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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|  |  | (Mark One)                                                                             
|x |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

|                                     |  |                                                                                                                        
|------------------------------------ |  | -----------------------------------------------------------------------------------------------------------------------
|For the Quarter Ended March 31, 2003
|o                                    |  | Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the Period From    to    .

Commission File Number: 000-32499

SELECT MEDICAL CORPORATION

(Exact name of Registrant as specified in its charter)


|                                                                        |  |                                                   
|----------------------------------------------------------------------- |  | --------------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 23-2872718
(I.R.S. employer identification
number)

4716 Old Gettysburg Road, P.O. Box 2034, Mechanicsburg, Pennsylvania 17055
(Address of principal executive offices and zip code)

(717) 972-1100
(Registrants telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES  
x        NO   o

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

YES  
x        NO   o

As of April 30, 2003, the number of outstanding shares of the Registrants
Common Stock was 47,475,097.



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TABLE OF CONTENTS





TABLE OF CONTENTS



|                                                   |                                                                                               |                                                                                           |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION                      
|                                                   | ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS                                                    
|                                                   |                                                                                               | Consolidated Balance Sheets                                                              
|                                                   |                                                                                               | Consolidated Statements of Operations                                                    
|                                                   |                                                                                               | Consolidated Statement of Changes in Stockholders Equity and Comprehensive Income (Loss)
|                                                   |                                                                                               | Consolidated Statements of Cash Flows                                                    
|                                                   |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                                   
|                                                   | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                   | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                                   | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II OTHER INFORMATION                         
|                                                   | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                                                   | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                                                   | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                                                   | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                                                   | ITEM 5. OTHER INFORMATION                                                                    
|                                                   | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                        
|WAIVER, DATED AS OF MARCH 18, 2003 TO CREDIT AGREE
|CERTIFICATION OF PRESIDENT & C.E.O.               
|CERTIFICATION OF SENIOR VICE PRESIDENT & C.F.O.   



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|          |  |                                                                 |  |  |    |  |    | 
|--------- |  | --------------------------------------------------------------- |  |  | -- |  | -- | 
|PART I    |  | FINANCIAL INFORMATION                                           |  |  | 3  | 
|ITEM 1.   |  | CONSOLIDATED FINANCIAL STATEMENTS                               |  |  |    | 
|          |  | Consolidated balance sheets                                     |  |  | 3  | 
|          |  | Consolidated statements of operations                           |  |  | 4  | 
|          |  | Consolidated
statement of changes in stockholders equity       |  |  | 5  | 
|          |  | Consolidated statements of cash flows                           |  |  | 6  | 
|          |  | Notes to consolidated financial statements                      |  |  | 7  | 
|ITEM 2.   |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND |  |  |    | 
|          |  | RESULTS OF OPERATIONS                                           |  |  | 18 | 
|ITEM 3.   |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      |  |  | 29 | 
|ITEM 4.   |  | CONTROLS AND PROCEDURES                                         |  |  | 29 | 
|PART II   |  | OTHER INFORMATION                                               |  |  | 29 | 
|ITEM 1.   |  | LEGAL PROCEEDINGS                                               |  |  | 29 | 
|ITEM 2.   |  | CHANGES IN SECURITIES AND USE OF PROCEEDS                       |  |  | 30 | 
|ITEM 3.   |  | DEFAULTS UPON SENIOR SECURITIES                                 |  |  | 30 | 
|ITEM 4.   |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS             |  |  | 30 | 
|ITEM 5.   |  | OTHER INFORMATION                                               |  |  | 30 | 
|ITEM 6.   |  | EXHIBITS AND REPORTS ON FORM 8-K                                |  |  | 30 | 
|SIGNATURE |  |                                                                 |  |  |    |  | 31 | 

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PART I  FINANCIAL INFORMATION




ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS




Select Medical Corporation
Consolidated Balance Sheets
(in thousands, except share and per share amounts)

|                                                       |                                                                                                                                          |   |                                      |         |             |   |              |         |   |  | 
|------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------------------------ | ------- | ----------- | - | ------------ | ------- | - |  | 
|                                                       |                                                                                                                                          |   |                                      |         | March 31,   |   | December 31,
|                                                       |                                                                                                                                          |   |                                      |         | 2003        |   | 2002        
|                                                       |                                                                                                                                          |   |                                      |         |             |   |             
|                                                       |                                                                                                                                          |   |                                      |         | (unaudited) |   |              |         |  
|Assets                                                 |                                                                                                                                          |   |                                      |         |             |   |              |        
|Current Assets:                                        |                                                                                                                                          |   |                                      |         |             |   |              |        
|                                                       | Cash and cash equivalents                                                                                                                |   | $                                    | 38,528  |             |   | $            | 56,062  |  
|                                                       | Accounts receivable, net of allowance for doubtful accounts of $87,204
and $79,815 in 2003 and 2002, respectively                        |   |                                      | 222,609 |             |   |              | 233,105 |  
|                                                       | Current deferred tax asset                                                                                                               |   |                                      | 42,268  |             |   |              | 40,125  |  
|                                                       | Other current assets                                                                                                                     |   |                                      | 17,663  |             |   |              | 17,601  |  
|                                                       |                                                                                                                                          |   |                                      |         |             |   |              |        
|Total Current Assets                                   |                                                                                                                                          |   | 321,068                              |         |             |   | 346,893      |        
|Property and equipment, net                            |                                                                                                                                          |   | 113,516                              |         |             |   | 114,707      |        
|Goodwill                                               |                                                                                                                                          |   | 208,096                              |         |             |   | 196,887      |        
|Trademark                                              |                                                                                                                                          |   | 37,875                               |         |             |   | 37,875       |        
|Intangible assets                                      |                                                                                                                                          |   | 941                                  |         |             |   | 8,969        |        
|Non-current deferred tax asset                         |                                                                                                                                          |   | 5,803                                |         |             |   | 7,995        |        
|Other assets                                           |                                                                                                                                          |   | 16,761                               |         |             |   | 25,733       |        
|                                                       |                                                                                                                                          |   |                                      |         |             |   |              |        
|Total Assets                                           |                                                                                                                                          | $ | 704,060                              |         |             | $ | 739,059      |        
|                                                       |                                                                                                                                          |   |                                      |         |             |   |              |        
|                                                       |                                                                                                                                          |   | Liabilities and Stockholders Equity |         |             |   |              |         |   |  | 
|Current Liabilities:                                   |                                                                                                                                          |   |                                      |         |             |   |              |        
|                                                       | Bank overdrafts                                                                                                                          |   | $                                    | 8,087   |             |   | $            | 11,121  |  
|                                                       | Current portion of long-term debt and notes payable                                                                                      |   |                                      | 21,432  |             |   |              | 29,470  |  
|                                                       | Accounts payable                                                                                                                         |   |                                      | 37,529  |             |   |              | 38,590  |  
|                                                       | Accrued payroll                                                                                                                          |   |                                      | 34,315  |             |   |              | 34,891  |  
|                                                       | Accrued vacation                                                                                                                         |   |                                      | 16,249  |             |   |              | 15,195  |  
|                                                       | Accrued restructuring                                                                                                                    |   |                                      | 682     |             |   |              | 800     |  
|                                                       | Accrued other                                                                                                                            |   |                                      | 44,862  |             |   |              | 36,306  |  
|                                                       | Income taxes payable                                                                                                                     |   |                                      | 15,392  |             |   |              | 23,722  |  
|                                                       | Due to third party payors                                                                                                                |   |                                      | 9,377   |             |   |              | 26,177  |  
|                                                       |                                                                                                                                          |   |                                      |         |             |   |              |        
|Total Current Liabilities                              |                                                                                                                                          |   | 187,925                              |         |             |   | 216,272      |        
|Long-term debt, net of current portion                 |                                                                                                                                          |   | 206,488                              |         |             |   | 230,747      |        
|                                                       |                                                                                                                                          |   |                                      |         |             |   |              |        
|Total Liabilities                                      |                                                                                                                                          |   | 394,413                              |         |             |   | 447,019      |        
|Commitments and Contingencies                          |                                                                                                                                          |   |                                      |         |             |   |              |        
|Minority interest in consolidated subsidiary companies |                                                                                                                                          |   | 5,088                                |         |             |   | 5,622        |        
|Stockholders Equity:                                  |                                                                                                                                          |   |                                      |         |             |   |              |        
|                                                       | Common stock - $.01 par
value: Authorized shares - 200,000,000,
Issued shares - 47,465,000 and 46,676,000 in 2003 and 2002, respectively |   |                                      | 475     |             |   |              | 467     |  
|                                                       | Capital in excess of par                                                                                                                 |   |                                      | 237,887 |             |   |              | 236,183 |  
|                                                       | Retained earnings                                                                                                                        |   |                                      | 64,609  |             |   |              | 50,155  |  
|                                                       | Accumulated
other comprehensive income (loss)                                                                                            |   |                                      | 1,588   |             |   |              | (387    | )
|                                                       |                                                                                                                                          |   |                                      |         |             |   |              |        
|Total Stockholders Equity                             |                                                                                                                                          |   | 304,559                              |         |             |   | 286,418      |        
|                                                       |                                                                                                                                          |   |                                      |         |             |   |              |        
|Total Liabilities and Stockholders Equity             |                                                                                                                                          | $ | 704,060                              |         |             | $ | 739,059      |        
|                                                       |                                                                                                                                          |   |                                      |         |             |   |              |        

See accompanying notes.

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Select Medical Corporation
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)

|                                                       |  |                               |                         |   |                                |      |         |   |         |      | 
|------------------------------------------------------ |  | ----------------------------- | ----------------------- | - | ------------------------------ | ---- | ------- | - | ------- | ---- | 
|                                                       |  |                               |                         |   | For the
Quarter EndedMarch 31,
|                                                       |  |                               |                         |   |                               
|                                                       |  |                               |                         |   | 2003                           |      | 2002   
|                                                       |  |                               |                         |   |                                |      |        
|Net operating revenues                                 |  | $                             | 312,307                 |   |                                | $    | 271,920 |  
|                                                       |  |                               |                         |   |                                |      |         |  
|Costs and expenses:                                    |  |                               |                         |   |                                |      |         |  
|                                                       |  | Cost of services              |                         |   | 252,269                        |      |         |   | 221,735 |     
|                                                       |  | General and administrative    |                         |   | 9,503                          |      |         |   | 9,686   |     
|                                                       |  | Bad debt expense              |                         |   | 12,183                         |      |         |   | 10,443  |     
|                                                       |  | Depreciation and amortization |                         |   | 7,514                          |      |         |   | 6,026   |     
|                                                       |  |                               |                         |   |                                |      |         |  
|Total costs and expenses                               |  |                               | 281,469                 |   |                                |      | 247,890 |  
|                                                       |  |                               |                         |   |                                |      |         |  
|Income from operations                                 |  |                               | 30,838                  |   |                                |      | 24,030  |  
|Other income and expense:                              |  |                               |                         |   |                                |      |         |  
|Interest income                                        |  |                               | (186                    | ) |                                |      | (71     | )
|Interest expense                                       |  |                               | 6,426                   |   |                                |      | 6,778   |  
|                                                       |  |                               |                         |   |                                |      |         |  
|Income before minority interests and income taxes      |  |                               | 24,598                  |   |                                |      | 17,323  |  
|Minority interest in consolidated subsidiary companies |  |                               | 824                     |   |                                |      | 603     |  
|                                                       |  |                               |                         |   |                                |      |         |  
|Income before income taxes                             |  |                               | 23,774                  |   |                                |      | 16,720  |  
|Income tax expense                                     |  |                               | 9,320                   |   |                                |      | 6,544   |  
|                                                       |  |                               |                         |   |                                |      |         |  
|Net income                                             |  | $                             | 14,454                  |   |                                | $    | 10,176  |  
|                                                       |  |                               |                         |   |                                |      |         |  
|Net income per common share:                           |  |                               |                         |   |                                |      |         |  
|                                                       |  | Basic:                        |                         |   |                                |      |         |   |         |     
|                                                       |  |                               | Income per common share |   | $                              | 0.31 |         |   | $       | 0.22 | 
|                                                       |  | Diluted:                      |                         |   |                                |      |         |   |         |     
|                                                       |  |                               | Income per common share |   | $                              | 0.29 |         |   | $       | 0.21 | 
|Weighted average shares outstanding:                   |  |                               |                         |   |                                |      |         |  
|                                                       |  | Basic                         |                         |   | 47,150                         |      |         |   | 46,080  |     
|                                                       |  | Diluted                       |                         |   | 49,201                         |      |         |   | 48,624  |     

See accompanying notes.

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Select Medical Corporation
Consolidated Statement of Changes in Stockholders Equity and Comprehensive Income (Loss)
(in thousands)
(unaudited)

|                             |                                       |  |        |     |           |   |           |   |            |   |               |       |               |   |        |        |  |   |             |       |  |  |   |        | 
|---------------------------- | ------------------------------------- |  | ------ | --- | --------- | - | --------- | - | ---------- | - | ------------- | ----- | ------------- | - | ------ | ------ |  | - | ----------- | ----- |  |  | - | ------ | 
|                             |                                       |  |        |     |           |   |           |   |            |   |               |       |               |   |        |        |  |   | Accumulated |       |  |  |  
|                             |                                       |  |        |     |           |   | Common    |   | Capital in |   |               |       |               |   | Other  |        |  |   |            
|                             |                                       |  | Common |     | Stock Par |   | Excess of |   | Retained   |   | Comprehensive |       | Comprehensive
|                             |                                       |  | Stock  |     | Value     |   | Par       |   | Earnings   |   | Income(Loss)  |       | Income       
|                             |                                       |  |        |     |           |   |           |   |            |   |               |       |              
|Balance at December 31, 2002 |                                       |  | 46,676 |     |           | $ | 467       |   |            | $ | 236,183       |       |               | $ | 50,155 |        |  | $ | (387        | )     |  |  |   |       
|                             | Net income                            |  |        |     |           |   |           |   |            |   |               |       |               |   |        | 14,454 |  |   |             |       |  |  | $ | 14,454 | 
|                             | Other comprehensive income            |  |        |     |           |   |           |   |            |   |               |       |               |   |        |        |  |   |             | 1,975 |  |  |   | 1,975  | 
|                             |                                       |  |        |     |           |   |           |   |            |   |               |       |               |   |        |        |  |   |             |       |  |  |   |       
|                             | Total comprehensive income            |  |        |     |           |   |           |   |            |   |               |       |               |   |        |        |  |   |             |       |  |  | $ | 16,429 | 
|                             |                                       |  |        |     |           |   |           |   |            |   |               |       |               |   |        |        |  |   |             |       |  |  |   |       
|                             | Issuance of common stock              |  |        | 789 |           |   |           | 8 |            |   |               | 1,487 |               |   |        |        |  |   |             |       |  |  |   |        | 
|                             | Tax benefit of stock option exercises |  |        |     |           |   |           |   |            |   |               | 217   |               |   |        |        |  |   |             |       |  |  |   |        | 
|                             |                                       |  |        |     |           |   |           |   |            |   |               |       |               |   |        |        |  |   |             |       |  |  |   |       
|Balance at March 31, 2003    |                                       |  | 47,465 |     |           | $ | 475       |   |            | $ | 237,887       |       |               | $ | 64,609 |        |  | $ | 1,588       |       |  |  |   |       
|                             |                                       |  |        |     |           |   |           |   |            |   |               |       |               |   |        |        |  |   |             |       |  |  |   |       

See accompanying notes.

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Select Medical Corporation
Consolidated Statements of Cash Flows

(in thousands)
(unaudited)

|                                                                                  |                                                                                             |                           |         |                       |         |      |         |        |         |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------- | ------- | --------------------- | ------- | ---- | ------- | ------ | ------- | -
|                                                                                  |                                                                                             |                           |         | For the Quarter Ended
|                                                                                  |                                                                                             |                           |         | March 31,            
|                                                                                  |                                                                                             |                           |         |                      
|                                                                                  |                                                                                             |                           |         | 2003                  |         | 2002
|                                                                                  |                                                                                             |                           |         |                       |         |     
|Operating activities                                                              |                                                                                             |                           |         |                       |         |      |         |       
|Net income                                                                        |                                                                                             | $                         | 14,454  |                       |         | $    | 10,176  |       
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                                             |                           |         |                       |         |      |         |       
|                                                                                  | Depreciation and amortization                                                               |                           |         | 7,514                 |         |      |         | 6,026  |        
|                                                                                  | Provision for bad debts                                                                     |                           |         | 12,183                |         |      |         | 10,443 |        
|                                                                                  | Minority interests                                                                          |                           |         | 824                   |         |      |         | 603    |        
|                                                                                  | Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |                           |         |                       |         |      |         |        |        
|                                                                                  |                                                                                             | Accounts receivable       |         |                       | 6,707   |      |         |        | (15,754 | )
|                                                                                  |                                                                                             | Other current assets      |         |                       | (10     | )    |         |        | (141    | )
|                                                                                  |                                                                                             | Other assets              |         |                       | 1,573   |      |         |        | 461     |  
|                                                                                  |                                                                                             | Accounts payable          |         |                       | (369    | )    |         |        | 934     |  
|                                                                                  |                                                                                             | Due to third-party payors |         |                       | (16,799 | )    |         |        | 8,009   |  
|                                                                                  |                                                                                             | Accrued expenses          |         |                       | 5,240   |      |         |        | 9,350   |  
|                                                                                  |                                                                                             | Income taxes              |         |                       | (6,887  | )    |         |        | 4,046   |  
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |       
|Net cash provided by operating activities                                         |                                                                                             |                           | 24,430  |                       |         |      | 34,153  |       
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |       
|Investing activities                                                              |                                                                                             |                           |         |                       |         |      |         |       
|Purchases of property and equipment, net                                          |                                                                                             |                           | (6,973  | )                     |         |      | (8,959  | )     
|Earnout payments                                                                  |                                                                                             |                           | (429    | )                     |         |      | (489    | )     
|Acquisition of businesses, net of cash acquired                                   |                                                                                             |                           | (732    | )                     |         |      |        |       
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |       
|Net cash used in investing activities                                             |                                                                                             |                           | (8,134  | )                     |         |      | (9,448  | )     
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |       
|Financing activities                                                              |                                                                                             |                           |         |                       |         |      |         |       
|Net repayments on credit facility debt                                            |                                                                                             |                           | (30,562 | )                     |         |      | (8,991  | )     
|Principal payments on seller and other debt                                       |                                                                                             |                           | (1,719  | )                     |         |      | (2,740  | )     
|Proceeds from issuance of common stock                                            |                                                                                             |                           | 1,495   |                       |         |      | 973     |       
|Proceeds from (repayment of) bank overdrafts                                      |                                                                                             |                           | (3,034  | )                     |         |      | 595     |       
|Payment of deferred financing costs                                               |                                                                                             |                           |        |                       |         |      | (67     | )     
|Distributions to minority interests                                               |                                                                                             |                           | (127    | )                     |         |      | (159    | )     
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |       
|Net cash used in financing activities                                             |                                                                                             |                           | (33,947 | )                     |         |      | (10,389 | )     
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |       
|Effect of exchange rate changes on cash
and cash equivalents                      |                                                                                             |                           | 117     |                       |         |      | (3      | )     
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |       
|Net increase (decrease) in cash and cash equivalents                              |                                                                                             |                           | (17,534 | )                     |         |      | 14,313  |       
|Cash and cash equivalents at beginning of period                                  |                                                                                             |                           | 56,062  |                       |         |      | 10,703  |       
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |       
|Cash and cash equivalents at end of period                                        |                                                                                             | $                         | 38,528  |                       |         | $    | 25,016  |       
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |       
|Supplemental Cash Flow Information                                                |                                                                                             |                           |         |                       |         |      |         |       
|Cash paid for interest                                                            |                                                                                             | $                         | 1,872   |                       |         | $    | 2,212   |       
|Cash paid for income taxes                                                        |                                                                                             | $                         | 16,321  |                       |         | $    | 2,218   |       

See accompanying notes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.   Basis of Presentation

The unaudited condensed consolidated financial statements of Select
Medical Corporation (the Company) as of March 31, 2003 and for the three
month periods ended March 31, 2003 and 2002, have been prepared in accordance
with generally accepted accounting principles. In the opinion of management,
such information contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for such periods.
All intercompany transactions and balances have been eliminated. The results
of operations for the three
months ended March 31, 2003 are not necessarily indicative of the results to be
expected for the full fiscal year ending December 31, 2003.

Certain information and disclosures normally included in the notes to
consolidated financial statements have been condensed or omitted as permitted
by the rules and regulations of the Securities and Exchange Commission,
although the Company believes the disclosure is adequate to make the
information presented not misleading. The accompanying unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 2002
contained in the Companys Form 10-K filed with the Securities Exchange
Commission.

2.   Accounting Policies

Reclassifications

Certain reclassifications have been made to prior-year amounts in order to
conform to the current-year presentation.

Use of Estimates

The preparation of financial statements in conformity with 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 financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Insurance Risk Programs

The Company is insured for malpractice claims based on claims made or
claims incurred policies purchased in the commercial insurance market. The Companys
policies prior to December 31, 2002 had low deductibles, or self-insured
retention levels. A self-insured retention is a minimal amount of liability
and legal fees that the Company must pay for each claim. The policy that
became effective on December 31, 2002 contains substantial self-insured
retentions for the Companys professional liability claims. The company
utilizes an actuary to determine the value of the losses that may occur within
this self-insured retention level and adjusts its accruals based upon this
analysis. To the extent that subsequent claims information varies from loss
estimates, the accruals for these liabilities are adjusted to current loss data.

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Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities,
an interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to improve financial reporting of special purpose and
other entities. In accordance with the interpretation, business enterprises
that represent the primary beneficiary of another entity by retaining a
controlling financial interest in that entitys assets, liabilities, and
results of operations must consolidate the entity in their financial
statements. Prior to the issuance of FIN 46, consolidation generally occurred
when an enterprise controlled another entity through voting interests. FIN 46
is effective immediately for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of
FIN 46 must be applied for the first interim or annual period beginning after
June 15, 2003. The Company does not expect FIN 46 to have a material impact on
its financial statements.

In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 145 Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. As a result of rescinding SFAS
No. 4, Reporting Gains and Losses from Extinguishment of Debt, the
requirement that gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item, net of the related
income tax effect is eliminated. The Company reported extraordinary items in
2000 and 2001 as a result of debt extinguishments. The provisions of SFAS 145
that affect the Company are effective for fiscal periods beginning after May
15, 2002, although early adoption of SFAS 145 is permitted. In
accordance with the provisions of SFAS No. 145, the Company
adopted this pronouncement in the first quarter of 2003. As a result of the
adoption of SFAS No. 145 the Company reclassified its extraordinary items
recorded in 2000 and 2001 to the other income and expense category of its
consolidated statement of operations.

Stock Option Plans

During the three months ended March 31, 2003, the Company granted stock
options under its Second Amended and Restated 1997 Stock Option Plan totaling
48,010 shares of Common Stock at the exercise price of $13.35 per share. In
addition, the Company granted stock options under its 2002 Non-Employee
Directors Plan totaling 29,000 shares of Common Stock at the exercise price of
$13.35 per share.

As permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation (SFAS No. 123), the Company has
chosen to apply APB Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25) and related interpretations in accounting for its Plans. Accordingly,
no compensation cost has been recognized for options granted under the Plans.
Had compensation costs for the Plans been determined based on the fair value at
the grant dates for awards under the Plans consistent with the method of SFAS
No. 123, approximately $1,080,000 and $2,080,000 of additional compensation
expense, net of tax, would have been recognized during the three months ended
March 31, 2003 and 2002, respectively.

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For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The Companys
pro forma net earnings and earnings per share assuming compensation costs had
been recognized consistent with the fair value method under SFAS No. 123 were
as follows:

|                                         |                                        |   |                                      |      |      |   |            |      | 
|---------------------------------------- | -------------------------------------- | - | ------------------------------------ | ---- | ---- | - | ---------- | ---- | 
|                                         |                                        |   | For the Three Months Ended March 31,
|                                         |                                        |   |                                     
|                                         |                                        |   | 2003                                 |      | 2002
|                                         |                                        |   |                                      |      |     
|Net
income  as reported                 |                                        | $ | 14,454,000                           |      |      | $ | 10,176,000 |     
|Net
income  pro forma                   |                                        |   | 13,374,000                           |      |      |   | 8,096,000  |     
|                                         | Weighted average grant-date fair value |   |                                      | 6.60 |      |   |            | 5.38 | 
|Basic earnings per share  as reported   |                                        |   | 0.31                                 |      |      |   | 0.22       |     
|Basic earnings per share  pro forma     |                                        |   | 0.29                                 |      |      |   | 0.17       |     
|Diluted earnings per share  as reported |                                        |   | 0.29                                 |      |      |   | 0.21       |     
|Diluted earnings per share  pro forma   |                                        |   | 0.27                                 |      |      |   | 0.17       |     

Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income at March 31, 2003
consist of cumulative translation adjustment gains of $1,921,000 associated
with the Companys Canadian operations and unrealized losses on
available-for-sale securities of $333,000, net of tax.

3.   Intangible Assets

Amortization expense
for intangible assets with finite lives for the three months ended March 31, 2003 was $7,000. Estimated amortization expense for
intangible assets for each of the five years commencing
January 1, 2003 will be approximately $28,000.

Intangible assets consist of the following:



|                               |  |                      |             |                         |  |   |          |  
|------------------------------ |  | -------------------- | ----------- | ----------------------- |  | - | -------- | -
|                               |  | As of March 31,
2003
|
|                               |  |                     
|                               |  | Gross
CarryingAmount |             | AccumulatedAmortization
|Amortized intangible assets    |  |                      |             |                         |  |   |          |  
|Management services agreements |  | $                    | 1,081,000   |                         |  | $ | (140,000 | )
|                               |  |                      |             |                        
|                              
|Unamortized intangible assets  |  |                      |             |                         |  |   |          |  
|Goodwill                       |  | $                    | 208,096,000 |                         |  |   |          |  
|Trademarks                     |  |                      | 37,875,000  |                         |  |   |          |  
|                               |  |                      |             |                         |  |  
|Total                          |  | $                    | 245,971,000 |                         |  |   |          |  
|                               |  |                      |             |                         |  |  

The changes in the
carrying amount of goodwill for the Companys reportable
segments for the three months ended March 31, 2003 are as
follows:



|                                |  | SpecialtyHospitals |            | OutpatientRehabilitation |  | All Other |             | Total
|------------------------------- |  | ------------------ | ---------- | ------------------------ |  | --------- | ----------- | -----
|Balance as of December 31, 2002 |  | $                  | 84,391,000 |                          |  | $         | 111,912,000 |      
|Goodwill acquired during year   |  |                    |           |                          |  |           | 10,166,000  |      
|Income tax benefits recognized  |  |                    |           |                          |  |           | (933,000    | )    
|Earn-out payments               |  |                    |           |                          |  |           | 429,000     |      
|Translation adjustment          |  |                    |           |                          |  |           | 1,547,000   |      
|                                |  |                    |            |                          |  |           |             |      
|Balance as of March 31, 2003    |  | $                  | 84,391,000 |                          |  | $         | 123,121,000 |      
|                                |  |                    |            |                          |  |           |             |      

4.   Restructuring Charges

The following summarizes the Companys restructuring activity:

|                     |  |             |          |           |  |       |         |   |  |   |          |  
|-------------------- |  | ----------- | -------- | --------- |  | ----- | ------- | - |  | - | -------- | -
|                     |  | Lease       |          |           |  |       |         |   |  |  
|                     |  | Termination |          |           |  |       |         |   |  |  
|                     |  | Costs       |          | Severance |  | Total
|                     |  |             |          |           |  |      
|December 31, 2002    |  | $           | 788,000  |           |  | $     | 12,000  |   |  | $ | 800,000  |  
|Amounts paid in 2003 |  |             | (106,000 | )         |  |       | (12,000 | ) |  |   | (118,000 | )
|                     |  |             |          |           |  |       |         |   |  |   |          |  
|March 31, 2003       |  | $           | 682,000  |           |  | $     |        |   |  | $ | 682,000  |  
|                     |  |             |          |           |  |       |         |   |  |   |          |  

The Company expects to pay out the remaining lease termination costs through 2005.

5.   Segment Information

The Companys segments consist of (i) specialty hospitals and (ii)
outpatient rehabilitation. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies.

The following table summarizes selected financial data for the Companys
reportable segments:

|                              |  |                                   |             |                |  |           |             |       |  |   |            |   |  |   |             | 
|----------------------------- |  | --------------------------------- | ----------- | -------------- |  | --------- | ----------- | ----- |  | - | ---------- | - |  | - | ----------- | 
|                              |  | Three Months Ended March 31, 2003
|                              |  |                                  
|                              |  | Specialty                         |             | Outpatient     |  |           |             |       |  |   |            |  
|                              |  | Hospitals                         |             | Rehabilitation |  | All Other |             | Total
|                              |  |                                   |             |                |  |           |             |      
|Net revenue                   |  | $                                 | 183,428,000 |                |  | $         | 125,575,000 |       |  | $ | 3,304,000  |   |  | $ | 312,307,000 | 
|Income (loss) from
operations |  |                                   | 21,859,000  |                |  |           | 16,588,000  |       |  |   | (7,609,000 | ) |  |   | 30,838,000  | 
|Total assets                  |  |                                   | 311,814,000 |                |  |           | 329,603,000 |       |  |   | 62,643,000 |   |  |   | 704,060,000 | 
|Capital expenditures          |  |                                   | 2,887,000   |                |  |           | 2,740,000   |       |  |   | 1,346,000  |   |  |   | 6,973,000   | 

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|                              |  |                                   |             |                |  |           |             |       |  |   |            |   |  |   |             | 
|----------------------------- |  | --------------------------------- | ----------- | -------------- |  | --------- | ----------- | ----- |  | - | ---------- | - |  | - | ----------- | 
|                              |  | Three Months Ended March 31, 2002
|                              |  |                                  
|                              |  | Specialty                         |             | Outpatient     |  |           |             |       |  |   |            |  
|                              |  | Hospitals                         |             | Rehabilitation |  | All Other |             | Total
|                              |  |                                   |             |                |  |           |             |      
|Net revenue                   |  | $                                 | 148,828,000 |                |  | $         | 119,694,000 |       |  | $ | 3,398,000  |   |  | $ | 271,920,000 | 
|Income (loss) from
operations |  |                                   | 12,619,000  |                |  |           | 18,522,000  |       |  |   | (7,111,000 | ) |  |   | 24,030,000  | 
|Total assets                  |  |                                   | 298,352,000 |                |  |           | 327,591,000 |       |  |   | 44,791,000 |   |  |   | 670,734,000 | 
|Capital expenditures          |  |                                   | 6,183,000   |                |  |           | 2,435,000   |       |  |   | 341,000    |   |  |   | 8,959,000   | 

6.   Net Income per Share

The following table sets forth for the periods indicated the calculation of net
income per share in the Companys consolidated statement of operations and the
differences between basic weighted average shares outstanding and diluted
weighted average shares outstanding used to compute diluted earnings per share:

|                                                                                                    |                                                                    |  |                              |            |      |  |            |            | 
|--------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ |  | ---------------------------- | ---------- | ---- |  | ---------- | ---------- | 
|                                                                                                    |                                                                    |  | Three Months Ended March 31,
|                                                                                                    |                                                                    |  | 2003                         |            | 2002
|                                                                                                    |                                                                    |  |                              |            |     
|Numerator:                                                                                          |                                                                    |  |                              |            |      |  |            |           
|                                                                                                    | Net income                                                         |  | $                            | 14,454,000 |      |  | $          | 10,176,000 | 
|                                                                                                    |                                                                    |  |                              |            |      |  |            |           
|Denominator:                                                                                        |                                                                    |  |                              |            |      |  |            |           
|                                                                                                    | Denominator for basic earnings per
share  weighted average shares |  |                              | 47,150,000 |      |  |            | 46,080,000 | 
|                                                                                                    | Effect of dilutive securities:                                     |  |                              |            |      |  |            |            | 
|                                                                                                    | a) Stock options                                                   |  |                              | 1,388,000  |      |  |            | 1,527,000  | 
|                                                                                                    | b) Warrants                                                        |  |                              | 663,000    |      |  |            | 1,017,000  | 
|                                                                                                    |                                                                    |  |                              |            |      |  |            |           
|Denominator for diluted earnings per
share-adjusted weighted average shares
and assumed conversions |                                                                    |  | 49,201,000                   |            |      |  | 48,624,000 |           
|                                                                                                    |                                                                    |  |                              |            |      |  |            |           
|                                                                                                    | Basic income per common share                                      |  | $                            | 0.31       |      |  | $          | 0.22       | 
|                                                                                                    | Diluted income per common share                                    |  | $                            | 0.29       |      |  | $          | 0.21       | 

7.   Commitments and Contingencies

Litigation

On August 10, 1998 a complaint in the U.S. District Court for the Eastern
District of Pennsylvania was filed that named as defendants NovaCare, Inc. (now
known as J.L. Halsey Corporation), other named defendants and 100 defendants
who were to be named at a later time. This qui tamaction sought triple
damages and penalties under the False Claims Act against J.L. Halsey
Corporation. The allegations involve, among other things, the distinction
between individual and group billing in physical rehabilitation clinics that
the Company acquired from NovaCare. On October 16, 2000, the relator plaintiff
made a motion to amend the complaint to, among other things, add the Company
and some of its subsidiaries acquired in the NovaCare acquisition as defendants
in this case. This motion was granted in September of 2001. The amended
complaint alleges that from about January 1, 1995 through the present, the
defendants submitted false or fraudulent bills for physical therapy to various
federal health programs. On January 3, 2002, J.L. Halsey Corporation and its
related subsidiaries (including the subsidiaries acquired in the NovaCare
acquisition) entered into a settlement agreement with the relator plaintiff and
the government, pursuant to which, in exchange for a payment by J.L.

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Halsey Corporation of $375,000, the parties settled all claims arising out of conduct
that took place before the Companys acquisition of the NovaCare subsidiaries
that are defendants in the case. Claims against the Company and the NovaCare
subsidiaries regarding alleged conduct occurring after the NovaCare acquisition
were not covered by the settlement. In September 2002, the Company learned
that the United States Attorney for the Eastern District of Pennsylvania had
notified the court that the United States had decided not to intervene in this
case. As of April 30, 2003, the Company and the subsidiaries have not been
served with the amended complaint. Based on a review of the amended complaint,
the Company does not believe that this lawsuit is meritorious, and it intends
to vigorously defend against this action if it is pursued by the relator
plaintiff. However, because of the uncertain nature of the litigation, the
Company cannot predict the outcome of this matter.

Other

In February 2002, PHICO Insurance Company (PHICO), at the request of the
Pennsylvania Insurance Department, was placed in liquidation by an order of the
Commonwealth Court of Pennsylvania (Liquidation Order). The Company had
placed its primary malpractice insurance coverage through PHICO from June 1998
through December 2000. In January 2001, these policies were replaced by policies
issued with other insurers. Currently, the Company has approximately 14
unsettled cases in seven states from the policy years covered by PHICO issued
policies. The Liquidation Order refers these claims to the various state
guaranty associations. These state guaranty association statutes generally
provide for coverage between $100,000-$300,000 per insured claim, depending
upon the state. Some states also have catastrophic loss funds to cover
settlements in excess of the available state guaranty funds. Most state
insurance guaranty statutes provide for net worth and residency limitations
that, if applicable, may limit or prevent the Company from recovering from
these state guaranty association funds. At this time, the Company believes
that it will meet the requirements for coverage under most of the applicable
state guarantee association statutes, and that the resolution of these claims
will not have a material adverse effect on the Companys financial position,
cash flow or results of operations. However, because the rules related to
state guaranty association funds are subject to interpretation, and because
these claims are still in the process of resolution, the Companys conclusions
may change as this process progresses.

The Company is subject to legal proceedings and claims that have arisen in
the ordinary course of its business and have not been finally adjudicated,
which include malpractice claims covered (subject to the above discussion
regarding PHICO Insurance Company) under the Companys insurance policy. In the
opinion of management, the outcome of these actions will not have a material
effect on the financial position or results of operations of the Company.

8.   Financial Information for Subsidiary Guarantors and Non-Guarantor Subsidiaries

The Company conducts a significant portion of its business through its
subsidiaries. Presented below is condensed consolidating financial information
for the Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries
at March 31, 2003 and for the three months ended March 31, 2003 and 2002.

On January 1, 2003, the Company purchased the outstanding minority
interests of Rehab Advantage Therapy Services, LLC and Select Management
Services, LLC. The operations of these businesses through January 1, 2003 have
been included as Non-Guarantor Subsidiaries. The operations (through a 100%
owned subsidiary) commencing on January 1, 2003 have been included as Guarantor
Subsidiaries.

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The equity method has been used by the Company with respect to investments
in subsidiaries. The equity method has been used by Subsidiary Guarantors with
respect to investments in Non-Guarantor Subsidiaries. Separate financial
statements for Subsidiary Guarantors are not presented.

The following table sets forth the Non-Guarantor Subsidiaries at March 31,
2003:



| |  |  | Canadian Back Institute Limited
Kentucky Orthopedic Rehabilitation, LLC.
Medical Information Management Systems, LLC.
Metro Therapy, Inc.
Millennium Rehab Services, LLC.
Select Specialty Hospital  Central Pennsylvania, L.P.
Select Specialty Hospital  Houston, L.P.
Select Specialty Hospital  Mississippi Gulf Coast, Inc.
TJ Corporation I, LLC.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |      |   |         |         | 
|------------------------------------------------------ | --------------------------------------------------- | - | ------------------------------------- | ------- | ---------- | - | ------------ | ------- | ------------ | - | ------------ | ------ | - | - | -------- | -------- | ---- | - | ------- | ------- | 
|                                                       |                                                     |   | Select Medical Corporation           
|                                                       |                                                     |   | Condensed Consolidating Balance Sheet
|                                                       |                                                     |   | March 31,2003                        
|                                                       |                                                     |   |                                      
|                                                       |                                                     |   | Select Medical                        |         |            |   |              |         |              |   |              |        |   |   |          |          |      |   |        
|                                                       |                                                     |   | Corporation                           |         |            |   |              |         | Non-         |   |              |        |   |   |          |          |     
|                                                       |                                                     |   | (Parent                               |         | Subsidiary |   | Guarantor    |         |              |   |              |        |   |   |         
|                                                       |                                                     |   | Company Only)                         |         | Guarantors |   | Subsidiaries |         | Eliminations |   | Consolidated
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |             
|                                                       |                                                     |   | (dollars in thousands)               
|Assets                                                 |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |      |   |         |        
|                                                       | Current Assets:                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |      |   |         |         | 
|                                                       | Cash and cash equivalents                           |   | $                                     | 15,170  |            |   | $            | 21,250  |              |   | $            | 2,108  |   |   | $        |         |      |   | $       | 38,528  | 
|                                                       | Accounts receivable, net                            |   |                                       | (480    | )          |   |              | 188,856 |              |   |              | 34,233 |   |   |          |         |      |   |         | 222,609 | 
|                                                       | Current deferred tax asset                          |   |                                       | 7,840   |            |   |              | 31,185  |              |   |              | 3,243  |   |   |          |         |      |   |         | 42,268  | 
|                                                       | Other current assets                                |   |                                       | 2,568   |            |   |              | 11,935  |              |   |              | 3,160  |   |   |          |         |      |   |         | 17,663  | 
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |      |   |         |         | 
|Total Current Assets                                   |                                                     |   | 25,098                                |         |            |   | 253,226      |         |              |   | 42,744       |        |   |   |         |          |      |   | 321,068 |        
|Property and equipment, net                            |                                                     |   | 9,777                                 |         |            |   | 85,677       |         |              |   | 18,062       |        |   |   |         |          |      |   | 113,516 |        
|Investment in affiliates                               |                                                     |   | 333,922                               |         |            |   | 56,632       |         |              |   |             |        |   |   | (390,554 | )(a)     |      |   |        |        
|Goodwill                                               |                                                     |   | 5,854                                 |         |            |   | 157,393      |         |              |   | 44,849       |        |   |   |         |          |      |   | 208,096 |        
|Trademark                                              |                                                     |   |                                      |         |            |   | 37,875       |         |              |   |             |        |   |   |         |          |      |   | 37,875  |        
|Other intangibles                                      |                                                     |   |                                      |         |            |   | 941          |         |              |   |             |        |   |   |         |          |      |   | 941     |        
|Non-current deferred tax asset                         |                                                     |   | (642                                  | )       |            |   | (5,793       | )       |              |   | 12,238       |        |   |   |         |          |      |   | 5,803   |        
|Other assets                                           |                                                     |   | 11,850                                |         |            |   | 4,185        |         |              |   | 726          |        |   |   |         |          |      |   | 16,761  |        
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |      |   |         |         | 
|Total Assets                                           |                                                     | $ | 385,859                               |         |            | $ | 590,136      |         |              | $ | 118,619      |        |   | $ | (390,554 | )        |      | $ | 704,060 |        
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |      |   |         |         | 
|Liabilities and Stockholders Equity                   |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |      |   |         |        
|Current Liabilities:                                   |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |      |   |         |        
|                                                       | Bank overdrafts                                     |   | $                                     | 8,087   |            |   | $            |        |              |   | $            |       |   |   | $        |         |      |   | $       | 8,087   | 
|                                                       | Current portion of long-term debt and notes payable |   |                                       | 570     |            |   |              | 20,253  |              |   |              | 609    |   |   |          |         |      |   |         | 21,432  | 
|                                                       | Accounts payable                                    |   |                                       | 2,365   |            |   |              | 29,700  |              |   |              | 5,464  |   |   |          |         |      |   |         | 37,529  | 
|                                                       | Intercompany accounts                               |   |                                       | (3,617  | )          |   |              | (11,294 | )            |   |              | 14,911 |   |   |          |         |      |   |         |        | 
|                                                       | Accrued payroll                                     |   |                                       | 472     |            |   |              | 33,742  |              |   |              | 101    |   |   |          |         |      |   |         | 34,315  | 
|                                                       | Accrued vacation                                    |   |                                       | 2,098   |            |   |              | 12,725  |              |   |              | 1,426  |   |   |          |         |      |   |         | 16,249  | 
|                                                       | Accrued restructuring                               |   |                                       |        |            |   |              | 682     |              |   |              |       |   |   |          |         |      |   |         | 682     | 
|                                                       | Accrued other                                       |   |                                       | 19,839  |            |   |              | 23,160  |              |   |              | 1,863  |   |   |          |         |      |   |         | 44,862  | 
|                                                       | Income taxes                                        |   |                                       | 653     |            |   |              | 19,142  |              |   |              | (4,403 | ) |   |          |         |      |   |         | 15,392  | 
|                                                       | Due to third party payors                           |   |                                       | (8,480  | )          |   |              | 26,370  |              |   |              | (8,513 | ) |   |          |         |      |   |         | 9,377   | 
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |      |   |         |         | 
|Total Current Liabilities                              |                                                     |   | 21,987                                |         |            |   | 154,480      |         |              |   | 11,458       |        |   |   |         |          |      |   | 187,925 |        
|Long-term debt, net of current portion                 |                                                     |   | 59,313                                |         |            |   | 99,183       |         |              |   | 47,992       |        |   |   |         |          |      |   | 206,488 |        
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |      |   |         |         | 
|Total liabilities                                      |                                                     |   | 81,300                                |         |            |   | 253,663      |         |              |   | 59,450       |        |   |   |         |          |      |   | 394,413 |        
|Commitments and Contingencies                          |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |      |   |         |        
|Minority interest in consolidated subsidiary companies |                                                     |   |                                      |         |            |   | 385          |         |              |   | 4,703        |        |   |   |         |          |      |   | 5,088   |        
|Stockholders Equity:                                  |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |      |   |         |        
|                                                       | Common stock                                        |   |                                       | 475     |            |   |              |        |              |   |              |       |   |   |          |         |      |   |         | 475     | 
|                                                       | Capital in excess of par                            |   |                                       | 237,887 |            |   |              |        |              |   |              |       |   |   |          |         |      |   |         | 237,887 | 
|                                                       | Retained earnings                                   |   |                                       | 64,609  |            |   |              | 86,782  |              |   |              | 25,657 |   |   |          | (112,439 | )(b) |   |         | 64,609  | 
|                                                       | Subsidiary investment                               |   |                                       |        |            |   |              | 249,306 |              |   |              | 28,809 |   |   |          | (278,115 | )(a) |   |         |        | 
|                                                       | Accumulated other comprehensive income              |   |                                       | 1,588   |            |   |              |        |              |   |              |       |   |   |          |         |      |   |         | 1,588   | 
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |      |   |         |         | 
|Total Stockholders Equity                             |                                                     |   | 304,559                               |         |            |   | 336,088      |         |              |   | 54,466       |        |   |   | (390,554 | )        |      |   | 304,559 |        
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |      |   |         |         | 
|Total Liabilities and Stockholders Equity             |                                                     | $ | 385,859                               |         |            | $ | 590,136      |         |              | $ | 118,619      |        |   | $ | (390,554 | )        |      | $ | 704,060 |        
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |      |   |         |        



|(a) |  | Elimination of investments in subsidiaries.          
|--- |  | -----------------------------------------------------
|    |  |                                                      
|(b) |  | Elimination of investments in subsidiaries earnings.

-13-



---



##### Table of Contents



|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |         | 
|-------------------------------------------------------- | ----------------------------- | - | ----------------------------------------------- | ----- | ---------- | - | ------------ | ------- | ------------ | - | ------ | ------ |  | - | ------------ | - | -- | - |  |  |  | - | ------- | ------- | 
|                                                         |                               |   | Select Medical Corporation                     
|                                                         |                               |   | Condensed Consolidating Statement of Operations
|                                                         |                               |   | For the Three Months Ended March 31, 2003      
|                                                         |                               |   |                                                
|                                                         |                               |   | Select Medical                                  |       |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |        
|                                                         |                               |   | Corporation                                     |       |            |   |              |         | Non-         |   |        |        |  |   |              |   |    |   |  |  | 
|                                                         |                               |   | (Parent Company                                 |       | Subsidiary |   | Guarantor    |         |              |   |        |        |  |   |              |   |    |   | 
|                                                         |                               |   | Only)                                           |       | Guarantors |   | Subsidiaries |         | Eliminations |   |        |        |  |   | Consolidated
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |        |        |  |   |             
|                                                         |                               |   | (dollars in thousands)                         
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |        |        |  |   |              |   |    |   | 
|Net operating revenues                                   |                               | $ | 2,795                                           |       |            | $ | 260,872      |         |              | $ | 48,640 |        |  | $ |             |   |    |   |  |  |  | $ | 312,307 |        
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        
|Costs and expenses:                                      |                               |   |                                                 |       |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        
|                                                         | Cost of services              |   |                                                 |      |            |   |              | 212,712 |              |   |        | 39,557 |  |   |              |  |    |   |  |  |  |   |         | 252,269 | 
|                                                         | General and administrative    |   |                                                 | 9,503 |            |   |              |        |              |   |        |       |  |   |              |  |    |   |  |  |  |   |         | 9,503   | 
|                                                         | Bad debt expense              |   |                                                 |      |            |   |              | 10,699  |              |   |        | 1,484  |  |   |              |  |    |   |  |  |  |   |         | 12,183  | 
|                                                         | Depreciation and amortization |   |                                                 | 898   |            |   |              | 5,662   |              |   |        | 954    |  |   |              |  |    |   |  |  |  |   |         | 7,514   | 
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        
|Total costs and expenses                                 |                               |   | 10,401                                          |       |            |   | 229,073      |         |              |   | 41,995 |        |  |   |             |   |    |   |  |  |  |   | 281,469 |        
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        
|Income (loss) from operations                            |                               |   | (7,606                                          | )     |            |   | 31,799       |         |              |   | 6,645  |        |  |   |             |   |    |   |  |  |  |   | 30,838  |        
|Other income and expense:                                |                               |   |                                                 |       |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        
|Intercompany interest and royalty fees                   |                               |   | 5,854                                           |       |            |   | (5,859       | )       |              |   | 5      |        |  |   |             |   |    |   |  |  |  |   |        |        
|Intercompany management fees                             |                               |   | (15,162                                         | )     |            |   | 14,697       |         |              |   | 465    |        |  |   |             |   |    |   |  |  |  |   |        |        
|Interest income                                          |                               |   | (113                                            | )     |            |   | (73          | )       |              |   |       |        |  |   |             |   |    |   |  |  |  |   | (186    | )      
|Interest expense                                         |                               |   | 2,115                                           |       |            |   | 3,015        |         |              |   | 1,296  |        |  |   |             |   |    |   |  |  |  |   | 6,426   |        
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        
|Income (loss) before minority interests and income taxes |                               |   | (300                                            | )     |            |   | 20,019       |         |              |   | 4,879  |        |  |   |             |   |    |   |  |  |  |   | 24,598  |        
|Minority interest in consolidated subsidiary companies   |                               |   |                                                |       |            |   | 117          |         |              |   | 707    |        |  |   |             |   |    |   |  |  |  |   | 824     |        
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        
|Income (loss) before income taxes                        |                               |   | (300                                            | )     |            |   | 19,902       |         |              |   | 4,172  |        |  |   |             |   |    |   |  |  |  |   | 23,774  |        
|Income tax expense (benefit)                             |                               |   | (84                                             | )     |            |   | 7,865        |         |              |   | 1,539  |        |  |   |             |   |    |   |  |  |  |   | 9,320   |        
|Equity in earnings of subsidiaries                       |                               |   | 14,670                                          |       |            |   | 1,228        |         |              |   |       |        |  |   | (15,898      | ) | (a | ) |  |  |  |   |        |        
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        
|Net income                                               |                               | $ | 14,454                                          |       |            | $ | 13,265       |         |              | $ | 2,633  |        |  | $ | (15,898      | ) |    |   |  |  |  | $ | 14,454  |        
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        



|(a) |  | Elimination of equity in net income (loss) from consolidated subsidiaries.
|--- |  | --------------------------------------------------------------------------

- 14 -



---



##### Table of Contents



|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |        |              |         |              |        |       |        |   |         |              |        |   |    |   |  |   |         |        |         |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------------------- | ------- | ----------------------------------------------- | ------- | ---------- | ------ | ------------ | ------- | ------------ | ------ | ----- | ------ | - | ------- | ------------ | ------ | - | -- | - |  | - | ------- | ------ | ------- | -
|                                                                                  |                                                                                             |                                    |         | Select Medical Corporation                     
|                                                                                  |                                                                                             |                                    |         | Condensed Consolidating Statement of Cash Flows
|                                                                                  |                                                                                             |                                    |         | For the Year Ended March 31, 2003              
|                                                                                  |                                                                                             |                                    |         |                                                
|                                                                                  |                                                                                             |                                    |         | Medical                                         |         |            |        |              |         |              |        |       |        |   |         |              |        |   |    |   |  |   |         |       
|                                                                                  |                                                                                             |                                    |         | Corporation                                     |         |            |        |              |         | Non-         |        |       |        |   |         |              |        |   |    |   |  |  
|                                                                                  |                                                                                             |                                    |         | (Parent                                         |         | Subsidiary |        | Guarantor    |         |              |        |       |        |   |         |              |        |   |    |  
|                                                                                  |                                                                                             |                                    |         | Company                                         |         | Guarantors |        | Subsidiaries |         | Eliminations |        |       |        |   |         | Consolidated
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |        |              |         |              |        |       |        |   |         |             
|                                                                                  |                                                                                             |                                    |         | (dollars in thousands)                         
|Operating activities                                                              |                                                                                             |                                    |         |                                                 |         |            |        |              |         |              |        |       |        |   |         |              |        |   |    |   |  |   |         |       
|Net income                                                                        |                                                                                             | $                                  | 14,454  |                                                 |         | $          | 13,265 |              |         | $            | 2,633  |       |        | $ | (15,898 | )            | (a     | ) |    |   |  | $ | 14,454  |       
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                                             |                                    |         |                                                 |         |            |        |              |         |              |        |       |        |   |         |              |        |   |    |   |  |   |         |       
|                                                                                  | Depreciation and amortization                                                               |                                    |         | 898                                             |         |            |        | 5,662        |         |              |        | 954   |        |   |         |             |        |   |    |   |  |   |         | 7,514  |        
|                                                                                  | Provision for bad debts                                                                     |                                    |         |                                                |         |            |        | 10,699       |         |              |        | 1,484 |        |   |         |             |        |   |    |   |  |   |         | 12,183 |        
|                                                                                  | Minority interests                                                                          |                                    |         |                                                |         |            |        | 117          |         |              |        | 707   |        |   |         |             |        |   |    |   |  |   |         | 824    |        
|                                                                                  | Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |                                    |         |                                                 |         |            |        |              |         |              |        |       |        |   |         |              |        |   |    |   |  |   |         |        |        
|                                                                                  |                                                                                             | Equity in earnings of subsidiaries |         |                                                 | (14,670 | )          |        |              | (1,228  | )            |        |       |       |   |         |              | 15,898 |   | (a | ) |  |   |         |        |        |  
|                                                                                  |                                                                                             | Intercompany                       |         |                                                 | 17,034  |            |        |              | (15,156 | )            |        |       | (1,878 | ) |         |              |       |   |    |   |  |   |         |        |        |  
|                                                                                  |                                                                                             | Accounts receivable                |         |                                                 | 195     |            |        |              | 5,320   |              |        |       | 1,192  |   |         |              |       |   |    |   |  |   |         |        | 6,707   |  
|                                                                                  |                                                                                             | Other current assets               |         |                                                 | 320     |            |        |              | (263    | )            |        |       | (67    | ) |         |              |       |   |    |   |  |   |         |        | (10     | )
|                                                                                  |                                                                                             | Other assets                       |         |                                                 | 85      |            |        |              | 1,173   |              |        |       | 315    |   |         |              |       |   |    |   |  |   |         |        | 1,573   |  
|                                                                                  |                                                                                             | Accounts payable                   |         |                                                 | (172    | )          |        |              | 28      |              |        |       | (225   | ) |         |              |       |   |    |   |  |   |         |        | (369    | )
|                                                                                  |                                                                                             | Due to third-party payors          |         |                                                 | 3,156   |            |        |              | (15,933 | )            |        |       | (4,022 | ) |         |              |       |   |    |   |  |   |         |        | (16,799 | )
|                                                                                  |                                                                                             | Accrued expenses                   |         |                                                 | 1,053   |            |        |              | 2,897   |              |        |       | 1,290  |   |         |              |       |   |    |   |  |   |         |        | 5,240   |  
|                                                                                  |                                                                                             | Income taxes                       |         |                                                 | (6,197  | )          |        |              |        |              |        |       | (690   | ) |         |              |       |   |    |   |  |   |         |        | (6,887  | )
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |        |              |         |              |        |       |        |   |         |              |        |   |    |   |  |   |         |       
|Net cash provided by operating activities                                         |                                                                                             |                                    | 16,156  |                                                 |         |            | 6,581  |              |         |              | 1,693  |       |        |   |        |              |        |   |    |   |  |   | 24,430  |       
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |        |              |         |              |        |       |        |   |         |              |        |   |    |   |  |   |         |       
|Investing activities                                                              |                                                                                             |                                    |         |                                                 |         |            |        |              |         |              |        |       |        |   |         |              |        |   |    |   |  |   |         |       
|Purchases of property and equipment, net                                          |                                                                                             |                                    | (1,339  | )                                               |         |            | (4,118 | )            |         |              | (1,516 | )     |        |   |        |              |        |   |    |   |  |   | (6,973  | )     
|Earnout payments                                                                  |                                                                                             |                                    |        |                                                 |         |            | (429   | )            |         |              |       |       |        |   |        |              |        |   |    |   |  |   | (429    | )     
|Acquisition of businesses, net of cash acquired                                   |                                                                                             |                                    |        |                                                 |         |            | (732   | )            |         |              |       |       |        |   |        |              |        |   |    |   |  |   | (732    | )     
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |        |              |         |              |        |       |        |   |         |              |        |   |    |   |  |   |         |       
|Net cash used in investing activities                                             |                                                                                             |                                    | (1,339  | )                                               |         |            | (5,279 | )            |         |              | (1,516 | )     |        |   |        |              |        |   |    |   |  |   | (8,134  | )     
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |        |              |         |              |        |       |        |   |         |              |        |   |    |   |  |   |         |       
|Financing activities                                                              |                                                                                             |                                    |         |                                                 |         |            |        |              |         |              |        |       |        |   |         |              |        |   |    |   |  |   |         |       
|Intercompany debt reallocation                                                    |                                                                                             |                                    | 6,140   |                                                 |         |            | (6,355 | )            |         |              | 215    |       |        |   |        |              |        |   |    |   |  |   |        |       
|Net repayments on credit facility debt                                            |                                                                                             |                                    | (29,743 | )                                               |         |            |       |              |         |              | (819   | )     |        |   |        |              |        |   |    |   |  |   | (30,562 | )     
|Principal payments on seller and other debt                                       |                                                                                             |                                    |        |                                                 |         |            | (1,719 | )            |         |              |       |       |        |   |        |              |        |   |    |   |  |   | (1,719  | )     
|Proceeds from issuance of common stock                                            |                                                                                             |                                    | 1,495   |                                                 |         |            |       |              |         |              |       |       |        |   |        |              |        |   |    |   |  |   | 1,495   |       
|Repayment of bank overdrafts                                                      |                                                                                             |                                    | (3,034  | )                                               |         |            |       |              |         |              |       |       |        |   |        |              |        |   |    |   |  |   | (3,034  | )     
|Distributions to minority interests                                               |                                                                                             |                                    |        |                                                 |         |            |       |              |         |              | (127   | )     |        |   |        |              |        |   |    |   |  |   | (127    | )     
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |        |              |         |              |        |       |        |   |         |              |        |   |    |   |  |   |         |       
|Net cash used in financing activities                                             |                                                                                             |                                    | (25,142 | )                                               |         |            | (8,074 | )            |         |              | (731   | )     |        |   |        |              |        |   |    |   |  |   | (33,947 | )     
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |        |              |         |              |        |       |        |   |         |              |        |   |    |   |  |   |         |       
|Effect of exchange rate changes on cash
and cash equivalents                      |                                                                                             |                                    | 117     |                                                 |         |            |       |              |         |              |       |       |        |   |        |              |        |   |    |   |  |   | 117     |       
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |        |              |         |              |        |       |        |   |         |              |        |   |    |   |  |   |         |       
|Net decrease in cash and cash equivalents                                         |                                                                                             |                                    | (10,208 | )                                               |         |            | (6,772 | )            |         |              | (554   | )     |        |   |        |              |        |   |    |   |  |   | (17,534 | )     
|Cash and cash equivalents at beginning of period                                  |                                                                                             |                                    | 25,378  |                                                 |         |            | 28,022 |              |         |              | 2,662  |       |        |   |        |              |        |   |    |   |  |   | 56,062  |       
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |        |              |         |              |        |       |        |   |         |              |        |   |    |   |  |   |         |       
|Cash and cash equivalents at end of period                                        |                                                                                             | $                                  | 15,170  |                                                 |         | $          | 21,250 |              |         | $            | 2,108  |       |        | $ |        |              |        |   |    |   |  | $ | 38,528  |       
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |        |              |         |              |        |       |        |   |         |              |        |   |    |   |  |   |         |       



|(a) |  | Elimination of equity in earnings of subsidiary.
|--- |  | ------------------------------------------------

- 15 -



---



##### Table of Contents



|                                                         |                               |   |                                                 |                        |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |         | 
|-------------------------------------------------------- | ----------------------------- | - | ----------------------------------------------- | ---------------------- | ---------- | - | ------------ | ------- | ------------ | - | ------ | ------ |  | - | ------------ | - | -- | - |  |  |  | - | ------- | ------- | 
|                                                         |                               |   | Select Medical Corporation                     
|                                                         |                               |   | Condensed Consolidating Statement of Operations
|                                                         |                               |   | For the Quarter Ended March 31, 2002           
|                                                         |                               |   |                                                
|                                                         |                               |   | Corporation                                     |                        |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |        
|                                                         |                               |   | (Parent                                         |                        |            |   |              |         | Non-         |   |        |        |  |   |              |   |    |   |  |  | 
|                                                         |                               |   | Company                                         |                        | Subsidiary |   | Guarantor    |         |              |   |        |        |  |   |              |   |    |   | 
|                                                         |                               |   | Only)                                           |                        | Guarantors |   | Subsidiaries |         | Eliminations |   |        |        |  |   | Consolidated
|                                                         |                               |   |                                                 |                        |            |   |              |         |              |   |        |        |  |   |             
|                                                         |                               |   |                                                 | (dollars in thousands)
|Net operating revenues                                   |                               | $ | 3,202                                           |                        |            | $ | 222,281      |         |              | $ | 46,437 |        |  | $ |             |   |    |   |  |  |  | $ | 271,920 |        
|                                                         |                               |   |                                                 |                        |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        
|Costs and expenses:                                      |                               |   |                                                 |                        |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        
|                                                         | Cost of services              |   |                                                 |                       |            |   |              | 183,819 |              |   |        | 37,916 |  |   |              |  |    |   |  |  |  |   |         | 221,735 | 
|                                                         | General and administrative    |   |                                                 | 9,686                  |            |   |              |        |              |   |        |       |  |   |              |  |    |   |  |  |  |   |         | 9,686   | 
|                                                         | Bad debt expense              |   |                                                 |                       |            |   |              | 8,440   |              |   |        | 2,003  |  |   |              |  |    |   |  |  |  |   |         | 10,443  | 
|                                                         | Depreciation and amortization |   |                                                 | 416                    |            |   |              | 4,431   |              |   |        | 1,179  |  |   |              |  |    |   |  |  |  |   |         | 6,026   | 
|                                                         |                               |   |                                                 |                        |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        
|Total costs and expenses                                 |                               |   | 10,102                                          |                        |            |   | 196,690      |         |              |   | 41,098 |        |  |   |             |   |    |   |  |  |  |   | 247,890 |        
|                                                         |                               |   |                                                 |                        |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        
|Income (loss) from operations                            |                               |   | (6,900                                          | )                      |            |   | 25,591       |         |              |   | 5,339  |        |  |   |             |   |    |   |  |  |  |   | 24,030  |        
|Other income and expense:                                |                               |   |                                                 |                        |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        
|Intercompany interest and royalty fees                   |                               |   | 5,079                                           |                        |            |   | (5,228       | )       |              |   | 149    |        |  |   |             |   |    |   |  |  |  |   |        |        
|Intercompany management fees                             |                               |   | (12,368                                         | )                      |            |   | 11,716       |         |              |   | 652    |        |  |   |             |   |    |   |  |  |  |   |        |        
|Interest income                                          |                               |   | (61                                             | )                      |            |   | (11          | )       |              |   | 1      |        |  |   |             |   |    |   |  |  |  |   | (71     | )      
|Interest expense                                         |                               |   | 1,588                                           |                        |            |   | 4,163        |         |              |   | 1,027  |        |  |   |             |   |    |   |  |  |  |   | 6,778   |        
|                                                         |                               |   |                                                 |                        |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        
|Income (loss) before minority interests and income taxes |                               |   | (1,138                                          | )                      |            |   | 14,951       |         |              |   | 3,510  |        |  |   |             |   |    |   |  |  |  |   | 17,323  |        
|Minority interest in consolidated subsidiary companies   |                               |   |                                                |                        |            |   |             |         |              |   | 603    |        |  |   |             |   |    |   |  |  |  |   | 603     |        
|                                                         |                               |   |                                                 |                        |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        
|Income (loss) before income taxes                        |                               |   | (1,138                                          | )                      |            |   | 14,951       |         |              |   | 2,907  |        |  |   |             |   |    |   |  |  |  |   | 16,720  |        
|Income tax expense                                       |                               |   | 901                                             |                        |            |   | 4,953        |         |              |   | 690    |        |  |   |             |   |    |   |  |  |  |   | 6,544   |        
|Equity in earnings of subsidiaries                       |                               |   | 12,215                                          |                        |            |   | 1,052        |         |              |   |       |        |  |   | (13,267      | ) | (a | ) |  |  |  |   |        |        
|                                                         |                               |   |                                                 |                        |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        
|Net income                                               |                               | $ | 10,176                                          |                        |            | $ | 11,050       |         |              | $ | 2,217  |        |  | $ | (13,267      | ) |    |   |  |  |  | $ | 10,176  |        
|                                                         |                               |   |                                                 |                        |            |   |              |         |              |   |        |        |  |   |              |   |    |   |  |  |  |   |         |        



|(a) |  | Elimination of equity in net income (loss) from consolidated subsidiaries.
|--- |  | --------------------------------------------------------------------------

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|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |                        |         |              |        |       |        |   |          |              |        |  |     |  | 
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ----------------------------------------- | ------ | ----------------------------------------------- | ------- | ---------- | ------- | ---------------------- | ------- | ------------ | ------ | ----- | ------ | - | -------- | ------------ | ------ |  | --- |  | 
|                                                                                  |                                                                                             |                                           |        | Select Medical Corporation                     
|                                                                                  |                                                                                             |                                           |        | Condensed Consolidating Statement of Cash Flows
|                                                                                  |                                                                                             |                                           |        | For the Quarter Ended March 31, 2002           
|                                                                                  |                                                                                             |                                           |        |                                                
|                                                                                  |                                                                                             |                                           |        | Select Medical                                  |         |            |         |                        |         |              |        |       |        |   |          |              |        |  |     |  | 
|                                                                                  |                                                                                             |                                           |        | Corporation                                     |         |            |         |                        |         | Non-         |        |       |        |   |          |              |        |  |     |  | 
|                                                                                  |                                                                                             |                                           |        | (Parent                                         |         | Subsidiary |         | Guarantor              |         |              |        |       |        |   |          |              |        |  |     | 
|                                                                                  |                                                                                             |                                           |        | Company Only)                                   |         | Guarantors |         | Subsidiaries           |         | Eliminations |        |       |        |   |          | Consolidated
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |                        |         |              |        |       |        |   |          |             
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         | (dollars in thousands) |         |              |        |       |        |   |          |             
|Operating activities                                                              |                                                                                             |                                           |        |                                                 |         |            |         |                        |         |              |        |       |        |   |          |              |        |  |     |  | 
|Net income                                                                        |                                                                                             | $                                         | 10,176 |                                                 |         | $          | 11,050  |                        |         | $            | 2,217  |       |        | $ | (13,267) |              | (a)    |  |     |  | 
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                                             |                                           |        |                                                 |         |            |         |                        |         |              |        |       |        |   |          |              |        |  |     |  | 
|                                                                                  | Depreciation and amortization                                                               |                                           |        | 416                                             |         |            |         | 4,431                  |         |              |        | 1,179 |        |   |          |             |        |  |     |  | 
|                                                                                  | Provision for bad debts                                                                     |                                           |        |                                                |         |            |         | 8,440                  |         |              |        | 2,003 |        |   |          |             |        |  |     |  | 
|                                                                                  | Minority interests                                                                          |                                           |        |                                                |         |            |         |                       |         |              |        | 603   |        |   |          |             |        |  |     |  | 
|                                                                                  | Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |                                           |        |                                                 |         |            |         |                        |         |              |        |       |        |   |          |              |        |  |     |  | 
|                                                                                  |                                                                                             | Equity (loss) in earnings of subsidiaries |        |                                                 | (12,215 | )          |         |                        | (1,052  | )            |        |       |       |   |          |              | 13,267 |  | (a) |  | 
|                                                                                  |                                                                                             | Intercompany                              |        |                                                 | 1,606   |            |         |                        | 5,451   |              |        |       | (7,057 | ) |          |              |       |  |     |  | 
|                                                                                  |                                                                                             | Accounts receivable                       |        |                                                 | (291    | )          |         |                        | (16,158 | )            |        |       | 695    |   |          |              |       |  |     |  | 
|                                                                                  |                                                                                             | Other current assets                      |        |                                                 | (257    | )          |         |                        | (170    | )            |        |       | 286    |   |          |              |       |  |     |  | 
|                                                                                  |                                                                                             | Other assets                              |        |                                                 | 893     |            |         |                        | (1,555  | )            |        |       | 1,123  |   |          |              |       |  |     |  | 
|                                                                                  |                                                                                             | Accounts payable                          |        |                                                 | 1,924   |            |         |                        | (552    | )            |        |       | (438   | ) |          |              |       |  |     |  | 
|                                                                                  |                                                                                             | Due to third-party payors                 |        |                                                 | (3,200  | )          |         |                        | 8,751   |              |        |       | 2,458  |   |          |              |       |  |     |  | 
|                                                                                  |                                                                                             | Accrued expenses                          |        |                                                 | 2,579   |            |         |                        | 7,637   |              |        |       | (866   | ) |          |              |       |  |     |  | 
|                                                                                  |                                                                                             | Income taxes                              |        |                                                 | 4,981   |            |         |                        |        |              |        |       | (935   | ) |          |              |       |  |     |  | 
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |                        |         |              |        |       |        |   |          |              |        |  |     |  | 
|Net cash provided by operating activities                                         |                                                                                             |                                           | 6,612  |                                                 |         |            | 26,273  |                        |         |              | 1,268  |       |        |   |         |              |        |  |     |  | 
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |                        |         |              |        |       |        |   |          |              |        |  |     |  | 
|Investing activities                                                              |                                                                                             |                                           |        |                                                 |         |            |         |                        |         |              |        |       |        |   |          |              |        |  |     |  | 
|Purchases of property and equipment, net                                          |                                                                                             |                                           | (329   | )                                               |         |            | (7,594  | )                      |         |              | (1,036 | )     |        |   |         |              |        |  |     |  | 
|Earnout payments                                                                  |                                                                                             |                                           |       |                                                 |         |            | (489    | )                      |         |              |       |       |        |   |         |              |        |  |     |  | 
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |                        |         |              |        |       |        |   |          |              |        |  |     |  | 
|Net cash used in investing activities                                             |                                                                                             |                                           | (329   | )                                               |         |            | (8,083  | )                      |         |              | (1,036 | )     |        |   |         |              |        |  |     |  | 
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |                        |         |              |        |       |        |   |          |              |        |  |     |  | 
|Financing activities                                                              |                                                                                             |                                           |        |                                                 |         |            |         |                        |         |              |        |       |        |   |          |              |        |  |     |  | 
|Intercompany debt reallocation                                                    |                                                                                             |                                           | 18,152 |                                                 |         |            | (18,446 | )                      |         |              | 294    |       |        |   |         |              |        |  |     |  | 
|Net repayments on credit facility debt                                            |                                                                                             |                                           | (8,320 | )                                               |         |            |        |                        |         |              | (671   | )     |        |   |         |              |        |  |     |  | 
|Principal payments on seller and other debt                                       |                                                                                             |                                           | (370   | )                                               |         |            | (2,370  | )                      |         |              |       |       |        |   |         |              |        |  |     |  | 
|Proceeds from issuance of common stock                                            |                                                                                             |                                           | 973    |                                                 |         |            |        |                        |         |              |       |       |        |   |         |              |        |  |     |  | 
|Proceeds from bank overdrafts                                                     |                                                                                             |                                           | 595    |                                                 |         |            |        |                        |         |              |       |       |        |   |         |              |        |  |     |  | 
|Payment of deferred financing costs                                               |                                                                                             |                                           | (67    | )                                               |         |            |        |                        |         |              |       |       |        |   |         |              |        |  |     |  | 
|Distributions to minority interests                                               |                                                                                             |                                           |        |                                                 |         |            |        |                        |         |              | (159   | )     |        |   |         |              |        |  |     |  | 
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |                        |         |              |        |       |        |   |          |              |        |  |     |  | 
|Net cash provided by (used in) financing activities                               |                                                                                             |                                           | 10,963 |                                                 |         |            | (20,816 | )                      |         |              | (536   | )     |        |   |         |              |        |  |     |  | 
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |                        |         |              |        |       |        |   |          |              |        |  |     |  | 
|Effect of exchange rate changes on cash
and cash equivalents                      |                                                                                             |                                           | (3     | )                                               |         |            |        |                        |         |              |       |       |        |   |         |              |        |  |     |  | 
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |                        |         |              |        |       |        |   |          |              |        |  |     |  | 
|Net increase (decrease) in cash and cash equivalents                              |                                                                                             |                                           | 17,243 |                                                 |         |            | (2,626  | )                      |         |              | (304   | )     |        |   |         |              |        |  |     |  | 
|Cash and cash equivalents at beginning of period                                  |                                                                                             |                                           | 559    |                                                 |         |            | 8,086   |                        |         |              | 2,058  |       |        |   |         |              |        |  |     |  | 
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |                        |         |              |        |       |        |   |          |              |        |  |     |  | 
|Cash and cash equivalents at end of period                                        |                                                                                             | $                                         | 17,802 |                                                 |         | $          | 5,460   |                        |         | $            | 1,754  |       |        | $ |         |              |        |  |     |  | 
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |                        |         |              |        |       |        |   |          |              |        |  |     |  | 



|(a) |  | Elimination of equity in earnings of subsidiary.
|--- |  | ------------------------------------------------

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

You should read this discussion together with our consolidated financial
statements and notes thereto contained in our Form 10-K filed with the
Securities Exchange Commission on March 14, 2003.

Forward Looking Statements

This discussion contains forward-looking statements relating to the
financial condition, results of operations, plans, objectives, future
performance and business of Select Medical Corporation. These statements
include, without limitation, statements preceded by, followed by or that
include the words believes, expects, anticipates, estimates or similar
expressions. These forward-looking statements involve risks and uncertainties.
Actual results may differ materially from those contemplated by the
forward-looking statements due to factors including the following:



| |  |  | a change in government reimbursement for our services
that would affect our revenue;                                                                                
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the failure of our long-term acute care hospitals to
maintain their status as such, which could negatively impact our
profitability;                                
|
| |  |  | a government investigation or assertion that we have
violated applicable regulations may result in increased costs and
a significant use of internal resources,     
|
| |  |  | shortages in qualified nurses could increase our operating costs significantly;                                                                                     
|
| |  |  | the effects of liability and other claims asserted against us;                                                                                                      
|
| |  |  | conditions in the malpractice insurance market may
further increase the cost of malpractice insurance and/or force
us to assume even higher self-insured retentions;
|
| |  |  | private third party payors of our services may
undertake cost containment initiatives that would decrease our
revenue; and                                          
|
| |  |  | future acquisitions may use significant resources and
expose us to unforeseen risks.                                                                                

For a discussion of these and other factors affecting our business, see the
section captioned Risk Factors in our Form 10-K under Item 1  Business.

Overview

We are a leading operator of specialty acute care hospitals for long term
stay patients in the United States. We are also a leading operator of
outpatient rehabilitation clinics in the United States and Canada. As of March
31, 2003, we operated 72 specialty acute care hospitals in 24 states and 739
outpatient rehabilitation clinics in 32 states, the District of Columbia and
seven Canadian provinces. We began operations in 1997 under the leadership of
our current management team.

We operate through two business segments, our specialty acute care
hospital segment and our outpatient rehabilitation segment. For the three
months ended March 31, 2003, we had net operating revenues of $312.3 million.
Of this total, we earned approximately 60% of our net operating revenues from
our specialty hospitals and approximately 40% from our outpatient
rehabilitation business.

Our specialty acute care hospital segment consists of hospitals designed
to serve the needs of long term stay acute patients. These patients typically
suffer from serious and often complex medical conditions that require a high
degree of care. Our outpatient rehabilitation business consists of clinics and
contract services that provide physical, occupational and speech rehabilitation
services. Our patients are typically diagnosed with musculoskeletal
impairments that restrict their ability to perform normal activities of daily
living.

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The following table sets forth operating statistics for our specialty
acute care hospitals and our outpatient rehabilitation clinics for each of the
periods presented. The data in the table reflect the changes in the number of
specialty acute care hospitals and outpatient rehabilitation clinics we operate
that resulted from acquisitions, start-up activities and closures. The
operating statistics reflect data for the period of time these operations were
managed by us.

|                               |                                          |                                       |   |                    |    |      |   |         |    | 
|------------------------------ | ---------------------------------------- | ------------------------------------- | - | ------------------ | -- | ---- | - | ------- | -- | 
|                               |                                          |                                       |   | Three months ended
|                               |                                          |                                       |   |                   
|                               |                                          |                                       |   | March 31,         
|                               |                                          |                                       |   |                   
|                               |                                          |                                       |   | 2003               |    | 2002
|                               |                                          |                                       |   |                    |    |     
|Specialty Hospital Data        |                                          |                                       |   |                    |    |      |   |        
|                               | # of Hospitals - Start of Period         |                                       |   | 72                 |    |      |   | 64      |   
|                               |                                          | # of Hospital Start-ups               |   |                    | 0  |      |   |         | 0  | 
|                               |                                          |                                       |   |                    |    |      |   |        
|                               | # of Hospitals - End of Period           |                                       |   | 72                 |    |      |   | 64      |   
|                               |                                          |                                       |   |                    |    |      |   |        
|                               | # of Licensed Beds                       |                                       |   | 2,616              |    |      |   | 2,307   |   
|                               | # of Admissions                          |                                       |   | 5,958              |    |      |   | 5,211   |   
|                               | # of Patient Days                        |                                       |   | 165,818            |    |      |   | 149,869 |   
|                               | Average Length of Stay                   |                                       |   | 29                 |    |      |   | 30      |   
|                               | Net Revenue Per Patient Day (a)          |                                       | $ | 1,106              |    |      | $ | 993     |   
|                               | Occupancy Rate                           |                                       |   | 71                 | %  |      |   | 72      | % 
|                               | % Patient Days  Medicare                |                                       |   | 78                 | %  |      |   | 77      | % 
|Outpatient Rehabilitation Data |                                          |                                       |   |                    |    |      |   |        
|                               | # of Clinics Owned - Start of Period     |                                       |   | 679                |    |      |   | 664     |   
|                               |                                          | # of Clinics Acquired                 |   |                    | 33 |      |   |         | 1  | 
|                               |                                          | # of Clinic Start-ups                 |   |                    | 6  |      |   |         | 14 | 
|                               |                                          | # of Clinics Closed/Sold/Consolidated |   |                    | 10 |      |   |         | 12 | 
|                               |                                          |                                       |   |                    |    |      |   |        
|                               | # of Clinics Owned - End of Period       |                                       |   | 708                |    |      |   | 667     |   
|                               | # of Clinics Managed - End of Period     |                                       |   | 31                 |    |      |   | 53      |   
|                               |                                          |                                       |   |                    |    |      |   |        
|                               | Total # of Clinics (All)  End of Period |                                       |   | 739                |    |      |   | 720     |   
|                               |                                          |                                       |   |                    |    |      |   |        
|                               | # of Visits (U.S)                        |                                       |   | 981,572            |    |      |   | 964,416 |   
|                               | Net Revenue Per Visit (U.S.) (b)         |                                       | $ | 88                 |    |      | $ | 86      |   

|    |  |                                                                                                                                                                                                                                                                           
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Net revenue per patient day is calculated by dividing
specialty hospital patient service revenues by the total number of
patient days.                                                                                                                                    
|    |  |                                                                                                                                                                                                                                                                           
|(b) |  | Net revenue per visit is calculated by dividing outpatient
rehabilitation clinic revenue by the total number of visits. For
purposes of this computation, outpatient rehabilitation clinic
revenue does not include our Canadian subsidiary and contract
services revenue.

Our goal is to open approximately eight to ten new specialty acute care
hospitals each year, utilizing primarily our hospital within a hospital
model. We also may open new specialty acute care hospitals in freestanding
buildings. We also intend to open new clinics in our current markets where we
can benefit from existing referral relationships and brand awareness to produce
incremental growth. From time to time, we also intend to evaluate acquisition
opportunities that may enhance the scale of our business and expand our
geographic reach.

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Critical Accounting Matters

Sources of Revenue

Our net operating revenues are derived from a number of sources, including
commercial, managed care, private and governmental payors. Our net operating
revenues include amounts estimated by management to be reimbursable from each
of the applicable payors and the federal Medicare program. Amounts we receive
for treatment of patients are generally less than the standard billing rates.
We account for the differences between the estimated reimbursement rates and
the standard billing rates as contractual adjustments, which we deduct from
gross revenues to arrive at net operating revenues.

Approximately
69% and 64% of our specialty hospital revenues for the three
months ended March 31, 2003 and 2002, respectively, were received from services
provided to Medicare patients. Of this amount, approximately 53% and 98% were
paid by Medicare under a cost-based reimbursement methodology for the three
months ended March 31, 2003 and 2002, respectively. These payments are subject
to final cost report settlements based on administrative review and audit by
third parties. An annual cost report is filed for each provider to report the
cost of providing services and to settle the difference between the interim
payments we receive and final costs. We record adjustments to the original
estimates in the periods that such adjustments become known. Historically
these adjustments have not been significant. Because our routine payments from
Medicare are different than the final reimbursement due to us under the cost
based reimbursement system, we record a receivable or payable for the
difference. As of March 31, 2003 we had a net amount due from Medicare of $0.7
million and at December 31, 2002 we had a net amount due to Medicare of $7.3
million, related to our cost-based hospitals. We recorded this amount as due
to third party payors on our balance sheet. Substantially all of our Medicare
cost reports are settled through 1999.

Net operating revenues generated directly from the Medicare program from
all segments represented approximately 45% and 40% of net operating revenues
for the three months ended March 31, 2003 and 2002, respectively. The increase
in the percentage of our revenues generated from the Medicare program is due to
the growth in the number of specialty hospitals and their higher respective
share of Medicare revenues generated in this segment of our business compared
to our outpatient rehabilitation segment.

On August 30, 2002, the Centers for Medicare & Medicaid Services (CMS)
published final regulations establishing a prospective payment system for
Medicare payment of long-term acute care hospitals (LTCH-PPS), which replaces
the reasonable cost-based payment system previously in effect. Under LTCH-PPS,
each discharged patient will be assigned to a distinct long-term care
diagnosis-related group (LTC-DRG), and a long-term acute care hospital will
generally be paid a pre-determined fixed amount applicable to the assigned
LTC-DRG (adjusted for area wage differences). As required by Congress, LTC-DRG
payment rates have been set to maintain budget neutrality with total
expenditures that would have been made under the reasonable cost-based payment
system.

LTCH-PPS is being phased in over a five-year transition period, during
which a long-term care hospitals payment for each Medicare patient will be a
blended amount consisting of set percentages of the LTC-DRG payment rate and
the hospitals reasonable cost-based reimbursement. The LTC-DRG payment rate
is 20% for a
hospitals cost reporting period beginning on or after October 1, 2002,
and will increase by 20% for each cost reporting period thereafter until the
hospitals cost reporting period beginning on or after October 1, 2006, when
the hospital will be paid solely on the basis of LTC-DRG payment rates. A
long-term acute care hospital may elect to be paid solely on the basis of
LTC-DRG payment rates (and not be subject to the transition period) at the
start of any of its cost reporting periods during the transition period.

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During the quarter ended March 31, 2003, an additional
twenty-three of our hospitals implemented LTCH-PPS pursuant to the new
regulations. This brings the total number of our hospitals which have
implemented LTCH-PPS to thirty-six at March 31, 2003. Thirty-five of these
hospitals elected to be paid solely on the basis of LTC-DRG payments. The
balance of our hospitals are expected to implement LTCH-PPS over the next six
months.

The LTCH-PPS regulations also refined the criteria that must be met in
order for a hospital to be classified as a long-term acute care hospital. For
cost reporting periods beginning on or after October 1, 2002, a long-term acute
care hospital must have an average inpatient length of stay for Medicare
patients (including both Medicare covered and non-covered days) of greater than
25 days. Previously, average lengths of stay were measured with respect to all
patients.

While the implementation of LTCH-PPS is intended to be revenue neutral to
the industry, it may be possible for our hospitals to experience enhanced
financial performance due to our low cost operating model and the high acuity
of our patient population. However, there are risks associated with
transitioning to the new payment system. The conversion to the new payment
system was accretive to our earnings in the quarter ended March 31, 2003, and
we are continuing to assess the long-term impact of the LTCH-PPS.

Other revenue primarily represents amounts the Medicare program reimburses
us for a portion of our corporate expenses that are related to our specialty
hospital operations. Under the LTCH-PPS, we will no longer get specifically
reimbursed for the portion of our corporate costs related to the provision of
Medicare services in our specialty hospitals. Instead, we will receive from
Medicare a pre-determined fixed amount assigned to the applicable LTC-DRG,
which is intended to reflect the average cost of treating such a patient,
including corporate costs. As a result of this change in our revenue stream,
we began allocating corporate departmental costs that are directly related to
our specialty hospital operations to our specialty hospital segment in 2003 to
better match the cost with the revenues for this segment. We do not believe
that this allocation of costs will have any adverse impact on the profitability
or margins of this segment, due to the increase in net revenue this segment
will experience under LTCH-PPS.

Insurance

Under a number of our insurance programs, which includes our employee
health insurance program and certain components under our property and casualty
insurance program, we are liable for a portion of our losses. In these cases
we accrue for our losses under an occurrence based principal whereby we
estimate the losses that will be incurred by us in a respective accounting
period and accrue that estimated liability. Where we have substantial
exposure, we utilize actuaries to assist us in estimating the losses. In cases
where we have minimal exposure, we will estimate our losses by analyzing
historical trends. We monitor these programs quarterly and make revision to
our estimates as necessary to appropriately reflect our liability under these
programs.

Bad Debts

We estimate our bad debts based upon the age of our accounts receivable
and our historical collection percentages. These estimates are sensitive to
changes in the economy that affect our customers.

Related Party

We are party to various rental and other agreements with companies
affiliated through common ownership. Our payments to these related parties
amounted to $0.4 million for each of the three months ended March 31, 2003 and
2002. Our future commitments are related to commercial office space we lease
for our corporate headquarters in Mechanicsburg, Pennsylvania. These future
commitments amount to $16.3 million through 2015. These transactions and
commitments are described more fully in Note 16 to Select Medical

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Corporations consolidated financial statements contained in our form 10-K
for the year ended December 31, 2002.

Results of Operations

The following table outlines, for the periods indicated, selected
operating data as a percentage of net operating revenues.

|                                                   |  |                    |       |      |  |  |       |  
|-------------------------------------------------- |  | ------------------ | ----- | ---- |  |  | ----- | -
|                                                   |  | Three Months Ended
|                                                   |  | March 31,         
|                                                   |  |                   
|                                                   |  | 2003               |       | 2002
|                                                   |  |                    |       |     
|Net operating revenues                             |  |                    | 100.0 | %    |  |  | 100.0 | %
|                                                   |  |                    |       |      |  |  |       |  
|Cost of services (a)                               |  |                    | 80.8  | %    |  |  | 81.5  | %
|General and administrative                         |  |                    | 3.0   | %    |  |  | 3.6   | %
|Bad debt expense                                   |  |                    | 3.9   | %    |  |  | 3.8   | %
|                                                   |  |                    |       |      |  |  |       |  
|EBITDA (b)                                         |  |                    | 12.3  | %    |  |  | 11.1  | %
|Depreciation and amortization                      |  |                    | 2.4   | %    |  |  | 2.2   | %
|                                                   |  |                    |       |      |  |  |       |  
|Income from operations                             |  |                    | 9.9   | %    |  |  | 8.9   | %
|Interest expense, net                              |  |                    | 2.0   | %    |  |  | 2.5   | %
|                                                   |  |                    |       |      |  |  |       |  
|Income before minority interests, and income taxes |  |                    | 7.9   | %    |  |  | 6.4   | %
|Minority interests                                 |  |                    | 0.3   | %    |  |  | 0.2   | %
|                                                   |  |                    |       |      |  |  |       |  
|Income before income taxes                         |  |                    | 7.6   | %    |  |  | 6.2   | %
|Income tax                                         |  |                    | 3.0   | %    |  |  | 2.5   | %
|                                                   |  |                    |       |      |  |  |       |  
|Net income                                         |  |                    | 4.6   | %    |  |  | 3.7   | %
|                                                   |  |                    |       |      |  |  |       |  

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The following table summarizes selected financial data by business segment, for
the periods indicated.

|                               |                           |               |    |                        |         |      |   |         |         |  |  |       |      |  
|------------------------------ | ------------------------- | ------------- | -- | ---------------------- | ------- | ---- | - | ------- | ------- |  |  | ----- | ---- | -
|                               |                           |               |    | Three Months Ended     |         |      |   |        
|                               |                           |               |    | March 31,              |         |      |   |        
|                               |                           |               |    |                        |         | %   
|                               |                           |               |    | 2003                   |         | 2002 |   | Change 
|                               |                           |               |    |                        |         |      |   |        
|                               |                           |               |    | (dollars in thousands) |         |      |   |        
|Net operating revenues:        |                           |               |    |                        |         |      |   |         |         |  |  |      
|                               | Specialty hospitals       |               | $  | 183,428                |         |      | $ | 148,828 |         |  |  | 23.2  | %   
|                               | Outpatient rehabilitation |               |    | 125,575                |         |      |   | 119,694 |         |  |  | 4.9   |     
|                               | Other                     |               |    | 3,304                  |         |      |   | 3,398   |         |  |  | (2.8  | )   
|                               |                           |               |    |                        |         |      |   |         |         |  |  |       |     
|                               |                           | Total company |    | $                      | 312,307 |      |   | $       | 271,920 |  |  |       | 14.9 | %
|                               |                           |               |    |                        |         |      |   |         |         |  |  |       |     
|EBITDA: (b)                    |                           |               |    |                        |         |      |   |         |         |  |  |      
|                               | Specialty hospitals       |               | $  | 25,486                 |         |      | $ | 15,667  |         |  |  | 62.7  | %   
|                               | Outpatient rehabilitation |               |    | 19,503                 |         |      |   | 21,048  |         |  |  | (7.3  | )   
|                               | Other                     |               |    | (6,637                 | )       |      |   | (6,659  | )       |  |  | 0.3   |     
|                               |                           |               |    |                        |         |      |   |         |         |  |  |       |     
|                               |                           | Total company |    | $                      | 38,352  |      |   | $       | 30,056  |  |  |       | 27.6 | %
|                               |                           |               |    |                        |         |      |   |         |         |  |  |       |     
|Income (loss) from operations: |                           |               |    |                        |         |      |   |         |         |  |  |      
|                               | Specialty hospitals       |               | $  | 21,859                 |         |      | $ | 12,619  |         |  |  | 73.2  | %   
|                               | Outpatient rehabilitation |               |    | 16,588                 |         |      |   | 18,522  |         |  |  | (10.4 | )   
|                               | Other                     |               |    | (7,609                 | )       |      |   | (7,111  | )       |  |  | (7.0  | )   
|                               |                           |               |    |                        |         |      |   |         |         |  |  |       |     
|                               |                           | Total company |    | $                      | 30,838  |      |   | $       | 24,030  |  |  |       | 28.3 | %
|                               |                           |               |    |                        |         |      |   |         |         |  |  |       |     
|EBITDA margins: (b)            |                           |               |    |                        |         |      |   |         |         |  |  |      
|                               | Specialty hospitals       |               |    | 13.9                   | %       |      |   | 10.5    | %       |  |  | 32.4  | %   
|                               | Outpatient rehabilitation |               |    | 15.5                   |         |      |   | 17.6    |         |  |  | (11.9 | )   
|                               | Other                     |               | NM |                        |         | NM   |   |         | NM      | 
|                               |                           |               |    |                        |         |      |   |         |         |  |  |      
|                               | Total company             |               |    | 12.3                   | %       |      |   | 11.1    | %       |  |  | 10.8  | %   
|                               |                           |               |    |                        |         |      |   |         |         |  |  |       |     
|Total assets:                  |                           |               |    |                        |         |      |   |         |         |  |  |      
|                               | Specialty hospitals       |               | $  | 311,814                |         |      | $ | 298,352 |         |  |  |       |     
|                               | Outpatient rehabilitation |               |    | 329,603                |         |      |   | 327,591 |         |  |  |       |     
|                               | Other                     |               |    | 62,643                 |         |      |   | 44,791  |         |  |  |       |     
|                               |                           |               |    |                        |         |      |   |         |         |  |  |       |     
|                               | Total company             |               | $  | 704,060                |         |      | $ | 670,734 |         |  |  |       |     
|                               |                           |               |    |                        |         |      |   |         |         |  |  |       |     
|Capital expenditures           |                           |               |    |                        |         |      |   |         |         |  |  |      
|                               | Specialty hospitals       |               | $  | 2,887                  |         |      | $ | 6,183   |         |  |  |       |     
|                               | Outpatient rehabilitation |               |    | 2,740                  |         |      |   | 2,435   |         |  |  |       |     
|                               | Other                     |               |    | 1,346                  |         |      |   | 341     |         |  |  |       |     
|                               |                           |               |    |                        |         |      |   |         |         |  |  |       |     
|                               | Total company             |               | $  | 6,973                  |         |      | $ | 8,959   |         |  |  |       |     
|                               |                           |               |    |                        |         |      |   |         |         |  |  |       |     

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The
following tables reconcile net income (loss) to EBITDA for the Company and
income (loss) from operations to EBITDA on a segment basis.

|                              |  |                |         |           |  |                        |         |            |  |     |         |   |  |    |        |  
|----------------------------- |  | -------------- | ------- | --------- |  | ---------------------- | ------- | ---------- |  | --- | ------- | - |  | -- | ------ | -
|                              |  | March 31, 2003
|                              |  |               
|                              |  |                |         |           |  | Specialty              |         | Outpatient |  | All
|                              |  | Total          |         | Hospitals |  | Rehabilitation         |         | Other     
|                              |  |                |         |           |  |                        |         |           
|                              |  |                |         |           |  | (dollars in thousands) |         |            |  |    
|Net income                    |  | $              | 14,454  |           |  |                        |         |            |  |     |         |   |  |    |        |  
|Income tax expense            |  |                | 9,320   |           |  |                        |         |            |  |     |         |   |  |    |        |  
|Minority interest             |  |                | 824     |           |  |                        |         |            |  |     |         |   |  |    |        |  
|Interest expense, net         |  |                | 6,240   |           |  |                        |         |            |  |     |         |   |  |    |        |  
|                              |  |                |         |           |  |                        |         |            |  |     |         |   |  |    |        |  
|Income (loss) from
operations |  | $              | 30,838  |           |  | $                      | 21,859  |            |  | $   | 16,588  |   |  | $  | (7,609 | )
|Depreciation and
amortization |  |                | 7,514   |           |  |                        | 3,627   |            |  |     | 2,915   |   |  |    | 972    |  
|                              |  |                |         |           |  |                        |         |            |  |     |         |   |  |    |        |  
|EBITDA (b)                    |  | $              | 38,352  |           |  | $                      | 25,486  |            |  | $   | 19,503  |   |  | $  | (6,637 | )
|                              |  |                |         |           |  |                        |         |            |  |     |         |   |  |    |        |  
|Net revenue                   |  | $              | 312,307 |           |  | $                      | 183,428 |            |  | $   | 125,575 |   |  | $  | 3,304  |  
|EBITDA margin (b)             |  |                | 12.3    | %         |  |                        | 13.9    | %          |  |     | 15.5    | % |  | NM

|                              |  |                |         |           |  |                        |         |            |  |     |         |   |  |    |        |  
|----------------------------- |  | -------------- | ------- | --------- |  | ---------------------- | ------- | ---------- |  | --- | ------- | - |  | -- | ------ | -
|                              |  | March 31, 2002
|                              |  |               
|                              |  |                |         |           |  | Specialty              |         | Outpatient |  | All
|                              |  | Total          |         | Hospitals |  | Rehabilitation         |         | Other     
|                              |  |                |         |           |  |                        |         |           
|                              |  |                |         |           |  | (dollars in thousands) |         |            |  |    
|Net income                    |  | $              | 10,176  |           |  |                        |         |            |  |     |         |   |  |    |        |  
|Income tax expense            |  |                | 6,544   |           |  |                        |         |            |  |     |         |   |  |    |        |  
|Minority interest             |  |                | 603     |           |  |                        |         |            |  |     |         |   |  |    |        |  
|Interest expense, net         |  |                | 6,707   |           |  |                        |         |            |  |     |         |   |  |    |        |  
|                              |  |                |         |           |  |                        |         |            |  |     |         |   |  |    |        |  
|Income (loss) from
operations |  | $              | 24,030  |           |  | $                      | 12,619  |            |  | $   | 18,522  |   |  | $  | (7,111 | )
|Depreciation and
amortization |  |                | 6,026   |           |  |                        | 3,048   |            |  |     | 2,526   |   |  |    | 452    |  
|                              |  |                |         |           |  |                        |         |            |  |     |         |   |  |    |        |  
|EBITDA (b)                    |  | $              | 30,056  |           |  | $                      | 15,667  |            |  | $   | 21,048  |   |  | $  | (6,659 | )
|                              |  |                |         |           |  |                        |         |            |  |     |         |   |  |    |        |  
|Net revenue                   |  | $              | 271,920 |           |  | $                      | 148,828 |            |  | $   | 119,694 |   |  | $  | 3,398  |  
|EBITDA margin (b)             |  |                | 11.1    | %         |  |                        | 10.5    | %          |  |     | 17.6    | % |  | NM

The following table reconciles same hospitals information.

|                             |                                                      |  |                        |         |                |  |      |         |  
|---------------------------- | ---------------------------------------------------- |  | ---------------------- | ------- | -------------- |  | ---- | ------- | -
|                             |                                                      |  | Three Months Ended    
|                             |                                                      |  |                       
|                             |                                                      |  | March 31, 2003         |         | March 31, 2002
|                             |                                                      |  |                        |         |               
|                             |                                                      |  | (dollars in thousands)
|Net Operating Revenue        |                                                      |  |                        |         |                |  |      |        
|                             | Specialty hospitals net operating revenue            |  | $                      | 183,428 |                |  | $    | 148,828 |  
|                             | Less: Specialty hospitals opened after 1/1/02        |  |                        | 8,803   |                |  |      |        |  
|                             |                                                      |  |                        |         |                |  |      |        
|                             | Same hospitals net operating revenue                 |  | $                      | 174,625 |                |  | $    | 148,828 |  
|                             |                                                      |  |                        |         |                |  |      |        
|EBITDA                       |                                                      |  |                        |         |                |  |      |        
|                             | Specialty hospitals EBITDA                           |  | $                      | 25,486  |                |  | $    | 15,667  |  
|                             | Less: Specialty hospitals opened after 1/1/02 losses |  |                        | (1,262  | )              |  |      | (738    | )
|                             |                                                      |  |                        |         |                |  |      |        
|                             | Same hospitals EBITDA                                |  | $                      | 26,748  |                |  | $    | 16,405  |  
|                             |                                                      |  |                        |         |                |  |      |        
|Same hospitals EBITDA margin |                                                      |  | 15.3                   | %       |                |  | 11.0 | %      

NM  Not Meaningful



|(a) |  | Cost of services include salaries, wages and benefits, operating
supplies, lease and rent expense and other operating costs.                                                                                         
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | We define EBITDA as net income (loss) before interest, income taxes,
depreciation and amortization and
minority interest. EBITDA is commonly used as an analytical indicator
within the healthcare industry, and also

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| |  | serves as a measure of leverage capacity and debt service ability. EBITDA is
also used by management to evaluate financial performance and determine
resource allocation for each of our operating units, and for us as a whole.
EBITDA is not a measure of financial performance under generally accepted
accounting principles. Items excluded from EBITDA are significant components
in understanding and assessing financial performance. EBITDA should not be
considered in isolation or as an alternative to, or substitute for, net
income, cash flows generated by operations, investing or financing
activities, or other financial statement data presented in the consolidated
financial statements as indicators of financial performance or liquidity.
Because EBITDA is not a measurement determined in accordance with generally
accepted accounting principles and is thus susceptible to varying
calculations, EBITDA as presented may not be comparable to other similarly
titled measures of other companies.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002

Net Operating Revenues

Our net operating revenues increased by 14.9% to $312.3 million for the
three months ended March 31, 2003 compared to $271.9 million for the three
months ended March 31, 2002. The reasons for the increase in net operating
revenues are discussed below.

Specialty Acute Care Hospitals.Our specialty hospital net operating
revenues increased 23.2% to $183.4 million for the three months ended March 31,
2003 compared to $148.8 million for the three months ended March 31, 2002. Net
operating revenues for the 64 specialty hospitals opened before January 1, 2002
and operated throughout both periods increased 17.3% to $174.6 million for the
three months ended March 31, 2003 from $148.8 million for the three months
ended March 31, 2002. This resulted from a higher volume of patient days and a
higher net revenue per patient day. The remaining increase of $8.8 million
resulted from the internal development of new specialty hospitals that
commenced operations in 2002.

Outpatient Rehabilitation.Our outpatient rehabilitation net operating
revenues increased 4.9% to $125.6 million for the three months ended March 31,
2003 compared to $119.7 million for the three months ended March 31, 2002. The
number of patient visits in our U.S. based outpatient rehab clinics increased
1.8% for the three months ended March 31, 2003 to 981,572 visits compared to
964,416 visits for the three months ended March 31, 2002. Net revenue per
visit in these clinics increased to $88 for the three months ended March 31,
2003 compared to $86 for the three months ended March 31, 2002. The increase
was principally related to the consolidation of a group of clinics that we
previously managed and clinics that we acquired after March 31, 2002.
Excluding the effects of the previously managed clinics and the recently
acquired clinics, net operating revenues for the three months ended March 31,
2003 would have been $121.6 million, a 1.6% increase from the prior year, and
the number of U.S. based visits would have been 905,216, a 6.1% decline from
the prior year. This decline in visits is principally related to the harsh
weather we experienced in several of our markets, which also constrained our
revenue growth. We estimate that we lost approximately 40,000
U.S. based visits due to
weather-related cancellations and temporary clinic closures during the three
months ended March 31, 2003. These lost weather related visits
affected clinics we operated throughout both periods.

Other.Our other revenues remained relatively constant at $3.3 million
for the three months ended March 31, 2003 compared to $3.4 million for the
three months ended March 31, 2002. We expect this revenue item to decline
throughout the remainder of 2003 as our specialty acute care hospitals convert
to LTCH-PPS. See Critical Accounting Matters-Sources of Revenue for a
further discussion of this change.

Operating Expenses

Our operating expenses increased by 13.3% to $274.0 million for the three
months ended March 31, 2003 compared to $241.9 million for the three months
ended March 31, 2002. Our operating expenses include our cost of services,
general and administrative expense and bad debt expense. The increase in
operating expenses was principally related to the internal development of new
specialty hospitals that commenced operations in 2002, costs associated with
increased patient volumes, consolidations of previously managed clinics and
higher benefit costs experienced in our NovaCare outpatient operations. As a
percentage of our net operating revenues, our operating expenses were 87.7% for
the three months ended March 31, 2003 compared to 88.9% for the three months
ended March 31, 2002. Cost of services as a percentage of operating revenues

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decreased to 80.8% for the three months ended March 31, 2003 from 81.5%
for the three months ended March 31, 2002. These costs primarily reflect our
labor expenses. This decrease resulted because we experienced a larger rate of
growth in our specialty hospital revenues compared to the growth in our
specialty hospital cost of services. Another component of cost of services is
rent expense, which was $22.2 million for the three months ended March 31, 2003
compared to $20.6 million for the three months ended March 31, 2002. This
increase is principally related to our new hospitals that opened during 2002.
During the same time period, general and administrative expense as a percentage
of net operating revenues decreased to 3.0% for the three months ended March
31, 2003 from 3.6% for the three months ended March 31, 2002. Our bad debt
expense as a percentage of net operating revenues was 3.9% for the three months
ended March 31, 2003 compared to 3.8% for the three months ended March 31,
2002.

EBITDA

Our total EBITDA increased 27.6% to $38.4 million for the three months
ended March 31, 2003 compared to $30.1 million for the three months ended March
31, 2002. Our EBITDA margins increased to 12.3% for the three months ended
March 31, 2003 compared to 11.1% for the three months ended March 31, 2002. Our
EBITDA margins are adversely affected by the losses incurred at our start-up
hospitals. If we exclude the dilutive effect caused by the hospitals opened in
2002 and our pre-opening hospitals, our overall EBITDA margins would be 13.1%
for the three months ended March 31, 2003 compared to 11.3% for the three
months ended March 31, 2002. For cash flow information, see -Capital
Resources and Liquidity.

Specialty Acute Care Hospitals.EBITDA increased by 62.7% to $25.5
million for the three months ended March 31, 2003 compared to $15.7 million for
the three months ended March 31, 2002. Our EBITDA margins increased to 13.9%
for the three months ended March 31, 2003 from 10.5% for the three months ended
March 31, 2002. The hospitals opened before January 1, 2002 and operated
throughout both periods had EBITDA of $26.7 million, an increase of 63.0% over
the EBITDA of these hospitals in the same period last year. This increase in
same hospital EBITDA resulted from an increase in patient days and revenue per
patient day. Our EBITDA margin in these same store hospitals increased to 15.3%
for the three months ended March 31, 2003 from 11.0% for the three months ended
March 31, 2002.

Outpatient Rehabilitation.EBITDA declined by 7.3% to $19.5 million for
the three months ended March 31, 2003 compared to $21.0 million for the three
months ended March 31, 2002. Our EBITDA margins decreased to 15.5% for the
three months ended March 31, 2003 from 17.6% for the three months ended March
31, 2002. This EBITDA decline was primarily the result of three factors.
First, the adverse effect of patient visit cancellations and temporary clinic
closure due to the harsh weather in several of our markets. Second, our
benefit costs in our NovaCare outpatient operations continued to run at levels
higher than those experienced prior to April 2002. Third, beginning January 1,
2003, we purchased and began consolidating a group of clinics that we previously managed,
which had the effect of compressing our margins.

Other.The EBITDA loss was $6.6 million for the three months ended March
31, 2003 compared to a loss of $6.7 million for the three months ended March
31, 2002.

Income from Operations

Income from operations increased 28.3% to $30.8 million for the three
months ended March 31, 2003 compared to $24.0 million for the three months
ended March 31, 2002. The increase in income from operations resulted from the
EBITDA increases described above, and was offset by an increase in depreciation
and amortization expense of $1.5 million. The increase in depreciation and
amortization expense resulted primarily from increases in depreciation on fixed
asset additions that are principally related to new hospital and clinic
development.

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Interest Expense

Interest expense decreased by $0.4 million to $6.4 million for the three
months ended March 31, 2003 from $6.8 million for the three months ended March
31, 2002. The decline in interest expense is due to the lower debt levels
outstanding in 2003 compared to 2002, and a lower effective interest rate in
2003. The lower debt levels resulted from scheduled term amortization payments
and principal pre-payments that we have made under our credit facility. All
repayments have been made with cash flows generated through operations.

Minority Interests

Minority interests in consolidated earnings increased to $0.8 million for
the three months ended March 31, 2003 compared to $0.6 million for the three
months ended March 31, 2002. This increase resulted from the improved
profitability of our specialty hospitals with minority interests.

Income Taxes

We recorded income tax expense of $9.3 million for the three months ended
March 31, 2003. The expense represented an effective tax rate of 39.2% and
approximates the federal and state statutory tax rates. We recorded income tax
expense of $6.5 million for the three months ended March 31, 2002. This
expense represented an effective tax rate of 39.1%.

Capital Resources and Liquidity

For the three months ended March 31, 2003 operating activities provided
$24.4 million of cash flow compared to $34.2 million for the three months ended
March 31, 2002. Although our net income was greater for the three months ended
March 31, 2003 compared to the three months ended March 31, 2002, we
experienced this decrease in cash flow because of repayments of amounts due to
third-party payors and income tax payments offset the increased income and the
strong collections of accounts receivable that we experienced. Our accounts
receivable days outstanding were 64 days at March 31, 2003 compared to 73 days
at December 31, 2002 and 74 days at March 31, 2002.

Investing activities used $8.1 and $9.4 million of cash flow for the three
months ended March 31, 2003 and 2002, respectively. This usage resulted from
purchases of property and equipment of $7.0 and $9.0 million in 2003 and 2002,
respectively, that relate principally to new hospital development.
Additionally, we incurred earnout-related payments of $0.4 million in 2003
and $0.5 million in 2002 and acquisition payments of $0.7 million in 2003.

Financing activities used $33.9 and $10.4 million of cash for the three
months ended March 31, 2003 and 2002, respectively. This was due principally
to the repayment of credit facility, seller and other debt which when
aggregated amount to $32.3 and $11.7 million in 2003 and 2002, respectively.
Of the $32.3 million debt repayment occurring during the three months ended
March 31, 2003, $25.0 million was related to an accelerated pre-payment of our
term debt that we made with our excess cash reserves.

Capital Resources

Net working capital increased slightly to $133.1 million at March 31, 2003
compared to $130.6 million at December 31, 2002.

We have a credit agreement with a group of banks. Our credit facility
consists of a term facility of $43.5 million and a revolving credit facility
of $152.4 million. As of March 31, 2003 we had borrowed all of our available
loans under the U.S. and Canadian term loans and had availability to borrow an
additional $147.8 million under our revolving facility subject to certain
limitations. We have $4.6 million outstanding under letters of credit issued
through the credit facility. The revolving facility terminates in 2005.

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Borrowings under the credit agreement bear interest at a fluctuating rate
of interest based upon financial covenant ratio tests. As of March 31, 2003,
our weighted average interest rate under our credit agreement was approximately
5.0% compared to 7.4% at December 31, 2002. This reduction occurred on March
31, 2003 when our hedging agreement terminated. As a result, we did not
realize any significant change in our interest expense during the quarter ended
March 31, 2003. See Item 3, Quantitative and Qualitative Disclosures on
Market Risk for a discussion of our floating interest rates on borrowings
under our credit facility.

We believe that existing cash balances, internally generated cash flows
and borrowings under our revolving credit facility will be sufficient to
finance capital expenditures and working capital requirements for at least the
next twelve months. Our goal is to open eight to ten additional hospitals
before the end of 2003. A new specialty hospital has typically required
approximately $3.4 million per hospital over the initial year of operations to
fund leasehold improvements, equipment, start-up losses and working capital.
From time to time, we may complete acquisitions of specialty hospitals and
outpatient rehabilitation businesses. We currently have approximately $147.8
million of unused capacity under our revolving credit facility which can be
used for acquisitions. Based on the size of the acquisition, approval of the
acquisition by our lenders may be required. If funds required for future
acquisitions exceed existing sources of capital, we will need to increase our credit
facilities or obtain additional capital by other means.

Inflation

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

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities,
an interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to improve financial reporting of special purpose and
other entities. In accordance with the interpretation, business enterprises
that represent the primary beneficiary of another entity by retaining a
controlling financial interest in that entitys assets, liabilities, and
results of operations must consolidate the entity in their financial
statements. Prior to the issuance of FIN 46, consolidation generally occurred
when an enterprise controlled another entity through voting interests. FIN 46
is effective immediately for all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period beginning after June 15, 2003. We do
not expect FIN 46 to have a material impact on our financial statements.

In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 145 Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. As a result of rescinding SFAS
No. 4, Reporting Gains and Losses from Extinguishment of Debt, the
requirement that gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item, net of the related
income tax effect is eliminated. We reported extraordinary items in 2000 and
2001 as a result of debt extinguishments. The provisions of SFAS 145 that
affect us are effective for fiscal periods beginning after May 15, 2002,
although early adoption of SFAS 145 is permitted. In accordance with
the provisions of SFAS No. 145, we adopted this pronouncement in
the first quarter of 2003. As a result of the adoption
of SFAS No. 145, we reclassified our extraordinary items recorded in 2000 and
2001 to the other income and expense category of our consolidated statement of
operations.

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ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest rate changes, primarily as a result of floating
interest rates on borrowings under our credit facility. A change in interest
rates by one percentage point on variable rate debt would have resulted in
interest expense fluctuating approximately $44,000 for the three months ended
March 31, 2003. Our interest rate swap agreement terminated on March 31, 2003.
Based on the credit facility debt outstanding on March 31, 2003 and after the
termination of the interest rate swap agreement, a change in interest rates by
one percentage point would result in interest expense fluctuating approximately
$0.1 million for a three-month period.

Approximately 27% of our term-loan borrowings under our credit agreement
are denominated in Canadian dollars. Although we are not required by our
credit agreement to maintain a hedge on our foreign currency risk, we have
entered into a five year agreement that allows us to limit the cost of Canadian
dollars to a range of U.S.$0.6631 to U.S.$0.6711 per Canadian dollar to limit
our risk on the potential fluctuation in the exchange rate of the Canadian
dollar to the U.S. dollar.




ITEM 4.     CONTROLS AND PROCEDURES

Within 90 days prior to the filing date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures provide reasonable
assurance that material information required to be included in our periodic SEC
reports is recorded, processed, summarized and reported within the time periods
specified in the relevant SEC rules and forms.

In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.




PART II     OTHER INFORMATION




ITEM 1.     LEGAL PROCEEDINGS

On August 10, 1998 a complaint in the U.S. District Court for the Eastern
District of Pennsylvania was filed that named as defendants, NovaCare, Inc.
(now known as J.L. Halsey Corporation), other named defendants and 100
defendants who were to be named at a later time. This qui tamaction sought
triple damages and penalties under the False Claims Act against J.L. Halsey
Corporation. The allegations involve, among other things, the distinction
between individual and group billing in physical rehabilitation clinics that we
acquired from NovaCare. On October 16, 2000 the relator plaintiff made a
motion to amend the complaint to, among other things, add Select Medical
Corporation and some of its subsidiaries acquired in the NovaCare acquisition
as defendants in this case. This motion was granted in September of 2001. The
amended complaint alleges that from about January 1, 1995 through the present,
the defendants submitted false or fraudulent bills for physical therapy to
various federal health programs. On January 3, 2002, J.L. Halsey Corporation
and its related subsidiaries (including the subsidiaries acquired in the
NovaCare acquisition) entered into a settlement agreement with the relator
plaintiff and the government, pursuant to which, in exchange for a payment by
J.L. Halsey Corporation of $375,000, the parties settled all claims arising out
of conduct that took place before Select Medicals acquisition of the NovaCare
subsidiaries that are defendants in the case. Claims against the Company and
the NovaCare subsidiaries regarding conduct occurring after the NovaCare
acquisition were not covered by this settlement. In September 2002, Select
learned that the United States Attorney for the Eastern District of
Pennsylvania had notified the court that the United States had decided no to
intervene in this case.

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As of April 30, 2003, Select and the subsidiaries have not been served
with the amended complaint. Based on a review of the amended complaint, we do
not believe that this lawsuit is meritorious, and we intend to vigorously
defend against this action if it is pursued by the relator plaintiff. However,
because of the uncertain nature of the litigation, we cannot predict the
outcome of this matter.

In addition, as part of our business, we are subject to legal actions
alleging liability on our part. To cover claims arising out of the operations
of our hospitals and outpatient rehabilitation facilities, we
maintain professional malpractice liability insurance and general liability
insurance in amounts and with deductibles that we believe to be sufficient for
our operations. We also maintain umbrella liability coverage covering claims
which, due to their nature or amount, are not covered by our insurance
policies. We cannot assure you that professional liability insurance will
cover all claims against us or continue to be available at reasonable costs for
us to maintain adequate levels of insurance. These insurance policies also do
not cover punitive damages.




ITEM 2.     CHANGES IN SECURITIES AND USE OF PROCEEDS

None.




ITEM 3.     DEFAULTS UPON SENIOR SECURITIES

Not applicable.




ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.




ITEM 5.     OTHER INFORMATION

None.




ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

a.        Exhibits



| |  |  | The exhibits to this report are listed in the Exhibit Index
appearing on page 34 hereof.
| |  |  | ----------------------------------------------------------------------------------------

b.        Reports on Form 8-K



| |  |  | Form 8K, dated March 19, 2003, pursuant to Item 9, in
connection with the certifications of our Chief Executive
Officer and Chief Financial Officer required by Section 906 of
the Sarbanes-Oxley Act of 2002, which accompanied our form 10-K
for the year ended December 31, 2002, in accordance with
Regulation FD.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Form 8-K, dated March 27, 2003, pursuant to Item 9, in
connection with the distribution of our annual report to
stockholders, in accordance with Regulation FD.                                                                                                                                                       

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

| |  |                            |  |                                                        
| |  | -------------------------- |  | -------------------------------------------------------
| |  | SELECT MEDICAL CORPORATION
| |  |                            |  |                                                        
| |  | By:                        |  | /s/   Martin F. Jackson                                
| |  |                            |  |                                                        
| |  |                            |  | Martin F. Jackson                                      
| |  |                            |  | Senior Vice
President and Chief Financial Officer      
| |  |                            |  | (Duly Authorized Officer)                              
| |  |                            |  |                                                        
| |  | By:                        |  | /s/   Scott A. Romberger                               
| |  |                            |  |                                                        
| |  |                            |  | Scott A. Romberger                                     
| |  |                            |  | Vice President, Chief Accounting Officer and Controller
| |  |                            |  | (Principal Accounting Officer)                         

Dated: May 12, 2003

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CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Robert A. Ortenzio, President and Chief Executive Officer of Select Medical
Corporation, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Select Medical Corporation;                                                                                                                                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                      



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based
upon our most recent evaluation, to the registrants auditors and the
audit committee of the registrants board of directors (or persons
fulfilling the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: May 12, 2003

|                                            
|--------------------------------------------
|/s/   Robert A. Ortenzio

Robert A. Ortenzio
|President and Chief Executive Officer       

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CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Martin F. Jackson, Senior Vice President and Chief Financial Officer of
Select Medical Corporation, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Select Medical Corporation;                                                                                                                                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                      



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based
upon our most recent evaluation, to the registrants auditors and the
audit committee of the registrants board of directors (or persons
fulfilling the equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        



|6. |  | The registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: May 12, 2003

|                                                 
|-------------------------------------------------
|/s/:   Martin F. Jackson

Martin F. Jackson      
|Senior Vice President and Chief Financial Officer

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EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                      
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                      
|10.1    |  | Waiver, dated as of March 18, 2003 to the Credit Agreement dated as
of September 22, 2000 among Select Medical Corporation, Canadian Back
Institute Limited, the lenders party thereto, JP Morgan Chase Bank,
J.P. Morgan Bank Canada, Banc of America Securities, LLC and CIBC,
Inc.
|        |  |                                                                                                                                                                                                                                                                                      
|99.1    |  | Certification of President and Chief Executive Officer relating to
Form 10-Q for the quarter ended March 31, 2003.                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                      
|99.2    |  | Certification of Senior Vice President and Chief Financial Officer
relating to Form 10-Q for the quarter ended March 31, 2003.                                                                                                                                                       

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