicare patients.

Reimbursement of Hospital Capital Costs. Hospital capital costs apportioned to Medicare patient use (including depreciation and interest) are paid by Medicare exclusively on the basis of a standard federal rate (based upon average national costs of capital), subject to limited adjustments specific to the hospital. There can be no assurance that future capital-related payments will be sufficient to cover the actual capital-related costs of Scripps Health’s facilities applicable to Medicare patient stays or will provide flexibility for hospitals to meet changing capital needs.

Medical Education Payments. Medicare currently pays for a portion of the costs of medical education at hospitals that have teaching programs. These payments are vulnerable to reduction or elimination. The direct and indirect medical education reimbursement programs have repeatedly emerged as targets in the legislative efforts to reduce the federal budget deficit.

The Medi-Cal Program. Medi-Cal is the Medicaid program in California. The Medicaid program provides medical assistance for certain needy individuals and their dependants. The federal and state governments jointly fund the Medicaid program, with limited funds coming from the federal government so long as the Medicaid program meets federal standards.

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Attempts to balance or reduce the federal budget, along with balanced-budget requirements in the State of California, will likely negatively impact Medicaid funding. Payments made to health care providers are subject to change, including changes in the methods for calculating payments, the amount of payments and the types of services that will be covered. Coverage of persons under Medicaid could also be reduced. See “California State Budget” below.

Under a federal Medicaid waiver, the State selectively contracts with hospitals to provide acute inpatient services to Medi-Cal patients. Currently, Scripps Health has a Medi-Cal contract with the State. The financial impact of selective contracting on a particular hospital depends upon a variety of factors such as the base contract rates, the availability of supplemental payments for disproportionate share hospitals and an individual hospital’s ability to control costs. Typically, the State of California or the contracting hospitals may terminate Medi-Cal contracts on 120 days’ prior written notice. The State also may terminate these contracts without notice under certain circumstances and is obligated to make contractual payments only to the extent the state legislature appropriates adequate funding therefor. No assurances can be made that hospitals will be awarded Medi-Cal contracts or that such contracts will reimburse hospitals for the costs of delivering services.

For the fiscal years ended September 30, 2007, September 30, 2008 and September 30, 2009, Scripps Health received approximately 10.5%, 10.7% and 10.1%, respectively, of gross patient service revenues from state Medicaid programs (including San Diego County medical service). See APPENDIX A – “INFORMATION CONCERNING SCRIPPS HEALTH—FINANCIAL AND OPERATING INFORMATION—Sources of Revenue.”

Hospital Tax. In October 2009, the California legislature enacted Assembly Bill 1383, which assessed a fee or tax on non-exempt California hospitals as a condition of participation in state-funded health insurance programs (the “Hospital Tax”). The amount of the fee is calculated by the Department of Health Care Services in accordance with statutory formulas, based on the number of patient days and the breakdown of days attributable to Medi-Cal. The revenues from this fee will be redistributed in the form of supplemental payments to hospitals for services provided to Medi-Cal beneficiaries. Subject to federal approval, these supplemental payments to hospitals will be matched by the federal government’s cost share for Medi-Cal services, making additional revenue available for California hospitals. Although it is anticipated that most hospitals and ambulatory surgical centers in California will ultimately benefit from the Hospital Tax program, not all hospitals will receive more in supplemental payments than they will pay out in new taxes. There can be no assurance that the Obligated Group will be compensated for the full amount of the Hospital Tax. At this point, it is not possible to predict the effect of the recent legislation on the revenues of the Obligated Group.

Private Hospital Supplemental Fund. The Medi-Cal Hospital/Uninsured Care Demonstration Project Act created the Private Hospital Supplemental Fund, which provides additional payments for disproportionate share hospitals either licensed to provide basic or comprehensive emergency services or designated by the National Cancer Center Institute as a comprehensive or clinical cancer research center that, in each case, are able to demonstrate a purpose for additional funding including proposals for expanding and/or improving access to emergency room and other health care facilities. The program is currently supported with the State’s general funds, which are then matched by the federal government. Scripps Mercy Hospital qualified to receive additional payments from the Private Hospital Supplemental Fund in the fiscal years ended September 30, 2007, 2008 and 2009. There can be no assurance that Scripps Mercy Health will continue to qualify in the future. There also can be no assurance that such payments will not be decreased or eliminated in the future, particularly under the Medi-Cal program. See APPENDIX A — “INFORMATION CONCERNING SCRIPPS HEALTH—FINANCIAL AND OPERATING INFORMATION—Sources of Revenue.”

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Disproportionate Share Payments. The federal Medicare and the California Medi-Cal programs each provide additional payment for hospitals that serve a disproportionate share of certain low income patients. Certain facilities of Scripps Health qualify as disproportionate share hospitals. There can be no assurance that such facilities will qualify for disproportionate share status in the future. There also can be no assurance that payments for disproportionate share will not be decreased or eliminated in the future, particularly under the Medi-Cal program. Disproportionate share payments are frequently the target of proposed Medi-Cal payment reductions. See APPENDIX A — “INFORMATION CONCERNING SCRIPPS HEALTH—FINANCIAL AND OPERATING INFORMATION—Sources of Revenue.”

California State Budget. California faces severe financial challenges, including erosion of general fund tax revenues, falling real estate values, slower economic growth and higher unemployment, which may continue or worsen over the coming years. In California these problems are compounded by political dysfunction in State government. Shortfalls between state revenues and spending have in the past and may in the future result in cutbacks to government health care programs. Failure by the California legislature to approve budgets prior to the start of a new fiscal year can also result in a temporary hold on or delay of Medi-Cal reimbursement. See APPENDIX A — “INFORMATION CONCERNING SCRIPPS HEALTH—FINANCIAL AND OPERATING INFORMATION—Sources of Revenue.”

The State of California’s budget for the 2009-2010 fiscal year authorizes a $2.0 billion spending reduction for state health care programs, including funding cuts of approximately $1.3 billion from Medi-Cal, approximately $1.0 billion of which reductions represent California’s expectation of increased federal participation to supplant state funding. This federal funding is not assured. California continues to face an approximate $6.6 billion budget deficit in the 2009-2010 fiscal year that will need to be resolved, in addition to an expected $12.3 billion deficit projected for the 2010-2011 fiscal year. Proposals by the Governor to bridge the deficit gap include limitations to eligibility for Medi-Cal and Healthy Families and curtailment of benefits covered under these programs. It is not possible to predict what actions will be taken in future years by the State Legislature and the Governor to address California’s financial problems.

The financial challenges facing the State of California may negatively affect hospitals in a number of ways, including, elimination or reduction of health care safety net programs (causing a greater number of indigent, uninsured or underinsured patients) and/or reductions in Medi-Cal reimbursement rates. See “Other Risk Factors—Impact of Economic Turmoil” below.

The financial challenges facing states may negatively affect hospitals in a number of ways, including, but not limited to, a greater number of indigent, uninsured or underinsured patients who are unable to pay for their care or access primary care facilities and a greater number of individuals who qualify for Medicaid and/or reductions in Medicaid reimbursement rates.

Health Plans and Managed Care. Most private health insurance coverage is provided by various types of “managed care” plans, including health maintenance organizations (“HMOs”) and preferred provider organizations (“PPOs”), that generally use discounts and other economic incentives to reduce or limit the cost and utilization of health care services. Medicare and Medicaid also purchase hospital care using managed care options. Payments to hospitals from managed care plans typically are lower than those received from traditional indemnity or commercial insurers.

In California, managed care plans have replaced indemnity insurance as the prime source of non-governmental payment for hospital services, and hospitals must be capable of attracting and maintaining managed care business, often on a regional basis. Regional coverage and aggressive pricing may be

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required. However, it is also essential that contracting hospitals be able to provide the contracted services without significant operating losses, which may require multiple forms of cost containment.

Defined broadly, for the fiscal years ended September 30, 2007, September 30, 2008 and September 30, 2009, managed care payments (excluding capitated Medicare and Medicaid contracts) constituted approximately 42.7%, 41.6% and 42.4%, respectively, of gross patient service revenues of Scripps Health. See APPENDIX A – “INFORMATION CONCERNING SCRIPPS HEALTH—FINANCIAL AND OPERATING INFORMATION—Sources of Revenue.”

Many HMOs and PPOs currently pay providers on a negotiated fee-for-service basis or, for institutional care, on a fixed rate per day of care, which, in each case, usually is discounted from the usual and customary charges for the care provided. As a result, the discounts offered to HMOs and PPOs may result in payment to a provider that is less than its actual cost. Additionally, the volume of patients directed to a provider may vary significantly from projections, and/or changes in the utilization may be dramatic and unexpected, thus jeopardizing the provider’s ability to manage this component of revenue and cost.

Some HMOs employ a “capitation” payment method under which hospitals are paid a predetermined periodic rate for each enrollee in the HMO who is “assigned” or otherwise directed to receive care at a particular hospital. The hospital may assume financial risk for the cost and scope of institutional care given. If payment is insufficient to meet the hospital’s actual costs of care, or if utilization by such enrollees materially exceeds projections, the financial condition of the hospital could erode rapidly and significantly.

Often, HMO contracts are enforceable for a stated term, regardless of hospital losses and may require hospitals to care for enrollees for a certain time period, regardless of whether the HMO is able to pay the hospital. Hospitals from time to time have disputes with managed care payors concerning payment and contract interpretation issues.

Failure to maintain contracts could have the effect of reducing the Scripps Health market share and net patient services revenues. Conversely, participation may result in lower net income if participating hospitals are unable to adequately contain their costs. Thus, managed care poses one of the most significant business risks (and opportunities) the hospitals face.

Negative Rankings Based on Clinical Outcomes, Cost, Quality, Patient Satisfaction and Other Performance Measures. Health plans, Medicare, Medi-Cal, employers, trade groups and other purchasers of health services, private standard-setting organizations and accrediting agencies increasingly are using statistical and other measures in efforts to characterize, publicize, compare, rank and change the quality, safety and cost of health care services provided by hospitals and providers. Published rankings such as “score cards,” “pay for performance” and other financial and non-financial incentive programs are being introduced to affect the reputation and revenue of hospitals, the members of their medical staffs and other providers and to influence the behavior of consumers and providers such as Scripps Health. Currently prevalent are measures of quality based on clinical outcomes of patient care, reduction in costs, patient satisfaction and investment in health information technology. Measures of performance set by others that characterize a hospital or a provider negatively may adversely affect its reputation and financial condition.

Regulatory Environment

“Fraud” and “False Claims.” Health care “fraud and abuse” laws have been enacted at the federal and state levels to broadly regulate the provision of services to government program beneficiaries

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and the methods and requirements for submitting claims for services rendered to the beneficiaries. Under these laws, hospitals and others can be penalized for a wide variety of conduct, including submitting claims for services that are not provided, billing in a manner that does not comply with government requirements or including inaccurate billing information, billing for services deemed to be medically unnecessary, or billings accompanied by an illegal inducement to utilize or refrain from utilizing a service or product.

Federal and state governments have a broad range of criminal, civil and administrative sanctions available to penalize and remediate health care fraud, including the exclusion of a hospital from participation in the Medicare/Medicaid programs, civil monetary penalties, and suspension of Medicare/Medicaid payments. Fraud and abuse cases may be prosecuted by one or more government entities and/or private individuals, and more than one of the available sanctions may be, and often are, imposed for each violation.

Laws governing fraud and abuse may apply to a hospital and to nearly all individuals and entities with which a hospital does business. Fraud investigations, settlements, prosecutions and related publicity can have a catastrophic effect on hospitals. See “Enforcement Activity,” below. Major elements of these often highly technical laws and regulations are generally summarized below.

False Claims Act. The False Claims Act (“FCA”) makes it illegal to submit or present a false, fictitious or fraudulent claim to the federal government, and may include claims that are simply erroneous. FCA investigations and cases have become common in the health care field and may cover a range of activity from intentionally inflated billings, to highly technical billing infractions, to allegations of inadequate care. Violation or alleged violation of the FCA most often results in settlements that require multi-million dollar payments and compliance agreements. The FCA also permits individuals to initiate civil actions on behalf of the government in lawsuits called “qui tam” actions. Qui tam plaintiffs, or “whistleblowers,” can share in the damages recovered by the government or recover independently if the government does not participate. The FCA has become one of the government’s primary weapons against health care fraud. FCA violations or alleged violations could lead to settlements, fines, exclusion or reputation damage that could have a material adverse impact on a hospital.

Anti-Kickback Law. The federal “Anti-Kickback Law” is a criminal statute that prohibits anyone from soliciting, receiving, offering or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for a referral (or to induce a referral) for any item or service that is paid by any federal or state health care program. The Anti-Kickback Law applies to many common health care transactions between persons and entities with which a hospital does business, including hospital-physician joint ventures, medical director agreements, physician recruitment agreements, physician office leases and other transactions.

Violation or alleged violation of the Anti-Kickback Law most often results in settlements that require multi-million dollar payments and compliance agreements. The Anti-Kickback Law can be prosecuted either criminally or civilly. Violation is a felony, subject to a fine of up to $250,000 for each act (which may be each item or each bill sent to a federal program), imprisonment and/or exclusion from the Medicare and Medicaid programs. In addition, civil monetary penalties of $10,000 per item or service in noncompliance (which may be each item or each bill sent to a federal program), or an “assessment” of three times the amount claimed may be imposed.

State “Fraud” and “False Claims” Laws. Hospital providers in California also are subject to a variety of State laws related to false claims (similar to the FCA or that are generally applicable false claims laws), anti-kickback (similar to the federal Anti-Kickback Law or that are generally applicable anti-kickback or fraud laws), and physician referral (similar to Stark). These prohibitions while similar in

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public policy and scope to the federal laws have not in all instances been avidly enforced to date. However, in the future they could pose the possibility of material adverse impact for the same reasons as the federal statutes.

Stark Referral Law. The federal “Stark” statute prohibits the referral of Medicare and Medicaid patients for certain designated health services (including inpatient and outpatient hospital services, clinical laboratory services, and radiation and other imaging services) to entities with which the referring physician has a financial relationship. It also prohibits a hospital furnishing the designated services from billing Medicare, or any other payor or individual, for services performed pursuant to a prohibited referral. The government does not need to prove that the entity knew that the referral was prohibited to establish a Stark violation. If certain technical requirements are met, many ordinary business practices and economically desirable arrangements between hospitals and physicians arguably constitute “financial relationships” within the meaning of the Stark statute, thus triggering the prohibition on referrals and billing. Most providers of the designated health services with physician relationships have some exposure to liability under the Stark statute. The Stark regulations that became effective December 4, 2007 and the CMS comments preceding them have made the statute more difficult to interpret clearly; this increases the possibility that inadvertent violations may occur.

Medicare may deny payment for all services related to a prohibited referral and a hospital that has billed for prohibited services may be obligated to refund the amounts collected from the Medicare program. For example, if an office lease between a hospital and a large group of heart surgeons is found to violate Stark, the hospital could be obligated to repay CMS for the payments received from Medicare for all of the heart surgeries performed by all of the physicians in the group for the duration of the lease; a potentially significant amount. The government may also seek substantial civil monetary penalties, and in some cases, a hospital may be liable for fines up to three times the amount of any monetary penalty, and/or be excluded from the Medicare and Medicaid programs. Although Stark does not have an extensive enforcement history, potential repayments to CMS, settlements, fines or exclusion for a Stark violation or alleged violation could have a material adverse impact on a hospital.

Antitrust. While enforcement of the antitrust laws against hospitals has been less intense in recent years, antitrust liability may arise in a wide variety of circumstances, including medical staff privilege disputes, payor contracting, physician relations, joint ventures, merger, affiliation and acquisition activities, certain pricing or salary setting activities, as well as other areas of activity. The application of the federal and state antitrust laws to health care is evolving, and therefore not always clear. Currently, the most common areas of potential liability are joint action among providers with respect to payor contracting and medical staff credentialing disputes.

Violation of the antitrust laws could result in criminal and/or civil enforcement proceedings by federal and state agencies, as well as actions by private litigants. In certain actions, private litigants may be entitled to treble damages, and in others, governmental entities may be able to assess substantial monetary fines.

HIPAA. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) adds additional criminal sanctions for health care fraud and applies to all health care benefit programs, whether public or private. HIPAA also provides for punishment of a health care provider for knowingly and willfully embezzling, stealing, converting or intentionally misapplying any money, funds, or other assets of a health care benefit program. A health care provider convicted of health care fraud could be subject to mandatory exclusion from Medicare.

HIPAA addresses the confidentiality of individuals’ health information. Disclosure of certain broadly defined protected health information is prohibited unless expressly permitted under the provisions

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of the HIPAA statute and regulations or authorized by the patient. HIPAA’s confidentiality provisions extend not only to patient medical records, but also to a wide variety of health care clinical and financial settings where patient privacy restrictions often impose new communication, operational, accounting and billing restrictions. These add costs and create potentially unanticipated sources of legal liability.

HIPAA imposes civil monetary penalties for violations and criminal penalties for knowingly obtaining or using individually identifiable health information. The penalties range from $100 to a maximum of $250,000 per violation and/or imprisonment depending on the violations degree of intent and the extent of the harm resulting from the violation.

The HITECH Act. Provisions in the 2009 Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), enacted as part of the economic stimulus legislation, increase the minimum and maximum civil monetary penalties for violations of HIPAA and grant enforcement authority of HIPAA to state attorneys general. The HITECH Act also (i) extends the reach of HIPAA beyond “covered entities,” (ii) imposes a breach notification requirement on HIPAA covered entities, (iii) limits certain uses and disclosures of individually identifiable health information, (iv) restricts covered entities’ marketing communications and (v) permits imposition of civil monetary penalties for a HIPAA violation even if an entity did not know and would not, by exercising reasonable diligence, have known of a violation. DHHS intends to finalize or issue additional regulations pursuant to the HITECH Act through August 2010, the details of which will likely influence regulatory enforcement.

Security Breaches and Unauthorized Releases of Personal Information. State and local authorities are increasingly focused on the importance of protecting the confidentiality of individuals’ personal information, including patient health information. Many states have enacted laws requiring businesses to notify individuals of security breaches that result in the unauthorized release of personal information. In some states, notification requirements may be triggered even where information has not been used or disclosed, but rather has been inappropriately accessed. State consumer protection laws may also provide the basis for legal action for privacy and security breaches and frequently, unlike HIPAA, authorize a private right of action. In particular, the public nature of security breaches exposes health organizations to increased risk of individual or class action lawsuits from patients or other affected persons, in addition to government enforcement. Failure to comply with restrictions on patient privacy or to maintain robust information security safeguards, including taking steps to ensure that contractors who have access to sensitive patient information maintain the confidentiality of such information, could consequently damage a health care provider’s reputation and materially adversely affect business operations.

Exclusions from Medicare or Medicaid Participation. The government may exclude a hospital from Medicare/Medicaid program participation that is convicted of a criminal offense relating to the delivery of any item or service reimbursed under Medicare or a state health care program, any criminal offense relating to patient neglect or abuse in connection with the delivery of health care, fraud against any federal, state or locally financed health care program or an offense relating to the illegal manufacture, distribution, prescription, or dispensing of a controlled substance. The government also may exclude individuals or entities under certain other circumstances, such as an unrelated conviction of fraud, or other financial misconduct relating either to the delivery of health care in general or to participation in a federal, state or local government program. Exclusion from the Medicare/Medicaid program means that a hospital would be decertified and no program payments can be made. Any hospital exclusion could be a materially adverse event. In addition, exclusion of hospital employees may be another source of potential liability for hospitals or health systems.

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Administrative Enforcement. Administrative regulations may require less proof of a violation than do criminal laws, and, thus, health care providers may have a higher risk of imposition of monetary penalties as a result of an administrative enforcement actions.

Compliance with Conditions of Participation. CMS, in its role of monitoring participating providers’ compliance with conditions of participation in the Medicare program, may determine that a provider is not in compliance with its conditions of participation. In that event, a notice of termination of participation may be issued or other sanctions potentially could be imposed.

EMTALA. The Emergency Medical Treatment and Active Labor Act (“EMTALA”) is a federal civil statute that requires hospitals to treat or conduct a medical screening for emergency conditions and to stabilize a patient’s emergency medical condition before releasing, discharging or transferring the patient. A hospital that violates EMTALA is subject to civil penalties of up to $50,000 per offense and exclusion from the Medicare and Medicaid programs. In addition, the hospital may be liable for any claim by an individual who has suffered harm as a result of a violation.

Licensing, Surveys, Investigations and Audits. Health facilities are subject to numerous legal, regulatory, professional and private licensing, certification and accreditation requirements. These include, but are not limited to, requirements of state licensing agencies and The Joint Commission. Renewal and continuation of certain of these licenses, certifications and accreditations are based on inspections or other reviews generally conducted in the normal course of business of health facilities. Loss of, or limitations imposed on, hospital licenses or accreditations could reduce hospital utilization or revenues, or a hospital’s ability to operate all or a portion of its facilities.

Environmental Laws and Regulations. Health facilities are subject to a wide variety of federal, state and local environmental and occupational health and safety laws and regulations. These include but are not limited to: air and water quality control requirements; waste management requirements; specific regulatory requirements applicable to asbestos and radioactive substances; requirements for providing notice to employees and members of the public about hazardous materials handled by or located at the hospital; and requirements for training employees in the proper handling and management of hazardous materials and wastes.

Health facilities may be subject to requirements related to investigating and remedying hazardous substances located on their property, including such substances that may have migrated off the property. Typical hospital operations include the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants and contaminants. As such, hospital operations are particularly susceptible to the practical, financial and legal risks associated with the environmental laws and regulations. Such risks may result in damage to individuals, property or the environment; may interrupt operations and/or increase their cost; may result in legal liability, damages, injunctions or fines; and may result in investigations, administrative proceedings, civil litigation, criminal prosecution, penalties or other governmental agency actions; and may not be covered by insurance.

Enforcement Activity. Enforcement activity against health care providers has increased, and enforcement authorities have adopted aggressive approaches. In the current regulatory climate, it is anticipated that many hospitals and physician groups will be subject to an audit, investigation or other enforcement action regarding the health care fraud laws mentioned above.

Enforcement authorities are often in a position to compel settlements by providers charged with or being investigated for false claims violations by withholding or threatening to withhold Medicare, Medicaid and/or similar payments and/or by instituting criminal action. In addition, the cost of defending

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such an action, the time and management attention consumed, and the facts of a case may dictate settlement. Therefore, regardless of the merits of a particular case, a hospital could experience materially adverse settlement costs, as well as materially adverse costs associated with implementation of any settlement agreement. Prolonged and publicized investigations could be damaging to the reputation and business of a hospital, regardless of outcome.

Certain acts or transactions may result in violation or alleged violation of a number of the federal health care fraud laws described above, and therefore penalties or settlement amounts often are compounded. Generally these risks are not covered by insurance. Enforcement actions may involve multiple hospitals in a health system, as the government often extends enforcement actions regarding health care fraud to other hospitals in the same organization. Therefore, Medicare fraud related risks identified as being materially adverse as to a hospital could have materially adverse consequences to a health system taken as a whole.

Business Relationships and Other Business Matters

Integrated Delivery Systems. Health facilities and health care systems often own, control or have affiliations with relatively large physician groups and independent practice associations. For a description of Scripps Health’s affiliations, see APPENDIX A – “INFORMATION CONCERNING SCRIPPS HEALTH – ORGANIZATIONAL STRUCTURE.” Generally, the sponsoring health facility or health system will be the capital and funding source for such alliances and may have an ongoing financial commitment to provide growth capital and support operating deficits.

These types of alliances are generally designed to respond to trends in the delivery of medicine to better integrate hospital and physician care, to increase physician availability to the community and/or to enhance the managed care capability of the affiliated hospitals and physicians. However, these goals may not be achieved, and an unsuccessful alliance may be costly and counterproductive to all of the above-stated goals.

Integrated delivery systems carry with them the potential for legal or regulatory risks in varying degrees. The ability of hospitals or health systems to conduct integrated physician operations may be altered or eliminated in the future by legal or regulatory interpretation or changes, or by health care fraud enforcement. In addition, participating physicians may seek their independence for a variety of reasons, thus putting the hospital or health system’s investment at risk, and potentially reducing its managed care leverage and/or overall utilization. Growth of integrated delivery systems may be resisted by local communities and physician groups.

Physician Medical Staff. The primary relationship between a hospital and physicians who practice in it is through the hospital’s organized medical staff. Medical staff bylaws, rules and policies establish the criteria and procedures by which a physician may have his or her privileges or membership curtailed, denied or revoked. Physicians who are denied medical staff membership or certain clinical privileges or who have such membership or privileges curtailed or revoked often file legal actions against hospitals and medical staffs. Such actions may include a wide variety of claims, some of which could result in substantial uninsured damages to a hospital. In addition, failure of the hospital governing body to adequately oversee the conduct of its medical staff may result in hospital liability to third parties.

Physician Supply. Sufficient community-based physician supply is important to hospitals. CMS annually reviews overall physician reimbursement formulas. Changes to physician compensation formulas could lead to physicians locating their practices in communities with lower Medicare populations. Hospitals may be required to invest additional resources in recruiting and retaining

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physicians, or may be required to increase the percentage of contracted physicians in order to continue serving the growing population base and maintain market share.

Competition Among Health Care Providers. Increased competition from a wide variety of sources, including specialty hospitals, other hospitals and health care systems, HMOs, inpatient and outpatient health care facilities, long-term care and skilled nursing services facilities, clinics, physicians and others, may adversely affect the utilization and/or revenues of hospitals. Existing and potential competitors may not be subject to various restrictions applicable to hospitals, and competition, in the future, may arise from new sources not currently anticipated or prevalent. The strong market position of Kaiser Permanente, a closed managed care system, presents additional challenges.

Specialty hospital developments that attract away an important segment of an existing hospital’s admitting specialists and/or services that generate a significant source of revenue may be particularly damaging. For example, some large hospitals may have significant dependence on heart surgery programs, as revenue streams from those programs may cover significant fixed overhead costs. If a significant component of such a hospital’s heart surgeons develop their own specialty heart hospital (alone or in conjunction with a growing number of specialty hospital operators and promoters), taking with them their patient base, the hospital could experience a rapid and dramatic decline in net revenues that is not proportionate to the number of patient admissions or patient days lost. It is also possible that the competing specialty hospital, as a for-profit venture, would not accept indigent patients or other payors and government programs, leaving low-pay patient populations in the full-service hospital. In certain cases, such an event could be materially adverse to the hospital. A variety of proposals have been advanced recently to permanently prohibit such investments. Nonetheless, specialty hospitals continue to represent a significant competitive challenge for full-service hospitals.

Likewise, freestanding ambulatory surgery centers may attract away significant commercial outpatient services traditionally performed at hospitals. Commercial outpatient services, currently among the most profitable for hospitals, may be lost to competitors who can provide these services in an alternative, less costly setting. Full-service hospitals rely upon the revenues generated from commercial outpatient services to fund other less profitable services, and the decline of such business may result in the significant reduction of profitable income. Competing ambulatory surgery centers, more likely a for-profit business, may not accept indigent patients or low paying programs and would leave these populations to receive services in the hospital setting. Consequently, hospitals are vulnerable to competition from ambulatory surgery centers.

Additionally, scientific and technological advances, new procedures, drugs and appliances, preventive medicine and outpatient health care delivery may reduce utilization and revenues of the hospitals in the future or otherwise lead the way to new avenues of competition. In some cases, hospital investment in facilities and equipment for capital-intensive services may be lost as a result of rapid changes in diagnosis, treatment or clinical practice brought about by new technology or new pharmacology.

Labor Relations and Collective Bargaining. Hospitals are large employers with a wide diversity of employees. Increasingly, employees of hospitals are becoming unionized, and many hospitals have collective bargaining agreements with one or more labor organizations. Employees subject to collective bargaining agreements may include essential nursing and technical personnel, as well as food service, maintenance and other trade personnel. Renegotiation of such agreements upon expiration may result in significant cost increases to hospitals. Employee strikes or other adverse labor actions may have an adverse impact on operations, revenue and hospital reputation.

No Scripps Health employees are covered by collective bargaining agreements.

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Wage and Hour Class Actions and Litigation. Federal law and many states, including notably California, impose standards related to worker classification, eligibility and payment for overtime, liability for providing rest periods and similar requirements. Large employers with complex workforces, such as hospitals, are susceptible to actual and alleged violations of these standards. In recent years there has been a proliferation of lawsuits over these “wage and hour” issues, often in the form of large, sometimes multi-state, class actions. For large employers such as hospitals, such class actions can involve multi-million dollar claims, judgments and/or settlements. A major class action decided or settled adversely to Scripps Health could have a material adverse impact on its financial condition and results of operations.

Health Care Worker Classification. Health care providers, like all businesses, are required to withhold income taxes from amounts paid to employees. If the employer fails to withhold the tax, the employer becomes liable for payment of the tax imposed on the employee. On the other hand, businesses are not required to withhold federal taxes from amounts paid to a worker classified as an independent contractor. The IRS has established criteria for determining whether a worker is an employee or an independent contractor for tax purposes. If the IRS were to reclassify a significant number of hospital independent contractors (e.g., physician medical directors) as employees, back taxes and penalties could be material.

Staffing. In recent years, the health care industry has suffered from a scarcity of nursing personnel, respiratory therapists, pharmacists and other trained health care technicians. In addition, aging medical staffs and difficulties in recruiting physicians are leading to physician shortages. A significant factor underlying this trend includes a decrease in the number of persons entering such professions. This is expected to intensify in the future, aggravating the general shortage and increasing the likelihood of hospital-specific shortages. Competition for physicians and employees, coupled with increased recruiting and retention costs will increase hospital operating costs, possibly significantly. This trend could have a material adverse impact on hospitals.

California imposes mandatory nurse staffing ratios for all hospital patient care areas. The nurse to patient ratio standards increased as of January 1, 2008. The impact on California hospitals will vary by facility, but the required staffing, in aggregate, is more costly than prior staffing patterns.

Professional Liability Claims and General Liability Insurance. In recent years, the number of professional and general liability suits and the dollar amounts of damage recoveries have increased in health care nationwide, resulting in substantial increases in malpractice insurance premiums, higher deductibles and generally less coverage. Professional liability and other actions alleging wrongful conduct and seeking punitive damages are often filed against health care providers. Insurance does not provide coverage for judgments for punitive damages.

Litigation also arises from the corporate and business activities of hospitals, from a hospital’s status as an employer or as a result of medical staff or provider network peer review or the denial of medical staff or provider network privileges. As with professional liability, many of these risks are covered by insurance, but some are not. For example, some antitrust claims or business disputes are not covered by insurance or other sources and may, in whole or in part, be a liability of a Member if determined or settled adversely.

There is no assurance that hospitals will be able to maintain coverage amounts currently in place in the future, that the coverage will be sufficient to cover malpractice judgments rendered against a hospital or that such coverage will be available at a reasonable cost in the future.

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Tax-Exempt Status and Other Tax Matters

Maintenance of the Tax-Exempt Status of Scripps Health. The tax-exempt status of the Bonds presently depends upon maintenance by Scripps Health of its status as an organization described in Section 501(c)(3) of the Code. The maintenance of such status is contingent on compliance with general rules promulgated in the Code and related regulations regarding the organization and operation of tax-exempt entities, including their operation for charitable and other permissible purposes and their avoidance of transactions that may cause their earnings or assets to inure to the benefit of private individuals. As these general principles were developed primarily for public charities that do not conduct large-scale technical operations and business activities, they often do not adequately address the myriad of operations and transactions entered into by a modern health care organization. Although traditional activities of health care providers, such as medical office building leases, have been the subject of interpretations by the IRS in the form of Private Letter Rulings, many activities or categories of activities have not been fully addressed in any official opinion, interpretation or policy of the IRS.

Scripps Health participates in a variety of joint ventures and transactions with physicians either directly or indirectly. Management believes that the joint ventures and transactions to which Scripps Health is a party are consistent with the requirements of the Code as to tax-exempt status, but, as noted above, there is uncertainty as to the state of the law.

The IRS has periodically conducted audit and other enforcement activity regarding tax-exempt health care organizations. The IRS conducts special audits of large tax-exempt health care organizations with at least $500 million in assets or $1 billion in gross receipts. Such audits are conducted by teams of revenue agents, often take years to complete and require the expenditure of significant staff time by both the IRS and taxpayers. These audits examine a wide range of possible issues, including tax-exempt bond financing of partnerships and joint ventures, retirement plans and employee benefits, employment taxes, political contributions and other matters.

If the IRS were to find that Scripps Health has participated in activities in violation of certain regulations or rulings, the tax-exempt status of such entity could be in jeopardy. Although the IRS has not frequently revoked the 501(c)(3) tax-exempt status of nonprofit health care corporations, it could do so in the future. Loss of tax-exempt status by Scripps Health potentially could result in loss of tax exemption of the Bonds and of other tax-exempt debt of Scripps Health and defaults in covenants regarding the Bonds and other related tax-exempt debt and obligations likely would be triggered. Loss of tax-exempt status also could result in substantial tax liabilities on income of Scripps Health. For these reasons, loss of tax-exempt status of Scripps Health could have a material adverse effect on the financial condition of Scripps Health.

In some cases, the IRS has imposed substantial monetary penalties on tax-exempt hospitals in lieu of revoking their tax-exempt status. In those cases, the IRS and exempt hospitals entered into settlement agreements requiring the hospital to make substantial payments to the IRS. Given the size of Scripps Health, the wide range of complex transactions it enters into, and potential exemption risks, Scripps Health could be at risk for incurring monetary and other liabilities imposed by the IRS.

In addition, the IRS may impose penalty excise taxes on certain “excess benefit transactions” involving 501(c)(3) organizations and “disqualified persons.” An excess benefit transaction is one in which a disqualified person or entity receives more than fair market value from the exempt organization or pays the exempt organization less than fair market value for property or services, or shares the net revenues of the tax-exempt entity. A disqualified person is a person (or an entity) who is in a position to exercise substantial influence over the affairs of the exempt organization during the five years preceding an excess benefit transaction. The statute imposes excise taxes on the disqualified person and any

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“organization manager” who knowingly participates in an excess benefit transaction. These rules do not penalize the exempt organization itself, so there would be no direct impact on Scripps Health or the tax status of the Bonds if an excess benefit transaction were subject to IRS enforcement, pursuant to these “intermediate sanctions” rules.

Health Care Reform Proposals to Revise Requirements for Section 501(c)(3) Hospitals. Federal legislative health care reform initiatives proposed by certain members of Congress have included provisions to revise the requirements for hospitals to qualify as organizations described in Section 501(c)(3) of the Code. These proposals have in certain cases included such new provisions as a requirement for periodic community needs assessment, requirements not to charge the maximum rate for patients who would qualify and requirements for minimum amounts of charity care. Current legislative proposals generally do not include transitional rules for hospitals, and tax-exempt bonds issued for the benefit of hospitals, qualifying under the existing community benefit standard. The effect of any of these proposed revisions, if enacted, is uncertain.

State and Local Tax Exemption. Until recently, the State of California has not been as active as the IRS in scrutinizing the income tax exemption of health care organizations. In California it is possible that legislation may be proposed to strengthen the role of the California Franchise Tax Board and the Attorney General in supervising nonprofit health systems. It is likely that the loss by Scripps Health of federal tax exemption would also trigger a challenge to its state tax-exemption. Depending on the circumstances, such event could be material and adverse.

State, county and local taxing authorities undertake audits and reviews of the operations of tax-exempt health care providers with respect to their real property tax exemptions. In some cases, particularly where authorities are dissatisfied with the amount of services provided to indigents, the real property tax-exempt status of the health care providers has been questioned. The majority of the real property of Scripps Health is currently treated as exempt from real property taxation. Although the real property tax exemption of Scripps Health with respect to its core hospital facilities has not, to the knowledge of management, been under challenge or investigation, an audit could lead to a challenge that could adversely affect the real property tax exemption of Scripps Health.

It is not possible to predict the scope or effect of future legislative or regulatory actions with respect to taxation of nonprofit corporations. There can be no assurance that future changes in the laws and regulations of state or local governments will not materially adversely affect the financial condition of Scripps Health by requiring payment of income, local property or other taxes.

Maintenance of Tax-Exempt Status of Interest on the Bonds. The Code imposes a number of requirements that must be satisfied for interest on state and local obligations, such as the Bonds, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of bond proceeds, limitations on the investment earnings of bond proceeds prior to expenditure, a requirement that certain investment earnings on bond proceeds be paid periodically to the United States Treasury, and a requirement that the Authority file an information report with the IRS. Scripps Health has covenanted in the Loan Agreement that it will comply with such requirements. Future failure by Scripps Health to comply with the requirements stated in the Code and related regulations, rulings and policies may result in the treatment of interest on the Bonds as taxable, retroactively to the date of issuance. The Authority has covenanted in the Indenture that it will not take any action or refrain from taking any action that would cause interest on the Bonds to be included in gross income for federal income tax purposes.

IRS officials have recently indicated that more resources will be invested in audits of tax-exempt bonds, including the use of bond proceeds, in the charitable organization sector, with specific review of

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private use. In addition, the IRS states that it has sent post-issuance compliance questionnaires to several hundred nonprofit corporations that have borrowed on a tax-exempt basis regarding their post-issuance compliance with various requirements for maintaining the federal tax exemption of interest on their bonds. The questionnaire includes questions relating to the borrower’s (i) record retention, which the IRS has particularly emphasized, (ii) qualified use of bond-financed property, (iii) arbitrage yield restriction and rebate requirements, (iv) debt management policies, and (v) voluntary compliance and education. IRS representatives indicate that after analyzing responses from the first wave of questionnaires, more will be sent to additional nonprofit organizations.

As previously discussed herein, the IRS has also added a new schedule to IRS Form 990 (Return of Organizations Exempt From Income Tax), on which hospitals and health systems will be asked to report how they provide community benefit and specify certain billing and collection practices. The new schedule also requests detailed information related to all outstanding bond issues of nonprofit borrowers, including information regarding operating, management and research contracts as well as private use compliance. There can be no assurance that responses by Scripps Health to a questionnaire or Form 990 will not lead to an IRS review that could adversely affect the market value of the Bonds or of other outstanding tax-exempt indebtedness of Scripps Health. Additionally, the Bonds or other tax-exempt obligations issued for the benefit of Scripps Health may be, from time to time, subject to examinations or audits by the IRS.

Scripps Health believes that the Bonds properly comply with the tax laws. In addition, Bond Counsel will render an opinion with respect to the tax-exempt status of the Bonds, as described under the caption “TAX MATTERS.” No ruling with respect to the Bonds has been or will be sought by the IRS, however, and opinions of counsel are not binding on the IRS or the courts. There can be no assurance that an IRS examination of the Bonds will not adversely affect the Bonds or the market value of the Bonds. See “TAX MATTERS” herein.

Limitations on Contractual and Other Arrangements Imposed by the Internal Revenue Code. As a tax-exempt organization, Scripps Health is limited with respect to their use of practice income guarantees, reduced rent on medical office space, low interest loans, joint venture programs and other means of recruiting and retaining physicians. Uncertainty in this area has been reduced somewhat by the issuance by the IRS of guidelines on permissible physician recruitment practices. The IRS scrutinizes a broad variety of contractual relationships commonly entered into by hospitals and has issued a detailed audit guide suggesting that field agents scrutinize numerous activities of the hospitals in an effort to determine whether any action should be taken with respect to limitations on or revocation of their tax-exempt status or assessment of additional tax. Any suspension, limitation, or revocation of one or more Member’s tax-exempt status or assessment of significant tax liability would have a materially adverse effect on Scripps Health and might lead to loss of tax exemption of interest on the Bonds.

Risks Related to Outstanding Variable Rate Obligations

Increased Interest Rates. Scripps Health has issued and may issue variable rate obligations (including the Variable Rate Bonds) secured under the Master Indenture, the interest rates on which could rise. Scripps Health’s protection against rising interest rates is limited by, among other things, market conditions and limitations contained in any related transaction documents governing the redemption or conversion of the variable rate obligations to bear interest at fixed rates.

Letters of Credit. While certain variable rate bonds of Scripps Health bear interest at variable interest rates, holders of such bonds may tender their bonds for purchase. Scripps Health’s existing variable rate bonds are secured by letters of credit obtained by Scripps Health in order to pay the principal and purchase price of and interest on the bonds. In the event of insolvency of a letter of credit bank or the

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occurrence of some other event precluding such bank from honoring its obligations to make payments pursuant to its letter of credit, holders may become general unsecured creditors of such bank. Under such circumstances, the financial resources of Scripps Health may be the only source of timely payment on the bonds on a scheduled interest or principal payment date or upon a holder’s optional tender for purchase. There can be no assurance that, under such circumstances, the financial resources of Scripps Health would be sufficient to pay the principal or purchase price of, premium, if any, or interest on such variable rate bonds.

Risks Related to Interest Rate Swap Agreements. Scripps Health has entered and may enter into interest rate swap agreements to hedge interest rate risk with respect to indebtedness. Typically, interest rate swap agreements are subject to early termination upon the occurrence of certain “termination events” or “events of default.” If either Scripps Health or the related swap counterparty terminates such an agreement when the agreement has a negative value, Scripps Health may be required to make a termination payment to the related swap counterparty, and such payment could be substantial and potentially materially adverse to the financial condition of Scripps Health.

Scripps Health has funded from time to time collateral calls by the counterparty to interest rate swap agreements previously entered by Scripps Health. See APPENDIX A—”INFORMATION CONCERNING SCRIPPS HEALTH—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL PERFORMANCE—Derivatives Transactions.”

Scripps Health’s existing interest rate swap agreements are secured by an Obligation issued under the Master Indenture. Scripps Health may in the future enter into interest rate swap agreements and other financial product and hedge devices that are secured on a parity basis with the Series 2010A Obligation and all other Obligations issued under the Master Indenture.

Other Risk Factors

Impact of Economic Turmoil. The current economic turmoil has had and will continue to have negative repercussions upon the United States and global economies. In recent months, this turmoil has particularly impacted the financial sector, prompting a number of banks and other financial institutions to seek additional capital, to merge, and, in some cases, to cease operating. These events collectively have led to a scarcity of credit, lack of confidence in the financial sector, volatility in the financial markets, fluctuations in interest rates, reduced economic activity, increased business failures and increased consumer and business bankruptcies. In addition, as investor confidence has waned, investments previously recognized as stable, such as tax-exempt money market funds (which are one of the largest purchasers of tax-exempt bonds), have experienced significant withdrawals.

If the current economic turmoil continues and the economy further weakens, health care providers could be materially and adversely impacted in a number of ways, including through reduced investment income, reduced access to the credit markets, difficulties in obtaining new liquidity facilities or extensions of existing liquidity facilities, significant draws on internal liquidity due to difficulties with remarketing existing variable rate bonds and commercial paper, and increased borrowing costs, any of which may negatively impact the operations or financial condition of a health care provider.

Earthquakes. Many hospitals in California are in close proximity to active earthquake faults. A significant earthquake in California could destroy or disable some or all of the hospital buildings of Scripps Health. California law requires each acute care hospital in the State to either comply with new hospital seismic safety standards or cease acute care operations by January 1, 2008. The California law allows three types of extensions beyond the January 1, 2008 deadline.

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First, the compliance deadline can be extended to January 1, 2013 if a hospital shows that capacity lost in the closure of a facility cannot be provided by another facility in the area or if a hospital agrees that, on or before January 1, 2013, designated services will be provided by moving into an existing conforming building, relocating to a newly built building or continuing in the building as retrofitted to comply with the standards. Scripps Health requested and received an extension to January 1, 2013 for all hospital campuses.

The second type of extension allows the 2013 deadline to be extended for up to two years to January 1, 2015, in limited cases. To qualify for the extension, such hospital must have (i) begun construction when the extension is requested; (ii) submitted construction plans to OSHPD before January 1, 2009; (iii) obtained a building permit for construction by January 1, 2011; (iv) submitted to state officials a timetable for construction; and (v) made reasonable progress in meeting this timetable. Scripps Health will assess the need for and the benefit of this second extension over time if circumstances warrant.

The third type of extension allows an acute care hospital that has obtained a compliance extension to 2013 to extend its compliance deadline to 2020. This extension is meant for hospitals that cannot afford to retrofit existing facilities by 2013, and gives them an opportunity to forego retrofitting and instead construct replacement facilities by 2020. See APPENDIX A – “INFORMATION CONCERNING SCRIPPS HEALTH – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL PERFORMANCE – Capital Expenditures” for further information regarding Scripps Health’s seismic upgrades.

Investments. Scripps Health has significant holdings in a broad range of investments. Market fluctuations may affect the value of those investments and those fluctuations may be and historically have been at times material. For a discussion of Scripps Health’s investments, see APPENDIX A – “INFORMATION CONCERNING SCRIPPS HEALTH—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL PERFORMANCE—Liquidity and Capital Resources.”

Other Future Risks. In the future, the following factors, among others, may adversely affect the operations of health care providers, including Scripps Health, or the market value of the Bonds, to an extent that cannot be determined at this time.

(a) Adoption of legislation that would establish a national or statewide single-payor health program or that would establish national, statewide or otherwise regulated rates applicable to hospitals and other health care providers.

(b) Reduced demand for the services of Scripps Health that might result from decreases in population or loss of market share to competitors.

(c) Bankruptcy of an indemnity/commercial insurer, managed care plan or other payor.

(d) Efforts by insurers and governmental agencies to limit the cost of hospital services, to reduce the number of beds and to reduce the utilization of hospital facilities by such means as preventive medicine, improved occupational health and safety and outpatient care, or comparable regulations or attempts by third-party payors to control or restrict the operations of certain health care facilities.

(e) Cost and availability of any insurance, such as professional liability, fire, automobile and general comprehensive liability coverages, which health care facilities of a similar size and type generally carry.

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(f) The occurrence of a natural or man-made disaster, a pandemic or an epidemic that could damage Scripps Health’s facilities, interrupt utility service to the facilities, result in an abnormally high demand for health care services or otherwise impair Scripps Health’s operations and the generation of revenues from the facilities.

(g) Limitations on the availability of, and increased compensation necessary to secure and retain, nursing, technical and other professional personnel.

TAX MATTERS

In the opinion of Orrick, Herrington & Sutcliffe LLP (“Bond Counsel”), based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Code and is exempt from State of California personal income taxes. Bond Counsel is of the further opinion that interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, nor is it included in adjusted current earnings in calculating corporate alternative minimum taxable income. A complete copy of the proposed form of opinion of Bond Counsel is set forth in Appendix D hereto.

To the extent the issue price of any maturity of the Bonds is less than the amount to be paid at maturity of such Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Bonds), the difference constitutes “original issue discount,” the accrual of which, to the extent properly allocable to each Beneficial Owner thereof, is treated as interest on the Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the Bonds is the first price at which a substantial amount of such maturity of the Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the Bonds accrues daily over the term to maturity of such Bonds on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Bonds. Beneficial Owners of the Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Bonds with original issue discount, including the treatment of Beneficial Owners who do not purchase such Bonds in the original offering to the public at the first price at which a substantial amount of such Bonds is sold to the public.

Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) (“Premium Bonds”) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a Beneficial Owner’s basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such Beneficial Owner. Beneficial Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances.

The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Bonds. The Authority and Scripps Health have made certain representations and have covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the Bonds will not be

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included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken) or events occurring (or not occurring), or any other matters coming to Bond Counsel’s attention after the date of issuance of the Bonds may adversely affect the value of, or the tax status of interest on, the Bonds. Accordingly, the opinion of Bond Counsel is not intended to, and may not, be relied upon in connection with any such actions, events or matters.

In addition, Bond Counsel has relied, among other things, on the opinion of Foley & Lardner, LLP, counsel to Scripps Health, regarding the current qualification of Scripps Health as an organization described in Section 501(c)(3) of the Code. Such opinion is subject to a number of qualifications and limitations. Bond Counsel has also relied upon representations of Scripps Health concerning Scripps Health’s “unrelated trade or business” activities as defined in Section 513(a) of the Code. Neither Bond Counsel nor counsel to Scripps Health has given any opinion or assurance concerning Section 513(a) of the Code and neither Bond Counsel nor counsel to Scripps Health can give or has given any opinion or assurance about the future activities of Scripps Health, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the resulting changes in enforcement thereof by the IRS. Failure of Scripps Health to be organized and operated in accordance with the IRS’s requirements for the maintenance of its status as an organization described in Section 501(c)(3) of the Code, or to operate the facilities financed by the Bonds in a manner that is substantially related to Scripps Health’s charitable purpose under Section 513(a) of the Code, may result in interest payable with respect to the Bonds being included in federal gross income, possibly from the date of the original issuance of the Bonds.

Although Bond Counsel is of the opinion that interest on the Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of interest on, the Bonds may otherwise affect a Beneficial Owner’s federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the Beneficial Owner or the Beneficial Owner’s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences.

Future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Bonds to be subject, directly or indirectly, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such future legislative proposals, clarification of the Code or court decisions may also affect the market price for, or marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel expresses no opinion.

The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel’s judgment as to the proper treatment of the Bonds for federal income tax purposes. It is not binding on the IRS or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the Authority or Scripps Health, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The Authority and Scripps Health have covenanted, however, to comply with the requirements of the Code.

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Bond Counsel’s engagement with respect to the Bonds ends with the issuance of the Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the Authority, Scripps Health or the Beneficial Owners regarding the tax-exempt status of the Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the Authority, Scripps Health and their appointed counsel, including the Beneficial Owners, would have little, if any, right to participate in, the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the Authority or Scripps Health legitimately disagree, may not be practicable. Any action of the IRS, including but not limited to selection of the Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the Bonds, and may cause the Authority, Scripps Health or the Beneficial Owners to incur significant expense.

APPROVAL OF LEGALITY

The validity of the Bonds and certain other legal matters are subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, as Bond Counsel to the Authority. Bond Counsel undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement. Certain other legal matters will be passed upon for the Authority by the Honorable Edmund G. Brown, Jr., Attorney General of the State of California, for Scripps Health by Foley & Lardner LLP, and for the Underwriters by Sidley Austin LLP, San Francisco, California, which also undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement.

INDEPENDENT AUDITORS

The consolidated financial statements of Scripps Health and Affiliates as of September 30, 2008 and 2009 and for the years then ended, included in Appendix B, have been audited by Ernst & Young LLP, independent auditors, as stated in their report included in Appendix B.

FINANCIAL ADVISOR

Kaufman, Hall & Associates, Inc. (“Kaufman Hall”), Skokie, Illinois, was engaged by Scripps Health to provide financial advisory services for the development and implementation of a capital financing plan for Scripps Health. Kaufman Hall is a national consulting firm that acts as capital advisor to health care organizations, particularly in the areas of short- and long-term debt financings, joint ventures and overall capital planning.

LITIGATION

Scripps Health

There is no controversy or litigation of any nature now pending against Scripps Health or, to the knowledge of its officers, threatened, seeking to restrain or enjoin the issuance, sale, execution or delivery of the Bonds, or in any way contesting or affecting the validity of the Bonds, any proceedings of Scripps Health taken concerning the issuance or sale thereof, the pledge or application of any moneys or security provided for the payment of the Bonds.

As with most health care providers, Scripps Health is subject to certain legal actions that, in whole or in part, are not or may not be covered by insurance because of the type of action or amount or types of damages requested (e.g., punitive damages), because of a reservation of rights by an insurance carrier, or because the action has not proceeded to a stage that permits full evaluation. There are certain

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legal actions currently pending against Scripps Health known to management of Scripps Health and for which insurance coverage is uncertain for the above reasons. Management of Scripps Health does not anticipate that any such suits will ultimately result in punitive damage awards or judgments in excess of applicable insurance limits, or if such awards or judgments were to be entered, that they would have a material adverse impact on the financial condition of Scripps Health.

Other than as described above, there is no litigation of any nature now pending against Scripps Health or, to the knowledge of its officers, threatened, which, if successful, would materially adversely affect the operations or financial condition of Scripps Health.

The Authority

To the knowledge of the officers of the Authority, there is no litigation of any nature now pending (with service of process having been accomplished) or threatened against the Authority, seeking to restrain or enjoin the issuance, sale, execution or delivery of the Bonds, or in any way contesting or affecting the validity of the Bonds, any proceedings of the Authority taken concerning the issuance or sale thereof, the pledge or application of any moneys or security provided for the payment of the Bonds, or the existence or powers of the Authority relating to the issuance of the Bonds.

RATINGS

Scripps Health has received ratings of “AA-” (with a stable outlook), “A1” (with a stable outlook) and “AA-” (with a stable outlook) from Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies (“S&P”), Moody’s Investors Service (“Moody’s”) and Fitch Ratings (“Fitch”), respectively, for the Bonds. Scripps Health has furnished to S&P, Moody’s and Fitch certain information and materials concerning the Bonds and itself. No application was made to any other rating agency for the purpose of obtaining additional ratings on the Bonds. Any explanation of the significance of such ratings may only be obtained from the rating agency furnishing the same. Generally, rating agencies base their ratings on such information and materials and on investigations, studies and assumptions made by the rating agencies themselves. There is no assurance that the ratings mentioned above will remain in effect for any given period of time or that they might not be lowered or withdrawn entirely by the rating agencies, if in their judgment circumstances so warrant. Any such downward change in or withdrawal of the ratings might have an adverse effect on the market price or marketability of the Bonds.

UNDERWRITING

The Bonds are being purchased by the Underwriters, for whom J.P. Morgan Securities Inc. (“J.P. Morgan”) is acting as Representative. Pursuant to the Purchase Contract for the Bonds, the Underwriters have agreed to purchase the Bonds at a purchase price of $119,458,923.80 (consisting of the aggregate principal amount of the Bonds of $120,000,000.00, less net original issue discount of $541,076.20). Scripps Health has agreed to pay the Underwriters underwriting compensation of $1,030,484.91 with respect to the Bonds. The Purchase Contract for the Bonds provides that the Underwriters will purchase all of the Bonds, if any are purchased, and contains the agreements of Scripps Health to indemnify the Underwriters and the Authority against certain liabilities. The Purchase Contract provides that the fees of counsel to the Underwriters will be paid by Scripps Health.

J.P. Morgan has entered into an agreement (the “Distribution Agreement”) with UBS Financial Services Inc. for the retail distribution of certain municipal securities offerings, including the Bonds, at the original issue prices. Pursuant to the Distribution Agreement, J.P. Morgan will share a portion of its underwriting compensation with respect to the Bonds with UBS Financial Services Inc.

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The initial public offering price of the Bonds set forth on page (i) may be changed without notice by the Underwriters.

MISCELLANEOUS

The foregoing and subsequent summaries or descriptions of provisions of the Bonds, the Indenture, the Loan Agreement, the Master Indenture, the Series 2010A Supplement and the Series 2010A Obligation and all references to other materials not purporting to be quoted in full are only brief outlines of some of the provisions thereof and do not purport to summarize or describe all of the provisions thereof, and reference is made to said documents for full and complete statements of their provisions. The appendices attached hereto are a part of this Official Statement. Copies, in reasonable quantity, of the Indenture, the Loan Agreement, the Master Indenture, the Series 2010A Supplement, and the Series 2010A Obligation may be obtained during the offering period upon request directed to the Underwriters and, thereafter, upon request directed to the corporate trust office of the Bond Trustee.

The information contained in this Official Statement has been compiled or prepared from information obtained from Scripps Health and other sources deemed to be reliable and, while not guaranteed as to completeness or accuracy, is believed to be correct as of the date of this Official Statement. The Authority furnished only the information contained under the headings “THE AUTHORITY” and “LITIGATION—The Authority” and, except for such information, makes no representation as to the adequacy, completeness or accuracy of this Official Statement or the information contained herein. Any statements involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact.

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This Official Statement has been delivered by the Authority and approved by Scripps Health. The Bond Trustee has not participated in the preparation of this Official Statement. This Official Statement is not to be construed as a contract or agreement among any of the Authority, Scripps Health and the purchasers or Holders of the Bonds.

CALIFORNIA HEALTH FACILITIES FINANCING AUTHORITY

By: /s/ Barbara J. Liebert Executive Director

Approved:

SCRIPPS HEALTH

By: /s/ Richard Rothberger Executive Vice President and

Chief Financial Officer

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APPENDIX A

INFORMATION CONCERNING SCRIPPS HEALTH

The information contained in this Appendix has been obtained from Scripps Health and its Affiliates.

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TABLE OF CONTENTS

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GENERAL ................................................................................................................................................ A-1 History ................................................................................................................................................ A-1 Mission ............................................................................................................................................... A-1 Strategic Plan/Core Strategies ............................................................................................................ A-1

ORGANIZATIONAL STRUCTURE ....................................................................................................... A-2 Obligated Group ................................................................................................................................. A-2 Organization Chart ............................................................................................................................. A-2 Scripps Health Foundation ................................................................................................................. A-3 Delivery System Services ................................................................................................................... A-3 Scripps Health Facilities ..................................................................................................................... A-4 Affiliated Entities Not Members of the Obligated Group ................................................................ A-10 Strategic Alliances and Acquisitions ................................................................................................ A-11

GOVERNANCE AND MANAGEMENT .............................................................................................. A-12 Related Party Transactions ............................................................................................................... A-13 Management of Scripps Health ........................................................................................................ A-13

SERVICE AREAS, HEALTH CARE MARKET AND COMPETITION ............................................. A-17 Utilization ......................................................................................................................................... A-17 Service Area ..................................................................................................................................... A-18 Market Environment and Competition ............................................................................................. A-18

FINANCIAL AND OPERATING INFORMATION ............................................................................. A-22 Summary Historical Financial Data ................................................................................................. A-22 Sources of Revenue .......................................................................................................................... A-25 Capitalization .................................................................................................................................... A-25 Maximum Annual Debt Service Coverage ....................................................................................... A-26

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL PERFORMANCE .............. A-28 Critical Accounting Policies and Estimates...................................................................................... A-28 Historical Performance ..................................................................................................................... A-29 Liquidity and Capital Resources ...................................................................................................... A-31 Derivatives Transactions .................................................................................................................. A-32 Retirement Plans ............................................................................................................................... A-33 Capital Expenditures ........................................................................................................................ A-33 Operating Lease Commitments ........................................................................................................ A-34

OTHER INFORMATION ...................................................................................................................... A-34 Licensure, Certification and Accreditation ....................................................................................... A-34 Medical Staff .................................................................................................................................... A-34 Employees ........................................................................................................................................ A-35 Nurse Staffing ................................................................................................................................... A-35 Risk Management ............................................................................................................................. A-36

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GENERAL

History

Scripps Health, a California nonprofit public benefit corporation, is the core organization of a community-based health care delivery network located in San Diego County, California, that includes four acute-care hospitals on five campuses, 19 outpatient clinic locations, an extensive ambulatory care network, home health care, associated support services and more than 2,750 affiliated physicians. Since its founding in 1924, Scripps Health has grown from a single acute care hospital in La Jolla, California, to its present countywide health care delivery system. Today, Scripps Health includes two of the six designated trauma centers in San Diego County, one of the 10 largest hospitals in California, and one of the oldest and most prestigious multi-specialty clinics in Southern California. Scripps Health is exempt from federal income taxation under Section 501(a) of the Internal Revenue Code of 1986, as amended (the “Code”), as an organization described in Section 501(c)(3) of the Code.

Mission

Scripps Health’s mission statement is as follows:

“Scripps strives to provide superior health services in a caring environment and to make a positive, measurable difference in the health of individuals in the communities we serve. We devote our resources to delivering quality, safe, cost-effective, socially responsible health care services. We advance clinical research, community health education, education of physicians and health care professionals and sponsor graduate medical education. We collaborate with others to deliver the continuum of care that improves the health of our community.”

Strategic Plan/Core Strategies

To accomplish its vision, the Board of Trustees of Scripps Health (the “Board”) has approved a 10-year strategic plan that is re-evaluated and updated every three years. The current plan establishes the following strategic priorities:

Quality and Patient Safety. In partnership with affiliated physicians, Scripps Health will achieve superior quality, patient safety and value through the identification and standardization of clinical protocols and enhanced information technology support.

Physician Alignment. Attract and retain superior physicians by offering opportunities for alignment and partnership using pluralistic models and approaches while maximizing operating performance.

Clinical Research and Graduate Medical Education. Support graduate medical education, continuing medical education and self-sustaining clinical research programs as differentiators of Scripps’ clinical excellence.

Workforce Development. Scripps will be a destination workplace to grow and develop staff and management (top talent) that creates the highest value, safe, quality and cost-effective care.

Financial Stewardship. Maintain financial viability through strong financial and operational performance, cost management, value-added capital investments, and philanthropy and capital structure management.

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Meeting Community Needs. Pursue fiscally responsible growth and retain patients within the Scripps Health system, addressing market factors (regionalization, technology advances, consumer-driven decision making, reimbursement trends) and community needs.

ORGANIZATIONAL STRUCTURE

Obligated Group

Scripps Health is currently the sole Member of the “Obligated Group” created pursuant to an Amended and Restated Master Indenture, which is described in the forepart of this Official Statement. The Obligated Group is the central financing vehicle and credit for Scripps Health and its operating divisions.

Organization Chart

An organization chart for Scripps Health depicting the entities that are subordinate corporations, as well as certain organizations that contract with Scripps Health, is shown below. Scripps Health is comprised of multiple operating divisions that are not separately incorporated, including: Scripps Clinic, Scripps Green Hospital, Scripps Memorial Hospital La Jolla, Scripps Memorial Hospital Encinitas, Scripps Mercy Hospital (San Diego and Chula Vista campuses) and other business units. The following related entities, which are each separately incorporated, are not Members of the Obligated Group: The Scripps Whittier Diabetes Institute, SC Physicians Organization, Scripps Health Plan Services, Inc., and Mercy Hospital Foundation. Scripps Health contracts for professional service with the Scripps Clinic Medical Group, Inc., Scripps Coastal Medical Group and Scripps Cardiovascular and Thoracic Medical Group.

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The Whittier Institute forDiabetes(1)

Mercy HospitalFoundation(1)

Fund- raising organizationfor Scripps Mercy Hospit al

Scripps Health Plan Services(2)

Operat es a l imi ted Knox- Keene l icensed heal t h care service p lan and Managed Care Medical Service Organization

Scripps ClinicMedical Group, Inc.(2)

Mul t i - specialt y group wi t h 387 board-cert i fied physicians

SC Physicians Organization(2)

ScrippsCoastal Medical Group(3)

110 physicians

Scripps Health(1)

• Scr ipps Clinic• Scr ipps Coastal Medical Center• Scr ipps Green Hospital• Scr ipps Memor ial Hospital La Jol la• Scr ipps Memor ial Hospital Encinitas• Scr ipps Mercy Hospital (2 Campuses)• Medical Off ice Bui ldings• Scr ipps Home Health Care Services• Scr ipps Health Foundat ion

Scripps Cardiovascular and Thoracic Medical Group

Sing le special ty group of 6 board- certi fied physicians

(1) Not for Profit, 501(c)(3) Corporation (2) For Profit Corporation (3) On August 1, 2008, Sharp Mission Park Medical Group became part of Scripps Mercy Medical Group, which was renamed

Scripps Coastal Medical Group. Obligated Group Member 100% owned or sole corporate member Contract – Professional Service Agreement

Scripps Health Foundation

Scripps Health Foundation (the “Foundation”), which is not separately incorporated, is a department of Scripps Health and promotes philanthropic support for Scripps Health, continuing Scripps Health’s 84-year legacy of community support. Beginning in 1924, when Ellen Browning Scripps made gifts to establish Scripps Memorial Hospital and the Scripps Metabolic Clinic, philanthropy has enhanced Scripps Health’s ability to expand its programs and services to meet the health care needs of San Diego County residents. The Foundation coordinates a comprehensive fundraising program, which includes planned giving, direct mail, major gift solicitations, gala events and many other efforts. Over the past five years, the Foundation has raised over $230 million dollars to maintain Scripps Health’s ability to offer the best health care to its patients.

Delivery System Services

Scripps Health offers a wide array of inpatient and outpatient services that are geographically distributed within its Primary Service Area (which is defined below) and its secondary market. The

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Scripps Health countywide network of health care providers includes more than 2,750 physicians in more than 50 specialties. Scripps Health is comprised of five hospital campuses, multiple urgent care and emergency services, home health care services and 19 outpatient facilities located throughout San Diego County.

• Around-the-Clock Care: Scripps Health includes four 24-hour emergency departments and a staff of board-certified emergency physicians. Scripps Memorial Hospital La Jolla and Scripps Mercy Hospital (San Diego campus) are two of San Diego County’s six designated trauma centers.

• Prevention and Early Detection: Scripps Health offers a full range of preventive care services, from free wellness programs and health screenings to state-of-the-art technology that can detect disease in its earliest stage.

• Maternal Child Health: The hospital facilities of Scripps Health include comfortable maternity centers complete with family-centered labor/delivery/recovery suites. A full range of prenatal and postnatal educational classes, lactation support and neonatal intensive care are provided.

• Cardiac Care: With a renowned cardiac arrhythmia center, state-of-the-art diagnostics and treatments, a dedicated heart, lung and vascular center, extensive education and cardiac rehabilitation programs and new, minimally invasive surgical procedures, Scripps Health offers patients the latest advancements in cardiovascular care. In addition, Scripps Health recently announced the creation of a Scripps Cardiovascular Institute, an undertaking that will combine the well-respected cardiology programs at Scripps Memorial Hospital La Jolla, Scripps Clinic and Scripps Green Hospital to create one of California’s largest integrated cardiovascular centers.

• Orthopedic Care: Orthopedic specialists at Scripps Health care for people of all ages and lifestyles, from weekend warriors injured during their weekly softball game to people with chronic degenerative diseases of the joints or muscles. Scripps Clinic has been the official health care provider for the San Diego Padres since 1981.

• Cancer Care: Scripps Cancer Center patients benefit from a network of the most advanced diagnostic, treatment and support services, as well as access to the latest research and clinical trials. Scripps Health also provides screening and prevention services, along with extensive education and support groups. Scripps Cancer Center is the first multi-hospital cancer program in California and one of only 28 programs nationally to earn network accreditation from the American College of Surgeons’ Commission on Cancer.

Scripps Health Facilities

The following is a description of inpatient, outpatient and affiliated physician services provided at Scripps Health facilities.

Scripps Memorial Hospital La Jolla. Established in 1924 by Ellen Browning Scripps, Scripps Memorial Hospital La Jolla has been one of Southern California’s premier medical centers for 85 years. In 1964, Scripps Memorial Hospital La Jolla moved from downtown La Jolla to its 43-acre site east of Interstate 5. Today, the hospital provides care for more than 130,000 patients each year, is equipped with 307 licensed beds, including 14 licensed chemical dependency recovery beds, and has approximately 2,600 employees and more than 800 physicians.

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Scripps Memorial Hospital La Jolla is the first hospital in San Diego to be recognized by the American Nurses Association as a Magnet Hospital for excellence in patient care. The hospital earned the Joint Commission’s Gold Seal of Approval for stroke care and has been designated as a Certified Primary Stroke Center. The hospital offers a wide range of clinical and surgical services, including a level II trauma center and 24-hour emergency services; intensive care; interventional cardiology and radiology; oncology services; cardiothoracic and orthopedic services; neurology; ophthalmology; bariatric surgery and women’s health services.

Among the wide range of specialty services and programs located on the hospital’s campus are the Cardiac Treatment Center, Centers for Outpatient Imaging and Outpatient Surgery, the Center for Women’s Health, the Scripps Center for Executive Health, the Scripps McDonald Center for Alcoholism and Drug Addiction Treatment, the Center for Voice and Swallowing, the Scripps Mericos Eye Institute, the Scripps Polster Breast Care Center, the Regional Cardiac Arrhythmia Center, the San Diego Gamma Knife Center and the Scripps Whittier Diabetes Institute.

• Center for Women’s Health: Designed to support a full range of birth experiences, including high-risk and cesarean deliveries, this newly updated center features 18 labor/delivery/recovery suites, 22 postpartum rooms, a newborn nursery and a neonatal intensive care nursery.

• The Heart Center & Cardiac Treatment Center: The state-of-the-art Cardiac Treatment Center includes five catheterization labs, an electrophysiology lab and a 17-bed recovery area. Staff members perform diagnostic and interventional procedures along with electrophysiology studies. In addition, the Cardiac Treatment Center offers medically supervised inpatient and outpatient cardiac exercise therapy and education.

• Robotic Surgery: The Scripps Minimally Invasive Robotic Surgery Program combines the precision of robotics and the expertise of board-certified surgeons. Board-certified surgeons perform robotic surgery for cancers of the prostate, bladder and kidney. They also provide robotic surgery for tumors of the uterus, cervix and ovaries, as well as robotic surgery for cardiothoracic conditions, such as atrial septal defects, coronary artery disease, mitral valve prolapse and myasthenia gravis – all completed endoscopically with no rib or sternal spreading. This systemwide program is also located on the San Diego campus of Scripps Mercy Hospital.

• Bariatric Surgery: The surgical weight loss program is about more than surgery. The program offers a comprehensive, multidisciplinary approach to surgical weight loss; offering pre- and postoperative support and education, exercise and nutrition training. Additionally, Scripps Memorial Hospital La Jolla’s bariatric surgeons are internationally known for their work in laparoscopic gastric bypass surgery, as well as minimally invasive gastric banding surgery. Scripps Memorial Hospital La Jolla is a designated Center of Excellence by the American Society for Bariatric Surgery.

• Imaging Services: Scripps Memorial Hospital La Jolla offers the latest imaging technology to meet the highest standards of patient care, including 64-slice CT, MRI, PET, PET/CT and digital mammography.

• Scripps McDonald Center: Specialists at Scripps McDonald Center offer personalized treatment programs, including detoxification, residential care, adult and adolescent outpatient services and follow-up care for people challenged by addictions.

Scripps Mercy Hospital. Founded in 1890, Scripps Mercy Hospital operates at two campuses in San Diego and Chula Vista. Formerly operated under separate hospital licenses, both campuses have

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operated under a single hospital license since October 2004. The San Diego campus is San Diego’s longest established and only Catholic medical center. Scripps Mercy provides professional expertise, leading-edge technology and a unique approach to care. The hospital’s commitment to quality patient care is based on the ethical and cultural precepts of the Catholic tradition, which inspire the role of spirituality in the healing process and the humanistic treatment given to patients and staff.

Scripps Mercy Hospital is a metropolitan medical center and teaching facility. With 700 licensed beds, more than 3,500 employees and 1,300 physicians, the two hospital campuses provide comprehensive care, from routine check-ups and primary care to a wide range of specialty services, including a minimally invasive robotic surgery program; 24-hour emergency care; a level I trauma center; obstetrics and gynecology; acute medical and surgical services, including a nationally designated Center of Excellence for Bariatric Surgery; a certified Segment Elevation Myocardial Infarction (“STEMI”) receiving center (for heart attacks) and one of San Diego’s few chest pain centers.

Scripps Mercy also brings together medical expertise around dedicated specialties, including: behavioral health, cancer care, diabetes, imaging services, maternal child health, obstetrics and gynecology, orthopedic and spine care, palliative care, rheumatology, senior health and surgical services.

• Robotic Surgery: Scripps Mercy Hospital has a Minimally Invasive Robotic Surgery Program that is virtually identical to the program located on the campus of Scripps Memorial Hospital La Jolla, described above.

• Bariatric Surgery: Scripps Mercy Hospital is a nationally recognized leader in bariatric surgery for clinically severe obesity. Having performed more than 12,000 bariatric procedures, the Bariatric Surgery Program at Scripps Mercy Hospital is a designated Center of Excellence by the American Society for Bariatric Surgery and a designated Blue Distinction Center for Bariatric Surgery by Blue Shield of California.

• Behavioral Health: Scripps Mercy Hospital’s Behavioral Health Services offers care for adult patients with psychiatric conditions, ranging from mild to severe. Specialists include psychiatrists, psychologists, nurses, social workers, activity therapists, occupational therapists, marriage and family therapists and chaplains. Outpatient services offer two levels of care: one to four treatment days a week or partial hospitalization for more intensive treatment five to six days a week. An experienced staff provides group, individual and family therapy, as well as medication management and case management.

• Heart Care Center: The physicians and staff of Scripps Mercy Hospital’s Heart Care Center offer the complete range of cardiac care from preventive and diagnostic services to advanced surgical treatments and rehabilitation services. With state-of-the-art technology, physicians can better detect and treat blockages of heart vessels and other critical arteries using procedures less invasive than bypass surgery. The Heart Care Center has assembled a team of experts in virtually every area of heart care – from diagnostic services to advanced procedures. These include angioplasty, endoscopic bypass surgery, prosthetic valve implantation, pacemaker implantation and drug-coated stent procedures. In addition, the center offers three cardiac catheterization laboratories, cardiac rehabilitation (including external counter pulsation), cardiac research, cardiac surgery, echocardiography, vascular sonography, electrophysiology and a surgical intensive care unit.

The Scripps Mercy Hospital Chula Vista campus offers a wide variety of services, including a 24-hour emergency department with 24 fully equipped rooms; a certified STEMI receiving center (for heart attacks); a newly remodeled family birthing center; advanced imaging services such as MRI and

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CT scanners; special women’s services, including bone density scanning and digital stereotactic breast biopsy; rehabilitation services; comprehensive cancer services; and surgical services, including orthopedics and neurosurgery.

• Maternity Services: Maternity services are offered through a family-centered birthing experience. Facilities include newly remodeled patient rooms, as well as a level II neonatal intensive care nursery.

• Imaging Center: The Imaging Center offers a full range of radiology services and the latest imaging techniques in the South County community. In addition, the Imaging Center has been designated as a Breast Imaging Center of Excellence by the American College of Radiology. The hospital’s new magnetic resonance system addresses the concerns of claustrophobic patients. The Cardius 3 nuclear medicine camera gives physicians the ability to perform myocardial rest and stress studies in one day rather than the usual three.

• Scripps Well Being: The hospital offers preventive health and wellness programs, parenting programs and support groups.

• Cardiovascular Services: As a certified STEMI receiving center, Scripps Mercy Hospital Chula Vista is an entry to the advanced cardiac resources of Scripps Health. Residing in a free-standing building of approximately 4,000 square feet, the hospital’s state-of-the-art catheterization laboratory includes the technology of the Innova 2000, an all digital cardiovascular imaging system that is the first of its kind.

Scripps Memorial Hospital Encinitas. Scripps Memorial Hospital Encinitas has served the growing communities of San Diego’s coastal North County since 1978. It offers a full range of clinical and surgical services, including 24-hour emergency services; intensive care; cancer/oncology; orthopedics; neurology; urology; ophthalmology; a level II neonatal nursery; award-winning obstetrics, gynecology and maternal and infant health services; and an ambulatory surgery center.

With 142 licensed acute care beds, more than 1,100 employees and 550 physicians, the campus offers a wide range of specialty services and programs, including North County’s first certified primary stroke center, the only brain injury program in San Diego, Imperial and Riverside Counties accredited by the Commission on Accreditation of Rehabilitation Facilities (“CARF”), San Diego County’s first World Health Organization-designated baby-friendly birth pavilion, a county-designated heart attack receiving center, a state-of-the-art, minimally invasive surgery center, the latest in imaging, and comprehensive rehabilitative care at the hospital’s regionally recognized rehabilitation center.

• Leichtag Family Birth Pavilion: As San Diego County’s first designated baby-friendly birth pavilion, the hospital provides a family-centered birthing environment, with private labor and delivery rooms, lactation consultation and physician- or midwife-assisted deliveries. Scripps Memorial Hospital Encinitas also offers a six-bed level II special care nursery, under the medical direction of Rady Children’s Hospital neonatologists, for newborns needing high-tech expertise.

• The Rehabilitation Center: The hospital’s CARF-accredited, 30-bed rehabilitation center includes speech, hearing, occupational and physical therapists, physicians and psychologists for highly individualized care in inpatient and outpatient therapy and support programs. Staff and physicians work with patients who are recovering from sports injuries, strokes, hip replacements, brain/spinal cord injuries and trauma.

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• Cardiovascular Services: The cardiologists, nurses and technologists at Scripps Memorial Hospital Encinitas provide the latest in cardiac care, including a new cardiac catheterization lab with the latest in diagnostic capabilities and experienced dietitians. Scripps Memorial Hospital Encinitas is an established North County location for advanced cardiac resources.

• Orthopedic Services: Scripps Memorial Hospital Encinitas physicians provide the latest orthopedic treatments and technologies, from spinal disc replacement to joint health. The hospital offers diagnostic and treatment services for a full range of problems and injuries of the hip, knee, shoulder, hand, ankle and spine.

• Minimally Invasive Surgery: Many surgical procedures can now be performed using minimally invasive techniques. With a state-of-the-art interventional radiology suite, cardiac catheterization lab, neurosurgical microscopes, physicians and care teams, minimally invasive techniques help shorten hospital stays and lead to fewer complications.

Scripps Green Hospital. Since its founding in 1977, Scripps Green Hospital has been recognized for a variety of medical “firsts” – such as offering San Diego’s first liver transplant program and being one of the nation’s first hospitals to use stem cell transplants as a treatment for blood and marrow disorders. The 173-bed hospital offers a spectrum of services including comprehensive cancer treatment, cardiology and cardiothoracic surgery, orthopedic surgery, and organ, tissue, marrow and cell transplantation. It is also a teaching facility, offering graduate medical education.

Scripps Green Hospital was named one of the nation’s 100 Top Hospitals by Thomson Healthcare and is the primary hospital for Scripps Clinic. Through this partnership, most Scripps Clinic patients who need to be admitted to a hospital for medical care or observation are admitted to Scripps Green Hospital. This allows for seamless care delivery and collaboration between referring physicians and the specialists of Scripps Clinic.

• Cancer Services: In alignment with Scripps Cancer Center, Scripps Green Hospital offers a full continuum of diagnostic, treatment, education and support services, as well as access to clinical trials. The center helped develop procedures for the treatment of hairy cell leukemia and initiated the One-Step Women’s Cancer Screening Program. Also offered are a bone marrow transplant program and a unique “Making Sense” breast cancer support program.

• Heart-Lung-Vascular Center: The center provides integrated education, diagnosis and treatment services for pulmonary and cardiovascular disease, as well as six cardiothoracic operating suites, two cardiac catheterization labs, a 24-bed intensive care unit, a pulmonary diagnostic lab, a laser bronchoscopy suite, an imaging suite and a vein clinic.

• Center for Organ and Cell Transplantation: Established in 1990, the Scripps Center for Organ and Cell Transplantation is San Diego’s first liver transplant program. Today, the Scripps Center for Organ and Cell Transplantation specializes in liver, kidney, pancreas and pancreatic islet transplants. It also provides living donor programs for liver and kidney transplants.

• Scripps Blood and Marrow Transplant Center: Established in 1980, the Scripps Blood and Marrow Transplant Center was the first blood and marrow transplant program in San Diego, California, and one of the first in the nation to administer life-saving stem cell transplantation. Today, the center is the primary collection center for the National Marrow Donor Program in Southern California and the Department of Defense and its autologous and allogeneic transplant programs are accredited by the Foundation for the Accreditation of Cellular Therapy. Scripps Blood and Marrow Transplant Center is also an active research facility. It is a member of the

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Blood and Marrow Transplant Clinical Trials Network, which conducts large multi-institutional clinical trials designed to address important issues in hematopoietic stem cell transplantation. Many of the studies are designed by Scripps Health clinicians and investigators at The Scripps Research Institute, one of the country’s largest private, nonprofit research organizations.

Scripps Clinic. Founded in 1924, Scripps Clinic is one of the oldest and most prestigious multi-specialty clinics in Southern California. In July 2000, Scripps Health acquired the Scripps Clinic, including all the outstanding shares of SC Physicians Organization, its wholly owned subsidiaries, and substantially all the assets and liabilities of Scripps Clinic Medical Group, Inc. Prior to the acquisition, Scripps Clinic had operated as a private medical group.

Scripps Clinic contracts with the Scripps Clinic Medical Group, Inc., which has 387 board-certified physicians in more than 50 fields of medicine and surgery. Scripps Clinic’s main facility is located on Torrey Pines Mesa, adjacent to Scripps Green Hospital. Diagnostic and treatment procedures are conducted at Scripps Clinic’s main facility and at nine other clinic facilities in San Diego County.

• Brain and Stroke Research and Treatment Center: This center provides care to stroke, multiple sclerosis, Alzheimer’s disease, AIDS dementia, Parkinson’s disease, diabetes, depression and epilepsy patients, as well as those with sleep, eating, learning and addictive disorders.

• Musculoskeletal Center: The center provides care to patients with bone, muscle and joint problems. These patients benefit from the center’s full education, diagnostic, treatment and research continuum. The staff includes rheumatologists, orthopedic surgeons, neurologists, endocrinologists and radiologists.

• Scripps Center for Integrative Medicine: Located just north of Scripps Green Hospital, the center integrates complementary and traditional approaches to health. Optimal nutrition, stress management and exercise are incorporated into a Healing Hearts program to help prevent and possibly reverse cardiovascular disease. The center includes a fitness center, gym, lap pool, physical and cardiac therapy and programs for weight management, smoking cessation, stress management and mind/body medicine.

• Scripps Clinic Center for Weight Management: The only comprehensive weight management center in San Diego, the center provides a broad continuum of care with a full team of specialists, from dietitians and exercise physiologists, to endocrinologists.

In September 2008, Scripps Clinic opened a new 150,000-square foot outpatient care facility in Rancho Bernardo. The new facility provides primary care services; a high-tech, fully-digital imaging center; expanded urgent care; and on-site ambulatory surgery. More than 80 physicians and 250 employees representing 25 specialties practice at the new Rancho Bernardo facility.

Scripps Coastal Medical Center. In 2008, Sharp HealthCare sold Sharp Mission Park Medical Group Health Centers to Scripps Health. In connection with the sale, the physicians of Sharp Mission Park Medical Group joined the physicians of Scripps Mercy Medical Group under the new name “Scripps Coastal Medical Group.” Scripps Coastal Medical Group is rated one of California’s best physician groups for quality care by the California Cooperative Healthcare Reporting Initiative.

With 110 affiliated physicians in nine locations throughout the San Diego region, Scripps Coastal Medical Center specializes in internal medicine, family medicine and pediatrics and operates an urgent care center in Vista. Since October 2008, Scripps Coastal Medical Center has added new locations in Carlsbad, Eastlake and Escondido.

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Scripps Cardiovascular and Thoracic Surgery Center. Four cardiovascular surgeons of La Jolla Cardiovascular and Thoracic Surgeons joined the two cardiovascular surgeons of Scripps Clinic Medical Group to create a new cardiovascular surgery medical group operating at the “Scripps Cardiovascular and Thoracic Surgery Center.” The surgeons began operating as the new medical group on August 1, 2009. Scripps Cardiovascular and Thoracic Surgery Center surgeons hold a wide range of expertise in chest and heart surgery, performing procedures to address cardiac and pulmonary disorders. In addition to traditional open heart surgeries, Scripps Cardiovascular and Thoracic Surgery Center offers minimally invasive robotic cardiac surgery procedures. Scripps Health operates three Scripps Cardiovascular and Thoracic Surgery Center locations in La Jolla and San Diego, employing nine staff.

Scripps Health Home Care Services. Scripps Health Home Care Services is a licensed home health agency offering comprehensive home care to patients throughout San Diego County. Home health services offered include nursing home health aide services, medical social services, diet and nutrition counseling and speech, physical and occupational therapy. Scripps Health maintains a continuity of care coordinator at each of its acute care facilities in order to coordinate a plan of care for each Scripps Health patient.

Affiliated Entities Not Members of the Obligated Group

The Scripps Whittier Diabetes Institute. The Scripps Whittier Diabetes Institute, a nonprofit public benefit corporation for which Scripps Health is the sole corporate member, provides resources for innovative diabetes research, education, and patient care and is a catalyst for collaboration among leading organizations to affect a cure for diabetes.

Founded in 1982, The Scripps Whittier Diabetes Institute is San Diego County’s leading comprehensive organization for diabetes. The Scripps Whittier Diabetes Institute administers one of the largest American Diabetes Association-certified education programs in the nation. It is credited with the first successful replication of insulin-producing human islet cells outside the human body. The Scripps Whittier Diabetes Institute led the establishment of Project Dulce, a diabetes care program for the underserved, heralded as a model program by the United States Department of Health and Human Services.

SC Physicians Organization and Scripps Health Plan Services, Inc. Scripps Health Plan Services, Inc. (“Scripps Health Plan Services”), a Delaware corporation, is a wholly owned subsidiary of SC Physicians Organization, which is a wholly-owned subsidiary of Scripps Health. Scripps Health Plan Services received its limited Knox-Keene license to operate as a managed health care business in California on April 7, 1999 and, since that date, has assumed a greater role across the Scripps Health system. Scripps Health Plan Services also contracts with other licensed health care service providers that provide health care services to plan enrollees or covered lives.

Mercy Hospital Foundation. The Mercy Hospital Foundation supports Scripps Mercy Hospital’s mission, which is to serve and advocate for compassionate, quality care with special concern for the needy. The Mercy Hospital Foundation’s professional staff and volunteer Board of Directors collectively serve as the primary fundraising arm of Scripps Mercy Hospital.

Scripps Clinical Research Services. This provides well-trained clinical research and support staff, off-campus research facilities, assistance with fiscal management and regulatory issues, necessary research equipment, space to see research patients and research start-up grants. Its goal is to increase physician-led research within Scripps Health, improve communication and collaboration among existing researchers, and help create new partnership opportunities both within and outside Scripps Health.

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Strategic Alliances and Acquisitions

General. To expand its health care delivery system, Scripps Health continuously evaluates new business opportunities that may involve affiliations, associations or contractual arrangements with or the acquisition of health care enterprises. Future acquisitions or affiliations may involve substantial capital expenditures, all or a portion of which may be financed through debt incurred by Scripps Health. See “BONDHOLDERS’ RISKS—Business Relationships and Other Business Matters” in the forepart of this Official Statement. In addition, management of Scripps Health periodically examines its current affiliations, associations and assets to determine whether continued operation and ownership is consistent with the Scripps Health mission and strategic priorities. It is possible that, as a result of such examination, Scripps Health may consider termination of such affiliations or divestiture or other transfers of such assets.

Affiliation with Catholic Healthcare West. In August 1995, Scripps Health and Catholic Healthcare West (“CHW”) entered into an affiliation agreement. Through the affiliation, CHW transferred the sole voting membership of one of its subordinate corporations, Mercy Healthcare San Diego, to Scripps Health, along with the responsibility for its operations and governance. Mercy Healthcare San Diego owned and operated what is now Scripps Mercy Hospital (San Diego campus).

Pursuant to the affiliation agreement, CHW, among other things, is entitled to receive a 20% interest in the annual change in unrestricted net assets of Scripps Health and 20% of the net proceeds, with certain restrictions, upon the liquidation of Scripps Health. Scripps Health has the right to receive from CHW an amount equal to 20% of (i) the annual capital expenditures of Scripps Health and (ii) the annual amortization of debt principal of Scripps Health. Scripps Health and CHW may make an election annually to receive all or a portion of the accumulated but not previously paid amounts under the affiliation agreement, subject to certain conditions. No payments have ever been paid by either party under these provisions, and as of September 30, 2009, no amounts are due to or from Scripps Health. Of the members of the Board, 20% are required to be elected from a slate of nominees proposed by CHW.

Kaiser Cardiac Services. For over 25 years, Scripps Health has provided cardiac services to Kaiser Foundation Hospital – San Diego patients at Scripps Memorial Hospital La Jolla.

West Wireless Health Institute. In a move designed to accelerate the use of wireless technology to improve health care delivery to patients, Scripps Health has become the founding health care affiliate of the new West Wireless Health Institute. Supported by a $45 million commitment from the Gary and Mary West Foundation, the institute brings together leaders in science, medicine, engineering and technology to help move emerging wireless health technologies quickly into the hands of doctors, health care organizations and patients.

Scripps Translational Science Institute. The Scripps Translational Science Institute is a collaboration of Scripps Health and The Scripps Research Institute and is dedicated to accelerating the “translation” of basic science to clinical trials and clinical treatment. The institute identifies promising opportunities among existing research efforts at Scripps Health to provide seed funding to physician researchers across the Scripps Health system. This funding supports the researcher in preparation for the pursuit of National Institutes of Health grant funding or other non-pharmaceutical associated grants. As part of Scripps Translational Science Institute, the Scripps Genomic Medicine Program supports basic research and clinical programs designed to understand an individual’s genetic susceptibility to disease and to forward those findings into drug discovery and clinical trials.

Physician Network. Scripps Health has ongoing relationships with numerous physician organizations, medical groups and solo practitioners in San Diego County. These relationships take a

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variety of forms, including partnerships and joint ventures with medical groups and contractual relationships for the provision of contract management services.

Affiliated Physician Organizations. The table below presents currently available information about some of the larger physician organizations with which Scripps Health has relationships. The physician organizations listed have full and/or shared risk managed care contracts.

Affiliated Physician Organizations As of August 31, 2009

Organization Number of Specialists

Number of Primary Care Physicians

San Diego Coastal Medical Group, Inc., dba Scripps Coastal Medical Group 5 105

Mercy Physicians Medical Group, Inc. 298 80 Scripps Clinic Medical Group, Inc. 291 96 Scripps Cardiovascular and Thoracic Medical Group 6 – San Diego Physicians Medical Group, Inc. 330 110 XIMED Medical Group, Inc. 285 56 Connect the Docs, A Multi Specialty Network, Inc. 172 14

Total 1,387 461

GOVERNANCE AND MANAGEMENT

Scripps Health is governed by the Board, which consists of 14 members. Each member serves a term of three years, may be elected to serve a second consecutive term of three years and, following at least one year of not serving on the Board, may serve up to two additional consecutive terms of three years each. The members of the Board, their occupations and current term expiration dates are set forth in the following table.

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Scripps Health Board of Trustees

Trustee Name Occupation 1st

Term 2nd

Term

Mary Jo Anderson, CHS(2) Healthcare Executive, Retired 12/31/10 Douglas A. Bingham, Esq.(1),(5) Executive Vice President, Chief Operating

Officer, The Scripps Research Institute n/a n/a Jeff Bowman(6) Fire Chief, Retired 12/31/09 Judy Churchill, Ph.D.(2) Clinical Psychologist, Retired 12/31/10 Gordon Clark Former President and Chief Executive Officer

of The Governance Institute 12/31/11

Martin C. Dickinson Banker, Retired 12/31/11 Virginia Gillis, RSM, ED.D(2) Healthcare Executive, Retired 12/31/09 Richard L. Hall M.D. Physician, Retired 12/31/11 Ernest S. Rady Founder, American Assets and Chairman, ICW

Group 12/31/10

Abby Silverman Weiss, Esq. Mediator/Arbitrator, Dispute Resolutions 12/31/11 Maureen Stapleton General Manager, San Diego County Water

Authority 12/31/09

Robert Tjosvold Market President, Bank of America, Retired 12/31/09 Chris Van Gorder(1) President and Chief Executive Officer, Scripps

Health n/a n/a Richard Vortmann(3) President and Chief Executive Officer,

National Steel and Shipbuilding Co., Retired 12/31/09(4)

(1) Ex-officio voting members (2) Nominated by CHW (3) Chairman of the Board (4) By operation of the Bylaws, Mr. Vortmann’s Board Term will end 12/31/10 (5) Nominated by The Scripps Research Institute (6) Mr. Bowman will continue to serve after his term has expired until the Board has selected his replacement

The bylaws of Scripps Health provide for 10 standing committees: Audit Committee; Credentialing Committee; Executive Committee; Finance Committee; Foundation Committee; Governance, Bylaws and Nominating Committee; Human Resources & Compensation Committee; Investment Committee; Quality Committee; and Strategic Planning Committee.

Related Party Transactions

Under the Conflicts of Interest Policy of Scripps Health, members of the Board and all officers are required to report to the Board any potential conflicts of interest which may arise from their position as a member of the Board, are required to disclose all such potential conflicts, and are required to abstain from voting on transactions involving conflicts of interest. Certain members of the Board have affiliations with businesses, associations, firms or persons that have professional relationships with Scripps Health and comply with the Conflict of Interest Policy with respect to such affiliations.

Management of Scripps Health

Scripps Health has earned national honors as the 2008 Top Leadership Team in Healthcare for large hospitals and health systems from HealthLeaders Media. Set forth below are brief professional

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biographical summaries of the senior management team involved with the oversight of Scripps Health operational affairs.

CHRIS VAN GORDER, FACHE, President and Chief Executive Officer. Mr. Van Gorder joined Scripps Health in December 1999 as Chief of Health Care Operations. In 2000, he was appointed President and Chief Executive Officer of Scripps Health. From 1997 until joining Scripps Health in 1999, Mr. Van Gorder was the Chief Executive Officer of Long Beach Memorial Medical Center, a 741-bed tertiary and teaching hospital and the third largest community hospital in California. From 1996 to 1997, he served as Executive Vice President of Memorial Health Services. From 1995 to 1996, Mr. Van Gorder served as President and Chief Executive Officer of Anaheim Memorial Hospital and, from 1993 to 1995, he served as Executive Vice President of Little Company of Mary Health Services. Mr. Van Gorder has more than 25 years of experience in the health care field with extensive operations experience. He is board-certified in health care management and a Fellow, Governor and Chair-Elect of the American College of Healthcare Executives. In 2005, he was Chair of the Healthcare Association of San Diego and Imperial Counties. In December 2004, the United States State Department appointed Mr. Van Gorder to the United States National Commission for the United Nations Educational, Scientific and Cultural Organization (“UNESCO”). In addition, he is an Assistant Clinical Professor in Health Administration at the University of Southern California. Mr. Van Gorder received his Master’s degree in Public Administration and Health Services Administration at the University of Southern California and his Bachelor of Arts degree at California State University, Los Angeles.

RICHARD ROTHBERGER, Corporate Executive Vice President and Chief Financial Officer. Mr. Rothberger joined Scripps Health as Executive Vice President and Chief Financial Officer in 2001. He is responsible for overseeing the corporate finance-treasury, financial and capital planning, payor contracting, revenue cycle management, supply chain management, all system and hospital financial operations and real estate and construction. From 1997 until joining Scripps Health in 2001, Mr. Rothberger served as Senior Vice President and Chief Financial Officer for Mercy Healthcare Sacramento, a division of Catholic Healthcare West, where he was responsible for the finances for an $850 million integrated delivery system, including seven hospitals, a home care agency and two large multi-specialty medical group practices. From 1978 to 1996, Mr. Rothberger held various senior management positions at Mercy Healthcare Sacramento, including Director of Finance and Decision Support and Director of Management Engineering. Mr. Rothberger has over 30 years of experience in the health care industry. He is a member of the Healthcare Financial Management Association and the Health Management Academy. Mr. Rothberger earned his Bachelor of Arts degree in Mathematics from Queens College, City University of New York in 1972 and his Masters of Science degree in Industrial Engineering and Health Systems from Northeastern University in 1975.

A. BRENT EASTMAN, M.D., Corporate Senior Vice President, Chief Medical Officer. Dr. Eastman joined Scripps Health in 1972 and became the Medical Director of Trauma Services in 1984 at Scripps Memorial Hospital La Jolla. In 1987 he became the N. Paul Whittier Chair of Trauma. In 1999, Dr. Eastman moved into his current position as Chief Medical Officer of Scripps Health. Dr. Eastman is Chair of the American College of Surgeons Board of Regents. Dr. Eastman also is an adjunct professor for the National Resource Center on Aging and Injury at San Diego State University and a principal investigator for the San Diego Crash Injury Research Engineering Network Project. From 1990 to 1994, Dr. Eastman served as chairman of the Committee on Trauma for the American College of Surgeons, which sets the standards for trauma care in the United States and abroad. This position led to his national and international involvement in the development of trauma systems in such places as the United States, Canada, England, Ireland, Australia, Brazil, Argentina, Mexico and South Africa. Dr. Eastman is the former chair of the Trauma Systems Consultation Committee for the American College of Surgeons and currently serves on the Institute of Medicine Committee on “The Future of Emergency Care in the United States.” Dr. Eastman has authored or co-authored numerous publications

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principally relating to trauma. He received his Medical Doctor degree from the University of California San Francisco where he did his general surgical residency and served as chief surgical resident from 1971 to 1972. From 1969 to 1970, he spent the year abroad doing surgical training in England.

VICTOR V. BUZACHERO, Corporate Senior Vice President of Human Resources. Mr. Buzachero joined Scripps Health in October 2001 as Senior Vice President of Human Resources. Prior to joining Scripps Health, he was the Special Assistant to the Chief Executive Officer at Providence Health System where he led the system’s E-Health strategy and Health Insurance Portability and Accountability Act compliance efforts and developed a strategic human resources plan for its Washington region. Prior to his tenure at Providence, Mr. Buzachero served as Senior Vice President of Human Resources and Organizational Development for the Banner Health System and as Senior Vice President of Human Resources for the Samaritan Health System, which is now a part of Banner. During this time, he led new programs for leadership development, service excellence, reduction in employee turnover, and improved employee satisfaction. His efforts in organizational development and effectiveness were recognized by Franklin/Covey with a 1999 “Organization of Excellence” award. Mr. Buzachero has also held senior executive roles in Presbyterian Health System (Texas Health Resources) and Baptist Health System. Mr. Buzachero has more than 30 years experience in human resources and health care. He is currently a member of American College of Health Care Executives as well as American Hospital Association Solutions, Inc., Board of Directors 2005 – present; Chairman 2009 and Chairman elect for 2010. Mr. Buzachero is a frequent speaker at the national level and serves as a director on various other Boards of Directors. He received his Bachelor of Science degree in Manpower and Industrial Relations from University of Alabama and his Master’s degree in Business Administration from Samford University.

JOHN B. ENGLE, Corporate Senior Vice President and Chief Development Officer. Mr. Engle was named Senior Vice President and Chief Development Officer at Scripps Health in 2004 after serving as President and Chief Executive Officer of The Scripps Whittier Diabetes Institute for ten years. As Chief Development Officer, Mr. Engle oversees the Scripps Health Foundation. His responsibilities include foundation operations and management, as well as all donor relations and fund-raising activities. Mr. Engle received his Bachelor of Arts degree in Business Administration from Point Loma College in San Diego.

JUNE KOMAR, Corporate Senior Vice President, Strategic Planning and Business Development. Ms. Komar joined Scripps Health in 1995 and served as Vice President, Administrative Services and Corporate Chief of Staff before being appointed Senior Vice President, Strategic Planning and Business Development in 2001. She is responsible for corporate and business unit strategic planning, corporate business development, corporate project management, information technology services and system-wide marketing and communication. Ms. Komar served as Director of Strategic Planning at Mercy Health Care San Diego from 1994 to 1995, when Scripps Health acquired Mercy Hospital in 1995. In addition, Ms. Komar served as Deputy Chief Administrative Officer for the County of San Diego from 1987 to 1993 and Chief Operating Officer and Interim Chief Executive Officer of the County of Washtenaw, Michigan from 1973 to 1987. She received a Bachelor of Arts degree from Ohio State University and attended graduate courses in regional planning at the University of Michigan.

RICHARD R. SHERIDAN, Corporate Senior Vice President, General Counsel and Corporate Secretary. Mr. Sheridan is the Senior Vice President, General Counsel and Corporate Secretary and joined Scripps Health in 1988. He is responsible for directing the provision of legal services, advising the Boards, management and medical staffs and providing guidance on legal aspects of patient care. Prior to joining Scripps Health, Mr. Sheridan worked at the San Francisco law firms of Hanson, Bridgett, Marcus, Vlahos & Rudy from 1984 to 1986 and Hassard, Bonnington, Rogers & Huber from 1986 to 1988, where he focused on hospital and medical legal issues. Mr. Sheridan is a member of the California State Bar,

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the American Health Lawyers Association and the American Bar Association-Health Law Section. He is on the Board of Directors of the California Society for Healthcare Attorneys and a member of the Board of Visitors of California Western Law School. Mr. Sheridan attended Stanford Law School and Boston University School of Law where he received his Juris Doctor degree.

GLEN C. MUELLER, Corporate Vice President, Chief Audit, Compliance and Information Security Executive. Mr. Mueller joined Scripps Health in 2000 as the Executive Director of Internal Audit before being appointed Vice President, Chief Audit, Compliance, and Information Security Executive. He is responsible for the corporate compliance and privacy program, internal audit function, information security program and the systemwide policies and procedures process. Prior to joining Scripps Health, Mr. Mueller served as Vice President of Audit Services for UCSF – Stanford Healthcare from 1997 to 2000, Chief Information Officer for Stanford University from 1994 to 1997, Director of Internal Audit for Stanford University and Health System from 1992 to 1994, and Director of Internal Audit for Cornell University and Medical Center from 1985 to 1992. He has more than 25 years of experience in key internal audit and compliance program management, information systems management, and information security management roles. Mr. Mueller received his Bachelor of Science degree and Master’s degree in Business Administration from Cornell University. He is a Certified Public Accountant, Certified Internal Auditor, Certified Information Security Manager and Certified Information Systems Auditor.

MARC A. REYNOLDS, Corporate Senior Vice President, Payer Relations. Mr. Reynolds joined Scripps Health in 2000 as Senior Vice President Payer Relations. He is responsible for systemwide payer contracting for Scripps Health, including subsidiaries and joint ventures. In addition, Mr. Reynolds is the President of Scripps Health Plan Services, Inc., a position he has held from 1999 to present. Mr. Reynolds began his career at the Scripps Clinic and Research Foundation as a grant and contract accountant over 30 years ago. He then moved into positions as Vice President of Finance and Chief Financial Officer and Senior Vice President, Clinic Operations at Scripps Clinic before being appointed Senior Vice President of Payer Relations for Scripps Health. Mr. Reynolds is a past member of the Board of Directors of the California Association of Physician Organizations and is active in the physician and managed care industry in Southern California. Mr. Reynolds received his Bachelor of Arts degree in Finance from New Mexico State University.

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SERVICE AREAS, HEALTH CARE MARKET AND COMPETITION

Utilization

The following table sets forth selected historical utilization statistics of Scripps Health acute care hospitals for fiscal years ended September 30, 2007, 2008 and 2009.

Scripps Health Utilization Statistics

September 30, 2007 2008 2009 Inpatient Activity

Acute and Rehab(1) 1,254 1,254 1,258 Chemical Dependency 64 64 64 Psychiatry 50 50 50

Licensed Beds(2) 1,368 1,368 1,372

Acute and Rehab 1,190 1,201 1,205 Chemical Dependency 44 44 44 Psychiatry 40 46 46

Available Beds 1,274 1,291 1,295

Acute and Rehab 64,862 66,185 67,406 Chemical Dependency 992 1,059 1,022 Psychiatry 1,349 1,566 1,803

Discharges 67,203 68,810 70,231

Acute and Rehab 281,412 288,809 284,686 Chemical Dependency 10,806 11,326 10,424 Psychiatry 13,382 13,908 12,481

Patient Days 305,600 314,043 307,591

Average Daily Census 837 858 843 Average Length of Stay 4.55 4.56 4.38 Occupancy Rate (Licensed Beds) 61% 63% 61% Occupancy Rate (Available Beds) 66% 66% 65% Inpatient Surgery Cases 20,889 21,772 22,362

Outpatient Activity Hospital Outpatient Total 447,411 460,318 466,348 Outpatient Surgery Cases 27,169 27,383 28,211 Emergency Services 123,472 125,342 124,912 Scripps Clinic Visits 1,016,805 1,044,131 1,068,794 Scripps Coastal Visits(4) 85,122 83,676 278,453 Ambulatory Surgery Center Cases(3) 2,608 3,735 7,112 Urgent Care Visits(4) 58,498 60,004 87,461 (1) Acute beds total 1,228; rehab beds total 30. (2) Scripps Memorial Hospital Encinitas’ licensed and available beds increased by four in 2009. (3) Includes Encinitas Ambulatory Surgery Center Joint Venture, which opened in February 2008. (4) Fiscal year 2009 reflects the acquisition of Scripps Coastal North and Escondido.

Source: Scripps Health

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For further information regarding utilization, see “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL PERFORMANCE—Historical Performance.”

Service Area

The service area (Primary Service Area and secondary service area) for Scripps Health is San Diego County. San Diego County has the third largest population among counties in the State of California and the sixth largest in the United States. Its diversified industries include biotechnology, high technology, agriculture, shipbuilding, defense contracting, manufacturing and tourism.

Population Trends San Diego County

(in thousands)

2005 2006 2007 2008(1)

San Diego County 2,936 2,941 2,974 3,001 State of California 35,990 36,250 36,553 36,757 United States 295,896 298,755 301,621 304,059 (1) Population information for 2008 is the most current information available from the United States Census Bureau.

Source: United States Census Bureau

Population Growth Forecasts San Diego County

(in thousands)

Year Population

2010 3,243 2020 3,633 2030 3,982

Source: San Diego Association of Governments 2030 Region-wide Forecast. Scripps Health provides no assurance regarding the accuracy of such estimates.

Market Environment and Competition

Scripps Health has identified its primary service area as the North City West, North County West, Central and South Suburban regions of San Diego County, California (collectively, the “Primary Service Area”). The Primary Service Area accounted for 67% of total discharges for Scripps Health hospitals in 2008.

Total market share for the Primary Service Area was 33% in 2006, 33.2% in 2007 and 33% in 2008. In North City West, Scripps Health’s market share was 45.3% in 2006, 45.8% in 2007 and 44.0% in 2008. In North County West, Scripps Health’s market share was 38% in 2006, 38% in 2007 and 38% in 2008. In the Central region, Scripps Health’s market share was 29.9% in 2006, 29.7% in 2007 and 29.9% in 2008. In the South Suburban region, Scripps Health market share was 26.8% in 2006, 27.4% in 2007 and 26.9% in 2008.

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In addition to Scripps Health, the San Diego County health care provider market is served by the following health care delivery systems: Sharp HealthCare, the University of California San Diego (“UCSD”), Kaiser Permanente Southern California (“Kaiser”), Tri-City Medical Center and Palomar Pomerado Health (“PPH”). Sharp HealthCare operates five acute care hospitals: Grossmont Hospital, Sharp Chula Vista Medical Center, Sharp Coronado Hospital, Sharp Mary Birch Hospital for Women, and Sharp Memorial Hospital, with an aggregate of 1,271 acute licensed beds. UCSD operates the UCSD Medical Center and the John M. and Sally B. Thornton Hospital, with an aggregate of 469 acute licensed beds. Kaiser operates one hospital in San Diego County, Kaiser Foundation Hospital, with 392 acute licensed beds, is licensed as a health care service plan pursuant to the Knox-Keene Health Care Service Plan of 1975, as amended, and contracts with other hospitals for additional capacity. The Tri-City Hospital District operates the Tri-City Medical Center, which has an aggregate of 397 acute licensed beds. PPH operates two hospitals: Palomar Medical Center and Pomerado Hospital, with an aggregate of 393 acute licensed beds. Other hospitals in the San Diego County market include Alvarado Medical Center with 226 acute licensed beds, Rady Children’s Hospital with 259 acute licensed beds, Fallbrook Hospital District with 47 acute licensed beds, Kindred Hospital – San Diego with 70 acute licensed beds, Paradise Valley Hospital with 237 beds and Villa View Community Hospital with 57 acute licensed beds. (The description of licensed bed complements included in this paragraph is extracted from information available from the California Office of Statewide Health Planning and Development.)

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There are 22 acute care hospitals in San Diego County. The following map shows the locations of the Scripps Health facilities and those of its major competitors in San Diego County:

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Competitive market share information for Scripps Health and its major competitors in San Diego County for the year ended December 31, 2008, the most current year for which such information is available from the California Office of Statewide Health Planning and Development, is shown below:

San Diego County Hospitals Market Share Information

Acute Care Discharges Year Ended December 31, 2008

Discharges Patient Days ALOS(1) Mkt. Share

Acute Licensed

Beds Acute

Occupancy(2)

Scripps Memorial Hospital Encinitas 8,492 33,119 3.9 3.2% 112 81.0% Scripps Green Hospital – La Jolla 10,918 38,213 3.5 4.1% 173 60.5% Scripps Memorial Hospital La Jolla 17,523 75,349 4.3 6.5% 293 70.5% Scripps Mercy Hospital – San Diego 19,439 89,419 4.6 7.2% 467 52.5% Scripps Mercy Hospital – Chula Vista 10,771 46,315 4.3 4.0% 183 69.3%

Scripps Health 67,143 282,415 4.2 25.0% 1,228(4) 63.0%

Sharp Coronado Hospital 2,520 8,568 3.4 0.9% 59 39.8% Sharp Memorial Hospital 15,780 78,900 5.0 5.9% 341 63.4% Sharp Chula Vista Medical Center 12,558 56,511 4.5 4.7% 169 91.6% Sharp Mary Birch Hospital for Women 14,955 67,298 4.5 5.6% 332 55.5% Grossmont Hospital 24,829 96,833 3.9 9.3% 370 71.7%

Sharp Health Care 70,642 308,110 4.4 26.3% 1,271 66.4%

Pomerado Hospital 7,089 26,229 3.7 2.6% 95 75.6% Palomar Medical Center 20,318 73,145 3.6 7.6% 298 67.2%

Palomar/Pomerado Health 27,407 99,374 3.6 10.2% 393 69.3%

UCSD Medical Center(3) 22,411 125,502 5.6 8.4% 469 73.3% UCSD 22,411 125,502 5.6 8.4% 469 73.3%

Kaiser Foundation Hospital – SD 28,821 118,166 4.1 10.7% 392 82.6% Tri-City Medical Center 17,093 68,372 4.0 6.4% 397 50.9% Alvarado Medical Center 8,644 42,356 4.9 3.2% 226 51.3% Paradise Valley Hospital 7,396 25,886 3.5 2.8% 237 35.8% Fallbrook Hospital District 2,812 8,155 2.9 1.0% 47 47.5% Rady Children’s Hospital 14,767 64,975 4.4 5.5% 259 68.7% Kindred 427 14,646 34.3 0.2% 70 57.3% Villa View Community Hospital 610 15,921 26.1 0.2% 57 76.5%

Total Other 80,570 358,476 4.4 30.0% 1,617 60.7%

Grand Total 268,173 1,173,877 4.4 100.0% 4,978 64.6%

(1) Average Length of Stay (2) Based on Licensed Beds (3) UCSD operates under one license (UCSD Hillcrest) (4) Scripps licensed bed count excludes 50 psychiatry, 30 rehab and 14 acute and 50 residential chemical dependency beds

Source: California Office of Statewide Health Planning and Development, 2008 Annual Patient Discharge Data, Acute Care Discharges, excludes Psych, Rehab, Chemical Dependency, SNF, and Normal Newborns totals may not add due to rounding.

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FINANCIAL AND OPERATING INFORMATION

Summary Historical Financial Data

General. The financial data for the fiscal years ended September 30, 2007, 2008 and 2009 has been derived from the audited consolidated financial statements and other financial information of Scripps Health and Affiliates. This summary should be read in conjunction with the audited consolidated financial statements and other financial information of Scripps Health and Affiliates, together with the related notes, appearing in Appendix B to this Official Statement.

Summary of Revenues and Expenses. The table below provides a condensed summary of the consolidated statements of operations and changes in net assets of Scripps Health and Affiliates, which include the results of operations of SC Physicians Organization, Scripps Health Plan Services, Inc.(a wholly owned subsidiary of SC Physicians Organization), The Scripps Whittier Diabetes Institute, the Mercy Ambulatory Surgery Center, Encinitas Ambulatory Surgery Center (collectively, the “Scripps Affiliates”) and Scripps Health for the years ended September 30, 2007, 2008 and 2009.

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Scripps Health and Affiliates(1) Condensed Consolidated Statements of Operations and Changes in Net Assets

(dollars in thousands)

Fiscal year ended September 30 2007 2008 2009 Revenues

Total operating revenues $1,781,071 $1,945,344 $2,161,135

Operating Expenses Wages and benefits 782,516 868,253 956,971 Supplies 313,894 323,662 350,866 Services 442,021 481,847 585,253 Provision for uncollectible accounts receivable 61,839 73,859 63,406 Depreciation and amortization 65,906 74,277 88,482 Interest 14,804 14,288 15,199

Total operating expenses 1,680,980 1,836,186 2,060,177

Operating income 100,091 109,158 100,958

Nonoperating gains (losses): Investment income (loss) 63,946 25,163 (11,155) Holding gain (loss) on trading portfolio 47,271 (118,054) 42,683 Contributions 11,546 1,604 2,192 Gain (loss) on disposal of property 794 (196) (28) Market adjustment on interest rate swaps 505 (8,028) (9,061) Loss on early extinguishment on debt (297) (8,903) –

Excess of revenues over expenses 223,856 744 125,589

Other changes in unrestricted net assets (34,571) 7,068 30,657 Increase in unrestricted net assets 189,285 7,812 156,246

Changes in restricted net assets(2) 45,601 10,740 (21,879)

Total increase in net assets $ 234,886 $ 18,552 $ 134,367 (1) The consolidated financial statements for Scripps Health also include the results of operations of certain affiliates of Scripps

Health that are not Members of the Obligated Group (the “Excluded Affiliates”). The Excluded Affiliates’ revenues were 10.3%, 11.3% and 12.1% of total consolidated revenues of Scripps Health, and their operating income was -0.4%, -1.1% and 0.8% of total consolidated operating income of Scripps Health for the fiscal years ended September 30, 2007, 2008 and 2009, respectively.

(2) Includes temporarily and permanently restricted net assets.

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Summary of Financial Position. The following table provides a summary of consolidated statements of financial position for the Excluded Affiliates and Scripps Health at September 30, 2007 and 2008 and 2009.

Scripps Health and Affiliates(1) Consolidated Statements of Financial Position

(dollars in thousands)

September 30, 2007 2008 2009 Assets

Current assets: Cash and cash equivalents $ 124,267 $ 249,144 $ 297,401 Accounts receivable, net 249,962 237,730 259,362 Assets limited as to use 10,102 10,323 20,278 Other current assets 27,067 31,130 37,152

Total current assets 411,398 528,327 614,193

Assets limited as to use 254,703 202,604 192,716 Investments 613,723 504,154 586,873 Property, plant and equipment, net 601,444 685,513 735,328 Other assets 107,180 96,899 77,415

Total assets $1,988,448 $2,017,497 $2,206,525

Liabilities and Net Assets Current liabilities:

Current portion of long-term debt $ 13,038 $ 59,040 $ 39,223 Accounts payable 98,423 96,986 127,953 Accrued liabilities 162,574 178,121 207,914

Total current liabilities 274,035 334,147 375,090

Long-term debt, less current portion 432,372 380,679 384,698 Other liabilities 81,121 83,199 92,898 Total liabilities 787,528 798,025 852,686

Net Assets: Unrestricted 988,273 996,085 1,152,331 Temporarily restricted 144,641 154,992 126,077 Permanently restricted 68,006 68,395 75,431

Total net assets 1,200,920 1,219,472 1,353,839

Total liabilities and net assets $1,988,448 $2,017,497 $2,206,525 (1) The consolidated financial statements for Scripps Health also include the financial position and results of operations of the

Excluded Affiliates, whose cash and cash equivalents were 20.3%, 13.9% and 11.6% of total cash and cash equivalents, whose unrestricted investments were 0.3%, 0.1% and 0.2% of total investments, whose restricted investments were 1.2%, 1.2% and 1.1% of total investments, and whose assets were 2.2%, 2.5% and 2.3% of total assets for the years ended September 30, 2007, 2008 and 2009, respectively.

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Sources of Revenue

Scripps Health derives its patient service revenue from Medicare, Medi-Cal, managed care payors, commercial insurers, self-paying patients and other sources. The following table sets forth the mix of consolidated gross patient service revenues by payor type for the fiscal years ended September 30, 2007, 2008, and 2009.

Scripps Health Payor Mix

2007 2008 2009 Medicare 39.1% 40.3% 40.5% Medi-Cal* 10.5 10.7 10.1 HMO & PPO 40.3 39.5 39.8 Managed Care Full Risk 2.4 2.1 2.6 Commercial Insurance 0.9 0.9 0.9 Workers’ Compensation 2.0 1.8 1.7 Self-Pay 4.8 4.7 4.4

Total 100.0% 100.0% 100.0% * Includes County Medical Service

Source: Scripps Health

Medi-Cal Programs. Scripps Mercy Hospital received funding from the State of California as a Medi-Cal disproportionate share hospital under Senate Bill 1100, DSH Replacement Program. For the fiscal years ended September 30, 2007, 2008, and 2009, these payments totaled $8,968,509, $8,941,748 and $9,557,873 respectively. Amounts to be received in future years, if any, are subject to annual determination. See “BONDHOLDERS’ RISKS—Patient Services Revenues–Disproportionate Share Payments” in the forepart of this Official Statement.

Scripps Mercy Hospital also received additional funding from the State of California under Senate Bill 1100; these funds are paid from the State’s separate additional “Private Hospital Supplemental Fund,” and the amounts are determined by contract. For the fiscal years ended September 30, 2007, 2008 and 2009, these payments totaled $8,575,000, $9,225,000 and $7,000,000 respectively. This funding must be applied for and approved each year.

Third-Party Payors. Scripps Health negotiates and manages all third-party payor contracts on a centralized basis.

Scripps Health has contracts with more than 60 health maintenance organizations (“HMOs”) and preferred provider organizations (“PPOs”). Overall, HMO, PPO and managed care full risk revenues comprised approximately 42.4% of Scripps Health gross patient revenues for the fiscal year ended September 30, 2009. See “BONDHOLDERS’ RISKS—Patient Service Revenues” in the forepart of this Official Statement.

Capitalization

The following table sets forth the actual capitalization of Scripps Health as of September 30, 2009, and as of September 30, 2009 as adjusted to reflect the issuance of the Series 2010 Bonds, on the assumption that they were issued on September 30, 2009.

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Scripps Health Capitalization

(dollars in thousands)

September 30, September 30, 2009 2008 Actual As Adjusted

Long-Term Debt, including current portion $ 439,719 $ 423,921 $ 423,921 Series 2010 Bonds – – 220,000

Total Long-Term Debt 439,719 423,921 643,921

Unrestricted Net Assets 996,085 1,152,331 1,152,331 Total Capitalization $1,435,804 $1,576,252 $1,796,252

Long-Term Debt to Capitalization Ratio 30.63% 26.89% 35.85% Maximum Annual Debt Service Coverage

The table below sets forth (i) the maximum annual debt service requirement on Indebtedness (as defined in the Master Indenture) and the maximum annual debt service coverage ratio for fiscal years ended September 30, 2008 and 2009, and (ii) the maximum annual debt service on such Indebtedness and the maximum annual debt service coverage ratio for the fiscal year ended September 30, 2009, as adjusted to give effect to the issuance of the Series 2010 Bonds as if such Series 2010 Bonds had been issued on October 1, 2008 in the estimated aggregate principal amount of $220,000,000, without reflecting any expenses to be incurred or revenues realized in connection with such issuance. For purposes of the following table, maximum annual debt service is assumed to be the maximum debt service payable in any fiscal year based upon actual principal and interest payments scheduled for fixed rate bonds and an assumed interest rate for variable rate bonds, as detailed in the footnotes to the following table.

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Scripps Health Maximum Annual Debt Service Coverage

(dollars in thousands)

Fiscal Year Ended September 30 2008 2009 Historical:

Excess of revenues over expenses $ 744 $125,589

Plus: Depreciation and amortization 74,277 88,482

Plus: Interest 14,288 15,199

(Subtract) Plus: Holding loss (gain) on trading portfolio 118,054 (42,683)

Plus: Loss on disposal of property 196 28

Plus: Market adjustment on interest rate swaps 8,028 9,061

Plus: Loss on early extinguishment of debt 8,903 ─

Income Available for Debt Service $224,490 $195,676

Maximum annual debt service requirement (1)(2)(3)(4)(5) $ 26,935 $ 26,935

Maximum annual debt service coverage ratio 8.3x 7.3x

As adjusted:

Maximum annual debt service requirement(1)(2)(3)(4)(5)(6) ─ $37,462

Maximum annual debt service coverage ratio ─ 5.2x

(1) Maximum annual debt service is assumed to be the maximum debt service payable in any fiscal year based upon actual

principal and interest payments scheduled for fixed rate bonds and an assumed interest rate for variable rate bonds as detailed in the footnotes below.

(2) For outstanding variable rate Series 2001A Bonds and the unhedged portion of the variable rate Series 2008B, 2008C, 2008D, 2008E, 2008F Bonds, assumes interest at an average annual interest rate of 2.97% per annum.

(3) Assumes interest on the borrowing under the SWEEP Program (a pooled revolving loan program administered by the California Statewide Communities Development Authority) at an average annual interest rate 2.97% per annum amortized as level debt service beginning in 2010 with a final maturity of 2035.

(4) Assumes the Series 2008G Bonds bear interest at the swap rate of 3.086% and the swapped portion of the Series 2008B, 2008C, 2008D, 2008E, and 2008F Bonds bear interest at the swap rate of 3.21%. Assumes floating rate paid by the swap counterparty is equal to the floating rate paid on such Bonds. The floating rates may differ from time to time, sometimes substantially.

(5) Maximum annual debt service does not include capital leases and other notes payable. (6) Assumes Variable Rate Bonds issued in the aggregate principal amount of $100,000,000, with interest payable at an average

annual interest rate of 2.97% per annum.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL PERFORMANCE

Critical Accounting Policies and Estimates

Use of Estimates. The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates include: the carrying amounts for goodwill, and property, plant, and equipment; valuation of deferred gifts; valuation allowances for receivables; and liabilities for claims incurred but not reported under capitation agreements and self-insured programs. Actual results could differ from those estimates.

Investments. Alternative investments represent ownership interests in limited partnerships and limited liability companies that Scripps Health does not have the ability to exercise significant influence or control over. Alternative investments are recorded using the equity method of accounting with the related changes in value in earnings reported as investment income in the accompanying consolidated statements of operations.

Investments in equity securities with readily determinable fair values and all investments in debt securities are recorded at fair value based on quoted market prices in the consolidated statements of financial position. Investment income or loss on trading securities (including realized and unrealized gains and losses, interest, and dividends) is included as nonoperating gains (losses), within the excess of revenues over expenses, unless the income or loss is restricted by donor or law, in which case the investment income or loss is recorded directly to temporarily or permanently restricted net assets.

Contributions and Restricted Net Assets. Contributions are recorded at estimated fair value as of the date the contribution is received. Unconditional promises (pledges) to contribute assets are recorded at fair value at the date the promise is received. Pledges and other deferred gifts are discounted to their net present value. In addition, gifts received as irrevocable trusts, which usually provide for payments to the donor until the donor’s death, are reduced by the present value of estimated payments to the donor. Contributions that are not restricted as to use are reported as unrestricted revenue in the consolidated statements of operations. If the donor restricts the use of the gift, contributions are reported as increases in temporarily or permanently restricted net assets in the consolidated statements of changes in net assets.

Temporarily restricted contributions are generally limited by a time or a specific purpose restriction. When restrictions are met, temporarily restricted net assets are transferred to unrestricted net assets and recorded as net assets released from restrictions in the consolidated statements of operations. Permanently restricted contributions have been restricted by donors to be maintained in perpetuity. Income from such gifts is recorded as temporarily restricted net assets and transferred to unrestricted net assets when restrictions are met.

Health Care Delivery Revenue and Accounts Receivable. Health care delivery revenue consists primarily of: (1) patient service revenue provided under contracts with various government-sponsored health care programs (Medicare and Medi-Cal), insurance companies, and other third parties and (2) capitation premium revenue received under contracts with managed care payors.

Patient service revenue is recognized as services are delivered. Contracts usually involve discounts from established rates. Payment arrangements consist of prospectively determined rates per discharge, discounted charges, per diem payments, and reimbursed costs. Scripps Health is reimbursed by

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Medicare for cost reimbursable items at a tentative rate with final settlement determined after submission of annual Medicare cost reports by Scripps Health and audits thereof by the fiscal intermediary. Revenue and related receivables are recorded net of contractual discounts. Provisions for uncollectible receivables are recorded as operating expenses. Provisions for contractual discounts and uncollectible accounts are estimated based upon an evaluation of historical collection experience. Adjustments and changes in estimates are recorded in the period in which they are determined.

Capitation premium revenue is recognized during the period enrollees are entitled to receive services. This is generally calculated and paid to Scripps Health as a fixed premium per enrollee (member) per month. Therefore, there are no accounts receivable from patients related to these types of contracts.

Scripps Health provides health care services at no cost or at amounts less than its established rates to unfunded self-pay patients that meet criteria under Scripps Health’s financial assistance policy (charity care). Because Scripps Health does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue.

Historical Performance

First Quarter Unaudited Financial Results. While the results for the first quarter ended December 31, 2009 are not yet complete, the preliminary unaudited operating results for the two months ended November 30, 2009, exceeded the operating results for the first two months of fiscal year 2009. Nonoperating gains, including investment income, for the first two months of fiscal year 2010 also exceeded nonoperating gains for the corresponding period in fiscal year 2009. Days cash on hand at November 30, 2009, are comparable to days cash on hand at September 30, 2009.

Fiscal Year 2009 Compared to Fiscal Year 2008. Excess of revenues over expenses increased by $124.9 million from $0.7 million in fiscal year 2008 to $125.6 million in fiscal year 2009. This was primarily due to an increase on holding gains on trading portfolio of $160.7 million, from losses of $118.1 million in 2008 to gains of $42.7 million in 2009, partially offset by a decrease in investment income of $36.3 million, from investment income of $25.2 million in 2008 to investment loss of $11.2 million in 2009. Operating income decreased by $8.2 million in fiscal year 2009 from fiscal year 2008.

Operating revenues increased by approximately 11.1% primarily due to:

• Increases in patient service revenues of approximately 10.2% primarily due to :

o volume increases in hospital discharges, outpatient surgeries and clinic visits.

o volume increases resulting from the newly acquired Scripps Coastal Medical Centers, and

o increases in payor reimbursement rates.

• Increases in capitation revenue of approximately 20.5% primarily due to additional capitation revenue from the newly acquired Scripps Coastal Medical Centers.

• Increases in net assets released from restrictions used for operations of approximately 11.4% primarily due to an increase in expenditures for programs supported by philanthropy.

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Operating expenses increased approximately 12.2% primarily due to:

• Increases in wages and benefits of approximately 10.2% primarily due to annual market and merit increases, increased labor expenses due to volume increases mentioned above as well as the addition of employees for the newly acquired Scripps Coastal Medical Centers.

• Increases in supplies expenses of approximately 8.4% primarily due to annual inflation and as a result of the acquisition of Scripps Coastal Medical Centers in North County.

• Increases in services expenses of approximately 21.5% primarily due to increased rates for physician services for current contracts and as a result of the newly acquired Scripps Coastal Medical Centers.

• Increases in depreciation and amortization of approximately 19.1% primarily due to assets placed in service during the year as a result of increased capital construction activities in the current and prior year, as well as additional depreciation and amortization expense related to the newly acquired Scripps Coastal Medical Centers.

A $9.1 million negative market adjustment on interest rate swaps was recorded in fiscal year 2009 compared to an $8.0 million negative market adjustment in 2008.

Cash and cash equivalents increased approximately $48.3 million primarily due to a $42.7 million holding gain on trading portfolio, as well as a positive cash flow from operations of $156.9 million offset by investments in capital expenditures of $121.6 million.

Accounts receivable consist primarily of patient receivables recorded net of contractual discounts and allowances for doubtful accounts. Accounts receivable increased from $237.7 million at September 30, 2008 to $259.4 million at September 30, 2009 primarily due to the new Scripps Coastal Medical Centers. Net days of revenue in accounts receivable decreased from 44.6 days at September 30, 2008 to 43.8 days at September 30, 2009.

Fiscal Year 2008 Compared to Fiscal Year 2007. Excess of revenue over expense decreased by $223.2 million from $223.9 million in fiscal year 2007 to $0.7 million in fiscal year 2008 primarily due to a decrease in investment income of $38.7 million, from investment income of $63.9 million in 2007 to investment income of $25.2 million in 2008, and holding losses on trading portfolio of $118.1 million in 2008, as compared to holding gains on trading portfolio of $47.3 million in 2007. Operating income increased by $9.1 million in fiscal year 2008 from fiscal year 2007.

Operating revenues increased by approximately 9.2% due primarily to:

• Increases in patient service revenues of approximately 9.3% primarily due to volume increases in hospital discharges and clinic visits, as well as increases in payor reimbursement rates.

• Increases in capitation revenue of approximately 15.7% primarily due to the full year impact of new membership and higher capitation rates received from various plans in fiscal year 2008.

Operating expenses increased approximately 9.2% from fiscal year 2007 to fiscal year 2008 primarily due to:

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• Increases in wages and benefits of approximately 11.0% primarily due to annual market and merit increases and increased labor expenses due to volume increases mentioned above.

• Increases in services expenses of approximately 9.0% primarily due to increased rates for physician services for current contracts.

• Increases in provision for uncollectible accounts receivable of approximately 19.4% primarily due to an increase in uninsured patients in fiscal year 2008.

• Increases in depreciation and amortization of approximately 12.7% primarily due to assets placed in service during the year as a result of increased capital construction activities in the current and prior year.

An $8.9 million loss on early extinguishment of debt was recorded in fiscal year 2008 as a result of writing off unamortized debt issuance costs.

An $8.0 million negative market adjustment on interest rate swaps was recorded in fiscal year 2008 compared to a positive $0.5 million in 2007.

Accounts receivable consist primarily of patient receivables recorded net of contractual discounts and allowances for doubtful accounts. Accounts receivable decreased from $250.0 million at September 30, 2007 to $237.7 million at September 30, 2008. Net days of revenue in accounts receivable decreased from 51.2 days at September 30, 2007 to 44.6 days at September 30, 2008.

Liquidity and Capital Resources

The unrestricted liquidity position (consisting of cash and cash equivalents, short-term fixed income investments, and long-term investments, less investments restricted as to use) of Scripps Health and the Excluded Affiliates as of September 30, 2009 was $884.3 million, including $297.4 million in operating cash and $586.9 million in unrestricted investments stated at fair market value. The available liquidity of $884.3 million represents a 17.4% increase over the $753.3 million in available liquidity as of September 30, 2008, and equaled 208.6% of total outstanding debt as of September 30, 2009 (as compared to available liquidity representing 171.3% of total outstanding debt as of September 30, 2008).

The Board establishes guidelines for all investment decisions. The Board has adopted an investment policy (Long-Term Investment Portfolio Statement of Investment Policy and Objectives) to guide the management of the investments, and the policy may be reviewed from time to time. Within those guidelines, the Investment Committee of the Board provides direct oversight of the policy. Implementation of the policy is provided through an investment program overseen by Scripps Health management. Pursuant to this policy, a strategic asset allocation model provides structure to achieve the investment objectives set out by the Board. The asset allocation model provides a range whereby certain percentages of the invested assets are allocated to equity, debt securities and alternative investments with the target allocation of 55% to equities; 10% to alternative investments comprised of private equity, venture capital and certain hedge fund strategies: and 35% to fixed income securities. At September 30, 2009, the investment portfolio conformed to the investment policy. Professional outside investment managers have been retained to manage specific asset classes in accordance with the policy. In October 2009, the Board approved a modification of the investment policy, reducing the exposure to equities by 5% and increasing the exposure to fixed income securities by 5%. The current target allocation is 50% equities, 40% fixed income and 10% alternative investments.

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The following table sets forth the liquidity position and corresponding days cash on hand for Scripps Health and the Excluded Affiliates at September 30, 2007, 2008 and 2009.

Scripps Health Liquidity Position(1) (dollars in thousands)

September 30, 2007 2008 2009

Cash and cash equivalents(2) $124,267 $249,144 $297,401

Short-term fixed income investments(3) 10,102 10,323 20,278

Long-term investments(4) 868,426 706,758 779,589

Total cash and investments 1,002,795 966,225 1,097,268

Less: Investments restricted as to use 264,805 212,927 212,994

Total unrestricted cash and investments $737,990 $753,298 $884,274

Days cash on hand(5) 166.8 156.5 163.7

(1) The consolidated financial statements for Scripps Health also include the financial position and results of operations of the

Excluded Affiliates, whose cash and cash equivalents were 20.3%, 13.9% and 11.6% of total cash and cash equivalents, whose unrestricted investments were 0.3%, 0.1% and 0.2% of total investments, whose restricted investments were 1.2%, 1.2% and 1.1% of total investments, and whose assets were 2.2%, 2.5% and 2.3% of total assets for the years ended September 30, 2007, 2008 and 2009, respectively.

(2) Includes debt securities with maturities less than three months. (3) Includes fixed income investments with maturities less than one year. (4) Includes fixed income investments with maturities greater than one year and equities. (5) Total unrestricted cash and investments, divided by the calculation of total operating expenses, minus depreciation and

amortization (on a rolling twelve-month basis), divided by 365 (in 2008, divided by 366).

Source: Scripps Health

Derivatives Transactions

Scripps Health utilizes interest rate swap agreements to manage interest rate risk related to its variable rate debt. At September 30, 2009, Scripps Health had six fixed payor swap agreements with Citibank, N.A., with a total notional amount of $204,425,000. Although these arrangements had been designated as hedges, effective January 1, 2007, management determined that the interest rate swap agreements ceased to be highly effective hedges and discontinued hedge accounting. Scripps Health has the right to terminate the agreement prior to maturity and the counterparty has the right to terminate under certain events of default. See further discussions of Scripps Health’s interest rate swap arrangements in the notes to the consolidated financial statements included as Appendix B hereto.

Scripps Health experienced a significant increase in its interest rate swap liability from $7.8 million at September 30, 2008 to $16.9 million at September 30, 2009. The interest rate swap instrument triggers a collateral call when the instrument’s negative value is greater than $15 million. As a result, Scripps Health was required to fund a collateral call to the counterparty in the amount of $1.5 million. Scripps Health retains ownership of the collateral, which is currently invested in an interest bearing account.

See “BONDHOLDERS’ RISKS – Other Risk Factors – Risks Related to Interest Rate Swap Agreements” in the forepart of this Official Statement.

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Retirement Plans

Scripps Health has a defined contribution savings plan for full-time and part-time employees who have completed six months of eligible service. In addition, Scripps Health maintains a defined benefit plan for six employees and a defined contribution plan for certain of its key executives. The defined benefit plan is currently closed to additional participants. Scripps Health could elect to offer additional defined benefit plans in the future. Both plans are disclosed in the notes to the audited financial statements appearing in Appendix B.

Capital Expenditures

Scripps Health is considering strategic future capital expenditures intended to expand services provided to the communities it serves Scripps Health cannot make any representation that such expansions will occur or, if they do occur, as to the source of their funding. Historically, Scripps Health has funded its significant growth with a combination of existing investments, current year cash flow and proceeds of debt. The decision on whether to proceed with the expansion or with the incurrence of additional debt will depend on the financial strength of Scripps Health. Capital expenditures amounted to $121.6 million for the fiscal year ended September 30, 2009. This represents a 15.8% decrease over the $144.4 million in capital expenditures for the fiscal year ended September 30, 2008 and a 14.2% increase over the $106.5 million in capital expenditures for the fiscal year ended September 30, 2007.

Scripps Health’s capital plan for fiscal years 2010 through 2014 is approximately $1,475 million. Significant projects include:

• Construction of parking structures at various campuses

• Seismic upgrade projects to meet California’s mandated standards

• Design costs for new facilities at Scripps Memorial Hospital La Jolla and Scripps Memorial Hospital Encinitas

• Expansion of the emergency departments at Scripps Mercy Hospital San Diego and Scripps Memorial Hospital Encinitas

• Infrastructure upgrades including new central energy plants at Scripps Mercy Hospital San Diego, Scripps Memorial Hospital Encinitas and Scripps Memorial Hospital La Jolla

• Bed expansion projects at Scripps Memorial Hospital Encinitas

• Investment in information technology projects including the implementation of an electronic health record

Before any individual project is commenced or significant capital costs are incurred, the project is evaluated by management to determine financial feasibility and is submitted for approval to the Board. Management expects that the sources of funding for capital projects for fiscal years 2010 through 2014 will be cash from operations, debt financing, investment earnings, and philanthropic donations. To the extent that available funds are not sufficient to pay for projected capital and seismic improvement expenditures through 2014, capital projects will be postponed or reduced in scope.

The State of California issued seismic safety standards, which call for more stringent structural building standards to be in place for buildings providing acute care services, with an initial compliance

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date of January 1, 2008. This deadline has been extended to 2013 for all of Scripps Health’s hospitals. An additional two-year extension may be granted for facilities that are under construction but unable to meet the 2013 deadline due to circumstances beyond the facilities’ control. The California Office of Statewide Health Planning and Development (“OSHPD”) was directed to review the previously established seismic performance categories for acute care hospital buildings using a software program, HAZUS, developed by the Federal Emergency Management Agency (“FEMA”). This evaluation takes into account the earthquake hazard in specific locations and also vulnerabilities of different building structure types in order to predict stability of a building after an earthquake. Scripps Health is evaluating its hospital buildings under HAZUS and management anticipates that this review will result in certain buildings being recategorized so that they will not be required to be modified to meet seismic standards applicable by 2013. Scripps Health management also expects that the HAZUS review, when completed, will result in fewer and less costly renovations required for those Scripps Health buildings not currently meeting the 2013 seismic standards. Current estimates are that the minimum remediation costs to meet the standards will be approximately $94 million over the next five years and the maximum remediation costs will be approximately $190 million over the same period, although actual costs may vary.

In the event Scripps Health facilities do not meet required seismic standards by a regulatory required date, Scripps Health may be precluded by OSHPD from using such facilities to care for patients, which could materially adversely affect Scripps Health’s operations.

Operating Lease Commitments

Scripps Health leases various facilities under operating leases that expire at various dates through 2043. These facilities are occupied primarily by Scripps Clinic and Scripps Coastal Medical Center. For the fiscal years ending September 30, 2010 through 2014, Scripps Health’s annual commitments under operating leases that have initial or remaining terms in excess of one year range from $29.5 million to $22.4 million. This operating expense is off-set, in part, by rental income, as well as patient service revenue generated by the operations of Scripps Clinic and Scripps Coastal Medical Center. See Notes 11 and 12 in APPENDIX B – “FINANCIAL STATEMENTS OF SCRIPPS HEALTH” hereto.

OTHER INFORMATION

Licensure, Certification and Accreditation

Each of the hospital facilities is appropriately licensed for the level of care it delivers and is certified to participate in the Medicare program and in the Medi-Cal program, and each is accredited by The Joint Commission.

Medical Staff

The following table represents a summary of physicians on the medical staffs of Scripps Health hospitals as of August 31, 2009. Based on an analysis of age distribution of the physicians on the medical staff the average age is 49. Scripps Health management does not expect to experience significant decreases in volume due to retirement in the foreseeable future.

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Scripps Health Medical Staff As of August 31, 2009

Hospital Physicians Board Certified

Physicians

Percentage Board Certified

Physicians Scripps Memorial Hospital La Jolla 785 699 89% Scripps Green Hospital – La Jolla 430 396 92 Scripps Memorial Hospital Encinitas 442 407 92 Scripps Mercy Hospital 1,099 949 86

Total 2,756 2,451 89%

Source: Scripps Health. Dentists are part of the medical staff but are not board certified. Eliminating dentists from total physicians would bring total to 90% Board Certified Physicians.

Employees

Scripps Health has been named to FORTUNE magazine’s 12th annual list of America’s “100 Best Companies to Work” and ranked 59th on the 2009 list. In addition Scripps has been named to AARP’s listing of the 50 Best Employers for Workers Over 50 for the past six years. Working Mother magazine named Scripps to its 2009 list of America’s 100 Best Companies for its family-friendly policies. Scripps goal is to create the best environment possible for retention and to support staff so they can provide the best patient care, clinical research and graduate medical education.

As of September 30, 2009, Scripps Health employed 13,022 employees, consisting of approximately 10,585 full-time employees and 1,602 part-time employees. Of those, approximately 3,457 are registered nurses.

Nurse Staffing

The markets in which Scripps Health operates are experiencing nursing shortages. To address the nursing shortage, Scripps Health is collaborating with local colleges to expand the supply of nurses. Scripps Health is implementing several system-wide initiatives to meet the staffing needs, including training hospital employees in effective recruiting strategies and methods, marketing initiatives with key nursing publications for print and web-based recruitment, system-wide employee referral program for nursing and other allied health care professions, tuition reimbursement programs and collaborative nursing and allied health educational program opportunities. Scripps Health has also focused on specialized training and development programs that will support the internal development of specialized nursing areas such as Intensive Care, Surgical/Operating Room, and Emergency Services. With the high incidence of newly graduated nurses in California, specialized orientation and development programs have been developed to prepare for eventual registered nurse turnover due to a maturing work force. In the shorter term, it is anticipated that the demand for nurses will continue to outweigh supply. To meet this increased demand, Scripps Health has created its own internal staffing resource service program that will provide additional supplemental staffing as needed. In the event of high demand due to any unplanned emergent situations, Scripps Health will also rely on increased use of registry (temporary agencies primarily for nurses, with the remainder consisting of certified nurse assistants and respiratory therapists). During the fiscal years ended September 30, 2008 and 2009, Scripps Health spent approximately $21 million and $15.8 million, respectively, on registry and traveler use, which is a 25.2% decrease, which was the result of implementing the initiatives described above. Scripps Memorial Hospital La Jolla achieved Magnet designation for demonstrated excellence in nursing clinical practice by the American Nursing Association the first in San Diego.

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Risk Management

Scripps Health has a comprehensive insurance program designed to safeguard its assets and properties. Scripps Health takes a large retention for those risks that it can mitigate to offset risk transfer costs. In addition, Scripps Health purchases excess liability coverage for losses that exceed its self-insurance program.

Scripps Health is self-insured for hospital professional and hospital general liability risks for the first $2,000,000 of loss per occurrence subject to a self-insurance retention aggregate of $10,000,000. Losses in excess of this amount are insured through modified claims-made professional liability policies that provide for a seven year built-in extended reporting period. Total limits purchased for Hospital Professional Liability is $50,000,000 per occurrence subject to a $50,000,000 aggregate. The provision for estimated self-insured professional liability claims includes estimates of the ultimate liability and defense costs for both reported claims and incurred but not reported claims. There is also an additional $50,000,000 per occurrence and aggregate coverage for catastrophic premise liability loss for both hospital and non-hospital locations for a total of $100,000,000 per occurrence and aggregate.

Scripps Health is self-insured for workers’ compensation risks for the first $1,000,000 of loss per occurrence. Losses in excess of this amount are insured through policies of insurance which provide coverage up to statutory amounts. The Part B coverage for workers’ compensation, employer’s liability, is covered with a primary excess occurrence policies totaling $2,000,000 limits per occurrence and in the aggregate and additional excess policies in the amount $100,000,000 per occurrence and aggregate.

Scripps Health Plan Services is insured for Managed Care Liability through a primary policy with limits of $2,000,000 per occurrence and $2,000,000 annual aggregate and is insured through excess policies for an additional $50,000,000 per occurrence and $50,000,000 aggregate.

Scripps Clinic is insured through a master policy with Scripps Clinic Medical Group on a claims-made basis and Scripps Health is acknowledged as an administrative insured of this policy. Scripps Health employees working in the Clinic are insured under the entity coverage for Scripps Clinic Medical Group with limits of $5,000,000 per occurrence and $10,000,000 in the annual aggregate subject to a self- insured retention of $500,000 per claim and $2,900,000 per year in the aggregate. Claims-made coverage covers only those claims reported during the policy period and the Company records an accrual for losses incurred but not reported.

Scripps Coastal Medical Centers (“SCMC”) is insured through a master policy with San Diego Coastal Medical Group on a claims-made basis and Scripps Health is acknowledged as an administrative insured of this policy. Scripps Health employees working in the clinics are insured under the entity coverage for Scripps Coastal Medical Group with limits of $1,000,000 per occurrence and $5,000,000 in the annual aggregate, subject to retention of $0 and $100,000 payable for 2009 and 2008, respectively.

Scripps is self-insured for employee health benefits, and records an accrual for claims incurred but not reported. Stop loss coverage is maintained which caps the maximum payable at $400,000 per claim.

APPENDIX B

FINANCIAL STATEMENTS OF SCRIPPS HEALTH

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A U D I T E D C O N S O L I D A T E D F I N A N C I A L

S T A T E M E N T S A N D O T H E R F I N A N C I A L

I N F O R M A T I O N Scripps Health and Affiliates Years Ended September 30, 2009 and 2008 With Report of Independent Auditors

Ernst & Young

dr

Scripps Health and Affiliates

Audited Consolidated Financial Statements and Other Financial Information

Years Ended September 30, 2009 and 2008

Contents Page

Report of Independent Auditors.......................................................................................................1 Consolidated Financial Statements:

Consolidated Statements of Financial Position ..........................................................................2 Consolidated Statements of Operations .....................................................................................3 Consolidated Statements of Changes in Net Assets ..................................................................4 Consolidated Statements of Cash Flows ....................................................................................5

Notes to Consolidated Financial Statements ..............................................................................6

Other Financial Information 2009 Consolidating Statement of Financial Position .....................................................................38 2009 Consolidating Statement of Operations ................................................................................39

1 A member firm of Ernst & Young Global Limited

Ernst & Young LLP Suite 500 4370 La Jolla Village Drive San Diego, California 92122 Tel: +1 858 535 7200 Fax: +1 858 535 7777 www.ey.com

Report of Independent Auditors Board of Trustees Scripps Health and Affiliates We have audited the accompanying consolidated statements of financial position of Scripps Health and Affiliates (collectively the Company) as of September 30, 2009 and 2008, and the related consolidated statements of operations, changes in net assets, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Scripps Health and Affiliates at September 30, 2009 and 2008, and the consolidated results of their operations and changes in their net assets, and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The accompanying consolidating financial statement information for 2009 is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information has been subjected to the auditing procedures applied in our audit of the consolidated financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the consolidated financial statements taken as a whole.

ey December 11, 2009

2009 2008AssetsCurrent assets:

Cash and cash equivalents $ 297,401 $ 249,144 Accounts receivable, net 259,362 237,730 Assets limited as to use 20,278 10,323 Other current assets 37,152 31,130

Total current assets 614,193 528,327

Assets limited as to use 192,716 202,604 Investments 586,873 504,154 Property, plant and equipment, net 735,328 685,513 Other assets 77,415 96,899

Total assets $ 2,206,525 $ 2,017,497

Liabilities and net assetsCurrent liabilities:

Current portion of long-term debt $ 39,223 $ 59,040 Accounts payable 127,953 96,986 Accrued liabilities 207,914 178,121

Total current liabilities 375,090 334,147

Long-term debt, less current portion 384,698 380,679 Other liabilities 92,898 83,199 Total liabilities 852,686 798,025

Net assets:Unrestricted 1,152,331 996,085 Temporarily restricted 126,077 154,992 Permanently restricted 75,431 68,395

Total net assets 1,353,839 1,219,472

Total liabilities and net assets $ 2,206,525 $ 2,017,497

See accompanying notes to consolidated financial statements.

September 30(in thousands)

Scripps Health and Affiliates

Consolidated Statements of Financial Position

2 .

2009 2008

1,838,108$ 1,667,710$ 242,832 201,548 60,886 58,759 19,309 17,327

2,161,135 1,945,344

956,971 868,253 350,866 323,662 585,253 481,847 63,406 73,859 88,482 74,277 15,199 14,288

2,060,177 1,836,186

100,958 109,158

(11,155) 25,163 42,683 (118,054) 2,192 1,604

(28) (196) (9,061) (8,028)

– (8,903) 125,589$ 744$

See accompanying notes to consolidated financial statements.

Year Ended September 30

Loss on disposal of propertyMarket adjustment on interest rate swaps

Contributions

Wages and benefitsSupplies

Provision for uncollectible accounts receivableServices

Operating expenses:

Scripps Health and Affiliates

Consolidated Statements of Operations

Investment (loss) income

Total operating expenses

Capitation premium

Operating income

(in thousands)

Interest

Holding gain (loss) on trading portfolio

Other Net assets released from restrictions used for operations

Total operating revenues

Patient service Operating revenues:

Nonoperating gains (losses):

Loss on early extinguishment of debtExcess of revenues over expenses

Depreciation and amortization

3 .

2009 2008

125,589$ 744$

32,467 7,689 (662) (621)

(1,148) – 156,246 7,812

21,723 45,373 (129) 2,392

4,894 (10,515) (19,309) (17,327)

(32,467) (7,689) (3,297) (751)

(330) (1,132) (28,915) 10,351

7,287 373 (253) 51

2 (35) 7,036 389

134,367 18,552

1,219,472 1,200,920 1,353,839$ 1,219,472$

See accompanying notes to consolidated financial statements.

Permanently restricted net assets:

Net assets at end of year

Net assets released from restrictions used for purchases of

Total increase in net assets

Other

Net assets at beginning of year

Other

(in thousands)

of property and equipmentOther

Increase in unrestricted net assets

Net assets released from restrictions used for purchases

Investment (loss) income

Cumulative effect on prior years of a change in accounting method

Contributions

(Decrease) Increase in temporarily restricted net assets

Increase in permanently restricted net assets

Change in value of deferred gifts

Change in value of deferred gifts

Temporarily restricted net assets:

property and equipment

Contributions

Net assets released from restrictions used for operationsUnrealized gains (losses) on investments

Scripps Health and Affiliates

Consolidated Statements of Changes in Net Assets

Excess of revenues over expenses

Year Ended September 30

Unrestricted net assets:

4 .

2009 2008

134,367$ 18,552$

88,482 74,277 302 525 (74) (12)

63,406 73,859 – 8,903

(15,408) 126,280 9,061 8,028

28 196 (28,881) (48,138)

Cumulative effect of accounting change for income taxes (1,148) –

(85,038) (61,627) (67,379) 35,167 (6,022) (4,063) 15,692 1,471 39,803 (5,538) 9,699 2,075

Loss on sale of propertyRestricted contributions and investment income

Other assetsAccounts payable and accrued liabilitiesOther liabilities

Scripps Health and Affiliates

(in thousands)

Cash flows from operating activities and nonoperating gains

Reconciliation of total increase in net assets to cash flows provided by operating Total increase in net assets

Consolidated Statements of Cash Flows

Year Ended September 30

Realized and unrealized (gains) losses on investmentsMarket adjustment on interest rate swaps

Changes in assets and liabilities:Accounts receivable

Other current assets

activities and nonoperating gains:

Investments

Depreciation and amortizationAmortization of debt issuance costs

Provision for uncollectible accounts receivableLoss on early extinguishment of debt

Amortization of original issue premium

, ,156,890 229,955

(121,620) (144,420) (121,620) (144,420)

28,881 48,138 Proceeds from line of credit 47,000 – Payments on line of credit (47,000) – Proceeds from borrowings 1,289 526,692 Payments on borrowings (17,012) (533,181) Payment of debt issuance costs (171) (3,117) Original issue premium – 810

12,987 39,342 48,257 124,877

249,144 124,267 297,401$ 249,144$

14,785$ 18,298$ 866 7,758

12,975 11,850

Cash paid during the year for interest, net of amount capitalized

Net cash provided by operating activities

Cash flows from financing activities

Net cash used in investing activities

Net cash provided by financing activities

Proceeds from restricted contributions and investment income

Purchases of property, plant and equipment

See accompanying notes to consolidated financial statements.

Cash flows from investing activities

Assets acquired through capital lease or note payableAccrued capital expenditures for property, plant and equipment

Cash and cash equivalents at beginning of yearCash and cash equivalents at end of year

Supplemental disclosure of cash flow information

Increase in cash and cash equivalents

5 .

6

Scripps Health and Affiliates

Notes to Consolidated Financial Statements

September 30, 2009

1. Organization and Nature of Operations

Scripps Health is a California not-for-profit public benefit corporation that provides healthcare services through a network of hospitals and related healthcare operations located in San Diego County.

The consolidated financial statements for Scripps Health include the financial position and results of operations of Scripps Clinic and Scripps Coastal Medical Center, each operated by Scripps Health as a 1206(1) foundation, Scripps Clinic Physicians Organization (SCPO), Scripps Clinic Health Plan Services (SHPS), a wholly owned subsidiary of SCPO and a California corporation that was granted a license under the Knox-Keene Health Care Service Plan Act to operate as a healthcare service plan in California, and The Whittier Institute for Diabetes (TWI), a not-for-profit public benefit corporation formed to provide research, education, and patient care in the field of diabetes.

The entities of Scripps Health, with the exception of SCPO and SHPS, are exempt from federal income taxes under Section (501)(c)(3) of the Internal Revenue Code and are exempt from state income taxes under Section 237(d) of the California Revenue and Taxation Code.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the accounts of the entities that Scripps Health controls (collectively, the Company). All significant transactions among these entities have been eliminated in the accompanying consolidated financial statements.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates include: the carrying amounts for goodwill, and property, plant and equipment; valuation of deferred gifts; valuation allowances for receivables; and liabilities for medical claims incurred but not reported, third-party payables and receivables, and self-insured programs. Actual results could differ from those estimates.

Scripps Health and Affiliates

Notes to Consolidated Financial Statements (continued)

7

2. Summary of Significant Accounting Policies (continued)

Cash and Cash Equivalents

The Company considers highly liquid investments with original maturities of three months or less, excluding those whose use is limited, to be cash equivalents. The carrying amount approximates fair value because of the short maturity of the investments.

Healthcare Delivery Revenue and Accounts Receivable

Healthcare delivery revenues consist primarily of: (1) patient service revenue provided under contracts with various government-sponsored healthcare programs (Medicare and Medi-Cal), insurance companies, and other third parties, and (2) capitation premium revenue received under contracts with managed care payors.

Patient service revenue is recognized as services are delivered. Contracts usually involve discounts from established rates. Payment arrangements consist of prospectively determined rates per discharge, discounted charges, per diem payments, and reimbursed costs. The Company is reimbursed by Medicare for cost reimbursable items at a tentative rate with final settlement determined after submission of annual Medicare cost reports by Scripps Health and audits thereof by the fiscal intermediary. Estimated net third-party settlement payables of $11,617,000 and $8,637,000 are included in accrued liabilities at September 30, 2009 and 2008, respectively.

Revenue and related receivables are recorded net of contractual discounts. Provisions for uncollectible receivables are recorded as operating expenses. Provisions for contractual discounts and uncollectible accounts are estimated based upon an evaluation of historical collection experience. Adjustments and changes in estimates are recorded in the period in which they are determined.

Capitation premium revenue is recognized during the period enrollees are entitled to receive services and is generally calculated and paid to the Company as a fixed premium per enrollee (member) per month. Therefore, there are no accounts receivable from patients related to these types of contracts.

The Company provides healthcare services at no cost or at amounts less than its established rates to unfunded self-pay patients that meet criteria under the Company’s financial assistance policy (charity care). Because the Company does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue.

Scripps Health and Affiliates

Notes to Consolidated Financial Statements (continued)

8

2. Summary of Significant Accounting Policies (continued)

Assets Limited as to Use

Assets limited as to use includes assets that are held by trustees under indenture agreements and as swap collateral and assets limited as to use by management over which management retains control and may at its discretion subsequently use for other purposes (see Note 5).

Investments

The Company classifies certain of its investments in debt and equity securities as trading.

Investments in equity securities with readily determinable fair values and all investments in debt securities are recorded at fair value based on quoted market prices in the consolidated statements of financial position. Investment income or loss on trading securities (including realized and unrealized gains and losses, interest, and dividends) is included as nonoperating gains (losses), within the excess of revenues over expenses, unless the income or loss is restricted by donor or law, in which case the investment income or loss is recorded directly to temporarily or permanently restricted net assets.

Alternative investments represent ownership interests in limited partnerships and limited liability companies that the Company does not have the ability to exercise significant influence or control over. Alternative investments are recorded using the equity method of accounting with the related changes in value in earnings reported as investment (loss) income in the accompanying consolidated statements of operations.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost when purchased or at fair market value if contributed. Depreciation and amortization of these assets are recorded on a straight-line basis over the period in which the assets are estimated to be in service and of value to the Company. Leases which have been capitalized are amortized on the straight-line method over the shorter period of the lease term or the estimated useful life of the equipment. Such amortization is included in depreciation and amortization in the consolidated statements of operations. Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Scripps Health and Affiliates

Notes to Consolidated Financial Statements (continued)

9

2. Summary of Significant Accounting Policies (continued)

Goodwill

Goodwill, which represents the excess of the purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited of twenty-five years for Scripps Clinic, five years for Scripps Coastal Medical Center (SCMC), twenty-six months for SCMC-Escondido, and two years for Scripps Cardiovascular and Thoracic Surgery Group. The Company assesses the recoverability of its goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows from the net assets acquired. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company’s average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved.

Cost of Borrowing

Interest expense is recorded as incurred; however, when money is borrowed for construction or renovation of facilities, the interest cost on that debt during the period of construction is capitalized as part of the asset. Any interest income earned on borrowed funds during construction is accounted for as a reduction of interest cost. Costs associated with issuing debt are capitalized and amortized over the term of the debt using the effective-interest method.

Contributions and Restricted Net Assets

Contributions are recorded at estimated fair value as of the date the contribution is received. Unconditional promises (pledges) to contribute cash and other assets are recorded at fair value at the date the promise is received. Pledges and other deferred gifts are discounted to their net present value. In addition, gifts received as irrevocable trusts, which usually provide for payments to the donor until the donor’s death, are reduced by the present value of estimated payments to the donor.

Contributions that are not restricted as to use are reported as unrestricted revenue in the consolidated statements of operations. If the donor restricts the use of the gift, contributions are reported as increases in temporarily or permanently restricted net assets in the consolidated statements of changes in net assets.

Scripps Health and Affiliates

Notes to Consolidated Financial Statements (continued)

10

2. Summary of Significant Accounting Policies (continued)

Contributions and Restricted Net Assets (continued)

Temporarily restricted contributions are generally limited by a time or a specific purpose restriction. When restrictions are met, temporarily restricted net assets are transferred to unrestricted net assets and recorded as net assets released from restrictions in the consolidated statements of operations.

Permanently restricted contributions have been restricted by donors to be maintained in perpetuity. Income from such gifts is recorded as temporarily restricted net assets and transferred to unrestricted net assets when restrictions are met.

Unbilled Services and Deferred Revenue

The Company is engaged in contractual research activities and continuing medical education programs. The majority of the contracts have a fixed budget with some variable components and range in duration from a few months to several years. Generally, a portion of the contract fee is paid at the time the contract is initiated with performance-based installments payable over the contract duration. In general, prerequisites for billings are established by contractual provisions, including predetermined payment schedules, the achievement of contract milestones, or submission of appropriate billing detail. Unbilled services arise when services have been rendered but clients have not been invoiced. Similarly, deferred revenue represents cash receipts for services that have not been rendered. The Company recognizes net revenue from its contracts based primarily on contract costs incurred to date. Management believes that this methodology appropriately reflects revenue earned for clinical trials in the period in which services are provided.

Cost of Healthcare Services

The cost of healthcare services is recognized in the period in which services are delivered. Under capitation contracts, the Company is responsible for the costs of certain services delivered to enrollees, but may not always be the provider of those services. The Company accrues expense for medical costs incurred but not yet reported (IBNR) by outside providers using historical studies of claims paid and trend factors. IBNR at September 30, 2009 and 2008 was $11,259,000 and $16,545,000, respectively, and is included in accrued liabilities in the accompanying consolidated statements of financial position.

Scripps Health and Affiliates

Notes to Consolidated Financial Statements (continued)

11

2. Summary of Significant Accounting Policies (continued)

Derivative Instruments

Financial Accounting Standards Board, Accounting Standard Codification (FASB ASC) 815, Derivatives and Hedging, requires that all derivative instruments be recorded in the consolidated statements of financial position at fair value. Gains or losses resulting from changes in the values of those derivatives are accounted for depending upon the use of the derivative and whether it qualifies for hedge accounting. The Company uses derivative instruments to manage the fluctuations in cash flows resulting from interest rate risk on variable-rate debt financing.

The Company has formally documented the hedging relationships and accounts for these arrangements as cash flow hedges. The Company recognizes all derivatives in the consolidated statements of financial position at fair value. The Company also formally assessed, both at the hedge’s inception and on an ongoing basis, whether the derivatives that were used in the hedging transactions were highly effective in offsetting changes in fair values or cash flows of the hedged items. Effective January 1, 2007, the Company determined that the derivatives ceased to be highly effective hedges and discontinued hedge accounting; consequently, the Company recognizes subsequent changes in fair value of hedge instruments in nonoperating gains (losses) in the excess of revenues over expenses.

Interest Expense

Interest expense on debt issued for construction projects is capitalized until the projects are placed in service. Interest components include the following (in thousands):

2009 2008

Total interest costs incurred $ 16,917 $ 19,866 Less: capitalized interest (1,718) (5,578) $ 15,199 $ 14,288

Ownership Interests in Health-Related Activities

Generally, when the Company has a controlling ownership interest in health-related activities, the activities are consolidated and a minority interest is recorded. When there is not a controlling ownership interest but the Company has significant influence, the activities are accounted for under the equity method and the income or loss is reflected in other operating revenue. Activities where the Company does not have significant influence are carried at the lower of cost or estimated net realizable value. Ownership interests in other health-related activities are not significant to the consolidated financial statements.

Scripps Health and Affiliates

Notes to Consolidated Financial Statements (continued)

12

2. Summary of Significant Accounting Policies (continued)

Operating Income

The Company’s primary purpose is to provide diversified healthcare services to the community it serves. Only those activities directly associated with the furtherance of this purpose are considered operating activities and classified as unrestricted operating revenues and expenses. Operating revenues include those generated from direct patient care, related support services, and other revenues related to the operation of the Company.

Other activities that result in gains or losses unrelated to the Company’s primary purpose are considered to be nonoperating. Nonoperating gains and losses include gifts, grants and bequests not restricted by donors, investment income, realized and unrealized gains and losses on trading securities, gain and losses from the sale of property and equipment, market adjustments on interest rate swaps, and gains and losses on extinguishment of debt.

The Company considered the performance indicator to be the excess of revenues over expenses.

Income Taxes

Scripps Health is generally not subject to federal or state income taxes. However, Scripps Health is subject to income taxes on any net income that is derived from a trade or business, regularly carried on, and not in furtherance of the purpose for which it was granted exemption. No income tax provision has been recorded in the accompany consolidated financial statements as the net income, if any, from any unrelated trade or business, in the opinion of management, is not material to the consolidated financial statements taken as whole.

Scripps Health accounts for income taxes related to the operations of its for-profit subsidiaries (SCPO and SHPS) under the provisions of FASB ASC 740, Income Taxes, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FASB ASC 740, the tax benefit from uncertain tax positions may be recognized only if it is more likely than not the tax position will be sustained, based solely on its technical merits, with the taxing authority having full knowledge of all relevant information. The Company recognized deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets and liabilities along with net operating loss and tax credit carryovers only for tax positions that meet the more likely than not recognition criteria. The Company records a liability for unrecognized tax benefits from uncertain tax positions as discrete tax adjustments in the first interim period that the more likely than not threshold is not met.

Scripps Health and Affiliates

Notes to Consolidated Financial Statements (continued)

13

2. Summary of Significant Accounting Policies (continued)

Income Taxes (continued)

Scripps Health currently files Form 990 (informational return of organizations exempt from income taxes) and Form 990-T (business income tax return for an exempt organization) in the U.S. federal jurisdiction and the state of California. Scripps Health is not subject to income tax examinations prior to 2005 in major tax jurisdictions.

Fair Value of Financial Instruments

The carrying amount reported in the accompanying consolidated statements of financial position for cash and cash equivalents, accounts receivable, assets limited as to use, accounts payable, and accrued liabilities approximates fair value. The fair value of debt and interest rate derivatives is disclosed in Note 9 and the fair value of investments is disclosed in Note 5.

New Accounting Pronouncements

FASB ASC 820, Fair Value Measurement and Disclosures, which provides enhanced guidance for using fair value to measure financial assets and liabilities, was issued in September 2006. FASB ASC 820 establishes a common definition of fair value, provides a framework for measuring fair value under U.S. generally accepted accounting principles (GAAP), and expands disclosure requirements about fair value measurements. The Company adopted FASB ASC 820 for its fiscal year ended September 30, 2009. There was no significant impact on the 2009 consolidated financial statements from the adoption of FASB ASC 820.

In accordance with the provisions of FASB ASC 820, the Company elected to defer implementation of FASB ASC 820 as it relates to the Company’s nonfinancial assets and liabilities that are not permitted or required to be measured at fair value on a recurring basis. The Company is evaluating the impact, if any, this accounting pronouncement will have on those nonfinancial assets and liabilities.

FASB ASC 825, Financial Instruments, was issued in February 2007 and permits entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value (the fair value option) and to include in the excess of revenues over expenses the unrealized gains and losses on these financial assets and liabilities for which the fair value option has been elected. The Company adopted FASB ASC 825 for its fiscal year ended September 30, 2009. There was no significant impact on the 2009 consolidated financial statements from the adoption of FASB ASC 825, as management chose not to measure any financial instruments and certain other items at fair value that are not already required to be reported at fair value. In April 2009,

Scripps Health and Affiliates

Notes to Consolidated Financial Statements (continued)

14

2. Summary of Significant Accounting Policies (continued)

New Accounting Pronouncements (continued)

the FASB further required disclosures about the fair value of financial instruments in financial statements for interim reporting periods and in annual financial statement. FASB ASC 825 also requires entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments in financial statements on an interim and annual basis and to highlight any changes from prior periods. FASB ASC 825 is effective for financial statements issued for interim and annual periods ending after June 15, 2009. The adoption of FASB ASC 825 did not have a material effect on the consolidated financial statements of the Company.

FASB ASC 958, Not-for-Profit Entities, provides guidance on the net asset classification of donor-restricted endowment funds for the not-for-profit organization that is subject to an enacted version of the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA). FASB ASC 958 also improves disclosures about an organization’s endowment funds (both donor-restricted and board-designated endowment funds), whether or not the organization is subject to UPMIFA. The Company adopted FASB ASC 958 during the year ended September 30, 2009, and the adoption did not have a material impact on the Company’s consolidated financial statements.

FASB ASC 105, Generally Accepted Accounting Principles, was issued in June 2009 and establishes the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. All existing accounting standard documents were superseded and all other accounting literature not included in the FASB Codification is considered non-authoritative. The provisions of FASB ASC 105 are effective for periods ending after September 15, 2009, and accordingly, are effective for the Company for the current reporting period. The adoption of FASB ASC 105 did not have a significant impact on the Company’s consolidated financial statements.

FASB ASC 855, Subsequent Events, was issued in May 2009 and establishes principles and requirements for subsequent events and in particular sets forth (a) the period after the balance sheet date during which a reporting entity shall evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (b) the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements, and (c) the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. FASB ASC 855 became effective for the Company on June 30, 2009, and the adoption of this new accounting standard now requires the Company to assess significant subsequent events through the date the financial statements are issued.

Scripps Health and Affiliates

Notes to Consolidated Financial Statements (continued)

15

2. Summary of Significant Accounting Policies (continued)

New Accounting Pronouncements (continued)

In May 2009, the FASB established the framework for financial accounting and reporting for not-for-profit mergers and acquisitions and amended the guidance for FASB ASC 350, Intangibles-Goodwill and Other, to make it applicable for not-for-profit entities. The accounting for mergers and acquisitions is significantly different and is effective for mergers and acquisitions on or after December 15, 2009. FASB ASC 350 is effective for the Company October 1, 2010, and the Company will no longer amortize goodwill, but will be subject to an annual impairment test. The Company is currently evaluating the effect of this guidance on its consolidated financial statements.

Accounting Method Change

During 2009, Scripps Health reevaluated the transfer pricing in regards to the services provided by the Company. This evaluation resulted in increased taxable liability for the Company in accordance with the provisions of FASB ASC 740, Income Taxes. FASB ASC 740 requires that realization of uncertain income tax positions must be more likely than not (i.e., greater than 50% likelihood of receiving a benefit). Furthermore, FASB ASC 740 prescribes the benefit to be recorded in the financial statements as the amount most likely to be realized assuming a review by tax authorities having all relevant information and applying current conventions. The cumulative effect of establishing the related tax liability amounted to a charge of $1,147,693 being reflected as a cumulative effect of an accounting change within unrestricted net assets.

Reclassifications

Certain amounts in the 2008 consolidated financial statements have been reclassified to conform to the 2009 presentation.

Subsequent Events

Scripps Health has evaluated subsequent events occurring between the end of the most recent fiscal year and December 11, 2009, the date the financial statements were issued.

Scripps Health and Affiliates

Notes to Consolidated Financial Statements (continued)

16

3. Affiliation with Catholic Healthcare West

In August 1995, Scripps Health and Catholic Healthcare West (CHW) entered into an affiliation agreement to enhance their mutual ability to serve the San Diego community. Through the affiliation, CHW transferred the sole voting membership of one of its subordinate corporations, Mercy Healthcare San Diego (MHSD), to Scripps Health, along with the responsibility for its operations and governance. MHSD’s principal activity is the operation of a hospital and a network of clinics. MHSD was subsequently merged into Scripps Health.

Pursuant to the affiliation agreement, CHW, among other things, obtained the right to receive a 20% interest in the annual change in unrestricted net assets of Scripps Health and the right to 20% of the net proceeds, with certain restrictions, upon the liquidation of Scripps Health. Scripps Health has the right to receive from CHW an amount equal to CHW’s percentage interest in (i) the annual capital expenditures of Scripps Health and (ii) the annual amortization of debt principal of Scripps Health. Scripps Health and CHW may make an election annually to receive all or a portion of the accumulated but not previously paid amounts under the affiliation agreement, subject to certain conditions. No payments have ever been paid by either party under these provisions, and as of September 30, 2009, no amounts are due. Of the members of the Scripps Health Board of Trustees, 20% are required to be elected from a slate of nominees proposed by CHW.

Under the terms of the affiliation agreement, Scripps Health was required to contribute $2,000,000 per year, adjusted annually for inflation, to a Strategic Capital Reserve Pool (the Pool), up to a maximum aggregate contribution of $20,000,000. During 2005, the parties agreed that Scripps Health had fulfilled the terms of the agreement and would therefore cease making contributions. Funds in the Pool may be used to undertake capital projects that are of mutual benefit to Scripps Health and CHW in support of healthcare in the San Diego community. Projects funded through the Pool require the approval of both Scripps Health and CHW. During 2009, Scripps Health received full reimbursement from the Pool and the account was closed. As of September 30, 2009 and 2008, the balance in the Pool is $0 and $7,495,000, respectively, and is included in assets limited as to use in the accompanying consolidated statements of financial position (see Note 5).

Scripps Health and Affiliates

Notes to Consolidated Financial Statements (continued)

17

4. Accounts Receivable

Gross accounts receivable relating to patient service revenue consisted of the following payor mix at September 30:

2009 2008

Medicare 24% 23% Medi-Cal 13 12 HMO/PPO payors 31 30 Other third-party payors 11 12 Patient responsibility 21 23 100% 100%

Accounts receivable of $259,362,000 and $237,730,000 at September 30, 2009 and 2008, respectively, is presented net of an allowance for doubtful accounts of $49,162,000 and $58,595,000 at September 30, 2009 and 2008, respectively.

The Company believes there is no significant credit risks associated with receivables from government programs. Receivables from HMO’s, PPO’s, and others are from various payors who are subject to differing economic conditions and, therefore, do not represent any concentrated risk to the Company. The Company continually monitors and adjusts the reserves associated with receivables.

The Company provides low and no-cost healthcare services to persons in need. Estimated costs to provide charity care, for which the Company is under-reimbursed by various state and county indigent care programs, were $123,008,000 in 2009 and $115,055,000 in 2008, net of Medi-Cal disproportionate share receipts of $16,558,000 in 2009 and $18,167,000 in 2008. Additionally, unpaid costs of Medicare were $160,512,000 in 2009 and $137,883,000 in 2008.

Community benefits provided by the Company also include the cost of health education, health clinics and screenings, and medical research. The cost of such benefits for the broader community is not included in the uncompensated costs reported above.

Capitation contracts with managed care payors generally have automatic renewal provisions unless terminated by prior notice to either party. Commercial capitation contracts are generally negotiated annually via the termination notice provision. Medicare HMO capitation is based on a percentage of Medicare revenue and does not require negotiation on an annual basis unless there are material changes in the risk or scope of services. The Company has agreements with various third parties that govern how financial risk is shared. Estimated amounts to be paid or received

Scripps Health and Affiliates

Notes to Consolidated Financial Statements (continued)

18

4. Accounts Receivable (continued)

under risk-sharing arrangements have been accrued as of September 30, 2009 and 2008, and are included in accounts receivable, net in the accompanying consolidated statements of financial position.

5. Investments

Assets Limited as to Use

Assets limited as to use are recorded at fair market value and include assets that are held by trustees under indenture agreements (see Note 9), and assets limited as to use by donor which have been designated by management, and assets held in trust for supplemental retirement plans and capital expenditures. Also included in assets limited as to use are assets held in trust for swap collateral.

The composition of assets limited as to use at September 30 is summarized below (in thousands):

2009 2008

Unexpended and reserve bond funds held by trustees (see Note 9)

Fixed income securities $ 20,278 $ 10,323Assets included in restricted net assets

Fixed income securities 73,429 81,504Equity securities 76,972 85,141Alternative investments 14,769 7,640Real estate 13,238 14,298International growth 5,951 –Other 1,226 1,228

Assets held in trust for supplemental retirement plans Equity securities 5,350 4,998

Assets held in trust for capital expenditures Fixed income securities – 3,275Equity securities – 3,867Real estate – 353

Assets held in trust for swap collateral Cash equivalents 1,481 -

Other assets whose use is limited 300 300 212,994 212,927Less assets limited as to use, current portion (20,278) (10,323) $ 192,716 $ 202,604

Scripps Health and Affiliates

Notes to Consolidated Financial Statements (continued)

19

5. Investments (continued)

Investments

The composition of investments at September 30 is summarized below (in thousands):

2009 2008

Fixed income securities $ 251,607 $ 212,267 Equity securities 253,949 228,484 Alternative investments 57,954 63,379 International growth 23,351 – Other 12 24

$ 586,873 $ 504,154 The composition of investment return (loss) for the years ended September 30 includes the following (in thousands):

2009 2008

Nonoperating gains (losses): Interest income and dividends $ 18,329 $ 23,179 Net realized (losses) gains on sale of investments (29,484) 1,984 Holding gains (losses) on trading portfolio 42,683 (118,054)

31,528 (92,891) Other changes in net assets:

Interest and dividends on temporarily restricted assets 2,556 2,087 Net realized (losses) gains on temporarily restricted net

assets (2,685) 305 Net unrealized gains (losses) on temporarily restricted

net assets 4,894 (10,515)

Total investment return (loss) $ 36,293 $ (101,014)

Scripps Health and Affiliates

Notes to Consolidated Financial Statements (continued)

20

6. Property, Plant and Equipment

Property, plant and equipment at September 30 are summarized below (in thousands):

Estimated

Useful Lives 2009

2008

Land – $ 79,247 $ 76,178 Buildings and improvements 5 to 40 years 731,190 689,202 Equipment 5 to 15 years 609,381 541,850 Construction in progress – 125,725 105,425 Capital lease equipment 5 years 15,044 14,248 1,560,587 1,426,903 Less amortization and accumulated

depreciation (825,259) (741,390)

Property, plant and equipment, net $ 735,328 $ 685,513 Construction in progress at September 30, 2009 and 2008 is related to various construction and information technology projects. As of September 30, 2009, there is approximately $99,555,000 (unaudited) of outstanding commitments to complete construction in progress projects.

7. Other Assets

Other assets at September 30 are summarized below (in thousands):

2009 2008

Pledges receivable, net $ 30,147 $ 43,828 Goodwill, net 37,509 41,441 Debt issuance costs, net 3,012 3,143 Land held for sale 1,179 4,339 Cash surrender value of life insurance 3,318 2,618 Other 2,250 1,530

$ 77,415 $ 96,899

Scripps Health and Affiliates

Notes to Consolidated Financial Statements (continued)

21

7. Other Assets (continued)

The amount of pledges receivable at September 30 is as follows (in thousands):

2009 2008

Unconditional promises to give $ 39,092 $ 54,235 Less allowance for uncollectible pledges (6,404) (6,240)Less unamortized discount (2,541) (4,167)

Net pledges receivable $ 30,147 $ 43,828

Amounts due in: Less than one year $ 18,359 $ 18,369 One to five years 10,036 22,499 More than five years 1,752 2,960

Total $ 30,147 $ 43,828 The fair value of these pledges was determined by calculating the net present value of the estimated future cash flows using discount rates at the date of the pledge ranging from 0.75% to 6.78%.

8. Goodwill

Scripps Clinic

In 2000, Scripps Health acquired all the outstanding shares of SCPO and its wholly owned subsidiaries and substantially all the assets and liabilities of Scripps Clinic Medical Group (SCMG). As a result of the acquisition, the excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill in the accompanying consolidated statements of financial position in the amount of $50,216,000, and is being amortized, on a straight-line basis, over a period of 25 years. Amortization of goodwill totaled $18,413,000 at September 30, 2009 and $16,404,000 at September 30, 2008.

Scripps Coastal Medical Center

In 2008, Scripps Health purchased substantially all of the net assets of Sharp Mission Park Medical Clinic (the Clinic). As a result of the acquisition, the excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill in the accompanying consolidated financial statements in the amount of $6,884,000 and $7,892,000 at September 30, 2009 and 2008, respectively. Amortization is being amortized on a straight-line basis, over a period of five years. Amortization of goodwill totaled $1,605,000 at September 30, 2009 and $263,000 at September 30, 2008.

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Notes to Consolidated Financial Statements (continued)

22

9. Long-Term Debt

A summary of long-term debt at September 30 follows (in thousands):

2009 2008

Tax-exempt bonds sponsored by the California Health Facilities Financing Authority (CHFFA):

Fixed rate bonds: Series 2008 A, principal due in varying annual

installments through October 2022; interest payable at a fixed rate of 4.99%, adjusting annually (including unamortized premium of $723 at September 30, 2009) $ 98,009

$ 99,818

Variable rate bonds:

Series 2008 B-F, principal due in varying annual

installments through October 2031; Series B, C and E ($41,960), Series D ($41,935) and Series F ($42,130); interest payable weekly at variable interest rates averaging 0.65% during the period from October 1, 2008 through September 30, 2009 (ranging from 0.21% to .028% at September 30, 2009) 209,945 221,230

Series 2008 G, principal due in varying annual installments through October 2019; interest payable weekly, at a variable rate averaging 0.56% during the period from October 1, 2008 through September 30, 2009. (0.28% at September 30, 2009) 40,975 40,975

Series 2001 A, principal due in varying annual installments through October 2023; interest payable monthly, at a variable rate averaging 0.67% during the period from October 1, 2008 through September 30, 2009. (0.27% at September 30, 2009) 11,700 11,700

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Notes to Consolidated Financial Statements (continued)

23

9. Long-Term Debt (continued)

2009 2008 Tax-exempt bonds sponsored by the California Statewide

Communities Development Authority: Variable rate revenue refunding bonds:

Series 2007 A State-wide Easy Equipment Program (SWEEP), principal due August 2035; interest payable weekly at a variable interest rate averaging 0.54% during the period from October 1, 2008 through September 30, 2009. (0.27% at September 30, 2009) $ 49,995 $ 49,995

Total fixed and variable rate debt 410,624 423,718 Obligations under capital leases 9,597 11,517 Other notes payable 3,700 4,484

Total debt 423,921 439,719

Less current liabilities 39,223 59,040

Total long-term debt $ 384,698 $ 380,679 Scheduled principal repayments of long-term debt for the next five fiscal years and thereafter are as follows (in thousands):

2010 $ 13,7972011 14,1592012 14,1162013 14,2122014 12,387Thereafter 355,250

$ 423,921 The Master Indenture of Trust (the Indenture) dated as of December 1, 1985 and amended and restated May 1, 1998, and supplemented through August 1, 2008, encompasses substantially all of the Company’s outstanding debt obligations. Scripps Health is currently the sole Member of the “Obligated Group” created pursuant to the Indenture. All bonds, with the exception of the Series 2008 A bonds, are guaranteed by liquidity facilities (principally letters of credit). The

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Notes to Consolidated Financial Statements (continued)

24

9. Long-Term Debt (continued)

Company has entered into liquidity facilities totaling $316,898,000 with various financial institutions to fund optional tenders from bondholders. These liquidity facilities are meant to provide support in times of market disruption. There were no draws on the liquidity facilities during 2009 and 2008 with the exception of a failed remarketing of the Series 2008 bonds on September 30, 2008, and on October 17, 2008, that required draws of $1,845,000 (Series 2008 G) and $27,000,000 (Series 2008 B), respectively. These bonds were all subsequently successfully remarketed in October 2008 and the credit facility draws were repaid.

At September 30, 2009 and 2008, approximately $35,623,000 and $52,441,000 of the Company’s variable rate demand bonds (Series 2008 B-G), were classified as current liabilities in accordance with FASB ASC 470, Debt, after consideration of the repayment terms of the related liquidity facilities if draws were to occur in accordance with FASB ASC 210, Short-Term Obligations.

In August 2008, the Company issued Series 2008 A-G bonds in the total amount of $361,225,000, which were used to retire the Series 1991 B, 1998 A&B and Series 2005 A-F bonds. Bond reserve funds are used to fund debt service reserve requirements for the 2008 A fixed rate bonds as well as principal and interest payments. At September 30, 2009 and 2008, bond reserve funds held by trustees were $20,278,000 and $10,323,000, respectively. Bond proceeds from the previous bond issues were used to finance certain capital projects.

The interest rates on variable debt are reset weekly by the remarketing agent in accordance with the Indenture depending on prevailing market conditions. The rates are highly correlated with the Securities Industry and Financial Markets Association (SIFMA) index.

The Company is party to six interest rate swap agreements with an aggregate notional amount of $204,425,000 to effectively convert a portion of the variable interest rate bonds to fixed rate debt of approximately 3.19% per annum. In August 2008, the Series 2005 swap agreements were assigned to the Series 2008 bonds. Under the interest rate swap agreement for the Series 2008 G bonds, with a notional amount of $40,975,000, the Company pays a fixed amount of 3.086% and receives a floating rate of 54.7% of LIBOR plus 0.32%. Under the interest rate swap agreements for the Series 2008 B-F bonds, with a total notional amount of $163,450,000, the Company pays a fixed rate of 3.21% and receives a floating rate of 54.7% of LIBOR plus 0.32%. The Company has the right to terminate the agreement prior to maturity and the counterparty has the right to terminate under certain events of default. At September 30, 2009 and 2008, the fair value of these swap agreements was recorded in the accompanying consolidated statements of financial position at $16,860,000 and $7,799,000, respectively, in accrued liabilities.

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Notes to Consolidated Financial Statements (continued)

25

9. Long-Term Debt (continued)

Under the terms of the Indenture and various letter of credit agreements, the Company is required to meet certain financial ratios. The Indenture also places limits on the Company’s ability to obtain additional borrowings. Under supplemental master indenture implementing amendments, dated August 1, 2008, the Obligated Group instituted a gross revenue pledge.

The Company maintains a credit facility arrangement which includes a revolving line of credit of $100,000,000. The revolving credit facility expires on April 7, 2010. There were no amounts outstanding under this revolving line of credit at either September 30, 2009 or 2008.

Based on the borrowing rates currently available to the Company for loans with similar terms and maturities, the estimated fair value of long-term debt was approximately $423,921,000 and $439,719,000 at September 30, 2009 and 2008, respectively.

10. Other Liabilities

Other liabilities at September 30 are summarized below (in thousands):

2009 2008

Accrued liability for professional and general liability self-insurance, net of current portion of $2,897 in 2009 and $3,527 in 2008 $ 7,924

$ 8,892 Accrued liability for physician malpractice, net of current

portion of $1,119 in 2009 and $1,549 in 2008 5,631 5,997 Annuity/unitrust liabilities (discounted at 4.33% in 2009

and 4.85% in 2008) 12,588 13,253 Accrued liability for workers’ compensation, net of current

portion of $8,318 in 2009 and $8,359 in 2008 29,836 26,284 Asset retirement obligation 13,813 13,156 Deferred retirement liability 11,098 9,037 Deferred rent liability 9,103 5,196 Minority interest 1,708 1,209 Other 1,197 175

$ 92,898 $ 83,199

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Notes to Consolidated Financial Statements (continued)

26

10. Other Liabilities (continued)

The Company follows the guidance of FASB ASC 410, Asset Retirement and Environmental Obligations. FASB ASC 410 requires that a legal obligation to perform an asset retirement activity which is not conditional on a future event and which is within the control of the Company must be recognized as a liability at fair value if it can be reasonably estimated. Because asbestos abatement is mandated under the laws of the State of California, the Company will eventually be required to remove and dispose of asbestos in all of its facilities, and recorded a liability totaling $13,813,000 at September 30, 2009 and $13,156,000 at September 30, 2008, which reflects the future value, discounted at an annual rate of 5%, of the estimated asbestos removal and disposal liability. Corresponding net increases to property, plant and equipment have also been recorded to reflect the undepreciated value of the assets that would have been capitalized at the time the liability was incurred, along with the subsequent depreciation of the asset.

11. Lease Commitments

The Company leases various equipment and facilities under operating leases expiring at various dates through 2043. Total rental expense for operating leases was $46,732,000 in 2009 and $31,487,000 in 2008. The following is a schedule of future minimum lease payments as of September 30, 2009 under operating leases that have initial or remaining terms in excess of one year (in thousands):

Facilities Equipment Total

2010 $ 29,500 $ 1,635 $ 31,135 2011 28,453 1,450 29,903 2012 25,934 – 25,934 2013 24,088 – 24,088 2014 22,427 – 22,427 Thereafter 187,568 – 187,568 $ 317,970 $ 3,085 $ 321,055

12. Rental Income

The Company leases medical office space to various physicians and other healthcare-related entities under operating leases. The leases provide for minimum rentals and additional amounts for real estate taxes and common area expenses. Total rental income was $9,401,000 in 2009 and $9,048,000 in 2008 and is included in other operating revenue in the consolidated financial statements.

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Notes to Consolidated Financial Statements (continued)

27

12. Rental Income (continued)

The following is a schedule of future minimum rentals to be received as of September 30, 2009 under operating leases that have initial or remaining terms in excess of one year (in thousands):

2010 $ 8,992 2011 7,608 2012 5,683 2013 4,778 2014 3,821 Thereafter 7,477

$ 38,359 13. Temporarily and Permanently Restricted Net Assets

Temporarily restricted net assets is available for the following purposes or periods as of September 30 (in thousands):

2009 2008

Building, construction and equipment $ 61,586 $ 83,183 Deferred gifts, available for use in future periods 22,375 28,218 Research 19,511 21,981 Education 12,983 12,811 Healthcare operations – specific purpose 7,899 7,066 Indigent care 1,723 1,733

$ 126,077 $ 154,992

During 2009 and 2008, temporarily restricted net assets of $51,776,000 and $25,016,000, respectively, were released from restrictions by incurring expenditures that satisfied the donor’s purpose or time restriction.

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Notes to Consolidated Financial Statements (continued)

28

13. Temporarily and Permanently Restricted Net Assets (continued)

Permanently restricted net assets at September 30 are restricted to investments in perpetuity, the income from which is expendable to support (in thousands):

2009 2008

Healthcare operations – specific purpose $ 25,449 $ 25,203 Research 19,731 14,438 Education 14,774 12,210 Indigent care 12,813 12,800 Deferred gifts, the income from which will be available for

use in future periods 1,578 2,658 Building, construction and equipment 1,086 1,086

$ 75,431 $ 68,395 Endowments The Company’s endowments consist of 77 individual funds established for a variety of purposes. Net assets associated with the endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions.

On September 30, 2008, California Senate Bill No. 1329 was signed into law which enacted the Uniform Prudent Management of Institutional Funds Act (UPMIFA) for California. The Board of Trustees of the Company has interpreted this as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor stipulations to the contrary. As a result of the interpretation, the Company classifies as permanently restricted net assets (a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at the time the accumulation is added to the fund. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriate for expenditure by the Company in a manner consistent with the standard of prudence described by UPMIFA. In accordance with UPMIFA, the Company considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: (1) duration and preservation of the fund, (2) purposes of the Company and the donor-restricted endowment fund, (3) general economic conditions, (4) possible effect of inflation or deflation, (5) expected total return from income and the appreciation of investments, (6) other resources of the Company, and (7) investment policies of the Company.

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Notes to Consolidated Financial Statements (continued)

29

13. Temporarily and Permanently Restricted Net Assets (continued)

Endowments (continued)

From time-to-time, the fair value of assets associated with individual endowment funds may fall below the level that the donor or UPMIFA requires Scripps Health to retain as a fund of perpetual duration. Deficiencies of this nature that are reported in unrestricted net assets were $1,293,000 and $3,513,000 as of September 30, 2009 and 2008, respectively. These deficiencies resulted from unfavorable investment market fluctuations.

Scripps Health has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowment while seeking to maintain the purchasing power of the endowment assets. Under this policy, as approved by the Board of Trustees, the endowment assets are invested in a manner that is intended to produce results that exceed the price and yield results while assuming a moderate level of investment risk. Scripps Health expects its endowment funds, over time, to provide an average rate of return of approximately 5% over the rate of inflation annually. Actual returns in any given year may vary from this amount.

To satisfy its long-term rate-of-return objectives, Scripps Health relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). Scripps Health targets a diversified asset allocation that places a great emphasis on equity-based investments to achieve its long-term return objectives within prudent risk constraints.

Scripps Health has a policy of appropriating for distribution each year 4% (with an additional 1% administrative fee) of its endowment fund’s average fair value over the prior three-year rolling average market values. In establishing this policy, Scripps Health considered the long-term expected return on its endowment. Accordingly, over the long term, Scripps Health expects the current spending policy to allow its endowment to grow at an average of 3% to 4% annually, above inflation. This is consistent with Scripps Health’s objective to maintain the purchasing power of the endowment assets held in perpetuity or for a specified term as well as to provide additional real growth through new gifts and investment return.

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Notes to Consolidated Financial Statements (continued)

30

13. Temporarily and Permanently Restricted Net Assets (continued)

Endowments (continued)

Changes in endowment net assets for the year ended September 30, 2009 is as follows (in thousands):

Unrestricted

Temporarily Restricted

Permanently Restricted Total

Endowment net assets as of September 30, 2008 $ (3,513) $ 11,679 $ 68,395 $ 76,561

Investment return: Investment income 444 1,910 – 2,354 Net appreciation (realized

and unrealized) 1,776 2,377 – 4,153 Total investment return 2,220 4,287 – 6,507 Contributions – – 7,288 7,288 Appropriation of endowment

assets for expenditure – (1,757) – (1,757) Other changes – – (252) (252) Endowment net assets as of

September 30, 2009 $ (1,293) $ 14,209 $ 75,431 $ 88,347 Temporarily restricted net assets is as follows at September 30, 2009 (in thousands):

Temporarily restricted net assets The portion of perpetual endowment funds subject to a time restriction

under UPMIFA: Without purpose restrictions $ 1,120 With purpose restrictions 13,089

Term endowment funds – Total endowment funds classified as temporarily restricted net assets $ 14,209

14. Risk Management and Contingencies

Insurance Coverage

The Company has a comprehensive insurance program designed to safeguard its assets and properties. The Company takes a large retention for those risks that it can mitigate to offset risk

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Notes to Consolidated Financial Statements (continued)

31

14. Risk Management and Contingencies (continued)

Insurance Coverage (continued)

transfer costs. Risk transfer is used to mitigate various exposures and losses to a third party insurer when it is appropriate. In addition, the Company purchases excess liability coverage to cover losses that exceed its self-insurance program.

The Company is self-insured for hospital professional and hospital general liability risks for the first $2,000,000 of loss per occurrence subject to a self-insurance retention aggregate of $10,000,000. Losses in excess of this amount are insured through modified claims-made professional liability policies that provide for a seven-year built-in extended reporting period. Total limits purchased for hospital professional liability is $50,000,000 per occurrence subject to a $50,000,000 aggregate. The provision for estimated self-insured professional liability claims includes estimates of the ultimate liability and defense costs for both reported claims and incurred but not reported claims. There is also an additional $50,000,000 per occurrence and aggregate coverage for catastrophic premise liability loss for both hospital and non-hospital locations for a total of $100,000,000 per occurrence and aggregate.

The Company is self-insured for workers’ compensation risks for the first $1,000,000 of loss per occurrence. Losses in excess of this amount are insured through policies of insurance which provide coverage up to statutory amounts. The Part B coverage for workers’ compensation, employer’s liability, is covered with primary excess occurrence policies totaling $2,000,000 limits per occurrence and in the aggregate and additional excess policies in the amount of $100,000,000 per occurrence and aggregate.

Scripps Health Plan Services is insured for managed care liability through a primary policy with limits of $2,000,000 per occurrence and $2,000,000 annual aggregate and is insured through excess policies for an additional $50,000,000 per occurrence and $50,000,000 aggregate.

Scripps Clinic is insured through a master policy with SCMG on a claims-made basis and Scripps Health is acknowledged as an administrative insured of this policy. Scripps Health employees working in Scripps Clinic are insureds in the entity coverage for SCMG with limits of $5,000,000 per occurrence and $10,000,000 in the annual aggregate subject to a self-insured retention of $500,000 per claim and $2,900,000 per year in the aggregate. Claims-made coverage covers only those claims reported during the policy period and the Company records an accrual for losses incurred but not reported.

SCMC is insured through a master policy with San Diego Coastal Medical Group on a claims-made basis and Scripps Health is acknowledged as an administrative insured of this policy.

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Notes to Consolidated Financial Statements (continued)

32

14. Risk Management and Contingencies (continued)

Insurance Coverage (continued)

Scripps Health employees working in the Clinic are insureds in the entity coverage for Scripps Coastal Medical Group with limits of $1,000,000 per occurrence and $5,000,000 in the annual aggregate subject to retention of $0 and $100,000 retention payable for 2009 and 2008, respectively.

The Company is self-insured for employee health benefits, and records an accrual for claims incurred but not reported. Stop loss coverage is maintained which caps the maximum payable per calendar year at $400,000.

Legal

The healthcare industry is subject to numerous laws and regulations of federal, state, and local governments. Compliance with these laws and regulations, specifically those relating to the Medicare and Medi-Cal programs, is subject to government review and interpretation, as well as regulatory actions. Claims for payment for services rendered to Medicare and Medi-Cal beneficiaries must meet applicable billing laws and regulations, which, among other things, require that the services are medically necessary, accurately coded, and sufficiently documented in the beneficiaries’ medical records. Allegations concerning possible violations of regulations can result in the imposition of significant fines and penalties, as well as significant repayment of previously billed and collected revenues for patient services. The Company believes that they are in compliance with all applicable laws and regulations, and they are not aware of any pending or threatened investigations involving allegations of potential wrongdoing.

The Company is a party to certain legal and regulatory actions in the ordinary course of business. It is the opinion of management that there will not be a material adverse effect on the consolidated financial position or results of operations of the Company as a result of such actions.

The Company was selected for a Comprehensive Examination Program (CEP) audit by the IRS in 2002. The audit consisted of two parts, an Exempt Organization (EO) audit and an Employee Plans (EP) audit. The EO audit has concluded and resulted in a Notice of Proposed Adjustment (NOPA) pertaining to unrelated business income with no tax owed. The EP audit concluded in 2009 and the Company agreed to pay a penalty for certain violations of employee plan policy. There was not a material adverse effect on the financial position of Scripps Health.

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Notes to Consolidated Financial Statements (continued)

33

14. Risk Management and Contingencies (continued)

Seismic Standards

The Company has assessed its earthquake retrofit requirements for healthcare facilities under a State of California law that requires compliance with certain seismic standards and estimates the total future cost of bringing all facilities into compliance to be $173,025,000 (unaudited) before inflation. Inflation of construction costs is expected to increase this amount. An extension of this seismic compliance deadline to 2013 has been granted for all of the Company’s facilities.

15. Retirement Plans

Defined Contribution Savings Plan

The Company provides a defined contribution savings plan for full-time and part-time employees who have completed six months of eligible service. Plan participants contribute 1%, 2%, or 3% of eligible compensation. The Company contributes an amount equal to the employees’ contributions up to 3%. Employees with 10 or more years of service contributing the maximum of 3% receive a 4%, 5%, or 6% matching contribution, depending on their years of service. All Company employees receive an additional 1% of their salary as a contribution to the defined contribution savings plan. The employer contribution vests over three years. The Company recorded plan expense in the amount of $25,839,000 in 2009 and $23,218,000 in 2008.

Nonqualified Supplemental Executive Retirement Plan

The Company maintains a nonqualified supplemental executive retirement plan for certain of its key executives. The plan provides defined benefits to its participants. As of September 30, 2009 and 2008, the plan had six participants and has been closed to new membership since 2000.

The funded status of the plan as of September 30 is as follows (in thousands):

2009 2008

Accumulated postretirement benefit obligation $ 10,091 $ 6,949 Plan assets at fair value 5,350 5,922 Accumulated postretirement benefit in excess of

plan assets (4,741) (1,027)

Accrued postretirement benefit obligation $ 10,091 $ 7,822 The Company recorded plan expense in the amount of $2,268,000 in 2009 and $1,925,000 in 2008.

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Notes to Consolidated Financial Statements (continued)

34

15. Retirement Plans (continued)

Executive Benefit Plan

During 2003, the Company implemented an annual pretax benefit plan for executives, which includes a flexible benefit allowance based on a percentage of each participant’s annual salary, from which the participant may purchase various benefits including long-term care coverage and supplemental survivor and spouse life insurance coverage. For the participants who select the split dollar life insurance benefit, the Company advances certain life insurance premiums and retains an interest in the applicable policies until the earliest of termination, retirement, disability, or death. The remaining benefit allowance may be invested in a supplemental accumulation retirement account (SARA). The participants vest in the SARA over a minimum of two years. The Company recorded plan expense in the amount of $1,451,000 in 2009 and $1,969,000 in 2008.

16. Functional Expenses

Operating expenses for 2009 and 2008 are grouped into functional classifications as summarized below (in thousands). Patient care services include expenses incurred by departments directly delivering patient care or directly supporting the delivery of patient care. General and administrative services include information services, financial services, employee relations services, insurance, and administration and related services.

2009 2008

Patient care services $ 1,874,883 $ 1,670,473 General and administrative 175,787 155,289 Fund-raising 9,507 10,424

Total operating expenses $ 2,060,177 $ 1,836,186 17. Fair Value Measurements The Company adopted the provisions of FASB ASC 820, Fair Value Measurements and Disclosures on October 1, 2009, for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements. FASB ASC 820 defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on

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Notes to Consolidated Financial Statements (continued)

35

17. Fair Value Measurements (continued)

assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. The adoption of FASB ASC 820 did not have an impact on the Company’s consolidated financial statements.

In addition to defining fair value, FASB ASC 820 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the measurement date.

Level 2: Pricing inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the asset or liabilities.

Level 3: Pricing inputs are generally unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management’s judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using factors that involve considerable judgment and interpretations, including but not limited to private and public comparables, their party appraisals, discounted cash flow models, and fund manager estimates.

Assets and liabilities measured at fair value are based on one or more of the three valuation techniques in FASB ASB 820. The three valuation techniques are identified in the tables below. Where more than one technique is noted, individual assets or liabilities were valued using one or more of the noted techniques. The valuation techniques are as follows:

a) Market approach. Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

b) Cost approach. Amount that would be required to replace the service capacity of asset (replacement cost).

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36

17. Fair Value Measurements (continued)

c) Income approach. Techniques to convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing and excess earnings models).

The Company’s investments in partnerships, limited liability companies, and similarly structured entities amounting to approximately $102,025,000 as of September 30, 2009, are accounted for using the equity method of accounting, which is not a fair value measurement.

The following represents financial assets and liabilities measured at fair value on a recurring basis and certain assets accounted for under the equity method as of September 30, 2009 (in thousands):

September 30,

2009

Active Markets for Identical

Assets (Level 1)

Significant Other

Observable Inputs

(Level 2)

Significant Unobservable

Inputs (Level 3)

Valuation Technique

(a, b, c)

Current assets: Assets limited as to use

Held by trustee Fixed income securities $ 20,278 $ – $ 20,278 $ – a, c

Assets limited as to use

Assets included in restricted net assets

Fixed income securities $ 73,429 $ – $ 73,429 $ – a, c Equity securities 64,709 64,709 – – a, c Mutual funds 12,263 12,263 – – a Real estate 13,238 – 13,238 – a, b Alternative investments 14,769 – – 14,769 a, c International growth 5,951 – – 5,951 a, c Other 1,226 1,226 – – a, c

Assets held in trust for supplemental retirement plans

Mutual funds 5,350 5,350 – – a Assets held in trust for swap

collateral Cash equivalents 1,481 1,481 – – a

Other assets whose use is limited

Cash equivalents 300 300 – – a $ 192,716 $ 85,329 $ 86,667 $ 20,720

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17. Fair Value Measurements (continued)

September 30,

2009

Active Markets for Identical

Assets (Level 1)

Significant Other

Observable Inputs

(Level 2)

Significant Unobservable

Inputs (Level 3)

Valuation Technique

(a, b, c)

Investments Fixed income securities $ 251,607 $ – $ 251,607 $ – a, c Equity securities 253,949 253,949 – – a, c Real estate 12 – 12 – a, b Alternative investments 57,954 – – 57,954 a, c International growth 23,351 – – 23,351 a, c

$ 586,873 $ 253,949 $ 251,619 $ 81,305

Other assets Pledges receivable, net $ 30,147 $ – $ 30,147 $ – c Land held for sale 1,179 – 1,179 – a, b

$ 31,326 $ – $ 31,326 $ –

Total assets at fair value $ 831,193 $ 339,280 $ 389,887 $ 102,025

Current liabilities Swap hedge $ 16,860 $ – $ 16,860 $ – c

Other liabilities Annuity/unitrust liabilities $ 12,618 $ – $ 12,618 $ – c

Total liabilities at fair value $ 29,478 $ – $ 29,478 $ –

The following table presents the change in the balance of the financial instruments classified within Level 3 of the valuation hierarchy for the year ended September 30, 2009 (in thousands):

Balance at October 1, 2008 $ 71,019 Realized and unrealized gains 5,971 Purchases, issuances, and settlements (net) 25,035 Balance at September 30, 2009 $ 102,025

18. Subsequent Events (Unaudited)

Scripps Health has evaluated subsequent events occurring between the end of the most recent fiscal year and January 14, 2010, the date the Official Statement was issued. Management has not noted any subsequent events between December 11, 2009, the date the audited financial statements were issued and January 14, 2010, the date the Official Statement was issued, which required a modification to or disclosure to the previously issued financial statements.

Other Financial Information

Scripps Health and AffiliatesConsolidating Statement of Financial Position

September 30, 2009

(in thousands)

ObligatedAssets Group TWI SHPS Joint Ventures Eliminations Consolidated

Current assets:Cash and cash equivalents $ 262,770 $ 770 $ 31,622 $ 2,239 $ – $ 297,401 Accounts receivable, net 266,456 458 1,961 1,444 (10,957) 259,362 Assets limited as to use 20,278 – – – – 20,278 Other current assets 36,504 3 129 516 – 37,152

Total current assets 586,008 1,231 33,712 4,199 (10,957) 614,193

Assets limited as to use 184,263 8,153 300 – – 192,716 Investments 585,147 1,726 – – – 586,873 Property, plant, and equipment, net 733,155 598 78 1,497 – 735,328 Other assets 87,504 – 232 62 (10,383) 77,415

Total assets $ 2,176,077 $ 11,708 $ 34,322 $ 5,758 $ (21,340) $ 2,206,525

Liabilities and Net Assets

Current liabilities:Current portion of long-term debt $ 38,644 $ 7 $ – $ 572 $ – $ 39,223 Accounts payable 127,081 87 295 490 – 127,953 Accrued liabilities 192,052 645 25,767 407 (10,957) 207,914

Total current liabilities 357,777 739 26,062 1,469 (10,957) 375,090

Long-term debt, net of current portion 382,591 17 – 2,090 – 384,698 Other liabilities 93,066 513 (681) – 92,898

Total liabilities 833,434 1,269 26,062 2,878 (10,957) 852,686

Net assets:Unrestricted 1,149,342 2,232 8,260 2,880 (10,383) 1,152,331 Temporarily restricted 124,564 1,513 – – – 126,077 Permanently restricted 68,737 6,694 – – – 75,431

Total net assets 1,342,643 10,439 8,260 2,880 (10,383) 1,353,839

Total liabilities and net assets $ 2,176,077 $ 11,708 $ 34,322 $ 5,758 $ (21,340) $ 2,206,525

See accompanying independent auditors’ report.

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Scripps Health and AffiliatesConsolidating Statement of Operations

Year ended September 30, 2009(in thousands)

ObligatedGroup TWI SHPS Joint Ventures Eliminations Consolidated

Operating revenues:Patient service $ 1,910,411 $ – $ – $ 15,933 $ (88,236) $ 1,838,108 Capitation premium 67,506 – 232,814 – (57,488) 242,832 Other 59,890 2,963 11,416 (1,465) (11,918) 60,886 Net assets released from restrictions –

used for operations 18,661 648 – – – 19,309

Total operating revenues 2,056,468 3,611 244,230 14,468 (157,642) 2,161,135

Operating expenses:Wages and benefits 941,777 2,680 8,129 4,385 – 956,971 Supplies 346,004 102 178 4,584 (2) 350,866 Services 502,387 1,764 235,918 2,824 (157,640) 585,253 Provision for uncollectible accounts

receivable 63,426 – 141 (161) – 63,406 Depreciation and amortization 87,713 94 51 624 – 88,482 Interest 15,025 2 11 161 – 15,199

Total operating expenses 1,956,332 4,642 244,428 12,417 (157,642) 2,060,177

Operating income (loss) 100,136 (1,031) (198) 2,051 – 100,958

Nonoperating gains (losses):Investment (loss) income (11,410) (114) 369 – – (11,155) Holding gain on trading portfolio 42,541 142 – – – 42,683 Contributions 2,019 173 – – – 2,192 Loss on disposal of property (28) – – – – (28) Market adjustment on interest rate swaps (9,061) – – – – (9,061)

Excess (deficiency) of revenues over expenses $ 124,197 $ (830) $ 171 $ 2,051 $ – $ 125,589

See accompanying independent auditors’ report.

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APPENDIX C

SUMMARY OF PRINCIPAL DOCUMENTS

The following is a summary of certain provisions of the Master Indenture, the Series2010A Supplement, the Bond Indenture and the Loan Agreement, that are not described elsewhere in thisOfficial Statement. These summaries do not purport to be comprehensive and reference should be madeto the Master Indenture, the Bond Indenture, the Loan Agreement and the Series 2010A Supplement for afull and complete statement of their provisions.

DEFINITIONS OF CERTAIN TERMS

Unless the context otherwise requires, the terms defined in this summary shall, for allpurposes of this summary, have the meanings herein specified, to be equally applicable to both singularand plural forms of any of the terms herein defined. Unless otherwise defined in this summary, all termsused herein or elsewhere in the Official Statement shall have the meanings assigned to such terms in theMaster Indenture, the Series 2010A Supplemental Master Indenture or Bond Indenture, as applicable.

“Accounts” means, collectively, all accounts (as such term is defined in the UCC),accounts receivable, other receivables, contracts, contractual rights, tax refunds or other obligations orindebtedness of any kind or description owing to any Member of the Obligated Group, whether secured orunsecured, now or hereafter existing, whether or not arising out of or in connection with the payment forgoods sold or leased or for services rendered, whether or not earned by performance, and all sums ofmoney or other proceeds due or not earned by performance, all sums of money or other proceeds due orbecoming due thereon, together with all rights now or hereafter existing under guarantees and collateralsecurity therefore and under leases and other contracts securing, guaranteeing or otherwise relating to anyof the foregoing, including, without limitation, (a) all rights to receive any performance or any paymentsin money or in kind; (b) all right, title and interest in and to the goods, services or other property that giverise to or that secure any of the foregoing, and insurance policies and proceeds thereof relating thereto; (c)all rights as an unpaid seller of goods and services including, without limitation, all rights to stoppage intransit, replevin, reclamation and resale; (d) all rights to receive any Medicare/Medicaid receivables orrights to payments under any other federal programs or state and local governmental programs providingfor the payment of or reimbursement for services rendered, and private insurance programs (including,without limitation, Blue Cross, prepaid health organizations, health maintenance organizations orpreferred provider or extended provider organizations), in each case only to the extent permitted underapplicable law; (e) reversionary interests in pension and profit-sharing plans, and reversionary, beneficialand residual interests in trusts, credits with and any other claims against any Person; and (f) all ledgersheets, files, records and documents relating to any of the foregoing, including all computer records,programs, storage media and computer software used or required in connection therewith.

“Administrative Fees and Expenses” means any application, commitment, financing orsimilar fee charged, or reimbursement for administrative or other expenses incurred, by the Authority orthe Bond Trustee.

“Annual Debt Service” means for each Fiscal Year the sum (without duplication) of (1)the aggregate amount of principal and interest becoming due and payable in such Fiscal Year on all Long-Term Indebtedness then Outstanding and (2) the aggregate amount of Obligation Payments becoming dueand payable in such Fiscal Year, (in either case by scheduled maturity, acceleration, mandatoryredemption or otherwise, but not including optional prepayments), less any amounts of such principal,interest or Obligation Payments to be paid during such Fiscal Year from (a) the proceeds of Indebtednessor (b) moneys or Governmental Obligations deposited in trust for the purpose of paying such principal,

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interest or Obligation Payments; provided that if a Financial Product Agreement has been entered into byany Member or Obligated Group Affiliate with respect to Long-Term Indebtedness, interest on suchLong-Term Indebtedness shall be included in the calculation of Annual Debt Service by including foreach Fiscal Year an amount equal to the amount of interest payable on such Long-Term Indebtedness insuch Fiscal Year at the rate or rates stated in such Long-Term Indebtedness plus any Financial AgreementPayments payable in such Fiscal Year minus any Financial Agreement Receipts receivable in such FiscalYear; provided that in no event shall any calculation made pursuant to this clause result in a number lessthan zero being included in the calculation of Annual Debt Service. With respect to any Guaranty, aslong as any such Guaranty is a contingent liability under generally accepted accounting principles, 20% ofthe annual debt service on the indebtedness being guaranteed (determined in a manner as nearly aspracticable to the determination of Annual Debt Service under the Master Indenture) shall be added to thecomputation of Annual Debt Service. If any such Guaranty becomes a current liability but thereafterbecomes a contingent liability, during the period such Guaranty is a current liability and for two yearsafter such Guaranty becomes a contingent liability, 100% of the annual debt service on the indebtednessbeing guaranteed shall be added to the computation of Annual Debt Service.

“Annual Required Debt Service Coverage Ratio” means, for any Fiscal Year, the ratiodetermined by dividing Income Available for Debt Service by Annual Debt Service for such Fiscal Year.

“Balloon Indebtedness” means Long-Term Indebtedness twenty-five percent (25%) ormore of the principal of which (calculated as of the date of issuance) becomes due during any period oftwelve (12) consecutive months if such maturing principal amount is not required to be amortized belowsuch percentage by mandatory redemption prior to such 12-month period.

“Bank Accounts” means all deposit accounts and shall include, without limitation, allchecking, investment or deposit accounts (general or specific, time or demand, provisional or final) at anytime maintained by any Member of the Obligated Group, including, without limitation,Medicare/Medicaid Accounts, and all moneys, securities, instruments and general intangibles deposited orheld therein.

"Book Value" shall mean, when used in connection with Property, Plant and Equipmentor other Property of any Member or Obligated Group Affiliate, the value of such property, net ofaccumulated depreciation, as it is carried on the books of such Member or Obligated Group Affiliate andin conformity with generally accepted accounting principles, and when used in connection with Property,Plant and Equipment or other Property of the Obligated Group, means the aggregate of the values sodetermined with respect to such Property of each Member and Obligated Group Affiliate determined insuch a way that no portion of such value of Property of any Member or Obligated Group Affiliate isincluded more than once.

“Certificate,” “Statement,” “Request,” “Requisition” and “Order” of the Authority orthe Corporation, mean, respectively, a written certificate, statement, request, requisition or order signed inthe name of the Authority by its Chairman, any Deputy to its Chairman, its Executive Director, or suchother person as may be designated and authorized to sign for the Authority, or in the name of theCorporation by an Authorized Representative of the Corporation.

“Completion Indebtedness” means any Long-Term Indebtedness incurred for the purposeof financing the completion of construction or equipping of any project for which Long-TermIndebtedness has theretofore been incurred in accordance with the provisions hereof, to the extentnecessary to provide a completed and fully equipped facility of the type and scope contemplated at thetime said Long-Term Indebtedness was incurred, and in accordance with the general plans andspecifications for such facility as originally prepared and approved in connection with the related

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financing, modified or amended only in conformance with the provisions of the documents pursuant towhich the related financing was undertaken.

“Contract Rights” means all rights of each Member of the Obligated Group in and tocontracts to which any Member of the Obligated Group is now or shall become a party pursuant to whichany Member of the Obligated Group has the right to perform medical and/or management services andreceive payment, reimbursement, insurance proceeds or any other form or manner of compensation,including, without limitation, the Medicare and Medicaid reimbursement agreements to which anyMember of the Obligated Group is a party and any and all other agreements to which any Member of theObligated Group and a governmental or quasi-governmental entity are parties and pursuant to which anyMember of the Obligated Group provides such healthcare services and receives any form of payment, andany other agreements pursuant to which any Member of the Obligated Group provides healthcare serviceson a reimbursed, capitated or other form of payment arrangement.

“Controlling Member” means the Member designated by the Obligated GroupRepresentative to establish and maintain control over an Obligated Group Affiliate.

“Corporation” means Scripps Health, a nonprofit public benefit corporation dulyorganized and existing under the laws of the State of California, or any corporation which is thesurviving, resulting or transferee corporation in any merger, consolidation or transfer of assets permittedunder the Master Indenture.

“Costs of Issuance” means all items of expense directly or indirectly payable by orreimbursable to the Authority or the Corporation and related to the authorization, issuance, sale anddelivery of the Bonds, including but not limited to advertising and printing costs, costs of preparation andreproduction of documents, filing and recording fees, initial fees and charges of the Bond Trustee and theMaster Trustee, initial and ongoing fees and charges of the Authority, legal fees and charges, fees anddisbursements of consultants and professionals, Rating Agency fees, fees and charges for preparation,execution, transportation and safekeeping of the Bonds, and any other cost, charge or fee in connectionwith the original issuance of the Bonds.

“Date of Issuance” means the date of original issuance of the Bonds.

“Debt Service Requirements” means, with respect to the period of time for whichcalculated, the aggregate of (a) payments made in respect of principal (whether at maturity, or as a resultof mandatory prepayment or otherwise) and interest on all outstanding Indebtedness of the Person orgroup of Persons involved, (b) mandatory deposits to an irrevocable escrow or sinking fund, and (c) theamount of the Obligation Payments.

“Depository Institution” means any financial institution which enters into a depositoryagreement with any Member of the Obligated Group and the Master Trustee.

“Event of Default” means any of the events specified in the Master Indenture and theBond Indenture.

"Fair Market Value," when used in connection with Property, shall mean the fair marketvalue of such Property as determined by either:

(1) an appraisal of the portion of such Property which is real property madewithin five years of the date of determination by a "Member of the Appraisal Institute"and by an appraisal of the portion of such Property which is not real property made

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within five years of the date of determination by any expert, provided that any suchappraisal shall be performed by a person or firm which (a) is in fact independent, (b) doesnot have any direct financial interest or any material indirect financial interest in anyMember or Obligated Group Affiliate and (c) is not connected with any Member orObligated Group Affiliate as an officer, employee, promoter, trustee, partner, director orperson performing similar functions, adjusted for the period, not in excess of five years,from the date of the last such appraisal for changes in the implicit price deflator for thegross national product as reported by the United States Department of Commerce or itssuccessor agency, or if such index is no longer published, such other index certified to becomparable and appropriate in an Officer's Certificate delivered to the Master Trustee; or

(2) a bona fide offer for the purchase of such Property made on an arm's-lengthbasis within six months of the date of determination, as established by an Officer'sCertificate.

“Financial Products Agreement” means an interest rate swap, cap, collar, option, floor,forward or other hedging agreement, arrangement or security, however denominated, identified to theMaster Trustee in a Certificate of the Obligated Group Representative as having been entered into by aMember or an Obligated Group Affiliate with a Qualified Provider not for investment purposes but withrespect to Indebtedness (which Indebtedness shall be specifically identified in the Certificate of theObligated Group Representative) for the purpose of (1) reducing or otherwise managing the Member’s orObligated Group Affiliate’s risk of interest rate changes or (2) effectively converting the Member’s orObligated Group Affiliate’s interest rate exposure, in whole or in part, from a fixed rate exposure to avariable rate exposure, or from a variable rate exposure to a fixed rate exposure.

“Financial Product Payments” means payments periodically required to be paid to acounterparty by a Member or an Obligated Group Affiliate pursuant to a Financial Products Agreement.

“Financial Product Receipts” means amounts periodically required to be paid to aMember or an Obligated Group Affiliate by a counterparty pursuant to a Financial Products Agreement.

“Fiscal Year” means the period beginning on October 1 of each year and ending on thenext succeeding September 30, or any other twelve-month period hereafter designated by the ObligatedGroup Representative as the fiscal year of the Obligated Group.

“General Intangibles” means the right to use all general intangibles (as such term isdefined in the UCC) of any Member of the Obligated Group including, without limitation, trademarks,copyrights, patents, contracts, licenses, franchises, trade names, computer programs and other computersoftware, inventions, designs, trade secrets, goodwill, proprietary rights, customer lists, supplier contacts,sale orders, correspondence and advertising materials.

“Government Issuer” means any municipal corporation, political subdivision, state,territory or possession of the United States, or any constituted authority or agency or instrumentality ofany of the foregoing empowered to issue obligations on behalf thereof, which obligations wouldconstitute Related Bonds under the Master Indenture.

“Government Obligations” means: (1) direct obligations of the United States of America(including obligations issued or held in book-entry form on the books of the Department of the Treasuryof the United States of America) or obligations the timely payment of the principal of and interest onwhich are fully guaranteed by the United States of America; (2) obligations issued or guaranteed by anyagency, department or instrumentality of the United States of America if the obligations issued or

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guaranteed by such entity are rated in one of the two highest rating categories of a Rating Agency(without regard to any gradation of such rating category); (3) certificates which evidence ownership of theright to the payment of the principal of and interest on obligations described in clauses (1) and/or (2),provided that such obligations are held in the custody of a bank or trust company in a special accountseparate from the general assets of such custodian; and (4) obligations the interest on which is excludedfrom gross income for purposes of federal income taxation pursuant to Section 103 of the InternalRevenue Code of 1986, and the timely payment of the principal of and interest on which is fully providedfor by the deposit in trust of cash and/or obligations described in clauses (1), (2) and/or (3).

“Gross Revenues” means all of the right, title and interest of each Member in thefollowing described Property, whether now owned or existing or hereafter acquired or arising andwherever located:

(a) all receipts, revenues, income and other moneys, including, without limitation,contributions, gifts, grants, bequests, pledges, whether in the form of cash or other Property, and all rightsto receive the same, whether in the form of Accounts, Bank Accounts, Contract Rights or GeneralIntangibles and Related Rights and any insurance on the foregoing of each Member of the ObligatedGroup;

(b) except as specifically applied in the Master Indenture, all moneys and securitiesheld from time to time by the Master Trustee under the Master Indenture (excluding money or securitiesheld in escrow by the Master Trustee pursuant to the Master Indenture); and

(c) all proceeds, cash proceeds, cash equivalents, replacements and additions to,substitutions for and accessions of any and all Property described in the foregoing;

but excluding any Restricted Moneys.

“Guaranty” means all loan commitments and all obligations of any Memberguaranteeing in any manner whatever, whether directly or indirectly, any obligation of any other Personwhich would, if such other Person were a Member, constitute Indebtedness.

“Holder,” used with respect to the Master Indenture, means the registered owner of anyObligation in registered form or the bearer of any Obligation in coupon form which is not registered or isregistered to bearer.

“Holder” or “Bondholder,” whenever used with respect to a Bond, means the Person inwhose name such Bond is registered.

“Immaterial Affiliate” means a Person (whether or not an Obligated Group Affiliate)whose total net assets, as shown on its financial statements (or consolidated financial statements for whichit is a part) for its most recently completed fiscal year, were less than 10% of the combined orconsolidated net assets of the Members and the Obligated Group Affiliates.

“Income Available for Debt Service” means, with respect to the Obligated Group, as toany period of time, the excess of revenues over expenses (or, in the case of for-profit Members orObligated Group Affiliates, net income after taxes) of the Obligated Group for such period, to which shallbe added depreciation, amortization and interest (and Obligation Payments to the extent that suchObligation Payments are treated as an expense during such period of time in accordance with generallyaccepted accounting principles), provided that no such determination shall include (1) any gain or lossresulting from (a) the extinguishment of Indebtedness, (b) any disposition of capital assets not made in theordinary course of business, (c) any discontinued operations or (d) adjustments to the value of assets orliabilities resulting from changes in generally accepted accounting principles, (2) unrealized gains on

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marketable securities held by a Member or an Obligated Group Affiliate as of the last date of such periodof time, (3) unrealized losses on marketable securities held by a Member or an Obligated Group Affiliateas of the last date of such period of time unless such losses represent a permanent decline in value of suchsecurities in accordance with generally accepted accounting principles or (4) any nonrecurring items of anextraordinary nature which do not involve the receipt, expenditure or transfer of assets.

“Indebtedness” means any Guaranty (other than any Guaranty by any Member orObligated Group Affiliate of Indebtedness of any other Member or Obligated Group Affiliate) and anyobligation of any Member or Obligated Group Affiliate (1) for borrowed money, (2) with respect to leaseswhich are considered capital leases or (3) under installment sale agreements, in each case as determinedin accordance with generally accepted accounting principles; provided, however, that if more than oneMember or Obligated Group Affiliate shall have incurred or assumed a Guaranty of a Person other than aMember or an Obligated Group Affiliate, or if more than one Member or Obligated Group Affiliate shallbe obligated to pay any obligation, for purposes of any computations or calculations under the MasterIndenture such Guaranty or obligation shall be included only one time.

“Independent Consultant” means a firm (but not an individual) which (1) is in factindependent, (2) does not have any direct financial interest or any material indirect financial interest inany Member or any Obligated Group Affiliate, (3) is not connected with any Member or any ObligatedGroup Affiliate as an officer, employee, promoter, trustee, partner, director or person performing similarfunctions and (4) is a certified public accounting firm, a nationally recognized investment banker or anationally recognized professional management consultant, and designated by the Obligated GroupRepresentative qualified to pass upon questions relating to the financial affairs or facilities of the type ortypes operated by the Obligated Group and having the skill and experience necessary to render theparticular opinion or report required by the provision of the Master Indenture in which such requirementappears.

"Industry Restrictions" shall mean federal, state or other applicable governmental laws orregulations or general industry standards or general industry conditions placing restrictions andlimitations on the rates, fees and charges to be fixed, charged and collected by the Members or ObligatedGroup Affiliates.

“Investment Securities” means any of the following:

(a) United States Government Obligations;

(b) bonds, debentures, notes or other evidences of indebtedness issued by any of thefollowing agencies or any other like governmental or government-sponsored agencies that are hereaftercreated: Federal Farm Credit Bank; Federal Intermediate Credit Banks; Federal Financing Bank; FederalHome Loan Bank System; Federal Home Loan Mortgage Corporation; Federal National MortgageAssociation; Tennessee Valley Authority; Student Loan Marketing Association; Export-Import Bank ofthe United States; Farmers Home Administration; Small Business Administration; Inter-AmericanDevelopment Bank; International Bank for Reconstruction and Development; Federal Land Banks; andGovernment National Mortgage Association;

(c) direct and general obligations of any state of the United States of America or anymunicipality or political subdivision of such state, or obligations of any corporation, if such obligationsare rated in one of the two highest Rating Categories by each Rating Agency then rating both the Bondsand such obligations (but in all cases by at least one Rating Agency then rating the Bonds);

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(d) commercial paper rated in the highest Rating Category by each Rating Agencythen rating both the Bonds and such commercial paper (but in all cases by at least one Rating Agencythen rating the Bonds);

(e) negotiable or non-negotiable certificates of deposit, time deposits, or othersimilar banking arrangements, issued by any bank or trust company or any savings and loan association,and either (i) the long-term obligations of such bank or trust company are rated in the highest RatingCategory by each Rating Agency then rating both the Bonds and such obligations (but in all events by atleast one Rating Agency then rating the Bonds), or (ii) the deposits or other arrangements arecontinuously secured as to principal, but only to the extent not insured by the Federal Deposit InsuranceCorporation or similar corporation chartered by the United States of America, (1) by depositing with abank or trust company, as collateral security, obligations described in paragraph (a) or (b) above in anaggregate principal amount equal to at least 105% of the amount so deposited or, with the approval of theAuthority (which may be conditioned on delivery of an Opinion of Counsel), other marketable securitieseligible as securities for the deposit of trust funds under applicable regulations of the Comptroller of theCurrency of the United States or applicable state law or regulations, having a market value (exclusive ofaccrued interest) not less than the amount of such deposit, or (2) if the furnishing of security as providedin clause (1) of this paragraph is not permitted by applicable law, in such other manner as may then berequired or permitted by applicable state or federal laws and regulations regarding the security for, orgranting a preference in the case of, the deposit of trust funds;

(f) repurchase agreements with respect to obligations listed in paragraph (a) or (b)above if entered into with a bank, a trust company or a broker or dealer (as defined by the SecuritiesExchange Act of 1934) that is a dealer in government bonds, that reports to, trades with and is recognizedas a primary dealer by a Federal Reserve Bank, if such obligations that are the subject of such repurchaseagreement are delivered to the Bond Trustee or are supported by a safekeeping receipt issued by adepository (other than the Bond Trustee), provided that such repurchase agreement must provide that thevalue of the underlying obligations shall be maintained at a current market value, calculated no lessfrequently than monthly, of not less than the repurchase price;

(g) shares or certificates in any short-term investment fund that is maintained orutilized by the Bond Trustee and which fund invests solely in other Investment Securities;

(h) investment agreements with any financial institution that at the time ofinvestment has long-term obligations rated in one of the three highest Rating Categories by each RatingAgency then rating both the Bonds and such obligations (but in all cases by at least one Rating Agencythen rating the Bonds);

(i) shares or certificates in any mutual fund invested solely in Investment Securitiesdescribed in clauses (a)-(h) of this definition; and

(j) obligations (including asset-backed and mortgaged-backed obligations) of anycorporation, partnership, trust or other entity which are rated in one of the two highest Rating Categoriesby each Rating Agency then rating both the Bonds and such obligations (but in all cases by at least oneRating Agency then rating the Bonds).

“Lien” means any mortgage or pledge of, or security interest in, or lien or encumbranceon, any Property, excluding liens applicable to Property in which any Member or Obligated GroupAffiliate has only a leasehold interest, unless the Lien is with respect to such leasehold interest.

“Loan Default Event” means any of the events specified in the Loan Agreement.

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“Loan Repayments” means the payments so designated and required to be made by theCorporation pursuant to the Loan Agreement.

“Long-Term Debt Service Coverage Ratio” means, for any Fiscal Year, the ratiodetermined by dividing Income Available for Debt Service for that Fiscal Year by Maximum AnnualDebt Service.

“Long-Term Indebtedness” means Indebtedness having an original maturity greater thanone year or renewable at the option of a Member or an Obligated Group Affiliate for a period greater thanone year from the date of original incurrence or issuance thereof unless, by the terms of suchIndebtedness, no Indebtedness is permitted to be outstanding thereunder for a period of at least 30consecutive days during each calendar year.

“Material Obligated Group Affiliate” means any Obligated Group Affiliate whose totalnet assets, as shown on its financial statements (or consolidated financial statements for which it is a part)for its most recently completed fiscal year, were equal to or greater than 10% of the combined orconsolidated net assets of the Members and the Obligated Group Affiliates for the most recent Fiscal Yearof the Obligated Group.

“Maximum Annual Debt Service” means the greatest amount of Debt ServiceRequirements becoming due and payable in any Fiscal Year (including the Fiscal Year in which thecalculation is made or any subsequent Fiscal Year) with respect to Long-Term Indebtedness; provided,however that for the purposes of computing Maximum Annual Debt Service:

(a) with respect to a Guaranty, there shall be included in Maximum Annual DebtService (i) twenty percent (20%) of the maximum possible monetary liability under the Guaranty in anyFiscal Year unless the Guaranty is drawn upon, and (ii) one hundred percent (100%) of the monetaryliability under the Guaranty which has been drawn upon in the last three years;

(b) if interest on Long-Term Indebtedness is payable pursuant to a variable interestrate formula, the interest rate on such Long-Term Indebtedness for periods when the actual interest ratecannot yet be determined shall be assumed to be equal to the average interest rate per annum which wasin effect (or would have been in effect) for any 12 consecutive calendar months during the 18 calendarmonths immediately preceding the date of calculation, all as specified in an Officer’s Certificate of theObligated Group Representative;

(c) if moneys or Government Obligations have been deposited with a trustee orescrow agent in an amount, together with earnings thereon, sufficient to pay all or a portion of theprincipal of or interest on Long-Term Indebtedness as it comes due, such principal or interest, as the casemay be, to the extent provided for, shall not be included in computations of Maximum Annual DebtService;

(d) debt service on Long-Term Indebtedness incurred to finance capitalimprovements shall be included in the calculation of Maximum Annual Debt Service only in proportionto the amount of interest on such Long-Term Indebtedness which is payable in the then-current FiscalYear from sources other than the funds held by a trustee or escrow agent for such purpose; and

(e) with respect to Balloon Indebtedness, the interest rate on such BalloonIndebtedness shall be assumed to be at such rate which the Obligated Group Representative at the date ofcomputation of Maximum Annual Debt Service for the Balloon Indebtedness could reasonably expect toborrow by issuing Long-Term Indebtedness with a term of thirty (30) years and the unamortized portion

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of such Balloon Indebtedness shall be treated as Balloon Indebtedness with substantially level debtservice over a period of thirty (30) years from the date of incurrence of such Balloon Indebtedness.

“Medicare/Medicaid Account” means a deposit account with a Depository Institution towhich all payments with respect to Medicare/Medicaid receivables are remitted.

“Member” means the Corporation and each other Person that is then obligated as aMember under and as defined in the Master Indenture.

“Nonrecourse Indebtedness” means any Indebtedness which is not a general obligationand which is secured by a Lien on Property, Plant and Equipment acquired or constructed with theproceeds of such Indebtedness, liability for which is effectively limited to the Property, Plant andEquipment subject to such Lien with no recourse, directly or indirectly, to any other Property of anyMember or Obligated Group Affiliate.

“Obligated Group” means all Members.

“Obligated Group Affiliate” means any Person which has been so designated by theObligated Group Representative in accordance with the Master Indenture so long as such Person has notbeen further designated by the Obligated Group Representative as no longer being an Obligated GroupAffiliate in accordance with the Master Indenture.

“Obligated Group Representative” means the Corporation or such other Member (orMembers acting jointly) as may have been designated pursuant to written notice to the Master Trusteeexecuted by all of the Members.

“Obligation” means any obligation of the Obligated Group issued pursuant to the MasterIndenture, as a joint and several obligation of each Member, which may be in any form set forth in aRelated Supplement, including, but not limited to, bonds, obligations, debentures, reimbursementagreements, loan agreements or leases. Reference to a Series of Obligations or to Obligations of a Seriesmeans Obligations or Series of Obligations issued pursuant to a single Related Supplement.

“Obligation Payments” means payments (however designated) required under anyObligation then Outstanding which does not constitute Indebtedness.

“Officer’s Certificate” means a certificate signed by an Authorized Representative of theObligated Group Representative.

“Obligated Group” means all Members.

“Opinion of Bond Counsel” means a written opinion signed by an attorney or firm ofattorneys experienced in the field of public finance whose opinions are generally accepted by purchasersof bonds issued by or on behalf of a Government Issuer.

“Opinion of Counsel” means a written opinion of counsel (who may be counsel for theAuthority) selected by the Corporation and not objected to by the Authority or the Bond Trustee. If andto the extent required by the provisions of the Bond Indenture, each Opinion of Counsel shall include thestatements provided for in the Bond Indenture.

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“Outstanding” when used with reference to Indebtedness or Obligations, means, as ofany date of determination, all Indebtedness or Obligations theretofore issued or incurred and not paid anddischarged other than (a) Obligations theretofore cancelled by the Master Trustee or delivered to theMaster Trustee for cancellation, (b) Obligations in lieu of which other Obligations have beenauthenticated and delivered or have been paid pursuant to the provisions of a Related Supplementregarding mutilated, destroyed, lost or stolen Obligations unless proof satisfactory to the Master Trusteehas been received that any such Obligation is held by a bona fide purchaser, (c) any Obligation held byany Member of the Obligated Group and (d) Indebtedness deemed paid and no longer outstandingpursuant to the terms thereof; provided, however, that if two or more obligations which constituteIndebtedness represent the same underlying obligation (as when an Obligation secures an issue or RelatedBonds and another Obligation secures repayment obligations to a bank under a letter of credit whichsecures such Related Bonds) for purposes of the various financial covenants contained in the MasterIndenture, but only for such purposes, only one of such Obligations shall be deemed Outstanding and theObligation so deemed to be Outstanding shall be that Obligation which produces the greatest amount ofAnnual Debt Service to be included in the calculation of such covenants.

“Outstanding,” when used as of any particular time with reference to Bonds, means(subject to the provisions of the Bond Indenture) all Bonds theretofore, or thereupon being, authenticatedand delivered by the Bond Trustee under the Bond Indenture except: (1) Bonds theretofore cancelled bythe Bond Trustee or surrendered to the Bond Trustee for cancellation; (2) Bonds with respect to which allliability of the Authority shall have been discharged in accordance with the Bond Indenture, includingBonds (or portions of Bonds) referred to in the Bond Indenture; and (3) Bonds for the transfer orexchange of or in lieu of or in substitution for which other Bonds shall have been authenticated anddelivered by the Bond Trustee pursuant to the Bond Indenture.

“Permitted Encumbrances” means and includes:

(1) Any judgment lien or notice of pending action against any Member or ObligatedGroup Affiliate so long as (a) such judgment or pending action is being contested and execution thereonis stayed or while the period for responsive pleading has not lapsed or (b) the judgment has been paid or(c) the judgment is covered by insurance;

(2) (a) Rights reserved to or vested in any municipality or public authority by theterms of any right, power, franchise, grant, license, permit or provision of law affecting any Property to (i)terminate such right, power, franchise, grant, license or permit (provided that the exercise of such a rightwould not materially and adversely affect the value thereof) or (ii) purchase, condemn, appropriate orrecapture, or designate a purchaser of, such Property; (b) any liens on any Property for taxes, assessments,levies, fees, water and sewer charges and other governmental and similar charges, and any liens ofmechanics, materialmen, laborers, suppliers or vendors for work or services performed or materialsfurnished in connection with such Property, which are not due and payable or which are not delinquent orwhich, or the amount or validity of which, are being contested and execution thereon is stayed or, withrespect to liens of mechanics, materialmen and laborers, have been due for less than sixty (60) days; (c)easements, rights of way, servitudes, restrictions and other minor defects, encumbrances and irregularitiesin the title to any Property which do not materially impair the use of such Property or materially andadversely affect the value thereof; (d) rights reserved to or vested in any municipality or public authorityto control or regulate any Property or to use such Property in any manner, which rights do not materiallyimpair the use of such Property in any manner, or materially and adversely affect the value thereof; and(e) to the extent that it affects title to any Property, the Master Indenture;

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(3) Any Lien in favor of the Master Trustee securing all Outstanding Obligations ona parity basis (provided that any such Lien may be released only in the manner set forth in the RelatedSupplement providing for such Lien);

(4) Liens arising by reason of good faith deposits with any Member or ObligatedGroup Affiliate in connection with leases of real estate, bids or contracts (other than contracts for thepayment of money), deposits by any Member or Obligated Group Affiliate to secure public or statutoryobligations, or to secure, or in lieu of, surety, stay or appeal bonds, and deposits as security for thepayment of taxes or assessments or other similar charges;

(5) Any Lien arising by reason of deposits with, or the giving of any form of securityto, any governmental agency or any body created or approved by law or governmental regulation for anypurpose at any time as required by law or governmental regulation as a condition to the transaction of anybusiness or the exercise of any privilege or license, or to enable any Member or Obligated Group Affiliateto maintain self-insurance or to participate in any funds established to cover any insurance risks or inconnection with workers’ compensation, unemployment insurance, pension or profit sharing plans orother similar social security plans, or to share in the privileges or benefits required for companiesparticipating in such arrangements, and any Lien in the nature of a banker’s lien or right of setoff withrespect to deposits which any Member or Obligated Group Affiliate is not required to maintain with thebank in question;

(6) Any Lien arising by reason of any escrow established to pay debt service withrespect to Indebtedness;

(7) Any Lien in favor of a trustee on the proceeds of Indebtedness prior to theapplication of such proceeds;

(8) Liens on moneys deposited by patients or others with any Member or ObligatedGroup Affiliate as security for or as prepayment for the cost of patient care, and any rights of residents oflife care, elderly housing or similar facilities to entrance fees, endowment or similar funds deposited by oron behalf of such residents;

(9) Liens on Property received by any Member or Obligated Group Affiliate throughgifts, grants or bequests; provided, that no such Lien (or the amount of Indebtedness secured thereby) maybe increased or modified so as to apply to any Property of any Member or Obligated Group Affiliate notpreviously subject to such Lien unless such Lien following such increase or modification otherwisequalifies as a Permitted Encumbrance;

(10) Statutory rights of the United States of America by reason of federal funds madeavailable under 42 U.S.C. Section 291 et seq. and similar rights under other federal and state statutes;

(11) Liens on funds established pursuant to the terms of any Related Supplement,Related Bond Indenture or related document in favor of the Master Trustee, a Related Bond Trustee or theregistered owner of the Indebtedness issued pursuant to such Related Supplement, Related BondIndenture or related document;

(12) Liens on supplies and inventory;

(13) Liens constituting reservations contained in patents granted by the United Statesof America or any state thereof;

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(14) Liens constituting rights of third-party payors to recoup excess reimbursement toany Member or Obligated Group Affiliate;

(15) Liens granted to insurance companies on the proceeds of insurance policies(provided that such Lien shall secure an amount not exceeding the premium owed to any such insurancecompany by a Member or an Obligated Group Affiliate);

(16) Liens required by any federal, state or local government as a condition to itsmaking a grant or loan (except loans made solely from the proceeds derived from the sale of RelatedBonds) to, or its guaranteeing or insuring part or all of Indebtedness of, a Member or an Obligated GroupAffiliate, but only if such Lien is limited to Property the acquisition of which has not been financed,directly or indirectly, with proceeds of Obligations or Related Bonds;

(17) Statutory rights of landlords with respect to the personal property of Members orObligated Group Affiliates that are their tenants;

(18) Liens junior to Liens in favor of the Master Trustee in accordance with clause (3)of this definition;

(19) Liens which are existing on the date of execution hereof or existing on the dateany Person becomes a Member of the Obligated Group or an Obligated Group Affiliate, provided that nosuch Lien (or the amount of Indebtedness secured thereby) may be increased or modified to apply to anyProperty of any Member or Obligated Group Affiliate not subject to such Lien on such date, unless suchLien following such increase or modification otherwise qualifies as a Permitted Encumbrance under theMaster Indenture;

(20) Liens on Property of a Person at the time such Person engages in a merger,consolidation, sale or conveyance pursuant to the Master Indenture; provided that no such Lien (or theamount of Indebtedness secured thereby) may be increased or modified to apply to any Property of anyMember or Obligated Group Affiliate not subject to such Lien on such date, unless such Lien followingsuch increase or modification otherwise qualifies as a Permitted Encumbrance under the MasterIndenture; and provided further, that no such Lien shall have been incurred in anticipation of such merger,consolidation, sale or conveyance;

(21) Liens granted by a Member or Obligated Group Affiliate to another Member orObligated Group Affiliate, for so long as such Member or Obligated Group Affiliate remains a Memberor Obligated Group Affiliate;

(22) Liens on accounts receivable, provided that the aggregate amount of accountsreceivable so encumbered (or sold as permitted by clause (h) under the heading “MASTER INDENTURE– Particular Covenants of Each Member – Limitations on Sale, Lease or Other Dispositions of Property)in any Fiscal Year does not exceed 20% of the Members’ and Obligated Group Affiliates’ net accountreceivables for such Fiscal Year

(23) Any other Lien, provided that the aggregate Value of Property subject to Lienscreated or permitted to exist pursuant to this clause (23) shall not exceed twenty percent (20%) of theProperty of the Obligated Group (as shown on the financial statements of the Obligated Group for themost recent fiscal year for which financial statements are available immediately preceding the date thatsuch Lien is created); and

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(24) Any Lien on medical office buildings or undeveloped land of the ObligatedGroup which Lien is existing on or created after the date of execution and delivery of Master IndentureObligation No. 7, and any Lien on research facilities of the Obligated Group which Lien is created afterthe date of execution and delivery of Master Indenture Obligation No 7.

“Principal Payment Date” means, with respect to a Bond, the date on which principalevidenced by such Bond becomes due and payable, whether at maturity, upon redemption, by declarationof acceleration or otherwise.

“Property” means the total assets of the Members of the Obligated Group and theObligated Group affiliates, including total assets of the Members and Obligated Group Affiliates,including any and all rights, titles and interests in and to any and all property of any Member or anyObligated Group Affiliate, whether real or personal, tangible or intangible and wherever situated.

“Property, Plant and Equipment” means all Property of any Members or ObligatedGroup Affiliate which is considered property, plant and equipment under generally accepted accountingprinciples.

“Qualified Provider” means any financial institution or insurance company which is aparty to a Financial Products Agreement if the unsecured long-term debt obligations of such financialinstitution or insurance company (or of the parent or a subsidiary of such financial institution or insurancecompany if such parent or subsidiary guarantees the performance of such financial institution or insurancecompany under such Financial Products Agreement), or obligations secured or supported by a letter ofcredit, contract, guarantee, agreement, insurance policy or surety bond issued by such financial institutionor insurance company (or such guarantor parent or subsidiary), are rated in one of the three highest ratingcategories of a national rating agency (without regard to any gradation or such rating category) at the timeof the execution and delivery of the Financial Products Agreement.

“Rating Agency” means S&P, Moody’s, Fitch or any national rating agency then ratingthe Bonds at the request of the Corporation.

“Rating Category” means one of the general rating categories of either Rating Agencywithout regard to any refinement or gradation of such rating category by numerical modifier or otherwise.

“Redemption Price” means, with respect to any Bond (or portion thereof), the principalamount of such Bond (or portion) plus the applicable premium, if any, payable upon redemption thereofpursuant to the provisions of such Bond and the Bond Indenture.

“Related Bond Indenture” means any indenture, bond resolution or other comparableinstrument pursuant to which a series of Related Bonds is issued.

“Related Bonds” means the revenue bonds or other obligations issued by anyGovernment Issuer, the proceeds of which are loaned or otherwise made available to a Member or anObligated Group Affiliate in consideration of the execution, authentication and delivery of an Obligationor Obligations to or for the order of such Government Issuer.

“Related Rights” means all tangible chattel paper, documents and/or instruments relatingto the Accounts, the Bank Accounts, the Contract Rights and the General Intangibles and all rights now orhereafter existing in and to all security agreements, leases and other contracts securing or otherwiserelating to the Accounts, the Bank Accounts, the Contract Rights or the General Intangibles or any suchchattel paper, documents and/or instruments.

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“Related Supplement” means an indenture supplemental to, and authorized and executedpursuant to the terms of, the Master Indenture.

“Required Payment” means any payment, whether at maturity, by acceleration, uponproceeding for redemption or otherwise, including the purchase price of Related Bonds tendered ordeemed tendered for purchase pursuant to the terms of a Related Bond Indenture, required to be made byany Member under the Master Indenture, any Related Supplement or any Obligation.

“Responsible Officer” means, with respect to the Master Trustee, any vice president, anyassistant vice president, any assistant secretary, any assistant treasurer, any trust officer, any assistant trustofficer or any other officer of the Master Trustee customarily performing functions similar to thoseperformed by the persons above designated or to whom any corporate trust matter is referred because ofsuch person’s knowledge of and familiarity with the particular subject.

“Restricted Moneys” means the proceeds of any grant, gift, bequest, contribution or otherdonation (and, to the extent subject to the applicable restrictions, the investment income derived from theinvestment of such proceeds) specifically restricted by the donor or grantor to an object or purpose whichprecludes the use by a Member of the Obligated Group thereof for payment of Required Payments.

“Revenues” means all amounts received by the Authority or the Bond Trustee for theaccount of the Authority pursuant or with respect to the Loan Agreement or the Series 2010A Obligation,including, without limiting the generality of the foregoing, Loan Repayments (including both timely anddelinquent payments, any late charges, and whether paid from any source), prepayments, insuranceproceeds, condemnation proceeds, and all interest, profits or other income derived from the investment ofamounts in any fund or account established pursuant to the Bond Indenture, but not including anyAdditional Payments or Administrative Fees and Expenses or any moneys required to be deposited to theRebate Fund.

“S&P” means Standard & Poor’s, a division of The McGraw-Hill Companies, Inc., acorporation organized and existing under the laws of the State of New York, its successors and assigns,or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of asecurities rating agency, any other nationally recognized securities rating agency designated by theCorporation by notice to the Authority and the Bond Trustee.

“Securities Depository” means The Depository Trust Company and its successors andassigns, or any other Securities Depository selected as set forth in the Bond Indenture which agrees tofollow the procedures required to be followed by such Securities Depository in connection with theBonds.

“Series 2010A Obligation” means the obligation with that designation issued under theMaster Indenture and the Series 2010A Supplement.

“Series 2010A Supplement” means that certain supplemental master trust indenturesecuring the Bonds, between the Corporation and the Master Trustee.

“Short-Term Indebtedness” means all Indebtedness having an original maturity less thanor equal to one year and not renewable at the option of a Member or an Obligated Group Affiliate for aterm greater than one year from the date of original incurrence or issuance unless, in the case ofIndebtedness with a maturity or renewable at the option of a Member or an Obligated Group Affiliatewith a term greater than one year, by the terms of such Indebtedness, no Indebtedness is permitted to beOutstanding thereunder for a period of at least 30 consecutive days during each calendar year.

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“Subordinated Indebtedness” means Long-Term Indebtedness specifically subordinatedas to payment and security to the payment of all Required Payments and other obligations of theObligated Group Members under the Master Indenture.

“Supplemental Bond Indenture” means any indenture hereafter duly authorized andentered into between the Authority and the Bond Trustee supplementing, modifying or amending theBond Indenture; but only if and to the extent that such Supplemental Bond Indenture is specificallyauthorized under the Master Indenture.

“Tax Certificate” means the Tax Certificate and Agreement delivered by the Authorityand the Corporation at the time of issuance and delivery of the Bonds, as the same may be amended orsupplemented in accordance with its terms.

“Term Bonds” mean the Bonds payable at or before their specified maturity date or datesfrom Mandatory Sinking Account Payments established for the purpose and calculated to retire suchBonds on or before their specified maturity date or dates.

“Total Revenues” means the combined operating and nonoperating revenues of theMembers and Obligated Group Affiliates for any Fiscal Year, all as determined in accordance withaccounting principles generally accepted in the United States of America.

“Transaction Test” means, with respect to any specified transaction, that either (1) noEvent of Default or Default then exists and the Debt Service Coverage Ratio for the most recent FiscalYear for which audited financial statements are available, calculated as if such transaction had occurredon the first day of such Fiscal Year, would be (A) greater than the actual Debt Service Coverage Ratio forsuch Fiscal Year or (B) at least 2.0:1.0 or (2) no Event of Default or Default then exists, the Debt ServiceCoverage Ratio for the most recent Fiscal Year for which audited financial statements are available,calculated as if such transaction had occurred on the first day of such Fiscal Year, would be at least equalto 75% of the actual Debt Service Coverage Ratio for such Fiscal Year, and, following such transaction,the Credit Group could satisfy the conditions for the issuance of $1.00 of additional Long-TermIndebtedness.

“UCC” means the Uniform Commercial Code of the State of California, as in effect fromtime to time.

“United States Government Obligations” means:

(1) direct obligations of the United States of America (including obligations issuedor held in book-entry form on the books of the Department of the Treasury of the United States ofAmerica) or obligations the timely payment of which are fully guaranteed by the United States ofAmerica;

(2) certificates or other instruments that evidence direct ownership of future principaland/or interest on obligations described in clause (1), provided that such obligations are held in thecustody of a bank or trust company in a special account separate from the general assets of suchcustodian; and

(3) obligations (a) the interest on which is excluded from gross income for federalincome tax purposes pursuant to Section 103 of the Code, (b) the timely payment of the principal of andinterest on which is fully provided for by the deposit in trust or escrow of cash or obligations described inclauses (1) or (2), and (c) that are rated in the highest Rating Category by each Rating Agency then ratingboth the Bonds and such obligations (but in all cases by at least one Rating Agency then rating theBonds).

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MASTER INDENTURE

The Master Indenture authorizes the issuance of Obligations by the Obligated Group,which may be unsecured general obligations or, to the extent permitted by the Master Indenture, securedby a claim on Property. An Obligation is stated in the Master Indenture to be a joint and severalobligation of the Corporation and each other Member of the Obligated Group. The following aresummaries of certain provisions of the Master Indenture, as amended by the Series 2010A Supplement.Other provisions are summarized in this Official Statement under the caption “SECURITY FOR THEBONDS.” This summary does not purport to be complete or definitive and is qualified in its entirety byreference to the full terms of the Master Indenture.

Authorization, Issuance and Form of Obligations

Each Member authorizes to be issued from time to time Obligations or Series ofObligations, without limitation as to amount, except as provided in the Master Indenture or as may belimited by law, and subject to the terms, conditions and limitations established in the Master Indentureand in any Related Supplement.

Covenants of Each Member

Payment of Required Payments. Each Member jointly and severally agrees to pay orcause to be paid promptly all Required Payments at the place, on the dates and in the manner provided in theMaster Indenture or in any Related Supplement or Obligation, and faithfully to observe and perform all ofthe conditions, covenants and requirements of the Master Indenture, any Related Supplement and anyObligation. Each Member acknowledges that the time of such payment and performance is of the essenceof the Obligations under the Master Indenture. The obligation of each Member with respect to RequiredPayments shall not be abrogated, prejudiced or affected by:

(a) the granting of any extension, waiver or other concession given to any Memberby the Master Trustee or any Holder or by any compromise, release, abandonment, variation,relinquishment or renewal of any of the rights of the Master Trustee or any Holder or anything done oromitted or neglected to be done by the Master Trustee or any Holder in exercise of the authority, powerand discretion vested in them by the Master Indenture, or by any other dealing or thing which, but for thisprovision, might operate to abrogate, prejudice or affect such obligation; or

(b) the liability of any other Member under the Master Indenture ceasing for anycause whatsoever, including the release of any other Member pursuant to the provisions of the MasterIndenture or any Related Supplement from membership in the Obligated Group; or

(c) any Member’s failing to become liable as, or losing eligibility to become, aMember of the Obligated Group with respect to an Obligation.

Subject to the provisions of the Master Indenture permitting withdrawal from the ObligatedGroup, the obligation of each Member to make Required Payments is a continuing one and is to remain ineffect until all Required Payments have been paid in full in accordance with the Master Indenture. Allmoneys from time to time received by the Obligated Group Representative or the Master Trustee to reduceliability on Obligations, whether from or on account of the Members or otherwise, shall be regarded aspayments in gross without any right on the part of any one or more of the Members to claim the benefit ofany moneys so received until the whole of the amounts owing on Obligations has been paid or satisfied andso that in the event of any such Member’s filing bankruptcy, the Obligated Group Representative or the

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Master Trustee shall be entitled to prove up the total indebtedness or other liability on ObligationsOutstanding as to which the liability of such Member has become fixed.

Each Obligation shall be a primary obligation and shall not be treated as ancillary to orcollateral with any other obligation and shall be independent of any other security so that the covenants andagreements of each Member under the Master Indenture shall be enforceable without first having recourseto any such security or source of payment and without first taking any steps or proceedings against any otherPerson. The Obligated Group Representative and the Master Trustee are each empowered to enforce eachcovenant and agreement of each Member under the Master Indenture and to enforce the making of RequiredPayments. Each Member authorizes each of the Obligated Group Representative and the Master Trustee toenforce or refrain from enforcing any covenant or agreement of the Members under the Master Indentureand to make any arrangement or compromise with any particular Member or Members as the ObligatedGroup Representative or the Master Trustee may deem appropriate, consistent with the Master Indentureand any Related Supplement. Each Member waives in favor of the Obligated Group Representative and theMaster Trustee all rights against the Obligated Group Representative, the Master Trustee and any otherMember, insofar as is necessary to give effect to any of the provisions of the Master Indenture.

Transfers From Obligated Group Affiliates. Each Controlling Member agrees that it shallcause each of its Obligated Group Affiliates to pay, loan or otherwise transfer to the Obligated GroupRepresentative such amounts as are necessary to enable the Members to comply with the provisions of theMaster Indenture including without limitation the provisions of the Master Indenture described above under“Payment of Requirement Payments.” Each Controlling Member covenants and agrees that it will not permitany of its Obligated Group Affiliates to limit the ability of such Obligated Group Affiliate to make suchpayments, loans or transfers to such Controlling Member.

Designation of Obligated Group Affiliates. The Obligated Group Representative byresolution of its Governing Body may from time to time designate Persons as Obligated Group Affiliates.In connection with such designation, the Obligated Group Representative shall designate for each ObligatedGroup Affiliate a Member to serve as the Controlling Member for such Obligated Group Affiliate. TheObligated Group Representative shall at all times maintain an accurate and complete list of all Personsdesignated as Obligated Group Affiliates (and of the Controlling Members for such Obligated GroupAffiliates) and file such list with the Master Trustee annually on or before August 1 of each year. EachControlling Member shall cause each of its Obligated Group Affiliates to provide to the Obligated GroupRepresentative a resolution of its Governing Body accepting such Person’s designation as an ObligatedGroup Affiliate and acknowledging the provisions of the Master Indenture which affect the Obligated GroupAffiliates. So long as such Person is designated as an Obligated Group Affiliate, the Controlling Member ofsuch Obligated Group Affiliate shall either (i) maintain, directly or indirectly, control of such ObligatedGroup Affiliate, including the power to direct management, policies, disposition of assets and other actionsof the Obligated Group Affiliate to the extent necessary to cause such Obligated Group Affiliate to complywith the terms of the Master Indenture, whether through the ownership of voting securities, by contract,corporate membership, reserved powers or the power to appoint corporate members, trustees or directors, orotherwise or (ii) execute and have in effect such contracts or other agreements which the Obligated GroupRepresentative and the Controlling Member, in the judgment of their respective Governing Bodies, deemsufficient for the Controlling Member to cause such Obligated Group Affiliate to comply with the terms ofthe Master Indenture. Each Controlling Member agrees that it will cause each of its Obligated GroupAffiliates to comply with the terms of the Master Indenture which are applicable to such Obligated GroupAffiliate. Any Person shall cease to be an Obligated Group Affiliate (and thus not subject to the terms of theMaster Indenture) upon adoption of a resolution of the Governing Body of the Obligated GroupRepresentative declaring such Person no longer an Obligated Group Affiliate and delivery to the MasterTrustee of an Officer’s Certificate to the effect that immediately following such declaration, no Memberwould be in default in the performance or observance of any term of the Master Indenture.

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Maintenance of Properties, Etc. Each Member agrees to, and each Controlling Memberagrees to cause each of its Obligated Group Affiliates to:

(a) maintain its Property, Plant and Equipment in accordance with all valid andapplicable governmental laws, ordinances, approvals and regulations including, without limitation, suchzoning, sanitary, pollution and safety ordinances and laws and such rules and regulations thereunder asmay be binding upon it; provided, however, that no Member or Obligated Group Affiliate shall berequired to comply with any law, ordinance, approval or regulation as long as it shall in good faith contestthe validity thereof;

(b) maintain and operate its Property, Plant and Equipment in reasonably goodworking condition, and from time to time make or cause to be made all needful and proper replacements,repairs and improvements so that the operations of such Member or Obligated Group Affiliate will not bematerially impaired;

(c) pay and discharge all applicable taxes, assessments, governmental charges of anykind whatsoever, water rates, meter charges and other utility charges which may be or have been assessedor which may have become Liens upon the Property, Plant and Equipment, and will make such paymentsor cause such payments to be made in due time to prevent any delinquency thereon or any forfeiture orsale of any part of the Property, Plant and Equipment, and, upon request, will furnish to the MasterTrustee receipts for all such payments, or other evidences satisfactory to the Master Trustee; provided,however, that no Member or Obligated Group Affiliate shall be required to pay any tax, assessment, rateor charge as long as it shall in good faith contest the validity thereof, and as long as it shall have set asidereserves with respect thereto that, in the opinion of the Governing Body of the Obligated GroupRepresentative, are adequate;

(d) pay or otherwise satisfy and discharge all of its obligations and Indebtedness andall demands and claims against it as and when the same become due and payable, other than any thereof(exclusive of the Obligations issued and Outstanding under the Master Indenture) the validity, amount orcollectibility of which is being contested in good faith;

(e) all times comply with all terms, covenants and provisions of any Liens at suchtime existing upon its Properties or any part thereof or securing any of its Indebtedness noncompliancewith which would have a material adverse effect on the operations of the Obligated Group or itsProperties; and

(f) use its best efforts (as long as it is in its best interests and will not materiallyadversely affect the interests of the Holders) to maintain all permits, licenses and other governmentalapprovals necessary for the operation of its Properties.

Nothing in the Master Indenture shall be construed to require a Member or ObligatedGroup Affiliate to maintain any permit, license or other governmental approval, or to continue to operate ormaintain any Property, Plant or Equipment, if, in the reasonable good faith judgment of the Member orObligated Group Affiliate, such permit, license, governmental approval or Property, Plant or Equipment is,or within the next succeeding 24 calendar months is reasonably expected to become, inadequate, obsolete,unsuitable, undesirable or unnecessary for the business of the Obligated Group and failure to maintain oroperate such permit, license, governmental approval, Property, Plant or Equipment will not materiallyadversely impair the operation of the Obligated Group and the Obligated Group Affiliates.

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Gross Revenue Pledge. Each Member pledges, assigns, conveys, transfers, grants andratifies to the Master Trustee for the benefit of the Holders of Obligations, subject in all cases toPermitted Encumbrances, a security interest in, general lien upon, and the right of setoff against all of itsright, title and interest in the “Gross Revenues.”

Against Encumbrances. Each Member agrees that it will not, and each ControllingMember agrees that it will not permit any of its Obligated Group Affiliates to, create, assume or suffer toexist any Lien upon the Property of the Obligated Group, except for Permitted Encumbrances. EachMember further covenants that if such a Lien is created or assumed by any Member or Obligated GroupAffiliate, it will make or cause to be made effective a provision whereby all Obligations will be securedprior to any Indebtedness secured by such Lien.

Debt Coverage. Within 150 days after the end of each Fiscal Year the Obligated GroupRepresentative shall compute the Annual Required Debt Service Coverage Ratio for the Members and theObligated Group Affiliates for such Fiscal Year and furnish to the Master Trustee an Officer’s Certificatesetting forth the results of such computation. The Obligated Group Representative agrees that if at the endof such Fiscal Year the Annual Required Debt Service Coverage Ratio shall have been less than 1.10:1.0, itwill promptly employ an Independent Consultant to make recommendations as to a revision of the rates,fees and charges of the Members and the Obligated Group Affiliates or the methods of operation of theMembers and the Obligated Group Affiliates to increase the Annual Debt Service Coverage Ratio to at least1.10:1.0 for subsequent Fiscal Years (or, if in the opinion of the Independent Consultant, the attainment ofsuch level is impracticable, to the highest practicable level). Copies of the recommendations of theIndependent Consultant shall be filed with the Master Trustee. Each Member shall, and each ControllingMember shall cause each of its Obligated Group Affiliates to, promptly upon its receipt of suchrecommendations, subject to applicable requirements or restrictions imposed by law, revise its rates, feesand charges or its methods of operation or collections and shall take such other action as shall be inconformity with such recommendations.

If the Members and the Obligated Group Affiliates comply in all material respects with thereasonable recommendations of the Independent Consultant with respect to their rates, fees, charges andmethods of operation or collection, the Members and the Obligated Group Affiliates will be deemed to havecomplied with the covenants described in the preceding paragraph for such Fiscal Year, notwithstandingthat the Annual Required Debt Service Coverage Ratio shall be less than 1.10:1.0; provided, however, thatan Event of Default shall exist if the Annual Required Debt Service Coverage Ratio is less than 1.0:1.0 forany Fiscal Year. Nevertheless, neither the Members nor the Obligated Group Affiliates shall be excusedfrom taking any action or performing any duty required under the Master Indenture and no other Event ofDefault shall be waived by the operation of the provisions described in this paragraph.

Notwithstanding the foregoing, Members and Obligated Group Affiliates may permit therendering of services or the use of their Property without charge or at reduced charges, at the discretion ofthe Governing Body of such Member or Obligated Group Affiliate, to the extent necessary for maintainingits tax-exempt status and its eligibility for grants, loans, subsidies or payments from governmental entities,or in compliance with any recommendation for free services that may be made by an IndependentConsultant.

Merger, Consolidation, Sale or Conveyance. Each Member agrees that it will not, andeach Controlling Member agrees that it will not permit its Obligated Group Affiliates to, merge orconsolidate with any other Person that is not a Member or an Obligated Group Affiliate or sell or convey allor substantially all of its assets to any Person that is not a Member or an Obligated Group Affiliate unless:(a) after giving effect to the merger, consolidation, sale or conveyance, (1) the successor or survivingcorporation (hereinafter, the “Surviving Corporation”) is a Member or Obligated Group Affiliate, or (2) the

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Surviving Corporation shall (A) be a corporation organized and existing under the laws of the United Statesof America or any State thereof and (B) become a Member or an Obligated Group Affiliate pursuant to theprovisions of the Master Indenture and, pursuant to the Related Supplement required by the provisions ofthe Master Indenture, expressly assume in writing the due and punctual payment of all Required Paymentsof the disappearing Member under the Master Indenture; and (b) the Master Trustee receives an Officer’sCertificate to the effect that the Transaction Test is satisfied, and (c) so long as any Related Bonds areOutstanding, the Master Trustee receives an Opinion of Bond Counsel, in form and substance satisfactory tothe Master Trustee, to the effect that, under then existing law, the consummation of such merger,consolidation, sale or conveyance, in and of itself, would not result in the inclusion of interest on suchRelated Bonds in gross income for purposes of federal income taxation and that such merger, consolidation,sale or conveyance complies with the provisions of the Master Indenture; and (d) the Master Trusteereceives an Opinion of Counsel, in form and substance satisfactory to the Master Trustee, to the effect that (i)all conditions of the Master Indenture relating to such merger, consolidation, sale or conveyance have beencomplied with and it is proper for the Master Trustee to join in the execution of any instrument required to beexecuted and delivered; (ii) the Surviving Corporation meets the conditions set forth in the Master Indentureand is liable on all Obligations then Outstanding; and (iii), under then existing law, such merger,consolidation, sale or conveyance will not subject any Obligations to the registration provisions of theSecurities Act of 1933, as amended (or that such Obligations have been so registered if registration isrequired); and (e) the Surviving Corporation shall be substituted for its predecessor in interest in allObligations and agreements then in effect which affect or relate to any Obligation, and the SurvivingCorporation shall execute and deliver to the Master Trustee appropriate documents in order to effect thesubstitution.

From and after the effective date of such substitution (as set forth in the above-mentioneddocuments), the Surviving Corporation shall be treated as though it were a Member or an Obligated GroupAffiliate, as the case may be, as of the date of the execution of the Master Indenture and shall thereafter havethe right to participate in transactions under the Master Indenture relating to Obligations to the same extentas the other Members and Obligated Group Affiliates. All Obligations issued under the Master Indenture onbehalf of a Surviving Corporation shall have the same legal rank and benefit under the Master Indenture asObligations issued on behalf of any other Member.

Prior to (i) any merger or consolidation of any Member with an Obligated Group Affiliate,after which the surviving corporation is the Obligated Group Affiliate, and (ii) any sale or conveyance of allor substantially all of the assets of a Member to an Obligated Group Affiliate, the Master Trustee shall havereceived an Officer’s Certificate to the effect that immediately following such merger, consolidation, sale orconveyance, no Member would be in default in the performance or observance of any term of the MasterIndenture. Except as provided in the immediately preceding sentence or as may be expressly provided inany Related Supplement, the ability of any Member or Obligated Group Affiliate to merge or consolidatewith any Person that is a Member or Obligated Group Affiliate after such merger or consolidation or to sellor convey all or substantially all of its assets to any Person that is a Member or Obligated Group Affiliateafter such sale or conveyance is not limited by the provisions of the Master Indenture.

Membership in Obligated Group. Additional Members may be added to the ObligatedGroup from time to time, provided that prior to such addition the Master Trustee receives: (a) a copy of aresolution of the Governing Body of the proposed new Member which authorizes the execution and deliveryof a Related Supplement and compliance with the terms of the Master Indenture; and (b) a RelatedSupplement executed by the Obligated Group Representative, the new Member and the Master Trusteepursuant to which the proposed new Member (1) agrees to become a Member, and (2) agrees to be bound bythe terms of the Master Indenture, the Related Supplements and the Obligations, and (3) irrevocablyappoints the Obligated Group Representative as its agent and attorney-in-fact and grants to the ObligatedGroup Representative full power to execute Related Supplements authorizing the issuance of Obligations or

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Series of Obligations; and (c) an Opinion of Counsel to the proposed new Member to the effect that theproposed new Member has taken all necessary action to become a Member, and upon execution of theRelated Supplement, such proposed new Member will be bound by the terms of the Master Indenture; and(d) an Officer’s Certificate to the effect that the Transaction Test is satisfied; and (e) an Opinion of BondCounsel to the effect that the addition of the proposed new Member: (1) will not, in and of itself, result inthe inclusion of interest on any Related Bonds in gross income for purposes of federal income taxation; and(2) will not cause the Master Indenture or any Obligations to be subject to registration under federal or statesecurities laws or the Trust Indenture Act of 1939, as amended (or, that any such registration, if required,has occurred).

Withdrawal From Obligated Group. Any Member may withdraw from the ObligatedGroup and be released from further liability or obligation under the provisions of the Master Indenture,provided that prior to such withdrawal the Master Trustee receives an Officer’s Certificate to the effectthat immediately following the withdrawal of such Member, the Transaction Test is satisfied. Uponcompliance with the conditions described above, the Master Trustee shall execute any documentsreasonably requested by the withdrawing Member to evidence the termination of such Member’s obligationsunder the Master Indenture, under all Related Supplements and under all Obligations.

Limitations on Additional Indebtedness. Each Member covenants that it will not incur,and each Controlling Member covenants that it will not permit its Obligated Group Affiliates to incur, anyIndebtedness except that the Members and Obligated Group Affiliates may incur the followingIndebtedness:

(a) Long-Term Indebtedness, if prior to the date of incurrence of the Long-TermIndebtedness there is delivered to the Master Trustee an Officer’s Certificate to the effect that:

(i) the Long-Term Debt Service Coverage Ratio for each of the two mostrecent Fiscal Years with respect to all Long-Term Indebtedness then Outstanding at the time ofsuch certification and the additional Long-Term Indebtedness to be incurred, but excluding anyLong-Term Indebtedness to be refunded with the proceeds of said additional Long-TermIndebtedness to be incurred, was not less than 1.25:1.00; or

(ii) (A) The Long-Term Debt Service Coverage Ratio for each of the twomost recent Fiscal Years was not less than 1.25:1.0 and (B) the Long-Term Debt ServiceCoverage Ratio for each of the two Fiscal Years beginning with the Fiscal Year commencingafter the estimated completion of the facilities financed by the newly incurred Indebtedness) withrespect to all Long-Term Indebtedness projected to be outstanding (including the additionalLong-Term Indebtedness to be incurred but excluding any Long-Term Indebtedness to berefunded with the proceeds of said additional Long-Term Indebtedness to be incurred), isprojected to be not less than 1.25:1.0.

(b) Completion Indebtedness; provided that the Master Trustee receives an Officer’sCertificate to the effect that the issuance of such Completion Indebtedness would not increase MaximumAnnual Debt Service by more than fifteen percent (15%), calculated without regard to clause (d) of thedefinition of Maximum Annual Debt Service.

(c) Short-term Indebtedness provided that the provisions described in clause (a)above are satisfied calculated as if such Short-term Indebtedness was Long-Term Indebtedness or:

(i) the total amount of such Short-term Indebtedness shall not exceed fifteenpercent (15%) of Total Revenues; and

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(ii) the total amount of such Short-term Indebtedness and Indebtednessincurred pursuant to the provision described below in paragraph (g) below then Outstanding shallnot exceed twenty-five percent (25%) of Total Revenues; and

(iii) In every Fiscal Year, there shall be at least a consecutive twenty (20) dayperiod when the balances of such Short-term Indebtedness is reduced to an amount which shallnot exceed three percent (3%) of Total Revenues.

(d) Nonrecourse Indebtedness, provided that the proceeds of NonrecourseIndebtedness shall not be used to acquire or construct facilities which replace existing facilities of theMembers or the Obligated Group Affiliates which generated more than ten percent (10%) of TotalRevenues.

(e) Long-Term Indebtedness, if such Long-Term Indebtedness is issued to refundLong-Term Indebtedness and the Master Trustee receive an Officer’s Certificate to the effect that theissuance of such Long-Term Indebtedness would not increase Maximum Annual Debt Service by morethan ten percent (10%).

(f) Subordinated Indebtedness, without limitation.

(g) Any other Indebtedness, provided that the aggregate principal amount of suchIndebtedness, together with the aggregate principal amount of Indebtedness incurred pursuant to theprovisions of paragraph (c) above, does not, as of the date of incurrence, exceed 25% of Total Revenues.

Sale, Lease or Other Disposition of Property. Each Member agrees that it shall not,and each Controlling Member agrees that it will not permit its Obligated Group Affiliates to, in any FiscalYear, sell, lease or otherwise dispose of any Property, the Value of which would cause the aggregateValue of Property so transferred in such year to exceed 10% of the Value of the Property of the Membersand Obligated Group Affiliates (excluding any asset restricted as to use for a particular purposeinconsistent with its use for the payment of principal of, prepayment premium, and interest onIndebtedness or the payment of operating expenses), except for dispositions of assets:

(a) In the ordinary course of business;

(b) In connection with a true sale and leaseback under the Code;

(c) If prior to the sale, lease or other disposition there is delivered to the BondInsurer an Officer’s Certificate stating that such Property has, or within the next succeeding twenty-four(24) calendar months is reasonably expected to become, inadequate, obsolete, worn out, unsuitable,unprofitable, undesirable or unnecessary and the sale, lease, removal or other disposition thereof will notimpair the operations of the Members and Obligated Group Affiliates;

(d) To any Person, provided such Property is received by a Member or ObligatedGroup Affiliate as a gift, grant, bequest or donation and is restricted as to use for a particular purposeinconsistent with its use for the payment of principal of, prepayment premium and interest onIndebtedness and such Person has as one of its corporate purposes the receipt of gifts, grants, bequestsand donations and the application of such Property in accordance with such restrictions;

(e) To any Person provided that such Property is transferred for fair market valueand the net proceeds of such sale or other disposition are applied either (1) to the payment of debt service

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on Indebtedness, (2) to the purchase of replacement assets, or (3) to the future purchase of tangible orintangible assets, provided that such net proceeds are restricted to the future purchase of assets;

(f) In connection with the lease or license of a part of the Property, Plant andEquipment in connection with the proper and economical use of such Property, Plant and Equipment inaccordance with customary and prudent business practice;

(g) to another Obligated Group Member;

(h) that constitute the transfer of accounts receivable, provided that the aggregateamount of accounts receivable so sold (or encumbered by a Permitted Lien described in clause (22) of thedefinition of that term) in any Fiscal Year does not exceed 20% of the Members’ and Obligated GroupAffiliates’ net account receivables for such Fiscal Year;

(i) there shall have been delivered to the Master Trustee an Officer’s Certificate tothe effect that the Transaction Test is satisfied.

Preparation and Filing of Financial Statements, Reports and Other Information.

(a) Each Member agrees that it will keep, and each Controlling Member agrees thatit will cause its Obligated Group Affiliates to keep, adequate records and books of accounts, each separatefrom the other and from all other records and accounts, in which complete and correct entries shall bemade (said books shall be subject to the inspection of the Master Trustee during regular business hoursafter reasonable notice).

(b) The Obligated Group Representative agrees that it will furnish to the MasterTrustee:

(i) As soon as practicable, but in no event more than five months after thelast day of each Fiscal Year, for each Member, a financial report for or including such Memberfor such Fiscal Year certified by a firm of nationally recognized independent certified publicaccountants approved by the Obligated Group Representative prepared on a combined orconsolidated basis to include the results of operations of all Persons required to be consolidated orcombined with such Member in accordance with generally accepted accounting principles andcontaining an audited combined balance sheet as of the end of such Fiscal Year and an auditedcombined statement of operations and changes in net assets for such Fiscal Year and an auditedcombined statement of cash flows for such Fiscal Year, together with an accompanying unauditedbalance sheet, statement of operations and changes in net assets prepared on a combined basis toreflect only the operations of the Members and Material Obligated Group Affiliates which havebeen required to be included in such report, showing in each case in comparative form thefinancial figures for the preceding Fiscal Year, and the statement that such accountants haveobtained no knowledge of any default by such Member in the fulfillment of any of the terms,covenants, provisions, or conditions of the Master Indenture, or if such accountant shall haveobtained knowledge of any such default or defaults, they shall disclose in such statements thedefault or defaults and the date thereof (but such accountant shall not be liable directly orindirectly to anyone for failure to obtain knowledge of any default).

(ii) If the reports referred to in paragraph (1) above do not include the resultsof operations of any Material Obligated Group Affiliate, as soon as practicable, but in no eventmore than five months after the last day of each Fiscal Year, a financial report for such MaterialObligated Group Affiliate for such Fiscal Year certified by a firm of nationally recognized

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independent certified public accountants approved by the Obligated Group Representative,prepared on a combined or consolidated basis to include the results of operations of all Personsrequired to be consolidated or combined with such Material Obligated Group Affiliate inaccordance with generally accepted accounting principles, and containing an audited combinedbalance sheet as of the end of such Fiscal Year and an audited combined statement of changes inoperations and changes in net assets for such Fiscal Year and an audited combined statement ofcash flows for such Fiscal Year, together with an accompanying unaudited balance sheet,statement of operations and changes in net assets prepared on a combined basis to reflect only theoperations of the Material Obligated Group Affiliates which have been required to be included insuch report, showing in each case in comparative form the financial figures for the precedingFiscal Year, and the statement that such accountants have obtained no knowledge of any defaultby such Material Obligated Group Affiliate in the fulfillment of any of the terms, covenants,provisions or conditions of the Master Indenture, or if such accountant shall have obtainedknowledge of any such default or defaults, they shall disclose in such statements the default ordefaults and the date thereof (but such accountants shall not be liable directly or indirectly toanyone for failure to obtain knowledge of any default).

(iii) As soon as practicable, but in no event more than six months after thelast day of each Fiscal Year, a balance sheet, statement of operations and changes in net assetsincluding all the Members and Material Obligated Group Affiliates prepared based on theaccompanying unaudited combined schedules delivered with the audited financial statementsdescribed in paragraphs (1) and (2) above (such balance sheet, statement of operations andchanges in net assets being referred to in the Master Indenture as the “Obligated Group FinancialStatements”), together with a certificate of the chief financial officer of the Obligated GroupRepresentative stating that the Obligated Group Financial Statements were prepared inaccordance with generally accepted accounting principles (except for required consolidations)and that the Obligated Group Financial Statements reflect the results of the operations of only theMembers and the Material Obligated Group Affiliates and all Members and Material ObligatedGroup Affiliates are included.

(iv) At the time of the delivery of the Obligated Group Financial Statements,a certificate of the chief financial officer of the Obligated Group Representative, stating that theObligated Group Representative has made a review of the activities of each Member andObligated Group Affiliate during the preceding Fiscal Year for the purpose of determiningwhether or not the Members and Material Obligated Group Affiliates have complied with all ofthe terms, provisions and conditions of the Master Indenture and that each Member and MaterialObligated Group Affiliate has kept, observed, performed and fulfilled each and every covenant,provision and condition of the Master Indenture on its part to be performed and is not in default inthe performance or observance of any of the terms, covenants, provisions or conditions, or if anyMember or Material Obligated Group Affiliate shall be in default such certificate shall specify allsuch defaults and the nature thereof.

(v) Notwithstanding the foregoing, the audited and unaudited financialstatements referred to in this section may include the results of operation and financial position ofImmaterial Affiliates, and such results of operation and financial position may be considered as ifthey were a portion of the results of operation and financial position of the Members and theObligated Group Affiliates for all purposes of the Master Indenture, provided, however, that allsuch Immaterial Affiliates which are not Obligated Group Affiliates shall represent less than 15%of the combined or consolidated net assets of the Members and the Obligated Group Affiliates asshown on the applicable financial statements.

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Default

Events of Default. Each of the following events shall be an Event of Default under theMaster Indenture:

(a) Failure on the part of the Obligated Group to make due and punctual payment ofthe principal of, redemption premium, if any, or interest on any Obligation.

(b) Any Member shall fail to observe or perform any other covenant or agreementunder the Master Indenture (including covenants or agreements contained in any Related Supplement orObligation) for a period of thirty (30) days after the date on which written notice of such failure, requiringthe failure to be remedied, shall have been given to the Obligated Group Representative by the MasterTrustee or to the Obligated Group Representative and the Master Trustee by the Holders of 25% inaggregate principal amount of Outstanding Obligations (provided that if such failure can be remedied butnot within such thirty (30) day period, such failure shall not become an Event of Default for so long as theObligated Group Representative shall diligently proceed to remedy the failure in accordance with andsubject to any directions or limitations of time established by the Master Trustee.

(c) Any Member shall default in the payment of Indebtedness (other thanIndebtedness secured by an Obligation) in an aggregate outstanding principal amount equal to the greaterof one million dollars ($1,000,000) or one percent (1%) of the aggregate principal amount of all Long-Term Indebtedness of the Obligated Group then Outstanding, and any grace period for such payment shallhave expired, or an event of default as defined in any mortgage, indenture or instrument under which anyIndebtedness is secured or evidenced, shall occur; provided, however, that such default shall notconstitute an Event of Default within the meaning of the Master Indenture, if, within thirty (30) days orwithin the time allowed for service of a responsive pleading if any proceeding to enforce payment of theIndebtedness is commenced, (1) any Member in good faith commences proceedings to contest theexistence or payment of such Indebtedness, and (2) sufficient moneys are deposited in escrow with a bankor trust company or a bond acceptable to the Master Trustee is posted for the payment of suchIndebtedness.

(d) A court having jurisdiction shall enter a decree or order for relief in respect ofany Member in an involuntary case under any applicable federal or state bankruptcy, insolvency or othersimilar law, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similarofficial) of any Member or for any substantial part of the Property of any Member, or ordering thewinding up or liquidation of its affairs, and such decree or order shall remain unstayed and in effect for aperiod of sixty (60) consecutive days.

(e) Any Member shall commence a voluntary case under any applicable federal orstate bankruptcy, insolvency or other similar law, or shall consent to the entry of an order for relief in aninvoluntary case under any such law, or shall consent to the appointment of or taking possession by areceiver, liquidator, assignee, trustee, custodian, sequestrator (or similar official) of any Member or forany substantial part of its Property, or shall make any general assignment for the benefit of creditors, orshall fail generally to pay its debts as they become due or shall take any corporate action in furtherance ofthe foregoing.

(f) An event of default shall exist under any Related Bond Indenture.

The Obligated Group Representative agrees that, as soon as practicable, and in any eventwithin 10 days after such event, the Obligated Group Representative shall notify the Master Trustee of anyevent which is an Event of Default under the Master Indenture which has occurred and is continuing, which

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notice shall state the nature of such event and the action which the Members of the Obligated Group proposeto take with respect thereto.

Acceleration; Annulment of Acceleration.

(a) Upon the occurrence and during the continuation of an Event of Default, theMaster Trustee may, and upon the written request of the Holders of not less than 25% in aggregateprincipal amount of Outstanding Obligations, shall, by notice to the Obligated Group Representative,declare all Outstanding Obligations immediately due and payable. Upon such declaration of acceleration,all Outstanding Obligations shall be immediately due and payable. If the terms of any RelatedSupplement give a Person the right to consent to acceleration of the Obligations issued pursuant to suchRelated Supplement, the Obligations issued pursuant to such Related Supplement may not be acceleratedby the Master Trustee unless such consent is properly obtained pursuant to the terms of such RelatedSupplement. In the event of acceleration, an amount equal to the aggregate principal amount of allOutstanding Obligations, plus all interest accrued thereon and, to the extent permitted by applicable law,which accrues on such principal and interest to the date of payment, shall be due and payable on theObligations.

(b) At any time after the Obligations have been declared to be due and payable, andbefore the entry of a final judgment or decree in any proceeding instituted with respect to the Event ofDefault that resulted in the declaration of acceleration, the Master Trustee may annul such declaration andits consequences if: (1) the Obligated Group has paid (or caused to be paid or deposited with the MasterTrustee moneys sufficient to pay) all payments then due on all Outstanding Obligations (other thanpayments then due only because of such declaration); and (2) the Obligated Group has paid (or caused tobe paid or deposited with the Master Trustee moneys sufficient to pay) all fees and expenses of the MasterTrustee then due; and (3) the Obligated Group has paid (or caused to be paid or deposited with the MasterTrustee moneys sufficient to pay) all other amounts then payable by the Obligated Group under theMaster Indenture; and (4) every Event of Default (other than a default in the payment of the principal orother payments of such Obligations then due only because of such declaration) has been remedied. Nosuch annulment shall extend to or affect any subsequent Event of Default or impair any right with respectto any subsequent Event of Default.

Additional Remedies and Enforcement of Remedies.

(a) Upon the occurrence and continuance of any Event of Default, the MasterTrustee may, and upon the written request of the Holders of not less than 50% in aggregate principalamount of the Outstanding Obligations (and upon indemnification of the Master Trustee to its satisfactionfor any such request), shall, proceed to protect and enforce its rights and the rights of the Holders underthe Master Indenture by such proceedings as the Master Trustee may deem expedient, including but notlimited to: (1) enforcement of the right of the Holders to collect amounts due or becoming due under theObligations; (2) civil action upon all or any part of the Obligations; (3) civil action to require any Personholding moneys, documents or other property pledged to secure payment of amounts due or to becomedue on the Obligations to account as if it were the trustee of an express trust for the Holders ofObligations; (4) civil action to enjoin any acts which may be unlawful or in violation of the rights of theHolders of Obligations; and (5) enforcement of any other right or remedy of the Holders conferred by lawor by the Master Indenture.

(b) Regardless of the occurrence of an Event of Default, if requested in writing bythe Holders of not less than 50% in aggregate principal amount of the Outstanding Obligations (and uponindemnification of the Master Trustee to its satisfaction for such request), the Master Trustee shallinstitute and maintain such proceedings as it may be advised shall be necessary or expedient (1) to

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prevent any impairment of the security under the Master Indenture by any acts which may be unlawful orin violation of the Master Indenture, or (2) to preserve or protect the interests of the Holders. However,the Master Trustee shall not comply with any such request or institute and maintain any such proceedingthat is in conflict with any applicable law or the provisions of the Master Indenture or (in the solejudgment of the Master Trustee) is unduly prejudicial to the interests of the Holders not making suchrequest.

Application of Moneys After Default. During the continuance of an Event of Default, allmoneys received by the Master Trustee pursuant to any right given or action taken under the provisions ofthe Master Indenture relating to Events of Default (after payment of the costs of the proceedings resulting inthe collection of such moneys and payment of all fees, expenses and other amounts owed to the MasterTrustee) shall be applied as follows:

(a) Unless all Outstanding Obligations have become or have been declared due andpayable (or if any such declaration is annulled in accordance with the terms of the Master Indenture):

First: To the payment of all installments of interest then due on the Obligations in the orderof their due dates, and, if the amount available is not sufficient to pay in full all installments due on the samedate, then to the payment thereof ratably, according to the amounts of interest due on such date, without anydiscrimination or preference; and

Second: To the payment of all installments of principal then due on the Obligations(whether at maturity or by call for redemption) in the order of their due dates, and, if the amount available isnot sufficient to pay in full all installments due on the same date, then to the payment thereof ratably,according to the amounts of principal due on such date, without any discrimination or preference.

(b) If all Outstanding Obligations have become or have been declared due andpayable (and such declaration has not been annulled under the terms of the Master Indenture), to thepayment of the principal and interest then due and unpaid on the Obligations, and, if the amount availableis not sufficient to pay in full the whole amount then due and unpaid, then to the payment thereof ratably,without preference or priority of principal over interest, of interest over principal, of any installment overany other installment or of any Obligation over any other Obligation, according to the amounts duerespectively for principal and interest, without any discrimination or preference.

Such moneys shall be applied at such times as the Master Trustee shall determine, havingdue regard for the amount of moneys available and the likelihood of additional moneys becoming availablein the future. Upon any date fixed by the Master Trustee for the application of such moneys to the paymentof principal, interest on the amounts of principal to be paid on such date shall cease to accrue. The MasterTrustee shall give such notices as it may deem appropriate of the deposit with it of such moneys or of thefixing of such dates. The Master Trustee shall not be required to make payment to the Holder of any unpaidObligation until such Obligation (and all unmatured interest coupons, if any) is presented to the MasterTrustee for appropriate endorsement of any partial payment or for cancellation if fully paid.

Whenever all Obligations have been paid under the terms of the Master Indenture describedabove and all fees and expenses of the Master Trustee have been paid, any balance remaining shall be paidto the Person entitled to receive such balance. If no other Person is entitled thereto, then the balance shall bepaid to the Obligated Group Representative, its successors or such Person as a court of competentjurisdiction may direct.

Remedies Vested in the Master Trustee. All rights of action (including the right to fileproof of claims) under the Master Indenture or under any of the Obligations may be enforced by the Master

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Trustee without the possession of any of the Obligations or the production thereof in any proceeding relatingthereto. Any proceeding instituted by the Master Trustee may be brought in its name as the Master Trusteewithout the necessity of joining any Holders as plaintiffs or defendants. Subject to the provisions of theMaster Indenture described above under “Application of Moneys After Default,” any recovery or judgmentshall be for the equal benefit of the Holders of the Outstanding Obligations.

Master Trustee to Represent Holders. The Master Trustee is irrevocably appointed astrustee and attorney-in-fact for the Holders for the purpose of exercising on their behalf the rights andremedies available to the Holders under the provisions of the Master Indenture, the Obligations, any RelatedSupplement and applicable provisions of law. The Holders, by taking and holding the Obligations, shall beconclusively deemed to have so appointed the Master Trustee.

Holders’ Control of Proceedings. If an Event of Default has occurred and is continuing,notwithstanding anything in the Master Indenture to the contrary, the Holders of at least a majority inaggregate principal amount of Outstanding Obligations shall have the right (upon the indemnification of theMaster Trustee to its satisfaction) to direct the method and/or place of conducting any proceeding to betaken in connection with the enforcement of the terms of the Master Indenture. Such direction must be inwriting, signed by such Holders and delivered to the Master Trustee. However, the Master Trustee shall notfollow any such direction that is in conflict with any applicable law or the provisions of the MasterIndenture or (in the sole judgment of the Master Trustee) is unduly prejudicial to the interests of the Holdersnot joining in such direction. Nothing described in this paragraph shall impair the right of the MasterTrustee to take any other action authorized by the Master Indenture which it may deem proper and which isnot inconsistent with such direction by Holders.

Waiver of Event of Default. No delay or omission of the Master Trustee or of any Holderto exercise any right with respect to any Event of Default shall impair such right or shall be construed to bea waiver of or acquiescence to such Event of Default. Every right and remedy given under the MasterIndenture to the Master Trustee and the Holders may be exercised from time to time and as often as may bedeemed expedient by them. The Master Trustee may waive any Event of Default which in its opinion hasbeen remedied before the entry of a final judgment or decree in any proceeding instituted by it under theprovisions of the Master Indenture, or before the completion of the enforcement of any other remedy underthe Master Indenture. Upon the written request of the Holders of at least a majority in aggregate principalamount of Outstanding Obligations, the Master Trustee shall waive any Event of Default under the MasterIndenture and its consequences; provided, however, that, except under the circumstances set forth in theMaster Indenture, the failure to pay the principal of, premium, if any, or interest on any Obligation when duemay not be waived without the written consent of the Holders of all Outstanding Obligations. In case of anywaiver by the Master Trustee of an Event of Default, the Members, the Master Trustee and the Holders shallbe restored to their former positions and rights. No waiver shall extend to, or impair any right with respectto, any other Event of Default.

Supplements and Amendments

Supplements Not Requiring Consent of Holders. The Obligated Group Representative(acting for itself and as agent for each Member) and the Master Trustee may, without the consent of ornotice to any of the Holders, enter into one or more Related Supplements for any of the following purposes:(a) to correct any ambiguity or formal defect or omission in the Master Indenture which does not materiallyand adversely affect the interests of the Holders; (b) to correct or supplement any provision which may beinconsistent with any other provision, or to make any other provision with respect to matters or questionsarising under the Master Indenture and which does not materially and adversely affect the interests of theHolders; (c) to grant or confer ratably upon all of the Holders any additional rights, remedies, powers orauthority, or to add to the covenants of and restrictions on the Members; (d) to qualify the Master Indenture

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under the Trust Indenture Act of 1939, as amended, or corresponding provisions of federal law from time totime in effect; (e) to create and provide for the issuance of an Obligation or Series of Obligations aspermitted under the Master Indenture; (f) to obligate a successor to any Member as provided in the MasterIndenture; or (g) to add a new Member as provided in the Master Indenture.

Supplements Requiring Consent of Holders. Other than Related Supplements referred toin the preceding paragraph and subject to the terms contained in the Master Indenture, the Holders of notless than a majority in aggregate principal amount of the Outstanding Obligations shall have the right toconsent to and approve the execution by the Obligated Group Representative (acting for itself and as agentfor each Member) and the Master Trustee of such Related Supplements as shall be deemed necessary ordesirable for the purpose of modifying, altering, amending, adding to or rescinding any of the termscontained in the Master Indenture; provided, however, that nothing shall permit or be construed aspermitting a Related Supplement which would: (1) extend the stated maturity of or time for paying intereston any Obligation or reduce the principal amount of or the redemption premium or rate of interest or methodof calculating interest payable on any Obligation without the consent of the Holder of such Obligation;(2) modify, alter, amend, add to or rescind any of the terms or provisions contained in the Master Indentureso as to affect the right of the Holders of any Obligations in default as to payment to compel the MasterTrustee to declare the principal of all Obligations to be due and payable, without the consent of the Holdersof all Outstanding Obligations; or (3) reduce the aggregate principal amount of Outstanding Obligations theconsent of the Holders of which is required to authorize such Related Supplement without the consent of theHolders of all Obligations then Outstanding.

Satisfaction and Discharge of Master Indenture

The Master Indenture shall cease to be of further effect if: (a) all Obligations previouslyauthenticated (other than any Obligations which have been mutilated, destroyed, lost or stolen and whichhave been replaced or paid as provided in any Related Supplement) and not cancelled are delivered to theMaster Trustee for cancellation; or (b) all Obligations not previously cancelled or delivered to the MasterTrustee for cancellation are paid; or (c) a deposit is made in trust with the Master Trustee (or with a bank ortrust company acceptable to the Master Trustee pursuant to an agreement between a Member and such bankor trust company in form acceptable to the Master Trustee) in cash or Government Obligations or both,sufficient to pay at maturity or upon redemption all Obligations not previously cancelled or delivered to theMaster Trustee for cancellation, including principal and interest due or to become due to such date ofmaturity or redemption date, as the case may be; and all other sums payable under the Master Indenture bythe Members are also paid. The Master Trustee, on demand of the Members or any thereof and at the costand expense of the Members, shall execute proper instruments acknowledging satisfaction of anddischarging the Master Indenture. The Members shall cause a report to be prepared by a firm nationallyrecognized for providing verification services regarding the sufficiency of funds for such discharge andsatisfaction provided pursuant to clause (c) described above, upon which report the Master Trustee may rely.

SERIES 2010A SUPPLEMENT

General

The Series 2010A Supplement provides for the issuance of the Series 2010A Obligationpursuant to the Master Indenture, and provides the terms and form thereof.

The following is a summary of certain provisions of the Series 2010A Supplement. Thissummary does not purport to be complete or definitive and reference is made to the Series 2010ASupplement for the complete terms thereof.

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Payments on the Series 2010A Obligation; Credits

Principal of and interest and any redemption premium on the Series 2010A Obligation ispayable in any coin or currency of the United States of America that on the payment date is legal tenderfor the payment of public and private debts. Except as provided in the following paragraph with respectto credits, and in the section described under the heading “Prepayment of the Series 2010A Obligation,”payments on the principal of and premium, if any, and interest on the Series 2010A Obligation shall bemade at the times and in the amounts specified in the Series 2010A Obligation by the Corporationdepositing the same with or to the account of the Bond Trustee at or prior to the opening of business onthe day such payments shall become due or payable (or the next succeeding business day if such date is aSaturday, Sunday or bank holiday in the city in which the principal corporate trust office of the BondTrustee is located). Subject to receipt by the Master Trustee from the Holder of the Series 2010AObligation of notice to the contrary, the Master Trustee may conclusively assume that such payment hasbeen made when due.

The Corporation shall receive credit for payment on the Series 2010A Obligation, inaddition to any credits resulting from payment or prepayment from other sources, as follows: (a) oninstallments of interest on the Series 2010A Obligation in an amount equal to moneys deposited in theInterest Account created under the Bond Indenture, to the extent such amounts have not previously beencredited against payments on the Series 2010A Obligation; (b) on installments of principal of the Series2010A Obligation in an amount equal to moneys deposited in the Principal Account created under theBond Indenture, to the extent such amounts have not previously been credited against payments on theSeries 2010A Obligation; (c) on installments of principal and interest on the Series 2010A Obligation inan amount equal to the principal amount of the Bonds for the redemption of which sufficient amounts (asdetermined by the Bond Indenture) in cash or Investment Securities, as defined in the Bond Indenture, areon deposit as provided in the Bond Indenture to the extent such amounts have not previously beencredited against such payments, and the interest on the Bonds from and after the date fixed for payment atmaturity or redemption thereof. Such credits shall be made against the installments of principal andinterest which would have been used, but for such call for redemption, to pay principal of and interest onthe Bonds when due at maturity; and (d) on installments of principal and interest on the Series 2010AObligation in an amount equal to the principal amount of the Bonds acquired by the Corporation andsurrendered to the Bond Trustee for cancellation or purchased by the Bond Trustee and cancelled, and theinterest on the Bonds from and after the date interest thereon has been paid prior to cancellation. Suchcredits shall be made against the installments of principal and interest which would have been used, butfor such cancellation, to pay principal of and interest on the Bonds when due.

Subject to the receipt by the Master Trustee from the Holder of the Series 2010AObligation of notice of the failure of the Corporation to make the foregoing payments as and when due,the Master Trustee may conclusively assume that such payments were made and to such extentcorresponding credit on the Series 2010A Obligation shall be deemed to have occurred.

Prepayment of the Series 2010A Obligation

So long as all amounts that have become due under the Series 2010A Obligation havebeen paid, the Corporation shall have the right, at any time and from time to time, to pay in advance andin any order of due dates all or part of the amounts to become due under such Obligation. Prepaymentsmay be made by payments of cash, deposit of Investment Securities or surrender of Bonds. All suchprepayments (and the additional payment of any amount necessary to pay the premium, if any, payableupon the redemption of the Bonds) shall be deposited upon receipt in the Optional Redemption Accountcreated under the Bond Indenture and, at the written request of and as determined by the Corporation,credited against payments due under such Obligation or used for the redemption or purchase of

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Outstanding Bonds in the manner and subject to the terms and conditions set forth in the Bond Indenture.Notwithstanding any such redemption or surrender of Bonds, as long as any Bonds remain outstanding orany additional payments required to be made under the Series 2010A Supplement remain unpaid, theCorporation shall not be relieved of its obligations under such Supplement. Prepayments made undersuch Supplement shall be credited against amounts to become due on the Series 2010A Obligation asprovided in the Loan Agreement.

Registration, Number, Negotiability and Transfer of the Series 2010A Obligation

The Master Trustee shall keep or cause to be kept at its Corporate Trust Office sufficientbooks for the registration of transfers of the Series 2010A Obligation.

Except as provided below, the Series 2010A Obligation shall consist of a singleObligation without coupons registered as to principal and interest in the name of the Bond Trustee and notransfer of the Obligation shall be permitted or shall be registered under the Master Indenture except fortransfers to a successor Bond Trustee. All payments made to the registered owner of the Series 2010AObligation shall be valid, and, to the extent of the sums so paid, sufficient to satisfy and discharge theliability for moneys payable on the Series 2010A Obligation. Upon the principal of all Master IndentureObligations Outstanding being declared immediately due and payable upon and during the continuance ofan Event of Default, the Series 2010A Obligation may be transferred, if and to the extent the BondTrustee requests that the above restrictions on transfers be terminated.

Right to Redeem

The Series 2010A Obligation shall be subject to redemption, in whole or in part, prior tomaturity at the times and in the amounts applicable to redemption of the Bonds as specified in the BondIndenture; provided that in no event shall the Series 2010A Obligation be redeemed unless acorresponding amount of Bonds is also redeemed in accordance with the terms and subject to thelimitations contained in the Bond Indenture.

BOND INDENTURE

General

The Bond Indenture sets forth the terms of the Bonds authorized thereunder, theapplication of the proceeds thereof, the nature and extent of the security for the Bonds, various rights ofthe Bondholders, rights, duties and immunities of the Bond Trustee and the rights and obligations of theAuthority. Certain provisions of the Bond Indenture are summarized below. Other provisions aresummarized in this Official Statement under the captions “THE BONDS” and “SECURITY FOR THEBONDS.” This summary does not purport to be complete or definitive and is qualified in its entirety byreference to the full terms of the Bond Indenture.

Pledge and Assignment; Revenue Fund

Subject only to the provisions of the Bond Indenture permitting the application thereoffor the purposes and on the terms and conditions set forth in the Bond Indenture, there are pledged tosecure the payment of the principal (and Redemption Price) of and interest on the Bonds in accordancewith their terms and the provisions of the Bond Indenture, all of the Revenues and any other amounts(including proceeds of the sale of Bonds) held in any fund or account established pursuant to the BondIndenture, excepting only moneys on deposit in the Rebate Fund. Said pledge shall constitute a lien on

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and security interest in such assets and shall attach, be perfected and be valid and binding from and afterdelivery by the Bond Trustee of the Bonds, without any physical delivery thereof or further act.

The Authority transfers in trust, grants a security interest in and assigns to the BondTrustee, for the benefit of the Holders from time to time of the Bonds, all of the Revenues and other assetspledged in the preceding paragraph and all of the right, title and interest of the Authority in the LoanAgreement (except for (i) the right to receive any Additional Payments or Administrative Fees andExpenses to the extent payable to the Authority, (ii) any rights of the Authority to receive any amountspaid by the Corporation pursuant to the Loan Agreement relating to reimbursement of certain expenses orrights of indemnification, inspection or to receive notices, and (iii) the obligation of the Corporation tomake deposits pursuant to the Tax Certificate) and the Series 2010A Obligation. The Bond Trustee shallbe entitled to and shall collect and receive all of the Revenues, and any Revenues collected or received bythe Authority shall be deemed to be held, and to have been collected or received, by the Authority as theagent of the Bond Trustee and shall forthwith be paid by the Authority to the Bond Trustee. The BondTrustee shall also be entitled to and subject to the provisions of the Bond Indenture, shall take all steps,actions and proceedings reasonably necessary in its judgment to enforce all of the rights of the Authorityand all of the obligations of the Corporation under the Loan Agreement and all of the obligations of theMembers under the Series 2010A Obligation other than for those rights retained by the Authority.

All Revenues shall be promptly deposited by the Bond Trustee upon receipt thereof in aspecial fund designated as the “Revenue Fund” which the Bond Trustee shall establish, maintain and holdin trust, except as otherwise provided in the Bond Indenture and except that all moneys received by theBond Trustee and required to be deposited in the Redemption Fund shall be promptly deposited in theRedemption Fund, which the Bond Trustee shall establish, maintain and hold in trust. All Revenuesdeposited with the Bond Trustee shall be held, disbursed, allocated and applied by the Bond Trustee onlyas provided in the Bond Indenture.

Allocation of Revenues

On or before the following dates, the Bond Trustee shall transfer from the Revenue Fundand deposit into the following respective accounts (each of which the Bond Trustee shall establish andmaintain within the Revenue Fund) and then to the Rebate Fund, the following amounts, in the followingorder of priority, the requirements of each such account or fund (including the making up of anydeficiencies in any such account resulting from lack of Revenues sufficient to make any earlier requireddeposit) at the time of deposit to be satisfied before any transfer is made to any account or fundsubsequent in priority:

First: on the Business Day immediately preceding each Interest Payment Date, to theInterest Account, the aggregate amount of interest becoming due and payable on the next succeedingInterest Payment Date on all Bonds then Outstanding;

Second: on the Business Day immediately preceding each Principal Payment Date, to thePrincipal Account, the aggregate principal amount of principal becoming due and payable on suchPrincipal Payment Date and the aggregate amount of the Mandatory Sinking Account Payment requiredto be paid into the Sinking Account for the Bonds at the next ensuing principal payment date;

Third: on the dates specified in the Tax Certificate, to the Rebate Fund, such amounts asare required to be deposited therein by the Tax Certificate.

Upon Request of the Corporation, any moneys remaining in the Revenue Fund after theforegoing transfers shall be transferred to the Corporation.

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Interest Account

All amounts in the Interest Account shall be used and withdrawn by the Bond Trusteesolely for the purpose of paying interest on the Bonds as it shall become due and payable (includingaccrued interest on any Bonds purchased or redeemed prior to maturity pursuant to the Bond Indenture).

Principal Account

All amounts in the Principal Account shall be used and withdrawn by the Bond Trusteesolely for the purpose of paying the principal of the Bonds when due and payable, as provided in theBond Indenture, except that all amounts in the Sinking Account shall be used and withdrawn by the BondTrustee to purchase or redeem or pay at maturity Term Bonds.

Redemption Fund

The Bond Trustee shall establish and maintain within the Redemption Fund a separateOptional Redemption Account and a separate Special Redemption Account and shall accept all moneysdeposited for redemption and shall deposit such moneys into said Accounts, as applicable. All amountsdeposited in the Optional Redemption Account and in the Special Redemption Account shall be acceptedand used and withdrawn by the Bond Trustee solely for the purpose of redeeming Bonds, in the mannerand upon the terms and conditions specified in the Bond Indenture, at the next succeeding date ofredemption for which notice has not been given and at the Redemption Prices then applicable toredemptions from the Optional Redemption Account and the Special Redemption Account, respectively;provided that, at any time prior to giving such notice of redemption, the Bond Trustee shall, upon writtendirection of the Corporation, apply such amounts to the purchase of Bonds at public or private sale, as andwhen and at such prices (including brokerage and other charges, but excluding accrued interest, which ispayable from the Interest Account) as the Corporation may direct, except that the purchase price(exclusive of accrued interest) may not exceed the Redemption Price then applicable to such Bonds (or, ifsuch Bonds are not then subject to redemption, the par value of such Bonds); and provided further that inlieu of redemption at such next succeeding date of redemption, or in combination therewith, amounts insuch account may be transferred to the Revenue Fund and credited against Loan Repayments in order oftheir due date as set forth in a Request of the Corporation. All Bonds purchased or redeemed from theRedemption Fund shall be allocated to applicable Mandatory Sinking Account Payments designated in aCertificate of the Corporation (or if the Corporation fails to deliver such a Certificate to the Bond Trustee,in inverse order of their payment dates).

Rebate Fund

The Bond Trustee shall establish and maintain, when required, a fund separate from anyother fund established and maintained under the Bond Indenture designated as the Rebate Fund. Withinthe Rebate Fund, the Bond Trustee shall maintain such accounts as shall be necessary to comply withinstructions of the Corporation given pursuant to the terms and conditions of the Tax Certificate. Subjectto the transfer provisions contained in the Bond Indenture, all money at any time deposited in the RebateFund shall be held by the Bond Trustee in trust, to the extent required to satisfy the Rebate Requirement(as defined in the Tax Certificate), for payment to the federal government of the United States ofAmerica. None of the Authority, the Corporation or the Holder of any Bonds shall have any rights in orclaim to such money.

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Investment of Moneys in Funds and Accounts

All moneys in any of the funds and accounts established pursuant to the Bond Indentureshall be invested and reinvested by the Bond Trustee, upon the written direction of the Corporation, solelyin Investment Securities subject to the limitations and other provisions set forth in the Bond Indenture.

Tax Covenant

The Authority agrees at all times do and perform all acts and things permitted by law andthe Bond Indenture that are necessary or desirable in order to assure that interest paid on the Bonds willbe excluded from gross income for purposes of federal income taxes and shall take no action that wouldresult in such interest not being excluded from gross income for federal income taxes. Without limitingthe generality of the foregoing, the Authority agrees to comply with the provisions of the Tax Certificate.

Amendment of Loan Agreement

Except as provided in the next paragraph, the Authority shall not amend, modify orterminate any of the terms of the Loan Agreement, or consent to any such amendment, modification ortermination unless the written consent of the Corporation and the Holders of a majority in principalamount of the Bonds then Outstanding to such amendment, modification or termination is filed with theBond Trustee, provided that no such amendment, modification or termination shall reduce the amount ofLoan Repayments to be made to the Authority or the Bond Trustee by the Corporation pursuant to theAgreement, or extend the time for making such payments, without the written consent of all of theHolders of the Bonds then Outstanding.

Notwithstanding the foregoing, the terms of the Loan Agreement may also be modified oramended from time to time and at any time by the Authority and the Corporation without the necessity ofobtaining the consent of or any Bondholders, only to the extent permitted by law and only for any one ormore of the following purposes:

(1) to add to the covenants and agreements of the Authority or the Corporationcontained in the Loan Agreement other covenants and agreements thereafter to be observed, to pledge orassign additional security for the Bonds (or any portion thereof), or to surrender any right or powertherein reserved to or conferred upon the Authority or the Corporation, provided, that no such covenant,agreement, pledge, assignment or surrender shall materially adversely affect the interests of the Holdersof the Bonds;

(2) to make such provisions for the purpose of curing any ambiguity, inconsistencyor omission, or of curing or correcting any defective provision, contained in the Loan Agreement, or inregard to matters or questions arising under the Loan Agreement, as the Authority may deem necessary ordesirable and not inconsistent with the Loan Agreement or the Bond Indenture, and which shall notmaterially adversely affect the interests of the Holders of the Bonds; or

(3) to maintain the exclusion from gross income for federal income tax purposes ofinterest payable with respect to the Bonds.

Events of Default

The following events shall be Events of Default under the Bond Indenture:

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(A) default in the due and punctual payment of the principal or Redemption Price of anyBond when and as the same shall become due and payable;

(B) default in the due and punctual payment of any installment of interest on any Bond whenand as the same shall become due and payable;

(C) except as provided in clause (D) below, default by the Authority in the observance of anyof the other covenants, agreements or conditions on its part contained in the Bond Indenture or in theBonds, if such default shall have continued for a period of 60 days after written notice thereof, specifyingsuch default and requiring the same to be remedied, shall have been given to the Authority by the BondTrustee, or to the Authority and the Bond Trustee by the Holders of not less than 25% in aggregateprincipal amount of the Bonds at the time Outstanding;

(D) default by the Authority in the observance of the tax covenants set forth in the BondIndenture, if such default shall have continued for a period of 30 days after written notice thereof,specifying such default and requiring the same to be remedied, shall have been given to the Authority; or

(E) a Loan Default Event.

Acceleration of Maturities

Whenever any Event of Default described above shall have happened and be continuing,the Bond Trustee may take the following remedial steps:

(A) In the case of an Event of Default described in paragraph (A) or (B) above, the BondTrustee may notify the Master Trustee of such Event of Default, may make a demand for payment underthe Series 2010A Obligation and request the Master Trustee in writing to give notice to the Memberspursuant to the Master Indenture declaring the principal of all Obligations issued under the MasterIndenture then outstanding to be due and immediately payable. Upon such declaration by the MasterTrustee, the Bond Trustee shall declare the principal of all the Bonds then Outstanding, and the interestaccrued thereon, to be due and payable immediately, and upon any such declaration the same shallbecome and shall be immediately due and payable, anything in the Bond Indenture to the contrarynotwithstanding. In addition, the Bond Trustee and the Authority may take whatever action at law or inequity is necessary or desirable to collect the payments due under the Series 2010A Obligation;

(B) In the case of an Event of Default described in paragraph (C) or (D) above, the BondTrustee may take whatever action at law or in equity is necessary or desirable to enforce the performance,observance or compliance by the Authority with any covenant, condition or agreement by the Authorityunder the Bond Indenture; and

(C) In the case of an Event of Default described in paragraph (E) above, the Bond Trusteemay take whatever action the Authority would be entitled to take, and shall take whatever action theAuthority would be required to take, pursuant to the Loan Agreement in order to remedy the Loan DefaultEvent.

Notwithstanding any other provision of the Bond Indenture or any right, power or remedyexisting at law or in equity or by statute, the Bond Trustee shall not under any circumstance in which anEvent of Default has occurred declare the entire unpaid aggregate principal amount of the BondsOutstanding to be immediately due and payable except in the event that the Master Trustee shall havedeclared the principal amount of the Series 2010A Obligation and all interest due thereon immediatelydue and payable in accordance with the Master Indenture.

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Any such declaration, however, is subject to the condition that if, at any time after suchdeclaration and before any judgment or decree for the payment of the moneys due shall have beenobtained or entered, the Authority or the Corporation shall deposit with the Bond Trustee a sum sufficientto pay all the principal or Redemption Price of and installments of interest on the Bonds, payment ofwhich is overdue, with interest on such overdue principal at the rate borne by the respective Bonds, andthe reasonable charges and expenses of the Bond Trustee and the Authority (including fees and expensesof their respective attorneys), and if the Bond Trustee has received notification from the Master Trusteethat the declaration of acceleration of the Series 2010A Obligation has been annulled pursuant to theMaster Indenture and any and all other defaults known to the Bond Trustee (other than in the payment ofprincipal of and interest on the Bonds due and payable solely by reason of such declaration) shall havebeen made good or cured to the satisfaction of the Bond Trustee or provision deemed by the Bond Trusteeto be adequate shall have been made therefor, then, and in every such case, the Bond Trustee shall, onbehalf of the Holders of all of the Bonds, rescind and annul such declaration and its consequences andwaive such default; but no such rescission and annulment shall extend to or shall affect any subsequentdefault, or shall impair or exhaust any right or power consequent thereon.

Bond Trustee to Represent Bondholders

The Bond Trustee is irrevocably appointed pursuant to the Bond Indenture (and thesuccessive respective Holders of the Bonds, by taking and holding the same, shall be conclusivelydeemed to have so appointed the Bond Trustee) as trustee and true and lawful attorney-in-fact of theHolders of the Bonds for the purpose of exercising and prosecuting on their behalf such rights andremedies as may be available to such Holders under the provisions of the Bonds, the Bond Indenture, theLoan Agreement, the Series 2010A Obligation, the Act and applicable provisions of any other law. Uponthe occurrence and continuance of an Event of Default or other occasion giving rise to a right in the BondTrustee to represent the Bondholders, the Bond Trustee in its discretion may, and upon the written requestof the Holders of not less than twenty-five percent (25%) in aggregate principal amount of the Bonds thenOutstanding, and upon being indemnified to its satisfaction therefor, shall, proceed to protect or enforceits rights or the rights of such Holders by such appropriate action, suit, mandamus or other proceedings asit shall deem most effectual to protect and enforce any such right, at law or in equity, either for thespecific performance of any covenant or agreement contained in the Bond Indenture, or in aid of theexecution of any power granted in the Bond Indenture, or for the enforcement of any other appropriatelegal or equitable right or remedy vested in the Bond Trustee, in such Holders under the Bond Indenture,the Loan Agreement, the Series 2010A Obligation, the Act or any other law; and upon instituting suchproceeding, the Bond Trustee shall be entitled, as a matter of right, to the appointment of a receiver of theRevenues and other assets pledged under the Bond Indenture, pending such proceedings. All rights ofaction under the Bond Indenture or the Bonds or otherwise may be prosecuted and enforced by the BondTrustee without the possession of any of the Bonds or the production thereof in any proceeding relatingthereto, and any such suit, action or proceeding instituted by the Bond Trustee shall be brought in thename of the Bond Trustee for the benefit and protection of all the Holders of such Bonds, subject to theprovisions of the Bond Indenture.

Bondholders’ Direction of Proceedings

Anything in the Bond Indenture to the contrary notwithstanding, the Holders of amajority in aggregate principal amount of the Bonds then Outstanding shall have the right, by aninstrument or concurrent instruments in writing executed and delivered to the Bond Trustee, to direct themethod of conducting all remedial proceedings taken by the Bond Trustee under the Bond Indenture,provided that such direction shall not be otherwise than in accordance with law and the provisions of theBond Indenture, and that the Bond Trustee shall have the right to decline to follow any such direction that

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in the opinion of the Bond Trustee would be unjustly prejudicial to Bondholders not parties to suchdirection.

Limitation on Bondholders’ Right to Sue

No Holder of any Bond shall have the right to institute any suit, action or proceeding atlaw or in equity, for the protection or enforcement of any right or remedy under the Bond Indenture, theLoan Agreement, the Series 2010A Obligation or any other applicable law with respect to such Bond,unless (1) such Holder shall have given to the Bond Trustee written notice of the occurrence of an Eventof Default; (2) the Holders of not less than 25% in aggregate principal amount of the Bonds thenOutstanding shall have made written request upon the Bond Trustee to exercise the powers hereinbeforegranted or to institute such suit, action or proceeding in its own name; (3) such Holder or said Holdersshall have tendered to the Bond Trustee reasonable indemnity against the costs, expenses and liabilities tobe incurred in compliance with such request; and (4) the Bond Trustee shall have refused or omitted tocomply with such request for a period of 60 days after such written request shall have been received by,and said tender of indemnity shall have been made to, the Bond Trustee.

Modification or Amendment of the Bond Indenture

The Bond Indenture and the rights and obligations of the Authority, of the Bond Trusteeand of the Holders of the Bonds may be modified or amended from time to time and at any time by aSupplemental Bond Indenture, which the Authority and the Bond Trustee may enter into with the writtenconsent of the Corporation when the written consent the Holders of a majority in aggregate principalamount of the Bonds then Outstanding, shall have been filed with the Bond Trustee. No suchmodification or amendment shall (1) extend the fixed maturity of any Bond, or reduce the amount ofprincipal thereof, or reduce the rate of interest thereon, or extend the time of payment of interest thereon,or reduce any premium payable upon the redemption thereof, without the consent of the Holder of eachBond so affected, or (2) reduce the aforesaid percentage of Bonds the consent of the Holders of which isrequired to effect any such modification or amendment, or permit the creation of any lien on the Revenuesand other assets pledged under the Bond Indenture prior to or on a parity with the lien created by theBond Indenture, or deprive the Holders of the Bonds of the lien created by the Bond Indenture on suchRevenues and other assets (except as expressly provided in the Bond Indenture), without the consent ofthe Holders of all Bonds then Outstanding. It shall not be necessary for the consent of the Bondholders toapprove the particular form of any Supplemental Bond Indenture, but it shall be sufficient if such consentshall approve the substance thereof. Promptly after the execution by the Authority and the Bond Trusteeof any such Supplemental Bond Indenture, the Bond Trustee shall mail a notice, setting forth in generalterms the substance of such Supplemental Bond Indenture to the Bondholders at the addresses shown onthe registration books maintained by the Bond Trustee. Any failure to give such notice, or any defecttherein, shall not, however, in any way impair or affect the validity of any such Supplemental BondIndenture.

The Bond Indenture and the rights and obligations of the Authority, of the Bond Trusteeand of the Holders of the Bonds may also be modified or amended from time to time and at any time by aSupplemental Bond Indenture, which the Authority and the Bond Trustee may enter into without theconsent of any Bondholders, but with the written consent of the Corporation, but only to the extentpermitted by law and only for any one or more of the following purposes:

(a) to add to the covenants and agreements of the Authority in the Bond Indenturecontained other covenants and agreements thereafter to be observed, to pledge or assign additionalsecurity for the Bonds (or any portion thereof), or to surrender any right or power in the Bond Indenture

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reserved to or conferred upon the Authority, provided, that no such covenant, agreement, pledge,assignment or surrender shall materially adversely affect the interests of the Holders of the Bonds;

(b) to make such provisions for the purpose of curing any ambiguity, inconsistencyor omission, or of curing or correcting any defective provision, contained in the Bond Indenture, or inregard to matters or questions arising under the Bond Indenture, as the Authority, the Corporation or theBond Trustee may deem necessary or desirable and not inconsistent with the Bond Indenture, and whichshall not materially adversely affect the interests of the Holders of the Bonds;

(c) to modify, amend or supplement the Bond Indenture in such manner as to permitthe qualification of the Bond Indenture under the Trust Indenture Act of 1939, as amended, or any similarfederal statute hereafter in effect, and to add such other terms, conditions and provisions as may bepermitted by said act or similar federal statute, and which shall not materially adversely affect theinterests of the Holders of the Bonds;

(d) to provide any additional procedures, covenants or agreements to maintain theexclusion from gross income for federal income tax purposes of the interest on the Bonds, including theamendment of any Tax Certificate;

(e) to facilitate the transfer of Bonds from one Securities Depository to another orthe withdrawal from the Book-Entry system and the issuance of replacement Bonds in fully registeredform to Persons other than a Securities Depository;

(f) to make any changes required by a Rating Agency in order to obtain or maintaina rating for the Bonds; or

(g) to make any other changes which will not materially adversely affect the interestsof the Holders of the Bonds.

Discharge of Bond Indenture

The Bonds may be paid by the Authority or the Bond Trustee on behalf of the Authorityin any of the following ways:

(a) by paying or causing to be paid the principal or Redemption Price of and intereston all Bonds Outstanding, as and when the same become due and payable;

(b) by depositing with the Bond Trustee, in trust, at or before maturity, moneys orsecurities in the necessary amount to pay when due or redeem all Bonds then Outstanding; or

(c) by delivering to the Bond Trustee, for cancellation by it, all Bonds thenOutstanding.

If the Authority shall pay all Bonds Outstanding and shall also pay or cause to be paid allother sums payable under the Bond Indenture by the Authority, then and in that case at the election of theAuthority (evidenced by a Certificate of the Authority filed with the Bond Trustee signifying the intentionof the Authority to discharge all such indebtedness and the Bond Indenture), and notwithstanding that anyBonds shall not have been surrendered for payment, the Bond Indenture and the pledge of Revenues andother assets made under the Bond Indenture and all covenants, agreements and other obligations of theAuthority under the Bond Indenture (except as otherwise specifically provided in the Bond Indenture)shall cease, terminate, become void and be completely discharged and satisfied.

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Deposit of Money or Securities with Bond Trustee

Whenever in the Bond Indenture it is provided or permitted that there be deposited withor held in trust by the Bond Trustee money or securities in the necessary amount to pay or redeem anyBonds, the money or securities so to be deposited or held may include money or securities held by theBond Trustee in the funds and accounts established pursuant to the Bond Indenture (other than the RebateFund) and shall be:

(a) lawful money of the United States of America in an amount equal to the principalamount of such Bonds and all unpaid interest thereon to maturity, except that, in the case of Bonds whichare to be redeemed prior to maturity and in respect of which notice of such redemption shall have beengiven as provided in the Bond Indenture or provision satisfactory to the Bond Trustee shall have beenmade for the giving of such notice, the amount to be deposited or held shall be the principal amount orRedemption Price of such Bonds and all unpaid interest thereon to the redemption date; or

(b) United States Government Obligations (not callable by the issuer thereof prior tomaturity), the principal of and interest on which when due (without any income from the reinvestmentthereof) will provide money sufficient to pay the principal or Redemption Price of and all unpaid interestto maturity, or to the redemption date, as the case may be, on the Bonds to be paid or redeemed, as suchprincipal or Redemption Price and interest become due; provided that, in the case of Bonds which are tobe redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided inthe Bond Indenture or provision satisfactory to the Bond Trustee shall have been made for the giving ofsuch notice; provided, in each case, the Bond Trustee shall have been irrevocably instructed (by the termsof the Bond Indenture or by Request of the Authority) to apply such money to the payment of suchprincipal or Redemption Price and interest with respect to such Bond.

LOAN AGREEMENT

The Loan Agreement provides the terms of the loan of proceeds of the Bonds to theCorporation and the repayment of and security for such loan provided by the Corporation. Certain of theprovisions of the Loan Agreement are summarized below. This summary does not purport to be completeor definitive and is qualified in its entirety by reference to the full terms of the Loan Agreement.

Issuance of the Series 2010A Obligation

In consideration of the issuance of the Bonds by the Authority and the application of theproceeds thereof as provided in the Bond Indenture, the Corporation agrees to issue, and to cause to beauthenticated and delivered to the Authority or its designee, pursuant to the Master Indenture and theSeries 2010A Supplement, concurrently with the issuance and delivery of the Bonds, the Series 2010AObligation. The Authority agrees that the Series 2010A Obligation shall be registered in the name of theBond Trustee.

Payments of Principal, Premium and Interest

In consideration of the loan of such proceeds to the Corporation, the Corporation agreesthat, on or before the Business Day immediately preceding each Interest Payment Date and PrincipalPayment Date and as long as any of the Bonds remain Outstanding, it shall pay to the Bond Trustee fordeposit in the Revenue Fund such amount as is required by the Bond Trustee to make the transfers anddeposits required on next Interest Payment Date and/or Principal Payment Date by the Bond Indenture.Notwithstanding the foregoing, if on any Interest Payment Date or Principal Payment Date, the aggregateamount in the Revenue Fund is for any reason insufficient or unavailable to make the required payments

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of principal (or Redemption Price) of or interest on the Bonds then becoming due (whether by maturity,redemption or acceleration), the Corporation shall forthwith pay the amount of any such deficiency to theBond Trustee. Each payment by the Corporation to the Bond Trustee under the Loan Agreement shall bein lawful money of the United States of America and paid to the Bond Trustee, and held, invested,disbursed and applied as provided in the Bond Indenture.

Additional Payments

In addition to the Loan Repayments, the Corporation shall also pay to the Authority or tothe Bond Trustee, as the case may be, “Additional Payments,” as follows: (i) all taxes and assessments ofany type or character charged to the Authority or to the Bond Trustee affecting the amount available tothe Authority or the Bond Trustee from payments to be received under the Loan Agreement or arising dueto the transactions contemplated thereby; (ii) all reasonable fees and expenses of the Bond Trustee forservices rendered under the Bond Indenture, as and when the same become due and payable; (iii) thereasonable fees and expenses of such accountants, consultants, attorneys and other experts as may beengaged by the Authority or the Bond Trustee to prepare audits, financial statements, reports or opinionsor provide such other services required under the Loan Agreement, the Series 2010A Obligation, or theBond Indenture; and (iv) the annual fee of the Authority and the reasonable fees and expenses of theAuthority, or any agent selected by the Authority to act on its behalf, including the Attorney General ofthe State of California, in connection with the Loan Agreement, the Series 2010A Obligation, the Series2010A Supplement, the Master Indenture, the Bonds or the Bond Indenture. Such Additional Paymentsshall be billed to the Corporation by the Authority or the Bond Trustee from time to time and shall bepaid by the Corporation within 30 days after receipt of the bill by the Corporation.

Credits for Payments

The Corporation shall receive credit against its Loan Repayments, in addition to anycredits resulting from payment or repayment from other sources, as follows:

(a) on installments of interest in an amount equal to moneys deposited in the InterestAccount, to the extent such amounts have not previously been credited against such payments;

(b) on installments of principal in an amount equal to moneys deposited in thePrincipal Account, to the extent such amounts have not previously been credited against such payments;

(c) on installments of principal and interest in an amount equal to the principalamount of Bonds for the payment at maturity or redemption of which sufficient amounts (as determinedby the Bond Indenture) in cash or United States Government Obligations are on deposit as provided in theBond Indenture to the extent such amounts have not previously been credited against such payments, andthe interest on such Bonds from and after the date fixed for payment at maturity or redemption thereof.Such credits shall be made against the installments of principal, premium, if any, and interest whichwould have been used, but for such call for redemption, to pay principal of and interest on such Bondswhen due at maturity; and

(d) on installments of principal and interest in an amount equal to the principalamount of Bonds acquired by the Corporation and surrendered to the Bond Trustee for cancellation orpurchased by the Bond Trustee and cancelled, and the interest on such Bonds from and after the dateinterest thereon has been paid prior to cancellation. Such credits shall be made against the installments ofprincipal and interest which would have been used, but for such cancellation, to pay principal of andinterest on such Bonds when due.

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Prepayment

The Corporation shall have the right, so long as all amounts which have become dueunder the Loan Agreement have been paid, at any time or from time to time to prepay all or any part ofthe Loan Repayments and the Authority agrees that the Bond Trustee shall accept such prepayments whenthe same are tendered. Prepayments may be made by payments of cash, deposits of United StatesGovernment Obligations or surrender of Bonds. All such prepayments (and the additional payment ofany amount necessary to pay the applicable premium, if any, payable upon the redemption of Bonds) shallbe deposited upon receipt in the Optional Redemption Account of the Redemption Fund and, at therequest of and as determined by the Corporation, credited against payments due under the LoanAgreement or used for the redemption or purchase of Outstanding Bonds in the manner and subject to theterms and conditions set forth in the Bond Indenture. the Corporation also shall have the right tosurrender Bonds acquired by it in any manner whatsoever to the Bond Trustee for cancellation, and suchBonds, upon such surrender and cancellation, shall be deemed to be paid and retired, and in the case ofBonds shall be allocated as set forth in the Bond Indenture. Notwithstanding any such prepayment orsurrender of Bonds, as long as any Bonds remain Outstanding or any Additional Payments required to bemade under the Loan Agreement remain unpaid, the Corporation shall not be relieved of its obligationsthereunder.

Tax Covenant

The Corporation covenants and agrees that it will at all times do and perform all acts andthings permitted by law and the Loan Agreement which are necessary in order to assure that interest paidon the Bonds will be excluded from gross income for federal income tax purposes and will take no actionthat would result in such interest not being so excluded.

Continuing Disclosure

The Corporation covenants and agrees that it will enter into, comply with and carry outall of the provisions of a disclosure agreement with respect to the Bonds that complies with the provisionsof Rule 15c2-12 promulgated by the Securities and Exchange Commission (as amended from time totime, the “Rule”), in form and substance satisfactory to the Participating Underwriters. Notwithstandingany other provision of the Loan Agreement or the Bond Indenture, failure of the Corporation to enter intoand comply with the such a disclosure agreement shall not be considered a Loan Default Event or anEvent of Default; however, the Bond Trustee may and, at the request of any Participating Underwriter (asdefined in such Continuing Disclosure Agreement) or the Holders of at least 25% in aggregate principalamount of Outstanding Bonds, shall (but only to the extent it has been indemnified by the Corporation toits satisfaction from any loss, liability or expense, including without limitation, fees and expenses of itsattorneys and advisors and additional fees and expenses of the Bond Trustee) or any Bondholder orBeneficial Owner may take such actions as may be necessary and appropriate, including seeking specificperformance by court order, to cause the Corporation to comply with its obligations described in thisparagraph.

Events of Default

The following events will be “Loan Default Events”: (i) failure by the Corporation topay in full any Loan Repayment when such Loan Repayment is due and payable; (ii) failure of theCorporation to pay any other payment required under the Loan Agreement when due and payable; (iii) ifany material representation or warranty made by the Corporation in the Loan Agreement or in anydocument, instrument or certificate furnished to the Bond Trustee or the Authority in connection with theissuance of the Series 2010A Obligation or the Bonds shall at any time prove to have been incorrect in

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any respect as of the time made; (iv) failure by the Corporation to observe or perform any covenant,condition, agreement or provision in the Loan Agreement on its part to be observed or performed, otherthan as referred to in (i) - (iii) above, or breach of any warranty by the Corporation contained in the LoanAgreement, for a period of 60 days after written notice, specifying such failure or breach and requestingthat it be remedied, has been given to the Corporation by the Authority or the Bond Trustee; except that,if such failure or breach can be remedied but not within such 60-day period and if the Corporation hastaken all action reasonably possible to remedy such failure or breach within such 60-day period, suchfailure or breach shall not become a Loan Default Event for so long as the Corporation shall diligentlyproceed to remedy the same in accordance with and subject to any directions or limitations of timeestablished by the Bond Trustee; (v) certain incidents of bankruptcy, insolvency or similar conditions; or(vi) any Event of Default as defined in and under the Bond Indenture or the Master Indenture.

Remedies on Default

Upon the occurrence and during the continuance of any Loan Default Event, the BondTrustee on behalf of the Authority, at the Bond Trustee’s option but subject to the limitations in the BondIndenture as to the enforcement of remedies, may take such action as it deems necessary or appropriate tocollect amounts due under the Loan Agreement, to enforce performance and observance of any obligationor agreement of the Corporation under the Loan Agreement or to protect the interests securing the same,and may, among other things, declare upon written notice to the Corporation, an amount equal to allamounts then due and payable on the Bonds, whether by acceleration of maturity or otherwise, to beimmediately due and payable under the Loan Agreement, whereupon the same shall become immediatelydue and payable. The Authority or the Bond Trustee may take any action at law or in equity to collect thepayment required under the Loan Agreement then due, whether on the stated due date or by declaration ofacceleration or otherwise, for damages or for specific performance or otherwise to enforce performanceand observance of any obligation, agreement or covenant of the Corporation under the Loan Agreement.

Amendment of Loan Agreement

The Loan Agreement may be amended, changed or modified only as provided in theBond Indenture. See “Summary of Principal Documents – Bond Indenture – Amendment of LoanAgreement.”

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APPENDIX D

FORM OF OPINION OF BOND COUNSEL

[Delivery Date]

California Health Facilities Financing AuthoritySacramento, California

California Health Facilities Financing AuthorityRevenue Bonds (Scripps Health), Series 2010A

(Final Opinion)

Ladies and Gentlemen:

We have acted as bond counsel to the California Health Facilities Financing Authority(the “Authority”) in connection with the issuance of $120,000,000 aggregate principal amount ofCalifornia Health Facilities Financing Authority Revenue Bonds (Scripps Health), Series 2010A (the“Bonds”), issued pursuant to a Bond Indenture, dated as of January 1, 2010 (the “Bond Indenture”),between the Authority and U.S. Bank National Association, as trustee (the “Bond Trustee”). The BondIndenture provides that the Bonds are issued for the purpose of making a loan of the proceeds thereof toScripps Health (the “Corporation”) pursuant to a Loan Agreement, dated as of January 1, 2010 (the “LoanAgreement”), between the Authority and the Corporation. Capitalized terms not otherwise defined hereinshall have the meanings ascribed thereto in the Bond Indenture.

In such connection, we have reviewed the Bond Indenture, the Loan Agreement, the TaxCertificate and Agreement, dated the date hereof (the “Tax Agreement”), between the Authority and theCorporation, opinions of counsel to the Authority and the Corporation, certificates of the Authority, theBond Trustee, the Corporation and others, and such other documents, opinions and matters to the extentwe deemed necessary to render the opinions set forth herein.

We have relied on the opinion of Foley & Lardner LLP, counsel to the Corporation,regarding, among other matters, the current qualification of the Corporation as an organization describedin Section 501(c)(3) of the Internal Revenue Code of 1986 (the “Code”). We note that the opinion issubject to a number of qualifications and limitations. We have also relied upon representations of theCorporation regarding the use of the facilities financed with the proceeds of Bonds in activities that arenot considered unrelated trade or business activities of the Corporation within the meaning of Section 513of the Code. We note that the opinion of counsel to the Corporation does not address Section 513 of theCode. Failure of the Corporation to be organized and operated in accordance with the Internal RevenueService’s requirements for the maintenance of its status as an organization described in Section 501(c)(3)of the Code, or use of the bond-financed facilities in activities that are considered unrelated trade orbusiness activities of the Corporation within the meaning of Section 513 of the Code, may result ininterest on the Bonds being included in gross income for federal income tax purposes, possibly from thedate of issuance of the Bonds.

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The opinions expressed herein are based on an analysis of existing laws, regulations,rulings and court decisions and cover certain matters not directly addressed by such authorities. Suchopinions may be affected by actions taken or omitted or events occurring after the date hereof. We havenot undertaken to determine, or to inform any person, whether any such actions are taken or omitted orevents do occur or any other matters come to our attention after the date hereof. Accordingly, thisopinion speaks only as of its date and is not intended to, and may not, be relied upon in connection withany such actions, events or matters. Our engagement with respect to the Bonds has concluded with theirissuance, and we disclaim any obligation to update this letter. We have assumed the genuineness of alldocuments and signatures presented to us (whether as originals or as copies) and the due and legalexecution and delivery thereof by, and validity against, any parties other than the Authority. We haveassumed, without undertaking to verify, the accuracy of the factual matters represented, warranted orcertified in the documents, and of the legal conclusions contained in the opinions, referred to in thesecond and third paragraphs hereof. Furthermore, we have assumed compliance with all covenants andagreements contained in the Bond Indenture, the Loan Agreement and the Tax Agreement, including(without limitation) covenants and agreements compliance with which is necessary to assure that futureactions, omissions or events will not cause interest on the Bonds to be included in gross income forfederal income tax purposes. We call attention to the fact that the rights and obligations under the Bonds,the Bond Indenture, the Loan Agreement and the Tax Agreement and their enforceability may be subjectto bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and otherlaws relating to or affecting creditors’ rights, to the application of equitable principles and to the exerciseof judicial discretion in appropriate cases. We express no opinion with respect to any indemnification,contribution, penalty, choice of law, choice of forum, choice of venue, waiver or severability provisionscontained in the foregoing documents, nor do we express any opinion with respect to the state or qualityof title to or interest in any of the assets described in or as subject to the lien of the Bond Indenture, or theaccuracy or sufficiency of the description contained therein of, or the remedies available to enforce lienson, any such assets. Finally, we undertake no responsibility for the accuracy, completeness or fairness ofthe Official Statement, or other offering material relating to the Bonds and express no opinion withrespect thereto.

Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, weare of the following opinions:

1. The Bonds constitute the valid and binding limited obligations of the Authority.

2. The Bond Indenture has been duly executed and delivered by, and constitutes thevalid and binding obligation of, the Authority. The Bond Indenture creates a valid pledge, to secure thepayment of the principal of and interest on the Bonds, of the Revenues and any other amounts held by theBond Trustee in any fund or account established pursuant to the Bond Indenture, except the Rebate Fund,subject to the provisions of the Bond Indenture permitting the application thereof for the purposes and onthe terms and conditions set forth in the Bond Indenture.

3. The Loan Agreement has been duly executed and delivered by, and constitutes avalid and binding agreement of, the Authority.

4. The Bonds are not a lien or charge upon the funds or property of the Authorityexcept to the extent of the aforementioned pledge. Neither the faith and credit nor the taxing power of theState of California or of any political subdivision thereof is pledged to the payment of the principal of orinterest on the Bonds. The Bonds are not a debt of the State of California, and said State is not liable forthe payment thereof.

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5. Interest on the Bonds is excluded from gross income for federal income taxpurposes under Section 103 of the Code and is exempt from State of California personal income taxes.Interest on the Bonds is not a specific preference item for purposes of the federal individual or corporatealternative minimum taxes, nor is it included in adjusted current earnings when calculating corporatealternative minimum taxable income. We express no opinion regarding other tax consequences related tothe ownership or disposition of, or the accrual or receipt of interest on, the Bonds.

Faithfully yours,

ORRICK, HERRINGTON & SUTCLIFFE LLP

per

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APPENDIX E

BOOK-ENTRY ONLY SYSTEM

The Depository Trust Company (“DTC”), New York, New York, will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond certificate will be issued for each maturity of the Bonds, each in the aggregate principal amount of such maturity, and will be deposited with DTC.

DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has Standard & Poor’s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org.

Purchases of the Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book-entry system for the Bonds is discontinued.

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be

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the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of the Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of the Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of the notices be provided directly to them.

Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. a consenting or voting right to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Redemption proceeds, distributions, and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the Authority or the Bond Trustee, on the payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participants and not of DTC nor of its nominee, the Bond Trustee, or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or the Bond Trustee. Disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the Authority or the Bond Trustee. Under such circumstances, in the event that a successor securities depository is not obtained, Bond certificates are required to be printed and delivered.

The Authority may decide to discontinue use of the system of book-entry only transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered to DTC.

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The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the Authority and Scripps Health (“Scripps Health”) believe to be reliable, but neither the Authority, Scripps Health nor the Obligated Group take responsibility for the accuracy thereof.

The Authority, Scripps Health and the Obligated Group cannot and do not give any assurances that DTC will distribute to Participants or that Participants or others will distribute to the Beneficial Owners payments of principal of and interest and premium, if any, on the Bonds paid or any redemption or other notices or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. Neither the Authority, Scripps Health or the Obligated Group is responsible or liable for the failure of DTC or any Participant or Indirect Participant to make any payments or give any notice to a Beneficial Owner with respect to the Bonds or any error or delay relating thereto.

None of the Authority, Scripps Health, the Obligated Group or the Bond Trustee will have any responsibility or obligation to Participants, to Indirect Participants or to any Beneficial Owner with respect to (i) the accuracy of any records maintained by DTC, any Participant, or any Indirect Participant; (ii) the payment by DTC or any Participant or Indirect Participant of any amount with respect to the principal of or premium, if any, or interest on the Bonds; (iii) any notice that is permitted or required to be given to Holders under the Bond Indenture; (iv) the selection by DTC, any Participant or any Indirect Participant of any person to receive payment in the event of a partial redemption of the Bonds; (v) any consent given or other action taken by DTC as Bondholder; or (vi) any other procedures or obligations of DTC, Participants or Indirect Participants under the book-entry system.

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APPENDIX F

FORM OF CONTINUING DISCLOSURE CERTIFICATE

This Continuing Disclosure Certificate (this “Disclosure Certificate”) is executed and delivered by the Corporation (as defined below) and the Dissemination Agent (defined below) in connection with the issuance of $_____________ California Health Facilities Financing Authority Revenue Bonds (Scripps Health), Series 2010A (the “Bonds”). The Bonds are being issued pursuant to an Indenture, dated as of January 1, 2010 (the “Indenture”), between the California Health Facilities Financing Authority (the “Authority”) and U.S. Bank National Association, as trustee (the “Trustee”). The Authority will lend the proceeds of the Bonds to Scripps Health, a California nonprofit public benefit corporation (the “Corporation”), which loan will be evidenced by a Loan Agreement, dated as of January 1, 2010 (the “Loan Agreement”), between the Authority and the Corporation. The Corporation’s obligation under the Loan Agreement will be evidenced and secured by payments made by the Corporation under an Obligation issued by the Corporation under the Master Indenture of Trust dated as of December 1, 1985, as amended and restated as of May 1, 1998, (the “Master Indenture”) and as supplemented and amended to date, between the Corporation and The Bank of New York Mellon Trust Company, National Association, as successor master trustee. Pursuant to the terms of the Loan Agreement, the Corporation and Dissemination Agent agree as follows:

SECTION 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the Corporation and the Dissemination Agent for the benefit of the Holders and Beneficial Owners of the Bonds and in order to assist the Participating Underwriters in complying with the Rule (defined below). The Corporation and the Dissemination Agent acknowledge that the Authority has undertaken no responsibility with respect to any reports, notices or disclosures provided or required under this Disclosure Certificate and has no liability to any Person, including any Holder or Beneficial Owner of the Bonds, with respect to the Rule.

SECTION 2. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section, the following capitalized terms shall have the following meanings:

“Annual Report” shall mean any Annual Report provided by the Corporation pursuant to, and as described in, Sections 3 and 4 of this Disclosure Certificate.

“Beneficial Owner” shall mean any Person which has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any Bonds (including any Person holding Bonds through nominees, depositories or other intermediaries).

“Dissemination Agent” shall mean Digital Assurance Certification, L.L.C., or any successor Dissemination Agent designated in writing by the Corporation and which has filed with the Trustee a written acceptance of such designation.

“Holder” shall mean either the registered owners of the Bonds, or, if the Bonds are registered in the name of The Depository Trust Company or another recognized depository, any applicable participant in such depository system.

“Listed Events” shall mean any of the events listed in Section 5(a) of this Disclosure Certificate.

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“Repository” shall mean the Municipal Securities Rulemaking Board or any other entity designated or authorized by the Securities and Exchange Commission to receive reports pursuant to the Rule.

“Official Statement” shall mean the Official Statement relating to the Bonds, dated _____________, 2010.

“Participating Underwriter” shall mean the original underwriter of the Bonds required to comply with the Rule in connection with the offering of the Bonds.

“Rule” shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

“State” shall mean the State of California.

SECTION 3. Provision of Annual and Quarterly Reports.

(a) The Corporation shall, or shall cause the Dissemination Agent to, not later than six months after the end of the Corporation’s fiscal year (presently such fiscal year ends September 30), commencing with the report for the fiscal year ending September 30, 2010, provide to the Repository an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Certificate. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may cross-reference other information as provided in Section 4 of this Disclosure Certificate; provided, that the audited financial statements of the Corporation may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. If the Corporation’s fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(c).

(b) Not later than thirty (30) days (and not more than sixty (60) days) prior to the date on which the Annual Report is to be provided pursuant to subsection (a), the Dissemination Agent shall give notice to the Corporation that the Annual Report is so required to be filed in accordance with the terms of this Disclosure Certificate. Not later than fifteen (15) Business Days prior to the date specified in subsection (a) above for providing the Annual Report to the Repository, the Corporation shall provide the Annual Report to the Dissemination Agent and the Trustee. The Corporation shall provide a written certification with the Annual Report furnished to the Dissemination Agent and the Trustee to the effect that such Annual Report constitutes the Annual Report required to be furnished by the Corporation hereunder. The Dissemination Agent and the Trustee may conclusively rely upon such certification of the Corporation. If by fifteen (15) Business Days prior to such date, the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall contact the Corporation and the Trustee to notify the Corporation and the Trustee of the requirements of subsection (a) and this subsection (b).

(c) If the Corporation is unable to provide to the Repository an Annual Report by the date required in subsection (a) above, the Dissemination Agent shall send a notice, in electronic format, to the Repository in substantially the form attached as Exhibit A.

(d) The Dissemination Agent shall:

(i) determine each year, within five (5) Business Days of the date for providing the Annual Report, the name and address or website, if the Annual Report is being submitted electronically, of the Repository; and

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(ii) file a report with the Corporation, the Authority and the Trustee, certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, stating the date it was provided, and listing the Repository to which it was provided or that the Annual Report has not been provided to the Repository, as required by this Disclosure Certificate.

(e) The Corporation shall, not later than 75 days following the end of each of the first three fiscal quarters of each fiscal year, commencing with the report for the December 31, 2009 fiscal quarter, provide to the Repository and to any Bondholder requesting such report at least two Business days prior to the report being filed a report consistent with the requirements of Section 4(B).

(f) The Corporation covenants to provide the reports identified in Section 3(e) above to any Holder that requests such information from the Corporation at least two Business Days prior to the end of the fiscal quarter to which such report relates.

SECTION 4. Content of Annual Reports. (A) The Annual Report shall contain or include by reference the following:

(1) The audited consolidated financial statements of the Obligated Group for the fiscal year ended the previous September 30, prepared in accordance with generally accepted accounting principles. If such audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited consolidated financial statements shall be filed in the same manner as the Annual Report when they become available.

(2) An update of the financial information and operating data with respect to the Obligated Group for the prior fiscal year of the type included in the following tables in Appendix A of the Official Statement (to the extent not included in such audited financial statements):

(i) The estimated number of full-time equivalent employees of the Obligated Group, the percentage of the Obligated Group’s employees represented by collective bargaining units, and the number of the Obligated Group’s facilities with employees represented by collective bargaining units, in each case as of the end of the preceding fiscal year;

(ii) A list showing each Member of the Obligated Group and each Obligated Group Affiliate;

(iii) A list showing each acute-care hospital and skilled nursing facility of the Obligated Group and the approximate number of licensed beds for each facility;

(iv) The payer mix for the Obligated Group;

(v) Utilization information for the Members of the Obligated Group, as shown under the heading “Utilization Statistics;”

(vi) A table showing the capitalization of the Obligated Group; and

(vii) Information concerning the liquidity position of the Obligated Group as shown under the heading “Liquidity Position.”

Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the Obligated Group or related public entities, which have

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been submitted to the Repository or the Securities and Exchange Commission. If the document included by reference is a final official statement, it must be available from the Repository. The Corporation shall clearly identify each such other document so included by reference.

(B) The quarterly reports required pursuant to Section 3(e) shall contain or include by reference the unaudited summarized financial statements of the Obligated Group, including a statement of financial position and a statement of operations.

SECTION 5. Reporting of Significant Events.

(a) Pursuant to the provisions of this Section 5, the Corporation shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds, if material under applicable federal securities laws:

1. Principal and interest payment delinquencies;

2. Non-payment related defaults;

3. Modifications to rights of Bondholders;

4. Optional, contingent or unscheduled bond calls;

5. Defeasances;

6. Rating changes;

7. Adverse tax opinions or events affecting the tax-exempt status of the Bonds;

8. Unscheduled draws on debt service reserves reflecting financial difficulties;

9. Unscheduled draws on credit enhancements reflecting financial difficulties;

10. Substitution of credit or liquidity providers or their failure to perform; or

11. Release, substitution or sale of property securing repayment of the Bonds.

(b) Whenever the Corporation obtains knowledge of the occurrence of a Listed Event, the Corporation shall, as soon as possible, determine if such event would be material under applicable federal securities laws.

(c) If the Corporation has determined that knowledge of the occurrence of a Listed Event would be material under applicable federal securities laws, the Corporation shall promptly notify the Dissemination Agent in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection (d) below.

(d) If the Dissemination Agent has been instructed by the Corporation to report the occurrence of a Listed Event, the Dissemination Agent shall file a notice of such occurrence with the Repository, with a copy to the Corporation. Notwithstanding the foregoing, notice of Listed Events described in subsections 5(a)(4) and (5) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to the Holders of affected Bonds pursuant to the Indenture.

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SECTION 6. Termination of Reporting Obligation. The Corporation’s obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior prepayment or payment in full of all of the Bonds. If such termination occurs prior to the final maturity of the Bonds, the Corporation shall give notice of such termination in the same manner as for a Listed Event under Section 5(d). If the Corporation’s obligations under the Loan Agreement are assumed in full by some other entity, such Person shall be responsible for compliance with this Disclosure Certificate relating thereto in the same manner as if it were the Corporation and the Corporation shall have no further responsibility hereunder with respect thereto.

SECTION 7. Dissemination Agent. The Corporation may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The initial Dissemination Agent shall be Digital Assurance Certification L.L.C. If at any time there is no designated Dissemination Agent appointed by the Corporation, or if the Dissemination Agent so appointed is unwilling or unable to perform the duties of the Dissemination Agent hereunder, Digital Assurance Certification L.L.C. shall be the Dissemination Agent and undertake or assume the obligations hereunder. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report required to be delivered by the Corporation pursuant to this Disclosure Certificate.

SECTION 8. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the Corporation may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied:

(a) If the amendment or waiver relates to the provisions of Sections 3(a), 4 or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an “obligated person” (as defined in the Rule) with respect to the Bonds, or the type of business conducted;

(b) The undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original execution and delivery of the Bonds after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and

(c) The amendment or waiver either (i) is approved by the Holders of the Bonds in the same manner as provided in the Indenture for amendments to such Indenture with the consent of Holders, or (ii) does not, in the opinion of Bond Counsel, materially impair the interests of the Holders or Beneficial Owners of the Bonds.

In the event of any amendment or waiver of a provision of this Disclosure Certificate, the Corporation shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the Corporation. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5(d), and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles.

SECTION 9. Additional Information. Nothing in this Disclosure Certificate shall be deemed to prevent the Corporation from disseminating any other information, using the means of dissemination set

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forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the Corporation chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the Corporation shall have no obligation hereunder to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

SECTION 10. Default. In the event of a failure of the Corporation to comply with any provision of this Disclosure Certificate, the Dissemination Agent may, (and, at the request of any Participating Underwriter or the Holders or Beneficial Owners of at least 25% aggregate principal amount of Outstanding Bonds, shall) or the Trustee or any Holders or Beneficial Owners of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Corporation to comply with its obligations under this Disclosure Certificate. Upon any such default, the Dissemination Agent is required to promptly notify (and confirm in writing) the Authority of such event but the Authority has no duties pursuant to this Disclosure Certificate as a result of being so notified. A default under this Disclosure Certificate shall not be deemed an event of default under the Loan Agreement, and the sole remedy under this Disclosure Certificate in the event of any failure of the Corporation to comply with this Disclosure Certificate shall be an action to compel performance.

SECTION 11. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and the Corporation agrees to indemnify and save the Dissemination Agent and its officers, directors, employees and agents, harmless against any loss, expense and liabilities which they may incur arising out of or in the exercise or performance of their powers and duties hereunder, including the costs and expenses (including reasonable attorney’s fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent’s negligence or willful misconduct. The obligations of the Corporation under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds.

SECTION 12. Notices. Any notice, request or other communication required or permitted to be given under this Certificate shall be in writing and deemed to have been properly given upon receipt at the applicable address set forth below.

Corporation: Scripps Health 4275 Campus Point Court San Diego, CA 92121 Attention: Richard K. Rothberger

Dissemination Agent: Digital Assurance Certification, L.L.C. (DAC)

390 North Orange Avenue, Suite 1750 Orlando, Florida 32801 Attention: Shana L. Shanks

SECTION 13. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the Borrower, the Authority, the Dissemination Agent, the Participating Underwriter, the Holders and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity.

SECTION 14. Counterparts. This Certificate may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all of which counterparts shall together constitute but one and the same instrument.

Dated: ____________, 2010

SCRIPPS HEALTH

By: ______________________________________ Richard K. Rothberger

Executive Vice President and Chief Financial Officer

DIGITAL ASSURANCE CERTIFICATION, L.L.C., as Dissemination Agent

By: ______________________________________ Authorized Officer

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EXHIBIT A

FORM OF NOTICE TO REPOSITORY OF FAILURE TO FILE ANNUAL REPORT

Name of Issuer: California Health Facilities Financing Authority

Names of Bond Issue: California Health Facilities Financing Authority Revenue Bonds (Scripps Health), Series 2010A.

Date of Issuance: Date of Delivery

NOTICE IS HEREBY GIVEN that Scripps Health (the “Corporation”) has not provided an Annual Report with respect to the above-named Bonds as required by the Continuing Disclosure Certificate executed by the Corporation on the date of issuance of the Bonds. The Corporation anticipates that the Annual Report will be filed by _____________.

Dated:_______________

DIGITAL ASSURANCE CERTIFICATION, L.L.C.,

as Dissemination Agent

By: ______________________________________ Dissemination Agent

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