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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 June 30, 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 July 31, 2003, the number of outstanding shares of the Registrants
Common Stock was 48,420,426.



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TABLE OF CONTENTS



|                                                 |                                                                                               |                                                            |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION                    
|                                                 | ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS                                                    
|                                                 |                                                                                               | CONSOLIDATED BALANCE SHEETS                               
|                                                 |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS                     
|                                                 |                                                                                               | Consolidated Statements of Changes in Stockholders Equity
|                                                 |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS                     
|                                                 |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                 | 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                                      
|EXHIBIT INDEX                                   
|STOCK PURCHASE AGREEMENT, DATED AS OF 06/30/2003
|CERTIFICATION OF PRESIDENT & CHIEF EXECUTIVE OFF
|CERTIFICATION OF SENIOR VICE PRESIDENT AND CFO  
|CERTIFICATION OF PRESIDENT AND CEO              
|CERTIFICATION OF SENIOR VICE PRESIDENT AND CFO  



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##### Table of Contents





TABLE OF
CONTENTS




|           |  |                                                                                       |  |  |    | 
|---------- |  | ------------------------------------------------------------------------------------- |  |  | -- | 
|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 |  |  | 20 | 
|ITEM 3.    |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  |  | 34 | 
|ITEM 4.    |  | CONTROLS AND PROCEDURES                                                               |  |  | 35 | 
|PART II    |  | OTHER INFORMATION                                                                     |  |  | 35 | 
|ITEM 1.    |  | LEGAL PROCEEDINGS                                                                     |  |  | 35 | 
|ITEM 2.    |  | CHANGES IN SECURITIES AND USE OF PROCEEDS                                             |  |  | 35 | 
|ITEM 3.    |  | DEFAULTS UPON SENIOR SECURITIES                                                       |  |  | 35 | 
|ITEM 4.    |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  |  | 36 | 
|ITEM 5.    |  | OTHER INFORMATION                                                                     |  |  | 36 | 
|ITEM 6.    |  | EXHIBITS AND REPORTS ON FORM 8-K                                                      |  |  | 36 | 
|SIGNATURES |  |                                                                                       |  |  | 37 | 

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##### Table of Contents









PART I   FINANCIAL INFORMATION
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

SELECT MEDICAL CORPORATION




CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share amounts)


|                                                       |                                                                                                                                                          |   |             |         |              |   |         |         |  
|------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------- | ------- | ------------ | - | ------- | ------- | -
|                                                       |                                                                                                                                                          |   | June 30,    |         | December 31,
|                                                       |                                                                                                                                                          |   | 2003        |         | 2002        
|                                                       |                                                                                                                                                          |   |             |         |             
|                                                       |                                                                                                                                                          |   | (unaudited) |         |              |   |        
|Assets                                                 |                                                                                                                                                          |   |             |         |              |   |         |        
|Current Assets:                                        |                                                                                                                                                          |   |             |         |              |   |         |        
|                                                       | Cash and cash equivalents                                                                                                                                |   | $           | 91,351  |              |   | $       | 56,062  |  
|                                                       | Accounts receivable, net of allowance for doubtful accounts of $88,911
and $79,815 in 2003 and 2002, respectively                                        |   |             | 199,723 |              |   |         | 233,105 |  
|                                                       | Current deferred tax asset                                                                                                                               |   |             | 42,058  |              |   |         | 40,125  |  
|                                                       | Other current assets                                                                                                                                     |   |             | 17,265  |              |   |         | 17,601  |  
|                                                       |                                                                                                                                                          |   |             |         |              |   |         |         |  
|Total Current Assets                                   |                                                                                                                                                          |   | 350,397     |         |              |   | 346,893 |        
|Property and equipment, net                            |                                                                                                                                                          |   | 112,421     |         |              |   | 114,707 |        
|Goodwill                                               |                                                                                                                                                          |   | 211,348     |         |              |   | 196,887 |        
|Trademark                                              |                                                                                                                                                          |   | 37,875      |         |              |   | 37,875  |        
|Other intangibles                                      |                                                                                                                                                          |   | 935         |         |              |   | 8,969   |        
|Non-current deferred tax asset                         |                                                                                                                                                          |   | 7,262       |         |              |   | 7,995   |        
|Other assets                                           |                                                                                                                                                          |   | 17,622      |         |              |   | 25,733  |        
|                                                       |                                                                                                                                                          |   |             |         |              |   |         |         |  
|Total Assets                                           |                                                                                                                                                          | $ | 737,860     |         |              | $ | 739,059 |        
|                                                       |                                                                                                                                                          |   |             |         |              |   |         |        
|Liabilities and Stockholders Equity                   |                                                                                                                                                          |   |             |         |              |   |         |        
|Current Liabilities:                                   |                                                                                                                                                          |   |             |         |              |   |         |        
|                                                       | Bank overdrafts                                                                                                                                          |   | $           | 6,765   |              |   | $       | 11,121  |  
|                                                       | Current portion of long-term debt and notes payable                                                                                                      |   |             | 22,176  |              |   |         | 29,470  |  
|                                                       | Accounts payable                                                                                                                                         |   |             | 36,720  |              |   |         | 38,590  |  
|                                                       | Accrued payroll                                                                                                                                          |   |             | 35,125  |              |   |         | 34,891  |  
|                                                       | Accrued vacation                                                                                                                                         |   |             | 17,134  |              |   |         | 15,195  |  
|                                                       | Accrued restructuring                                                                                                                                    |   |             | 589     |              |   |         | 800     |  
|                                                       | Accrued other                                                                                                                                            |   |             | 45,463  |              |   |         | 36,306  |  
|                                                       | Income taxes payable                                                                                                                                     |   |             | 8,917   |              |   |         | 23,722  |  
|                                                       | Due to third party payors                                                                                                                                |   |             | 31,438  |              |   |         | 26,177  |  
|                                                       |                                                                                                                                                          |   |             |         |              |   |         |         |  
|Total Current Liabilities                              |                                                                                                                                                          |   | 204,327     |         |              |   | 216,272 |        
|Long-term debt, net of current portion                 |                                                                                                                                                          |   | 201,767     |         |              |   | 230,747 |        
|                                                       |                                                                                                                                                          |   |             |         |              |   |         |        
|Total Liabilities                                      |                                                                                                                                                          |   | 406,094     |         |              |   | 447,019 |        
|Commitments and Contingencies                          |                                                                                                                                                          |   |             |         |              |   |         |        
|Minority interest in consolidated subsidiary companies |                                                                                                                                                          |   | 5,227       |         |              |   | 5,622   |        
|Stockholders Equity:                                  |                                                                                                                                                          |   |             |         |              |   |         |        
|                                                       | Common stock - $.01 par value: Authorized shares - 200,000,000 in 2003 and 2002
Issued shares - 48,067,000 and 46,676,000 in 2003 and 2002, respectively |   |             | 481     |              |   |         | 467     |  
|                                                       | Capital in excess of par                                                                                                                                 |   |             | 238,685 |              |   |         | 236,183 |  
|                                                       | Retained earnings                                                                                                                                        |   |             | 83,240  |              |   |         | 50,155  |  
|                                                       | Accumulated other comprehensive income (loss)                                                                                                            |   |             | 4,133   |              |   |         | (387    | )
|                                                       |                                                                                                                                                          |   |             |         |              |   |         |         |  
|Total Stockholders Equity                             |                                                                                                                                                          |   | 326,539     |         |              |   | 286,418 |        
|                                                       |                                                                                                                                                          |   |             |         |              |   |         |        
|Total Liabilities and Stockholders Equity             |                                                                                                                                                          | $ | 737,860     |         |              | $ | 739,059 |        
|                                                       |                                                                                                                                                          |   |             |         |              |   |         |        

See accompanying notes.

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SELECT MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(unaudited)

|                                                       |                               |         |                                 |         |                       |      |                          |         |        |      |         |         |        |      |         |         |        |      | 
|------------------------------------------------------ | ----------------------------- | ------- | ------------------------------- | ------- | --------------------- | ---- | ------------------------ | ------- | ------ | ---- | ------- | ------- | ------ | ---- | ------- | ------- | ------ | ---- | 
|                                                       |                               |         |                                 |         | For the Quarter Ended |      | For the Six Months Ended
|                                                       |                               |         |                                 |         | June 30,              |      | June 30,                
|                                                       |                               |         |                                 |         |                       |      |                         
|                                                       |                               |         |                                 |         | 2003                  |      | 2002                     |         | 2003   |      | 2002   
|                                                       |                               |         |                                 |         |                       |      |                          |         |        |      |        
|Net operating revenues                                 |                               | $       | 326,218                         |         |                       | $    | 280,272                  |         |        | $    | 638,525 |         |        | $    | 552,192 |        
|                                                       |                               |         |                                 |         |                       |      |                          |         |        |      |         |         |        |      |         |        
|Costs and expenses:                                    |                               |         |                                 |         |                       |      |                          |         |        |      |         |         |        |      |         |        
|                                                       | Cost of services              |         |                                 | 258,218 |                       |      |                          | 228,183 |        |      |         | 510,487 |        |      |         | 449,918 |       
|                                                       | General and administrative    |         |                                 | 11,624  |                       |      |                          | 9,326   |        |      |         | 21,127  |        |      |         | 19,012  |       
|                                                       | Bad debt expense              |         |                                 | 12,337  |                       |      |                          | 8,577   |        |      |         | 24,520  |        |      |         | 19,020  |       
|                                                       | Depreciation and amortization |         |                                 | 7,192   |                       |      |                          | 6,180   |        |      |         | 14,706  |        |      |         | 12,206  |       
|                                                       |                               |         |                                 |         |                       |      |                          |         |        |      |         |         |        |      |         |        
|Total costs and expenses                               |                               |         | 289,371                         |         |                       |      | 252,266                  |         |        |      | 570,840 |         |        |      | 500,156 |        
|                                                       |                               |         |                                 |         |                       |      |                          |         |        |      |         |         |        |      |         |        
|Income from operations                                 |                               |         | 36,847                          |         |                       |      | 28,006                   |         |        |      | 67,685  |         |        |      | 52,036  |        
|Other income and expense:                              |                               |         |                                 |         |                       |      |                          |         |        |      |         |         |        |      |         |        
|Interest income                                        |                               |         | (156                            | )       |                       |      | (136                     | )       |        |      | (342    | )       |        |      | (207    | )      
|Interest expense                                       |                               |         | 5,622                           |         |                       |      | 6,815                    |         |        |      | 12,048  |         |        |      | 13,593  |        
|                                                       |                               |         |                                 |         |                       |      |                          |         |        |      |         |         |        |      |         |        
|Income before minority interests and income taxes      |                               |         | 31,381                          |         |                       |      | 21,327                   |         |        |      | 55,979  |         |        |      | 38,650  |        
|Minority interest in consolidated subsidiary companies |                               |         | 713                             |         |                       |      | 570                      |         |        |      | 1,537   |         |        |      | 1,173   |        
|                                                       |                               |         |                                 |         |                       |      |                          |         |        |      |         |         |        |      |         |        
|Income before income taxes                             |                               |         | 30,668                          |         |                       |      | 20,757                   |         |        |      | 54,442  |         |        |      | 37,477  |        
|Income tax expense                                     |                               |         | 12,037                          |         |                       |      | 8,156                    |         |        |      | 21,357  |         |        |      | 14,700  |        
|                                                       |                               |         |                                 |         |                       |      |                          |         |        |      |         |         |        |      |         |        
|Net income available to common stockholders            |                               | $       | 18,631                          |         |                       | $    | 12,601                   |         |        | $    | 33,085  |         |        | $    | 22,777  |        
|                                                       |                               |         |                                 |         |                       |      |                          |         |        |      |         |         |        |      |         |        
|Net income per common share:                           |                               |         |                                 |         |                       |      |                          |         |        |      |         |         |        |      |         |        
|                                                       |                               |         | Basic income per common share   |         | $                     | 0.39 |                          |         | $      | 0.27 |         |         | $      | 0.70 |         |         | $      | 0.49 | 
|                                                       |                               |         | Diluted income per common share |         | $                     | 0.37 |                          |         | $      | 0.25 |         |         | $      | 0.66 |         |         | $      | 0.46 | 
|Weighted average shares outstanding:                   |                               |         |                                 |         |                       |      |                          |         |        |      |         |         |        |      |         |        
|                                                       |                               | Basic   |                                 |         | 47,527                |      |                          |         | 46,442 |      |         |         | 47,339 |      |         |         | 46,262 |     
|                                                       |                               | Diluted |                                 |         | 50,687                |      |                          |         | 49,469 |      |         |         | 50,002 |      |         |         | 49,054 |     

See accompanying notes.

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

|                             |                                       |  |        |       |           |   |           |    |            |   |               |       |               |   |        |        |  |   |             |       |  |  |   |        | 
|---------------------------- | ------------------------------------- |  | ------ | ----- | --------- | - | --------- | -- | ---------- | - | ------------- | ----- | ------------- | - | ------ | ------ |  | - | ----------- | ----- |  |  | - | ------ | 
|                             |                                       |  |        |       |           |   |           |    |            |   |               |       |               |   |        |        |  |   | Accumulated |       |  |  |  
|                             |                                       |  |        |       |           |   | Common    |    | Capital in |   |               |       |               |   | Other  |        |  |   |            
|                             |                                       |  | Common |       | Stock Par |   | Excess of |    | Retained   |   | Comprehensive |       | Comprehensive
|                             |                                       |  | Stock  |       | Value     |   | Par       |    | Earnings   |   | Loss          |       | Income       
|                             |                                       |  |        |       |           |   |           |    |            |   |               |       |              
|Balance at December 31, 2002 |                                       |  | 46,676 |       |           | $ | 467       |    |            | $ | 236,183       |       |               | $ | 50,155 |        |  | $ | (387        | )     |  |  |   |       
|                             | Net income                            |  |        |       |           |   |           |    |            |   |               |       |               |   |        | 33,085 |  |   |             |       |  |  | $ | 33,085 | 
|                             | Other comprehensive income            |  |        |       |           |   |           |    |            |   |               |       |               |   |        |        |  |   |             | 4,520 |  |  |   | 4,520  | 
|                             |                                       |  |        |       |           |   |           |    |            |   |               |       |               |   |        |        |  |   |             |       |  |  |   |       
|                             | Total comprehensive income            |  |        |       |           |   |           |    |            |   |               |       |               |   |        |        |  |   |             |       |  |  | $ | 37,605 | 
|                             |                                       |  |        |       |           |   |           |    |            |   |               |       |               |   |        |        |  |   |             |       |  |  |   |       
|                             | Issuance of common stock              |  |        | 1,391 |           |   |           | 14 |            |   |               | 2,111 |               |   |        |        |  |   |             |       |  |  |   |        | 
|                             | Tax benefit of stock option exercises |  |        |       |           |   |           |    |            |   |               | 391   |               |   |        |        |  |   |             |       |  |  |   |        | 
|                             |                                       |  |        |       |           |   |           |    |            |   |               |       |               |   |        |        |  |   |             |       |  |  |   |       
|Balance at June 30, 2003     |                                       |  | 48,067 |       |           | $ | 481       |    |            | $ | 238,685       |       |               | $ | 83,240 |        |  | $ | 4,133       |       |  |  |   |       
|                             |                                       |  |        |       |           |   |           |    |            |   |               |       |               |   |        |        |  |   |             |       |  |  |   |       

See accompanying notes.

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SELECT MEDICAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

|                                                                                  |                                                                                             |                           |         |                          |         |      |         |        |         |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------- | ------- | ------------------------ | ------- | ---- | ------- | ------ | ------- | -
|                                                                                  |                                                                                             |                           |         | For the Six Months Ended
|                                                                                  |                                                                                             |                           |         | June 30,                
|                                                                                  |                                                                                             |                           |         |                         
|                                                                                  |                                                                                             |                           |         | 2003                     |         | 2002
|                                                                                  |                                                                                             |                           |         |                          |         |     
|Operating activities                                                              |                                                                                             |                           |         |                          |         |      |         |       
|Net income                                                                        |                                                                                             | $                         | 33,085  |                          |         | $    | 22,777  |       
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                                             |                           |         |                          |         |      |         |       
|                                                                                  | Depreciation and amortization                                                               |                           |         | 14,706                   |         |      |         | 12,206 |        
|                                                                                  | Provision for bad debts                                                                     |                           |         | 24,520                   |         |      |         | 19,020 |        
|                                                                                  | Minority interests                                                                          |                           |         | 1,537                    |         |      |         | 1,173  |        
|                                                                                  | Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |                           |         |                          |         |      |         |        |        
|                                                                                  |                                                                                             | Accounts receivable       |         |                          | 17,880  |      |         |        | (35,895 | )
|                                                                                  |                                                                                             | Other current assets      |         |                          | 426     |      |         |        | (1,240  | )
|                                                                                  |                                                                                             | Other assets              |         |                          | 861     |      |         |        | 1,556   |  
|                                                                                  |                                                                                             | Accounts payable          |         |                          | (1,268  | )    |         |        | (2,379  | )
|                                                                                  |                                                                                             | Due to third-party payors |         |                          | 5,262   |      |         |        | 14,626  |  
|                                                                                  |                                                                                             | Accrued expenses          |         |                          | 7,122   |      |         |        | 6,882   |  
|                                                                                  |                                                                                             | Income taxes              |         |                          | (12,859 | )    |         |        | 11,749  |  
|                                                                                  |                                                                                             |                           |         |                          |         |      |         |       
|Net cash provided by operating activities                                         |                                                                                             |                           | 91,272  |                          |         |      | 50,475  |       
|                                                                                  |                                                                                             |                           |         |                          |         |      |         |       
|Investing activities                                                              |                                                                                             |                           |         |                          |         |      |         |       
|Purchases of property and equipment, net                                          |                                                                                             |                           | (15,206 | )                        |         |      | (17,948 | )     
|Proceeds from disposal of assets                                                  |                                                                                             |                           | 2,400   |                          |         |      |        |       
|Earnout payments                                                                  |                                                                                             |                           | (429    | )                        |         |      | (536    | )     
|Acquisition of businesses, net of cash acquired                                   |                                                                                             |                           | (3,786  | )                        |         |      | (3,303  | )     
|                                                                                  |                                                                                             |                           |         |                          |         |      |         |       
|Net cash used in investing activities                                             |                                                                                             |                           | (17,021 | )                        |         |      | (21,787 | )     
|                                                                                  |                                                                                             |                           |         |                          |         |      |         |       
|Financing activities                                                              |                                                                                             |                           |         |                          |         |      |         |       
|Net repayments on credit facility debt                                            |                                                                                             |                           | (34,191 | )                        |         |      | (12,981 | )     
|Payment of deferred financing fees                                                |                                                                                             |                           |        |                          |         |      | (67     | )     
|Principal payments on seller and other debt                                       |                                                                                             |                           | (2,114  | )                        |         |      | (3,947  | )     
|Proceeds from issuance of common stock                                            |                                                                                             |                           | 2,125   |                          |         |      | 3,893   |       
|Proceeds from (repayment of) bank overdrafts                                      |                                                                                             |                           | (4,356  | )                        |         |      | 3,624   |       
|Distributions to minority interests                                               |                                                                                             |                           | (775    | )                        |         |      | (1,151  | )     
|                                                                                  |                                                                                             |                           |         |                          |         |      |         |       
|Net cash used in financing activities                                             |                                                                                             |                           | (39,311 | )                        |         |      | (10,629 | )     
|                                                                                  |                                                                                             |                           |         |                          |         |      |         |       
|Effect of exchange rate changes on cash
and cash equivalents                      |                                                                                             |                           | 349     |                          |         |      | 72      |       
|                                                                                  |                                                                                             |                           |         |                          |         |      |         |       
|Net increase in cash and cash equivalents                                         |                                                                                             |                           | 35,289  |                          |         |      | 18,131  |       
|Cash and cash equivalents at beginning of period                                  |                                                                                             |                           | 56,062  |                          |         |      | 10,703  |       
|                                                                                  |                                                                                             |                           |         |                          |         |      |         |       
|Cash and cash equivalents at end of period                                        |                                                                                             | $                         | 91,351  |                          |         | $    | 28,834  |       
|                                                                                  |                                                                                             |                           |         |                          |         |      |         |       
|Supplemental Cash Flow Information                                                |                                                                                             |                           |         |                          |         |      |         |       
|Cash paid for interest                                                            |                                                                                             | $                         | 9,491   |                          |         | $    | 11,794  |       
|Cash paid for income taxes                                                        |                                                                                             | $                         | 34,790  |                          |         | $    | 3,358   |       

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 June 30, 2003 and for the three and
six month periods ended June 30, 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 and six months ended June
30, 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 the 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 reflect current
loss data.

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Recent Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 150 Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. SFAS No. 150 establishes standards for how an
issuer classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances) because that financial
instrument embodies an obligation of the issuer. This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Company does not expect SFAS No. 150 to have a
material impact on its financial statements.

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 six months ended June 30, 2003, the Company granted stock
options under its Second Amended and Restated 1997 Stock Option Plan totaling
61,162 shares of Common Stock at exercise prices ranging from $13.35 to $20.50
per share. In addition, during that period 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.

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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                       |        | For the Six Months Ended
|                                                                                                                                            |  | June 30,                                         |        | June 30,                
|                                                                                                                                            |  |                                                  |        |                         
|                                                                                                                                            |  | 2003                                             |        | 2002                     |  | 2003 |        | 2002
|                                                                                                                                            |  |                                                  |        |                          |  |      |        |     
|                                                                                                                                            |  | (dollars in thousands, except per share amounts)
|Net income  as reported                                                                                                                    |  | $                                                | 18,631 |                          |  | $    | 12,601 |      |  | $ | 33,085 |  |  | $ | 22,777 | 
|Deduct: Total stock based employee
Compensation expense determined
under fair value based method for
all awards, net of related tax
effects |  |                                                  | 828    |                          |  |      | 4,719  |      |  |   | 1,908  |  |  |   | 6,799  | 
|                                                                                                                                            |  |                                                  |        |                          |  |      |        |      |  |   |        |  |  |   |        | 
|Net income  pro forma                                                                                                                      |  | $                                                | 17,803 |                          |  | $    | 7,882  |      |  | $ | 31,177 |  |  | $ | 15,978 | 
|                                                                                                                                            |  |                                                  |        |                          |  |      |        |      |  |   |        |  |  |   |        | 
|Weighted average grant-date fair value                                                                                                      |  | $                                                | 10.37  |                          |  | $    | 7.49   |      |  | $ | 7.15   |  |  | $ | 7.10   | 
|Basic earnings per share  as reported                                                                                                      |  |                                                  | 0.39   |                          |  |      | 0.27   |      |  |   | 0.70   |  |  |   | 0.49   | 
|Basic earnings per share  pro forma                                                                                                        |  |                                                  | 0.37   |                          |  |      | 0.17   |      |  |   | 0.66   |  |  |   | 0.35   | 
|Diluted earnings per share  as
reported                                                                                                    |  |                                                  | 0.37   |                          |  |      | 0.25   |      |  |   | 0.66   |  |  |   | 0.46   | 
|Diluted earnings per share  pro forma                                                                                                      |  |                                                  | 0.35   |                          |  |      | 0.16   |      |  |   | 0.62   |  |  |   | 0.33   | 

Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income at June 30, 2003
consist of cumulative translation adjustment gains of $4,244,000 associated
with the Companys Canadian operations and unrealized losses on
available-for-sale securities of $111,000, net of tax.

3. Intangible Assets

Amortization expense for intangible assets with finite lives for the six
months ended June 30, 2003 was $14,000. 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 June 30, 2003   
|                               |  |                       
|                               |  | Gross Carrying         |         | Accumulated 
|                               |  | Amount                 |         | Amortization
|                               |  |                        |         |             
|                               |  | (dollars in thousands)
|Amortized intangible assets    |  |                        |         |              |  |   |      |  
|Management services agreements |  | $                      | 1,081   |              |  | $ | (146 | )
|                               |  |                        |         |              |  |   |      |  
|Unamortized intangible assets  |  |                        |         |              |  |   |      |  
|Goodwill                       |  | $                      | 211,348 |              |  |   |      |  
|Trademarks                     |  |                        | 37,875  |              |  |   |      |  
|                               |  |                        |         |              |  |   |      |  
|Total                          |  | $                      | 249,223 |              |  |   |      |  
|                               |  |                        |         |              |  |   |      |  

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The changes in the carrying amount of goodwill for the Companys
reportable segments for the six months ended June 30, 2003 are as follows:

|                                |  |           |        |                |  |                        |         |       |  |   |     |  |  |   |         |  
|------------------------------- |  | --------- | ------ | -------------- |  | ---------------------- | ------- | ----- |  | - | --- |  |  | - | ------- | -
|                                |  | Specialty |        | Outpatient     |  |                        |         |       |  |   |     | 
|                                |  | Hospitals |        | Rehabilitation |  | All Other              |         | Total
|                                |  |           |        |                |  |                        |         |      
|                                |  |           |        |                |  | (dollars in thousands) |         |       |  |  
|Balance as of December 31, 2002 |  | $         | 84,391 |                |  | $                      | 111,912 |       |  | $ | 584 |  |  | $ | 196,887 |  
|Goodwill acquired during year   |  |           | 75     |                |  |                        | 12,356  |       |  |   |    |  |  |   | 12,431  |  
|Income tax benefits recognized  |  |           |       |                |  |                        | (2,005  | )     |  |   |    |  |  |   | (2,005  | )
|Earn-out payments               |  |           |       |                |  |                        | 429     |       |  |   |    |  |  |   | 429     |  
|Translation adjustment          |  |           |       |                |  |                        | 3,693   |       |  |   |    |  |  |   | 3,693   |  
|Other                           |  |           |       |                |  |                        | (87     | )     |  |   |    |  |  |   | (87     | )
|                                |  |           |        |                |  |                        |         |       |  |   |     |  |  |   |         |  
|Balance as of June 30, 2003     |  |           | 84,466 |                |  | $                      | 126,298 |       |  | $ | 584 |  |  | $ | 211,348 |  
|                                |  |           |        |                |  |                        |         |       |  |   |     |  |  |   |         |  

4. Restructuring Charges

The following summarizes the Companys restructuring activity:

|                     |  |                        |      |           |  |       |     |   |  |   |      |  
|-------------------- |  | ---------------------- | ---- | --------- |  | ----- | --- | - |  | - | ---- | -
|                     |  | Lease                  |      |           |  |       |     |   |  |  
|                     |  | Termination            |      |           |  |       |     |   |  |  
|                     |  | Costs                  |      | Severance |  | Total
|                     |  |                        |      |           |  |      
|                     |  | (dollars in thousands)
|December 31, 2002    |  | $                      | 788  |           |  | $     | 12  |   |  | $ | 800  |  
|Amounts paid in 2003 |  |                        | (199 | )         |  |       | (12 | ) |  |   | (211 | )
|                     |  |                        |      |           |  |       |     |   |  |   |      |  
|June 30, 2003        |  | $                      | 589  |           |  | $     |    |   |  | $ | 589  |  
|                     |  |                        |      |           |  |       |     |   |  |   |      |  

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
Company evaluates performance based on Adjusted EBITDA of the respective
business units. Adjusted EBITDA is defined as net income (loss) before
interest, income taxes, depreciation and amortization and minority interest.

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

|                     |  |                                  |         |                |  |           |         |       |  |   |         |   |  |   |         | 
|-------------------- |  | -------------------------------- | ------- | -------------- |  | --------- | ------- | ----- |  | - | ------- | - |  | - | ------- | 
|                     |  | Three Months Ended June 30, 2003
|                     |  |                                 
|                     |  | Specialty                        |         | Outpatient     |  |           |         |       |  |   |         |  
|                     |  | Hospitals                        |         | Rehabilitation |  | All Other |         | Total
|                     |  |                                  |         |                |  |           |         |      
|                     |  | (dollars in thousands)          
|Net revenue          |  | $                                | 191,763 |                |  | $         | 132,047 |       |  | $ | 2,408   |   |  | $ | 326,218 | 
|Adjusted EBITDA      |  |                                  | 30,708  |                |  |           | 23,391  |       |  |   | (10,060 | ) |  |   | 44,039  | 
|Total assets         |  |                                  | 293,106 |                |  |           | 333,686 |       |  |   | 111,068 |   |  |   | 737,860 | 
|Capital expenditures |  |                                  | 4,529   |                |  |           | 1,790   |       |  |   | 1,914   |   |  |   | 8,233   | 

|                     |  |                                  |         |                |  |           |         |       |  |   |        |   |  |   |         | 
|-------------------- |  | -------------------------------- | ------- | -------------- |  | --------- | ------- | ----- |  | - | ------ | - |  | - | ------- | 
|                     |  | Three Months Ended June 30, 2002
|                     |  |                                 
|                     |  | Specialty                        |         | Outpatient     |  |           |         |       |  |   |        |  
|                     |  | Hospitals                        |         | Rehabilitation |  | All Other |         | Total
|                     |  |                                  |         |                |  |           |         |      
|                     |  | (dollars in thousands)          
|Net revenue          |  | $                                | 152,073 |                |  | $         | 124,639 |       |  | $ | 3,560  |   |  | $ | 280,272 | 
|Adjusted EBITDA      |  |                                  | 17,281  |                |  |           | 23,075  |       |  |   | (6,170 | ) |  |   | 34,186  | 
|Total assets         |  |                                  | 315,115 |                |  |           | 330,800 |       |  |   | 47,518 |   |  |   | 693,433 | 
|Capital expenditures |  |                                  | 6,257   |                |  |           | 2,492   |       |  |   | 240    |   |  |   | 8,989   | 

|                     |  |                                |         |                |  |           |         |       |  |   |         |   |  |   |         | 
|-------------------- |  | ------------------------------ | ------- | -------------- |  | --------- | ------- | ----- |  | - | ------- | - |  | - | ------- | 
|                     |  | Six Months Ended June 30, 2003
|                     |  |                               
|                     |  | Specialty                      |         | Outpatient     |  |           |         |       |  |   |         |  
|                     |  | Hospitals                      |         | Rehabilitation |  | All Other |         | Total
|                     |  |                                |         |                |  |           |         |      
|                     |  | (dollars in thousands)        
|Net revenue          |  | $                              | 375,191 |                |  | $         | 257,622 |       |  | $ | 5,712   |   |  | $ | 638,525 | 
|Adjusted EBITDA      |  |                                | 56,194  |                |  |           | 42,894  |       |  |   | (16,697 | ) |  |   | 82,391  | 
|Total assets         |  |                                | 293,106 |                |  |           | 333,686 |       |  |   | 111,068 |   |  |   | 737,860 | 
|Capital expenditures |  |                                | 7,416   |                |  |           | 4,530   |       |  |   | 3,260   |   |  |   | 15,206  | 

|                     |  |                                |         |                |  |           |         |       |  |   |         |   |  |   |         | 
|-------------------- |  | ------------------------------ | ------- | -------------- |  | --------- | ------- | ----- |  | - | ------- | - |  | - | ------- | 
|                     |  | Six Months Ended June 30, 2002
|                     |  |                               
|                     |  | Specialty                      |         | Outpatient     |  |           |         |       |  |   |         |  
|                     |  | Hospitals                      |         | Rehabilitation |  | All Other |         | Total
|                     |  |                                |         |                |  |           |         |      
|                     |  | (dollars in thousands)        
|Net revenue          |  | $                              | 300,901 |                |  | $         | 244,333 |       |  | $ | 6,958   |   |  | $ | 552,192 | 
|Adjusted EBITDA      |  |                                | 32,948  |                |  |           | 44,123  |       |  |   | (12,829 | ) |  |   | 64,242  | 
|Total assets         |  |                                | 315,115 |                |  |           | 330,800 |       |  |   | 47,518  |   |  |   | 693,433 | 
|Capital expenditures |  |                                | 12,440  |                |  |           | 4,927   |       |  |   | 581     |   |  |   | 17,948  | 

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A reconciliation of Adjusted EBITDA to net income is as follows:

|                              |  |                                     |         |                                   |  |      |        |      |  |   |         |   |  |   |         |  
|----------------------------- |  | ----------------------------------- | ------- | --------------------------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                              |  | For the three months ended June 30, |         | For the six months ended June 30,
|                              |  | 2003                                |         | 2002                              |  | 2003 |        | 2002
|                              |  |                                     |         |                                   |  |      |        |     
|                              |  | (dollars in thousands)             
|Adjusted EBITDA               |  | $                                   | 44,039  |                                   |  | $    | 34,186 |      |  | $ | 82,391  |   |  | $ | 64,242  |  
|Depreciation and
amortization |  |                                     | (7,192  | )                                 |  |      | (6,180 | )    |  |   | (14,706 | ) |  |   | (12,206 | )
|Interest income               |  |                                     | 156     |                                   |  |      | 136    |      |  |   | 342     |   |  |   | 207     |  
|Interest expense              |  |                                     | (5,622  | )                                 |  |      | (6,815 | )    |  |   | (12,048 | ) |  |   | (13,593 | )
|Minority interest             |  |                                     | (713    | )                                 |  |      | (570   | )    |  |   | (1,537  | ) |  |   | (1,173  | )
|Income tax expense            |  |                                     | (12,037 | )                                 |  |      | (8,156 | )    |  |   | (21,357 | ) |  |   | (14,700 | )
|                              |  |                                     |         |                                   |  |      |        |      |  |   |         |   |  |   |         |  
|Net income                    |  | $                                   | 18,631  |                                   |  | $    | 12,601 |      |  | $ | 33,085  |   |  | $ | 22,777  |  
|                              |  |                                     |         |                                   |  |      |        |      |  |   |         |   |  |   |         |  



|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                            |        | Six Months Ended
|                                                                                                    |                                                                    |   | June 30,                                      |        | June 30,        
|                                                                                                    |                                                                    |   | 2003                                          |        | 2002             |   | 2003   |        | 2002
|                                                                                                    |                                                                    |   |                                               |        |                  |   |        |        |     
|                                                                                                    |                                                                    |   | (dollars in thousands, except per share data)
|Numerator:                                                                                          |                                                                    |   |                                               |        |                  |   |        |        |      |   |        |        |  |   |        |       
|Net income                                                                                          |                                                                    | $ | 18,631                                        |        |                  | $ | 12,601 |        |      | $ | 33,085 |        |  | $ | 22,777 |       
|Denominator:                                                                                        |                                                                    |   |                                               |        |                  |   |        |        |      |   |        |        |  |   |        |       
|                                                                                                    | Denominator for basic earnings per share -
weighted average shares |   |                                               | 47,527 |                  |   |        | 46,442 |      |   |        | 47,339 |  |   |        | 46,262 | 
|                                                                                                    | Effect of dilutive securities:                                     |   |                                               |        |                  |   |        |        |      |   |        |        |  |   |        |        | 
|                                                                                                    | a) Stock options                                                   |   |                                               | 2,696  |                  |   |        | 1,884  |      |   |        | 2,074  |  |   |        | 1,706  | 
|                                                                                                    | b) Warrants                                                        |   |                                               | 464    |                  |   |        | 1,143  |      |   |        | 589    |  |   |        | 1,086  | 
|                                                                                                    |                                                                    |   |                                               |        |                  |   |        |        |      |   |        |        |  |   |        |       
|Denominator for diluted earnings per
share-adjusted weighted average shares and
assumed conversions |                                                                    |   | 50,687                                        |        |                  |   | 49,469 |        |      |   | 50,002 |        |  |   | 49,054 |       
|                                                                                                    |                                                                    |   |                                               |        |                  |   |        |        |      |   |        |        |  |   |        |       
|                                                                                                    | Basic income per common share:                                     |   | $                                             | 0.39   |                  |   | $      | 0.27   |      |   | $      | 0.70   |  |   | $      | 0.49   | 
|                                                                                                    | Diluted income per common share:                                   |   | $                                             | 0.37   |                  |   | $      | 0.25   |      |   | $      | 0.66   |  |   | $      | 0.46   | 



|7. |  | Supplemental Disclosures of Cash Flow Information
|-- |  | -------------------------------------------------

Non-cash investing and financing activities are comprised of the following
for the six months ended June 30, 2003 and 2002:

|                                      |  |                        |     |      |  |   |       | 
|------------------------------------- |  | ---------------------- | --- | ---- |  | - | ----- | 
|                                      |  | 2003                   |     | 2002
|                                      |  |                        |     |     
|                                      |  | (dollars in thousands)
|Notes issued with acquisitions        |  | $                      | 316 |      |  | $ | 1,380 | 
|Tax benefit of stock option exercises |  |                        | 391 |      |  |   | 2,192 | 

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|8. |  | Commitments and Contingencies
|-- |  | -----------------------------

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
13 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
adverse effect on the financial position or results of operations of the
Company.



|9. |  | Subsequent Events
|-- |  | -----------------

On June 30, 2003, the Company signed a definitive agreement to acquire the
stock of Kessler Rehabilitation Corporation for approximately $228.1 million in
cash and approximately $1.9 million of assumed indebtedness. On July 29, 2003,
the Company agreed to sell $175.0 million of 7 1/2% Senior Subordinated Notes
(the Notes) due 2013. The closing of the sale of the Notes is subject to
satisfaction of customary closing conditions and is scheduled to occur on
August 12, 2003. The Company intends to use the proceeds of the
Notes offering,
together with existing cash and, to the extent necessary, borrowings under the
Companys senior credit facility, to complete the acquisition of Kessler
Rehabilitation Corporation (the Kessler Acquisition). If
the Kessler Acquisition is not completed by November 27, 2003, the Notes must be redeemed
at 101% of their principal amount plus accrued interest.



|10. |  | 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 June 30, 2003 and for the six months ended June 30, 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

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January 1, 2003 have been included as Non-Guarantor Subsidiaries. The
operations of the businesses (through a 100% owned subsidiary) commencing on
January 1, 2003 have been included as Guarantor Subsidiaries.

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 June 30,
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
|                                                       |                                                     |   | June 30, 2003                        
|                                                       |                                                     |   |                                      
|                                                       |                                                     |   | Select Medical                        |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |        
|                                                       |                                                     |   | Corporation                           |         |            |   |              |         | Non-         |   |              |        |   |   |          |          |      
|                                                       |                                                     |   | (Parent Company                       |         | Subsidiary |   | Guarantor    |         |              |   |              |        |   |   |         
|                                                       |                                                     |   | Only)                                 |         | Guarantors |   | Subsidiaries |         | Eliminations |   | Consolidated
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |             
|                                                       |                                                     |   | (dollars in thousands)               
|Assets                                                 |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |        
|                                                       | Current Assets:                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |         | 
|                                                       | Cash and cash equivalents                           |   | $                                     | 62,820  |            |   | $            | 26,022  |              |   | $            | 2,509  |   |   | $        |         |       |   | $       | 91,351  | 
|                                                       | Accounts receivable, net                            |   |                                       | (30     | )          |   |              | 164,854 |              |   |              | 34,899 |   |   |          |         |       |   |         | 199,723 | 
|                                                       | Current deferred tax asset                          |   |                                       | 7,722   |            |   |              | 31,102  |              |   |              | 3,234  |   |   |          |         |       |   |         | 42,058  | 
|                                                       | Other current assets                                |   |                                       | 2,274   |            |   |              | 12,097  |              |   |              | 2,894  |   |   |          |         |       |   |         | 17,265  | 
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |         | 
|Total Current Assets                                   |                                                     |   | 72,786                                |         |            |   | 234,075      |         |              |   | 43,536       |        |   |   |         |          |       |   | 350,397 |        
|Property and equipment, net                            |                                                     |   | 8,476                                 |         |            |   | 85,130       |         |              |   | 18,815       |        |   |   |         |          |       |   | 112,421 |        
|Investment in affiliates                               |                                                     |   | 333,922                               |         |            |   | 59,551       |         |              |   |             |        |   |   | (393,473 | ) (a)    |       |   |        |        
|Goodwill                                               |                                                     |   | 5,854                                 |         |            |   | 158,439      |         |              |   | 47,055       |        |   |   |         |          |       |   | 211,348 |        
|Trademark                                              |                                                     |   |                                      |         |            |   | 37,875       |         |              |   |             |        |   |   |         |          |       |   | 37,875  |        
|Other intangibles                                      |                                                     |   |                                      |         |            |   | 935          |         |              |   |             |        |   |   |         |          |       |   | 935     |        
|Non-current deferred tax asset                         |                                                     |   | (582                                  | )       |            |   | (420         | )       |              |   | 8,264        |        |   |   |         |          |       |   | 7,262   |        
|Other assets                                           |                                                     |   | 11,758                                |         |            |   | 5,209        |         |              |   | 655          |        |   |   |         |          |       |   | 17,622  |        
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |         | 
|Total Assets                                           |                                                     | $ | 432,214                               |         |            | $ | 580,794      |         |              | $ | 118,325      |        |   | $ | (393,473 | )        |       | $ | 737,860 |        
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |         | 
|Liabilities and Stockholders Equity                   |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |        
|Current Liabilities:                                   |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |        
|                                                       | Bank overdrafts                                     |   | $                                     | 6,765   |            |   | $            |        |              |   | $            |       |   |   | $        |         |       |   | $       | 6,765   | 
|                                                       | Current portion of long-term debt and notes payable |   |                                       | 570     |            |   |              | 20,951  |              |   |              | 655    |   |   |          |         |       |   |         | 22,176  | 
|                                                       | Accounts payable                                    |   |                                       | 1,394   |            |   |              | 29,608  |              |   |              | 5,718  |   |   |          |         |       |   |         | 36,720  | 
|                                                       | Intercompany accounts                               |   |                                       | 15,217  |            |   |              | (22,519 | )            |   |              | 7,302  |   |   |          |         |       |   |         |        | 
|                                                       | Accrued payroll                                     |   |                                       | 911     |            |   |              | 34,091  |              |   |              | 123    |   |   |          |         |       |   |         | 35,125  | 
|                                                       | Accrued vacation                                    |   |                                       | 2,190   |            |   |              | 13,387  |              |   |              | 1,557  |   |   |          |         |       |   |         | 17,134  | 
|                                                       | Accrued restructuring                               |   |                                       |        |            |   |              | 589     |              |   |              |       |   |   |          |         |       |   |         | 589     | 
|                                                       | Accrued other                                       |   |                                       | 21,354  |            |   |              | 21,531  |              |   |              | 2,578  |   |   |          |         |       |   |         | 45,463  | 
|                                                       | Income taxes                                        |   |                                       | 2,546   |            |   |              | 11,879  |              |   |              | (5,508 | ) |   |          |         |       |   |         | 8,917   | 
|                                                       | Due to third party payors                           |   |                                       | (3,587  | )          |   |              | 37,353  |              |   |              | (2,328 | ) |   |          |         |       |   |         | 31,438  | 
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |         | 
|Total Current Liabilities                              |                                                     |   | 47,360                                |         |            |   | 146,870      |         |              |   | 10,097       |        |   |   |         |          |       |   | 204,327 |        
|Long-term debt, net of current portion                 |                                                     |   | 58,315                                |         |            |   | 96,604       |         |              |   | 46,848       |        |   |   |         |          |       |   | 201,767 |        
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |         | 
|Total liabilities                                      |                                                     |   | 105,675                               |         |            |   | 243,474      |         |              |   | 56,945       |        |   |   |         |          |       |   | 406,094 |        
|Commitments and Contingencies                          |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |        
|Minority interest in consolidated subsidiary companies |                                                     |   |                                      |         |            |   | 375          |         |              |   | 4,852        |        |   |   |         |          |       |   | 5,227   |        
|Stockholders Equity:                                  |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |        
|                                                       | Common stock                                        |   |                                       | 481     |            |   |              |        |              |   |              |       |   |   |          |         |       |   |         | 481     | 
|                                                       | Capital in excess of par                            |   |                                       | 238,685 |            |   |              |        |              |   |              |       |   |   |          |         |       |   |         | 238,685 | 
|                                                       | Retained earnings                                   |   |                                       | 83,240  |            |   |              | 105,021 |              |   |              | 27,719 |   |   |          | (132,740 | ) (b) |   |         | 83,240  | 
|                                                       | Subsidiary investment                               |   |                                       |        |            |   |              | 231,924 |              |   |              | 28,809 |   |   |          | (260,733 | ) (a) |   |         |        | 
|                                                       | Accumulated other comprehensive income              |   |                                       | 4,133   |            |   |              |        |              |   |              |       |   |   |          |         |       |   |         | 4,133   | 
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |         | 
|Total Stockholders Equity                             |                                                     |   | 326,539                               |         |            |   | 336,945      |         |              |   | 56,528       |        |   |   | (393,473 | )        |       |   | 326,539 |        
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |         | 
|Total Liabilities and Stockholders Equity             |                                                     | $ | 432,214                               |         |            | $ | 580,794      |         |              | $ | 118,325      |        |   | $ | (393,473 | )        |       | $ | 737,860 |        
|                                                       |                                                     |   |                                       |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |         | 

(a) Elimination of investments in
subsidiaries.

(b) Elimination of investments in subsidiaries earnings.

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|                                                         |                               |   |                                                 |        |            |   |              |         |              |   |              |        |  |   |         |        |  |   |         |         | 
|-------------------------------------------------------- | ----------------------------- | - | ----------------------------------------------- | ------ | ---------- | - | ------------ | ------- | ------------ | - | ------------ | ------ |  | - | ------- | ------ |  | - | ------- | ------- | 
|                                                         |                               |   | Select Medical Corporation                     
|                                                         |                               |   | Condensed Consolidating Statement of Operations
|                                                         |                               |   | For the Six Months Ended June 30, 2003         
|                                                         |                               |   |                                                
|                                                         |                               |   | Select Medical                                  |        |            |   |              |         | Non-         |   |              |        |  |   |         |        | 
|                                                         |                               |   | Corporation (Parent                             |        | Subsidiary |   | Guarantor    |         |              |   |              |        |  |   |        
|                                                         |                               |   | Company Only)                                   |        | Guarantors |   | Subsidiaries |         | Eliminations |   | Consolidated
|                                                         |                               |   |                                                 |        |            |   |              |         |              |   |             
|                                                         |                               |   | (dollars in thousands)                         
|Net operating revenues                                   |                               | $ | 5,005                                           |        |            | $ | 527,933      |         |              | $ | 105,587      |        |  | $ |        |        |  | $ | 638,525 |        
|                                                         |                               |   |                                                 |        |            |   |              |         |              |   |              |        |  |   |         |        |  |   |         |        
|Costs and expenses:                                      |                               |   |                                                 |        |            |   |              |         |              |   |              |        |  |   |         |        |  |   |         |        
|                                                         | Cost of services              |   |                                                 |       |            |   |              | 422,424 |              |   |              | 88,063 |  |   |         |       |  |   |         | 510,487 | 
|                                                         | General and administrative    |   |                                                 | 21,127 |            |   |              |        |              |   |              |       |  |   |         |       |  |   |         | 21,127  | 
|                                                         | Bad debt expense              |   |                                                 |       |            |   |              | 21,244  |              |   |              | 3,276  |  |   |         |       |  |   |         | 24,520  | 
|                                                         | Depreciation and amortization |   |                                                 | 1,374  |            |   |              | 11,383  |              |   |              | 1,949  |  |   |         |       |  |   |         | 14,706  | 
|                                                         |                               |   |                                                 |        |            |   |              |         |              |   |              |        |  |   |         |        |  |   |         |        
|Total costs and expenses                                 |                               |   | 22,501                                          |        |            |   | 455,051      |         |              |   | 93,288       |        |  |   |        |        |  |   | 570,840 |        
|                                                         |                               |   |                                                 |        |            |   |              |         |              |   |              |        |  |   |         |        |  |   |         |        
|Income (loss) from operations                            |                               |   | (17,496                                         | )      |            |   | 72,882       |         |              |   | 12,299       |        |  |   |        |        |  |   | 67,685  |        
|Other income and expense:                                |                               |   |                                                 |        |            |   |              |         |              |   |              |        |  |   |         |        |  |   |         |        
|Intercompany interest and royalty fees                   |                               |   | 11,964                                          |        |            |   | (11,974      | )       |              |   | 10           |        |  |   |        |        |  |   |        |        
|Intercompany management fees                             |                               |   | (31,646                                         | )      |            |   | 30,032       |         |              |   | 1,614        |        |  |   |        |        |  |   |        |        
|Interest income                                          |                               |   | (180                                            | )      |            |   | (162         | )       |              |   |             |        |  |   |        |        |  |   | (342    | )      
|Interest expense                                         |                               |   | 3,633                                           |        |            |   | 5,833        |         |              |   | 2,582        |        |  |   |        |        |  |   | 12,048  |        
|                                                         |                               |   |                                                 |        |            |   |              |         |              |   |              |        |  |   |         |        |  |   |         |        
|Income (loss) before minority interests and income taxes |                               |   | (1,267                                          | )      |            |   | 49,153       |         |              |   | 8,093        |        |  |   |        |        |  |   | 55,979  |        
|Minority interest in consolidated subsidiary companies   |                               |   |                                                |        |            |   | 123          |         |              |   | 1,414        |        |  |   |        |        |  |   | 1,537   |        
|                                                         |                               |   |                                                 |        |            |   |              |         |              |   |              |        |  |   |         |        |  |   |         |        
|Income (loss) before income taxes                        |                               |   | (1,267                                          | )      |            |   | 49,030       |         |              |   | 6,679        |        |  |   |        |        |  |   | 54,442  |        
|Income tax expense                                       |                               |   | 138                                             |        |            |   | 19,235       |         |              |   | 1,984        |        |  |   |        |        |  |   | 21,357  |        
|Equity in earnings of subsidiaries                       |                               |   | 34,490                                          |        |            |   | 1,709        |         |              |   |             |        |  |   | (36,199 | )  (a) |  |   |        |        
|                                                         |                               |   |                                                 |        |            |   |              |         |              |   |              |        |  |   |         |        |  |   |         |        
|Net income                                               |                               | $ | 33,085                                          |        |            | $ | 31,504       |         |              | $ | 4,695        |        |  | $ | (36,199 | )      |  | $ | 33,085  |        
|                                                         |                               |   |                                                 |        |            |   |              |         |              |   |              |        |  |   |         |        |  |   |         |        

(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 Six Months Ended June 30, 2003         
|                                                                                  |                                                                                             |                                    |         |                                                
|                                                                                  |                                                                                             |                                    |         | Select Medical                                  |         |            |         |               |         |              |        |              |        |   |         |       |        |     |         |       
|                                                                                  |                                                                                             |                                    |         | Corporation (Parent                             |         | Subsidiary |         | Non-Guarantor |         |              |        |              |        |   |         |      
|                                                                                  |                                                                                             |                                    |         | Company Only)                                   |         | Guarantors |         | Subsidiaries  |         | Eliminations |        | Consolidated
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |             
|                                                                                  |                                                                                             |                                    |         | (dollars in thousands)                         
|Operating activities                                                              |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |       |        |     |         |       
|Net income                                                                        |                                                                                             | $                                  | 33,085  |                                                 |         | $          | 31,504  |               |         | $            | 4,695  |              |        | $ | (36,199 | ) (a) |        | $   | 33,085  |       
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |       |        |     |         |       
|                                                                                  | Depreciation and amortization                                                               |                                    |         | 1,374                                           |         |            |         | 11,383        |         |              |        | 1,949        |        |   |         |      |        |     |         | 14,706 |        
|                                                                                  | Provision for bad debts                                                                     |                                    |         |                                                |         |            |         | 21,244        |         |              |        | 3,276        |        |   |         |      |        |     |         | 24,520 |        
|                                                                                  | Minority interests                                                                          |                                    |         |                                                |         |            |         | 123           |         |              |        | 1,414        |        |   |         |      |        |     |         | 1,537  |        
|                                                                                  | Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |       |        |     |         |        |        
|                                                                                  |                                                                                             | Equity in earnings of subsidiaries |         |                                                 | (34,490 | )          |         |               | (1,709  | )            |        |              |       |   |         |       | 36,199 | (a) |         |        |        |  
|                                                                                  |                                                                                             | Intercompany                       |         |                                                 | 65,326  |            |         |               | (58,239 | )            |        |              | (7,087 | ) |         |       |       |     |         |        |        |  
|                                                                                  |                                                                                             | Accounts receivable                |         |                                                 | (255    | )          |         |               | 19,401  |              |        |              | (1,266 | ) |         |       |       |     |         |        | 17,880  |  
|                                                                                  |                                                                                             | Other current assets               |         |                                                 | 614     |            |         |               | (387    | )            |        |              | 199    |   |         |       |       |     |         |        | 426     |  
|                                                                                  |                                                                                             | Other assets                       |         |                                                 | 177     |            |         |               | 298     |              |        |              | 386    |   |         |       |       |     |         |        | 861     |  
|                                                                                  |                                                                                             | Accounts payable                   |         |                                                 | (1,143  | )          |         |               | (154    | )            |        |              | 29     |   |         |       |       |     |         |        | (1,268  | )
|                                                                                  |                                                                                             | Due to third-party payors          |         |                                                 | 8,049   |            |         |               | (4,950  | )            |        |              | 2,163  |   |         |       |       |     |         |        | 5,262   |  
|                                                                                  |                                                                                             | Accrued expenses                   |         |                                                 | 3,099   |            |         |               | 1,865   |              |        |              | 2,158  |   |         |       |       |     |         |        | 7,122   |  
|                                                                                  |                                                                                             | Income taxes                       |         |                                                 | (11,063 | )          |         |               |        |              |        |              | (1,796 | ) |         |       |       |     |         |        | (12,859 | )
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |       |        |     |         |       
|Net cash provided by operating activities                                         |                                                                                             |                                    | 64,773  |                                                 |         |            | 20,379  |               |         |              | 6,120  |              |        |   |        |       |        |     | 91,272  |       
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |       |        |     |         |       
|Investing activities                                                              |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |       |        |     |         |       
|Purchases of property and equipment, net                                          |                                                                                             |                                    | (3,247  | )                                               |         |            | (9,385  | )             |         |              | (2,574 | )            |        |   |        |       |        |     | (15,206 | )     
|Proceeds from disposal of assets                                                  |                                                                                             |                                    | 2,400   |                                                 |         |            |        |               |         |              |       |              |        |   |        |       |        |     | 2,400   |       
|Earnout payments                                                                  |                                                                                             |                                    |        |                                                 |         |            | (429    | )             |         |              |       |              |        |   |        |       |        |     | (429    | )     
|Acquisition of businesses, net of cash acquired                                   |                                                                                             |                                    |        |                                                 |         |            | (3,596  | )             |         |              | (190   | )            |        |   |        |       |        |     | (3,786  | )     
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |       |        |     |         |       
|Net cash used in investing activities                                             |                                                                                             |                                    | (847    | )                                               |         |            | (13,410 | )             |         |              | (2,764 | )            |        |   |        |       |        |     | (17,021 | )     
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |       |        |     |         |       
|Financing activities                                                              |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |       |        |     |         |       
|Intercompany debt reallocation                                                    |                                                                                             |                                    | 7,800   |                                                 |         |            | (6,855  | )             |         |              | (945   | )            |        |   |        |       |        |     |        |       
|Net repayments on credit facility debt                                            |                                                                                             |                                    | (32,402 | )                                               |         |            |        |               |         |              | (1,789 | )            |        |   |        |       |        |     | (34,191 | )     
|Principal payments on seller and other debt                                       |                                                                                             |                                    |        |                                                 |         |            | (2,114  | )             |         |              |       |              |        |   |        |       |        |     | (2,114  | )     
|Proceeds from issuance of common stock                                            |                                                                                             |                                    | 2,125   |                                                 |         |            |        |               |         |              |       |              |        |   |        |       |        |     | 2,125   |       
|Repayment of bank overdrafts                                                      |                                                                                             |                                    | (4,356  | )                                               |         |            |        |               |         |              |       |              |        |   |        |       |        |     | (4,356  | )     
|Distributions to minority interests                                               |                                                                                             |                                    |        |                                                 |         |            |        |               |         |              | (775   | )            |        |   |        |       |        |     | (775    | )     
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |       |        |     |         |       
|Net cash used in financing activities                                             |                                                                                             |                                    | (26,833 | )                                               |         |            | (8,969  | )             |         |              | (3,509 | )            |        |   |        |       |        |     | (39,311 | )     
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |       |        |     |         |       
|Effect of exchange rate changes on cash
and cash equivalents                      |                                                                                             |                                    | 349     |                                                 |         |            |        |               |         |              |       |              |        |   |        |       |        |     | 349     |       
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |       |        |     |         |       
|Net increase (decrease) in cash and cash equivalents                              |                                                                                             |                                    | 37,442  |                                                 |         |            | (2,000  | )             |         |              | (153   | )            |        |   |        |       |        |     | 35,289  |       
|Cash and cash equivalents at beginning of period                                  |                                                                                             |                                    | 25,378  |                                                 |         |            | 28,022  |               |         |              | 2,662  |              |        |   |        |       |        |     | 56,062  |       
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |       |        |     |         |       
|Cash and cash equivalents at end of period                                        |                                                                                             | $                                  | 62,820  |                                                 |         | $          | 26,022  |               |         | $            | 2,509  |              |        | $ |        |       |        | $   | 91,351  |       
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |       |        |     |         |       

(a) Elimination of equity in earnings of subsidiary.

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|                                                         |                               |   |                                                 |        |            |   |               |         |              |   |              |        |  |   |         |       |  |   |         |         | 
|-------------------------------------------------------- | ----------------------------- | - | ----------------------------------------------- | ------ | ---------- | - | ------------- | ------- | ------------ | - | ------------ | ------ |  | - | ------- | ----- |  | - | ------- | ------- | 
|                                                         |                               |   | Select Medical Corporation                     
|                                                         |                               |   | Condensed Consolidating Statement of Operations
|                                                         |                               |   | For the Six Months Ended June 30, 2002         
|                                                         |                               |   |                                                
|                                                         |                               |   | Select Medical                                  |        |            |   |               |         |              |   |              |        |  |   |         |       |  |   |        
|                                                         |                               |   | Corporation                                     |        |            |   |               |         |              |   |              |        |  |   |         |       |  |   |        
|                                                         |                               |   | (Parent                                         |        | Subsidiary |   | Non-Guarantor |         |              |   |              |        |  |   |        
|                                                         |                               |   | Company Only)                                   |        | Guarantors |   | Subsidiaries  |         | Eliminations |   | Consolidated
|                                                         |                               |   |                                                 |        |            |   |               |         |              |   |             
|                                                         |                               |   | (dollars in thousands)                         
|Net operating revenues                                   |                               | $ | 6,502                                           |        |            | $ | 447,326       |         |              | $ | 98,364       |        |  | $ |        |       |  | $ | 552,192 |        
|                                                         |                               |   |                                                 |        |            |   |               |         |              |   |              |        |  |   |         |       |  |   |         |        
|Costs and expenses:                                      |                               |   |                                                 |        |            |   |               |         |              |   |              |        |  |   |         |       |  |   |         |        
|                                                         | Cost of services              |   |                                                 |       |            |   |               | 369,233 |              |   |              | 80,685 |  |   |         |      |  |   |         | 449,918 | 
|                                                         | General and administrative    |   |                                                 | 19,012 |            |   |               |        |              |   |              |       |  |   |         |      |  |   |         | 19,012  | 
|                                                         | Bad debt expense              |   |                                                 |       |            |   |               | 15,820  |              |   |              | 3,200  |  |   |         |      |  |   |         | 19,020  | 
|                                                         | Depreciation and amortization |   |                                                 | 827    |            |   |               | 8,833   |              |   |              | 2,546  |  |   |         |      |  |   |         | 12,206  | 
|                                                         |                               |   |                                                 |        |            |   |               |         |              |   |              |        |  |   |         |       |  |   |         |        
|Total costs and expenses                                 |                               |   | 19,839                                          |        |            |   | 393,886       |         |              |   | 86,431       |        |  |   |        |       |  |   | 500,156 |        
|                                                         |                               |   |                                                 |        |            |   |               |         |              |   |              |        |  |   |         |       |  |   |         |        
|Income (loss) from operations                            |                               |   | (13,337                                         | )      |            |   | 53,440        |         |              |   | 11,933       |        |  |   |        |       |  |   | 52,036  |        
|Other income and expense:                                |                               |   |                                                 |        |            |   |               |         |              |   |              |        |  |   |         |       |  |   |         |        
|Intercompany interest and royalty fees                   |                               |   | 10,567                                          |        |            |   | (10,863       | )       |              |   | 296          |        |  |   |        |       |  |   |        |        
|Intercompany management fees                             |                               |   | (24,735                                         | )      |            |   | 23,373        |         |              |   | 1,362        |        |  |   |        |       |  |   |        |        
|Interest income                                          |                               |   | (167                                            | )      |            |   | (40           | )       |              |   |             |        |  |   |        |       |  |   | (207    | )      
|Interest expense                                         |                               |   | 3,684                                           |        |            |   | 7,666         |         |              |   | 2,243        |        |  |   |        |       |  |   | 13,593  |        
|                                                         |                               |   |                                                 |        |            |   |               |         |              |   |              |        |  |   |         |       |  |   |         |        
|Income (loss) before minority interests and income taxes |                               |   | (2,686                                          | )      |            |   | 33,304        |         |              |   | 8,032        |        |  |   |        |       |  |   | 38,650  |        
|Minority interest in consolidated subsidiary companies   |                               |   |                                                |        |            |   | 6             |         |              |   | 1,167        |        |  |   |        |       |  |   | 1,173   |        
|                                                         |                               |   |                                                 |        |            |   |               |         |              |   |              |        |  |   |         |       |  |   |         |        
|Income (loss) before income taxes                        |                               |   | (2,686                                          | )      |            |   | 33,298        |         |              |   | 6,865        |        |  |   |        |       |  |   | 37,477  |        
|Income tax expense (benefit)                             |                               |   | (1,308                                          | )      |            |   | 14,727        |         |              |   | 1,281        |        |  |   |        |       |  |   | 14,700  |        
|Equity in earnings of subsidiaries                       |                               |   | 24,155                                          |        |            |   | 4,032         |         |              |   |             |        |  |   | (28,187 | ) (a) |  |   |        |        
|                                                         |                               |   |                                                 |        |            |   |               |         |              |   |              |        |  |   |         |       |  |   |         |        
|Net income                                               |                               | $ | 22,777                                          |        |            | $ | 22,603        |         |              | $ | 5,584        |        |  | $ | (28,187 | )     |  | $ | 22,777  |        
|                                                         |                               |   |                                                 |        |            |   |               |         |              |   |              |        |  |   |         |       |  |   |         |        

(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 Six Months Ended June 30, 2002         
|                                                                                  |                                                                                             |                                    |         |                                                
|                                                                                  |                                                                                             |                                    |         | Select Medical                                  |         |            |         |               |         |              |        |              |        |   |         |        |        |     |         |       
|                                                                                  |                                                                                             |                                    |         | Corporation                                     |         |            |         |               |         |              |        |              |        |   |         |        |        |     |         |       
|                                                                                  |                                                                                             |                                    |         | (Parent Company                                 |         | Subsidiary |         | Non-Guarantor |         |              |        |              |        |   |         |       
|                                                                                  |                                                                                             |                                    |         | Only)                                           |         | Guarantors |         | Subsidiaries  |         | Eliminations |        | Consolidated
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |             
|                                                                                  |                                                                                             |                                    |         | (dollars in thousands)                         
|Operating activities                                                              |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |        |        |     |         |       
|Net income                                                                        |                                                                                             | $                                  | 22,777  |                                                 |         | $          | 22,603  |               |         | $            | 5,584  |              |        | $ | (28,187 | )  (a) |        | $   | 22,777  |       
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |        |        |     |         |       
|                                                                                  | Depreciation and amortization                                                               |                                    |         | 827                                             |         |            |         | 8,833         |         |              |        | 2,546        |        |   |         |       |        |     |         | 12,206 |        
|                                                                                  | Provision for bad debts                                                                     |                                    |         |                                                |         |            |         | 15,820        |         |              |        | 3,200        |        |   |         |       |        |     |         | 19,020 |        
|                                                                                  | Minority interests                                                                          |                                    |         |                                                |         |            |         | 6             |         |              |        | 1,167        |        |   |         |       |        |     |         | 1,173  |        
|                                                                                  | Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |        |        |     |         |        |        
|                                                                                  |                                                                                             | Equity in earnings of subsidiaries |         |                                                 | (24,155 | )          |         |               | (4,032  | )            |        |              |       |   |         |        | 28,187 | (a) |         |        |        |  
|                                                                                  |                                                                                             | Intercompany                       |         |                                                 | (20,800 | )          |         |               | 25,868  |              |        |              | (5,068 | ) |         |        |       |     |         |        |        |  
|                                                                                  |                                                                                             | Accounts receivable                |         |                                                 | (124    | )          |         |               | (30,108 | )            |        |              | (5,663 | ) |         |        |       |     |         |        | (35,895 | )
|                                                                                  |                                                                                             | Other current assets               |         |                                                 | (461    | )          |         |               | (739    | )            |        |              | (40    | ) |         |        |       |     |         |        | (1,240  | )
|                                                                                  |                                                                                             | Other assets                       |         |                                                 | 1,150   |            |         |               | (862    | )            |        |              | 1,268  |   |         |        |       |     |         |        | 1,556   |  
|                                                                                  |                                                                                             | Accounts payable                   |         |                                                 | (1,870  | )          |         |               | (250    | )            |        |              | (259   | ) |         |        |       |     |         |        | (2,379  | )
|                                                                                  |                                                                                             | Due to third-party payors          |         |                                                 | (237    | )          |         |               | 12,842  |              |        |              | 2,021  |   |         |        |       |     |         |        | 14,626  |  
|                                                                                  |                                                                                             | Accrued expenses                   |         |                                                 | 670     |            |         |               | 7,489   |              |        |              | (1,277 | ) |         |        |       |     |         |        | 6,882   |  
|                                                                                  |                                                                                             | Income taxes                       |         |                                                 | 13,323  |            |         |               |        |              |        |              | (1,574 | ) |         |        |       |     |         |        | 11,749  |  
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |        |        |     |         |       
|Net cash provided by (used in) operating activities                               |                                                                                             |                                    | (8,900  | )                                               |         |            | 57,470  |               |         |              | 1,905  |              |        |   |        |        |        |     | 50,475  |       
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |        |        |     |         |       
|Investing activities                                                              |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |        |        |     |         |       
|Purchases of property and equipment, net                                          |                                                                                             |                                    | (561    | )                                               |         |            | (14,870 | )             |         |              | (2,517 | )            |        |   |        |        |        |     | (17,948 | )     
|Earnout payments                                                                  |                                                                                             |                                    |        |                                                 |         |            | (536    | )             |         |              |       |              |        |   |        |        |        |     | (536    | )     
|Acquisition of businesses, net of cash acquired                                   |                                                                                             |                                    |        |                                                 |         |            | (3,303  | )             |         |              |       |              |        |   |        |        |        |     | (3,303  | )     
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |        |        |     |         |       
|Net cash used in investing activities                                             |                                                                                             |                                    | (561    | )                                               |         |            | (18,709 | )             |         |              | (2,517 | )            |        |   |        |        |        |     | (21,787 | )     
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |        |        |     |         |       
|Financing activities                                                              |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |        |        |     |         |       
|Intercompany debt reallocation                                                    |                                                                                             |                                    | 34,114  |                                                 |         |            | (36,852 | )             |         |              | 2,738  |              |        |   |        |        |        |     |        |       
|Net repayments on credit facility debt                                            |                                                                                             |                                    | (11,640 | )                                               |         |            |        |               |         |              | (1,341 | )            |        |   |        |        |        |     | (12,981 | )     
|Principal payments on seller and other debt                                       |                                                                                             |                                    | (370    | )                                               |         |            | (3,577  | )             |         |              |       |              |        |   |        |        |        |     | (3,947  | )     
|Proceeds from issuance of common stock                                            |                                                                                             |                                    | 3,893   |                                                 |         |            |        |               |         |              |       |              |        |   |        |        |        |     | 3,893   |       
|Proceeds from bank overdrafts                                                     |                                                                                             |                                    | 3,624   |                                                 |         |            |        |               |         |              |       |              |        |   |        |        |        |     | 3,624   |       
|Payment of deferred financing costs                                               |                                                                                             |                                    | (67     | )                                               |         |            |        |               |         |              |       |              |        |   |        |        |        |     | (67     | )     
|Distributions to minority interests                                               |                                                                                             |                                    |        |                                                 |         |            |        |               |         |              | (1,151 | )            |        |   |        |        |        |     | (1,151  | )     
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |        |        |     |         |       
|Net cash provided by (used in) financing activities                               |                                                                                             |                                    | 29,554  |                                                 |         |            | (40,429 | )             |         |              | 246    |              |        |   |        |        |        |     | (10,629 | )     
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |        |        |     |         |       
|Effect of exchange rate changes on cash
and cash equivalents                      |                                                                                             |                                    | 72      |                                                 |         |            |        |               |         |              |       |              |        |   |        |        |        |     | 72      |       
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |        |        |     |         |       
|Net increase (decrease) in cash and cash equivalents                              |                                                                                             |                                    | 20,165  |                                                 |         |            | (1,668  | )             |         |              | (366   | )            |        |   |        |        |        |     | 18,131  |       
|Cash and cash equivalents at beginning of period                                  |                                                                                             |                                    | 559     |                                                 |         |            | 8,086   |               |         |              | 2,058  |              |        |   |        |        |        |     | 10,703  |       
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |        |        |     |         |       
|Cash and cash equivalents at end of period                                        |                                                                                             | $                                  | 20,724  |                                                 |         | $          | 6,418   |               |         | $            | 1,692  |              |        | $ |        |        |        | $   | 28,834  |       
|                                                                                  |                                                                                             |                                    |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |        |        |     |         |       

(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;                                              
|
| |  |  | unexpected difficulties in integrating our and Kesslers
operations or realizing the anticipated benefits from the Kessler
Acquisition;                             
|
| |  |  | unforeseen liabilities associated with the Kessler Acquisition; 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.

Non-GAAP Financial Measures

The SEC recently adopted rules regarding the use of non-GAAP financial
measures, such as EBITDA and Adjusted EBITDA, which we use in this report.
Historically, we have defined EBITDA as net income (loss) before interest,
income taxes, depreciation and amortization, special charges, loss on early
retirement of debt and minority interest, and used this measure to report our
consolidated operating results as well as our segment results. We are now
referring to this financial measure as Adjusted EBITDA. In order to comply
with the new rules, we are now using EBITDA, defined as net income (loss)
before interest, income taxes, depreciation and amortization, to report our
consolidated operating results. However, SFAS 131 requires us to report our
segment results in a manner consistent with managements internal reporting of
operating results to our chief operating decision maker (as defined under SFAS
131) for purposes of evaluating segment performance. Therefore, since we use
Adjusted EBITDA to measure performance of our segments for internal reporting
purposes, we will continue to use Adjusted EBITDA to report our segment
results. The difference between EBITDA and Adjusted EBITDA for the periods
presented in this report result from minority interests, which are added back
to EBITDA in the computation of Adjusted EBITDA.

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Overview

We are a leading operator of specialty 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 June 30, 2003,
we operated 75 long term acute care hospitals in 24 states and 737 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 hospital segment
and our outpatient rehabilitation segment. For the six months ended June 30,
2003, we had net operating revenues of $638.5 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 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.

The following table sets forth operating statistics for our specialty
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 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 |    | Six Months Ended
|                        |                                  |                         |   |                    |    |                 
|                        |                                  |                         |   | June 30,           |    | June 30,        
|                        |                                  |                         |   |                    |    |                 
|                        |                                  |                         |   | 2003               |    | 2002             |   | 2003    |   | 2002
|                        |                                  |                         |   |                    |    |                  |   |         |   |     
|Specialty Hospital Data |                                  |                         |   |                    |    |                  |   |         |   |      |   |         |    |   |   |        
|                        | # of Hospitals - Start of Period |                         |   | 72                 |    |                  |   | 64      |   |      |   | 72      |    |   |   | 64      |  
|                        |                                  | # of Hospital Start-ups |   |                    | 4  |                  |   |         | 2 |      |   |         | 4  |   |   |         | 2 | 
|                        |                                  | # of Hospitals Closed   |   |                    | (1 | )                |   |         |  |      |   |         | (1 | ) |   |         |  | 
|                        |                                  |                         |   |                    |    |                  |   |         |   |      |   |         |    |   |   |        
|                        | # of Hospitals - End of Period   |                         |   | 75                 |    |                  |   | 66      |   |      |   | 75      |    |   |   | 66      |  
|                        |                                  |                         |   |                    |    |                  |   |         |   |      |   |         |    |   |   |        
|                        | # of Licensed Beds               |                         |   | 2,758              |    |                  |   | 2,383   |   |      |   | 2,758   |    |   |   | 2,383   |  
|                        | # of Admissions                  |                         |   | 6,117              |    |                  |   | 5,019   |   |      |   | 12,075  |    |   |   | 10,230  |  
|                        | # of Patient Days                |                         |   | 167,945            |    |                  |   | 153,942 |   |      |   | 333,763 |    |   |   | 303,811 |  
|                        | Average Length of Stay           |                         |   | 27                 |    |                  |   | 31      |   |      |   | 28      |    |   |   | 30      |  
|                        | Net Revenue Per Patient Day (a)  |                         | $ | 1,138              |    |                  | $ | 987     |   |      | $ | 1,122   |    |   | $ | 990     |  
|                        | Occupancy Rate                   |                         |   | 70                 | %  |                  |   | 73      | % |      |   | 70      | %  |   |   | 72      | %
|                        | % Patient Days  Medicare        |                         |   | 77                 | %  |                  |   | 76      | % |      |   | 77      | %  |   |   | 77      | %

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|                               |                                          |                                       |   |                    |     |                  |   |         |    |      |   |           |     |   |   |           |     |  
|------------------------------ | ---------------------------------------- | ------------------------------------- | - | ------------------ | --- | ---------------- | - | ------- | -- | ---- | - | --------- | --- | - | - | --------- | --- | -
|                               |                                          |                                       |   | Three Months Ended |     | Six Months Ended
|                               |                                          |                                       |   |                    |     |                 
|                               |                                          |                                       |   | June 30,           |     | June 30,        
|                               |                                          |                                       |   |                    |     |                 
|                               |                                          |                                       |   | 2003               |     | 2002             |   | 2003    |    | 2002
|                               |                                          |                                       |   |                    |     |                  |   |         |    |     
|Outpatient Rehabilitation Data |                                          |                                       |   |                    |     |                  |   |         |    |      |   |           |     |   |   |          
|                               | # of Clinics Owned - Start of Period     |                                       |   | 708                |     |                  |   | 667     |    |      |   | 679       |     |   |   | 664       |    
|                               |                                          | # of Clinics Acquired                 |   |                    |    |                  |   |         | 6  |      |   |           | 33  |   |   |           | 7   |  
|                               |                                          | # of Clinic Start-ups                 |   |                    | 11  |                  |   |         | 18 |      |   |           | 17  |   |   |           | 32  |  
|                               |                                          | # of Clinics Closed/Sold/Consolidated |   |                    | (12 | )                |   |         | (5 | )    |   |           | (22 | ) |   |           | (17 | )
|                               |                                          |                                       |   |                    |     |                  |   |         |    |      |   |           |     |   |   |          
|                               | # of Clinics Owned - End of Period       |                                       |   | 707                |     |                  |   | 686     |    |      |   | 707       |     |   |   | 686       |    
|                               | # of Clinics Managed  End of Period     |                                       |   | 30                 |     |                  |   | 54      |    |      |   | 30        |     |   |   | 54        |    
|                               |                                          |                                       |   |                    |     |                  |   |         |    |      |   |           |     |   |   |          
|                               | Total # of Clinics (All)  End of Period |                                       |   | 737                |     |                  |   | 740     |    |      |   | 737       |     |   |   | 740       |    
|                               |                                          |                                       |   |                    |     |                  |   |         |    |      |   |           |     |   |   |          
|                               | # of Visits (U.S.)                       |                                       |   | 1,019,028          |     |                  |   | 995,050 |    |      |   | 2,000,600 |     |   |   | 1,959,466 |    
|                               | Net Revenue Per Visit (U.S.) (b)         |                                       | $ | 88                 |     |                  | $ | 86      |    |      | $ | 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 hospitals
each year, utilizing primarily our hospital within a hospital model. We also
may open new specialty 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.

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 68% and 62% of our specialty hospital revenues for the six
months ended June 30, 2003 and 2002, respectively, were received from services
provided to Medicare patients. Of this amount, approximately 45% and 98% were
paid by Medicare under a cost-based reimbursement methodology for the six
months ended June 30, 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 June 30, 2003 and December 31, 2002 we had a net amount due
to Medicare of $12.7 million and $7.3 million, related to our cost-based
hospitals. We recorded this amount as

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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 six months ended June 30, 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.

During the quarter ended June 30, 2003, an additional fourteen of our
hospitals implemented LTCH-PPS pursuant to the new regulations, and one
hospital that previously had implemented LTCH-PPS was closed. This brings the
total number of our hospitals which have implemented LTCH-PPS to forty-nine at
June 30, 2003. For forty-eight of these hospitals, we have elected to be paid
solely on the basis of LTC-DRG payments. The balance of our long term acute
care hospitals are expected to implement LTCH-PPS in the next quarter.

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, our hospitals are experiencing 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 and six months ended June 30, 2003.

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

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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 expected 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 $0.8 million and $0.7 million for the six months ended June 30,
2003 and 2002, respectively. Our future commitments are related to commercial
office space we lease for our corporate headquarters in Mechanicsburg,
Pennsylvania. These future commitments amount to $16.0 million through 2015.
These transactions and commitments are described more fully in Note 16 to
Select Medical Corporations consolidated financial statements contained in our
form 10-K for the year ended December 31, 2002.

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Results of Operations

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

|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|-------------------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                                                   |  | Three Months Ended |       | Six Months Ended
|                                                   |  | June 30,           |       | June 30,        
|                                                   |  |                    |       |                 
|                                                   |  | 2003               |       | 2002             |  | 2003 |       | 2002
|                                                   |  |                    |       |                  |  |      |       |     
|Net Operating revenues                             |  |                    | 100.0 | %                |  |      | 100.0 | %    |  |  | 100.0 | % |  |  | 100.0 | %
|Cost of services (a)                               |  |                    | 79.2  | %                |  |      | 81.4  | %    |  |  | 80.0  | % |  |  | 81.6  | %
|General and administrative                         |  |                    | 3.5   | %                |  |      | 3.3   | %    |  |  | 3.3   | % |  |  | 3.4   | %
|Bad debt expense                                   |  |                    | 3.8   | %                |  |      | 3.1   | %    |  |  | 3.8   | % |  |  | 3.4   | %
|Depreciation and amortization                      |  |                    | 2.2   | %                |  |      | 2.2   | %    |  |  | 2.3   | % |  |  | 2.2   | %
|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|Income from operations                             |  |                    | 11.3  | %                |  |      | 10.0  | %    |  |  | 10.6  | % |  |  | 9.4   | %
|Interest expense, net                              |  |                    | 1.7   | %                |  |      | 2.4   | %    |  |  | 1.8   | % |  |  | 2.4   | %
|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|Income before minority
interests, and income taxes |  |                    | 9.6   | %                |  |      | 7.6   | %    |  |  | 8.8   | % |  |  | 7.0   | %
|Minority interests                                 |  |                    | 0.2   | %                |  |      | 0.2   | %    |  |  | 0.3   | % |  |  | 0.2   | %
|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|Income before income taxes                         |  |                    | 9.4   | %                |  |      | 7.4   | %    |  |  | 8.5   | % |  |  | 6.8   | %
|Income tax expense                                 |  |                    | 3.7   | %                |  |      | 2.9   | %    |  |  | 3.3   | % |  |  | 2.7   | %
|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|Net income                                         |  |                    | 5.7   | %                |  |      | 4.5   | %    |  |  | 5.2   | % |  |  | 4.1   | %
|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  

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

|                                          |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |       |      |  
|----------------------------------------- | ------------------------- | ------------- | - | ------------------ | ------- | ---- | - | -------- | ------- | ---------------- |  | ---------------------- | ---- | ------ | - | ------- | ------- |  | - | ------- | ------- |  |  | ----- | ---- | -
|                                          |                           |               |   | Three Months Ended |         |      |   |          |         | Six Months Ended |  |                        |      |       
|                                          |                           |               |   | June 30,           |         |      |   | June 30, |         |                 
|                                          |                           |               |   |                    |         | %    |   |          |         | %               
|                                          |                           |               |   | 2003               |         | 2002 |   | Change   |         | 2003             |  | 2002                   |      | Change
|                                          |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |       
|                                          |                           |               |   |                    |         |      |   |          |         |                  |  | (dollars in thousands) |      |        |   |         |         |  |   |        
|Net operating revenues:                   |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Specialty hospitals       |               | $ | 191,763            |         |      | $ | 152,073  |         |                  |  | 26.1                   | %    |        | $ | 375,191 |         |  | $ | 300,901 |         |  |  | 24.7  | %   
|                                          | Outpatient rehabilitation |               |   | 132,047            |         |      |   | 124,639  |         |                  |  | 5.9                    |      |        |   | 257,622 |         |  |   | 244,333 |         |  |  | 5.4   |     
|                                          | Other                     |               |   | 2,408              |         |      |   | 3,560    |         |                  |  | (32.4                  | )    |        |   | 5,712   |         |  |   | 6,958   |         |  |  | (17.9 | )   
|                                          |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |      
|                                          |                           | Total company |   | $                  | 326,218 |      |   | $        | 280,272 |                  |  |                        | 16.4 | %      |   | $       | 638,525 |  |   | $       | 552,192 |  |  |       | 15.6 | %
|                                          |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |       |     
|Adjusted EBITDA: (b)                      |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Specialty hospitals       |               | $ | 30,708             |         |      | $ | 17,281   |         |                  |  | 77.7                   | %    |        | $ | 56,194  |         |  | $ | 32,948  |         |  |  | 70.6  | %   
|                                          | Outpatient rehabilitation |               |   | 23,391             |         |      |   | 23,075   |         |                  |  | 1.4                    |      |        |   | 42,894  |         |  |   | 44,123  |         |  |  | (2.8  | )   
|                                          | Other                     |               |   | (10,060            | )       |      |   | (6,170   | )       |                  |  | (63.0                  | )    |        |   | (16,697 | )       |  |   | (12,829 | )       |  |  | (30.2 | )   
|                                          |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |      
|                                          |                           | Total company |   | $                  | 44,039  |      |   | $        | 34,186  |                  |  |                        | 28.8 | %      |   | $       | 82,391  |  |   | $       | 64,242  |  |  |       | 28.3 | %
|                                          |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |       |     
|Income (loss) from operations:            |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Specialty hospitals       |               | $ | 27,162             |         |      | $ | 14,134   |         |                  |  | 92.2                   | %    |        | $ | 49,021  |         |  | $ | 26,753  |         |  |  | 83.2  | %   
|                                          | Outpatient rehabilitation |               |   | 20,292             |         |      |   | 20,488   |         |                  |  | (1.0                   | )    |        |   | 36,880  |         |  |   | 39,010  |         |  |  | (5.5  | )   
|                                          | Other                     |               |   | (10,607            | )       |      |   | (6,616   | )       |                  |  | (60.3                  | )    |        |   | (18,216 | )       |  |   | (13,727 | )       |  |  | (32.7 | )   
|                                          |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |      
|                                          |                           | Total company |   | $                  | 36,847  |      |   | $        | 28,006  |                  |  |                        | 31.6 | %      |   | $       | 67,685  |  |   | $       | 52,036  |  |  |       | 30.1 | %
|                                          |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |      
|Adjusted EBITDA margins: (b)              |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Specialty hospitals       |               |   | 16.0               | %       |      |   | 11.4     | %       |                  |  | 40.4                   | %    |        |   | 15.0    | %       |  |   | 10.9    | %       |  |  | 37.6  | %   
|                                          | Outpatient rehabilitation |               |   | 17.7               |         |      |   | 18.5     |         |                  |  | (4.3                   | )    |        |   | 16.6    |         |  |   | 18.1    |         |  |  | (8.3  | )   
|                                          | Other                     |               |   | N/M                |         |      |   | N/M      |         |                  |  | N/M                    |      |        |   | N/M     |         |  |   | N/M     |         |  |  | N/M   |     
|                                          |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Total company             |               |   | 13.5               | %       |      |   | 12.2     | %       |                  |  | 10.7                   | %    |        |   | 12.9    | %       |  |   | 11.6    | %       |  |  | 11.2  | %   
|                                          |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |      
|Total assets:                             |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Specialty hospitals       |               | $ | 293,106            |         |      | $ | 315,115  |         |                  |  |                        |      |        | $ | 293,106 |         |  | $ | 315,115 |         |  |  |       |     
|                                          | Outpatient rehabilitation |               |   | 333,686            |         |      |   | 330,800  |         |                  |  |                        |      |        |   | 333,686 |         |  |   | 330,800 |         |  |  |       |     
|                                          | Other                     |               |   | 111,068            |         |      |   | 47,518   |         |                  |  |                        |      |        |   | 111,068 |         |  |   | 47,518  |         |  |  |       |     
|                                          |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Total company             |               | $ | 737,860            |         |      | $ | 693,433  |         |                  |  |                        |      |        | $ | 737,860 |         |  | $ | 693,433 |         |  |  |       |     
|                                          |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |      
|Purchases of property and
equipment, net: |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Specialty hospitals       |               | $ | 4,529              |         |      | $ | 6,257    |         |                  |  |                        |      |        | $ | 7,416   |         |  | $ | 12,440  |         |  |  |       |     
|                                          | Outpatient rehabilitation |               |   | 1,790              |         |      |   | 2,492    |         |                  |  |                        |      |        |   | 4,530   |         |  |   | 4,927   |         |  |  |       |     
|                                          | Other                     |               |   | 1,914              |         |      |   | 240      |         |                  |  |                        |      |        |   | 3,260   |         |  |   | 581     |         |  |  |       |     
|                                          |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Total company             |               | $ | 8,233              |         |      | $ | 8,989    |         |                  |  |                        |      |        | $ | 15,206  |         |  | $ | 17,948  |         |  |  |       |     
|                                          |                           |               |   |                    |         |      |   |          |         |                  |  |                        |      |        |   |         |         |  |   |         |         |  |  |      

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The following tables reconcile net income to EBITDA for the Company and
EBITDA to Adjusted EBITDA for our reportable segments.

|                              |  |                        |         |                  |  |      |         |      |  |   |         |   |  |   |         |  
|----------------------------- |  | ---------------------- | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                              |  | Three Months Ended     |         | Six Months Ended
|                              |  | June 30,               |         | June 30,        
|                              |  |                        |         |                 
|                              |  | 2003                   |         | 2002             |  | 2003 |         | 2002
|                              |  |                        |         |                  |  |      |         |     
|                              |  | (dollars in thousands)
|Net income                    |  | $                      | 18,631  |                  |  | $    | 12,601  |      |  | $ | 33,085  |   |  | $ | 22,777  |  
|Income tax expense            |  |                        | 12,037  |                  |  |      | 8,156   |      |  |   | 21,357  |   |  |   | 14,700  |  
|Interest expense, net         |  |                        | 5,466   |                  |  |      | 6,679   |      |  |   | 11,706  |   |  |   | 13,386  |  
|Depreciation and amortization |  |                        | 7,192   |                  |  |      | 6,180   |      |  |   | 14,706  |   |  |   | 12,206  |  
|                              |  |                        |         |                  |  |      |         |      |  |   |         |   |  |   |         |  
|EBITDA (b)                    |  |                        | 43,326  |                  |  |      | 33,616  |      |  |   | 80,854  |   |  |   | 63,069  |  
|Minority interest             |  |                        | 713     |                  |  |      | 570     |      |  |   | 1,537   |   |  |   | 1,173   |  
|                              |  |                        |         |                  |  |      |         |      |  |   |         |   |  |   |         |  
|Adjusted EBITDA (b)           |  | $                      | 44,039  |                  |  | $    | 34,186  |      |  | $ | 82,391  |   |  | $ | 64,242  |  
|                              |  |                        |         |                  |  |      |         |      |  |   |         |   |  |   |         |  
|Net revenue                   |  | $                      | 326,218 |                  |  | $    | 280,272 |      |  | $ | 638,525 |   |  | $ | 552,192 |  
|EBITDA margin (b)             |  |                        | 13.3    | %                |  |      | 12.0    | %    |  |   | 12.7    | % |  |   | 11.4    | %

The following table reconciles same hospitals information.

|                                      |                                               |                           |      |                        |      |                  |      |         |     |      |      |         |       |   |      |         |       | 
|------------------------------------- | --------------------------------------------- | ------------------------- | ---- | ---------------------- | ---- | ---------------- | ---- | ------- | --- | ---- | ---- | ------- | ----- | - | ---- | ------- | ----- | 
|                                      |                                               |                           |      | Three Months Ended     |      | Six Months Ended
|                                      |                                               |                           |      | June 30,               |      | June 30,        
|                                      |                                               |                           |      |                        |      |                 
|                                      |                                               |                           |      | 2003                   |      | 2002             |      | 2003    |     | 2001
|                                      |                                               |                           |      |                        |      |                  |      |         |     |     
|                                      |                                               |                           |      | (dollars in thousands)
|Net Operating Revenue                 |                                               |                           |      |                        |      |                  |      |         |     |      |      |         |       |   |      |        
|                                      | Specialty hospitals net operating revenue     |                           | $    | 191,763                |      |                  | $    | 152,073 |     |      | $    | 375,191 |       |   | $    | 300,901 |      
|                                      | Less: Specialty hospitals opened after 1/1/02 |                           |      | 14,011                 |      |                  |      | 5       |     |      |      | 22,814  |       |   |      | 5       |      
|                                      |                                               | Closed specialty hospital |      |                        | 10   |                  |      |         | 997 |      |      |         | 1,473 |   |      |         | 2,460 | 
|                                      |                                               |                           |      |                        |      |                  |      |         |     |      |      |         |       |   |      |        
|                                      | Same hospitals net operating revenue          |                           | $    | 177,742                |      |                  | $    | 151,071 |     |      | $    | 350,904 |       |   | $    | 298,436 |      
|                                      |                                               |                           |      |                        |      |                  |      |         |     |      |      |         |       |   |      |        
|Adjusted EBITDA                       |                                               |                           |      |                        |      |                  |      |         |     |      |      |         |       |   |      |        
|                                      | Specialty hospitals Adjusted EBITDA           |                           | $    | 30,708                 |      |                  | $    | 17,281  |     |      | $    | 56,194  |       |   | $    | 32,948  |      
|                                      | Less: Specialty hospitals opened after 1/1/02 |                           |      | 87                     |      |                  |      | (847    | )   |      |      | (1,176  | )     |   |      | (1,585  | )    
|                                      |                                               | Closed specialty hospital |      |                        | (246 | )                |      |         | 26  |      |      |         | (39   | ) |      |         | 307   | 
|                                      |                                               |                           |      |                        |      |                  |      |         |     |      |      |         |       |   |      |        
|                                      | Same hospitals Adjusted EBITDA                |                           | $    | 30,867                 |      |                  | $    | 18,102  |     |      | $    | 57,409  |       |   | $    | 34,226  |      
|                                      |                                               |                           |      |                        |      |                  |      |         |     |      |      |         |       |   |      |        
|Same hospitals Adjusted EBITDA margin |                                               |                           | 17.4 | %                      |      |                  | 12.0 | %       |     |      | 16.4 | %       |       |   | 11.5 | %      

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 Adjusted EBITDA as net income before interest, income taxes,
depreciation and amortization and minority interest. Minority interest is
then deducted from Adjusted EBITDA to derive EBITDA. EBITDA is commonly
used as an analytical indicator of performance within the healthcare
industry. Adjusted EBITDA is used by management to evaluate financial
performance and determine resource allocation for each of our operating
units, and for the us as a whole. EBITDA and Adjusted EBITDA are not
measures of financial performance under generally accepted accounting
principles. Items excluded from EBITDA and Adjusted EBITDA are
significant components in understanding and assessing financial
performance. EBITDA and Adjusted 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 and Adjusted EBITDA are not measurements determined in accordance
with generally accepted accounting principles and are thus susceptible to
varying calculations, EBITDA and Adjusted EBITDA as presented may not be
comparable to other similarly titled measures of other companies

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Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002

Net Operating Revenues

Our net operating revenues increased by 16.4% to $326.2 million for the
three months ended June 30, 2003 compared to $280.3 million for the three
months ended June 30, 2002. The reasons for the increase in net operating
revenues are discussed below.

Specialty Hospitals.Our specialty hospital net operating revenues
increased 26.1% to $191.8 million for the three months ended June 30, 2003
compared to $152.1 million for the three months ended June 30, 2002. Net
operating revenues for the 63 specialty hospitals opened before January 1, 2002
and operated throughout both periods increased 17.7% to $177.7 million for the
three months ended June 30, 2003 from $151.1 million for the three months ended
June 30, 2002. This resulted from a higher volume of patient days and a higher
net revenue per patient day. The remaining increase of $13.1 million resulted
primarily from the internal development of new specialty hospitals that
commenced operations in 2002.

Outpatient Rehabilitation.Our outpatient rehabilitation net operating
revenues increased 5.9% to $132.0 million for the three months ended June 30,
2003 compared to $124.6 million for the three months ended June 30, 2002. The
number of patient visits in our U.S. based outpatient rehabilitation clinics
increased 2.4% for the three months ended June 30, 2003 to 1,019,028 visits
compared to 995,050 visits for the three months ended June 30, 2002. Net
revenue per visit in these clinics increased to $88 for the three months ended
June 30, 2003 compared to $86 for the three months ended June 30, 2002. The
increase in net operating revenues was principally related to the consolidation
of a group of clinics that we previously managed and clinics that we acquired
after June 30, 2002. Excluding the effects of the previously managed clinics
and the recently acquired clinics, net operating revenues for the three months
ended June 30, 2003 would have been $127.8 million, a 2.6% increase from the
prior year, and the number of U.S. based visits would have been 938,996, a 5.6%
decline from the prior year.

Other.Our other revenues declined to $2.4 million for the three months
ended June 30, 2003 compared to $3.6 million for the three months ended June
30, 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 14.7% to $282.2 million for the three
months ended June 30, 2003 compared to $246.1 million for the three months
ended June 30, 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 and 2003, costs
associated with increased patient volumes and the consolidation of previously
managed clinics. As a percentage of our net operating revenues, our operating
expenses were 86.5% for the three months ended June 30, 2003 compared to 87.8%
for the three months ended June 30, 2002. Cost of services as a percentage of
operating revenues decreased to 79.2% for the three months ended June 30, 2003
from 81.4% for the three months ended June 30, 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 $22.5 million for the three months ended
June 30, 2003 compared to $21.4 million for the three months ended June 30,
2002. This increase is principally related to our new hospitals that opened
during 2002 and 2003. During the same time period, general and administrative
expense as a percentage of net operating revenues increased to 3.5% for the
three months ended June 30, 2003 from 3.3% for the three months ended June 30,
2002. This

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increase in general and administrative expenses is the result of an
increase in compensation costs, legal expenditures and the funding of
charitable endeavors. Our bad debt expense as a percentage of net operating
revenues was 3.8% for the three months ended June 30, 2003 compared to 3.1% for
the three months ended June 30, 2002. This increase in bad debt expense
resulted from the migration of some of our accounts receivable to older aging
categories where we significantly reduce our estimates of net realizable value.

EBITDA

Our total EBITDA increased 28.9% to $43.3 million for the three months
ended June 30, 2003 compared to $33.6 million for the three months ended June
30, 2002. Our EBITDA margins increased to 13.3% for the three months ended June
30, 2003 compared to 12.0% for the three months ended June 30, 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 2003, our pre-opening hospitals, and the hospital closed in 2003, our
overall EBITDA margins would be 14.2% for the three months ended June 30, 2003
compared to 12.5% for the three months ended June 30, 2002. For cash flow
information, see -Capital Resources and Liquidity.

Specialty Hospitals.Adjusted EBITDA increased by 77.7% to $30.7 million
for the three months ended June 30, 2003 compared to $17.3 million for the
three months ended June 30, 2002. Our Adjusted EBITDA margins increased to
16.0% for the three months ended June 30, 2003 from 11.4% for the three months
ended June 30, 2002. The hospitals opened before January 1, 2002 and operated
throughout both periods had Adjusted EBITDA of $30.9 million, an increase of
70.5% over the Adjusted EBITDA of these hospitals in the same period last year.
This increase in same hospital Adjusted EBITDA resulted from an increase in
patient days and revenue per patient day. Our Adjusted EBITDA margin in these
same store hospitals increased to 17.4% for the three months ended June 30,
2003 from 12.0% for the three months ended June 30, 2002.

Outpatient Rehabilitation.Adjusted EBITDA increased by 1.4% to $23.4
million for the three months ended June 30, 2003 compared to $23.1 million for
the three months ended June 30, 2002. Our Adjusted EBITDA margins decreased to
17.7% for the three months ended June 30, 2003 from 18.5% for the three months
ended June 30, 2002. This Adjusted EBITDA margin decline was primarily the
result of consolidating a group of clinics that we previously managed, which
had the effect of compressing our margins.

Other.The Adjusted EBITDA loss was $10.1 million for the three months
ended June 30, 2003 compared to a loss of $6.2 million for the three months
ended June 30, 2002. This increase in the Adjusted EBITDA loss was the result
of the decline in other net operating revenue described above and an increase
in our general and administrative expenses described above.

Income from Operations

Income from operations increased 31.6% to $36.8 million for the three
months ended June 30, 2003 compared to $28.0 million for the three months ended
June 30, 2002. The increase in income from operations resulted from the EBITDA
and Adjusted EBITDA increases described above, and was offset by an increase in
depreciation and amortization expense of $1.0 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.

Interest Expense

Interest expense decreased by $1.2 million to $5.6 million for the three
months ended June 30, 2003 from $6.8 million for the three months ended June
30, 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

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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 from operations.

Minority Interests

Minority interests in consolidated earnings increased to $0.7 million for
the three months ended June 30, 2003 compared to $0.6 million for the three
months ended June 30, 2002. This increase resulted from the improved
profitability of our specialty hospitals with minority interests.

Income Taxes

We recorded income tax expense of $12.0 million for the three months ended
June 30, 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 $8.2 million for the three months ended June 30, 2002. This expense
represented an effective tax rate of 39.3%.

Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

Net Operating Revenues

Our net operating revenues increased by 15.6% to $638.5 million for the
six months ended June 30, 2003 compared to $552.2 million for the six months
ended June 30, 2002. The reasons for the increase in net operating revenues
are discussed below.

Specialty Hospitals.Our specialty hospital net operating revenues
increased 24.7% to $375.2 million for the six months ended June 30, 2003
compared to $300.9 million for the six months ended June 30, 2002. Net
operating revenues for the 63 specialty hospitals opened before January 1, 2002
and operated throughout both periods increased 17.6% to $350.9 million for the
six months ended June 30, 2003 from $298.4 million for the six months ended
June 30, 2002. This resulted from a higher volume of patient days and a higher
net revenue per patient day. The remaining increase of $21.8 million resulted
from the internal development of new specialty hospitals that commenced
operations in 2002 and 2003.

Outpatient Rehabilitation.Our outpatient rehabilitation net operating
revenues increased 5.4% to $257.6 million for the six months ended June 30,
2003 compared to $244.3 million for the six months ended
June 30, 2002. The number of patient visits in our U.S. based outpatient
rehabilitation clinics increased 2.1% for the six months ended June 30, 2003 to
2,000,600 visits compared to 1,959,466 visits for the six months ended June 30,
2002. Net revenue per visit in these clinics increased to $88 for the six
months ended June 30, 2003 compared to $86 for the six months ended June 30,
2002. The increase in net operating revenues was principally related to the
consolidation of a group of clinics that we previously managed and clinics that
we acquired during 2002 and 2003. Excluding the effects of the previously
managed clinics and the recently acquired clinics, net operating revenues for
the six months ended June 30, 2003 would have been $249.2 million, a 2.0%
increase from the prior year, and the number of U.S. based visits would have
been 1,844,951, a 5.8% 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 January and February of 2003. These lost
weather related visits affected clinics we operated throughout both periods.

Other.Our other revenues declined to $5.7 million for the six months
ended June 30, 2003 compared to $7.0 million for the six months ended June 30,
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.

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Operating Expenses

Our operating expenses increased by 14.0% to $556.1 million for the six
months ended June 30, 2003 compared to $488.0 million for the six months ended
June 30, 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 and 2003, costs associated with
increased patient volumes, consolidation 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 87.1% for
the six months ended June 30, 2003 compared to 88.4% for the six months ended
June 30, 2002. Cost of services as a percentage of operating revenues decreased
to 80.0% for the six months ended June 30, 2003 from 81.6% for the six months
ended June 30, 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 $44.7 million for the six months ended June 30, 2003 compared to $42.0
million for the six months ended June 30, 2002. This increase is principally
related to our new hospitals that opened during 2002 and 2003. During the same
time period, general and administrative expense as a percentage of net
operating revenues decreased to 3.3% for the six months ended June 30, 2003
from 3.4% for the six months ended June 30, 2002. Our bad debt expense as a
percentage of net operating revenues was 3.8% for the six months ended June 30,
2003 compared to 3.4% for the six months ended June 30, 2002. This increase in
bad debt expense resulted from the migration of some of our accounts receivable
to older aging categories where we significantly reduce our estimates of net
realizable value.

EBITDA

Our total EBITDA increased 28.2% to $80.9 million for the six months ended
June 30, 2003 compared to $63.1 million for the six months ended June 30, 2002.
Our EBITDA margins increased to 12.7% for the six months ended June 30, 2003
compared to 11.4% for the six months ended June 30, 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 2003,
and our pre-opening hospitals, our overall EBITDA margins would be 13.6% for
the six months ended June 30, 2003 compared to 11.9% for the six months ended
June 30, 2002. For cash flow information, see -Capital Resources and
Liquidity.

Specialty Hospitals.Adjusted EBITDA increased by 70.6% to $56.2 million
for the six months ended June 30, 2003 compared to $32.9 million for the six
months ended June 30, 2002. Our Adjusted EBITDA margins increased to 15.0% for
the six months ended June 30, 2003 from 10.9% for the six months ended June 30,
2002. The hospitals opened before January 1, 2002 and operated throughout both
periods had Adjusted EBITDA of $57.4 million, an increase of 67.7% over the
Adjusted EBITDA of these hospitals in the same period last year. This increase
in same hospital Adjusted EBITDA resulted from an increase in patient days and
revenue per patient day. Our Adjusted EBITDA margin in these same store
hospitals increased to 16.4% for the six months ended June 30, 2003 from 11.5%
for the six months ended June 30, 2002.

Outpatient Rehabilitation.Adjusted EBITDA declined by 2.8% to $42.9
million for the six months ended June 30, 2003 compared to $44.1 million for
the six months ended June 30, 2002. Our Adjusted EBITDA margins decreased to
16.6% for the six months ended June 30, 2003 from 18.1% for the six months
ended June 30, 2002. This Adjusted 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
during January and February 2003. 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.

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Other.The Adjusted EBITDA loss was $16.7 million for the six months
ended June 30, 2003 compared to a loss of $12.8 million for the six months
ended June 30, 2002. This is the result of the decline in other net operating
revenue described above and the increase in general and administrative expenses
described under our three months ended June 30, 2003 results.

Income from Operations

Income from operations increased 30.1% to $67.7 million for the six months
ended June 30, 2003 compared to $52.0 million for the six months ended June 30,
2002. The increase in income from operations resulted from the Adjusted EBITDA
increases described above, and was offset by an increase in depreciation and
amortization expense of $2.5 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.

Interest Expense

Interest expense decreased by $1.6 million to $12.0 million for the six
months ended June 30, 2003 from $13.6 million for the six months ended June 30,
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 $1.5 million for
the six months ended June 30, 2003 compared to $1.2 million for the six months
ended June 30, 2002. This increase resulted from the improved profitability of
our specialty hospitals with minority interests.

Income Taxes

We recorded income tax expense of $21.4 million for the six months ended
June 30, 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 $14.7 million for the six months ended June 30, 2002. This expense
represented an effective tax rate of 39.2%.

Capital Resources and Liquidity

For the six months ended June 30, 2003 operating activities provided $91.3
million of cash flow compared to $50.5 million for the six months ended June
30, 2002. Our cash flow from operations benefited from strong collections of
our accounts receivable and an increase in our due to third-party payors
liability, which primarily resulted from the early payment of our bi-weekly
periodic interim payment from Medicare of approximately $16 million at the end
of June. Offsetting those increases is the payment of cash taxes of
$34.8
million. Our accounts receivable days outstanding were 56 days at June 30,
2003 compared to 73 days at December 31, 2002 and 76 days at June 30, 2002.

Investing activities used $17.0 and $21.8 million of cash flow for the six
months ended June 30, 2003 and 2002, respectively. This usage resulted from
purchases of property and equipment of $15.2 and $17.9 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 $3.8 million and $3.3 million
in 2003 and 2002, respectively.

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Financing activities used $39.3 and $10.6 million of cash for the six
months ended June 30, 2003 and 2002, respectively. This was due principally to
the repayment of credit facility, seller and other debt which total in the
aggregate $36.3 and $16.9 million in 2003 and 2002, respectively. Of the $36.3
million debt repayment occurring during the six months ended June 30, 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 to $146.1 million at June 30, 2003 compared
to $130.6 million at December 31, 2002. Our increase in working capital
resulted primarily from the increase in our cash balance.

We have a credit agreement with a group of banks. Our credit facility
consists of a term facility of $39.9 million and a revolving credit facility
of $152.4 million. As of June 30, 2003 we had borrowed all of our available
loans under the U.S. and Canadian term loans and had availability to borrow an
additional $146.7 million under our revolving facility subject to certain
limitations. We have $5.7 million outstanding under letters of credit issued
through the credit facility. The revolving facility terminates in 2005.

Borrowings under the credit agreement bear interest at a fluctuating rate
of interest based upon financial covenant ratio tests. As of June 30, 2003,
our weighted average interest rate under our credit agreement was approximately
4.2% compared to 7.4% at December 31, 2002. This reduction occurred as a
result of terminating our hedging agreement on 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 related to our
routine operations and development activities 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 $3.5
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 $146.7 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.

On June 30, 2003, we signed a definitive agreement to acquire the stock of
Kessler Rehabilitation Corporation for approximately $228.1 million in cash and
approximately $1.9 million of assumed indebtedness. On July 29, 2003, we
agreed to sell $175.0 million of 7 1/2% Senior Subordinated
Notes due 2013. The closing of the sale of the Notes is subject to satisfaction of
customary closing conditions and is scheduled to occur on August 12, 2003. We
intend to use the proceeds of the Notes offering, together with existing cash and,
to the extent necessary, borrowings under our senior credit facility, to
complete the Kessler Acquisition. If the
Kessler Acquisition is not completed by November
27, 2003, the Notes must be redeemed at 101% of their principal amount plus
accrued interest.

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.

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Recent Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 150 Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. SFAS No. 150 establishes standards for how an
issuer classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances) because that financial
instrument embodies an obligation of the issuer. This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. We do not expect SFAS No. 150 to have a material impact
on our financial statements.

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.




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 $108,000 and $152,000 for the three
and six months ended June 30, 2003.

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.

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ITEM 4.      CONTROLS AND PROCEDURES

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 as of
the end of the period covered in this report. 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

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.

In recent years, physicians, hospitals and other healthcare providers have
become subject to an increasing number of legal actions alleging malpractice,
product liability or related legal theories. Many of these actions involve
large claims and significant defense costs. We are also subject to lawsuits
under a federal whistleblower statute designed to combat fraud and abuse in the
healthcare industry. These lawsuits can involve significant monetary damages
and award bounties to private plaintiffs who successfully bring the suits.




ITEM 2.      CHANGES IN SECURITIES AND USE OF PROCEEDS

None.




ITEM 3.      DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

On May 13, 2003, the Company held its Annual Meeting of Stockholders. At
this meeting the stockholders voted in favor of the following items listed and
described in the Companys Proxy statement dated April 18, 2003.



|1) |  | Election of Directors.
|-- |  | ----------------------

|                     |  |     |            |          |  |  |           | 
|-------------------- |  | --- | ---------- | -------- |  |  | --------- | 
|                     |  | For |            | Withheld
|                     |  |     |            |         
|Bryan C. Cressey     |  |     | 44,111,226 |          |  |  | 963,575   | 
|James E. Dalton, Jr. |  |     | 44,593,828 |          |  |  | 480,973   | 
|Robert A. Ortenzio   |  |     | 37,614,987 |          |  |  | 7,459,814 | 



| |  | The following directors term of office as directors continued after this
meeting:
| |  | ----------------------------------------------------------------------------------

| |  |                   
| |  | ------------------
| |  |                   
| |  | Russell L. Carson 
| |  | David S. Chernow  
| |  | Meyer Feldberg    
| |  | Rocco A. Ortenzio 
| |  | Leopold Swergold  
| |  | LeRoy S. Zimmerman



|2) |  | Ratification of the appointment of PricewaterhouseCoopers LLP as the
Companys independent auditors for the fiscal year ending December 31,
2003.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

| |  |     |            |         |  |         |         |  |  |  |       | 
| |  | --- | ---------- | ------- |  | ------- | ------- |  |  |  | ----- | 
| |  | For |            | Against |  | Abstain
| |  |     |            |         |  |        
| |  |     | 44,782,061 |         |  |         | 291,475 |  |  |  | 1,265 | 




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 38 hereof.

b.     Reports on Form 8-K

Form
8-K, dated April 29, 2003, pursuant to Item 9, in connection with our
issuance of a press release on April 28, 2003 reporting our
results for the three months ended March 31, 2003.

Form
8-K, dated June 2, 2003, pursuant to Item 9, in connection with
certain investor presentations given during June 2003.

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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: August 11, 2003

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EXHIBIT INDEX

|        |  |                                                                                                                                                                            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                
|        |  |                                                                                                                                                                            
|2.1     |  | Stock Purchase
Agreement, dated as of June 30, 2003, by and among Kessler
Rehabilitation Corporation, the Henry H. Kessler Foundation,
Inc. and Select Medical Corporation.
|       
|31.1    |  | Certification of
President and Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                                          
|       
|31.2    |  | Certification of Senior
Vice President and Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.                                              
|       
|32.1    |  | Certification of
President and Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.            
|       
|32.2    |  | Certification of
Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

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