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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 September 30, 2003

|o |  | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934For 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 [  ]

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

YES [X]            NO [  ]

As of October 31, 2003, the number of outstanding shares of the
Registrants Common Stock was 50,411,150.



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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 |  |                                                           | 22 | 
|ITEM 3.    |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  |                                                           | 36 | 
|ITEM 4.    |  | CONTROLS AND PROCEDURES                                                               |  |                                                           | 37 | 
|PART II    |  | OTHER INFORMATION                                                                     |  |                                                           | 37 | 
|ITEM 1.    |  | LEGAL PROCEEDINGS                                                                     |  |                                                           | 37 | 
|ITEM 2.    |  | CHANGES IN SECURITIES AND USE OF PROCEEDS                                             |  |                                                           | 37 | 
|ITEM 3.    |  | DEFAULTS UPON SENIOR SECURITIES                                                       |  |                                                           | 37 | 
|ITEM 4.    |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  |                                                           | 38 | 
|ITEM 5.    |  | OTHER INFORMATION                                                                     |  |                                                           | 38 | 
|ITEM 6.    |  | EXHIBITS AND REPORTS ON FORM 8-K                                                      |  |                                                           | 38 | 
|SIGNATURES |  |                                                                                       |  |                                                           | 39 | 

- 2 -



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PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

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

|                                                       |                                                                                                                                                          |                   |         |               |         |              |         |         |        | 
|------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | ------- | ------------- | ------- | ------------ | ------- | ------- | ------ | 
|                                                       |                                                                                                                                                          |                   |         | September 30, |         | December 31,
|                                                       |                                                                                                                                                          |                   |         | 2003          |         | 2002        
|                                                       |                                                                                                                                                          |                   |         |               |         |             
|                                                       |                                                                                                                                                          |                   |         | (unaudited)   |         |              |         |        
|Assets                                                 |                                                                                                                                                          |                   |         |               |         |              |         |        
|Current Assets:                                        |                                                                                                                                                          |                   |         |               |         |              |         |        
|                                                       | Cash and cash equivalents                                                                                                                                |                   | $       | 81,448        |         |              | $       | 56,062  |       
|                                                       | Accounts receivable, net of allowance for doubtful accounts of $114,615
and $79,815 in 2003 and 2002, respectively                                       |                   |         | 228,431       |         |              |         | 233,105 |       
|                                                       | Current deferred tax asset                                                                                                                               |                   |         | 60,483        |         |              |         | 40,125  |       
|                                                       | Prepaid income taxes                                                                                                                                     |                   |         | 4,601         |         |              |         |        |       
|                                                       | Other current assets                                                                                                                                     |                   |         | 20,646        |         |              |         | 17,601  |       
|                                                       |                                                                                                                                                          |                   |         |               |         |              |         |         |       
|Total Current Assets                                   |                                                                                                                                                          |                   | 395,609 |               |         |              | 346,893 |        
|Property and equipment, net                            |                                                                                                                                                          |                   | 176,030 |               |         |              | 114,707 |        
|Goodwill                                               |                                                                                                                                                          |                   | 318,771 |               |         |              | 196,887 |        
|Trademark                                              |                                                                                                                                                          |                   | 37,875  |               |         |              | 37,875  |        
|Other intangibles                                      |                                                                                                                                                          |                   | 24,209  |               |         |              | 8,969   |        
|Non-current deferred tax asset                         |                                                                                                                                                          |                   | 13,211  |               |         |              | 7,995   |        
|Other assets                                           |                                                                                                                                                          |                   | 25,237  |               |         |              | 25,733  |        
|                                                       |                                                                                                                                                          |                   |         |               |         |              |         |         |       
|Total Assets                                           |                                                                                                                                                          | $                 | 990,942 |               |         | $            | 739,059 |        
|                                                       |                                                                                                                                                          |                   |         |               |         |              |         |        
|Liabilities and Stockholders Equity                   |                                                                                                                                                          |                   |         |               |         |              |         |        
|Current Liabilities:                                   |                                                                                                                                                          |                   |         |               |         |              |         |        
|                                                       | Bank overdrafts                                                                                                                                          |                   | $       | 4,311         |         |              | $       | 11,121  |       
|                                                       | Current portion of long-term debt and notes payable                                                                                                      |                   |         | 10,483        |         |              |         | 29,470  |       
|                                                       | Accounts payable                                                                                                                                         |                   |         | 49,058        |         |              |         | 38,590  |       
|                                                       | Accrued payroll                                                                                                                                          |                   |         | 53,274        |         |              |         | 34,891  |       
|                                                       | Accrued vacation                                                                                                                                         |                   |         | 20,467        |         |              |         | 15,195  |       
|                                                       | Accrued restructuring                                                                                                                                    |                   |         | 11,015        |         |              |         | 800     |       
|                                                       | Accrued other                                                                                                                                            |                   |         | 60,871        |         |              |         | 36,306  |       
|                                                       | Income taxes payable                                                                                                                                     |                   |         |              |         |              |         | 23,722  |       
|                                                       | Due to third party payors                                                                                                                                |                   |         | 35,203        |         |              |         | 26,177  |       
|                                                       |                                                                                                                                                          |                   |         |               |         |              |         |         |       
|Total Current Liabilities                              |                                                                                                                                                          |                   | 244,682 |               |         |              | 216,272 |        
|Long-term debt, net of current portion                 |                                                                                                                                                          |                   | 359,458 |               |         |              | 230,747 |        
|                                                       |                                                                                                                                                          |                   |         |               |         |              |         |        
|Total Liabilities                                      |                                                                                                                                                          |                   | 604,140 |               |         |              | 447,019 |        
|Commitments and Contingencies                          |                                                                                                                                                          |                   |         |               |         |              |         |        
|Minority interest in consolidated subsidiary companies |                                                                                                                                                          |                   | 5,306   |               |         |              | 5,622   |        
|Stockholders Equity:                                  |                                                                                                                                                          |                   |         |               |         |              |         |        
|                                                       | Common
stock - $.01 par value: Authorized shares - 200,000,000 in 2003 and 2002
Issued shares - 50,381,000 and 46,676,000 in 2003 and 2002, respectively |                   |         | 504           |         |              |         | 467     |       
|                                                       | Capital in excess of par                                                                                                                                 |                   |         | 275,023       |         |              |         | 236,183 |       
|                                                       |                                                                                                                                                          | Retained earnings |         |               | 101,853 |              |         |         | 50,155 | 
|                                                       | Accumulated other comprehensive income (loss)                                                                                                            |                   |         | 4,116         |         |              |         | (387    | )     
|                                                       |                                                                                                                                                          |                   |         |               |         |              |         |         |       
|Total Stockholders Equity                             |                                                                                                                                                          |                   | 381,496 |               |         |              | 286,418 |        
|                                                       |                                                                                                                                                          |                   |         |               |         |              |         |        
|Total Liabilities and Stockholders Equity             |                                                                                                                                                          | $                 | 990,942 |               |         | $            | 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 Nine Months Ended
|                                                       |                               |         |                                 |         | September 30,         |      | September 30,            
|                                                       |                               |         |                                 |         |                       |      |                          
|                                                       |                               |         |                                 |         | 2003                  |      | 2002                      |         | 2003   |      | 2002   
|                                                       |                               |         |                                 |         |                       |      |                           |         |        |      |        
|Net operating revenues                                 |                               | $       | 353,475                         |         |                       | $    | 278,983                   |         |        | $    | 992,000 |         |        | $    | 831,175 |        
|                                                       |                               |         |                                 |         |                       |      |                           |         |        |      |         |         |        |      |         |        
|Costs and expenses:                                    |                               |         |                                 |         |                       |      |                           |         |        |      |         |         |        |      |         |        
|                                                       | Cost of services              |         |                                 | 282,935 |                       |      |                           | 231,054 |        |      |         | 793,422 |        |      |         | 680,972 |       
|                                                       | General and administrative    |         |                                 | 11,124  |                       |      |                           | 10,317  |        |      |         | 32,251  |        |      |         | 29,329  |       
|                                                       | Bad debt expense              |         |                                 | 13,674  |                       |      |                           | 8,611   |        |      |         | 38,194  |        |      |         | 27,631  |       
|                                                       | Depreciation and amortization |         |                                 | 8,807   |                       |      |                           | 6,518   |        |      |         | 23,513  |        |      |         | 18,724  |       
|                                                       |                               |         |                                 |         |                       |      |                           |         |        |      |         |         |        |      |         |        
|Total costs and expenses                               |                               |         | 316,540                         |         |                       |      | 256,500                   |         |        |      | 887,380 |         |        |      | 756,656 |        
|                                                       |                               |         |                                 |         |                       |      |                           |         |        |      |         |         |        |      |         |        
|Income from operations                                 |                               |         | 36,935                          |         |                       |      | 22,483                    |         |        |      | 104,620 |         |        |      | 74,519  |        
|Other income and expense:                              |                               |         |                                 |         |                       |      |                           |         |        |      |         |         |        |      |         |        
|Equity in earnings from joint ventures                 |                               |         | 334                             |         |                       |      |                          |         |        |      | 334     |         |        |      |        |        
|Interest income                                        |                               |         | 284                             |         |                       |      | 181                       |         |        |      | 626     |         |        |      | 388     |        
|Interest expense                                       |                               |         | (6,426                          | )       |                       |      | (6,875                    | )       |        |      | (18,474 | )       |        |      | (20,468 | )      
|                                                       |                               |         |                                 |         |                       |      |                           |         |        |      |         |         |        |      |         |        
|Income before minority interests and income taxes      |                               |         | 31,127                          |         |                       |      | 15,789                    |         |        |      | 87,106  |         |        |      | 54,439  |        
|Minority interest in consolidated subsidiary companies |                               |         | 356                             |         |                       |      | 390                       |         |        |      | 1,893   |         |        |      | 1,563   |        
|                                                       |                               |         |                                 |         |                       |      |                           |         |        |      |         |         |        |      |         |        
|Income before income taxes                             |                               |         | 30,771                          |         |                       |      | 15,399                    |         |        |      | 85,213  |         |        |      | 52,876  |        
|Income tax expense                                     |                               |         | 12,158                          |         |                       |      | 6,044                     |         |        |      | 33,515  |         |        |      | 20,744  |        
|                                                       |                               |         |                                 |         |                       |      |                           |         |        |      |         |         |        |      |         |        
|Net income                                             |                               | $       | 18,613                          |         |                       | $    | 9,355                     |         |        | $    | 51,698  |         |        | $    | 32,132  |        
|                                                       |                               |         |                                 |         |                       |      |                           |         |        |      |         |         |        |      |         |        
|Net income per common share:                           |                               |         |                                 |         |                       |      |                           |         |        |      |         |         |        |      |         |        
|                                                       |                               |         | Basic income per common share   |         | $                     | 0.38 |                           |         | $      | 0.20 |         |         | $      | 1.08 |         |         | $      | 0.69 | 
|                                                       |                               |         | Diluted income per common share |         | $                     | 0.35 |                           |         | $      | 0.19 |         |         | $      | 1.01 |         |         | $      | 0.65 | 
|Weighted average shares outstanding:                   |                               |         |                                 |         |                       |      |                           |         |        |      |         |         |        |      |         |        
|                                                       |                               | Basic   |                                 |         | 49,348                |      |                           |         | 46,653 |      |         |         | 48,016 |      |         |         | 46,394 |     
|                                                       |                               | Diluted |                                 |         | 52,565                |      |                           |         | 49,268 |      |         |         | 51,183 |      |         |         | 49,126 |     

See accompanying notes.

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

|                              |                                       |  |        |       |           |   |           |    |            |   |               |        |               |   |                   |        |  |   |       |       |  |  |   |        | 
|----------------------------- | ------------------------------------- |  | ------ | ----- | --------- | - | --------- | -- | ---------- | - | ------------- | ------ | ------------- | - | ----------------- | ------ |  | - | ----- | ----- |  |  | - | ------ | 
|                              |                                       |  |        |       |           |   | Common    |    | Capital in |   |               |        |               |   | Accumulated Other |        |  |   |      
|                              |                                       |  | Common |       | Stock Par |   | Excess of |    | Retained   |   | Comprehensive |        | Comprehensive
|                              |                                       |  | Stock  |       | Value     |   | Par       |    | Earnings   |   | Income (Loss) |        | Income       
|                              |                                       |  |        |       |           |   |           |    |            |   |               |        |              
|Balance at December 31, 2002  |                                       |  | 46,676 |       |           | $ | 467       |    |            | $ | 236,183       |        |               | $ | 50,155            |        |  | $ | (387  | )     |  |  |   |       
|                              | Net income                            |  |        |       |           |   |           |    |            |   |               |        |               |   |                   | 51,698 |  |   |       |       |  |  | $ | 51,698 | 
|                              | Other comprehensive income            |  |        |       |           |   |           |    |            |   |               |        |               |   |                   |        |  |   |       | 4,503 |  |  |   | 4,503  | 
|                              |                                       |  |        |       |           |   |           |    |            |   |               |        |               |   |                   |        |  |   |       |       |  |  |   |       
|                              | Total comprehensive income            |  |        |       |           |   |           |    |            |   |               |        |               |   |                   |        |  |   |       |       |  |  | $ | 56,201 | 
|                              |                                       |  |        |       |           |   |           |    |            |   |               |        |               |   |                   |        |  |   |       |       |  |  |   |       
|                              | Issuance of common stock              |  |        | 3,705 |           |   |           | 37 |            |   |               | 20,199 |               |   |                   |        |  |   |       |       |  |  |   |        | 
|                              | Tax benefit of stock option exercises |  |        |       |           |   |           |    |            |   |               | 18,641 |               |   |                   |        |  |   |       |       |  |  |   |        | 
|                              |                                       |  |        |       |           |   |           |    |            |   |               |        |               |   |                   |        |  |   |       |       |  |  |   |       
|Balance at September 30, 2003 |                                       |  | 50,381 |       |           | $ | 504       |    |            | $ | 275,023       |        |               | $ | 101,853           |        |  | $ | 4,116 |       |  |  |   |       
|                              |                                       |  |        |       |           |   |           |    |            |   |               |        |               |   |                   |        |  |   |       |       |  |  |   |       

See accompanying notes.

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

|                                                                                  |                                                                                             |                           |          |                           |        |      |         |        |         |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------- | -------- | ------------------------- | ------ | ---- | ------- | ------ | ------- | -
|                                                                                  |                                                                                             |                           |          | For the Nine Months Ended
|                                                                                  |                                                                                             |                           |          | September 30,            
|                                                                                  |                                                                                             |                           |          |                          
|                                                                                  |                                                                                             |                           |          | 2003                      |        | 2002
|                                                                                  |                                                                                             |                           |          |                           |        |     
|Operating activities                                                              |                                                                                             |                           |          |                           |        |      |         |       
|Net income                                                                        |                                                                                             | $                         | 51,698   |                           |        | $    | 32,132  |       
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                                             |                           |          |                           |        |      |         |       
|                                                                                  | Depreciation and amortization                                                               |                           |          | 23,513                    |        |      |         | 18,724 |        
|                                                                                  | Provision for bad debts                                                                     |                           |          | 38,194                    |        |      |         | 27,631 |        
|                                                                                  | Minority interests                                                                          |                           |          | 1,893                     |        |      |         | 1,563  |        
|                                                                                  | Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |                           |          |                           |        |      |         |        |        
|                                                                                  |                                                                                             | Accounts receivable       |          |                           | 10,927 |      |         |        | (39,161 | )
|                                                                                  |                                                                                             | Other current assets      |          |                           | 941    |      |         |        | (72     | )
|                                                                                  |                                                                                             | Other assets              |          |                           | 1,413  |      |         |        | 3,566   |  
|                                                                                  |                                                                                             | Accounts payable          |          |                           | 8,901  |      |         |        | 382     |  
|                                                                                  |                                                                                             | Due to third-party payors |          |                           | 4,680  |      |         |        | 21,494  |  
|                                                                                  |                                                                                             | Accrued expenses          |          |                           | 24,010 |      |         |        | 20,019  |  
|                                                                                  |                                                                                             | Income taxes              |          |                           | (1,933 | )    |         |        | 16,478  |  
|                                                                                  |                                                                                             |                           |          |                           |        |      |         |       
|Net cash provided by operating activities                                         |                                                                                             |                           | 164,237  |                           |        |      | 102,756 |       
|                                                                                  |                                                                                             |                           |          |                           |        |      |         |       
|Investing activities                                                              |                                                                                             |                           |          |                           |        |      |         |       
|Purchases of property and equipment, net                                          |                                                                                             |                           | (23,725  | )                         |        |      | (28,805 | )     
|Proceeds from disposal of assets                                                  |                                                                                             |                           | 2,400    |                           |        |      |        |       
|Earnout payments                                                                  |                                                                                             |                           | (429     | )                         |        |      | (563    | )     
|Acquisition of businesses, net of cash acquired                                   |                                                                                             |                           | (232,226 | )                         |        |      | (7,761  | )     
|                                                                                  |                                                                                             |                           |          |                           |        |      |         |       
|Net cash used in investing activities                                             |                                                                                             |                           | (253,980 | )                         |        |      | (37,129 | )     
|                                                                                  |                                                                                             |                           |          |                           |        |      |         |       
|Financing activities                                                              |                                                                                             |                           |          |                           |        |      |         |       
|Issuance of 7.5% Senior Subordinated Notes                                        |                                                                                             |                           | 175,000  |                           |        |      |        |       
|Net repayments on credit facility debt                                            |                                                                                             |                           | (64,415  | )                         |        |      | (16,972 | )     
|Payment of deferred financing fees                                                |                                                                                             |                           | (5,578   | )                         |        |      | (67     | )     
|Principal payments on seller and other debt                                       |                                                                                             |                           | (2,619   | )                         |        |      | (4,524  | )     
|Proceeds from issuance of common stock                                            |                                                                                             |                           | 20,235   |                           |        |      | 4,025   |       
|Proceeds from (repayment of) bank overdrafts                                      |                                                                                             |                           | (6,810   | )                         |        |      | 2,432   |       
|Distributions to minority interests                                               |                                                                                             |                           | (1,042   | )                         |        |      | (1,264  | )     
|                                                                                  |                                                                                             |                           |          |                           |        |      |         |       
|Net cash provided by (used in) financing activities                               |                                                                                             |                           | 114,771  |                           |        |      | (16,370 | )     
|                                                                                  |                                                                                             |                           |          |                           |        |      |         |       
|Effect of exchange rate changes on cash
and cash equivalents                      |                                                                                             |                           | 358      |                           |        |      | 9       |       
|                                                                                  |                                                                                             |                           |          |                           |        |      |         |       
|Net increase in cash and cash equivalents                                         |                                                                                             |                           | 25,386   |                           |        |      | 49,266  |       
|Cash and cash equivalents at beginning of period                                  |                                                                                             |                           | 56,062   |                           |        |      | 10,703  |       
|                                                                                  |                                                                                             |                           |          |                           |        |      |         |       
|Cash and cash equivalents at end of period                                        |                                                                                             | $                         | 81,448   |                           |        | $    | 59,969  |       
|                                                                                  |                                                                                             |                           |          |                           |        |      |         |       
|Supplemental Cash Flow Information                                                |                                                                                             |                           |          |                           |        |      |         |       
|Cash paid for interest                                                            |                                                                                             | $                         | 11,493   |                           |        | $    | 14,200  |       
|Cash paid for income taxes                                                        |                                                                                             | $                         | 36,149   |                           |        | $    | 4,552   |       

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 September 30, 2003 and for the three
and nine month periods ended September 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 nine months ended
September 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 actuarial methods 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.

- 7 -



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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
generally effective
for financial instruments entered into or modified after May 31,
2003, and for 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 December 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 nine months ended September 30, 2003, the Company granted stock
options under its Second Amended and Restated 1997 Stock Option Plan totaling
2,551,314 shares of Common Stock at exercise prices ranging from $13.35 to
$29.05 per share. In addition, during that period the Company granted stock
options under its 2002 Non-Employee Directors Plan totaling 39,000 shares of
Common Stock at the exercise prices ranging from $13.35 to $29.05 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.

- 8 -



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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 Nine Months Ended
|                                                                                                                                            |  | September 30,                                    |        | September 30,            
|                                                                                                                                            |  |                                                  |        |                          
|                                                                                                                                            |  | 2003                                             |        | 2002                      |  | 2003 |       | 2002
|                                                                                                                                            |  |                                                  |        |                           |  |      |       |     
|                                                                                                                                            |  | (dollars in thousands, except per share amounts)
|Net income  as reported                                                                                                                    |  | $                                                | 18,613 |                           |  | $    | 9,355 |      |  | $ | 51,698 |  |  | $ | 32,132 | 
|Deduct: Total stock based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects |  |                                                  | 8,461  |                           |  |      | 1,915 |      |  |   | 10,369 |  |  |   | 8,714  | 
|                                                                                                                                            |  |                                                  |        |                           |  |      |       |      |  |   |        |  |  |   |        | 
|Net income  pro forma                                                                                                                      |  | $                                                | 10,152 |                           |  | $    | 7,440 |      |  | $ | 41,329 |  |  | $ | 23,418 | 
|                                                                                                                                            |  |                                                  |        |                           |  |      |       |      |  |   |        |  |  |   |        | 
|Weighted average grant-date fair value                                                                                                      |  | $                                                | 13.01  |                           |  | $    | 6.65  |      |  | $ | 12.81  |  |  | $ | 7.08   | 
|Basic earnings per share  as reported                                                                                                      |  |                                                  | 0.38   |                           |  |      | 0.20  |      |  |   | 1.08   |  |  |   | 0.69   | 
|Basic earnings per share  pro forma                                                                                                        |  |                                                  | 0.21   |                           |  |      | 0.16  |      |  |   | 0.86   |  |  |   | 0.50   | 
|Diluted earnings per share  as
reported                                                                                                    |  |                                                  | 0.35   |                           |  |      | 0.19  |      |  |   | 1.01   |  |  |   | 0.65   | 
|Diluted earnings per share  pro forma                                                                                                      |  |                                                  | 0.19   |                           |  |      | 0.15  |      |  |   | 0.81   |  |  |   | 0.48   | 

Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income at September 30,
2003 consist of cumulative translation adjustment gains of $4,217,000
associated with the Companys Canadian operations and unrealized losses on
available-for-sale securities of $101,000, net of tax.

3.     Acquisition

On September 2, 2003, the Company completed the acquisition of all of the
outstanding stock of Kessler Rehabilitation Corporation from the Henry H.
Kessler Foundation, Inc. for $228.3 million in cash and $1.7 million of assumed
indebtedness and liabilities related to the planned restructuring. The
purchase was funded through a combination of the proceeds from the issuance of
7 1/2% Senior Subordinated Notes due 2013 and existing cash (see note 6).
The purchase price has been allocated to net assets acquired and liabilities
assumed based on preliminary valuation estimates. The excess of the amount of
the purchase price over the net asset value of $108,320,000 was allocated to
goodwill. The results of operations of Kessler Rehabilitation Corporation have
been included in the Companys consolidated financial statements since
September 1, 2003. Kessler Rehabilitation Corporation operates rehabilitation
hospital facilities and outpatient clinics. The Company has included
the operations of Kesslers four acute medical rehabilitation
hospitals and one skilled nursing facility in its specialty hospital
segment. Kesslers outpatient clinics and onsite contract
rehabilitation services have been included in the Companys outpatient
rehabilitation segment. Kesslers other services, which include
sales of home medical equipment, orthotics, prosthetics, and
infusion/intravenous services and corporate support costs, have
been included in the all other category.

- 9 -



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##### 



The table below presents the allocation of the purchase price related to
the Kessler acquisition (dollars in thousands):

|                          |  |   |         | 
|------------------------- |  | - | ------- | 
|Current assets            |  | $ | 61,714  | 
|Fixed assets              |  |   | 63,176  | 
|Intangible assets:        |  |   |         | 
|Goodwill                  |  |   | 108,320 | 
|Non-compete, 7 year life  |  |   | 24,035  | 
|Other assets              |  |   | 10,259  | 
|                          |  |   |         | 
|Total assets acquired     |  | $ | 267,504 | 
|                          |  |   |         | 
|Current liabilities       |  |   | 37,118  | 
|Non-Current Liabilities   |  |   | 2,099   | 
|                          |  |   |         | 
|Total liabilities assumed |  |   | $39,217 | 
|                          |  |   |         | 
|Total purchase price      |  | $ | 228,287 | 
|                          |  |   |         | 

The following pro forma unaudited results of operations have been prepared
assuming the acquisition of Kessler Rehabilitation Corporation occurred at the
beginning of the periods presented. These results are not necessarily
indicative of results of future operations nor of the results that would have
actually occurred had the acquisition been consummated as of the beginning of
the period presented.

|                                                                              |  |                           |           |                    |  |   |           | 
|----------------------------------------------------------------------------- |  | ------------------------- | --------- | ------------------ |  | - | --------- | 
|                                                                              |  | For the Nine Months Ended
|                                                                              |  | September 30, 2003        |           | September 30, 2002
|                                                                              |  |                           |           |                   
|                                                                              |  | (dollars in thousands)   
|Net revenue                                                                   |  | $                         | 1,148,507 |                    |  | $ | 1,000,231 | 
|Net
income before cumulative effect of accounting change                      |  |                           | 43,452    |                    |  |   | 34,344    | 
|Net income                                                                    |  |                           | 43,452    |                    |  |   | 9,030     | 
|Basic income per common share
before cumulative effect of accounting change   |  | $                         | 0.90      |                    |  | $ | 0.74      | 
|Basic income per common share                                                 |  | $                         | 0.90      |                    |  | $ | 0.19      | 
|Diluted income per common share
before cumulative effect of accounting change |  | $                         | 0.85      |                    |  | $ | 0.70      | 
|Diluted income per common share                                               |  | $                         | 0.85      |                    |  | $ | 0.18      | 

4.     Intangible Assets

Amortization expense for intangible assets with finite lives for the nine
months ended September 30, 2003 was $774,000. Estimated amortization expense
for intangible assets for each of the five years commencing
January 1, 2004
will be approximately $3,429,000 and primarily relates to the
amortization of the non-compete associated with the Kessler
acquisition.

- 10 -



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##### 



Intangible assets consist of the following:

|                               |  |                          |         |              |  |   |      |  
|------------------------------ |  | ------------------------ | ------- | ------------ |  | - | ---- | -
|                               |  | As of September 30, 2003
|                               |  |                         
|                               |  | Gross Carrying           |         | Accumulated 
|                               |  | Amount                   |         | Amortization
|                               |  |                          |         |             
|                               |  | (dollars in thousands)  
|Amortized intangible assets    |  |                          |         |              |  |   |      |  
|Non competes                   |  | $                        | 24,035  |              |  | $ | (290 | )
|Management services agreements |  |                          | 1,081   |              |  |   | (617 | )
|                               |  |                          |         |              |  |   |      |  
|Total                          |  | $                        | 25,116  |              |  | $ | (907 | )
|                               |  |                          |         |              |  |   |      |  
|Unamortized intangible assets  |  |                          |         |              |  |   |      |  
|Goodwill                       |  | $                        | 318,771 |              |  |   |      |  
|Trademarks                     |  |                          | 37,875  |              |  |   |      |  
|                               |  |                          |         |              |  |   |      |  
|Total                          |  | $                        | 356,646 |              |  |   |      |  
|                               |  |                          |         |              |  |   |      |  

The changes in the carrying amount of goodwill for the Companys
reportable segments for the nine months ended September 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    |  |                        | 86,760  |                |  |           | 34,027  |       |  |   |    |  |  |   | 120,787 |  
|Income tax benefits recognized   |  |                        |        |                |  |           | (2,852  | )     |  |   |    |  |  |   | (2,852  | )
|Earn-out payments                |  |                        |        |                |  |           | 429     |       |  |   |    |  |  |   | 429     |  
|Translation adjustment           |  |                        |        |                |  |           | 3,566   |       |  |   |    |  |  |   | 3,566   |  
|Other                            |  |                        |        |                |  |           | (46     | )     |  |   |    |  |  |   | (46     | )
|                                 |  |                        |         |                |  |           |         |       |  |   |     |  |  |   |         |  
|Balance as of September 30,
2003 |  | $                      | 171,151 |                |  | $         | 147,036 |       |  | $ | 584 |  |  | $ | 318,771 |  
|                                 |  |                        |         |                |  |           |         |       |  |   |     |  |  |   |         |  

- 11 -



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##### 



5.     Restructuring Charges

During September 2003, the Company recorded a $11,525,000 restructuring
reserve in connection with the acquisition of Kessler Rehabilitation
Corporation which was accounted for as additional purchase price. The reserves
primarily included costs associated with workforce reductions of 36
employees and lease
buyouts in accordance with the Companys restructuring plan.

The following summarizes the Companys restructuring activity:

|                         |  |                        |       |           |  |       |       |       |  |   |       |   |  |   |        |  
|------------------------ |  | ---------------------- | ----- | --------- |  | ----- | ----- | ----- |  | - | ----- | - |  | - | ------ | -
|                         |  | Lease                  |       |           |  |       |       |       |  |   |       |   |  |  
|                         |  | Termination            |       |           |  |       |       |       |  |   |       |   |  |  
|                         |  | Costs                  |       | Severance |  | Other |       | Total
|                         |  |                        |       |           |  |       |       |      
|                         |  | (dollars in thousands)
|December 31, 2002        |  | $                      | 788   |           |  | $     | 12    |       |  | $ |      |   |  | $ | 800    |  
|2003 restructuring costs |  |                        | 4,486 |           |  |       | 5,532 |       |  |   | 1,507 |   |  |   | 11,525 |  
|Amounts paid in 2003     |  |                        | (310  | )         |  |       | (12   | )     |  |   | (988  | ) |  |   | (1,310 | )
|                         |  |                        |       |           |  |       |       |       |  |   |       |   |  |   |        |  
|September 30, 2003       |  | $                      | 4,964 |           |  | $     | 5,532 |       |  | $ | 519   |   |  | $ | 11,015 |  
|                         |  |                        |       |           |  |       |       |       |  |   |       |   |  |   |        |  

The Company expects to pay out the remaining lease termination costs through
2007 and severance through 2005.

6.     Long-Term Debt and Notes Payable

On August 12, 2003, the Company through a wholly owned subsidiary issued
and sold $175.0 million of 71⁄2% Senior Subordinated Notes (the Notes) due
2013. The net proceeds of the Notes offering together with existing cash were
used to complete the acquisition of Kessler Rehabilitation Corporation. The
Notes are fully and unconditionally guaranteed on a senior subordinated basis
by all of the Companys wholly owned domestic subsidiaries (the Subsidiary
Guarantors). Certain of the Companys subsidiaries did not guarantee the
Notes (the Non-Guarantor Subsidiaries). The guarantees of
the Notes are
subordinated in right of payment to all existing and future senior indebtedness
of the Subsidiary Guarantors, including any borrowings or guarantees by those
subsidiaries under the senior credit facility. The Notes rank equally in
right of payment with all of the Companys existing and future senior
subordinated indebtedness, including the existing 9 1⁄2 % senior subordinated
notes, and senior to all of the Companys existing and future subordinated
indebtedness. The Subsidiary Guarantors are the same for both
the 71⁄2% and the 91⁄2% Senior Subordinated Notes.

7.     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 segments. Adjusted EBITDA is defined as net income (loss) before
interest, income taxes, depreciation and amortization, equity in earnings from
joint ventures and minority interest. The acquisition of Kessler
Rehabilitation Corporation impacts both of the Companys segments. The Company has included
the operations of Kesslers four acute medical rehabilitation
hospitals and one skilled nursing facility in its specialty hospital
segment. Kesslers outpatient clinics and onsite contract
rehabilitation services have been included in the Companys outpatient
rehabilitation segment. Kesslers other services, which include
sales of home medical equipment, orthotics, prosthetics, and
infusion/intravenous services and corporate support costs, have
been included in the all other category.

- 12 -



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##### 



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

|                     |  |                                       |         |                |  |           |         |       |  |   |         |   |  |   |         | 
|-------------------- |  | ------------------------------------- | ------- | -------------- |  | --------- | ------- | ----- |  | - | ------- | - |  | - | ------- | 
|                     |  | Three Months Ended September 30, 2003
|                     |  |                                      
|                     |  | Specialty                             |         | Outpatient     |  |           |         |       |  |   |         |  
|                     |  | Hospitals                             |         | Rehabilitation |  | All Other |         | Total
|                     |  |                                       |         |                |  |           |         |      
|                     |  | (dollars in thousands)               
|Net revenue          |  | $                                     | 222,040 |                |  | $         | 129,108 |       |  | $ | 2,327   |   |  | $ | 353,475 | 
|Adjusted EBITDA      |  |                                       | 38,482  |                |  |           | 16,862  |       |  |   | (9,602  | ) |  |   | 45,742  | 
|Total assets         |  |                                       | 427,773 |                |  |           | 370,031 |       |  |   | 193,138 |   |  |   | 990,942 | 
|Capital expenditures |  |                                       | 5,970   |                |  |           | 1,685   |       |  |   | 864     |   |  |   | 8,519   | 

|                     |  |                                       |         |                |  |           |         |       |  |   |        |   |  |   |         | 
|-------------------- |  | ------------------------------------- | ------- | -------------- |  | --------- | ------- | ----- |  | - | ------ | - |  | - | ------- | 
|                     |  | Three Months Ended September 30, 2002
|                     |  |                                      
|                     |  | Specialty                             |         | Outpatient     |  |           |         |       |  |   |        |  
|                     |  | Hospitals                             |         | Rehabilitation |  | All Other |         | Total
|                     |  |                                       |         |                |  |           |         |      
|                     |  | (dollars in thousands)               
|Net revenue          |  | $                                     | 155,637 |                |  | $         | 119,179 |       |  | $ | 4,167  |   |  | $ | 278,983 | 
|Adjusted EBITDA      |  |                                       | 16,522  |                |  |           | 19,025  |       |  |   | (6,546 | ) |  |   | 29,001  | 
|Total assets         |  |                                       | 318,164 |                |  |           | 324,934 |       |  |   | 78,431 |   |  |   | 721,529 | 
|Capital expenditures |  |                                       | 5,908   |                |  |           | 4,067   |       |  |   | 882    |   |  |   | 10,857  | 

|                     |  |                                      |         |                |  |           |         |       |  |   |         |   |  |   |         | 
|-------------------- |  | ------------------------------------ | ------- | -------------- |  | --------- | ------- | ----- |  | - | ------- | - |  | - | ------- | 
|                     |  | Nine Months Ended September 30, 2003
|                     |  |                                     
|                     |  | Specialty                            |         | Outpatient     |  |           |         |       |  |   |         |  
|                     |  | Hospitals                            |         | Rehabilitation |  | All Other |         | Total
|                     |  |                                      |         |                |  |           |         |      
|                     |  | (dollars in thousands)              
|Net revenue          |  | $                                    | 597,231 |                |  | $         | 386,730 |       |  | $ | 8,039   |   |  | $ | 992,000 | 
|Adjusted EBITDA      |  |                                      | 94,676  |                |  |           | 59,756  |       |  |   | (26,299 | ) |  |   | 128,133 | 
|Total assets         |  |                                      | 427,773 |                |  |           | 370,031 |       |  |   | 193,138 |   |  |   | 990,942 | 
|Capital expenditures |  |                                      | 13,386  |                |  |           | 6,215   |       |  |   | 4,124   |   |  |   | 23,725  | 

|                     |  |                                      |         |                |  |           |         |       |  |   |         |   |  |   |         | 
|-------------------- |  | ------------------------------------ | ------- | -------------- |  | --------- | ------- | ----- |  | - | ------- | - |  | - | ------- | 
|                     |  | Nine Months Ended September 30, 2002
|                     |  |                                     
|                     |  | Specialty                            |         | Outpatient     |  |           |         |       |  |   |         |  
|                     |  | Hospitals                            |         | Rehabilitation |  | All Other |         | Total
|                     |  |                                      |         |                |  |           |         |      
|                     |  | (dollars in thousands)              
|Net revenue          |  | $                                    | 456,538 |                |  | $         | 363,512 |       |  | $ | 11,125  |   |  | $ | 831,175 | 
|Adjusted EBITDA      |  |                                      | 49,470  |                |  |           | 63,148  |       |  |   | (19,375 | ) |  |   | 93,243  | 
|Total assets         |  |                                      | 318,164 |                |  |           | 324,934 |       |  |   | 78,431  |   |  |   | 721,529 | 
|Capital expenditures |  |                                      | 18,348  |                |  |           | 8,994   |       |  |   | 1,463   |   |  |   | 28,805  | 

- 13 -



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##### 



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

|                                       |  |                            |        |                           |  |      |        |      |  |   |         |   |  |   |        |  
|-------------------------------------- |  | -------------------------- | ------ | ------------------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                       |  | For the Three Months Ended |        | For the Nine Months Ended
|                                       |  | September 30,              |        | September 30,            
|                                       |  | 2003                       |        | 2002                      |  | 2003 |        | 2002
|                                       |  |                            |        |                           |  |      |        |     
|                                       |  | (dollars in thousands)    
|Net income                             |  | $                          | 18,613 |                           |  | $    | 9,355  |      |  | $ | 51,698  |   |  | $ | 32,132 |  
|Income tax expense                     |  |                            | 12,158 |                           |  |      | 6,044  |      |  |   | 33,515  |   |  |   | 20,744 |  
|Minority interest                      |  |                            | 356    |                           |  |      | 390    |      |  |   | 1,893   |   |  |   | 1,563  |  
|Interest expense                       |  |                            | 6,426  |                           |  |      | 6,875  |      |  |   | 18,474  |   |  |   | 20,468 |  
|Interest income                        |  |                            | (284   | )                         |  |      | (181   | )    |  |   | (626    | ) |  |   | (388   | )
|Equity in earnings
from joint ventures |  |                            | (334   | )                         |  |      |       |      |  |   | (334    | ) |  |   |       |  
|Depreciation and
amortization          |  |                            | 8,807  |                           |  |      | 6,518  |      |  |   | 23,513  |   |  |   | 18,724 |  
|                                       |  |                            |        |                           |  |      |        |      |  |   |         |   |  |   |        |  
|Adjusted EBITDA                        |  | $                          | 45,742 |                           |  | $    | 29,001 |      |  | $ | 128,133 |   |  | $ | 93,243 |  
|                                       |  |                            |        |                           |  |      |        |      |  |   |         |   |  |   |        |  

8.     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                            |        | Nine Months Ended
|                                                                                                    |                                                                    |   | September 30,                                 |        | September 30,    
|                                                                                                    |                                                                    |   | 2003                                          |        | 2002              |   | 2003   |        | 2002
|                                                                                                    |                                                                    |   |                                               |        |                   |   |        |        |     
|                                                                                                    |                                                                    |   | (dollars in thousands, except per share data)
|Numerator:                                                                                          |                                                                    |   |                                               |        |                   |   |        |        |      |   |        |        |  |   |        |       
|Net income                                                                                          |                                                                    | $ | 18,613                                        |        |                   | $ | 9,355  |        |      | $ | 51,698 |        |  | $ | 32,132 |       
|Denominator:                                                                                        |                                                                    |   |                                               |        |                   |   |        |        |      |   |        |        |  |   |        |       
|                                                                                                    | Denominator for basic earnings per share -
weighted average shares |   |                                               | 49,348 |                   |   |        | 46,653 |      |   |        | 48,016 |  |   |        | 46,394 | 
|                                                                                                    | Effect of dilutive securities:                                     |   |                                               |        |                   |   |        |        |      |   |        |        |  |   |        |        | 
|                                                                                                    | a) Stock options                                                   |   |                                               | 3,217  |                   |   |        | 1,536  |      |   |        | 2,733  |  |   |        | 1,649  | 
|                                                                                                    | b) Warrants                                                        |   |                                               |       |                   |   |        | 1,079  |      |   |        | 434    |  |   |        | 1,083  | 
|                                                                                                    |                                                                    |   |                                               |        |                   |   |        |        |      |   |        |        |  |   |        |       
|Denominator for diluted earnings per
share-adjusted weighted average shares and
assumed conversions |                                                                    |   | 52,565                                        |        |                   |   | 49,268 |        |      |   | 51,183 |        |  |   | 49,126 |       
|                                                                                                    |                                                                    |   |                                               |        |                   |   |        |        |      |   |        |        |  |   |        |       
|                                                                                                    | Basic income per common share:                                     |   | $                                             | 0.38   |                   |   | $      | 0.20   |      |   | $      | 1.08   |  |   | $      | 0.69   | 
|                                                                                                    | Diluted income per common share:                                   |   | $                                             | 0.35   |                   |   | $      | 0.19   |      |   | $      | 1.01   |  |   | $      | 0.65   | 

- 14 -



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##### 



9.     Supplemental Disclosures of Cash Flow Information

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

|                                      |  |                        |        |      |  |   |       | 
|------------------------------------- |  | ---------------------- | ------ | ---- |  | - | ----- | 
|                                      |  | 2003                   |        | 2002
|                                      |  |                        |        |     
|                                      |  | (dollars in thousands)
|Notes issued with acquisitions        |  | $                      | 316    |      |  | $ | 1,827 | 
|Tax benefit of stock option exercises |  |                        | 18,641 |      |  |   | 2,239 | 
|Liabilities assumed with acquisitions |  |                        | 39,217 |      |  |   |      | 

10.     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
nine 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 policies. 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.

11.     Subsequent
Events

On
November 11, 2003, the
Companys Board of Directors approved a 2-for-1 split of its
common stock. The stock split is being effected in the form of a 100%
stock dividend that is payable on or about December 22, 2003 to
shareholders of record on December 5, 2003.

The
following table sets forth for the periods indicated the calculation
of net income per share and the differences between basic weighted
average shares outstanding and diluted weighted averaged shares
outstanding used to computed diluted earnings per share on a pro
forma basis for the 2-for-1 stock split:

|                                                                                                    |                                                                    |   |                                                           |        |                   |   |        |        |      |   |         |        |  |   |        |        | 
|--------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | - | --------------------------------------------------------- | ------ | ----------------- | - | ------ | ------ | ---- | - | ------- | ------ |  | - | ------ | ------ | 
|                                                                                                    |                                                                    |   | Three Months Ended                                        |        | Nine Months Ended
|                                                                                                    |                                                                    |   | September 30,                                             |        | September 30,    
|                                                                                                    |                                                                    |   | 2003                                                      |        | 2002              |   | 2003   |        | 2002
|                                                                                                    |                                                                    |   |                                                           |        |                   |   |        |        |     
|                                                                                                    |                                                                    |   | (dollars in
thousands, except per share data)
(unaudited)
|Numerator:                                                                                          |                                                                    |   |                                                           |        |                   |   |        |        |      |   |         |        |  |   |        |       
|Net income                                                                                          |                                                                    | $ | 18,613                                                    |        |                   | $ | 9,355  |        |      | $ | 51,698  |        |  | $ | 32,132 |       
|Denominator:                                                                                        |                                                                    |   |                                                           |        |                   |   |        |        |      |   |         |        |  |   |        |       
|                                                                                                    | Denominator for basic earnings per share -
weighted average shares |   |                                                           | 98,697 |                   |   |        | 93,306 |      |   |         | 96,033 |  |   |        | 92,788 | 
|                                                                                                    | Effect of dilutive securities:                                     |   |                                                           |        |                   |   |        |        |      |   |         |        |  |   |        |        | 
|                                                                                                    | a) Stock options                                                   |   |                                                           | 6,434  |                   |   |        | 3,072  |      |   |         | 5,466  |  |   |        | 3,298  | 
|                                                                                                    | b) Warrants                                                        |   |                                                           |       |                   |   |        | 2,158  |      |   |         | 868    |  |   |        | 2,166  | 
|                                                                                                    |                                                                    |   |                                                           |        |                   |   |        |        |      |   |         |        |  |   |        |       
|Denominator for diluted earnings per
share-adjusted weighted average shares and
assumed conversions |                                                                    |   | 105,131                                                   |        |                   |   | 98,536 |        |      |   | 102,367 |        |  |   | 98,252 |       
|                                                                                                    |                                                                    |   |                                                           |        |                   |   |        |        |      |   |         |        |  |   |        |       
|                                                                                                    | Basic income per common share:                                     |   | $                                                         | 0.19   |                   |   | $      | 0.10   |      |   | $       | 0.54   |  |   | $      | 0.35   | 
|                                                                                                    | Diluted income per common share:                                   |   | $                                                         | 0.18   |                   |   | $      | 0.09   |      |   | $       | 0.51   |  |   | $      | 0.33   | 

The
Companys pro forma net earnings assuming a 2-for-1 stock split
and adjusted to reflect earnings per share assuming
compensation costs consistent with the fair value
method under SFAS No. 123 were as follows:

|                                                                                                                                            |  |                                                              |        |                           |  |      |       |      |  |   |        |  |  |   |        | 
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------ | ------ | ------------------------- |  | ---- | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|                                                                                                                                            |  | For the Three Months Ended                                   |        | For the Nine Months Ended
|                                                                                                                                            |  | September 30,                                                |        | September 30,            
|                                                                                                                                            |  |                                                              |        |                          
|                                                                                                                                            |  | 2003                                                         |        | 2002                      |  | 2003 |       | 2002
|                                                                                                                                            |  |                                                              |        |                           |  |      |       |     
|                                                                                                                                            |  | (dollars in
thousands, except per share amounts)
(unaudited)
|Net income  as reported                                                                                                                    |  | $                                                            | 18,613 |                           |  | $    | 9,355 |      |  | $ | 51,698 |  |  | $ | 32,132 | 
|Deduct: Total stock based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects |  |                                                              | 8,461  |                           |  |      | 1,915 |      |  |   | 10,369 |  |  |   | 8,714  | 
|                                                                                                                                            |  |                                                              |        |                           |  |      |       |      |  |   |        |  |  |   |        | 
|Net
income  pro forma as adjusted                                                                                                          |  | $                                                            | 10,152 |                           |  | $    | 7,440 |      |  | $ | 41,329 |  |  | $ | 23,418 | 
|                                                                                                                                            |  |                                                              |        |                           |  |      |       |      |  |   |        |  |  |   |        | 
|Pro forma weighted average grant-date fair value                                                                                            |  | $                                                            | 6.51   |                           |  | $    | 3.33  |      |  | $ | 6.41   |  |  | $ | 3.54   | 
|Pro forma basic earnings per share  as reported                                                                                            |  |                                                              | 0.19   |                           |  |      | 0.10  |      |  |   | 0.54   |  |  |   | 0.35   | 
|Pro
forma basic earnings per share  as adjusted                                                                                            |  |                                                              | 0.10   |                           |  |      | 0.08  |      |  |   | 0.43   |  |  |   | 0.25   | 
|Pro forma diluted earnings per share  as
reported                                                                                          |  |                                                              | 0.18   |                           |  |      | 0.09  |      |  |   | 0.51   |  |  |   | 0.33   | 
|Pro
forma diluted earnings per share  as adjusted                                                                                          |  |                                                              | 0.10   |                           |  |      | 0.08  |      |  |   | 0.40   |  |  |   | 0.24   | 

12.     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 September 30, 2003 and for the nine months ended September 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 December 31, 2002
have been included as Non-Guarantor Subsidiaries. The operations of the
businesses

- 15 -



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##### 



(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 September
30, 2003:

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Canadian Back Institute Limited
Cupertino Medical Center, P.C.
Kentucky Orthopedic Rehabilitation, LLC.
Medical Information Management Systems, LLC.
Metro Therapy, Inc.
Millennium Rehab Services, LLC.
Philadelphia Occupational Health, P.C.
Select Specialty Hospital  Central Pennsylvania, L.P.
Select Specialty Hospital  Houston, L.P.
Select Specialty Hospital  Mississippi Gulf Coast, Inc.
TJ Corporation I, LLC.
U.S. Regional Occupational Health II, P.C.

- 16 -



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##### 



Select Medical Corporation
Condensed Consolidating Balance Sheet
September 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                           |   | $                      | 36,527  |            |   | $            | 41,575  |              |   | $            | 3,346  |   |   | $        |         |       |   | $       | 81,448  | 
|                                                       | Accounts receivable, net                            |   |                        | 145     |            |   |              | 199,204 |              |   |              | 29,082 |   |   |          |         |       |   |         | 228,431 | 
|                                                       | Current deferred tax asset                          |   |                        | 7,494   |            |   |              | 49,787  |              |   |              | 3,202  |   |   |          |         |       |   |         | 60,483  | 
|                                                       | Prepaid income taxes                                |   |                        | (5,370  | )          |   |              | 3,919   |              |   |              | 6,052  |   |   |          |          |       |   |         | 4,601   | 
|                                                       | Other current assets                                |   |                        | 2,348   |            |   |              | 16,047  |              |   |              | 2,251  |   |   |          |         |       |   |         | 20,646  | 
|                                                       |                                                     |   |                        |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |         | 
|Total Current Assets                                   |                                                     |   | 41,144                 |         |            |   | 310,532      |         |              |   | 43,933       |        |   |   |         |          |       |   | 395,609 |        
|Property and equipment, net                            |                                                     |   | 8,481                  |         |            |   | 149,427      |         |              |   | 18,122       |        |   |   |         |          |       |   | 176,030 |        
|Investment in affiliates                               |                                                     |   | 333,922                |         |            |   | 59,551       |         |              |   |             |        |   |   | (393,473 | ) (a)    |       |   |        |        
|Goodwill                                               |                                                     |   | 5,854                  |         |            |   | 266,019      |         |              |   | 46,898       |        |   |   |         |          |       |   | 318,771 |        
|Trademark                                              |                                                     |   |                       |         |            |   | 37,875       |         |              |   |             |        |   |   |         |          |       |   | 37,875  |        
|Other intangibles                                      |                                                     |   |                       |         |            |   | 24,209       |         |              |   |             |        |   |   |         |          |       |   | 24,209  |        
|Non-current deferred tax asset                         |                                                     |   | (1,380                 | )       |            |   | 8,886        |         |              |   | 5,705        |        |   |   |         |          |       |   | 13,211  |        
|Other assets                                           |                                                     |   | 16,735                 |         |            |   | 7,799        |         |              |   | 703          |        |   |   |         |          |       |   | 25,237  |        
|                                                       |                                                     |   |                        |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |         | 
|Total Assets                                           |                                                     | $ | 404,756                |         |            | $ | 864,298      |         |              | $ | 115,361      |        |   | $ | (393,473 | )        |       | $ | 990,942 |        
|                                                       |                                                     |   |                        |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |        
|Liabilities and Stockholders Equity                   |                                                     |   |                        |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |        
|Current Liabilities:                                   |                                                     |   |                        |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |        
|                                                       | Bank overdrafts                                     |   | $                      | 4,311   |            |   | $            |        |              |   | $            |       |   |   | $        |         |       |   | $       | 4,311   | 
|                                                       | Current portion of long-term debt and notes payable |   |                        | 570     |            |   |              | 9,339   |              |   |              | 574    |   |   |          |         |       |   |         | 10,483  | 
|                                                       | Accounts payable                                    |   |                        | 2,515   |            |   |              | 40,955  |              |   |              | 5,588  |   |   |          |         |       |   |         | 49,058  | 
|                                                       | Intercompany accounts                               |   |                        | (94,020 | )          |   |              | 87,505  |              |   |              | 6,515  |   |   |          |         |       |   |         |        | 
|                                                       | Accrued payroll                                     |   |                        | 589     |            |   |              | 52,581  |              |   |              | 104    |   |   |          |         |       |   |         | 53,274  | 
|                                                       | Accrued vacation                                    |   |                        | 2,305   |            |   |              | 16,615  |              |   |              | 1,547  |   |   |          |         |       |   |         | 20,467  | 
|                                                       | Accrued restructuring                               |   |                        |        |            |   |              | 11,015  |              |   |              |       |   |   |          |         |       |   |         | 11,015  | 
|                                                       | Accrued other                                       |   |                        | 28,748  |            |   |              | 28,952  |              |   |              | 3,171  |   |   |          |         |       |   |         | 60,871  | 
|                                                       | Due to third party payors                           |   |                        | (2,156  | )          |   |              | 37,830  |              |   |              | (471   | ) |   |          |         |       |   |         | 35,203  | 
|                                                       |                                                     |   |                        |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |         | 
|Total Current Liabilities                              |                                                     |   | (57,138                | )       |            |   | 284,792      |         |              |   | 17,028       |        |   |   |         |          |       |   | 244,682 |        
|Long-term debt, net of current portion                 |                                                     |   | 80,398                 |         |            |   | 240,112      |         |              |   | 38,948       |        |   |   |         |          |       |   | 359,458 |        
|                                                       |                                                     |   |                        |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |        
|Total liabilities                                      |                                                     |   | 23,260                 |         |            |   | 524,904      |         |              |   | 55,976       |        |   |   |         |          |       |   | 604,140 |        
|Minority interest in consolidated subsidiary companies |                                                     |   |                       |         |            |   | 350          |         |              |   | 4,956        |        |   |   |         |          |       |   | 5,306   |        
|Stockholders Equity:                                  |                                                     |   |                        |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |        
|                                                       | Common stock                                        |   |                        | 504     |            |   |              |        |              |   |              |       |   |   |          |         |       |   |         | 504     | 
|                                                       | Capital in excess of par                            |   |                        | 275,023 |            |   |              |        |              |   |              |       |   |   |          |         |       |   |         | 275,023 | 
|                                                       | Retained earnings                                   |   |                        | 101,853 |            |   |              | 126,684 |              |   |              | 25,620 |   |   |          | (152,304 | ) (b) |   |         | 101,853 | 
|                                                       | Subsidiary investment                               |   |                        |        |            |   |              | 212,360 |              |   |              | 28,809 |   |   |          | (241,169 | ) (a) |   |         |        | 
|                                                       | Accumulated other comprehensive income              |   |                        | 4,116   |            |   |              |        |              |   |              |       |   |   |          |         |       |   |         | 4,116   | 
|                                                       |                                                     |   |                        |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |         | 
|Total Stockholders Equity                             |                                                     |   | 381,496                |         |            |   | 339,044      |         |              |   | 54,429       |        |   |   | (393,473 | )        |       |   | 381,496 |        
|                                                       |                                                     |   |                        |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |        
|Total Liabilities and Stockholders Equity             |                                                     | $ | 404,756                |         |            | $ | 864,298      |         |              | $ | 115,361      |        |   | $ | (393,473 | )        |       | $ | 990,942 |        
|                                                       |                                                     |   |                        |         |            |   |              |         |              |   |              |        |   |   |          |          |       |   |         |        



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

- 17 -



---



##### 



Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Nine Months Ended September 30, 2003

|                                                         |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |         | 
|-------------------------------------------------------- | ----------------------------- | - | ---------------------- | ------ | ---------- | - | ------------ | ------- | ------------ | - | ------------ | ------- |  | - | ------- | ----- |  | - | ------- | ------- | 
|                                                         |                               |   | Select Medical         |        |            |   |              |         | Non-         |   |              |         |  |   |         |       | 
|                                                         |                               |   | Corporation (Parent    |        | Subsidiary |   | Guarantor    |         |              |   |              |         |  |   |        
|                                                         |                               |   | Company Only)          |        | Guarantors |   | Subsidiaries |         | Eliminations |   | Consolidated
|                                                         |                               |   |                        |        |            |   |              |         |              |   |             
|                                                         |                               |   | (dollars in thousands)
|Net operating revenues                                   |                               | $ | 6,145                  |        |            | $ | 830,566      |         |              | $ | 155,289      |         |  | $ |        |       |  | $ | 992,000 |        
|                                                         |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        
|Costs and expenses:                                      |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        
|                                                         | Cost of services              |   |                        |       |            |   |              | 660,439 |              |   |              | 132,983 |  |   |         |      |  |   |         | 793,422 | 
|                                                         | General and administrative    |   |                        | 31,258 |            |   |              | 993     |              |   |              |        |  |   |         |      |  |   |         | 32,251  | 
|                                                         | Bad debt expense              |   |                        |       |            |   |              | 31,424  |              |   |              | 6,770   |  |   |         |      |  |   |         | 38,194  | 
|                                                         | Depreciation and amortization |   |                        | 1,848  |            |   |              | 18,615  |              |   |              | 3,050   |  |   |         |      |  |   |         | 23,513  | 
|                                                         |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        
|Total costs and expenses                                 |                               |   | 33,106                 |        |            |   | 711,471      |         |              |   | 142,803      |         |  |   |        |       |  |   | 887,380 |        
|                                                         |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        
|Income (loss) from operations                            |                               |   | (26,961                | )      |            |   | 119,095      |         |              |   | 12,486       |         |  |   |        |       |  |   | 104,620 |        
|Other income and expense:                                |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        
|Intercompany interest and royalty fees                   |                               |   | 18,236                 |        |            |   | (18,250      | )       |              |   | 14           |         |  |   |         |       |  |   |        |        
|Intercompany management fees                             |                               |   | (45,661                | )      |            |   | 43,703       |         |              |   | 1,958        |         |  |   |         |       |  |   |        |        
|Equity in earnings from joint ventures                   |                               |   |                       |        |            |   | (334         | )       |              |   |             |         |  |   |         |       |  |   | (334    | )      
|Interest income                                          |                               |   | (402                   | )      |            |   | (224         | )       |              |   |             |         |  |   |        |       |  |   | (626    | )      
|Interest expense                                         |                               |   | 6,107                  |        |            |   | 8,930        |         |              |   | 3,437        |         |  |   |        |       |  |   | 18,474  |        
|                                                         |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        
|Income (loss) before minority interests and income taxes |                               |   | (5,241                 | )      |            |   | 85,270       |         |              |   | 7,077        |         |  |   |        |       |  |   | 87,106  |        
|Minority interest in consolidated subsidiary companies   |                               |   |                       |        |            |   | 79           |         |              |   | 1,814        |         |  |   |        |       |  |   | 1,893   |        
|                                                         |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        
|Income (loss) before income taxes                        |                               |   | (5,241                 | )      |            |   | 85,191       |         |              |   | 5,263        |         |  |   |        |       |  |   | 85,213  |        
|Income tax expense (benefit)                             |                               |   | (1,304                 | )      |            |   | 32,152       |         |              |   | 2,667        |         |  |   |         |       |  |   | 33,515  |        
|Equity in earnings of subsidiaries                       |                               |   | 55,635                 |        |            |   | 128          |         |              |   |             |         |  |   | (55,763 | ) (a) |  |   |        |        
|                                                         |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        
|Net income                                               |                               | $ | 51,698                 |        |            | $ | 53,167       |         |              | $ | 2,596        |         |  | $ | (55,763 | )     |  | $ | 51,698  |        
|                                                         |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        



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

- 18 -



---



##### 



Select Medical CorporationCondensed Consolidating Statement of Cash FlowsFor the Nine Months Ended September 30, 2003



|                                                                                  |                                                                                             |                                    |          |                        |         |            |          |              |        |              |         |              |        |   |         |       |        |     |          |        |        |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------------------- | -------- | ---------------------- | ------- | ---------- | -------- | ------------ | ------ | ------------ | ------- | ------------ | ------ | - | ------- | ----- | ------ | --- | -------- | ------ | ------ | -
|                                                                                  |                                                                                             |                                    |          | Select Medical         |         |            |          |              |        | Non-         |         |              |        |   |         |       |        |    
|                                                                                  |                                                                                             |                                    |          | Corporation (Parent    |         | Subsidiary |          | Guarantor    |        |              |         |              |        |   |         |      
|                                                                                  |                                                                                             |                                    |          | Company Only)          |         | Guarantors |          | Subsidiaries |        | Eliminations |         | Consolidated
|                                                                                  |                                                                                             |                                    |          |                        |         |            |          |              |        |              |         |             
|                                                                                  |                                                                                             |                                    |          | (dollars in thousands)
|Operating activities                                                              |                                                                                             |                                    |          |                        |         |            |          |              |        |              |         |              |        |   |         |       |        |     |          |       
|Net income                                                                        |                                                                                             | $                                  | 51,698   |                        |         | $          | 53,167   |              |        | $            | 2,596   |              |        | $ | (55,763 | ) (a) |        | $   | 51,698   |       
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                                             |                                    |          |                        |         |            |          |              |        |              |         |              |        |   |         |       |        |     |          |       
|                                                                                  | Depreciation and amortization                                                               |                                    | $        | 1,848                  |         |            | $        | 18,615       |        |              | $       | 3,050        |        |   |         |      |        |     |          | 23,513 |       
|                                                                                  | Provision for bad debts                                                                     |                                    |          |                       |         |            |          | 31,424       |        |              |         | 6,770        |        |   |         |      |        |     |          | 38,194 |       
|                                                                                  | Minority interests                                                                          |                                    |          |                       |         |            |          | 79           |        |              |         | 1,814        |        |   |         |      |        |     |          | 1,893  |       
|                                                                                  | Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |                                    |          |                        |         |            |          |              |        |              |         |              |        |   |         |       |        |     |          |        |       
|                                                                                  |                                                                                             | Equity in earnings of subsidiaries |          |                        | (55,635 | )          |          |              | (128   | )            |         |              |       |   |         |       | 55,763 | (a) |          |        |       |  
|                                                                                  |                                                                                             | Intercompany                       |          |                        | (11,819 | )          |          |              | 17,271 |              |         |              | (5,452 | ) |         |       |       |     |          |        |       |  
|                                                                                  |                                                                                             | Accounts receivable                |          |                        | (430    | )          |          |              | 10,300 |              |         |              | 1,057  |   |         |       |       |     |          |        | 10,927 |  
|                                                                                  |                                                                                             | Other current assets               |          |                        | 540     |            |          |              | (441   | )            |         |              | 842    |   |         |       |       |     |          |        | 941    |  
|                                                                                  |                                                                                             | Other assets                       |          |                        | 778     |            |          |              | 297    |              |         |              | 338    |   |         |       |       |     |          |        | 1,413  |  
|                                                                                  |                                                                                             | Accounts payable                   |          |                        | (22     | )          |          |              | 9,024  |              |         |              | (101   | ) |         |       |       |     |          |        | 8,901  |  
|                                                                                  |                                                                                             | Due to third-party payors          |          |                        | 9,480   |            |          |              | (8,820 | )            |         |              | 4,020  |   |         |       |       |     |          |        | 4,680  |  
|                                                                                  |                                                                                             | Accrued expenses                   |          |                        | 10,286  |            |          |              | 11,002 |              |         |              | 2,722  |   |         |       |       |     |          |        | 24,010 |  
|                                                                                  |                                                                                             | Income taxes                       |          |                        | 413     |            |          |              |       |              |         |              | (2,346 | ) |         |       |       |     |          |        | (1,933 | )
|                                                                                  |                                                                                             |                                    |          |                        |         |            |          |              |        |              |         |              |        |   |         |       |        |     |          |       
|Net cash provided by operating activities                                         |                                                                                             |                                    | 7,137    |                        |         |            | 141,790  |              |        |              | 15,310  |              |        |   |        |       |        |     | 164,237  |       
|                                                                                  |                                                                                             |                                    |          |                        |         |            |          |              |        |              |         |              |        |   |         |       |        |     |          |       
|Investing activities                                                              |                                                                                             |                                    |          |                        |         |            |          |              |        |              |         |              |        |   |         |       |        |     |          |       
|Purchases of property and equipment, net                                          |                                                                                             |                                    | (4,074   | )                      |         |            | (16,718  | )            |        |              | (2,933  | )            |        |   |        |       |        |     | (23,725  | )     
|Proceeds from disposal of assets                                                  |                                                                                             |                                    | 2,400    |                        |         |            |         |              |        |              |        |              |        |   |        |       |        |     | 2,400    |       
|Earnout payments                                                                  |                                                                                             |                                    |         |                        |         |            | (429     | )            |        |              |        |              |        |   |        |       |        |     | (429     | )     
|Acquisition of businesses, net of cash acquired                                   |                                                                                             |                                    |         |                        |         |            | (232,036 | )            |        |              | (190    | )            |        |   |        |       |        |     | (232,226 | )     
|                                                                                  |                                                                                             |                                    |          |                        |         |            |          |              |        |              |         |              |        |   |         |       |        |     |          |       
|Net cash used in investing activities                                             |                                                                                             |                                    | (1,674   | )                      |         |            | (249,183 | )            |        |              | (3,123  | )            |        |   |        |       |        |     | (253,980 | )     
|                                                                                  |                                                                                             |                                    |          |                        |         |            |          |              |        |              |         |              |        |   |         |       |        |     |          |       
|Financing activities                                                              |                                                                                             |                                    |          |                        |         |            |          |              |        |              |         |              |        |   |         |       |        |     |          |       
|Intercompany debt reallocation                                                    |                                                                                             |                                    | (115,862 | )                      |         |            | 123,497  |              |        |              | (7,635  | )            |        |   |        |       |        |     |         |       
|Issuance of 7.5% Senior Subordinated Notes                                        |                                                                                             |                                    | 175,000  |                        |         |            |         |              |        |              |        |              |        |   |        |       |        |     | 175,000  |       
|Payment of deferred financing costs                                               |                                                                                             |                                    | (5,578   | )                      |         |            |         |              |        |              |        |              |        |   |        |       |        |     | (5,578   | )     
|Net repayments on credit facility debt                                            |                                                                                             |                                    | (61,657  | )                      |         |            |         |              |        |              | (2,758  | )            |        |   |        |       |        |     | (64,415  | )     
|Principal payments on seller and other debt                                       |                                                                                             |                                    |         |                        |         |            | (2,551   | )            |        |              | (68     | )            |        |   |        |       |        |     | (2,619   | )     
|Proceeds from issuance of common stock                                            |                                                                                             |                                    | 20,235   |                        |         |            |         |              |        |              |        |              |        |   |        |       |        |     | 20,235   |       
|Repayment of bank overdrafts                                                      |                                                                                             |                                    | (6,810   | )                      |         |            |         |              |        |              |        |              |        |   |        |       |        |     | (6,810   | )     
|Distributions to minority interests                                               |                                                                                             |                                    |         |                        |         |            |         |              |        |              | (1,042  | )            |        |   |        |       |        |     | (1,042   | )     
|                                                                                  |                                                                                             |                                    |          |                        |         |            |          |              |        |              |         |              |        |   |         |       |        |     |          |       
|Net
cash provided by (used in) financing activities                               |                                                                                             |                                    | 5,328    |                        |         |            | 120,946  |              |        |              | (11,503 | )            |        |   |        |       |        |     | 114,771  |       
|                                                                                  |                                                                                             |                                    |          |                        |         |            |          |              |        |              |         |              |        |   |         |       |        |     |          |       
|Effect of exchange rate changes on cash
and cash equivalents                      |                                                                                             |                                    | 358      |                        |         |            |         |              |        |              |        |              |        |   |        |       |        |     | 358      |       
|                                                                                  |                                                                                             |                                    |          |                        |         |            |          |              |        |              |         |              |        |   |         |       |        |     |          |       
|Net
increase in cash and cash equivalents                                         |                                                                                             |                                    | 11,149   |                        |         |            | 13,553   |              |        |              | 684     |              |        |   |        |       |        |     | 25,386   |       
|Cash and cash equivalents at beginning of period                                  |                                                                                             |                                    | 25,378   |                        |         |            | 28,022   |              |        |              | 2,662   |              |        |   |        |       |        |     | 56,062   |       
|                                                                                  |                                                                                             |                                    |          |                        |         |            |          |              |        |              |         |              |        |   |         |       |        |     |          |       
|Cash and cash equivalents at end of period                                        |                                                                                             | $                                  | 36,527   |                        |         | $          | 41,575   |              |        | $            | 3,346   |              |        | $ |        |       |        | $   | 81,448   |       
|                                                                                  |                                                                                             |                                    |          |                        |         |            |          |              |        |              |         |              |        |   |         |       |        |     |          |       



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

- 19 -



---



##### 



Select Medical Corporation
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2002

|                                                       |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |         | 
|------------------------------------------------------ | ----------------------------- | - | ---------------------- | ------ | ---------- | - | ------------ | ------- | ------------ | - | ------------ | ------- |  | - | ------- | ----- |  | - | ------- | ------- | 
|                                                       |                               |   | Select Medical         |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |        
|                                                       |                               |   | Corporation            |        |            |   |              |         | Non-         |   |              |         |  |   |         |       | 
|                                                       |                               |   | (Parent Company        |        | Subsidiary |   | Guarantor    |         |              |   |              |         |  |   |        
|                                                       |                               |   | Only)                  |        | Guarantors |   | Subsidiaries |         | Eliminations |   | Consolidated
|                                                       |                               |   |                        |        |            |   |              |         |              |   |             
|                                                       |                               |   | (dollars in thousands)
|Net operating revenues                                 |                               | $ | 10,402                 |        |            | $ | 676,897      |         |              | $ | 143,876      |         |  | $ |        |       |  | $ | 831,175 |        
|                                                       |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        
|Costs and expenses:                                    |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        
|                                                       | Cost of services              |   |                        |       |            |   |              | 561,303 |              |   |              | 119,669 |  |   |         |      |  |   |         | 680,972 | 
|                                                       | General and administrative    |   |                        | 29,329 |            |   |              |        |              |   |              |        |  |   |         |      |  |   |         | 29,329  | 
|                                                       | Bad debt expense              |   |                        |       |            |   |              | 23,457  |              |   |              | 4,174   |  |   |         |      |  |   |         | 27,631  | 
|                                                       | Depreciation and amortization |   |                        | 1,261  |            |   |              | 13,559  |              |   |              | 3,904   |  |   |         |      |  |   |         | 18,724  | 
|                                                       |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        
|Total costs and expenses                               |                               |   | 30,590                 |        |            |   | 598,319      |         |              |   | 127,747      |         |  |   |        |       |  |   | 756,656 |        
|                                                       |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        
|Income (loss) from operations                          |                               |   | (20,188                | )      |            |   | 78,578       |         |              |   | 16,129       |         |  |   |        |       |  |   | 74,519  |        
|Other income and expense:                              |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        
|Intercompany interest and royalty fees                 |                               |   | 16,097                 |        |            |   | (16,507      | )       |              |   | 410          |         |  |   |        |       |  |   |        |        
|Intercompany management fees                           |                               |   | (43,573                | )      |            |   | 41,412       |         |              |   | 2,161        |         |  |   |        |       |  |   |        |        
|Interest income                                        |                               |   | (318                   | )      |            |   | (69          | )       |              |   | (1           | )       |  |   |        |       |  |   | (388    | )      
|Interest expense                                       |                               |   | 5,799                  |        |            |   | 11,137       |         |              |   | 3,532        |         |  |   |        |       |  |   | 20,468  |        
|                                                       |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        
|Income before minority interests and income taxes      |                               |   | 1,807                  |        |            |   | 42,605       |         |              |   | 10,027       |         |  |   |        |       |  |   | 54,439  |        
|Minority interest in consolidated subsidiary companies |                               |   |                       |        |            |   | 21           |         |              |   | 1,542        |         |  |   |        |       |  |   | 1,563   |        
|                                                       |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        
|Income before income taxes                             |                               |   | 1,807                  |        |            |   | 42,584       |         |              |   | 8,485        |         |  |   |        |       |  |   | 52,876  |        
|Income tax expense                                     |                               |   | 474                    |        |            |   | 18,298       |         |              |   | 1,972        |         |  |   |        |       |  |   | 20,744  |        
|Equity in earnings of subsidiaries                     |                               |   | 30,799                 |        |            |   | 3,299        |         |              |   |             |         |  |   | (34,098 | ) (a) |  |   |        |        
|                                                       |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        
|Net income                                             |                               | $ | 32,132                 |        |            | $ | 27,585       |         |              | $ | 6,513        |         |  | $ | (34,098 | )     |  | $ | 32,132  |        
|                                                       |                               |   |                        |        |            |   |              |         |              |   |              |         |  |   |         |       |  |   |         |        



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

- 20 -



---



##### 



Select Medical Corporation
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2002

|                                                                                  |                                                                                             |                                    |         |       |                        |   |            |        |              |   |              |       |              |   |         |       |        |     |         |        |         |   | 
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------------------- | ------- | ----- | ---------------------- | - | ---------- | ------ | ------------ | - | ------------ | ----- | ------------ | - | ------- | ----- | ------ | --- | ------- | ------ | ------- | - | 
|                                                                                  |                                                                                             |                                    |         |       | Select Medical         |   |            |        |              |   |              |       |              |   |         |       |        |     |         |        |        
|                                                                                  |                                                                                             |                                    |         |       | Corporation            |   |            |        |              |   | Non-         |       |              |   |         |       |        |     |        
|                                                                                  |                                                                                             |                                    |         |       | (Parent Company        |   | Subsidiary |        | Guarantor    |   |              |       |              |   |         |       |       
|                                                                                  |                                                                                             |                                    |         |       | Only)                  |   | Guarantors |        | Subsidiaries |   | Eliminations |       | Consolidated
|                                                                                  |                                                                                             |                                    |         |       |                        |   |            |        |              |   |              |       |             
|                                                                                  |                                                                                             |                                    |         |       | (dollars in thousands)
|Operating activities                                                              |                                                                                             |                                    |         |       |                        |   |            |        |              |   |              |       |              |   |         |       |        |     |         |       
|Net income                                                                        |                                                                                             | $                                  | 32,132  |       |                        | $ | 27,585     |        |              | $ | 6,513        |       |              | $ | (34,098 | ) (a) |        | $   | 32,132  |       
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                                             |                                    |         |       |                        |   |            |        |              |   |              |       |              |   |         |       |        |     |         |       
|                                                                                  | Depreciation and amortization                                                               |                                    |         | 1,261 |                        |   |            | 13,559 |              |   |              | 3,904 |              |   |         |      |        |     |         | 18,724 |        
|                                                                                  | Provision for bad debts                                                                     |                                    |         |      |                        |   |            | 23,457 |              |   |              | 4,174 |              |   |         |      |        |     |         | 27,631 |        
|                                                                                  | Minority interests                                                                          |                                    |         |      |                        |   |            | 21     |              |   |              | 1,542 |              |   |         |      |        |     |         | 1,563  |        
|                                                                                  | Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |                                    |         |       |                        |   |            |        |              |   |              |       |              |   |         |       |        |     |         |        |        
|                                                                                  |                                                                                             | Equity in earnings of subsidiaries |         |       | (30,799                | ) |            |        | (3,299       | ) |              |       |             |   |         |       | 34,098 | (a) |         |        |        |  
|                                                                                  |                                                                                             | Intercompany                       |         |       | (14,364                | ) |            |        | 21,077       |   |              |       | (6,713       | ) |         |       |       |     |         |        |        |  
|                                                                                  |                                                                                             | Accounts receivable                |         |       | (64                    | ) |            |        | (30,404      | ) |              |       | (8,693       | ) |         |       |       |     |         |        | (39,161 | )
|                                                                                  |                                                                                             | Other current assets               |         |       | (598                   | ) |            |        | 631          |   |              |       | (105         | ) |         |       |       |     |         |        | (72     | )
|                                                                                  |                                                                                             | Other assets                       |         |       | 1,536                  |   |            |        | 1,164        |   |              |       | 866          |   |         |       |       |     |         |        | 3,566   |  
|                                                                                  |                                                                                             | Accounts payable                   |         |       | (1,234                 | ) |            |        | 957          |   |              |       | 659          |   |         |       |       |     |         |        | 382     |  
|                                                                                  |                                                                                             | Due to third-party payors          |         |       | 9,309                  |   |            |        | 6,496        |   |              |       | 5,689        |   |         |       |       |     |         |        | 21,494  |  
|                                                                                  |                                                                                             | Accrued expenses                   |         |       | 6,937                  |   |            |        | 14,067       |   |              |       | (985         | ) |         |       |       |     |         |        | 20,019  |  
|                                                                                  |                                                                                             | Income taxes                       |         |       | 3,534                  |   |            |        | 16,326       |   |              |       | (3,382       | ) |         |       |       |     |         |        | 16,478  |  
|                                                                                  |                                                                                             |                                    |         |       |                        |   |            |        |              |   |              |       |              |   |         |       |        |     |         |       
|Net cash provided by operating activities                                         |                                                                                             |                                    | 7,650   |       |                        |   | 91,637     |        |              |   | 3,469        |       |              |   |        |       |        |     | 102,756 |       
|                                                                                  |                                                                                             |                                    |         |       |                        |   |            |        |              |   |              |       |              |   |         |       |        |     |         |       
|Investing activities                                                              |                                                                                             |                                    |         |       |                        |   |            |        |              |   |              |       |              |   |         |       |        |     |         |       
|Purchases of property and equipment, net                                          |                                                                                             |                                    | (1,444  | )     |                        |   | (23,833    | )      |              |   | (3,528       | )     |              |   |        |       |        |     | (28,805 | )     
|Earnout payments                                                                  |                                                                                             |                                    |        |       |                        |   | (563       | )      |              |   |             |       |              |   |        |       |        |     | (563    | )     
|Acquisition of businesses, net of cash acquired                                   |                                                                                             |                                    |        |       |                        |   | (5,548     | )      |              |   | (2,213       | )     |              |   |        |       |        |     | (7,761  | )     
|                                                                                  |                                                                                             |                                    |         |       |                        |   |            |        |              |   |              |       |              |   |         |       |        |     |         |       
|Net cash used in investing activities                                             |                                                                                             |                                    | (1,444  | )     |                        |   | (29,944    | )      |              |   | (5,741       | )     |              |   |        |       |        |     | (37,129 | )     
|                                                                                  |                                                                                             |                                    |         |       |                        |   |            |        |              |   |              |       |              |   |         |       |        |     |         |       
|Financing activities                                                              |                                                                                             |                                    |         |       |                        |   |            |        |              |   |              |       |              |   |         |       |        |     |         |       
|Intercompany debt reallocation                                                    |                                                                                             |                                    | 37,429  |       |                        |   | (42,365    | )      |              |   | 4,936        |       |              |   |        |       |        |     |        |       
|Net repayments on credit facility debt                                            |                                                                                             |                                    | (14,960 | )     |                        |   |           |        |              |   | (2,012       | )     |              |   |        |       |        |     | (16,972 | )     
|Principal payments on seller and other debt                                       |                                                                                             |                                    | (370    | )     |                        |   | (4,148     | )      |              |   | (6           | )     |              |   |        |       |        |     | (4,524  | )     
|Proceeds from issuance of common stock                                            |                                                                                             |                                    | 4,025   |       |                        |   |           |        |              |   |             |       |              |   |        |       |        |     | 4,025   |       
|Proceeds from bank overdrafts                                                     |                                                                                             |                                    | 2,432   |       |                        |   |           |        |              |   |             |       |              |   |        |       |        |     | 2,432   |       
|Payment of deferred financing costs                                               |                                                                                             |                                    | (67     | )     |                        |   |           |        |              |   |             |       |              |   |        |       |        |     | (67     | )     
|Distributions to minority interests                                               |                                                                                             |                                    |        |       |                        |   |           |        |              |   | (1,264       | )     |              |   |        |       |        |     | (1,264  | )     
|                                                                                  |                                                                                             |                                    |         |       |                        |   |            |        |              |   |              |       |              |   |         |       |        |     |         |       
|Net cash provided by (used in) financing activities                               |                                                                                             |                                    | 28,489  |       |                        |   | (46,513    | )      |              |   | 1,654        |       |              |   |        |       |        |     | (16,370 | )     
|                                                                                  |                                                                                             |                                    |         |       |                        |   |            |        |              |   |              |       |              |   |         |       |        |     |         |       
|Effect of exchange rate changes on cash
and cash equivalents                      |                                                                                             |                                    | 9       |       |                        |   |           |        |              |   |             |       |              |   |        |       |        |     | 9       |       
|                                                                                  |                                                                                             |                                    |         |       |                        |   |            |        |              |   |              |       |              |   |         |       |        |     |         |       
|Net increase (decrease) in cash and cash equivalents                              |                                                                                             |                                    | 34,704  |       |                        |   | 15,180     |        |              |   | (618         | )     |              |   |        |       |        |     | 49,266  |       
|Cash and cash equivalents at beginning of period                                  |                                                                                             |                                    | 559     |       |                        |   | 8,086      |        |              |   | 2,058        |       |              |   |        |       |        |     | 10,703  |       
|                                                                                  |                                                                                             |                                    |         |       |                        |   |            |        |              |   |              |       |              |   |         |       |        |     |         |       
|Cash and cash equivalents at end of period                                        |                                                                                             | $                                  | 35,263  |       |                        | $ | 23,266     |        |              | $ | 1,440        |       |              | $ |        |       |        | $   | 59,969  |       
|                                                                                  |                                                                                             |                                    |         |       |                        |   |            |        |              |   |              |       |              |   |         |       |        |     |         |       



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

- 21 -



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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
sections captioned Risk Factors in our Form 10-K under Item 1  Business and
our form S-4 filed October 17, 2003.

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 have used Adjusted EBITDA to report our segment results. The
difference between EBITDA and Adjusted EBITDA for the periods presented in this
report result from equity in earnings from joint ventures and minority
interests, which are added back to EBITDA in the computation of Adjusted
EBITDA.

- 22 -



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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 September 30,
2003, after our acquisition of Kessler Rehabilitation Corporation we operated
77 long term acute care hospitals in 24 states and 814 outpatient
rehabilitation clinics in 31 states, the District of Columbia and seven
Canadian provinces. In addition we operated four acute medical rehabilitation
hospitals that we acquired as part of the Kessler Acquisition in September
2003. 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 nine months ended September
30, 2003, we had net operating revenues of $992.0 million. Of this total, we
earned approximately 61% of our net operating revenues from our specialty
hospitals and approximately 39% from our outpatient rehabilitation business.

Our specialty hospital segment consists of hospitals designed to serve the
needs of long term stay acute patients and hospitals designed to serve patients
that require intensive medical rehabilitation care. Patients in our long-term
acute care hospitals typically suffer from serious and often complex medical
conditions that require a high degree of care. Patients in our acute medical
rehabilitation hospitals typically suffer from debilitating injuries, including
traumatic brain and spinal cord injuries, and require rehabilitation care in
the form of physical, psychological, social and vocational rehabilitation
services. Our outpatient rehabilitation business consists of clinics and
contract services that provide physical, occupational and speech rehabilitation
services. Our outpatient rehabilitation 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 |   | Nine Months Ended
|                                                         |                                  |                         |   | September 30,      |   | September 30,    
|                                                         |                                  |                         |   |                    |   |                  
|                                                         |                                  |                         |   | 2003               |   | 2002              |   | 2003    |   | 2002
|                                                         |                                  |                         |   |                    |   |                   |   |         |   |     
|Specialty Hospital Data  long term acute care hospitals |                                  |                         |   |                    |   |                   |   |         |   |      |   |         |    |   |   |        
|                                                         | # of Hospitals - Start of Period |                         |   | 75                 |   |                   |   | 66      |   |      |   | 72      |    |   |   | 64      |  
|                                                         |                                  | # of Hospital Start-ups |   |                    | 2 |                   |   |         | 2 |      |   |         | 6  |   |   |         | 4 | 
|                                                         |                                  | # of Hospitals Closed   |   |                    |  |                   |   |         |  |      |   |         | (1 | ) |   |         |  | 
|                                                         |                                  |                         |   |                    |   |                   |   |         |   |      |   |         |    |   |   |        
|                                                         | # of Hospitals - End of Period   |                         |   | 77                 |   |                   |   | 68      |   |      |   | 77      |    |   |   | 68      |  
|                                                         |                                  |                         |   |                    |   |                   |   |         |   |      |   |         |    |   |   |        
|                                                         | # of Licensed Beds               |                         |   | 2,829              |   |                   |   | 2,461   |   |      |   | 2,829   |    |   |   | 2,461   |  
|                                                         | # of Admissions                  |                         |   | 6,443              |   |                   |   | 5,262   |   |      |   | 18,518  |    |   |   | 15,492  |  
|                                                         | # of Patient Days                |                         |   | 171,971            |   |                   |   | 155,105 |   |      |   | 505,734 |    |   |   | 458,916 |  
|                                                         | Average Length of Stay           |                         |   | 27                 |   |                   |   | 30      |   |      |   | 28      |    |   |   | 30      |  
|                                                         | Net Revenue Per Patient Day (a)  |                         | $ | 1,221              |   |                   | $ | 1,003   |   |      | $ | 1,156   |    |   | $ | 994     |  
|                                                         | Occupancy Rate                   |                         |   | 67                 | % |                   |   | 69      | % |      |   | 69      | %  |   |   | 71      | %
|                                                         | % Patient Days  Medicare        |                         |   | 78                 | % |                   |   | 76      | % |      |   | 77      | %  |   |   | 76      | %

- 23 -



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##### 



|                                                                 |                                          |  |                                       |           |                    |     |                   |         |      |     |      |           |   |     |   |           |  |     |  
|---------------------------------------------------------------- | ---------------------------------------- |  | ------------------------------------- | --------- | ------------------ | --- | ----------------- | ------- | ---- | --- | ---- | --------- | - | --- | - | --------- |  | --- | -
|                                                                 |                                          |  |                                       |           | Three Months Ended |     | Nine Months Ended
|                                                                 |                                          |  |                                       |           | September 30,      |     | September 30,    
|                                                                 |                                          |  |                                       |           |                    |     |                  
|                                                                 |                                          |  |                                       |           | 2003               |     | 2002              |         | 2003 |     | 2002
|                                                                 |                                          |  |                                       |           |                    |     |                   |         |      |     |     
|Specialty Hospital Data  acute medical rehabilitation hospitals |                                          |  |                                       |           |                    |     |                   |         |      |     |      |           |   |     |   |          
|                                                                 | # of Hospitals  Start of Period         |  |                                       |          |                    |     |                   |        |      |     |      |          |   |     |   |          | 
|                                                                 | # of Hospitals Acquired                  |  |                                       | 4         |                    |     |                   |        |      |     |      | 4         |   |     |   |          | 
|                                                                 |                                          |  |                                       |           |                    |     |                   |         |      |     |      |           |   |     |   |           | 
|                                                                 | # of Hospitals  End of Period           |  |                                       | 4         |                    |     |                   |        |      |     |      | 4         |   |     |   |          | 
|                                                                 |                                          |  |                                       |           |                    |     |                   |         |      |     |      |           |   |     |   |           | 
|                                                                 | # of Licensed Beds                       |  |                                       | 322       |                    |     |                   |        |      |     |      | 322       |   |     |   |          | 
|                                                                 | # of Admissions                          |  |                                       | 582       |                    |     |                   |        |      |     |      | 582       |   |     |   |          | 
|                                                                 | # of Patient Days                        |  |                                       | 9,217     |                    |     |                   |        |      |     |      | 9,217     |   |     |   |          | 
|                                                                 | Average Length of Stay                   |  |                                       | 16        |                    |     |                   |        |      |     |      | 16        |   |     |   |          | 
|                                                                 | Net Revenue Per Patient Day (a)          |  | $                                     | 1,143     |                    |     |                   |        |      |     | $    | 1,143     |   |     |   |          | 
|                                                                 | Occupancy Rate                           |  |                                       | 95        | %                  |     |                   |        |      |     |      | 95        | % |     |   |          | 
|                                                                 | % Patient Days - Medicare                |  |                                       | 57        | %                  |     |                   |        |      |     |      | 57        | % |     |   |          | 
|Outpatient Rehabilitation Data                                   |                                          |  |                                       |           |                    |     |                   |         |      |     |      |           |   |     |   |          
|                                                                 | # of Clinics Owned - Start of Period     |  |                                       | 707       |                    |     |                   | 686     |      |     |      | 679       |   |     |   | 664       | 
|                                                                 |                                          |  | # of Clinics Acquired                 |           |                    | 92  |                   |         |      | 2   |      |           |   | 125 |   |           |  | 9   |  
|                                                                 |                                          |  | # of Clinic Start-ups                 |           |                    | 5   |                   |         |      | 14  |      |           |   | 22  |   |           |  | 46  |  
|                                                                 |                                          |  | # of Clinics Closed/Sold/Consolidated |           |                    | (19 | )                 |         |      | (13 | )    |           |   | (41 | ) |           |  | (30 | )
|                                                                 |                                          |  |                                       |           |                    |     |                   |         |      |     |      |           |   |     |   |          
|                                                                 | # of Clinics Owned - End of Period       |  |                                       | 785       |                    |     |                   | 689     |      |     |      | 785       |   |     |   | 689       | 
|                                                                 | # of Clinics Managed - End of Period     |  |                                       | 29        |                    |     |                   | 54      |      |     |      | 29        |   |     |   | 54        | 
|                                                                 |                                          |  |                                       |           |                    |     |                   |         |      |     |      |           |   |     |   |          
|                                                                 | Total # of Clinics (All)  End of Period |  |                                       | 814       |                    |     |                   | 743     |      |     |      | 814       |   |     |   | 743       | 
|                                                                 |                                          |  |                                       |           |                    |     |                   |         |      |     |      |           |   |     |   |          
|                                                                 | # of Visits (U.S.)                       |  |                                       | 1,002,354 |                    |     |                   | 957,517 |      |     |      | 3,002,954 |   |     |   | 2,916,983 | 
|                                                                 | Net Revenue Per Visit (U.S.) (b)         |  | $                                     | 87        |                    |     | $                 | 87      |      |     | $    | 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 long term acute care
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.

- 24 -



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##### 



Kessler Rehabilitation Corporation Acquisition

On September 2, 2003, we completed the acquisition of all the outstanding
stock of Kessler Rehabilitation Corporation from the Henry H. Kessler
Foundation, Inc. for $228.3 million in cash, and $1.7 million of assumed
indebtedness. Through its four wholly-owned acute medical rehabilitation
hospitals and 92 outpatient clinics, Kessler is one of the nations leading
providers of comprehensive rehabilitation care and physical medicine services.
We have included the operations of Kesslers four acute medical rehabilitation
hospitals and one skilled nursing facility in our specialty hospitals segment.
Kesslers outpatient clinics and onsite contract rehabilitation services have
been included in our outpatient rehabilitation segment. Kesslers other
services, which include sales of home medical equipment, orthotics,
prosthetics, oxygen and ventilator systems and infusion/intravenous services
and corporate support costs, have been included under the all
other category. The results of operations of Kessler Rehabilitation
Corporation have been included in our consolidated financial
statements  since September 1, 2003.

Critical Accounting Matters

Sources of Revenue

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

Approximately
69% and 64% of our specialty hospital revenues for the nine
months ended September 30, 2003 and 2002, respectively, were received from
services provided to Medicare patients. Of this amount, approximately 33% and
98% were paid by Medicare under a cost-based reimbursement methodology for the
nine months ended September 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 September 30, 2003 and December 31, 2002 we had a
net amount due to Medicare of $16.6 million and $7.3 million, related to our
cost-based hospitals. We recorded this amount as due to third party payors on
our balance sheet. Substantially all of our Medicare cost reports are settled
through 2000.

Net operating revenues generated directly from the Medicare program from
all segments represented approximately 46% and 40% of net operating revenues
for the nine months ended September 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 acute 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.

- 25 -



---



##### 



During the quarter ended September 30, 2003, an additional 25 of our
hospitals implemented LTCH-PPS pursuant to the new regulations. As of September
30, 2003, all of our 74 eligible hospitals have implemented LTCH-PPS. We have
elected to be paid solely on the basis of LTC-DRG payments for 73 of those
hospitals.

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 nine months ended September 30, 2003.

Other revenue primarily represents amounts the Medicare program reimburses
us for a portion of our corporate expenses that are related to our
long-term acute care
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 long-term acute care hospitals. Instead, we will receive from
Medicare a pre-determined fixed amount assigned to the applicable LTC-DRG,
which is intended to reflect the average cost of treating such a patient,
including corporate costs. As a result of this change in our revenue stream,
we began allocating corporate departmental costs that are directly related to
our long-term acute care 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 actuarial methods 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.

- 26 -



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##### 



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 $1.1 million and $1.0 million for the nine months ended September
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 $15.7 million
through 2015; however, this does not include the leasing of an
additional 3,008 square feet of office space at 4718 Old Gettysburg
Road from Old Gettysburg Associates II for a five year initial term
at $17.40 per square foot, and an additional 8,644 square feet of
office space at 4720 Old Gettysburg Road from Old Gettysburg
Associates III for a five year initial term at $18.01 per square foot
approved by our board of directors on August 11, 2003. These
approvals were subject to our receipt of independent appraisals
regarding the market value of the leased space, which we have
subsequently obtained. We anticipate executing additional leases
regarding this space with these partnerships. 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.

Results of Operations

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

|                                                   |  |                    |       |                   |  |      |       |      |  |  |       |    |  |  |       |   
|-------------------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  |  | ----- | -- |  |  | ----- | --
|                                                   |  | Three Months Ended |       | Nine Months Ended
|                                                   |  | September 30,      |       | September 30,    
|                                                   |  |                    |       |                  
|                                                   |  | 2003               |       | 2002              |  | 2003 |       | 2002
|                                                   |  |                    |       |                   |  |      |       |     
|Net operating revenues                             |  |                    | 100.0 | %                 |  |      | 100.0 | %    |  |  | 100.0 | %  |  |  | 100.0 | % 
|Cost of services (a)                               |  |                    | 80.0  | %                 |  |      | 82.8  | %    |  |  | 80.0  | %  |  |  | 81.9  | % 
|General and administrative                         |  |                    | 3.2   | %                 |  |      | 3.7   | %    |  |  | 3.3   | %  |  |  | 3.5   | % 
|Bad debt expense                                   |  |                    | 3.9   | %                 |  |      | 3.1   | %    |  |  | 3.8   | %  |  |  | 3.3   | % 
|Depreciation and amortization                      |  |                    | 2.5   | %                 |  |      | 2.3   | %    |  |  | 2.4   | %  |  |  | 2.3   | % 
|                                                   |  |                    |       |                   |  |      |       |      |  |  |       |    |  |  |       |   
|Income from operations                             |  |                    | 10.4  | %                 |  |      | 8.1   | %    |  |  | 10.5  | %  |  |  | 9.0   | % 
|Equity in earnings from joint ventures             |  |                    | 0.1   | %                 |  |      |      |      |  |  | N/M   |    |  |  |      |   
|Interest expense, net                              |  |                    | (1.7  | %)                |  |      | (2.4  | %)   |  |  | (1.7  | %) |  |  | (2.4  | %)
|                                                   |  |                    |       |                   |  |      |       |      |  |  |       |    |  |  |       |   
|Income before minority interests, and
income taxes |  |                    | 8.8   | %                 |  |      | 5.7   | %    |  |  | 8.8   | %  |  |  | 6.6   | % 
|Minority interests                                 |  |                    | 0.1   | %                 |  |      | 0.1   | %    |  |  | 0.2   | %  |  |  | 0.2   | % 
|                                                   |  |                    |       |                   |  |      |       |      |  |  |       |    |  |  |       |   
|Income before income taxes                         |  |                    | 8.7   | %                 |  |      | 5.6   | %    |  |  | 8.6   | %  |  |  | 6.4   | % 
|Income tax expense                                 |  |                    | 3.4   | %                 |  |      | 2.2   | %    |  |  | 3.4   | %  |  |  | 2.5   | % 
|                                                   |  |                    |       |                   |  |      |       |      |  |  |       |    |  |  |       |   
|Net income                                         |  |                    | 5.3   | %                 |  |      | 3.4   | %    |  |  | 5.2   | %  |  |  | 3.9   | % 
|                                                   |  |                    |       |                   |  |      |       |      |  |  |       |    |  |  |       |   

- 27 -



---



##### 



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

|                                          |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |       |      |  
|----------------------------------------- | ------------------------- | ------------- | - | ---------------------- | ------- | ---- | - | ------- | ------- | ----------------- |  | ----- | ---- | ------ | - | ------- | ------- |  | - | ------- | ------- |  |  | ----- | ---- | -
|                                          |                           |               |   | Three Months Ended     |         |      |   |         |         | Nine Months Ended |  |       |      |       
|                                          |                           |               |   | September 30,          |         |      |   |         |         | September 30,     |  |       |      |       
|                                          |                           |               |   |                        |         | %    |   |         |         | %                
|                                          |                           |               |   | 2003                   |         | 2002 |   | Change  |         | 2003              |  | 2002  |      | Change
|                                          |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |       
|                                          |                           |               |   | (dollars in thousands) |         |      |   |        
|Net operating revenues:                   |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Specialty hospitals       |               | $ | 222,040                |         |      | $ | 155,637 |         |                   |  | 42.7  | %    |        | $ | 597,231 |         |  | $ | 456,538 |         |  |  | 30.8  | %   
|                                          | Outpatient rehabilitation |               |   | 129,108                |         |      |   | 119,179 |         |                   |  | 8.3   |      |        |   | 386,730 |         |  |   | 363,512 |         |  |  | 6.4   |     
|                                          | Other                     |               |   | 2,327                  |         |      |   | 4,167   |         |                   |  | (44.2 | )    |        |   | 8,039   |         |  |   | 11,125  |         |  |  | (27.7 | )   
|                                          |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|                                          |                           | Total company |   | $                      | 353,475 |      |   | $       | 278,983 |                   |  |       | 26.7 | %      |   | $       | 992,000 |  |   | $       | 831,175 |  |  |       | 19.3 | %
|                                          |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|Adjusted EBITDA: (b)                      |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Specialty hospitals       |               | $ | 38,482                 |         |      | $ | 16,522  |         |                   |  | 132.9 | %    |        | $ | 94,676  |         |  | $ | 49,470  |         |  |  | 91.4  | %   
|                                          | Outpatient rehabilitation |               |   | 16,862                 |         |      |   | 19,025  |         |                   |  | (11.4 | )    |        |   | 59,756  |         |  |   | 63,148  |         |  |  | (5.4  | )   
|                                          | Other                     |               |   | (9,602                 | )       |      |   | (6,546  | )       |                   |  | (46.7 | )    |        |   | (26,299 | )       |  |   | (19,375 | )       |  |  | (35.7 | )   
|                                          |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|                                          |                           | Total company |   | $                      | 45,742  |      |   | $       | 29,001  |                   |  |       | 57.7 | %      |   | $       | 128,133 |  |   | $       | 93,243  |  |  |       | 37.4 | %
|                                          |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|Income (loss) from operations:            |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Specialty hospitals       |               | $ | 34,442                 |         |      | $ | 13,184  |         |                   |  | 161.2 | %    |        | $ | 83,463  |         |  | $ | 39,937  |         |  |  | 109.0 | %   
|                                          | Outpatient rehabilitation |               |   | 13,139                 |         |      |   | 16,311  |         |                   |  | (19.4 | )    |        |   | 50,019  |         |  |   | 55,321  |         |  |  | (9.6  | )   
|                                          | Other                     |               |   | (10,646                | )       |      |   | (7,012  | )       |                   |  | (51.8 | )    |        |   | (28,862 | )       |  |   | (20,739 | )       |  |  | (39.2 | )   
|                                          |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|                                          |                           | Total company |   | $                      | 36,935  |      |   | $       | 22,483  |                   |  |       | 64.3 | %      |   | $       | 104,620 |  |   | $       | 74,519  |  |  |       | 40.4 | %
|                                          |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|Adjusted EBITDA margins: (b)              |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Specialty hospitals       |               |   | 17.3                   | %       |      |   | 10.6    | %       |                   |  | 63.2  | %    |        |   | 15.9    | %       |  |   | 10.8    | %       |  |  | 47.2  | %   
|                                          | Outpatient rehabilitation |               |   | 13.1                   |         |      |   | 16.0    |         |                   |  | (18.1 | )    |        |   | 15.5    |         |  |   | 17.4    |         |  |  | (10.9 | )   
|                                          | Other                     |               |   | N/M                    |         |      |   | N/M     |         |                   |  | N/M   |      |        |   | N/M     |         |  |   | N/M     |         |  |  | N/M   |     
|                                          |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Total company             |               |   | 12.9                   | %       |      |   | 10.4    | %       |                   |  | 24.0  | %    |        |   | 12.9    | %       |  |   | 11.2    | %       |  |  | 15.2  | %   
|                                          |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|Total assets:                             |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Specialty hospitals       |               | $ | 427,773                |         |      | $ | 318,164 |         |                   |  |       |      |        | $ | 427,773 |         |  | $ | 318,164 |         |  |  |       |     
|                                          | Outpatient rehabilitation |               |   | 370,031                |         |      |   | 324,934 |         |                   |  |       |      |        |   | 370,031 |         |  |   | 324,934 |         |  |  |       |     
|                                          | Other                     |               |   | 193,138                |         |      |   | 78,431  |         |                   |  |       |      |        |   | 193,138 |         |  |   | 78,431  |         |  |  |       |     
|                                          |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Total company             |               | $ | 990,942                |         |      | $ | 721,529 |         |                   |  |       |      |        | $ | 990,942 |         |  | $ | 721,529 |         |  |  |       |     
|                                          |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|Purchases of property and
equipment, net: |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Specialty hospitals       |               | $ | 5,970                  |         |      | $ | 5,908   |         |                   |  |       |      |        | $ | 13,386  |         |  | $ | 18,348  |         |  |  |       |     
|                                          | Outpatient rehabilitation |               |   | 1,685                  |         |      |   | 4,067   |         |                   |  |       |      |        |   | 6,215   |         |  |   | 8,994   |         |  |  |       |     
|                                          | Other                     |               |   | 864                    |         |      |   | 882     |         |                   |  |       |      |        |   | 4,124   |         |  |   | 1,463   |         |  |  |       |     
|                                          |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      
|                                          | Total company             |               | $ | 8,519                  |         |      | $ | 10,857  |         |                   |  |       |      |        | $ | 23,725  |         |  | $ | 28,805  |         |  |  |       |     
|                                          |                           |               |   |                        |         |      |   |         |         |                   |  |       |      |        |   |         |         |  |   |         |         |  |  |      

- 28 -



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##### 



The following tables reconcile net income to EBITDA for the Company.

|                              |  |                        |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|----------------------------- |  | ---------------------- | ------- | ----------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                              |  | Three Months Ended     |         | Nine Months Ended
|                              |  | September 30,          |         | September 30,    
|                              |  |                        |         |                  
|                              |  | 2003                   |         | 2002              |  | 2003 |         | 2002
|                              |  |                        |         |                   |  |      |         |     
|                              |  | (dollars in thousands)
|Net income                    |  | $                      | 18,613  |                   |  | $    | 9,355   |      |  | $ | 51,698  |   |  | $ | 32,132  |  
|Income tax expense            |  |                        | 12,158  |                   |  |      | 6,044   |      |  |   | 33,515  |   |  |   | 20,744  |  
|Interest expense, net         |  |                        | 6,142   |                   |  |      | 6,694   |      |  |   | 17,848  |   |  |   | 20,080  |  
|Depreciation and amortization |  |                        | 8,807   |                   |  |      | 6,518   |      |  |   | 23,513  |   |  |   | 18,724  |  
|                              |  |                        |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|EBITDA (b)                    |  | $                      | 45,720  |                   |  | $    | 28,611  |      |  | $ | 126,574 |   |  | $ | 91,680  |  
|                              |  |                        |         |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Net revenue                   |  | $                      | 353,475 |                   |  | $    | 278,983 |      |  | $ | 992,000 |   |  | $ | 831,175 |  
|EBITDA margin (b)             |  |                        | 12.9    | %                 |  |      | 10.3    | %    |  |   | 12.8    | % |  |   | 11.0    | %

The following table reconciles same hospitals information.

|                                                          |                                                       |                           |      |                        |    |                   |      |         |       |      |      |         |       |   |      |         |       | 
|--------------------------------------------------------- | ----------------------------------------------------- | ------------------------- | ---- | ---------------------- | -- | ----------------- | ---- | ------- | ----- | ---- | ---- | ------- | ----- | - | ---- | ------- | ----- | 
|                                                          |                                                       |                           |      | Three Months Ended     |    | Nine Months Ended
|                                                          |                                                       |                           |      | September 30,          |    | September 30,    
|                                                          |                                                       |                           |      |                        |    |                  
|                                                          |                                                       |                           |      | 2003                   |    | 2002              |      | 2003    |       | 2002
|                                                          |                                                       |                           |      |                        |    |                   |      |         |       |     
|                                                          |                                                       |                           |      | (dollars in thousands)
|Net Operating Revenue                                     |                                                       |                           |      |                        |    |                   |      |         |       |      |      |         |       |   |      |        
|                                                          | Specialty hospitals net operating revenue             |                           | $    | 222,040                |    |                   | $    | 155,637 |       |      | $    | 597,231 |       |   | $    | 456,538 |      
|                                                          | Less: Acquired acute medical rehabilitation hospitals |                           |      | 11,719                 |    |                   |      |        |       |      |      | 11,719  |       |   |      |        |      
|                                                          |                                                       |                           |      |                        |    |                   |      |         |       |      |      |         |       |   |      |        
|                                                          | All long-term acute care hospitals                    |                           |      | 210,321                |    |                   |      | 155,637 |       |      |      | 585,512 |       |   |      | 456,538 |      
|                                                          | Less: Specialty hospitals opened after 1/1/02         |                           |      | 23,768                 |    |                   |      | 1,966   |       |      |      | 46,582  |       |   |      | 1,971   |      
|                                                          |                                                       | Closed specialty hospital |      |                        | 64 |                   |      |         | 1,030 |      |      |         | 1,537 |   |      |         | 3,490 | 
|                                                          |                                                       |                           |      |                        |    |                   |      |         |       |      |      |         |       |   |      |        
|                                                          | Same hospitals net operating revenue                  |                           | $    | 186,489                |    |                   | $    | 152,641 |       |      | $    | 537,393 |       |   | $    | 451,077 |      
|                                                          |                                                       |                           |      |                        |    |                   |      |         |       |      |      |         |       |   |      |        
|Adjusted EBITDA                                           |                                                       |                           |      |                        |    |                   |      |         |       |      |      |         |       |   |      |        
|                                                          | Specialty hospitals Adjusted EBITDA                   |                           | $    | 38,482                 |    |                   | $    | 16,522  |       |      | $    | 94,676  |       |   | $    | 49,470  |      
|                                                          | Less: Acquired acute medical rehabilitation hospitals |                           |      | 3,252                  |    |                   |      |        |       |      |      | 3,252   |       |   |      |        |      
|                                                          |                                                       |                           |      |                        |    |                   |      |         |       |      |      |         |       |   |      |         |      
|                                                          | All long-term acute care hospitals                    |                           |      | 35,230                 |    |                   |      | 16,522  |       |      |      | 91,424  |       |   |      | 49,470  |      
|                                                          | Less: Specialty hospitals opened after 1/1/02         |                           |      | 2,420                  |    |                   |      | (1,857  | )     |      |      | 1,244   |       |   |      | (3,442  | )    
|                                                          |                                                       | Closed specialty hospital |      |                        | 24 |                   |      |         | (91   | )    |      |         | (15   | ) |      |         | 216   | 
|                                                          |                                                       |                           |      |                        |    |                   |      |         |       |      |      |         |       |   |      |        
|                                                          | Same hospitals Adjusted EBITDA                        |                           | $    | 32,786                 |    |                   | $    | 18,470  |       |      | $    | 90,195  |       |   | $    | 52,696  |      
|                                                          |                                                       |                           |      |                        |    |                   |      |         |       |      |      |         |       |   |      |        
|All long-term acute care hospitals Adjusted
EBITDA margin |                                                       |                           | 16.8 | %                      |    |                   | 10.6 | %       |       |      | 15.6 | %       |       |   | 10.8 | %      
|Same hospitals Adjusted EBITDA margin                     |                                                       |                           | 17.6 | %                      |    |                   | 12.1 | %       |       |      | 16.8 | %       |       |   | 11.7 | %      

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, equity in income from joint ventures and
minority interest. Equity in income from joint ventures and minority
interest is then deducted from Adjusted EBITDA to derive EBITDA. We
believe that the presentation of EBITDA is important to investors because
EBITDA is commonly used as an analytical indicator of performance by
investors 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. See footnote 7 to our unaudited consolidated interim
financial statements for a reconciliation of net income to Adjusted EBITDA
as utilized by us in reporting our segment performance in accordance with
SFAS No. 131.

- 29 -



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##### 



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

Net Operating Revenues

Our net operating revenues increased by 26.7% to $353.5 million for the
three months ended September 30, 2003 compared to $279.0 million for the three
months ended September 30, 2002. The reasons for the increase in net operating
revenues are discussed below.

Specialty Hospitals.Our specialty hospital net operating revenues
increased 42.7% to $222.0 million for the three months ended September 30, 2003
compared to $155.6 million for the three months ended September 30, 2002. Net
operating revenues for the 63 specialty hospitals opened before January 1, 2002
and operated throughout both periods increased 22.2% to $186.5 million for the
three months ended September 30, 2003 from $152.6 million for the three months
ended September 30, 2002. This resulted from higher net revenue per patient
day. The remaining increase of $32.5 million resulted from the acquisition of
the Kessler facilities, which contributed $11.7 million of net revenue, and the
internal development of new specialty hospitals that commenced operations in
2002 and 2003.

Outpatient Rehabilitation.Our outpatient rehabilitation net operating
revenues increased 8.3% to $129.1 million for the three months ended September
30, 2003 compared to $119.2 million for the three months ended September 30,
2002. The number of patient visits in our U.S. based outpatient rehabilitation
clinics increased 4.7% for the three months ended September 30, 2003 to
1,002,354 visits compared to 957,517 visits for the three months ended
September 30, 2002. Net revenue per visit in these clinics remained constant
at $87 for both periods. The increase in net operating revenues was
principally related to the acquisition of the Kessler operations, which
contributed $6.3 million of net operating revenue, and the consolidation of
clinics that we previously managed and clinics that we acquired after September
30, 2002. Excluding the effects of the previously managed clinics and the
recently acquired clinics (including the Kessler clinics), net operating
revenues for the three months ended September 30, 2003 would have been $119.3
million, and the number of U.S. based visits would have been 884,414.

Other.Our other revenues declined to $2.3 million for the three months
ended September 30, 2003 compared to $4.2 million for the three months ended
September 30, 2002. We expect this revenue item to decline throughout the
remainder of 2003 as a result of our specialty acute care hospitals converting
to LTCH-PPS. See Critical Accounting Matters-Sources of Revenue for a
further discussion of this change.

Operating Expenses

Our operating expenses increased by 23.1% to $307.7 million for the three
months ended September 30, 2003 compared to $250.0 million for the three months
ended September 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 acquisition of Kessler, 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 87.1% for the three months
ended September 30, 2003 compared to 89.6% for the three months ended September
30, 2002. Cost of services as a percentage of operating revenues decreased to
80.0% for the three months ended September 30, 2003 from 82.8% for the three
months ended September 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 $24.3 million for the three months ended September 30, 2003
compared to $20.9 million for the three months ended September 30, 2002. This
increase is principally related to our new hospitals that opened during 2002
and 2003 and the rent expense for

- 30 -



---



##### 



the acquired Kessler clinics. During the
same time period, general and administrative expense as a percentage of net
operating revenues declined to 3.2% for the three months ended September 30,
2003 from 3.7% for the three months ended September 30, 2002. This decrease in
general and administrative expenses is the result of a growth in net operating
revenues that exceeded the growth in our general and administrative costs. Our
bad debt expense as a percentage of net operating revenues was 3.9% for the
three months ended September 30, 2003 compared to 3.1% for the three months
ended September 30, 2002. This increase in bad debt expense
resulted primarily from two factors. First, we experienced
migration of some of our accounts receivable to older aging categories where we
significantly reduce our estimates of net realizable value. Second,
the transition to the new LTACH-PPS payment mechanism in our
long-term acute care hospitals has caused uncertainty associated with
collections from payors that insure patients co-payments and Medicare exhaust
coverage.

EBITDA and Adjusted EBITDA

Our total EBITDA increased 59.8% to $45.7 million for the three months
ended September 30, 2003 compared to $28.6 million for the three months ended
September 30, 2002. Our EBITDA margins increased to 12.9% for the three months
ended September 30, 2003 compared to 10.3% for the three months ended September
30, 2002. For cash flow information, see -Capital Resources and Liquidity.

Specialty Hospitals.Adjusted EBITDA increased by 132.9% to $38.5
million for the three months ended September 30, 2003 compared to $16.5 million
for the three months ended September 30, 2002. Our Adjusted EBITDA margins
increased to 17.3% for the three months ended September 30, 2003 from 10.6% for
the three months ended September 30, 2002. The hospitals opened before January
1, 2002 and operated throughout both periods had Adjusted EBITDA of $32.8
million, an increase of 77.5% 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 revenue per patient day. Our Adjusted EBITDA
margin in these same store hospitals increased to 17.6% for the three months
ended September 30, 2003 from 12.1% for the three months ended September 30,
2002.

Outpatient Rehabilitation.Adjusted EBITDA decreased by 11.4% to $16.9
million for the three months ended September 30, 2003 compared to $19.0 million
for the three months ended September 30, 2002. Our Adjusted EBITDA margins
decreased to 13.1% for the three months ended September 30, 2003 from 16.0% for
the three months ended September 30, 2002. This Adjusted EBITDA margin decline
was primarily the result of four factors. First, Kessler outpatient operations
experienced negative margins, which had the effect of lowering the overall
margins for the segment. Second, we are now consolidating a group of clinics
that we previously managed, which had the effect of compressing margins.
Third, we experienced a shift in our business mix, where overall growth
occurred in operating units that have higher relative operating costs. Fourth,
we experienced additional overhead costs associated with the consolidation of
two central billing offices into one during the quarter, where we experienced
both incremental staffing costs and severance costs.

Other.The Adjusted EBITDA loss was $9.6 million for the three months
ended September 30, 2003 compared to a loss of $6.5 million for the three
months ended September 30, 2002. This increase in the Adjusted EBITDA loss was
primarily the result of the decline in other net operating revenue of $1.8
million described above and an increase in our general and administrative
expenses of $0.8 million.

Income from Operations

Income from operations increased 64.3% to $36.9 million for the three
months ended September 30, 2003 compared to $22.5 million for the three months
ended September 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 $2.3 million. The increase in
depreciation and amortization expense resulted primarily from the additional
depreciation associated with acquired Kessler assets, the amortization of

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the
Kessler non-compete agreement, and increases in depreciation on fixed asset
additions that are principally related to new hospital and clinic development.

Interest Expense

Interest expense decreased by $0.5 million to $6.4 million for the three
months ended September 30, 2003 from $6.9 million for the three months ended
September 30, 2002. The decline in interest expense is the result of lower
debt levels outstanding in 2003 compared to 2002, related to our Senior credit
facility offset by the additional interest resulting from the issuance of
$175.0 million of 71⁄2% Senior Subordinated notes due 2013 on August 12,
2003. The lower debt levels on our Senior Credit Facility resulted from
scheduled term amortization payments and principal pre-payments. All
repayments have been made with cash flows generated from operations.

Minority Interests

Minority interests in consolidated earnings was $0.4 million for both the
three months ended September 30, 2003 and the three months ended September 30,
2002.

Income Taxes

We recorded income tax expense of $12.2 million for the three months ended
September 30, 2003. The expense represented an effective tax rate of 39.5% and
approximates the federal and state statutory tax rates. We recorded income tax
expense of $6.0 million for the three months ended September 30, 2002. This
expense represented an effective tax rate of 39.2%. We expect our effective
income tax rate to increase as a result of the Kessler acquisition because a
high portion of Kesslers income is generated in New Jersey, which has higher
relative state taxes than other states where we operate.

Nine Months Ended September 30, 2003 Compared to Nine Months Ended September
30, 2002

Net Operating Revenues

Our net operating revenues increased by 19.3% to $992.0 million for the
nine months ended September 30, 2003 compared to $831.2 million for the nine
months ended September 30, 2002. The reasons for the increase in net operating
revenues are discussed below.

Specialty Hospitals.Our specialty hospital net operating revenues
increased 30.8% to $597.2 million for the nine months ended September 30, 2003
compared to $456.5 million for the nine months ended September 30, 2002. Net
operating revenues for the 63 specialty hospitals opened before January 1, 2002
and operated throughout both periods increased 19.1% to $537.4 million for the
nine months ended September 30, 2003 from $451.1 million for the nine months
ended September 30, 2002. This resulted from a higher volume of patient days
and a higher net revenue per patient day. The remaining increase of $54.4
million resulted from the acquisition of the Kessler facilities, which
contributed $11.7 million of net revenue, and the internal development of new
specialty hospitals that commenced operations in 2002 and 2003.

Outpatient Rehabilitation.Our outpatient rehabilitation net operating
revenues increased 6.4% to $386.7 million for the nine months ended September
30, 2003 compared to $363.5 million for the nine months ended September 30,
2002. The number of patient visits in our U.S. based outpatient rehabilitation
clinics increased 2.9% for the nine months ended September 30, 2003 to
3,002,954 visits compared to 2,916,983 visits for the nine months ended
September 30, 2002. Net revenue per visit in these clinics increased to $88
for the nine months ended September 30, 2003 compared to $86 for the nine
months ended September 30, 2002. The increase in net operating revenues was
principally related to the acquisition of the Kessler operations, which
contributed $6.3 million of net operating revenue and the consolidation of
clinics that we previously managed

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and clinics that we acquired during 2002 and
2003. Excluding the effects of the previously managed clinics and the recently
acquired clinics (including the Kessler clinics), net operating revenues for
the nine months ended September 30, 2003 would have been $370.4 million, and
the number of U.S. based visits would have been 2,728,672.

Other.Our other revenues declined to $8.0 million for the nine months
ended September 30, 2003 compared to $11.1 million for the nine months ended
September 30, 2002. We expect this revenue item to decline throughout the
remainder of 2003 as a result of our specialty acute care hospitals converting
to LTCH-PPS. See Critical Accounting Matters-Sources of Revenue for a
further discussion of this change.

Operating Expenses

Our operating expenses increased by 17.1% to $863.9 million for the nine
months ended September 30, 2003 compared to $737.9 million for the nine months
ended September 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 acquisition of Kessler, 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 87.1% for the nine months ended
September 30, 2003 compared to 88.7% for the nine months ended September 30,
2002. Cost of services as a percentage of operating revenues decreased to 80.0%
for the nine months ended September 30, 2003 from 81.9% for the nine months
ended September 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 $69.0 million for the nine months ended September 30, 2003 compared to
$62.9 million for the nine months ended September 30, 2002. This increase is
principally related to our new hospitals that opened during 2002 and 2003, and
the rent expense for the acquired Kessler clinics. During the same time
period, general and administrative expense as a percentage of net operating
revenues decreased to 3.3% for the nine months ended September 30, 2003 from
3.5% for the nine months ended September 30, 2002. Our bad debt expense as a
percentage of net operating revenues was 3.8% for the nine months ended
September 30, 2003 compared to 3.3% for the nine months ended September 30,
2002. This increase in bad debt expense resulted primarily from two
factors. First, we experienced a migration of some of
our accounts receivable to older aging categories where we significantly reduce
our estimates of net realizable value. Second, the transition to the
new LTACH-PPS payment mechanism in our long-term acute care hospitals
has caused uncertainty associated with collections from payors that
insure patients co-payments and Medicare exhaust coverage.

EBITDA and Adjusted EBITDA

Our total EBITDA increased 38.1% to $126.6 million for the nine months
ended September 30, 2003 compared to $91.7 million for the nine months ended
September 30, 2002. Our EBITDA margins increased to 12.8% for the nine months
ended September 30, 2003 compared to 11.0% for the nine months ended September
30, 2002. For cash flow information, see -Capital Resources and Liquidity.

Specialty Hospitals.Adjusted EBITDA increased by 91.4% to $94.7 million
for the nine months ended September 30, 2003 compared to $49.5 million for the
nine months ended September 30, 2002. Our Adjusted EBITDA margins increased to
15.9% for the nine months ended September 30, 2003 from 10.8% for the nine
months ended September 30, 2002. The hospitals opened before January 1, 2002
and operated throughout both periods had Adjusted EBITDA of $90.2 million, an
increase of 71.2% 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 16.8% for the nine months
ended September 30, 2003 from 11.7% for the nine months ended September 30,
2002.

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Outpatient Rehabilitation.Adjusted EBITDA declined by 5.4% to $59.8
million for the nine months ended September 30, 2003 compared to $63.1 million
for the nine months ended September 30, 2002. Our Adjusted EBITDA margins
decreased to 15.5% for the nine months ended September 30, 2003 from 17.4% for
the nine months ended September 30, 2002. This Adjusted EBITDA decline was
primarily the result of three factors. First, the adverse effect of patient
visit cancellations and temporary clinic closures due to the harsh weather in
several of our markets during January and February of 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.

Other.The Adjusted EBITDA loss was $26.3 million for the nine months
ended September 30, 2003 compared to a loss of $19.4 million for the nine
months ended September 30, 2002. This is the result of the decline in other
net operating revenue of $3.1 million described above and the increase in
general and administrative expenses of $2.9 million.

Income from Operations

Income from operations increased 40.4% to $104.6 million for the nine
months ended September 30, 2003 compared to $74.5 million for the nine months
ended September 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 $4.8 million. The increase in
depreciation and amortization expense resulted primarily from the additional
depreciation associated with acquired Kessler assets, the amortization of the
Kessler non-compete agreement and increases in depreciation on fixed asset
additions that are principally related to new hospital and clinic development.

Interest Expense

Interest expense decreased by $2.0 million to $18.5 million for the nine
months ended September 30, 2003 from $20.5 million for the nine months ended
September 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 $1.9 million for
the nine months ended September 30, 2003 compared to $1.6 million for the nine
months ended September 30, 2002. This increase resulted from the improved
profitability of our outpatient rehabilitation subsidiaries with minority
interests.

Income Taxes

We recorded income tax expense of $33.5 million for the nine months ended
September 30, 2003. The expense represented an effective tax rate of 39.3% and
approximates the federal and state statutory tax rates. We recorded income tax
expense of $20.7 million for the nine months ended September 30, 2002. This
expense represented an effective tax rate of 39.2%.

Capital Resources and Liquidity

For the nine months ended September 30, 2003 operating activities provided
$164.2 million of cash flow compared to $102.8 million for the nine months
ended September 30, 2002. Our cash flow from operations benefited from strong
collections of our accounts receivable and an increase in net income. Our
accounts

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receivable days outstanding were 54 days at September 30, 2003
compared to 73 days at December 31, 2002 and 76 days at September 30, 2002.

Investing activities used $254.0 and $37.1 million of cash flow for the
nine months ended September 30, 2003 and 2002, respectively. This usage
resulted from purchases of property and equipment of $23.7 and $28.8 million in
2003 and 2002, respectively, that relate principally to new hospital
development. Additionally, we incurred acquisition costs of $232.2 million and
$7.8 million in 2003 and 2002, respectively. The Kessler acquisition costs of
$228.3 million comprise the majority of the 2003 expenditures.

Financing activities produced $114.8 million of cash for the nine months
ended September 30, 2003. During 2003, we sold through a wholly owned
subsidiary $175.0 million of 71⁄2% Senior Subordinated Notes due 2013. The
net proceeds from the sale of these notes, after deducting the initial
purchasers discount, was $169.4 million. Also during 2003,
we repaid $64.4 million of credit facility debt and $2.6 million of seller and other
debt. In 2003 we received $20.2 million of proceeds from the issuance of
stock related to the exercise of employee stock options and stock warrants. In the
nine months ended September 30, 2002, financing activities utilized $16.4
million of cash. This was due principally to the repayment of credit facility,
seller and other debt which total in the aggregate $21.5 million.

Capital Resources

Net working capital increased to $150.9 million at September 30, 2003
compared to $130.6 million at December 31, 2002. Our increase in working
capital resulted primarily from the working capital acquired in the Kessler
acquisition.

We have a credit agreement with a group of banks. Our credit facility
consists of a Canadian term facility of $9.7 million and a revolving credit facility of
$152.4 million. As of September 30, 2003 we had borrowed all of our available
loans under the Canadian term loans and had availability to borrow an
additional $143.2 million under our revolving facility subject to certain
limitations. We have $9.2 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 September 30,
2003, our weighted average interest rate under our credit agreement was
approximately 5.1% 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 one to two 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 $143.2 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.

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Inflation

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

Recent Accounting Pronouncements

In 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
generally effective
for financial instruments entered into or modified after May 31, 2003, and
for 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 December 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

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resulted in
interest expense fluctuating approximately $75,000 and $227,000 for the three
and nine months ended September 30, 2003.

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

ITEM 4. CONTROLS AND PROCEDURES

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | a. |  | Exhibits
| | -- |  | --------
|

| |  |  | The exhibits to this report are listed in the Exhibit Index
appearing on page 40 hereof.
| |  |  | ----------------------------------------------------------------------------------------
|

| | b. |  | Reports on Form 8-K
| | -- |  | -------------------
|

| |  |  | Form 8-K, dated July 1,
2003, filed pursuant to Item 5, in connection
with our issuance of a press release on June 30, 2003
announcing our agreement to purchase the outstanding stock of
Kessler Rehabilitation Corporation.                                                                                                                     
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Form 8-K, dated July 22,
2003, furnished pursuant to Item 9, in
connection with our issuance of a press release on July 21,
2003 announcing our intention to issue $175 million principal
amount of Senior Subordinated Notes, together with disclosure
of certain information not previously publicly reported, in
accordance with Regulation FD.
|
| |  |  | Form 8-K, dated July 29, 2003, furnished pursuant to Item 12, in
connection with our issuance of a press release on July 28,
2003 reporting our results for the three months ended June 30,
2003.                                                                                                                                                 
|
| |  |  | Form 8-K, dated July 30, 2003, furnished pursuant to Item 9, in
connection with our issuance of a press release on July 29,
2003 reporting the pricing of the 7 1/2% Senior Subordinated
Notes.                                                                                                                                                   
|
| |  |  | Form 8-K, dated July 30, 2003, furnished pursuant to Item 9, in
connection with certain investor presentations given during
July and August, 2003.                                                                                                                                                                                                
|
| |  |  | Form 8-K, dated August 1, 2003, furnished pursuant to Item 9, in
connection with our issuance of a press release on July 31,
2003 announcing the early termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, applicable to the acquisition of Kessler
Rehabilitation Corporation.         
|
| |  |  | Form 8-K, dated September 2, 2003, furnished pursuant to Item 9, in
connection with our issuance of a press release on September 2,
2003 announcing the closing of our acquisition of Kessler
Rehabilitation Corporation.                                                                                                                         
|
| |  |  | Form 8-K, dated
September 10, 2003, filed pursuant to Item 2, in
connection with our acquisition of Kessler Rehabilitation
Corporation.                                                                                                                                                                                                           

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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: November 14, 2003

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EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|2.1     |  | Letter Agreement dated as of August 29, 2003, by and among Kessler
Rehabilitation Corporation, Henry H. Kessler Foundation, Inc. and Select
Medical Corporation, incorporated by reference to Exhibit 2.2 of the
Companys Form 8-K filed September 10, 2003.                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|2.5     |  | Agreement and Plan of Merger dated as of September 2, 2003 between Select
Medical Corporation and Select Medical Escrow, Inc., incorporated by
reference to Exhibit 2.5 of the Companys Registration Statement on Form
S-4 (Reg. No. 333-109776) filed October 17, 2003.                                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|4.1     |  | Indenture governing 7 1/2% Senior Subordinated Notes due 2013 among
Select Medical Escrow, Inc. and U.S. Bank Trust National Association,
dated as of August 12, 2003, incorporated by reference to Exhibit 4.4 of
the Companys Registration Statement on Form S-4 (Reg. No. 333-109776)
filed October 17, 2003.                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|4.2     |  | Form of 7 1/2% Senior Subordinated Notes due 2013, incorporated by
reference to Exhibit 4.5 of the Companys Registration Statement on Form
S-4 (Reg. No. 333-109776) filed October 17, 2003.                                                                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|4.3     |  | Exchange and Registration Rights Agreement, dated as of August 12, 2003
by and among Select Medical Escrow, Inc., Select Medical Corporation, the
Company Guarantors named therein, J.P. Morgan Securities Inc., Merrill
Lynch, Pierce, Fenner & Smith Inc., Wachovia Capital Markets, LLC, SG
Cowen Securities Corporation, CIBC World Markets Corp., Fleet Securities,
Inc. and Jefferies & Company, Inc., incorporated by reference to Exhibit
4.6 of the Companys Registration Statement on Form S-4 (Reg. No.
333-109776) filed October 17, 2003.
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|4.4     |  | Supplemental Indenture dated as of September 2, 2003 among Select Medical
Corporation, Select Medical Escrow, Inc., the Subsidiary Guarantors named
therein and U.S. Bank Trust National Association, incorporated by
reference to Exhibit 4.7 of the Companys Registration Statement on Form
S-4 (Reg. No. 333-109776) filed October 17, 2003.                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|4.5     |  | Assumption Agreement dated as of September 2, 2003 among Select Medical
Corporation, Select Medical Escrow, Inc., the Subsidiary Guarantors named
therein and U.S. Bank Trust National Association, incorporated by
reference to Exhibit 4.8 of the Companys Registration Statement on Form
S-4 (Reg. No. 333-109776) filed October 17, 2003.                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.1    |  | Fifth Amendment dated as of July 29, 2003 to the Credit Agreement dated
as of September 22, 2000 among Select Medical Corporation, Canadian Back
Institute Limited, The Chase Manhattan Bank, the Chase Manhattan Bank of
Canada, Banc of America Securities, LLC and CIBC Inc., incorporated by
reference to Exhibit 10.74 of the                                                                                                                                                                                                                     

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##### 



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        |  | Companys Registration Statement on Form
S-4 (Reg. No. 333-109776) filed October 17, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.2    |  | Purchase Agreement dated as of July 29, 2003 by and among Select Medical
Escrow, Inc., Select Medical Corporation, the Company Guarantors named
therein, J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner &
Smith Inc., Wachovia Capital Markets, LLC, SG Cowen Securities
Corporation, CIBC World Markets Corp., Fleet Securities, Inc. and
Jefferies & Company, Inc., incorporated by reference to Exhibit 10.75 of
the Companys Registration Statement on Form S-4 (Reg. No. 333-109776)
filed October 17, 2003.
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.3    |  | Escrow Agreement dates as of August 12, 2003 among Select Medical
Corporation, Select Medical Escrow, Inc., and U.S. Bank Trust National
Association, as escrow agent and trustee, incorporated by reference to
Exhibit 10.76 of the Companys Registration Statement on Form S-4 (Reg.
No. 333-109776) filed October 17, 2003.                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|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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