##### Table of Contents



---

---

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


|  |  |                                                                                                                                       
|- |  | --------------------------------------------------------------------------------------------------------------------------------------
|  |  | (Mark One)                                                                                                                            
| 
| 
| 
| 
|þ |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934                                               
| 
| 
| 
| 
| 
| 
| 
| 
| 
| 
| 
| 
| 
| 
| 
| 
|  |  | For the Quarter Ended June 30, 2002                                                                                                   
| 
| 
| 
| 
|o |  | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period From __________ to __________.

Commission File Number: 000-32499

SELECT MEDICAL CORPORATION

(Exact name of Registrant as specified in its charter)


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

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

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

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

YESþNOo

As of July 31, 2002, the number of outstanding shares of the Registrants
Common Stock was 46,649,937.



---

---





---

TABLE OF CONTENTS



|                                                                                              |                                                                                     |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                      FINANCIAL INFORMATION                                            
|ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS                                                    
|                                                                                              | CONSOLIDATED BALANCE SHEETS                                                        
|                                                                                              | CONSOLIDATED STATEMENTS OF OPERATIONS                                              
|                                                                                              | Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income
|                                                                                              | CONSOLIDATED STATEMENTS OF CASH FLOWS                                              
|                                                                                              | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                         
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II                      OTHER INFORMATION                                               
|ITEM 1. LEGAL PROCEEDINGS                                                                    
|ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|ITEM 5. OTHER INFORMATION                                                                    
|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                                                                   
|FIRST ADDENDUM TO LEASE AGREEMENT                                                            
|SECOND ADDENDUM TO LEASE AGREEMENT                                                           
|THIRD ADDENDUM TO LEASE AGREEMENT                                                            



---



##### Table of Contents



TABLE OF CONTENTS

|           |  |                                                                                       |  |                                                                                     |    |  |   | 
|---------- |  | ------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------- | -- |  | - | 
|PART I     |  | FINANCIAL INFORMATION                                                                 |  |                                                                                     | 3  | 
|          
|          
|          
|          
|ITEM 1.    |  | CONSOLIDATED FINANCIAL STATEMENTS                                                     |  |                                                                                     |    | 
|          
|          
|          
|          
|           |  |                                                                                       |  | Consolidated Balance Sheets                                                         |    |  | 3 | 
|          
|          
|          
|          
|           |  |                                                                                       |  | Consolidated Statements of Operations                                               |    |  | 4 | 
|          
|          
|          
|          
|           |  |                                                                                       |  | Consolidated
Statements of Changes in Stockholders Equity and Comprehensive
Income |    |  | 5 | 
|          
|          
|          
|          
|           |  |                                                                                       |  | Consolidated Statements of Cash Flows                                               |    |  | 6 | 
|          
|          
|          
|          
|           |  |                                                                                       |  | Notes to Consolidated Financial Statements                                          |    |  | 7 | 
|          
|          
|          
|          
|ITEM 2.    |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |  |                                                                                     | 20 | 
|          
|          
|          
|          
|ITEM 3.    |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  |                                                                                     | 31 | 
|          
|          
|          
|          
|PART II    |  | OTHER INFORMATION                                                                     |  |                                                                                     | 32 | 
|          
|          
|          
|          
|ITEM 1.    |  | LEGAL PROCEEDINGS                                                                     |  |                                                                                     | 32 | 
|          
|          
|          
|          
|ITEM 2.    |  | CHANGES IN SECURITIES AND USE OF PROCEEDS                                             |  |                                                                                     | 32 | 
|          
|          
|          
|          
|ITEM 3.    |  | DEFAULTS UPON SENIOR SECURITIES                                                       |  |                                                                                     | 32 | 
|          
|          
|          
|          
|ITEM 4.    |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  |                                                                                     | 33 | 
|          
|          
|          
|          
|ITEM 5.    |  | OTHER INFORMATION                                                                     |  |                                                                                     | 34 | 
|          
|          
|          
|          
|ITEM 6.    |  | EXHIBITS AND REPORTS ON FORM 8-K                                                      |  |                                                                                     | 34 | 
|          
|          
|          
|          
|SIGNATURES |  |                                                                                       |  |                                                                                     | 34 | 

- 2 -



---



##### Table of Contents






PART I  FINANCIAL INFORMATION




ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS




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

|                                                       |  |                                                                                                                                           |                                      |        |          |   |              |       |         |   | 
|------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------ | -------- | - | ------------ | ----- | ------- | - | 
|                                                       |  |                                                                                                                                           |                                      |        | June 30, |   | December 31,
|                                                       |  |                                                                                                                                           |                                      |        | 2002     |   | 2001        
|                                                       |  |                                                                                                                                           |                                      |        |          |   |             
|Assets                                                 |  | (unaudited)                                                                                                                               |                                      |        |          |  
|Current Assets:                                        |  |                                                                                                                                           |                                      |        |          |   |              |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Cash and cash equivalents                                                                                                                 |                                      | $      | 28,834   |   |              | $     | 10,703  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Accounts receivable, net of allowance for doubtful accounts of $76,866
and $79,889 in 2002 and 2001, respectively                         |                                      |        | 235,541  |   |              |       | 218,393 |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Current deferred tax asset                                                                                                                |                                      |        | 28,942   |   |              |       | 28,945  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Other current assets                                                                                                                      |                                      |        | 18,507   |   |              |       | 18,444  |  
|                                                       |  |                                                                                                                                           |                                      |        |          |   |              |      
|Total Current Assets                                   |  |                                                                                                                                           | 311,824                              |        |          |   | 276,485      |      
|                                                      
|                                                      
|                                                      
|                                                      
|Property and equipment, net                            |  |                                                                                                                                           | 98,599                               |        |          |   | 92,005       |      
|                                                      
|                                                      
|                                                      
|                                                      
|Goodwill                                               |  |                                                                                                                                           | 203,771                              |        |          |   | 199,850      |      
|                                                      
|                                                      
|                                                      
|                                                      
|Trademark                                              |  |                                                                                                                                           | 37,875                               |        |          |   | 37,875       |      
|                                                      
|                                                      
|                                                      
|                                                      
|Other intangibles                                      |  |                                                                                                                                           | 9,245                                |        |          |   | 9,532        |      
|                                                      
|                                                      
|                                                      
|                                                      
|Non-current deferred tax asset                         |  |                                                                                                                                           | 5,103                                |        |          |   | 6,674        |      
|                                                      
|                                                      
|                                                      
|                                                      
|Other assets                                           |  |                                                                                                                                           | 27,016                               |        |          |   | 28,424       |      
|                                                       |  |                                                                                                                                           |                                      |        |          |   |              |      
|Total Assets                                           |  | $                                                                                                                                         | 693,433                              |        |          | $ | 650,845      |      
|                                                       |  |                                                                                                                                           |                                      |        |          |   |              |      
|                                                       |  |                                                                                                                                           | Liabilities and Stockholders Equity |        |          |   |              |       |         |   | 
|                                                      
|                                                      
|                                                      
|                                                      
|Current Liabilities:                                   |  |                                                                                                                                           |                                      |        |          |   |              |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Bank overdrafts                                                                                                                           |                                      | $      | 9,707    |   |              | $     | 6,083   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Current portion of long-term debt and notes payable                                                                                       |                                      |        | 28,636   |   |              |       | 26,774  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Accounts payable                                                                                                                          |                                      |        | 31,199   |   |              |       | 33,520  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Accrued payroll                                                                                                                           |                                      |        | 27,507   |   |              |       | 27,160  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Accrued vacation                                                                                                                          |                                      |        | 14,910   |   |              |       | 12,820  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Accrued restructuring                                                                                                                     |                                      |        | 1,142    |   |              |       | 1,819   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Accrued other                                                                                                                             |                                      |        | 29,357   |   |              |       | 23,568  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Income taxes payable                                                                                                                      |                                      |        | 7,649    |   |              |       | 1,735   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Due to third party payors                                                                                                                 |                                      |        | 28,698   |   |              |       | 16,257  |  
|                                                       |  |                                                                                                                                           |                                      |        |          |   |              |      
|Total Current Liabilities                              |  |                                                                                                                                           | 178,805                              |        |          |   | 149,736      |      
|                                                      
|                                                      
|                                                      
|                                                      
|Long-term debt, net of current portion                 |  |                                                                                                                                           | 244,239                              |        |          |   | 261,649      |      
|                                                       |  |                                                                                                                                           |                                      |        |          |   |              |      
|Total Liabilities                                      |  |                                                                                                                                           | 423,044                              |        |          |   | 411,385      |      
|                                                      
|                                                      
|                                                      
|                                                      
|Commitments and Contingencies                          |  |                                                                                                                                           |                                      |        |          |   |              |      
|                                                      
|                                                      
|                                                      
|                                                      
|Minority interest in consolidated subsidiary companies |  |                                                                                                                                           | 5,361                                |        |          |   | 5,176        |      
|                                                      
|                                                      
|                                                      
|                                                      
|Stockholders Equity:                                  |  |                                                                                                                                           |                                      |        |          |   |              |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Common
stock  $.01 par value: Authorized shares - 200,000,000 in 2002
and 2001
Issued shares - 47,109,000 in 2002 and 46,488,000 in 2001 |                                      |        | 471      |   |              |       | 465     |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Capital in excess of par                                                                                                                  |                                      |        | 237,580  |   |              |       | 231,349 |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Retained earnings                                                                                                                         |                                      | 28,701 |          |   |              | 5,924 |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Treasury stock, at cost - 461,000 shares                                                                                                  |                                      |        | (1,560   | ) |              |       | (1,560  | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |  | Accumulated other comprehensive loss                                                                                                      |                                      |        | (164     | ) |              |       | (1,894  | )
|                                                       |  |                                                                                                                                           |                                      |        |          |   |              |      
|Total Stockholders Equity                             |  |                                                                                                                                           | 265,028                              |        |          |   | 234,284      |      
|                                                       |  |                                                                                                                                           |                                      |        |          |   |              |      
|Total Liabilities and Stockholders Equity             |  | $                                                                                                                                         | 693,433                              |        |          | $ | 650,845      |      
|                                                       |  |                                                                                                                                           |                                      |        |          |   |              |      

See accompanying notes.

- 3 -



---



##### Table of Contents






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

|                                                                      |                               |          |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |         |        |       |  
|--------------------------------------------------------------------- | ----------------------------- | -------- | ---------------------------------- | ------- | ------------------------------ | ---- | --------------------------------- | ------- | ------ | ----- | ------- | ------- | ------ | ---- | ------- | ------- | ------ | ----- | -
|                                                                      |                               |          |                                    |         | For the Quarter Ended June 30, |      | For the Six Months Ended June 30,
|                                                                      |                               |          |                                    |         |                                |      |                                  
|                                                                      |                               |          |                                    |         | 2002                           |      | 2001                              |         | 2002   |       | 2001   
|                                                                      |                               |          |                                    |         |                                |      |                                   |         |        |       |        
|Net operating revenues                                                |                               | $        | 280,272                            |         |                                | $    | 234,199                           |         |        | $     | 552,192 |         |        | $    | 459,287 |        
|                                                                      |                               |          |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |        
|Costs and expenses:                                                   |                               |          |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Cost of services              |          |                                    | 228,183 |                                |      |                                   | 188,688 |        |       |         | 449,918 |        |      |         | 369,961 |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | General and administrative    |          |                                    | 9,326   |                                |      |                                   | 8,554   |        |       |         | 19,012  |        |      |         | 16,994  |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Bad debt expense              |          |                                    | 8,577   |                                |      |                                   | 8,305   |        |       |         | 19,020  |        |      |         | 16,648  |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Depreciation and amortization |          |                                    | 6,180   |                                |      |                                   | 7,863   |        |       |         | 12,206  |        |      |         | 15,679  |       
|                                                                      |                               |          |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |        
|Total costs and expenses                                              |                               |          | 252,266                            |         |                                |      | 213,410                           |         |        |       | 500,156 |         |        |      | 419,282 |        
|                                                                      |                               |          |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |        
|Income from operations                                                |                               |          | 28,006                             |         |                                |      | 20,789                            |         |        |       | 52,036  |         |        |      | 40,005  |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Other income and expense:                                             |                               |          |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Interest income                                                       |                               |          | (136                               | )       |                                |      | (39                               | )       |        |       | (207    | )       |        |      | (280    | )      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Interest expense                                                      |                               |          | 6,815                              |         |                                |      | 7,506                             |         |        |       | 13,593  |         |        |      | 15,522  |        
|                                                                      |                               |          |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |        
|Income before minority interests, income taxes
and extraordinary item |                               |          | 21,327                             |         |                                |      | 13,322                            |         |        |       | 38,650  |         |        |      | 24,763  |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Minority interest in consolidated subsidiary companies                |                               |          | 570                                |         |                                |      | 865                               |         |        |       | 1,173   |         |        |      | 2,272   |        
|                                                                      |                               |          |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |        
|Income before income taxes and extraordinary item                     |                               |          | 20,757                             |         |                                |      | 12,457                            |         |        |       | 37,477  |         |        |      | 22,491  |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Income tax expense                                                    |                               |          | 8,156                              |         |                                |      | 4,859                             |         |        |       | 14,700  |         |        |      | 8,772   |        
|                                                                      |                               |          |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |        
|Income before extraordinary item                                      |                               |          | 12,601                             |         |                                |      | 7,598                             |         |        |       | 22,777  |         |        |      | 13,719  |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Extraordinary item (net of tax benefit of $5,547)                     |                               |          |                                   |         |                                |      | 8,676                             |         |        |       |        |         |        |      | 8,676   |        
|                                                                      |                               |          |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |        
|Net income (loss)                                                     |                               | $        | 12,601                             |         |                                | $    | (1,078                            | )       |        | $     | 22,777  |         |        | $    | 5,043   |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Less: Preferred dividends                                             |                               |          |                                   |         |                                |      | (207                              | )       |        |       |        |         |        |      | (2,513  | )      
|                                                                      |                               |          |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |        
|Net income (loss) available to common stockholders                    |                               | $        | 12,601                             |         |                                | $    | (1,285                            | )       |        | $     | 22,777  |         |        | $    | 2,530   |        
|                                                                      |                               |          |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |        
|Net income (loss) per common share:                                   |                               |          |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                               | Basic:   |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |         |        |      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                               |          | Income before extraordinary item   |         | $                              | 0.27 |                                   |         | $      | 0.17  |         |         | $      | 0.49 |         |         | $      | 0.32  |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                               |          | Extraordinary item                 |         |                                |     |                                   |         |        | (0.20 | )       |         |        |     |         |         |        | (0.25 | )
|                                                                      |                               |          |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |        
|                                                                      |                               |          | Net income (loss) per common share |         | $                              | 0.27 |                                   |         | $      | (0.03 | )       |         | $      | 0.49 |         |         | $      | 0.07  |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                               | Diluted: |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |         |        |      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                               |          | Income before extraordinary item   |         | $                              | 0.25 |                                   |         | $      | 0.16  |         |         | $      | 0.46 |         |         | $      | 0.29  |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                               |          | Extraordinary item                 |         |                                |     |                                   |         |        | (0.19 | )       |         |        |     |         |         |        | (0.20 | )
|                                                                      |                               |          |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |        
|                                                                      |                               |          | Net income (loss) per common share |         | $                              | 0.25 |                                   |         | $      | (0.03 | )       |         | $      | 0.46 |         |         | $      | 0.09  |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Weighted average shares outstanding:                                  |                               |          |                                    |         |                                |      |                                   |         |        |       |         |         |        |      |         |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                               | Basic    |                                    |         | 46,442                         |      |                                   |         | 43,259 |       |         |         | 46,262 |      |         |         | 34,417 |      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                               | Diluted  |                                    |         | 49,469                         |      |                                   |         | 47,205 |       |         |         | 49,054 |      |         |         | 41,788 |      

See accompanying notes.

- 4 -



---



##### Table of Contents






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

|                                      |                            |  |              |     |           |   |               |   |            |   |          |       |                    |   |                   |        |               |   |        |   |  |   |        |       |  |  |   |        | 
|------------------------------------- | -------------------------- |  | ------------ | --- | --------- | - | ------------- | - | ---------- | - | -------- | ----- | ------------------ | - | ----------------- | ------ | ------------- | - | ------ | - |  | - | ------ | ----- |  |  | - | ------ | 
|                                      |                            |  |              |     |           |   | Common Stock  |   | Capital in |   | Retained |       | Treasury           |   | Accumulated Other |        | Comprehensive
|                                      |                            |  | Common Stock |     | Par Value |   | Excess of Par |   | Earnings   |   | Stock    |       | Comprehensive Loss |   | Income           
|                                      |                            |  |              |     |           |   |               |   |            |   |          |       |                    |   |                  
|Balance at December 31, 2001          |                            |  | 46,488       |     |           | $ | 465           |   |            | $ | 231,349  |       |                    | $ | 5,924             |        |               | $ | (1,560 | ) |  | $ | (1,894 | )     |  |  |   |       
|                                     
|                                     
|                                     
|                                     
|                                      | Net income                 |  |              |     |           |   |               |   |            |   |          |       |                    |   |                   | 22,777 |               |   |        |   |  |   |        |       |  |  | $ | 22,777 | 
|                                     
|                                     
|                                     
|                                     
|                                      | Other comprehensive income |  |              |     |           |   |               |   |            |   |          |       |                    |   |                   |        |               |   |        |   |  |   |        | 1,730 |  |  |   | 1,730  | 
|                                      |                            |  |              |     |           |   |               |   |            |   |          |       |                    |   |                   |        |               |   |        |   |  |   |        |       |  |  |   |       
|                                      | Total comprehensive income |  |              |     |           |   |               |   |            |   |          |       |                    |   |                   |        |               |   |        |   |  |   |        |       |  |  | $ | 24,507 | 
|                                      |                            |  |              |     |           |   |               |   |            |   |          |       |                    |   |                   |        |               |   |        |   |  |   |        |       |  |  |   |       
|                                      | Issuance of common stock   |  |              | 621 |           |   |               | 6 |            |   |          | 3,887 |                    |   |                   |        |               |   |        |   |  |   |        |       |  |  |   |        | 
|                                     
|                                     
|                                     
|                                     
|Valuation of non-employee options     |                            |  |              |     |           |   |               |   |            |   | 152      |       |                    |   |                   |        |               |   |        |   |  |   |        |       |  |  |   |       
|                                     
|                                     
|                                     
|                                     
|Tax benefit of stock option exercises |                            |  |              |     |           |   |               |   |            |   | 2,192    |       |                    |   |                   |        |               |   |        |   |  |   |        |       |  |  |   |       
|                                      |                            |  |              |     |           |   |               |   |            |   |          |       |                    |   |                   |        |               |   |        |   |  |   |        |       |  |  |   |       
|Balance at June 30, 2002              |                            |  | 47,109       |     |           | $ | 471           |   |            | $ | 237,580  |       |                    | $ | 28,701            |        |               | $ | (1,560 | ) |  | $ | (164   | )     |  |  |   |       
|                                      |                            |  |              |     |           |   |               |   |            |   |          |       |                    |   |                   |        |               |   |        |   |  |   |        |       |  |  |   |       

See accompanying notes.

- 5 -



---



##### Table of Contents






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

|                                                                                  |                                                                                             |                           |         |                                   |         |      |         |        |         |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------- | ------- | --------------------------------- | ------- | ---- | ------- | ------ | ------- | -
|                                                                                  |                                                                                             |                           |         | For the Six Months Ended June 30,
|                                                                                  |                                                                                             |                           |         |                                  
|                                                                                  |                                                                                             |                           |         | 2002                              |         | 2001
|                                                                                  |                                                                                             |                           |         |                                   |         |     
|Operating activities                                                              |                                                                                             |                           |         |                                   |         |      |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income                                                                        |                                                                                             | $                         | 22,777  |                                   |         | $    | 5,043   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                                             |                           |         |                                   |         |      |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Depreciation and amortization                                                               |                           |         | 12,206                            |         |      |         | 15,679 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Provision for bad debts                                                                     |                           |         | 19,020                            |         |      |         | 16,648 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Minority interests                                                                          |                           |         | 1,173                             |         |      |         | 2,272  |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Extraordinary item                                                                          |                           |         |                                  |         |      |         | 8,676  |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |                           |         |                                   |         |      |         |        |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accounts receivable       |         |                                   | (35,895 | )    |         |        | (25,997 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Other current assets      |         |                                   | (1,240  | )    |         |        | 872     |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Other assets              |         |                                   | 1,556   |      |         |        | 5,639   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accounts payable          |         |                                   | (2,379  | )    |         |        | 2,137   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Due to third-party payors |         |                                   | 14,626  |      |         |        | 3,714   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accrued expenses          |         |                                   | 6,882   |      |         |        | 11,518  |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Income taxes              |         |                                   | 11,749  |      |         |        | 5,695   |  
|                                                                                  |                                                                                             |                           |         |                                   |         |      |         |       
|Net cash provided by operating activities                                         |                                                                                             |                           | 50,475  |                                   |         |      | 51,896  |       
|                                                                                  |                                                                                             |                           |         |                                   |         |      |         |       
|Investing activities                                                              |                                                                                             |                           |         |                                   |         |      |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchases of property and equipment, net                                          |                                                                                             |                           | (17,948 | )                                 |         |      | (10,810 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from disposal of assets                                                  |                                                                                             |                           |        |                                   |         |      | 808     |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Earnout payments                                                                  |                                                                                             |                           | (536    | )                                 |         |      | (4,763  | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Acquisition of businesses, net of cash acquired                                   |                                                                                             |                           | (3,303  | )                                 |         |      | (11,723 | )     
|                                                                                  |                                                                                             |                           |         |                                   |         |      |         |       
|Net cash used in investing activities                                             |                                                                                             |                           | (21,787 | )                                 |         |      | (26,488 | )     
|                                                                                  |                                                                                             |                           |         |                                   |         |      |         |       
|Financing activities                                                              |                                                                                             |                           |         |                                   |         |      |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Issuance of 9.5% Senior Subordinated Notes                                        |                                                                                             |                           |        |                                   |         |      | 175,000 |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net repayments on credit facility debt                                            |                                                                                             |                           | (12,981 | )                                 |         |      | (96,000 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Repayment of 10% Senior Subordinated Notes                                        |                                                                                             |                           |        |                                   |         |      | (90,000 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Payment of deferred financing fees                                                |                                                                                             |                           | (67     | )                                 |         |      | (4,681  | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Principal payments on seller and other debt                                       |                                                                                             |                           | (3,947  | )                                 |         |      | (10,561 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from initial public offering, net of fees                                |                                                                                             |                           |        |                                   |         |      | 89,169  |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Redemption of Class A Preferred Stock                                             |                                                                                             |                           |        |                                   |         |      | (52,838 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Payment of Class A and Class B Preferred Stock Dividends                          |                                                                                             |                           |        |                                   |         |      | (19,248 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from issuance of common stock                                            |                                                                                             |                           | 3,893   |                                   |         |      | 10      |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from (repayment of) bank overdrafts                                      |                                                                                             |                           | 3,624   |                                   |         |      | (3,449  | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Distributions to minority interests                                               |                                                                                             |                           | (1,151  | )                                 |         |      | (1,846  | )     
|                                                                                  |                                                                                             |                           |         |                                   |         |      |         |       
|Net cash used in financing activities                                             |                                                                                             |                           | (10,629 | )                                 |         |      | (14,444 | )     
|                                                                                  |                                                                                             |                           |         |                                   |         |      |         |       
|Effect of exchange rate changes on cash
and cash equivalents                      |                                                                                             |                           | 72      |                                   |         |      | (20     | )     
|                                                                                  |                                                                                             |                           |         |                                   |         |      |         |       
|Net increase in cash and cash equivalents                                         |                                                                                             |                           | 18,131  |                                   |         |      | 10,944  |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash and cash equivalents at beginning of period                                  |                                                                                             |                           | 10,703  |                                   |         |      | 3,151   |       
|                                                                                  |                                                                                             |                           |         |                                   |         |      |         |       
|Cash and cash equivalents at end of period                                        |                                                                                             | $                         | 28,834  |                                   |         | $    | 14,095  |       
|                                                                                  |                                                                                             |                           |         |                                   |         |      |         |       
|Supplemental Cash Flow Information                                                |                                                                                             |                           |         |                                   |         |      |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash paid for interest                                                            |                                                                                             | $                         | 11,794  |                                   |         | $    | 15,423  |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash paid for income taxes                                                        |                                                                                             | $                         | 3,358   |                                   |         | $    | 2,328   |       

See accompanying notes.

- 6 -



---



##### Table of Contents






NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.  Basis of Presentation

The unaudited condensed consolidated financial statements of Select
Medical Corporation (the Company) as of June 30, 2002 and for the three and
six month periods ended June 30, 2002 and 2001, have been prepared in
accordance with generally accepted accounting principles. In the opinion of
management, such information contains all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
for such periods. All intercompany transactions and balances have been
eliminated. The results of operations for the three and six months ended June
30, 2002 are not necessarily indicative of the results to be expected for the
full fiscal year ending December 31, 2002.

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, 2001
contained in the Companys Form 10-K filed with the Securities Exchange
Commission.

2.  Accounting Policies

Reclassifications

Certain amounts on the December 31, 2001 consolidated balance sheet have
been reclassified to conform to the classifications used on the June 30, 2002
consolidated balance sheet.

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.

Recent Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
SFAS No. 146 requires recording costs associated with exit or disposal
activities at their fair values when a liability has been incurred. Under
previous guidance, certain exit costs were accrued upon managements commitment
to an exit plan, which is generally before an actual liability has been
incurred. Adoption of SFAS No. 146 is required with the beginning of fiscal
year 2003. The Company does not anticipate a significant impact on its results
of operations from adopting this Statement.

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
1999, 2000 and 2001 as a result of debt extinguishments. The provisions of
SFAS 145 that affect the

- 7 -



---



##### Table of Contents



Company are effective for fiscal periods beginning
after May 15, 2002 although, early adoption of SFAS 145 is permitted. The
Company believes that the adoption of SFAS 145 will require the
reclassification of its extraordinary items recorded in 1999, 2000 and 2001 to
the other income and expense category of its consolidated statement of
operations.

In October 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets
which is effective for financial statements issued for fiscal years beginning
after December 15, 2001. SFAS No. 144 supersedes the accounting provisions of APB 30 that address
the disposal of a segment of a business and requires that such long-lived
assets be reported at fair value less cost to sell. SFAS No. 144 requires that
long-lived assets to be abandoned, exchanged for similar productive assets or
distributed to owners in a spin-off be considered held for use until they are
abandoned, exchanged or distributed. It also eliminates the exception to
consolidation for a subsidiary while control is expected to be temporary. The
Company adopted SFAS No. 144 on January 1, 2002 with no material effect on net
income.

3.  Stock Option Plans

On April 11, 2002, the Companys Board of Directors adopted the Select
Medical Corporation Second Amended and Restated 1997 Stock Option Plan, which
was approved by the stockholders on May 13, 2002. The amended plan provides
for the grant of non-qualified stock options to key employees to purchase an
additional 3,000,000 shares of common stock. A substantial portion of these
options are Performance Accelerated Vesting Options. The Performance
Accelerated Vesting Options will vest and become exercisable on the seventh
anniversary of the grant of such options, but the vesting schedule for these
options will be accelerated if the Company meets or exceeds its
performance-based targets of earnings per share (EPS) and return on equity
(ROE). The EPS target for 2002 is $0.84 and for each subsequent year, the EPS
target will be calculated by increasing the immediately preceding years EPS
target by fifteen percent. The ROE target for 2002 is 13.5%, and for each
subsequent year the ROE target shall be determined by increasing the target
percentage for the immediately preceding year by .5%. Twenty percent (20%) of
a grant of Performance Accelerated Vesting Options shall vest and become
exercisable after the completion of each fiscal year in which the Company meets
or exceeds both its earnings per share and return on equity targets. No
accelerated vesting shall occur in years in which the Company fails to meet
either of its targets. In addition, if the Company meets both of these targets
in 2002, 2003 and 2004, and the Companys earnings per share for fiscal year
2004 is greater than or equal to $1.21, then all Performance Accelerated
Vesting Options will become fully vested and immediately exercisable.

On February 12, 2002, the Companys Board of Directors adopted the 2002
Non-Employee Directors Plan, which was amended on April 11, 2002, and approved
by the stockholders on May 13, 2002. Under the terms of the Non-Employee
Directors Plan, directors who are not employees of the Company may be granted
non-qualified stock options to purchase up to 250,000 shares of the Companys
common stock (such number being subject to adjustment under the terms of the
plan), at a price of not less than 100% of the market price on the date the
option is granted. Options expire no later than ten years after the date of
grant. On February 12, 2002, the Company granted 28,000 options at $14.04 per
share.

During the six months ended June 30, 2002, the Company granted stock
options under its Second Amended and Restated 1997 Stock Option Plan totaling
4,284,080 shares of Common Stock at exercise prices ranging from $12.66 to
$15.25 per share. Of this amount, 2,294,200 were issued as Performance
Accelerated Vesting Options.

- 8 -



---



##### Table of Contents



4.  Segment Information

The Companys segments consist of (i) inpatient 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 EBITDA of the respective business units.
EBITDA is defined as earnings before interest, minority interest, income taxes,
depreciation and amortization and extraordinary item. All segment revenues are
from external customers.

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

|                     |  |                                  |             |                |  |           |             |       |  |   |            |   |  |   |             | 
|-------------------- |  | -------------------------------- | ----------- | -------------- |  | --------- | ----------- | ----- |  | - | ---------- | - |  | - | ----------- | 
|                     |  | Three Months Ended June 30, 2002
|                     |  |                                 
|                     |  | Specialty                        |             | Outpatient     |  |           |             |       |  |   |            |  
|                     |  | Hospitals                        |             | Rehabilitation |  | All Other |             | Total
|                     |  |                                  |             |                |  |           |             |      
|Net revenue          |  | $                                | 152,073,000 |                |  | $         | 124,639,000 |       |  | $ | 3,560,000  |   |  | $ | 280,272,000 | 
|                    
|                    
|                    
|                    
|EBITDA               |  |                                  | 17,281,000  |                |  |           | 23,075,000  |       |  |   | (6,170,000 | ) |  |   | 34,186,000  | 
|                    
|                    
|                    
|                    
|Total assets         |  |                                  | 315,115,000 |                |  |           | 330,800,000 |       |  |   | 47,518,000 |   |  |   | 693,433,000 | 
|                    
|                    
|                    
|                    
|Capital expenditures |  |                                  | 6,257,000   |                |  |           | 2,492,000   |       |  |   | 240,000    |   |  |   | 8,989,000   | 

|                     |  |                                  |             |                |  |           |             |       |  |   |            |   |  |   |             | 
|-------------------- |  | -------------------------------- | ----------- | -------------- |  | --------- | ----------- | ----- |  | - | ---------- | - |  | - | ----------- | 
|                     |  | Three Months Ended June 30, 2001
|                     |  |                                 
|                     |  | Specialty                        |             | Outpatient     |  |           |             |       |  |   |            |  
|                     |  | Hospitals                        |             | Rehabilitation |  | All Other |             | Total
|                     |  |                                  |             |                |  |           |             |      
|Net revenue          |  | $                                | 119,035,000 |                |  | $         | 111,958,000 |       |  | $ | 3,206,000  |   |  | $ | 234,199,000 | 
|                    
|                    
|                    
|                    
|EBITDA               |  |                                  | 13,583,000  |                |  |           | 20,631,000  |       |  |   | (5,562,000 | ) |  |   | 28,652,000  | 
|                    
|                    
|                    
|                    
|Total assets         |  |                                  | 262,027,000 |                |  |           | 311,375,000 |       |  |   | 39,106,000 |   |  |   | 612,508,000 | 
|                    
|                    
|                    
|                    
|Capital expenditures |  |                                  | 3,254,000   |                |  |           | 2,024,000   |       |  |   | 207,000    |   |  |   | 5,485,000   | 

|                     |  |                                |             |                |  |           |             |       |  |   |             |   |  |   |             | 
|-------------------- |  | ------------------------------ | ----------- | -------------- |  | --------- | ----------- | ----- |  | - | ----------- | - |  | - | ----------- | 
|                     |  | Six Months Ended June 30, 2002
|                     |  |                               
|                     |  | Specialty                      |             | Outpatient     |  |           |             |       |  |   |             |  
|                     |  | Hospitals                      |             | Rehabilitation |  | All Other |             | Total
|                     |  |                                |             |                |  |           |             |      
|Net revenue          |  | $                              | 300,901,000 |                |  | $         | 244,333,000 |       |  | $ | 6,958,000   |   |  | $ | 552,192,000 | 
|                    
|                    
|                    
|                    
|EBITDA               |  |                                | 32,948,000  |                |  |           | 44,123,000  |       |  |   | (12,829,000 | ) |  |   | 64,242,000  | 
|                    
|                    
|                    
|                    
|Total assets         |  |                                | 315,115,000 |                |  |           | 330,800,000 |       |  |   | 47,518,000  |   |  |   | 693,433,000 | 
|                    
|                    
|                    
|                    
|Capital expenditures |  |                                | 12,440,000  |                |  |           | 4,927,000   |       |  |   | 581,000     |   |  |   | 17,948,000  | 

|                     |  |                                |             |                |  |           |             |       |  |   |             |   |  |   |             | 
|-------------------- |  | ------------------------------ | ----------- | -------------- |  | --------- | ----------- | ----- |  | - | ----------- | - |  | - | ----------- | 
|                     |  | Six Months Ended June 30, 2001
|                     |  |                               
|                     |  | Specialty                      |             | Outpatient     |  |           |             |       |  |   |             |  
|                     |  | Hospitals                      |             | Rehabilitation |  | All Other |             | Total
|                     |  |                                |             |                |  |           |             |      
|Net revenue          |  | $                              | 232,185,000 |                |  | $         | 220,631,000 |       |  | $ | 6,471,000   |   |  | $ | 459,287,000 | 
|                    
|                    
|                    
|                    
|EBITDA               |  |                                | 26,978,000  |                |  |           | 39,686,000  |       |  |   | (10,980,000 | ) |  |   | 55,684,000  | 
|                    
|                    
|                    
|                    
|Total assets         |  |                                | 262,027,000 |                |  |           | 311,375,000 |       |  |   | 39,106,000  |   |  |   | 612,508,000 | 
|                    
|                    
|                    
|                    
|Capital expenditures |  |                                | 6,309,000   |                |  |           | 3,766,000   |       |  |   | 735,000     |   |  |   | 10,810,000  | 

- 9 -



---



##### Table of Contents



A reconciliation of EBITDA to net income (loss) is as follows:

|                              |  |                                     |            |                                   |  |      |            |      |  |   |             |   |  |   |             |  
|----------------------------- |  | ----------------------------------- | ---------- | --------------------------------- |  | ---- | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                              |  | For the three months ended June 30, |            | For the six months ended June 30,
|                              |  |                                     |            |                                  
|                              |  | 2002                                |            | 2001                              |  | 2002 |            | 2001
|                              |  |                                     |            |                                   |  |      |            |     
|EBITDA                        |  | $                                   | 34,186,000 |                                   |  | $    | 28,652,000 |      |  | $ | 64,242,000  |   |  | $ | 55,684,000  |  
|                             
|                             
|                             
|                             
|Depreciation and amortization |  |                                     | (6,180,000 | )                                 |  |      | (7,863,000 | )    |  |   | (12,206,000 | ) |  |   | (15,679,000 | )
|                             
|                             
|                             
|                             
|Interest income               |  |                                     | 136,000    |                                   |  |      | 39,000     |      |  |   | 207,000     |   |  |   | 280,000     |  
|                             
|                             
|                             
|                             
|Interest expense              |  |                                     | (6,815,000 | )                                 |  |      | (7,506,000 | )    |  |   | (13,593,000 | ) |  |   | (15,522,000 | )
|                             
|                             
|                             
|                             
|Minority interest             |  |                                     | (570,000   | )                                 |  |      | (865,000   | )    |  |   | (1,173,000  | ) |  |   | (2,272,000  | )
|                             
|                             
|                             
|                             
|Income tax expense            |  |                                     | (8,156,000 | )                                 |  |      | (4,859,000 | )    |  |   | (14,700,000 | ) |  |   | (8,772,000  | )
|                             
|                             
|                             
|                             
|Extraordinary item            |  |                                     |           |                                   |  |      | (8,676,000 | )    |  |   |            |   |  |   | (8,676,000  | )
|                              |  |                                     |            |                                   |  |      |            |      |  |   |             |   |  |   |             |  
|Net income (loss)             |  | $                                   | 12,601,000 |                                   |  | $    | (1,078,000 | )    |  | $ | 22,777,000  |   |  | $ | 5,043,000   |  
|                              |  |                                     |            |                                   |  |      |            |      |  |   |             |   |  |   |             |  

5.  Restructuring Charges

The following summarizes the Companys restructuring activity:

|                     |  |                   |           |           |  |       |         |   |  |   |           |  
|-------------------- |  | ----------------- | --------- | --------- |  | ----- | ------- | - |  | - | --------- | -
|                     |  | Lease Termination |           |           |  |       |         |   |  |  
|                     |  | Costs             |           | Severance |  | Total
|                     |  |                   |           |           |  |      
|December 31, 2001    |  | $                 | 1,687,000 |           |  | $     | 132,000 |   |  | $ | 1,819,000 |  
|                    
|                    
|                    
|                    
|Amounts paid in 2002 |  |                   | (632,000  | )         |  |       | (45,000 | ) |  |   | (677,000  | )
|                     |  |                   |           |           |  |       |         |   |  |   |           |  
|June 30, 2002        |  | $                 | 1,055,000 |           |  | $     | 87,000  |   |  | $ | 1,142,000 |  
|                     |  |                   |           |           |  |       |         |   |  |   |           |  

Management expects to pay out the remaining restructuring reserves through 2003
which is consistent with the original plan.

6.  Intangible Assets

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.
Under SFAS No. 142, goodwill and other intangible assets with indefinite lives
are no longer subject to periodic amortization but are instead reviewed
annually, or more frequently if impairment indicators arise. Additionally, a
transitional impairment test is required within six months of the date of
adoption utilizing data as of the beginning of the year. These reviews require
the Company to estimate the fair value of its identified reporting units and
compare those estimates against the related carrying values. For each of the
reporting units, the estimated fair value is determined utilizing the expected
present value of the future cash flows of the units.

During the quarter ended March 31, 2002, the Company conducted its initial
transition test. In all instances, the estimated fair value of the reporting
units exceeded their book values and therefore no write-down of goodwill was
required at January 1, 2002.

Amortization expense for intangible assets for the six months ended June
30, 2002 was $390,000. Estimated amortization expense for intangible assets
for each of the five years commencing January 1, 2002 will be approximately
$553,000.

- 10 -



---



##### Table of Contents



Intangible assets consist of the following:

|                               |       |   |                     |             |              |   |            |   | 
|------------------------------ | ----- | - | ------------------- | ----------- | ------------ | - | ---------- | - | 
|                               |       |   | As of June 30, 2002
|                               |       |   |                    
|                               |       |   | Gross Carrying      |             | Accumulated 
|                               |       |   | Amount              |             | Amortization
|                               |       |   |                     |             |             
|Amortized intangible assets    |       |   |                     |             |              |   |            |  
|                              
|                              
|                              
|                              
|Management services agreements |       | $ | 11,404,000          |             |              | $ | (2,159,000 | )
|                              
|                              
|                              
|                              
|Unamortized intangible assets  |       |   |                     |             |              |   |            |  
|                              
|                              
|                              
|                              
|Goodwill                       |       | $ | 203,771,000         |             |              |   |            |  
|                              
|                              
|                              
|                              
|Trademarks                     |       |   | 37,875,000          |             |              |   |            |  
|                               |       |   |                     |             |              |   |            |  
|                               | Total |   | $                   | 241,646,000 |              |   |            |   | 
|                               |       |   |                     |             |              |   |            |  

The following table reflects unaudited pro forma results of operations,
net of related tax effect, of the Company, giving effect to SFAS No. 142 as if
it were adopted on January 1, 2001:

|                                 |  |                                |            |                                   |  |      |            |      |  |   |            |  |  |   |           | 
|-------------------------------- |  | ------------------------------ | ---------- | --------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- |  |  | - | --------- | 
|                                 |  | For the Quarter Ended June 30, |            | For the Six Months Ended June 30,
|                                 |  |                                |            |                                  
|                                 |  | 2002                           |            | 2001                              |  | 2002 |            | 2001
|                                 |  |                                |            |                                   |  |      |            |     
|Reported net income (loss)       |  | $                              | 12,601,000 |                                   |  | $    | (1,078,000 | )    |  | $ | 22,777,000 |  |  | $ | 5,043,000 | 
|                                
|                                
|                                
|                                
|Add back: Goodwill amortization  |  |                                |           |                                   |  |      | 1,237,000  |      |  |   |           |  |  |   | 2,469,000 | 
|                                
|                                
|                                
|                                
|Add back: Trademark amortization |  |                                |           |                                   |  |      | 152,000    |      |  |   |           |  |  |   | 304,000   | 
|                                 |  |                                |            |                                   |  |      |            |      |  |   |            |  |  |   |           | 
|Adjusted net income              |  | $                              | 12,601,000 |                                   |  | $    | 311,000    |      |  | $ | 22,777,000 |  |  | $ | 7,816,000 | 
|                                 |  |                                |            |                                   |  |      |            |      |  |   |            |  |  |   |           | 
|Basic earnings per share:        |  |                                |            |                                   |  |      |            |      |  |   |            |  |  |   |           | 
|                                
|                                
|                                
|                                
|Reported net income (loss)       |  | $                              | 0.27       |                                   |  | $    | (0.03      | )    |  | $ | 0.49       |  |  | $ | 0.07      | 
|                                
|                                
|                                
|                                
|Goodwill amortization            |  |                                |           |                                   |  |      | 0.03       |      |  |   |           |  |  |   | 0.07      | 
|                                
|                                
|                                
|                                
|Trademark amortization           |  |                                |           |                                   |  |      |           |      |  |   |           |  |  |   | 0.01      | 
|                                 |  |                                |            |                                   |  |      |            |      |  |   |            |  |  |   |           | 
|Adjusted net income              |  | $                              | 0.27       |                                   |  | $    |           |      |  | $ | 0.49       |  |  | $ | 0.15      | 
|                                 |  |                                |            |                                   |  |      |            |      |  |   |            |  |  |   |           | 
|Diluted earnings per share:      |  |                                |            |                                   |  |      |            |      |  |   |            |  |  |   |           | 
|                                
|                                
|                                
|                                
|Reported net income (loss)       |  | $                              | 0.25       |                                   |  | $    | (0.03      | )    |  | $ | 0.46       |  |  | $ | 0.09      | 
|                                
|                                
|                                
|                                
|Goodwill amortization            |  |                                |           |                                   |  |      | 0.03       |      |  |   |           |  |  |   | 0.06      | 
|                                
|                                
|                                
|                                
|Trademark amortization           |  |                                |           |                                   |  |      |           |      |  |   |           |  |  |   | 0.01      | 
|                                 |  |                                |            |                                   |  |      |            |      |  |   |            |  |  |   |           | 
|Adjusted net income              |  | $                              | 0.25       |                                   |  | $    |           |      |  | $ | 0.46       |  |  | $ | 0.16      | 
|                                 |  |                                |            |                                   |  |      |            |      |  |   |            |  |  |   |           | 

- 11 -



---



##### Table of Contents



The changes in the carrying amount of goodwill for the Companys reportable
segments for the six months ended June 30, 2002, are as follows:

|                               |  |                     |            |                |  |            |             |       |  |   |         |  |  |   |             |  
|------------------------------ |  | ------------------- | ---------- | -------------- |  | ---------- | ----------- | ----- |  | - | ------- |  |  | - | ----------- | -
|                               |  |                     |            |                |  | Outpatient |             |       |  |   |         |  |  |  
|                               |  | Specialty Hospitals |            | Rehabilitation |  | All Other  |             | Total
|                               |  |                     |            |                |  |            |             |      
|Balance as of January 1, 2002  |  | $                   | 84,391,000 |                |  | $          | 114,875,000 |       |  | $ | 584,000 |  |  | $ | 199,850,000 |  
|                              
|                              
|                              
|                              
|Goodwill acquired during year  |  |                     |           |                |  |            | 4,466,000   |       |  |   |        |  |  |   | 4,466,000   |  
|                              
|                              
|                              
|                              
|Income tax benefits recognized |  |                     |           |                |  |            | (1,939,000  | )     |  |   |        |  |  |   | (1,939,000  | )
|                              
|                              
|                              
|                              
|Earn-out payments              |  |                     |           |                |  |            | 536,000     |       |  |   |        |  |  |   | 536,000     |  
|                              
|                              
|                              
|                              
|Translation adjustment         |  |                     |           |                |  |            | 867,000     |       |  |   |        |  |  |   | 867,000     |  
|                              
|                              
|                              
|                              
|Other                          |  |                     |           |                |  |            | (9,000      | )     |  |   |        |  |  |   | (9,000      | )
|                               |  |                     |            |                |  |            |             |       |  |   |         |  |  |   |             |  
|Balance as of June 30, 2002    |  | $                   | 84,391,000 |                |  | $          | 118,796,000 |       |  | $ | 584,000 |  |  | $ | 203,771,000 |  
|                               |  |                     |            |                |  |            |             |       |  |   |         |  |  |   |             |  

7.  Net Income (Loss) per Share

The following table sets forth the computation of basic and diluted earnings
(loss) per share:

|                                                                                                    |                                                                                                                     |   |                             |            |                           |   |            |            |      |   |            |            |  |   |            |            | 
|--------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | - | --------------------------- | ---------- | ------------------------- | - | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                                                                                    |                                                                                                                     |   | Three Months Ended June 30, |            | Six Months Ended June 30,
|                                                                                                    |                                                                                                                     |   |                             |            |                          
|                                                                                                    |                                                                                                                     |   | 2002                        |            | 2001                      |   | 2002       |            | 2001
|                                                                                                    |                                                                                                                     |   |                             |            |                           |   |            |            |     
|Numerator:                                                                                          |                                                                                                                     |   |                             |            |                           |   |            |            |      |   |            |            |  |   |            |           
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Net income before extraordinary item                                                                |                                                                                                                     | $ | 12,601,000                  |            |                           | $ | 7,598,000  |            |      | $ | 22,777,000 |            |  | $ | 13,719,000 |           
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Extraordinary item, net of $5,547,000 tax benefit                                                   |                                                                                                                     |   |                            |            |                           |   | (8,676,000 | )          |      |   |           |            |  |   | (8,676,000 | )         
|                                                                                                    |                                                                                                                     |   |                             |            |                           |   |            |            |      |   |            |            |  |   |            |           
|Net income (loss)                                                                                   |                                                                                                                     |   | 12,601,000                  |            |                           |   | (1,078,000 | )          |      |   | 22,777,000 |            |  |   | 5,043,000  |           
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Less: Class A and Class B Preferred stock                      dividends                                            |   |                             |           |                           |   |            | 207,000    |      |   |            |           |  |   |            | 2,513,000  | 
|                                                                                                    |                                                                                                                     |   |                             |            |                           |   |            |            |      |   |            |            |  |   |            |           
|                                                                                                    | Numerator for basic earnings per share  income (loss)
available to common stockholders                             |   |                             | 12,601,000 |                           |   |            | (1,285,000 | )    |   |            | 22,777,000 |  |   |            | 2,530,000  | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Effect of dilutive securities:                                                                      |                                                                                                                     |   |                             |            |                           |   |            |            |      |   |            |            |  |   |            |           
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Class B Preferred stock dividends                                                                                   |   |                             |           |                           |   |            | 61,000     |      |   |            |           |  |   |            | 1,067,000  | 
|                                                                                                    |                                                                                                                     |   |                             |            |                           |   |            |            |      |   |            |            |  |   |            |           
|                                                                                                    | Numerator for diluted earnings per share  income (loss)
available to common stockholders after assumed
conversions |   | $                           | 12,601,000 |                           |   | $          | (1,224,000 | )    |   | $          | 22,777,000 |  |   | $          | 3,597,000  | 
|                                                                                                    |                                                                                                                     |   |                             |            |                           |   |            |            |      |   |            |            |  |   |            |           
|Denominator:                                                                                        |                                                                                                                     |   |                             |            |                           |   |            |            |      |   |            |            |  |   |            |           
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Denominator for basic earnings per share weighted
average shares                                                   |   |                             | 46,442,000 |                           |   |            | 43,259,000 |      |   |            | 46,262,000 |  |   |            | 34,417,000 | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Effect of dilutive securities:                                                                                      |   |                             |            |                           |   |            |            |      |   |            |            |  |   |            |            | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | a) Stock options                                                                                                    |   |                             | 1,884,000  |                           |   |            | 1,887,000  |      |   |            | 1,706,000  |  |   |            | 1,387,000  | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | b) Warrants                                                                                                         |   |                             | 1,143,000  |                           |   |            | 1,046,000  |      |   |            | 1,086,000  |  |   |            | 892,000    | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | c) Convertible preferred stock                                                                                      |   |                             |           |                           |   |            | 1,013,000  |      |   |            |           |  |   |            | 5,092,000  | 
|                                                                                                    |                                                                                                                     |   |                             |            |                           |   |            |            |      |   |            |            |  |   |            |           
|Denominator for diluted earnings per share-adjusted
weighted average shares and assumed conversions |                                                                                                                     |   | 49,469,000                  |            |                           |   | 47,205,000 |            |      |   | 49,054,000 |            |  |   | 41,788,000 |           
|                                                                                                    |                                                                                                                     |   |                             |            |                           |   |            |            |      |   |            |            |  |   |            |           

- 12 -



---



##### Table of Contents



|                                        |                                        |   |                             |      |                           |   |      |       |      |   |      |      |  |   |      |       |  
|--------------------------------------- | -------------------------------------- | - | --------------------------- | ---- | ------------------------- | - | ---- | ----- | ---- | - | ---- | ---- |  | - | ---- | ----- | -
|                                        |                                        |   | Three Months Ended June 30, |      | Six Months Ended June 30,
|                                        |                                        |   |                             |      |                          
|                                        |                                        |   | 2002                        |      | 2001                      |   | 2002 |       | 2001
|                                        |                                        |   |                             |      |                           |   |      |       |     
|Basic income (loss) per common share:   |                                        |   |                             |      |                           |   |      |       |      |   |      |      |  |   |      |      
|                                       
|                                       
|                                       
|                                       
|Income before extraordinary item        |                                        | $ | 0.27                        |      |                           | $ | 0.17 |       |      | $ | 0.49 |      |  | $ | 0.32 |      
|                                       
|                                       
|                                       
|                                       
|                                        | Extraordinary item                     |   |                             |     |                           |   |      | (0.20 | )    |   |      |     |  |   |      | (0.25 | )
|                                        |                                        |   |                             |      |                           |   |      |       |      |   |      |      |  |   |      |      
|                                        | Income (loss) per common share         |   | $                           | 0.27 |                           |   | $    | (0.03 | )    |   | $    | 0.49 |  |   | $    | 0.07  |  
|                                        |                                        |   |                             |      |                           |   |      |       |      |   |      |      |  |   |      |      
|Diluted income (loss) per common share: |                                        |   |                             |      |                           |   |      |       |      |   |      |      |  |   |      |      
|                                       
|                                       
|                                       
|                                       
|Income before extraordinary item        |                                        | $ | 0.25                        |      |                           | $ | 0.16 |       |      | $ | 0.46 |      |  | $ | 0.29 |      
|                                       
|                                       
|                                       
|                                       
|                                        | Extraordinary item                     |   |                             |     |                           |   |      | (0.19 | )    |   |      |     |  |   |      | (0.20 | )
|                                        |                                        |   |                             |      |                           |   |      |       |      |   |      |      |  |   |      |      
|                                        | Diluted income (loss) per common share |   | $                           | 0.25 |                           |   | $    | (0.03 | )    |   | $    | 0.46 |  |   | $    | 0.09  |  
|                                        |                                        |   |                             |      |                           |   |      |       |      |   |      |      |  |   |      |      

8.  Supplemental Disclosures of Cash Flow Information

Non-cash investing and financing activities are comprised of the following
for the six months ended June 30, 2002 and 2001:

|                                                |  |      |           |      |  |   |            | 
|----------------------------------------------- |  | ---- | --------- | ---- |  | - | ---------- | 
|                                                |  | 2002 |           | 2001
|                                                |  |      |           |     
|Conversion of preferred stock into common stock |  | $    |          |      |  | $ | 60,000,000 | 
|                                               
|                                               
|                                               
|                                               
|Preferred stock dividends                       |  | $    |          |      |  | $ |           | 
|                                               
|                                               
|                                               
|                                               
|Minority interest repurchase                    |  | $    |          |      |  | $ | 4,973,000  | 
|                                               
|                                               
|                                               
|                                               
|Notes issued with acquisitions                  |  | $    | 1,380,000 |      |  | $ |           | 
|                                               
|                                               
|                                               
|                                               
|Tax benefit of stock option exercises           |  | $    | 2,192,000 |      |  | $ |           | 

9.  Commitments and Contingencies

Litigation

On August 10, 1998 a complaint in the U.S. District Court for the Eastern
District of Pennsylvania was filed that named as defendants NovaCare, Inc. (now
known as NAHC, Inc.), other named defendants and 100 defendants who were to be
named at a later time. This qui tamaction sought triple damages and penalties
under the False Claims Act against NAHC. The Department of Justice did not
intervene in this action. The allegations involve, among other things, the
distinction between individual and group billing in physical rehabilitation
clinics that the Company acquired from NovaCare. On October 16, 2000 the
relator plaintiff made a motion to amend the complaint to, among other things,
add Select Medical Corporation and some of its subsidiaries acquired in the
NovaCare acquisition as defendants in this case. This motion was granted in
September of 2001. The amended complaint alleges that from about January 1,
1995 through the present, the defendants submitted false or fraudulent bills
for physical therapy to various federal health programs. The United States
Attorneys Office has asserted that because the complaint is being amended to
add allegations against new defendants, it is entitled to a new period to
determine whether to intervene in the new allegations. On January 3, 2002,
NAHC entered into a settlement agreement with the relator plaintiff and the
government, pursuant to which, in exchange for a payment by NAHC of $375,000,
the parties settled all claims arising out of conduct that took place before
the Companys acquisition of the NovaCare subsidiaries that are defendants in
the case. Claims against the Company and the NovaCare subsidiaries regarding
conduct occurring after the NovaCare acquisition were not settled. As of July
31, 2002, the government had not advised the Company whether it intends to
intervene in any remaining claims, and the Company and the subsidiaries have
not been served with the amended
complaint. Based on a review of the amended complaint, the Company does
not believe that this lawsuit is meritorious and intends to vigorously defend
against this action. However, because of the uncertain nature of the
litigation, the Company cannot predict the outcome of this matter.

- 13 -



---



##### Table of Contents



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 under the Companys insurance
policies, as well as claims that were covered under policies issued by PHICO
Insurance Company, which are discussed below. 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.

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 issuers. Currently, the Company has approximately
19 unsettled cases in 9 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 on
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, subrogation 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 guarantee
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.

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

The Company conducts a significant portion of its business through its
subsidiaries. Presented below is condensed consolidating financial information
for the Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries
at June 30, 2002 and for the six months ended June 30, 2002 and 2001.

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:

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

- 14 -



---



##### Table of Contents



|                                                       |                                      |                                                     |         |                                       |         |                       |         |              |         |               |         |              |        |   |          |          |      |   |         |         |        | 
|------------------------------------------------------ | ------------------------------------ | --------------------------------------------------- | ------- | ------------------------------------- | ------- | --------------------- | ------- | ------------ | ------- | ------------- | ------- | ------------ | ------ | - | -------- | -------- | ---- | - | ------- | ------- | ------ | 
|                                                       |                                      |                                                     |         | Select Medical Corporation           
|                                                       |                                      |                                                     |         | Condensed Consolidating Balance Sheet
|                                                       |                                      |                                                     |         | June
30, 2002                        
|                                                       |                                      |                                                     |         |                                      
|                                                       |                                      |                                                     |         | Select Medical Corporation            |         |                       |         |              |         | Non-Guarantor |         |              |        |   |          |          |      |  
|                                                       |                                      |                                                     |         | (Parent Company Only)                 |         | Subsidiary Guarantors |         | Subsidiaries |         | Eliminations  |         | Consolidated
|                                                       |                                      |                                                     |         |                                       |         |                       |         |              |         |               |         |             
|                                                       |                                      |                                                     |         | (dollars in thousands)               
|Assets                                                 |                                      |                                                     |         |                                       |         |                       |         |              |         |               |         |              |        |   |          |          |      |   |         |         |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Current Assets:                      |                                                     |         |                                       |         |                       |         |              |         |               |         |              |        |   |          |          |      |   |         |         |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Cash and cash equivalents            |                                                     | $       | 20,724                                |         |                       | $       | 6,418        |         |               | $       | 1,692        |        |   | $        |         |      |   | $       | 28,834  |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accounts receivable, net             |                                                     |         | (367                                  | )       |                       |         | 200,348      |         |               |         | 35,560       |        |   |          |         |      |   |         | 235,541 |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Current deferred tax asset           |                                                     |         | 1,881                                 |         |                       |         | 27,054       |         |               |         | 7            |        |   |          |         |      |   |         | 28,942  |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Other current assets                 |                                                     |         | 2,425                                 |         |                       |         | 13,328       |         |               |         | 2,754        |        |   |          |         |      |   |         | 18,507  |       
|                                                       |                                      |                                                     |         |                                       |         |                       |         |              |         |               |         |              |        |   |          |          |      |   |         |         |        | 
|Total Current Assets                                   |                                      |                                                     | 24,663  |                                       |         |                       | 247,148 |              |         |               | 40,013  |              |        |   |         |          |      | $ | 311,824 |        
|                                                      
|                                                      
|                                                      
|                                                      
|Property and equipment, net                            |                                      |                                                     | 6,584   |                                       |         |                       | 71,500  |              |         |               | 20,515  |              |        |   |         |          |      |   | 98,599  |        
|                                                      
|                                                      
|                                                      
|                                                      
|Investment in affiliates                               |                                      |                                                     | 330,454 |                                       |         |                       | 68,013  |              |         |               |        |              |        |   | (398,467 | )(a)     |      |   |        |        
|                                                      
|                                                      
|                                                      
|                                                      
|Goodwill                                               |                                      |                                                     | 5,854   |                                       |         |                       | 160,410 |              |         |               | 37,507  |              |        |   |         |          |      |   | 203,771 |        
|                                                      
|                                                      
|                                                      
|                                                      
|Trademark                                              |                                      |                                                     |        |                                       |         |                       | 37,875  |              |         |               |        |              |        |   |         |          |      |   | 37,875  |        
|                                                      
|                                                      
|                                                      
|                                                      
|Other intangibles                                      |                                      |                                                     |        |                                       |         |                       | 961     |              |         |               | 8,284   |              |        |   |         |          |      |   | 9,245   |        
|                                                      
|                                                      
|                                                      
|                                                      
|Non-current deferred tax asset                         |                                      |                                                     | (31     | )                                     |         |                       | 5,134   |              |         |               |        |              |        |   |         |          |      |   | 5,103   |        
|                                                      
|                                                      
|                                                      
|                                                      
|Other assets                                           |                                      |                                                     | 11,344  |                                       |         |                       | 15,105  |              |         |               | 567     |              |        |   |         |          |      |   | 27,016  |        
|                                                       |                                      |                                                     |         |                                       |         |                       |         |              |         |               |         |              |        |   |          |          |      |   |         |        
|Total
Assets                                           |                                      | $                                                   | 378,868 |                                       |         | $                     | 606,146 |              |         | $             | 106,886 |              |        | $ | (398,467 | )        |      | $ | 693,433 |        
|                                                       |                                      |                                                     |         |                                       |         |                       |         |              |         |               |         |              |        |   |          |          |      |   |         |        
|Liabilities and Stockholders Equity                   |                                      |                                                     |         |                                       |         |                       |         |              |         |               |         |              |        |   |          |          |      |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Current Liabilities:                 |                                                     |         |                                       |         |                       |         |              |         |               |         |              |        |   |          |          |      |   |         |         |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                      | Bank overdrafts                                     |         | $                                     | 9,707   |                       |         | $            |        |               |         | $            |       |   |          | $        |     |   |         | $       | 9,707  | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                      | Current portion of long-term debt and notes payable |         |                                       | 570     |                       |         |              | 28,048  |               |         |              | 18     |   |          |          |     |   |         |         | 28,636 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                      | Accounts payable                                    |         |                                       | 1,220   |                       |         |              | 25,668  |               |         |              | 4,311  |   |          |          |     |   |         |         | 31,199 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                      | Intercompany accounts                               |         |                                       | 18,549  |                       |         |              | (23,853 | )             |         |              | 5,304  |   |          |          |     |   |         |         |       | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                      | Accrued payroll                                     |         |                                       | 658     |                       |         |              | 26,822  |               |         |              | 27     |   |          |          |     |   |         |         | 27,507 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                      | Accrued vacation                                    |         |                                       | 2,968   |                       |         |              | 10,475  |               |         |              | 1467   |   |          |          |     |   |         |         | 14,910 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                      | Accrued restructuring                               |         |                                       |        |                       |         |              | 1,142   |               |         |              |       |   |          |          |     |   |         |         | 1,142  | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                      | Accrued other                                       |         |                                       | 12,590  |                       |         |              | 16,709  |               |         |              | 58     |   |          |          |     |   |         |         | 29,357 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                      | Income taxes                                        |         |                                       | 9,755   |                       |         |              | 981     |               |         |              | (3,087 | ) |          |          |     |   |         |         | 7,649  | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                      | Due to third party payors                           |         |                                       | (29,688 | )                     |         |              | 59,393  |               |         |              | (1,007 | ) |          |          |     |   |         |         | 28,698 | 
|                                                       |                                      |                                                     |         |                                       |         |                       |         |              |         |               |         |              |        |   |          |          |      |   |         |         |       
|Total Current Liabilities                              |                                      |                                                     | 26,329  |                                       |         |                       | 145,385 |              |         |               | 7,091   |              |        |   |         |          |      |   | 178,805 |        
|                                                      
|                                                      
|                                                      
|                                                      
|Long-term debt, net of current portion                 |                                      |                                                     | 87,511  |                                       |         |                       | 110,517 |              |         |               | 46,211  |              |        |   |         |          |      |   | 244,239 |        
|                                                       |                                      |                                                     |         |                                       |         |                       |         |              |         |               |         |              |        |   |          |          |      |   |         |        
|Total Liabilities                                      |                                      |                                                     | 113,840 |                                       |         |                       | 255,902 |              |         |               | 53,302  |              |        |   |         |          |      |   | 423,044 |        
|                                                      
|                                                      
|                                                      
|                                                      
|Commitments and Contingencies                          |                                      |                                                     |         |                                       |         |                       |         |              |         |               |         |              |        |   |          |          |      |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|Minority interest in consolidated subsidiary companies |                                      |                                                     |        |                                       |         |                       | 1,129   |              |         |               | 4,232   |              |        |   |         |          |      |   | 5,361   |        
|                                                      
|                                                      
|                                                      
|                                                      
|Stockholders Equity:                                  |                                      |                                                     |         |                                       |         |                       |         |              |         |               |         |              |        |   |          |          |      |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Common stock                         |                                                     |         | 471                                   |         |                       |         |             |         |               |         |             |        |   |          |         |      |   |         | 471     |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Capital in excess of par             |                                                     |         | 237,580                               |         |                       |         |             |         |               |         |             |        |   |          |         |      |   |         | 237,580 |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Retained earnings                    |                                                     |         | 28,701                                |         |                       |         | 44,208       |         |               |         | 14,248       |        |   |          | (58,456  | )(b) |   |         | 28,701  |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Subsidiary investment                |                                                     |         |                                      |         |                       |         | 304,907      |         |               |         | 35,104       |        |   |          | (340,011 | )(a) |   |         |        |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Treasury stock, at cost              |                                                     |         | (1,560                                | )       |                       |         |             |         |               |         |             |        |   |          |         |      |   |         | (1,560  | )     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accumulated other comprehensive loss |                                                     |         | (164                                  | )       |                       |         |             |         |               |         |             |        |   |          |         |      |   |         | (164    | )     
|                                                       |                                      |                                                     |         |                                       |         |                       |         |              |         |               |         |              |        |   |          |          |      |   |         |        
|Total Stockholders Equity                             |                                      |                                                     | 265,028 |                                       |         |                       | 349,115 |              |         |               | 49,352  |              |        |   | (398,467 | )        |      |   | 265,028 |        
|                                                       |                                      |                                                     |         |                                       |         |                       |         |              |         |               |         |              |        |   |          |          |      |   |         |        
|Total
Liabilities and Stockholders Equity             |                                      | $                                                   | 378,868 |                                       |         | $                     | 606,146 |              |         | $             | 106,886 |              |        | $ | (398,467 | )        |      | $ | 693,433 |        
|                                                       |                                      |                                                     |         |                                       |         |                       |         |              |         |               |         |              |        |   |          |          |      |   |         |        



---

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

- 15 -



---



##### Table of Contents



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



---

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

- 16 -



---



##### Table of Contents



|                                                                                  |                                                                                             |                                           |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |      |        |     |         |        |         |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ----------------------------------------- | ------- | ----------------------------------------------- | ------- | ---------- | ------- | ------------- | ------- | ------------ | ------ | ------------ | ------ | - | ------- | ---- | ------ | --- | ------- | ------ | ------- | -
|                                                                                  |                                                                                             |                                           |         | Select Medical Corporation                     
|                                                                                  |                                                                                             |                                           |         | Condensed Consolidating Statement of Cash Flows
|                                                                                  |                                                                                             |                                           |         | For the Six Months Ended June 30, 2002         
|                                                                                  |                                                                                             |                                           |         |                                                
|                                                                                  |                                                                                             |                                           |         | Select Medical Corporation                      |         | Subsidiary |         | Non-Guarantor |         |              |        |              |        |   |         |     
|                                                                                  |                                                                                             |                                           |         | (Parent Company Only)                           |         | Guarantors |         | Subsidiaries  |         | Eliminations |        | Consolidated
|                                                                                  |                                                                                             |                                           |         |                                                 |         |            |         |               |         |              |        |             
|                                                                                  |                                                                                             |                                           |         | (dollars in thousands)                         
|Operating activities                                                              |                                                                                             |                                           |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |      |        |     |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income (loss)                                                                 |                                                                                             | $                                         | 22,777  |                                                 |         | $          | 22,603  |               |         | $            | 5,584  |              |        | $ | (28,187 | )(a) |        | $   | 22,777  |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                                             |                                           |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |      |        |     |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Depreciation and amortization                                                               |                                           |         | 827                                             |         |            |         | 8,833         |         |              |        | 2,546        |        |   |         |     |        |     |         | 12,206 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Provision for bad debts                                                                     |                                           |         |                                                |         |            |         | 15,820        |         |              |        | 3,200        |        |   |         |     |        |     |         | 19,020 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Minority interests                                                                          |                                           |         |                                                |         |            |         | 6             |         |              |        | 1,167        |        |   |         |     |        |     |         | 1,173  |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |                                           |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |      |        |     |         |        |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Equity (loss) in earnings of subsidiaries |         |                                                 | (24,155 | )          |         |               | (4,032  | )            |        |              |       |   |         |      | 28,187 | (a) |         |        |        |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Intercompany                              |         |                                                 | (16,920 | )          |         |               | 20,475  |              |        |              | (3,555 | ) |         |      |       |     |         |        |        |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accounts receivable                       |         |                                                 | (124    | )          |         |               | (30,108 | )            |        |              | (5,663 | ) |         |      |       |     |         |        | (35,895 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Other current assets                      |         |                                                 | (461    | )          |         |               | (739    | )            |        |              | (40    | ) |         |      |       |     |         |        | (1,240  | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Other assets                              |         |                                                 | 1,150   |            |         |               | (862    | )            |        |              | 1,268  |   |         |      |       |     |         |        | 1,556   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accounts payable                          |         |                                                 | (1,870  | )          |         |               | (250    | )            |        |              | (259   | ) |         |      |       |     |         |        | (2,379  | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Due to third-party payors                 |         |                                                 | (237    | )          |         |               | 12,842  |              |        |              | 2,021  |   |         |      |       |     |         |        | 14,626  |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accrued expenses                          |         |                                                 | 670     |            |         |               | 7,489   |              |        |              | (1,277 | ) |         |      |       |     |         |        | 6,882   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Income taxes                              |         |                                                 | 9,443   |            |         |               | 5,393   |              |        |              | (3,087 | ) |         |      |       |     |         |        | 11,749  |  
|                                                                                  |                                                                                             |                                           |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |      |        |     |         |       
|Net cash provided by (used in) operating activities                               |                                                                                             |                                           | (8,900  | )                                               |         |            | 57,470  |               |         |              | 1,905  |              |        |   |        |      |        |     | 50,475  |       
|                                                                                  |                                                                                             |                                           |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |      |        |     |         |       
|Investing activities                                                              |                                                                                             |                                           |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |      |        |     |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchases of property and equipment, net                                          |                                                                                             |                                           | (561    | )                                               |         |            | (14,870 | )             |         |              | (2,517 | )            |        |   |        |      |        |     | (17,948 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Earnout payments                                                                  |                                                                                             |                                           |        |                                                 |         |            | (536    | )             |         |              |       |              |        |   |        |      |        |     | (536    | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Acquisition of businesses, net of cash acquired                                   |                                                                                             |                                           |        |                                                 |         |            | (3,303  | )             |         |              |       |              |        |   |        |      |        |     | (3,303  | )     
|                                                                                  |                                                                                             |                                           |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |      |        |     |         |       
|Net cash used in investing activities                                             |                                                                                             |                                           | (561    | )                                               |         |            | (18,709 | )             |         |              | (2,517 | )            |        |   |        |      |        |     | (21,787 | )     
|                                                                                  |                                                                                             |                                           |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |      |        |     |         |       
|Financing activities                                                              |                                                                                             |                                           |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |      |        |     |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Intercompany debt reallocation                                                    |                                                                                             |                                           | 34,114  |                                                 |         |            | (36,852 | )             |         |              | 2,738  |              |        |   |        |      |        |     |        |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net repayments on credit facility debt                                            |                                                                                             |                                           | (11,640 | )                                               |         |            |        |               |         |              | (1,341 | )            |        |   |        |      |        |     | (12,981 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Principal payments on seller and other debt                                       |                                                                                             |                                           | (370    | )                                               |         |            | (3,577  | )             |         |              |       |              |        |   |        |      |        |     | (3,947  | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from issuance of common stock                                            |                                                                                             |                                           | 3,893   |                                                 |         |            |        |               |         |              |       |              |        |   |        |      |        |     | 3,893   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from bank overdrafts                                                     |                                                                                             |                                           | 3,624   |                                                 |         |            |        |               |         |              |       |              |        |   |        |      |        |     | 3,624   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Payment of deferred financing costs                                               |                                                                                             |                                           | (67     | )                                               |         |            |        |               |         |              |       |              |        |   |        |      |        |     | (67     | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Distributions to minority interests                                               |                                                                                             |                                           |        |                                                 |         |            |        |               |         |              | (1,151 | )            |        |   |        |      |        |     | (1,151  | )     
|                                                                                  |                                                                                             |                                           |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |      |        |     |         |       
|Net cash provided by (used in) financing activities                               |                                                                                             |                                           | 29,554  |                                                 |         |            | (40,429 | )             |         |              | 246    |              |        |   |        |      |        |     | (10,629 | )     
|                                                                                  |                                                                                             |                                           |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |      |        |     |         |       
|Effect of exchange rate changes on cash
and cash equivalents                      |                                                                                             |                                           | 72      |                                                 |         |            |        |               |         |              |       |              |        |   |        |      |        |     | 72      |       
|                                                                                  |                                                                                             |                                           |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |      |        |     |         |       
|Net increase (decrease) in cash and cash equivalents                              |                                                                                             |                                           | 20,165  |                                                 |         |            | (1,668  | )             |         |              | (366   | )            |        |   |        |      |        |     | 18,131  |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash and cash equivalents at beginning of period                                  |                                                                                             |                                           | 559     |                                                 |         |            | 8,086   |               |         |              | 2,058  |              |        |   |        |      |        |     | 10,703  |       
|                                                                                  |                                                                                             |                                           |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |      |        |     |         |       
|Cash and cash equivalents at end of period                                        |                                                                                             | $                                         | 20,724  |                                                 |         | $          | 6,418   |               |         | $            | 1,692  |              |        | $ |        |      |        | $   | 28,834  |       
|                                                                                  |                                                                                             |                                           |         |                                                 |         |            |         |               |         |              |        |              |        |   |         |      |        |     |         |       



---

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

- 17 -



---



##### Table of Contents



|                                                       |                               |   |                                                 |        |                       |   |              |         |               |   |              |        |  |   |         |      |  |   |         |         | 
|------------------------------------------------------ | ----------------------------- | - | ----------------------------------------------- | ------ | --------------------- | - | ------------ | ------- | ------------- | - | ------------ | ------ |  | - | ------- | ---- |  | - | ------- | ------- | 
|                                                       |                               |   | Select Medical Corporation                     
|                                                       |                               |   | Condensed Consolidating Statement of Operations
|                                                       |                               |   | For the Six Months Ended June 30, 2001         
|                                                       |                               |   |                                                
|                                                       |                               |   | Select Medical Corporation                      |        |                       |   |              |         | Non-Guarantor |   |              |        |  |   |         |      | 
|                                                       |                               |   | (Parent Company Only)                           |        | Subsidiary Guarantors |   | Subsidiaries |         | Eliminations  |   | Consolidated
|                                                       |                               |   |                                                 |        |                       |   |              |         |               |   |             
|                                                       |                               |   | (dollars in thousands)                         
|Net operating revenues                                 |                               | $ | 6,023                                           |        |                       | $ | 372,521      |         |               | $ | 80,743       |        |  | $ |        |      |  | $ | 459,287 |        
|                                                       |                               |   |                                                 |        |                       |   |              |         |               |   |              |        |  |   |         |      |  |   |         |        
|Costs and expenses:                                    |                               |   |                                                 |        |                       |   |              |         |               |   |              |        |  |   |         |      |  |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Cost of services              |   |                                                 |       |                       |   |              | 305,097 |               |   |              | 64,864 |  |   |         |     |  |   |         | 369,961 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | General and administrative    |   |                                                 | 16,994 |                       |   |              |        |               |   |              |       |  |   |         |     |  |   |         | 16,994  | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Bad debt expense              |   |                                                 |       |                       |   |              | 14,427  |               |   |              | 2,221  |  |   |         |     |  |   |         | 16,648  | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Depreciation and amortization |   |                                                 | 919    |                       |   |              | 12,356  |               |   |              | 2,404  |  |   |         |     |  |   |         | 15,679  | 
|                                                       |                               |   |                                                 |        |                       |   |              |         |               |   |              |        |  |   |         |      |  |   |         |        
|Total costs and expenses                               |                               |   | 17,913                                          |        |                       |   | 331,880      |         |               |   | 69,489       |        |  |   |        |      |  |   | 419,282 |        
|                                                       |                               |   |                                                 |        |                       |   |              |         |               |   |              |        |  |   |         |      |  |   |         |        
|Income (loss) from operations                          |                               |   | (11,890                                         | )      |                       |   | 40,641       |         |               |   | 11,254       |        |  |   |        |      |  |   | 40,005  |        
|                                                      
|                                                      
|                                                      
|                                                      
|Other income and expense:                              |                               |   |                                                 |        |                       |   |              |         |               |   |              |        |  |   |         |      |  |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|Intercompany charges                                   |                               |   | (21,688                                         | )      |                       |   | 18,359       |         |               |   | 3,329        |        |  |   |        |      |  |   |        |        
|                                                      
|                                                      
|                                                      
|                                                      
|Interest income                                        |                               |   | (102                                            | )      |                       |   | (177         | )       |               |   | (1           | )      |  |   |        |      |  |   | (280    | )      
|                                                      
|                                                      
|                                                      
|                                                      
|Interest expense                                       |                               |   | 3,575                                           |        |                       |   | 9,279        |         |               |   | 2,668        |        |  |   |        |      |  |   | 15,522  |        
|                                                       |                               |   |                                                 |        |                       |   |              |         |               |   |              |        |  |   |         |      |  |   |         |        
|Income before minority interests and income taxes      |                               |   | 6,325                                           |        |                       |   | 13,180       |         |               |   | 5,258        |        |  |   |        |      |  |   | 24,763  |        
|                                                      
|                                                      
|                                                      
|                                                      
|Minority interest in consolidated subsidiary companies |                               |   |                                                |        |                       |   | 578          |         |               |   | 1,694        |        |  |   |        |      |  |   | 2,272   |        
|                                                       |                               |   |                                                 |        |                       |   |              |         |               |   |              |        |  |   |         |      |  |   |         |        
|Income before income taxes                             |                               |   | 6,325                                           |        |                       |   | 12,602       |         |               |   | 3,564        |        |  |   |        |      |  |   | 22,491  |        
|                                                      
|                                                      
|                                                      
|                                                      
|Income tax expense                                     |                               |   | 2,594                                           |        |                       |   | 5,903        |         |               |   | 275          |        |  |   |        |      |  |   | 8,772   |        
|                                                      
|                                                      
|                                                      
|                                                      
|Equity in earnings of subsidiaries                     |                               |   | 9,988                                           |        |                       |   | 1,878        |         |               |   |             |        |  |   | (11,866 | )(a) |  |   |        |        
|                                                       |                               |   |                                                 |        |                       |   |              |         |               |   |              |        |  |   |         |      |  |   |         |        
|Income (loss) before extraordinary item                |                               | $ | 13,719                                          |        |                       | $ | 8,577        |         |               | $ | 3,289        |        |  | $ | (11,866 | )    |  | $ | 13,719  |        
|                                                      
|                                                      
|                                                      
|                                                      
|Extraordinary item                                     |                               |   | 8,676                                           |        |                       |   |             |         |               |   |             |        |  |   |        |      |  |   | 8,676   |        
|
|                                                       |                               |   |                                                 |        |                       |   |              |         |               |   |              |        |  |   |         |      |  |   |         |        
|Net income (loss)                                      |                               | $ | 5,043                                           |        |                       | $ | 8,577        |         |               | $ | 3,289        |        |  | $ | (11,866 | )    |  | $ | 5,043   |        
|                                                       |                               |   |                                                 |        |                       |   |              |         |               |   |              |        |  |   |         |      |  |   |         |        



---

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

- 18 -



---



##### Table of Contents



|                                                                                  |                                                                                             |                                           |         |                                                 |        |                       |         |                           |         |              |        |              |        |   |         |      |        |     |         |        |         |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ----------------------------------------- | ------- | ----------------------------------------------- | ------ | --------------------- | ------- | ------------------------- | ------- | ------------ | ------ | ------------ | ------ | - | ------- | ---- | ------ | --- | ------- | ------ | ------- | -
|                                                                                  |                                                                                             |                                           |         | Select Medical Corporation                     
|                                                                                  |                                                                                             |                                           |         | Condensed Consolidating Statement of Cash Flows
|                                                                                  |                                                                                             |                                           |         | For the Six Months Ended June 30, 2001         
|                                                                                  |                                                                                             |                                           |         |                                                
|                                                                                  |                                                                                             |                                           |         | Select Medical                                  |        |                       |         |                           |         |              |        |              |        |   |         |      |        |     |         |       
|                                                                                  |                                                                                             |                                           |         | Corporation
(Parent                             |        |                       |         |                           |         |              |        |              |        |   |         |     
|                                                                                  |                                                                                             |                                           |         | Company
Only)                                   |        | Subsidiary
Guarantors |         | Non-GuarantorSubsidiaries |         | Eliminations |        | Consolidated
|                                                                                  |                                                                                             |                                           |         |                                                 |        |                       |         |                           |         |              |        |             
|                                                                                  |                                                                                             |                                           |         | (dollars in thousands)                         
|Operating activities                                                              |                                                                                             |                                           |         |                                                 |        |                       |         |                           |         |              |        |              |        |   |         |      |        |     |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income (loss)                                                                 |                                                                                             | $                                         | 5,043   |                                                 |        | $                     | 8,577   |                           |         | $            | 3,289  |              |        | $ | (11,866 | )(a) |        | $   | 5,043   |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                                             |                                           |         |                                                 |        |                       |         |                           |         |              |        |              |        |   |         |      |        |     |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Depreciation and amortization                                                               |                                           |         | 919                                             |        |                       |         | 12,356                    |         |              |        | 2,404        |        |   |         |     |        |     |         | 15,679 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Provision for bad debts                                                                     |                                           |         |                                                |        |                       |         | 14,427                    |         |              |        | 2,221        |        |   |         |     |        |     |         | 16,648 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Minority interests                                                                          |                                           |         |                                                |        |                       |         | 578                       |         |              |        | 1,694        |        |   |         |     |        |     |         | 2,272  |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Extraordinary item                                                                          |                                           |         | 8,676                                           |        |                       |         |                          |         |              |        |             |        |   |         |     |        |     |         | 8,676  |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |                                           |         |                                                 |        |                       |         |                           |         |              |        |              |        |   |         |      |        |     |         |        |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Equity (loss) in earnings of subsidiaries |         |                                                 | (9,988 | )                     |         |                           | (1,878  | )            |        |              |       |   |         |      | 11,866 | (a) |         |        |        |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Intercompany                              |         |                                                 | 31,263 |                       |         |                           | (34,877 | )            |        |              | 3,614  |   |         |      |       |     |         |        |        |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accounts receivable                       |         |                                                 | 29     |                       |         |                           | (18,602 | )            |        |              | (7,424 | ) |         |      |       |     |         |        | (25,997 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Other current assets                      |         |                                                 | 92     |                       |         |                           | 1,188   |              |        |              | (408   | ) |         |      |       |     |         |        | 872     |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Other assets                              |         |                                                 | 47     |                       |         |                           | 6,230   |              |        |              | (638   | ) |         |      |       |     |         |        | 5,639   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accounts payable                          |         |                                                 | 1,572  |                       |         |                           | (429    | )            |        |              | 994    |   |         |      |       |     |         |        | 2,137   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Due to third-party payors                 |         |                                                 | (6,000 | )                     |         |                           | 11,080  |              |        |              | (1,366 | ) |         |      |       |     |         |        | 3,714   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accrued expenses                          |         |                                                 | 344    |                       |         |                           | 9,577   |              |        |              | 1,597  |   |         |      |       |     |         |        | 11,518  |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Income taxes                              |         |                                                 | (8,343 | )                     |         |                           | 14,982  |              |        |              | (944   | ) |         |      |       |     |         |        | 5,695   |  
|                                                                                  |                                                                                             |                                           |         |                                                 |        |                       |         |                           |         |              |        |              |        |   |         |      |        |     |         |       
|Net cash provided by operating activities                                         |                                                                                             |                                           | 23,654  |                                                 |        |                       | 23,209  |                           |         |              | 5,033  |              |        |   |        |      |        |     | 51,896  |       
|                                                                                  |                                                                                             |                                           |         |                                                 |        |                       |         |                           |         |              |        |              |        |   |         |      |        |     |         |       
|Investing activities                                                              |                                                                                             |                                           |         |                                                 |        |                       |         |                           |         |              |        |              |        |   |         |      |        |     |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchases of property and equipment, net                                          |                                                                                             |                                           | (735    | )                                               |        |                       | (8,851  | )                         |         |              | (1,224 | )            |        |   |        |      |        |     | (10,810 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from disposal of assets                                                  |                                                                                             |                                           |        |                                                 |        |                       | 808     |                           |         |              |       |              |        |   |        |      |        |     | 808     |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Earnout payments                                                                  |                                                                                             |                                           |        |                                                 |        |                       | (4,763  | )                         |         |              |       |              |        |   |        |      |        |     | (4,763  | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Acquisition of businesses, net of cash acquired                                   |                                                                                             |                                           | (11,723 | )                                               |        |                       |        |                           |         |              |       |              |        |   |        |      |        |     | (11,723 | )     
|                                                                                  |                                                                                             |                                           |         |                                                 |        |                       |         |                           |         |              |        |              |        |   |         |      |        |     |         |       
|Net cash used in investing activities                                             |                                                                                             |                                           | (12,458 | )                                               |        |                       | (12,806 | )                         |         |              | (1,224 | )            |        |   |        |      |        |     | (26,488 | )     
|                                                                                  |                                                                                             |                                           |         |                                                 |        |                       |         |                           |         |              |        |              |        |   |         |      |        |     |         |       
|Financing activities                                                              |                                                                                             |                                           |         |                                                 |        |                       |         |                           |         |              |        |              |        |   |         |      |        |     |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Issuance of 9.5% Senior Subordinated Notes                                        |                                                                                             |                                           | 175,000 |                                                 |        |                       |        |                           |         |              |       |              |        |   |        |      |        |     | 175,000 |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net repayments on credit facility debt                                            |                                                                                             |                                           | (96,000 | )                                               |        |                       |        |                           |         |              |       |              |        |   |        |      |        |     | (96,000 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Repayment of 10% Senior Subordinated Notes                                        |                                                                                             |                                           | (90,000 | )                                               |        |                       |        |                           |         |              |       |              |        |   |        |      |        |     | (90,000 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Payment of deferred financing fees                                                |                                                                                             |                                           | (4,681  | )                                               |        |                       |        |                           |         |              |       |              |        |   |        |      |        |     | (4,681  | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Principal payments on seller and other debt                                       |                                                                                             |                                           | (10,561 | )                                               |        |                       |        |                           |         |              |       |              |        |   |        |      |        |     | (10,561 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from initial public offering, net of fees                                |                                                                                             |                                           | 89,169  |                                                 |        |                       |        |                           |         |              |       |              |        |   |        |      |        |     | 89,169  |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Redemption of Class A Preferred Stock                                             |                                                                                             |                                           | (52,838 | )                                               |        |                       |        |                           |         |              |       |              |        |   |        |      |        |     | (52,838 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Payment of Class A and Class B Preferred Stock Dividends                          |                                                                                             |                                           | (19,248 | )                                               |        |                       |        |                           |         |              |       |              |        |   |        |      |        |     | (19,248 | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from issuance of common stock                                            |                                                                                             |                                           | 10      |                                                 |        |                       |        |                           |         |              |       |              |        |   |        |      |        |     | 10      |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from (repayment of) bank overdrafts                                      |                                                                                             |                                           | 9,258   |                                                 |        |                       | (9,939  | )                         |         |              | (2,768 | )            |        |   |        |      |        |     | (3,449  | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Distributions to minority interests                                               |                                                                                             |                                           |        |                                                 |        |                       | (680    | )                         |         |              | (1,166 | )            |        |   |        |      |        |     | (1,846  | )     
|                                                                                  |                                                                                             |                                           |         |                                                 |        |                       |         |                           |         |              |        |              |        |   |         |      |        |     |         |       
|Net cash provided by (used in) financing activities                               |                                                                                             |                                           | 109     |                                                 |        |                       | (10,619 | )                         |         |              | (3,934 | )            |        |   |        |      |        |     | (14,444 | )     
|                                                                                  |                                                                                             |                                           |         |                                                 |        |                       |         |                           |         |              |        |              |        |   |         |      |        |     |         |       
|Effect of exchange rate changes on cash
and cash equivalents                      |                                                                                             |                                           | (20     | )                                               |        |                       |        |                           |         |              |       |              |        |   |        |      |        |     | (20     | )     
|                                                                                  |                                                                                             |                                           |         |                                                 |        |                       |         |                           |         |              |        |              |        |   |         |      |        |     |         |       
|Net increase (decrease) in cash and cash equivalents                              |                                                                                             |                                           | 11,285  |                                                 |        |                       | (216    | )                         |         |              | (125   | )            |        |   |        |      |        |     | 10,944  |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash and cash equivalents at beginning of period                                  |                                                                                             |                                           |        |                                                 |        |                       | 1,015   |                           |         |              | 2,136  |              |        |   |         |      |        |     | 3,151   |       
|                                                                                  |                                                                                             |                                           |         |                                                 |        |                       |         |                           |         |              |        |              |        |   |         |      |        |     |         |       
|Cash and cash equivalents at end of period                                        |                                                                                             | $                                         | 11,285  |                                                 |        | $                     | 799     |                           |         | $            | 2,011  |              |        | $ |        |      |        | $   | 14,095  |       
|                                                                                  |                                                                                             |                                           |         |                                                 |        |                       |         |                           |         |              |        |              |        |   |         |      |        |     |         |       



---

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

- 19 -



---



##### Table of Contents






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 5, 2002.

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;
|
| |  |  | private third party payors of our services may undertake
cost containment initiatives that would decrease our revenue;              
|
| |  |  | shortages in qualified nurses could increase our operating costs significantly;                                                     
|
| |  |  | future acquisitions may use significant resources and expose us to unforeseen risks, and                                            
|
| |  |  | the effects of liability and other claims asserted against us.                                                                      

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

Overview

We are a leading operator of specialty acute care hospitals for long term
stay patients in the United States. We are also the second largest operator of
outpatient rehabilitation clinics in the United States. As of June 30, 2002,
we operated 66 specialty acute care hospitals in 22 states and 740 outpatient
rehabilitation clinics in 32 states, the District of Columbia and seven
Canadian provinces. We began operations in 1997 under the leadership of our
current management team.

We operate through two business segments, our specialty acute care
hospital segment and our outpatient rehabilitation segment. For the three
months ended June 30, 2002, we had net operating revenues of $280.3 million.
Of this total, we earned approximately 55% of our net operating revenues from
our specialty hospitals and approximately 45% from our outpatient
rehabilitation business.

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

- 20 -



---



##### Table of Contents



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

|                               |                                          |                                       |    |                             |    |                           |    |         |    |      |    |           |     |   |    |           |     |  
|------------------------------ | ---------------------------------------- | ------------------------------------- | -- | --------------------------- | -- | ------------------------- | -- | ------- | -- | ---- | -- | --------- | --- | - | -- | --------- | --- | -
|                               |                                          |                                       |    | Three months ended June 30, |    | Six months ended June 30,
|                               |                                          |                                       |    |                             |    |                          
|                               |                                          |                                       |    | 2002                        |    | 2001                      |    | 2002    |    | 2001
|                               |                                          |                                       |    |                             |    |                           |    |         |    |     
|Specialty Hospital Data        |                                          |                                       |    |                             |    |                           |    |         |    |      |    |           |     |   |    |          
|                              
|                              
|                              
|                              
|                               | # of Hospitals  Start of Period         |                                       | 64 |                             |    |                           | 56 |         |    |      | 64 |           |     |   | 54 |          
|                              
|                              
|                              
|                              
|                               | # of Hospital Start-ups                  |                                       |    | 2                           |    |                           |    | 2       |    |      |    | 2         |     |   |    | 4         |    
|                               |                                          |                                       |    |                             |    |                           |    |         |    |      |    |           |     |   |    |          
|                               | # of Hospitals  End of Period           |                                       |    | 66                          |    |                           |    | 58      |    |      |    | 66        |     |   |    | 58        |    
|                               |                                          |                                       |    |                             |    |                           |    |         |    |      |    |           |     |   |    |          
|                               | # of Licensed Beds                       |                                       |    | 2,383                       |    |                           |    | 2,117   |    |      |    | 2,383     |     |   |    | 2,117     |    
|                              
|                              
|                              
|                              
|                               | # of Admissions                          |                                       |    | 5,019                       |    |                           |    | 4,224   |    |      |    | 10,230    |     |   |    | 8,415     |    
|                              
|                              
|                              
|                              
|                               | # of Patient Days                        |                                       |    | 153,942                     |    |                           |    | 125,587 |    |      |    | 303,811   |     |   |    | 249,327   |    
|                              
|                              
|                              
|                              
|                               | Average Length of Stay                   |                                       |    | 31                          |    |                           |    | 29      |    |      |    | 30        |     |   |    | 30        |    
|                              
|                              
|                              
|                              
|                               | Net Revenue Per Patient Day (a)          |                                       | $  | 987                         |    |                           | $  | 947     |    |      | $  | 990       |     |   | $  | 930       |    
|                              
|                              
|                              
|                              
|                               | Occupancy Rate                           |                                       |    | 73                          | %  |                           |    | 66      | %  |      |    | 72        | %   |   |    | 67        | %  
|                              
|                              
|                              
|                              
|                               | % Patient Days  Medicare                |                                       |    | 76                          | %  |                           |    | 75      | %  |      |    | 77        | %   |   |    | 76        | %  
|                              
|                              
|                              
|                              
|Outpatient Rehabilitation Data |                                          |                                       |    |                             |    |                           |    |         |    |      |    |           |     |   |    |          
|                              
|                              
|                              
|                              
|                               | # of Clinics Owned  Start of Period     |                                       |    | 667                         |    |                           |    | 624     |    |      |    | 664       |     |   |    | 636       |    
|                              
|                              
|                              
|                              
|                               |                                          | # of Clinics Acquired                 |    |                             | 6  |                           |    |         | 2  |      |    |           | 7   |   |    |           | 2   |  
|                              
|                              
|                              
|                              
|                               |                                          | # of Clinic Start-ups                 |    |                             | 18 |                           |    |         | 4  |      |    |           | 32  |   |    |           | 13  |  
|                              
|                              
|                              
|                              
|                               |                                          | # of Clinics Closed/Sold/Consolidated |    |                             | (5 | )                         |    |         | (7 | )    |    |           | (17 | ) |    |           | (28 | )
|                               |                                          |                                       |    |                             |    |                           |    |         |    |      |    |           |     |   |    |          
|                               | # of Clinics Owned  End of Period       |                                       |    | 686                         |    |                           |    | 623     |    |      |    | 686       |     |   |    | 623       |    
|                               | # of Clinics Managed  End of Period     |                                       |    | 54                          |    |                           |    | 48      |    |      |    | 54        |     |   |    | 48        |    
|                              
|                              
|                              
|                              
|                               |                                          |                                       |    |                             |    |                           |    |         |    |      |    |           |     |   |    |          
|                               | Total # of Clinics (All)  End of Period |                                       |    | 740                         |    |                           |    | 671     |    |      |    | 740       |     |   |    | 671       |    
|                               |                                          |                                       |    |                             |    |                           |    |         |    |      |    |           |     |   |    |          
|                               | # of Visits (U.S.)                       |                                       |    | 995,050                     |    |                           |    | 966,088 |    |      |    | 1,959,466 |     |   |    | 1,912,268 |    
|                              
|                              
|                              
|                              
|                               | Net Revenue Per Visit (U.S.) (b)         |                                       | $  | 86                          |    |                           | $  | 81      |    |      | $  | 86        |     |   | $  | 81        |    



---

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

Our goal is to open approximately eight to ten new specialty acute care
hospitals each year utilizing our hospital within a hospital model. 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.

- 21 -



---



##### Table of Contents



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.

Our specialty hospitals are paid by Medicare under a cost-based
reimbursement methodology. 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. 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. At June 30, 2002 and December 31, 2001, we had a net amount due to
Medicare of $11.3 million and $3.4 million respectively. We recorded this
amount as due to third party payors on our balance sheet.

On March 22, 2002, the Centers for Medicare and Medicaid Services (CMS)
published a proposed rule to establish a prospective payment system for
Medicare payment of inpatient hospital services furnished by long-term acute
care hospitals such as ours. CMS accepted comments on the proposed rule
through May 21, 2002. Current expectations are that the regulations may be
final by the CMS deadline of October 2002, with implementation at a later date.

Results of Operations

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

|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|-------------------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                                                   |  | Three Months Ended |       | Six Months Ended
|                                                   |  | June 30,           |       | June 30,        
|                                                   |  |                    |       |                 
|                                                   |  | 2002               |       | 2001             |  | 2002 |       | 2001
|                                                   |  |                    |       |                  |  |      |       |     
|Net Operating revenues                             |  |                    | 100.0 | %                |  |      | 100.0 | %    |  |  | 100.0 | % |  |  | 100.0 | %
|                                                  
|                                                  
|                                                  
|                                                  
|Cost of services (a)                               |  |                    | 81.4  | %                |  |      | 80.6  | %    |  |  | 81.6  | % |  |  | 80.6  | %
|                                                  
|                                                  
|                                                  
|                                                  
|General and administrative                         |  |                    | 3.3   | %                |  |      | 3.7   | %    |  |  | 3.4   | % |  |  | 3.7   | %
|                                                  
|                                                  
|                                                  
|                                                  
|Bad debt expense                                   |  |                    | 3.1   | %                |  |      | 3.5   | %    |  |  | 3.4   | % |  |  | 3.6   | %
|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|EBITDA (b)                                         |  |                    | 12.2  | %                |  |      | 12.2  | %    |  |  | 11.6  | % |  |  | 12.1  | %
|                                                  
|                                                  
|                                                  
|                                                  
|Depreciation and amortization                      |  |                    | 2.2   | %                |  |      | 3.3   | %    |  |  | 2.2   | % |  |  | 3.4   | %
|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|Income from operations                             |  |                    | 10.0  | %                |  |      | 8.9   | %    |  |  | 9.4   | % |  |  | 8.7   | %
|                                                  
|                                                  
|                                                  
|                                                  
|Interest expense, net                              |  |                    | 2.4   | %                |  |      | 3.2   | %    |  |  | 2.4   | % |  |  | 3.3   | %
|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|Income before minority interests, and income
taxes |  |                    | 7.6   | %                |  |      | 5.7   | %    |  |  | 7.0   | % |  |  | 5.4   | %
|                                                  
|                                                  
|                                                  
|                                                  
|Minority interests                                 |  |                    | 0.2   | %                |  |      | 0.4   | %    |  |  | 0.2   | % |  |  | 0.5   | %
|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|Income before income taxes                         |  |                    | 7.4   | %                |  |      | 5.3   | %    |  |  | 6.8   | % |  |  | 4.9   | %
|                                                  
|                                                  
|                                                  
|                                                  
|Income tax expense                                 |  |                    | 2.9   | %                |  |      | 2.1   | %    |  |  | 2.7   | % |  |  | 1.9   | %
|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|Net income before extraordinary item               |  |                    | 4.5   | %                |  |      | 3.2   | %    |  |  | 4.1   | % |  |  | 3.0   | %
|                                                  
|                                                  
|                                                  
|                                                  
|Extraordinary item                                 |  |                    |      | %                |  |      | 3.7   | %    |  |  |      | % |  |  | 1.9   | %
|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  
|Net income (loss)                                  |  |                    | 4.5   | %                |  |      | (0.5  | )%   |  |  | 4.1   | % |  |  | 1.1   | %
|                                                   |  |                    |       |                  |  |      |       |      |  |  |       |   |  |  |       |  

- 22 -



---



##### Table of Contents



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

|                                          |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |       |      |  
|----------------------------------------- | ------------------------- | ------------- | ------ | ---------------------- | ------- | ---- | ------ | -------- | ------- | ---------------- | ---- | ----- | ---- | ------ | ------ | ------- | ------- | - | ------ | ------- | ------- |  | ---- | ----- | ---- | -
|                                          |                           |               |        | Three Months Ended     |         |      |        |          |         | Six months Ended |      |       |      |       
|                                          |                           |               |        | June 30,               |         | %    |        | June 30, |         | %               
|                                          |                           |               |        | 2002                   |         | 2001 |        | Change   |         | 2002             |      | 2001  |      | Change
|                                          |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |       
|                                          |                           |               |        | (dollars in thousands)
|Net operating revenues:                   |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |      
|                                         
|                                         
|                                         
|                                         
|                                          | Specialty hospitals       |               | $      | 152,073                |         |      | $      | 119,035  |         |                  |      | 27.8  | %    |        | $      | 300,901 |         |   | $      | 232,185 |         |  |      | 29.6  | %   
|                                         
|                                         
|                                         
|                                         
|                                          | Outpatient rehabilitation |               |        | 124,639                |         |      |        | 111,958  |         |                  |      | 11.3  |      |        |        | 244,333 |         |   |        | 220,631 |         |  |      | 10.7  |     
|                                         
|                                         
|                                         
|                                         
|                                          | Other                     |               |        | 3,560                  |         |      |        | 3,206    |         |                  |      | 11.0  |      |        |        | 6,958   |         |   |        | 6,471   |         |  |      | 7.5   |     
|                                          |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |       |     
|                                          |                           | Total company |        | $                      | 280,272 |      |        | $        | 234,199 |                  |      |       | 19.7 | %      |        | $       | 552,192 |   |        | $       | 459,287 |  |      |       | 20.2 | %
|                                          |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |       |     
|EBITDA: (b)
Specialty hospitals           |                           | $             | 17,281 |                        |         | $    | 13,583 |          |         |                  | 27.2 | %     |      | $      | 32,948 |         |         | $ | 26,978 |         |         |  | 22.1 | %    
|                                         
|                                         
|                                         
|                                         
|                                          | Outpatient rehabilitation |               |        | 23,075                 |         |      |        | 20,631   |         |                  |      | 11.8  |      |        |        | 44,123  |         |   |        | 39,686  |         |  |      | 11.2  |     
|                                         
|                                         
|                                         
|                                         
|                                          | Other                     |               |        | (6,170                 | )       |      |        | (5,562   | )       |                  |      | (10.9 | )    |        |        | (12,829 | )       |   |        | (10,980 | )       |  |      | (16.8 | )   
|                                          |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |       |     
|                                          |                           | Total company |        | $                      | 34,186  |      |        | $        | 28,652  |                  |      |       | 19.3 | %      |        | $       | 64,242  |   |        | $       | 55,684  |  |      |       | 15.4 | %
|                                          |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |       |     
|Income (loss) from operations:            |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |      
|                                         
|                                         
|                                         
|                                         
|                                          | Specialty hospitals       |               | $      | 14,134                 |         |      | $      | 10,926   |         |                  |      | 29.4  | %    |        | $      | 26,753  |         |   | $      | 21,841  |         |  |      | 22.5  | %   
|                                         
|                                         
|                                         
|                                         
|                                          | Outpatient rehabilitation |               |        | 20,488                 |         |      |        | 16,924   |         |                  |      | 21.1  |      |        |        | 39,010  |         |   |        | 32,275  |         |  |      | 20.9  |     
|                                         
|                                         
|                                         
|                                         
|                                          | Other                     |               |        | (6,616                 | )       |      |        | (7,061   | )       |                  |      | 6.3   |      |        |        | (13,727 | )       |   |        | (14,111 | )       |  |      | 2.7   |     
|                                          |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |       |     
|                                          |                           | Total company |        | $                      | 28,006  |      |        | $        | 20,789  |                  |      |       | 34.7 | %      |        | $       | 52,036  |   |        | $       | 40,005  |  |      |       | 30.1 | %
|                                          |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |       |     
|EBITDA margins: (b)
Specialty hospitals   |                           |               | 11.4   | %                      |         |      | 11.4   | %        |         |                  | 0.0  | %     |      |        | 10.9   | %       |         |   | 11.6   | %       |         |  | (5.8 | )%   
|                                         
|                                         
|                                         
|                                         
|                                          | Outpatient rehabilitation |               |        | 18.5                   |         |      |        | 18.4     |         |                  |      | 0.5   |      |        |        | 18.1    |         |   |        | 18.0    |         |  |      | 0.4   |     
|                                         
|                                         
|                                         
|                                         
|                                          | Other                     |               |        | N/M                    |         |      |        | N/M      |         |                  |      | N/M   |      |        |        | N/M     |         |   |        | N/M     |         |  |      | N/M   |     
|                                          |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |       |     
|                                          | Total company             |               |        | 12.2                   | %       |      |        | 12.2     | %       |                  |      | 0.0   | %    |        |        | 11.6    | %       |   |        | 12.1    | %       |  |      | (4.0  | )%  
|                                          |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |       |     
|Total assets:                             |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |      
|                                         
|                                         
|                                         
|                                         
|                                          | Specialty hospitals       |               | $      | 315,115                |         |      | $      | 262,027  |         |                  |      |       |      |        | $      | 315,115 |         |   | $      | 262,027 |         |  |      |       |     
|                                         
|                                         
|                                         
|                                         
|                                          | Outpatient rehabilitation |               |        | 330,800                |         |      |        | 311,375  |         |                  |      |       |      |        |        | 330,800 |         |   |        | 311,375 |         |  |      |       |     
|                                         
|                                         
|                                         
|                                         
|                                          | Other                     |               |        | 47,518                 |         |      |        | 39,106   |         |                  |      |       |      |        |        | 47,518  |         |   |        | 39,106  |         |  |      |       |     
|                                          |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |      
|                                          | Total company             |               | $      | 693,433                |         |      | $      | 612,508  |         |                  |      |       |      |        | $      | 693,433 |         |   | $      | 612,508 |         |  |      |       |     
|                                          |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |       |     
|Purchases of property and
equipment, net: |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |      
|                                         
|                                         
|                                         
|                                         
|                                          | Specialty hospitals       |               | $      | 6,257                  |         |      | $      | 3,254    |         |                  |      |       |      |        | $      | 12,440  |         |   | $      | 6,309   |         |  |      |       |     
|                                         
|                                         
|                                         
|                                         
|                                          | Outpatient rehabilitation |               |        | 2,492                  |         |      |        | 2,024    |         |                  |      |       |      |        |        | 4,927   |         |   |        | 3,766   |         |  |      |       |     
|                                         
|                                         
|                                         
|                                         
|                                          | Other                     |               |        | 240                    |         |      |        | 207      |         |                  |      |       |      |        |        | 581     |         |   |        | 735     |         |  |      |       |     
|                                          |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |       |     
|                                          | Total company             |               | $      | 8,989                  |         |      | $      | 5,485    |         |                  |      |       |      |        | $      | 17,948  |         |   | $      | 10,810  |         |  |      |       |     
|                                          |                           |               |        |                        |         |      |        |          |         |                  |      |       |      |        |        |         |         |   |        |         |         |  |      |       |     



---

|    |  | N/M  Not Meaningful                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(a) |  | Cost of services include salaries, wages and benefits, operating
supplies, lease and rent expense and other operating costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|   
|   
|   
|(b) |  | We define EBITDA as income (loss) before interest, income taxes,
depreciation and amortization and other income, minority interest and
extraordinary items. EBITDA should not be considered as a measure of
financial performance under generally accepted accounting principles.
Items excluded from EBITDA are significant components in understanding and
assessing financial performance. EBITDA is a key measure used by
management to evaluate our operations and provides useful information to
investors. EBITDA should not be considered in isolation or as an
alternative to net income, cash flows generated

- 23 -



---



##### Table of Contents



| |  | by operations, investing or financing activities, or other financial
statement data presented in the consolidated financial statements as
indicators of financial performance or liquidity. Because EBITDA is not a
measurement determined in accordance with generally accepted accounting
principles and is susceptible to varying calculations, EBITDA as presented
may not be comparable to similarly titled measures of other companies.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
following table reconciles EBITDA to net income (loss):

|                                 |  |                            |        |                          |  |      |        |      |  |   |         |   |  |   |         |  
|-------------------------------- |  | -------------------------- | ------ | ------------------------ |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                 |  | For the Three Months Ended |        | For the Six months Ended
|                                 |  | June 30,                   |        | June 30,                
|                                 |  |                            |        |                         
|                                 |  | 2002                       |        | 2001                     |  | 2002 |        | 2001
|                                 |  |                            |        |                          |  |      |        |     
|                                 |  | (in thousands)            
|EBITDA                           |  | $                          | 34,186 |                          |  | $    | 28,652 |      |  | $ | 64,242  |   |  | $ | 55,684  |  
|                                
|                                
|                                
|                                
|Depreciation and amortization    |  |                            | (6,180 | )                        |  |      | (7,863 | )    |  |   | (12,206 | ) |  |   | (15,679 | )
|                                
|                                
|                                
|                                
|Interest income                  |  |                            | 136    |                          |  |      | 39     |      |  |   | 207     |   |  |   | 280     |  
|                                
|                                
|                                
|                                
|Interest expense                 |  |                            | (6,815 | )                        |  |      | (7,506 | )    |  |   | (13,593 | ) |  |   | (15,522 | )
|                                
|                                
|                                
|                                
|Minority interest                |  |                            | (570   | )                        |  |      | (865   | )    |  |   | (1,173  | ) |  |   | (2,272  | )
|                                
|                                
|                                
|                                
|Income tax expense               |  |                            | (8,156 | )                        |  |      | (4,859 | )    |  |   | (14,700 | ) |  |   | (8,772  | )
|                                
|                                
|                                
|                                
|Extraordinary item, net of taxes |  |                            |       |                          |  |      | (8,676 | )    |  |   |        |   |  |   | (8,676  | )
|                                 |  |                            |        |                          |  |      |        |      |  |   |         |   |  |   |         |  
|Net income (loss)                |  | $                          | 12,601 |                          |  | $    | (1,078 | )    |  | $ | 22,777  |   |  | $ | 5,043   |  
|                                 |  |                            |        |                          |  |      |        |      |  |   |         |   |  |   |         |  

Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

Net Operating Revenues

Our net operating revenues increased by 19.7% to $280.3 million for the
three months ended June 30, 2002 compared to $234.2 million for the three
months ended June 30, 2001.

Specialty Acute Care Hospitals.Our specialty hospital net operating
revenues increased 27.8% to $152.1 million for the three months ended June 30,
2002 compared to $119.0 million for the three months ended June 30, 2001. Net
operating revenues for the specialty hospitals opened before January 1, 2001
and operated throughout both periods increased 15.2% to $135.7 million for the
three months ended June 30, 2002 from $117.8 million for the three months ended
June 30, 2001. This resulted from a higher occupancy rate and a higher net
revenue per patient day. The remaining increase of $15.2 million resulted
from the internal development of new specialty hospitals that commenced
operations in 2001 and 2002.

Outpatient Rehabilitation.Our outpatient rehabilitation net operating
revenues increased 11.3% to $124.6 million for the three months ended June 30,
2002 compared to $112.0 million for the three months ended June 30, 2001. The
increase was related to an increase in the number of visits, an increase in the
net revenue per visit experienced at our outpatient rehabilitation locations
and the additional revenues associated with acquisitions that occurred in the
third and fourth quarters of 2001 and the first six months of 2002. These
acquisitions provided approximately $8.8 million of net operating revenue for
the three months ended June 30, 2002.

Other.Our other revenues increased to $3.6 million for the three months
ended June 30, 2002 compared to $3.2 million for the three months ended June
30, 2001. The increase in other revenue reflects higher corporate general and
administrative costs in 2002, which resulted in higher Medicare reimbursements
for those costs.

Operating Expenses

Our operating expenses increased by 19.7% to $246.1 million for the three
months ended June 30, 2002 compared to $205.5 million for the three months
ended June 30, 2001. Our operating expenses consist of our

- 24 -



---



##### Table of Contents



cost of services, general and administrative expense and bad debt expense.
The increase in operating expenses was principally related to the internal
development of new specialty hospitals that commenced operations in 2001, costs
associated with the increased patient volumes and the operating expenses
associated with the acquisitions that occurred in the third and fourth quarter
of 2001 and first six months of 2002. As a percentage of our net operating
revenues, our operating expenses were 87.8% for both the three months ended
June 30, 2002 and 2001. Cost of services as a percentage of operating revenues
increased to 81.4% for the three months ended June 30, 2002 from 80.6% for the
three months ended June 30, 2001. These costs primarily reflect our labor
expenses. This increase reflects the higher costs of services as a percentage
of revenue in our newly developed specialty hospitals. During the same time
period, general and administrative expense as a percentage of net operating
revenues decreased to 3.3% for the three months ended June 30, 2002 from 3.7%
for the three months ended June 30, 2001. Our bad debt expense as a percentage
of net operating revenues was 3.1% for the three months ended June 30, 2002
compared to 3.5% for the three months ended June 30, 2001. This decline in our
relative bad debt percentage resulted from improvement in the composition and
age of our accounts receivable.

EBITDA

Our total EBITDA increased 19.3% to $34.2 million for the three months
ended June 30, 2002 compared to $28.7 million for the three months ended June
30, 2001. Our EBITDA margins remained consistent at 12.2% for both the three
months ended June 30, 2002 and the three months ended June 30, 2001. Excluding
dilutive effect caused by the hospitals opened in 2001 and 2002, our EBITDA
margins would be 13.3% for the three months ended June 30, 2002 compared to
13.0% for the three months ended June 30, 2001. For cash flow information, see
-Capital Resources and Liquidity.

Specialty Acute Care Hospitals.Our specialty hospital EBITDA increased
by 27.2% to $17.3 million for the three months ended June 30, 2002 compared to
$13.6 million for the three months ended June 30, 2001. Our EBITDA margins
remained consistent at 11.4% for both the three months ended June 30, 2002 and
the three months ended June 30, 2001. The hospitals opened before January 1,
2001 and operated throughout both periods had EBITDA of $18.3 million, an
increase of 19.3% over the EBITDA of these hospitals in the same period last
year. This increase in same hospital EBITDA resulted from an increase in
non-Medicare patient days and its associated increased revenue per patient day.
Our EBITDA margin in these same store hospitals increased to 13.5% from 13.0%.

Outpatient Rehabilitation.Our outpatient rehabilitation EBITDA
increased by 11.8% to $23.1 million for the three months ended June 30, 2002
compared to $20.6 million for the three months ended June 30, 2001.
Approximately $0.9 million of this increase was related to the EBITDA generated
by the acquisitions that occurred in the third and fourth quarter of 2001 and
the first six months of 2002. Our EBITDA margins increased to 18.5% for the three
months ended June 30, 2002 from 18.4% for the three months ended June 30, 2001.

Other.Our other EBITDA loss increased to $6.2 million for the three
months ended June 30, 2002 compared to a loss of $5.6 million for the three
months ended June 30, 2001. This increase resulted from the higher general and
administrative costs needed to support the growth of the organization,
principally our new hospital development.

Income from Operations

Income from operations increased 34.7% to $28.0 million for the three
months ended June 30, 2002 compared to $20.8 million for the three months ended
June 30, 2001. The increase in income from operations resulted from the EBITDA
increases described above, and a reduction in amortization expense of $2.3
million resulting from the adoption of FAS 142, and was offset by an increase
in depreciation expense. The increase in depreciation expense resulted
primarily from increases in depreciation on fixed asset additions that are
principally related to new hospital development.

- 25 -



---



##### Table of Contents



Interest Expense

Interest expense decreased by $0.7 million to $6.8 million for the three
months ended June 30, 2002 from $7.5 million for the three months ended June
30, 2001. The decline in interest expense is due to the lower debt levels
outstanding in 2002 compared to 2001 and a lower effective interest rate in
2002. The lower debt levels resulted from the scheduled term amortization
payments under our credit facility. All repayments have been made with cash
flows generated through operations.

Minority Interests

Minority interests in consolidated earnings decreased by 34.1% to $0.6
million for the three months ended June 30, 2002 compared to $0.9 million for
the three months ended June 30, 2001. This decrease resulted from a smaller
percentage of ownership held by minority interests. The terms of our
agreements with some of our minority owners allowed them to sell their minority
interests back to us upon the completion of our initial public offering which
occurred on April 10, 2001. We completed the purchase of these minority
interests between May 2001 and October 2001.

Income Taxes

We recorded income tax expense of $8.2 million for the three months ended
June 30, 2002. 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 $4.9 million for the three months ended June 30, 2001. This expense
represented an effective tax rate of 39.0%.

Extraordinary Item

We recorded an extraordinary charge in the quarter ended June 30, 2001.
The extraordinary item consists of $1.3 million of unamortized deferred
financing costs related to the repayment of our U.S. term loan and $12.9
million of deferred financing costs and unamortized discount related to the
repayment of our 10% Senior Subordinated Notes. These costs were offset by a
tax benefit of $5.5 million.

Six months Ended June 30, 2002 Compared to Six months Ended June 30, 2001

Net Operating Revenues

Our net operating revenues increased by 20.2% to $552.2 million for the
six months ended June 30, 2002 compared to $459.3 million for the six months
ended June 30, 2001.

Specialty Acute Care Hospitals.Our specialty hospital net operating
revenues increased 29.6% to $300.9 million for the six months ended June 30,
2002 compared to $232.2 million for the six months ended June 30, 2001. Net
operating revenues for the specialty hospitals opened before January 1, 2001
and operated throughout both periods increased 18.5% to $273.1 million for the
six months ended June 30, 2002 from $230.4 million for the six months ended
June 30, 2001. This resulted from a higher occupancy rate and a higher net
revenue per patient day. The remaining increase of $26.0 million resulted
from the internal development of new specialty hospitals that commenced
operations in 2001 and 2002.

Outpatient Rehabilitation.Our outpatient rehabilitation net operating
revenues increased 10.7% to $244.3 million for the six months ended June 30,
2002 compared to $220.6 million the six months ended June 30, 2001. The
increase was related to an increase in the number of visits and the net revenue
per visit experienced at our outpatient rehabilitation locations and the
additional revenues associated with acquisitions that occurred in the third and
fourth quarter of 2001 and the first six months of 2002. These acquisitions
provided approximately $16.6 million of net operating revenue for the six
months ended June 30, 2002.

- 26 -



---



##### Table of Contents



Other.Our other revenues increased to $7.0 million for the six months
ended June 30, 2002 compared to $6.5 million for the six months ended June 30,
2001. The increase in other revenue reflects higher corporate general and
administrative costs in 2002, which resulted in higher Medicare reimbursements
for those costs.

Operating Expenses

Our operating expenses increased by 20.9% to $488.0 million for the six
months ended June 30, 2002 compared to $403.6 million for the six months ended
June 30, 2001. Our operating expenses consist of our cost of services, general
and administrative expense and bad debt expense. The increase in operating
expenses was principally related to the internal development of new specialty
hospitals that commenced operations in 2001, costs associated with the
increased patient volumes and the operating expenses associated with the
acquisitions that occurred in the third and fourth quarter of 2001 and first
six months of 2002. As a percentage of our net operating revenues, our operating
expenses were 88.4% for the six months ended June 30, 2002 compared to 87.9%
for the six months ended June 30, 2001. Cost of services as a percentage of
operating revenues increased to 81.6% for the six months ended June 30, 2002
from 80.6% for the six months ended June 30, 2001. These costs primarily
reflect our labor expenses. This increase reflects the higher costs of services
as a percentage of revenue in our newly developed specialty hospitals. During
the same time period, general and administrative expense as a percentage of net
operating revenues decreased to 3.4% for the six months ended June 30, 2002
from 3.7% for the six months ended June 30, 2001. Our bad debt expense as a
percentage of net operating revenues was 3.4% for the six months ended June 30,
2002 compared to 3.6% for the six months ended June 30, 2001. This decline in
our relative bad debt percentage resulted from improvement in the composition
and age of our accounts receivable.

EBITDA

Our total EBITDA increased 15.4% to $64.2 million for the six months ended
June 30, 2002 compared to $55.7 million for the six months ended June 30, 2001.
Our EBITDA margins declined to 11.6% for the six months ended June 30, 2002
compared to 12.1% for the six months ended June 30, 2001. The decline in
margins is caused by the start-up losses and lower margins incurred in our
hospitals that have opened or have been developed since December 31, 2000.
Excluding the hospitals opened in 2001 and 2002, our EBITDA margins would be
12.9% for the six months ended June 30, 2002 compared to 12.7% for the six
months ended June 30, 2001. For cash flow information, see -Capital Resources
and Liquidity.

Specialty Acute Care Hospitals.Our specialty hospital EBITDA increased
by 22.1% to $32.9 million for the six months ended June 30, 2002 compared to
$27.0 million for the six months ended June 30, 2001. Our EBITDA margins were
10.9% for the six months ended June 30, 2002 compared to 11.6% for the six
months ended June 30, 2001. The decline in margins is caused by the start-up
losses and lower margins incurred in our hospitals that have opened or have
been developed since December 31, 2000. The hospitals opened before January 1,
2001 and operated throughout both periods had EBITDA of $36.4 million, an
increase of 23.8% over the EBITDA of these hospitals in the same period last
year. This increase in same hospital EBITDA resulted from an increase in
non-Medicare patient days and its associated increased revenue per patient day.
Our EBITDA margin in these same store hospitals increased to 13.3% from 12.7%.

Outpatient Rehabilitation.Our outpatient rehabilitation EBITDA
increased by 11.2% to $44.1 million for the six months ended June 30, 2002
compared to $39.7 million for the six months ended June 30, 2001. Approximately
$2.1 million of this increase was related to the EBITDA generated by the
acquisitions that occurred in the third and fourth quarter of 2001 and the
first six months of 2002. Our EBITDA margins increased to 18.1% for the six
months ended June 30, 2002 from 18.0% for the six months ended June 30, 2001.

Other.Our other EBITDA loss increased to $12.8 million for the six
months ended June 30, 2002 compared to a loss of $11.0 million for the six
months ended June 30, 2001. This increase resulted from the

- 27 -



---



##### Table of Contents



higher general and administrative costs needed to support the growth of
the organization, principally our new hospital development.

Income from Operations

Income from operations increased 30.1% to $52.0 million for the six months
ended June 30, 2002 compared to $40.0 million for the six months ended June 30,
2001. The increase in income from operations resulted from the EBITDA
increases described above, and a reduction in amortization expense of $4.6
million resulting from the adoption of FAS 142, which was offset by an increase
in depreciation expense. The increase in depreciation expense resulted
primarily from increases in depreciation on fixed asset additions that are
principally related to new hospital development.

Interest Expense

Interest expense decreased by $1.9 million to $13.6 million for the six
months ended June 30, 2002 from $15.5 million for the six months ended June 30,
2001. The decline in interest expense is due to the lower debt levels
outstanding in 2002 compared to 2001 and a lower effective interest rate in
2002. The lower debt levels resulted from the scheduled term amortization
payments under our credit facility and the repayment of all borrowings under
the revolving portion of the credit facility. All repayments have been made
with cash flows generated through operations.

Minority Interests

Minority interests in consolidated earnings decreased by 48.4% to $1.2
million for the six months ended June 30, 2002 compared to $2.3 million for the
six months ended June 30, 2001. This decrease resulted from a smaller
percentage of ownership held by minority interests. The terms of our
agreements with some of our minority owners allowed them to sell their minority
interests back to us upon the completion of our initial public offering which
occurred on April 10, 2001. We completed the purchase of these minority
interests between May 2001 and October 2001.

Income Taxes

We recorded income tax expense of $14.7 million for the six months ended
June 30, 2002. The expense represented an effective tax rate of 39.2% and
approximates the federal and state statutory tax rates. We recorded income tax
expense of $8.8 million for the six months ended June 30, 2001. This expense
represented an effective tax rate of 39.0%.

Extraordinary Item

We recorded an extraordinary charge in the six months ended June 30, 2001.
The extraordinary item consists of $1.3 million of unamortized deferred
financing costs related to the repayment of our U.S. term loan and $12.9
million of deferred financing costs and unamortized discount related to the
repayment of our 10% Senior Subordinated Notes. These costs were offset by a
tax benefit of $5.5 million.

Capital Resources and Liquidity

For the six months ended June 30, 2002 operating activities provided $50.5
million of cash flow compared to $51.9 million for the six months ended June
30, 2001. Our accounts receivable days outstanding were 76 days at June 30,
2002 compared to 77 days at December 31, 2001 and 80 days at June 30, 2001.

- 28 -



---



##### Table of Contents



Investing activities used $21.8 and $26.5 million of cash flow for the six
months ended June 30, 2002 and 2001, respectively. This usage resulted from
purchases of property and equipment of $17.9 and $10.8 million in 2002 and
2001, respectively that relate principally to new hospital development.
Additionally, we incurred earnout related payments of $0.5 million and $4.8
million in 2002 and 2001, respectively. We incurred acquisition payments of
$3.3 million and $11.7 million in 2002 and 2001, respectively.

Financing activities used $10.6 and $14.4 million of cash for the six
months ended June 30, 2002 and 2001, respectively. This was due principally to
the repayment of credit facility, seller and other debt.

Capital Resources

Net working capital increased to $133.0 million as of June 30, 2002
compared to $126.7 million at December 31, 2001. This increase is principally
related to higher cash balances.

We have a credit agreement with a group of banks. Our credit facility
consists of a term facility of $83.8 million and a revolving credit facility
of $152.4 million. As of June 30, 2002 we had borrowed all of our available
loans under the U.S. and Canadian term loans and had availability to borrow an
additional $147.7 million under our revolving facility subject to certain
limitations. We have $4.7 million outstanding under letters of credit issued
through the credit facility. The revolving facility terminates in 2005.

Borrowings under the credit agreement bear interest at a fluctuating rate
of interest based upon financial covenant ratio tests. As of June 30, 2002,
our weighted average interest rate under our credit agreement was approximately
7.5%. A portion of the amount borrowed under our U.S. term loan portion of our
credit agreement is hedged through an interest rate swap transaction, which
fixes the rate paid through 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 are required to pay a quarterly commitment fee at a rate that ranges from
     .375% to .500%, based upon financial covenant ratio tests. This fee applies to
unused commitments under the revolving credit facility.
The terms of the credit agreement include various restrictive covenants. These
covenants include:



| |  |  | restrictions against incurring additional indebtedness,
| | - |  | -------------------------------------------------------
|
| |  |  | disposing of assets,                                   
|
| |  |  | incurring capital expenditures,                        
|
| |  |  | making investments,                                    
|
| |  |  | restrictions against paying certain dividends,         
|
| |  |  | engaging in transactions with affiliates,              
|
| |  |  | incurring contingent obligations, and                  
|
| |  |  | allowing or causing fundamental changes.               

The covenants also require us to maintain various financial ratios
regarding total indebtedness, interest, fixed charges and net worth. The borrowings are secured by substantially all of
the tangible and intangible assets of us and our subsidiaries, including all of the capital stock of our
domestic subsidiaries and 65% of the capital stock of our direct foreign subsidiaries. In addition, the loans have
been guaranteed by our domestic subsidiaries.

- 29 -



---



##### Table of Contents



On June 11, 2001, we issued and sold $175.0 million aggregate principal
amount of 9 1 /2% senior subordinated notes due June 15, 2009. The notes were issued under an indenture
dated as of June 11, 2001 between us and State Street Bank and Trust Company, N.A., as Trustee. Interest
on the notes is payable semiannually in arrears on June 15 and December 15 of
each year. The notes are unsecured senior subordinated obligations of Select
Medical, are subordinated in right of payment to all existing and future senior
indebtedness of Select Medical, and are senior in right of payment to all
future subordinated indebtedness of Select Medical. The notes are guaranteed on
a senior subordinated basis by all of our wholly-owned domestic subsidiaries,
subject to certain exceptions. On or after June 15, 2005, the notes may be
redeemed at our option, in whole or in part, at redemption prices that decline
annually to 100% on and after June 15, 2008, plus accrued and unpaid interest.

Upon a change of control of Select Medical, each holder of notes may
require us to repurchase all or any portion of the holders notes at a purchase price equal to 101% of the
principal amount plus accrued and unpaid interest to the date of purchase. The indenture contains certain
covenants that, among other things, limit
the incurrence of additional debt by Select Medical and certain of its
subsidiaries; the payment of dividends on
capital stock of Select Medical and the purchase, redemption or retirement of
capital stock or subordinated
indebtedness; investments; certain transactions with affiliates; sales of
assets, including capital stock of
subsidiaries; and certain consolidations, mergers and transfers of assets. The
indenture also prohibits certain
restrictions on distributions from certain subsidiaries. All of these
limitations and prohibitions, however, are subject to a number of
qualifications.

We believe that existing cash balances, internally generated cash flows
and borrowings under our revolving credit facility will be sufficient to
finance acquisitions, capital expenditures and working capital requirements for
at least the next twelve months. Our goal is to open eight to ten additional
hospitals during 2002. A new specialty hospital has historically required
approximately $3.4 million per hospital over the initial year of operations to
fund leasehold improvements, equipment, start-up losses and working capital.
From time to time, we may complete acquisitions of specialty hospitals and
outpatient rehabilitation businesses. We currently have approximately $148
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 this capacity, we will need to increase our credit
facilities or obtain additional capital by other means.

Inflation

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

Recent Accounting Pronouncement

In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 146,  Accounting for Costs Associated with Exit or Disposal Activities.
SFAS No. 146 requires recording costs associated with exit or disposal
activities at their fair values when a liability has been incurred. Under
previous guidance, certain exit costs were accrued upon managements commitment
to an exit plan, which is generally before an actual liability has been
incurred. Adoption of SFAS No. 146 is required with the beginning of fiscal
year 2003. We do not anticipate a significant impact on its results of
operations from adopting this Statement.

- 30 -



---



##### Table of Contents



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 1999, 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. We believe that the adoption
of SFAS 145 will require us to reclassify our extraordinary items recorded in
1999, 2000 and 2001 to the other income and expense category of our
consolidated statement of operations.

In October 2001, the Financial Accounting Standards Board approved SFAS
No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets which
is effective for financial statements issued for fiscal years beginning after
December 15, 2001. SFAS 144 supersedes the accounting provisions of APB 30
that address the disposal of a segment of a business and requires that such
long-lived assets be reported at fair value less cost to sell. SFAS 144
requires that long-lived assets to be abandoned, exchanged for similar
productive assets or distributed to owners in a spin-off be considered held for
use until they are abandoned, exchanged or distributed. It also eliminates the
exception to consolidation for a subsidiary while control is expected to be
temporary. We adopted SFAS 144 on January 1, 2002 with no material effect on
net income.

In June 2001, the Financial Accounting Standards Board issued No. 142
Goodwill and Other Intangible Assets which we adopted on January 1, 2002.
This accounting standard eliminates the periodic amortization of goodwill, and
instead requires an annual impairment testing of goodwill and introduces the
concept of indefinite life intangible assets. There was no asset impairment
recognized by Select upon the adoption of this accounting standard. If the new
standard had been in effect in 2001, pre-tax amortization expense for the three
months and six months ended June 30, 2001 would have been $2.3 million and $4.6
million less, respectively. This would have increased fully diluted earnings
per share by approximately $0.03 and $0.07 for the three and six months ended
June 30, 2001, respectively.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest rate changes, primarily as a result of floating
interest rates on borrowings under our credit facility. A change in interest
rates by one percentage point on variable rate debt would have resulted in
interest expense fluctuating approximately $0.1 million and $0.2 million for
the three and six months ended June 30, 2002, respectively. As required by our
credit agreement, on March 30, 2001, we entered into an interest rate swap
agreement that fixes the interest rate cost to us on a portion of the U.S. term
loans outstanding under our credit facility for a period of four years. The
swap became effective on April 27, 2001. In January 2002 we amended the swap
to mature in March 2003. The fixed rate portion of all of our outstanding U.S.
term loans was 91% as of June 30, 2002.

Approximately 17% 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.

- 31 -



---



##### Table of Contents






PART II                      OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

On August 10, 1998 a complaint in the U.S. District Court for the Eastern
District of Pennsylvania was filed that named as defendants, NovaCare, Inc.
(now known as NAHC, Inc.), other named defendants and 100 defendants who were
to be named at a later time. This qui tamaction sought triple damages and
penalties under the False Claims Act against NAHC. The Department of Justice
did not intervene in this action. The allegations involve, among other things,
the distinction between individual and group billing in physical rehabilitation
clinics that we acquired from NovaCare. On October 16, 2000 the relator
plaintiff made a motion to amend the complaint to, among other things, add
Select Medical Corporation and some of its subsidiaries acquired in the
NovaCare acquisition as defendants in this case. This motion was granted in
September of 2001. The amended complaint alleges that from about January 1,
1995 through the present, the defendants submitted false or fraudulent bills
for physical therapy to various federal health programs. The United States
Attorneys Office has asserted that because the complaint is being amended to
add allegations against new defendants, it is entitled to a new period to
determine whether to intervene in the new allegations. On January 3, 2002,
NAHC and its related subsidiaries (including the subsidiaries acquired in the
NovaCare acquisition) entered in to a settlement agreement with the relator
plaintiff and the government, pursuant to which, in exchange for a payment by
NAHC of $375,000, the parties settled all claims arising out of conduct that
took place before Select Medicals acquisition of the NovaCare subsidiaries
that are defendants in the case. Claims against the Company and the NovaCare
subsidiaries regarding conduct occurring after the NovaCare acquisition were
not settled. As of July 31, 2002, the government had not advised the Company
whether it intends to intervene in any remaining claims, and Select and the
subsidiaries have not been served with the amended complaint. Based on a
review of the amended complaint, we do not believe that this lawsuit is
meritorious, and we intend to vigorously defend against this action. However,
because of the uncertain nature of the litigation, we cannot predict the
outcome of this matter.

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




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.




ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

- 32 -



---



##### Table of Contents






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

On May 13, 2002, the Company held its Annual Meeting of Stockholders. At this meeting the stockholders voted in favor of the following
items listed and described in the Companys Proxy Statement dated April 19,
2002.



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

|                   |  |     |            |          |  |  |           | 
|------------------ |  | --- | ---------- | -------- |  |  | --------- | 
|                   |  | For |            | Withheld
|                   |  |     |            |         
|David S. Chernow   |  |     | 42,180,519 |          |  |  | 1,506,800 | 
|                  
|                  
|                  
|                  
|Meyer Feldberg     |  |     | 42,117,632 |          |  |  | 1,569,687 | 
|                  
|                  
|                  
|                  
|LeRoy S. Zimmerman |  |     | 42,090,007 |          |  |  | 1,597,312 | 

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

|                     |  | 
|-------------------- |  | 
|Bryan C. Cressey     |  | 
|                    
|                    
|                    
|                    
|James E. Dalton, Jr. |  | 
|                    
|                    
|                    
|                    
|Robert A. Ortenzio   |  | 
|                    
|                    
|                    
|                    
|Russell L. Carson    |  | 
|                    
|                    
|                    
|                    
|Rocco A. Ortenzio    |  | 
|                    
|                    
|                    
|                    
|Leopold Swergold     |  | 



|2) |  | Approval of the adoption of the Select Medical Corporation Amended and
Restated 2002 Non-Employee Directors Plan.
|-- |  | ------------------------------------------------------------------------------------------------------------------

|           |  |         |           |         |  |           |        |  |  |        |           | 
|---------- |  | ------- | --------- | ------- |  | --------- | ------ |  |  | ------ | --------- | 
|           |  |         |           |         |  |           |        |  |  | Broker
|For        |  | Against |           | Abstain |  | Non-Votes
|           |  |         |           |         |  |          
|34,684,562 |  |         | 6,568,367 |         |  |           | 27,664 |  |  |        | 2,406,726 | 



|3) |  | Approval of the adoption of the Select Medical Corporation Second Amended
and Restated 1997 Stock Option Plan.
|-- |  | --------------------------------------------------------------------------------------------------------------

|           |  |         |           |         |  |           |        |  |  |        |           | 
|---------- |  | ------- | --------- | ------- |  | --------- | ------ |  |  | ------ | --------- | 
|           |  |         |           |         |  |           |        |  |  | Broker
|For        |  | Against |           | Abstain |  | Non-Votes
|           |  |         |           |         |  |          
|33,741,123 |  |         | 7,512,416 |         |  |           | 27,054 |  |  |        | 2,406,726 | 



|4) |  | Ratification of the appointment of PricewaterhouseCoopers LLP as the
Companys independent auditors for the fiscal year ending December 31,
2002.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|           |  |         |         |         |  |  |       | 
|---------- |  | ------- | ------- | ------- |  |  | ----- | 
|For        |  | Against |         | Abstain
|           |  |         |         |        
|43,575,439 |  |         | 107,460 |         |  |  | 4,420 | 

- 33 -



---



##### Table of Contents






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 35 hereof.

b.     Reports on Form 8-K



| |      
| | -----
| | None.




SIGNATURES

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

|                      |  |                            |  |                                                                                                          
|--------------------- |  | -------------------------- |  | ---------------------------------------------------------------------------------------------------------
|                      |  | SELECT MEDICAL CORPORATION
|                     
|                     
|                     
|                     
|                      |  |                            |  |                                                                                                          
|                     
|                     
|                     
|                     
|                      |  | By:                        |  | /s/ Martin F. Jackson                                                                                    
|                      |  |                            |  |                                                                                                          
|                      |  |                            |  | Martin F. Jackson
Senior Vice President and Chief Financial
Officer
(Duly Authorized Officer)            
|                     
|                     
|                     
|                     
|                      |  |                            |  |                                                                                                          
|                     
|                     
|                     
|                     
|                      |  | By:                        |  | /s/ Scott A. Romberger                                                                                   
|                      |  |                            |  |                                                                                                          
|                      |  |                            |  | Scott A. Romberger
Vice President, Chief Accounting Officer and Controller
(Principal Accounting Officer)
|                     
|                     
|                     
|                     
|                      |  |                            |  |                                                                                                          
|                     
|                     
|                     
|                     
|Dated: August 9, 2002 |  |                            |  |                                                                                                          

- 34 -



---



##### Table of Contents



EXHIBIT INDEX

|        |  |                                                                                                                                                                                                 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                 
|10.1    |  | Select Medical Corporation Second Amended and Restated 1997 Stock
Option Plan, incorporated by reference to Appendix C of the Companys
Proxy Statement filed on Schedule 14A on April 19, 2002.
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                 
|       
|       
|       
|       
|10.2    |  | First Addendum to Lease Agreement by and between Old Gettysburg
Associates II and Select Medical Corporation, dated as of February
26, 2002.                                                    
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                 
|       
|       
|       
|       
|10.3    |  | Second Addendum to Lease Agreement by and between Old Gettysburg
Associates II and Select Medical Corporation, data as of February 26,
2002.                                                    
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                 
|       
|       
|       
|       
|10.4    |  | Third Addendum to Lease Agreement by and between Old Gettysburg
Associates II and Select Medical Corporation, dated as of February
26, 2002.                                                    

- 35 -