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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


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

|                                          |  |                                                                                         
|----------------------------------------- |  | ----------------------------------------------------------------------------------------
|For the Quarter Ended March 31, 2002     
|                                         
|(BOX)                                     |  | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
|For the Period From ________ to ________.

Commission File Number: 000-32499

SELECT MEDICAL CORPORATION

(Exact name of Registrant as specified in its charter)


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

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

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

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

YES (X BOX)       NO (BOX)

As of April 30, 2002, the number of outstanding shares of the Registrants
Common Stock was 46,180,492.



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TABLE OF CONTENTS



|                                                |                                                                                               |                                                                                     |  |  |  |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I    FINANCIAL INFORMATION                
|                                                | ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS                                                    
|                                                |                                                                                               | Consolidated Balance Sheets                                                        
|                                                |                                                                                               | Consolidated Statements of Operations                                              
|                                                |                                                                                               | Consolidated Statements of Changes in Stockholders Equity 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                                     
|EXHIBIT INDEX                                  
|CONSULTING AGREEMENT BETWEEN ZIMMERMAN & SELECT
|AIRPLANE COST SHARING AGREEMENT                
|SELECT MEDICAL CORP. AMEND.& RESTATED 2002 PLAN



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##### Table of Contents



TABLE OF CONTENTS

|          |  |                                                                                       |  |  |    | 
|--------- |  | ------------------------------------------------------------------------------------- |  |  | -- | 
|PART I    |  | FINANCIAL INFORMATION                                                                 |  |  | 3  | 
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|ITEM 1.   |  | CONSOLIDATED FINANCIAL STATEMENTS                                                     |  |  |    | 
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|          |  | Consolidated balance sheets                                                           |  |  | 3  | 
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|          |  | Consolidated statements of operations                                                 |  |  | 4  | 
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|          |  | Consolidated statement of changes in stockholders equity                             |  |  | 5  | 
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|          |  | Consolidated statements of cash flows                                                 |  |  | 6  | 
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|          |  | Notes to consolidated financial statements                                            |  |  | 7  | 
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|ITEM 2.   |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS |  |  | 19 | 
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|          |  |                                                                                       |  |  |    | 
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|ITEM 3.   |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  |  | 28 | 
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|PART II   |  | OTHER INFORMATION                                                                     |  |  | 29 | 
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|ITEM 1.   |  | LEGAL PROCEEDINGS                                                                     |  |  | 29 | 
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|ITEM 2.   |  | CHANGES IN SECURITIES AND USE OF PROCEEDS                                             |  |  | 29 | 
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|ITEM 3.   |  | DEFAULTS UPON SENIOR SECURITIES                                                       |  |  | 29 | 
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|ITEM 4.   |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  |  | 29 | 
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|ITEM 5.   |  | OTHER INFORMATION                                                                     |  |  | 30 | 
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|ITEM 6.   |  | EXHIBITS AND REPORTS ON FORM 8-K                                                      |  |  | 30 | 
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|          |  |                                                                                       |  |  |    | 
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|SIGNATURE |  |                                                                                       |  |  | 30 | 

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PART I    FINANCIAL INFORMATION
ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS

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

|                                                       |                                                                                                                                          |             |           |         |              |   |         |         |  
|------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------- | ----------- | --------- | ------- | ------------ | - | ------- | ------- | -
|                                                       |                                                                                                                                          |             | March 31, |         | December 31,
|                                                       |                                                                                                                                          |             | 2002      |         | 2001        
|                                                       |                                                                                                                                          |             |           |         |             
|Assets                                                 |                                                                                                                                          | (unaudited) |           |         |              |  
|Current Assets:                                        |                                                                                                                                          |             |           |         |              |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Cash and cash equivalents                                                                                                                |             | $         | 25,016  |              |   | $       | 10,703  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accounts receivable, net of allowance for doubtful accounts of $75,342
and $79,889 in 2002 and 2001, respectively                        |             |           | 223,690 |              |   |         | 218,393 |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Current deferred tax asset                                                                                                               |             |           | 28,943  |              |   |         | 28,945  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Other current assets                                                                                                                     |             |           | 17,371  |              |   |         | 18,444  |  
|                                                       |                                                                                                                                          |             |           |         |              |   |         |         |  
|Total Current Assets                                   |                                                                                                                                          |             | 295,020   |         |              |   | 276,485 |        
|                                                      
|                                                      
|                                                      
|                                                      
|Property and equipment, net                            |                                                                                                                                          |             | 95,159    |         |              |   | 92,005  |        
|                                                      
|                                                      
|                                                      
|                                                      
|Goodwill                                               |                                                                                                                                          |             | 199,377   |         |              |   | 199,850 |        
|                                                      
|                                                      
|                                                      
|                                                      
|Trademark                                              |                                                                                                                                          |             | 37,875    |         |              |   | 37,875  |        
|                                                      
|                                                      
|                                                      
|                                                      
|Other intangibles                                      |                                                                                                                                          |             | 9,441     |         |              |   | 9,532   |        
|                                                      
|                                                      
|                                                      
|                                                      
|Non-current deferred tax asset                         |                                                                                                                                          |             | 5,891     |         |              |   | 6,674   |        
|                                                      
|                                                      
|                                                      
|                                                      
|Other assets                                           |                                                                                                                                          |             | 27,971    |         |              |   | 28,424  |        
|                                                       |                                                                                                                                          |             |           |         |              |   |         |         |  
|Total Assets                                           |                                                                                                                                          | $           | 670,734   |         |              | $ | 650,845 |        
|                                                       |                                                                                                                                          |             |           |         |              |   |         |        
|Liabilities and Stockholders Equity                   |                                                                                                                                          |             |           |         |              |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|Current Liabilities:                                   |                                                                                                                                          |             |           |         |              |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Bank overdrafts                                                                                                                          |             | $         | 6,678   |              |   | $       | 6,083   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Current portion of long-term debt and notes payable                                                                                      |             |           | 27,424  |              |   |         | 26,774  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accounts payable                                                                                                                         |             |           | 34,453  |              |   |         | 33,520  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accrued payroll                                                                                                                          |             |           | 29,413  |              |   |         | 27,160  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accrued vacation                                                                                                                         |             |           | 13,834  |              |   |         | 12,820  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accrued restructuring                                                                                                                    |             |           | 1,466   |              |   |         | 1,819   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accrued other                                                                                                                            |             |           | 30,199  |              |   |         | 23,568  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Income taxes payable                                                                                                                     |             |           | 3,704   |              |   |         | 1,735   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Due to third party payors                                                                                                                |             |           | 22,081  |              |   |         | 16,257  |  
|                                                       |                                                                                                                                          |             |           |         |              |   |         |         |  
|Total Current Liabilities                              |                                                                                                                                          |             | 169,252   |         |              |   | 149,736 |        
|                                                      
|                                                      
|                                                      
|                                                      
|Long-term debt, net of current portion                 |                                                                                                                                          |             | 249,268   |         |              |   | 261,649 |        
|                                                       |                                                                                                                                          |             |           |         |              |   |         |        
|Total Liabilities                                      |                                                                                                                                          |             | 418,520   |         |              |   | 411,385 |        
|                                                      
|                                                      
|                                                      
|                                                      
|Commitments and Contingencies                          |                                                                                                                                          |             |           |         |              |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|Minority interest in consolidated subsidiary companies |                                                                                                                                          |             | 5,615     |         |              |   | 5,176   |        
|                                                      
|                                                      
|                                                      
|                                                      
|Stockholders Equity:                                  |                                                                                                                                          |             |           |         |              |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Common stock  $.01 par value: Authorized shares - 200,000,000,
Issued shares - 46,635,000 and 46,488,000 in 2002 and 2001, respectively |             |           | 466     |              |   |         | 465     |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Capital in excess of par                                                                                                                 |             |           | 232,704 |              |   |         | 231,349 |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Retained earnings                                                                                                                        |             |           | 16,100  |              |   |         | 5,924   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Treasury stock, at cost - 461,000 shares                                                                                                 |             |           | (1,560  | )            |   |         | (1,560  | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accumulated other comprehensive loss                                                                                                     |             |           | (1,111  | )            |   |         | (1,894  | )
|                                                       |                                                                                                                                          |             |           |         |              |   |         |         |  
|Total Stockholders Equity                             |                                                                                                                                          |             | 246,599   |         |              |   | 234,284 |        
|                                                       |                                                                                                                                          |             |           |         |              |   |         |        
|Total Liabilities and Stockholders Equity             |                                                                                                                                          | $           | 670,734   |         |              | $ | 650,845 |        
|                                                       |                                                                                                                                          |             |           |         |              |   |         |        

See accompanying notes.

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##### Table of Contents






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

|                                                       |                               |          |                         |         |                       |      |         |         |        |      | 
|------------------------------------------------------ | ----------------------------- | -------- | ----------------------- | ------- | --------------------- | ---- | ------- | ------- | ------ | ---- | 
|                                                       |                               |          |                         |         | For the Quarter Ended
|                                                       |                               |          |                         |         | March 31,            
|                                                       |                               |          |                         |         |                      
|                                                       |                               |          |                         |         | 2002                  |      | 2001   
|                                                       |                               |          |                         |         |                       |      |        
|Net operating revenues                                 |                               | $        | 271,920                 |         |                       | $    | 225,088 |        
|                                                       |                               |          |                         |         |                       |      |         |        
|Costs and expenses:                                    |                               |          |                         |         |                       |      |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Cost of services              |          |                         | 221,735 |                       |      |         | 181,273 |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | General and administrative    |          |                         | 9,686   |                       |      |         | 8,440   |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Bad debt expense              |          |                         | 10,443  |                       |      |         | 8,343   |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Depreciation and amortization |          |                         | 6,026   |                       |      |         | 7,816   |       
|                                                       |                               |          |                         |         |                       |      |         |        
|Total costs and expenses                               |                               |          | 247,890                 |         |                       |      | 205,872 |        
|                                                       |                               |          |                         |         |                       |      |         |        
|Income from operations                                 |                               |          | 24,030                  |         |                       |      | 19,216  |        
|                                                      
|                                                      
|                                                      
|                                                      
|Other income and expense:                              |                               |          |                         |         |                       |      |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|Interest income                                        |                               |          | (71                     | )       |                       |      | (241    | )      
|                                                      
|                                                      
|                                                      
|                                                      
|Interest expense                                       |                               |          | 6,778                   |         |                       |      | 8,016   |        
|                                                       |                               |          |                         |         |                       |      |         |        
|Income before minority interests and income taxes      |                               |          | 17,323                  |         |                       |      | 11,441  |        
|                                                      
|                                                      
|                                                      
|                                                      
|Minority interest in consolidated subsidiary companies |                               |          | 603                     |         |                       |      | 1,407   |        
|                                                       |                               |          |                         |         |                       |      |         |        
|Income before income taxes                             |                               |          | 16,720                  |         |                       |      | 10,034  |        
|                                                      
|                                                      
|                                                      
|                                                      
|Income tax expense                                     |                               |          | 6,544                   |         |                       |      | 3,913   |        
|                                                       |                               |          |                         |         |                       |      |         |        
|Net income                                             |                               | $        | 10,176                  |         |                       | $    | 6,121   |        
|                                                      
|                                                      
|                                                      
|                                                      
|Less: Preferred dividends                              |                               |          |                        |         |                       |      | 2,306   |        
|                                                       |                               |          |                         |         |                       |      |         |        
|Net income available to common stockholders            |                               | $        | 10,176                  |         |                       | $    | 3,815   |        
|                                                       |                               |          |                         |         |                       |      |         |        
|Net income per common share:                           |                               |          |                         |         |                       |      |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                               | Basic:   |                         |         |                       |      |         |         |        |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                               |          | Income per common share |         | $                     | 0.22 |         |         | $      | 0.15 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                               | Diluted: |                         |         |                       |      |         |         |        |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                               |          | Income per common share |         | $                     | 0.21 |         |         | $      | 0.13 | 
|                                                      
|                                                      
|                                                      
|                                                      
|Weighted average shares outstanding:                   |                               |          |                         |         |                       |      |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                               | Basic    |                         |         | 46,080                |      |         |         | 25,476 |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                               | Diluted  |                         |         | 48,624                |      |         |         | 36,078 |     

See accompanying notes.

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##### Table of Contents






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

|                             |                                       |  |        |     |           |   |           |   |            |   |          |     |               |   |               |        |  |   |        |   |  |   |             |     |  |  |   |        | 
|---------------------------- | ------------------------------------- |  | ------ | --- | --------- | - | --------- | - | ---------- | - | -------- | --- | ------------- | - | ------------- | ------ |  | - | ------ | - |  | - | ----------- | --- |  |  | - | ------ | 
|                             |                                       |  |        |     |           |   |           |   |            |   |          |     |               |   |               |        |  |   |        |   |  |   | Accumulated |     |  |  |  
|                             |                                       |  |        |     |           |   | Common    |   | Capital in |   |          |     |               |   |               |        |  |   | Other  |   |  |   |            
|                             |                                       |  | Common |     | Stock Par |   | Excess of |   | Retained   |   | Treasury |     | Comprehensive |   | Comprehensive
|                             |                                       |  | Stock  |     | Value     |   | Par       |   | Earnings   |   | Stock    |     | Loss          |   | Income       
|                             |                                       |  |       
|Balance at December 31, 2001 |                                       |  | 46,488 |     |           | $ | 465       |   |            | $ | 231,349  |     |               | $ | 5,924         |        |  | $ | (1,560 | ) |  | $ | (1,894      | )   |  |  |   |       
|                            
|                            
|                            
|                            
|                             | Net income                            |  |        |     |           |   |           |   |            |   |          |     |               |   |               | 10,176 |  |   |        |   |  |   |             |     |  |  | $ | 10,176 | 
|                            
|                            
|                            
|                            
|                             | Other comprehensive income            |  |        |     |           |   |           |   |            |   |          |     |               |   |               |        |  |   |        |   |  |   |             | 783 |  |  |   | 783    | 
|                             |                                       |  |        |     |           |   |           |   |            |   |          |     |               |   |               |        |  |   |        |   |  |   |             |     |  |  |   |       
|                             | Total comprehensive income            |  |        |     |           |   |           |   |            |   |          |     |               |   |               |        |  |   |        |   |  |   |             |     |  |  | $ | 10,959 | 
|                             |                                       |  |        |     |           |   |           |   |            |   |          |     |               |   |               |        |  |   |        |   |  |   |             |     |  |  |   |       
|                             | Issuance of common stock              |  |        | 147 |           |   |           | 1 |            |   |          | 972 |               |   |               |        |  |   |        |   |  |   |             |     |  |  |   |        | 
|                            
|                            
|                            
|                            
|                             | Tax benefit of stock option exercises |  |        |     |           |   |           |   |            |   |          | 383 |               |   |               |        |  |   |        |   |  |   |             |     |  |  |   |        | 
|                             |                                       |  |        |     |           |   |          
|Balance at March 31, 2002    |                                       |  | 46,635 |     |           | $ | 466       |   |            | $ | 232,704  |     |               | $ | 16,100        |        |  | $ | (1,560 | ) |  | $ | (1,111      | )   |  |  |   |       
|                             |                                       |  |        |     |           |   |          

See accompanying notes.

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##### Table of Contents






Select Medical Corporation
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

|                                                                                  |                                                                                             |                           |         |                       |         |      |         |       |         |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------- | ------- | --------------------- | ------- | ---- | ------- | ----- | ------- | -
|                                                                                  |                                                                                             |                           |         | For the Quarter Ended
|                                                                                  |                                                                                             |                           |         | March 31,            
|                                                                                  |                                                                                             |                           |         |                      
|                                                                                  |                                                                                             |                           |         | 2002                  |         | 2001
|                                                                                  |                                                                                             |                           |         |                       |         |     
|Operating activities                                                              |                                                                                             |                           |         |                       |         |      |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income                                                                        |                                                                                             | $                         | 10,176  |                       |         | $    | 6,121   |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                                             |                           |         |                       |         |      |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Depreciation and amortization                                                               |                           |         | 6,026                 |         |      |         | 7,816 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Provision for bad debts                                                                     |                           |         | 10,443                |         |      |         | 8,343 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Minority interests                                                                          |                           |         | 603                   |         |      |         | 1,407 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |                           |         |                       |         |      |         |       |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accounts receivable       |         |                       | (15,754 | )    |         |       | (13,733 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Other current assets      |         |                       | (141    | )    |         |       | 2,226   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Other assets              |         |                       | 461     |      |         |       | 3,468   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accounts payable          |         |                       | 934     |      |         |       | 263     |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Due to third-party payors |         |                       | 8,009   |      |         |       | (1,875  | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accrued expenses          |         |                       | 9,350   |      |         |       | 8,126   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Income taxes              |         |                       | 4,046   |      |         |       | 2,657   |  
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |      
|Net cash provided by operating activities                                         |                                                                                             |                           | 34,153  |                       |         |      | 24,819  |      
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |      
|Investing activities                                                              |                                                                                             |                           |         |                       |         |      |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchases of property and equipment, net                                          |                                                                                             |                           | (8,959  | )                     |         |      | (5,325  | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Earnout payments                                                                  |                                                                                             |                           | (489    | )                     |         |      | (505    | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Acquisition of businesses, net of cash acquired                                   |                                                                                             |                           |        |                       |         |      | (1,375  | )    
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |      
|Net cash used in investing activities                                             |                                                                                             |                           | (9,448  | )                     |         |      | (7,205  | )    
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |      
|Financing activities                                                              |                                                                                             |                           |         |                       |         |      |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net repayments on credit facility debt                                            |                                                                                             |                           | (8,991  | )                     |         |      | (7,000  | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Principal payments on seller and other debt                                       |                                                                                             |                           | (2,740  | )                     |         |      | (6,445  | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from issuance of common stock                                            |                                                                                             |                           | 973     |                       |         |      | 2       |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from (repayment of) bank overdrafts                                      |                                                                                             |                           | 595     |                       |         |      | (4,691  | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Payment of deferred financing costs                                               |                                                                                             |                           | (67     | )                     |         |      |        |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Distributions to minority interests                                               |                                                                                             |                           | (159    | )                     |         |      | (397    | )    
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |      
|Net cash used in financing activities                                             |                                                                                             |                           | (10,389 | )                     |         |      | (18,531 | )    
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |      
|Effect of exchange rate changes on cash
and cash equivalents                      |                                                                                             |                           | (3      | )                     |         |      | (60     | )    
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |      
|Net increase (decrease) in cash and cash equivalents                              |                                                                                             |                           | 14,313  |                       |         |      | (977    | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash and cash equivalents at beginning of period                                  |                                                                                             |                           | 10,703  |                       |         |      | 3,151   |      
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |      
|Cash and cash equivalents at end of period                                        |                                                                                             | $                         | 25,016  |                       |         | $    | 2,174   |      
|                                                                                  |                                                                                             |                           |         |                       |         |      |         |      
|Supplemental Cash Flow Information                                                |                                                                                             |                           |         |                       |         |      |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash paid for interest                                                            |                                                                                             | $                         | 3,544   |                       |         | $    | 8,016   |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash paid for income taxes                                                        |                                                                                             | $                         | 2,218   |                       |         | $    | 1,249   |      

See accompanying notes.

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##### 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 March 31, 2002 and for the three
month periods ended March 31, 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 months ended March 31, 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

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 Pronouncement

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 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. 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, subject
to stockholder approval. 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 must be 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

- 7 -



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##### Table of Contents



exceeds two performance-based targets.
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. Both the
adoption of the plan and the amendment were subject to stockholder approval.
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 subject to stockholder approval.

During the three months ended March 31, 2002, the Company granted stock
options under its 1997 Stock Option Plan totaling 785,348 shares of Common
Stock at exercise prices ranging from $12.66 to $14.04 per share.

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. All segment revenues are from external
customers.

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

|                     |  |                                   |             |                |  |           |             |       |  |   |            |   |  |   |             | 
|-------------------- |  | --------------------------------- | ----------- | -------------- |  | --------- | ----------- | ----- |  | - | ---------- | - |  | - | ----------- | 
|                     |  | Three Months Ended March 31, 2002
|                     |  |                                  
|                     |  | Specialty                         |             | Outpatient     |  |           |             |       |  |   |            |  
|                     |  | Hospitals                         |             | Rehabilitation |  | All Other |             | Total
|                     |  |                                  
|Net revenue          |  | $                                 | 148,828,000 |                |  | $         | 119,694,000 |       |  | $ | 3,398,000  |   |  | $ | 271,920,000 | 
|                    
|                    
|                    
|                    
|EBITDA               |  |                                   | 15,667,000  |                |  |           | 21,048,000  |       |  |   | (6,659,000 | ) |  |   | 30,056,000  | 
|                    
|                    
|                    
|                    
|Total assets         |  |                                   | 298,352,000 |                |  |           | 327,591,000 |       |  |   | 44,791,000 |   |  |   | 670,734,000 | 
|                    
|                    
|                    
|                    
|Capital expenditures |  |                                   | 6,183,000   |                |  |           | 2,435,000   |       |  |   | 341,000    |   |  |   | 8,959,000   | 

|                     |  |                                   |             |                |  |           |             |       |  |   |            |   |  |   |             | 
|-------------------- |  | --------------------------------- | ----------- | -------------- |  | --------- | ----------- | ----- |  | - | ---------- | - |  | - | ----------- | 
|                     |  | Three Months Ended March 31, 2001
|                     |  |                                  
|                     |  | Specialty                         |             | Outpatient     |  |           |             |       |  |   |            |  
|                     |  | Hospitals                         |             | Rehabilitation |  | All Other |             | Total
|                     |  |                                  
|Net revenue          |  | $                                 | 113,150,000 |                |  | $         | 108,673,000 |       |  | $ | 3,265,000  |   |  | $ | 225,088,000 | 
|                    
|                    
|                    
|                    
|EBITDA               |  |                                   | 13,395,000  |                |  |           | 19,056,000  |       |  |   | (5,419,000 | ) |  |   | 27,032,000  | 
|                    
|                    
|                    
|                    
|Total assets         |  |                                   | 255,290,000 |                |  |           | 314,962,000 |       |  |   | 11,144,000 |   |  |   | 581,396,000 | 
|                    
|                    
|                    
|                    
|Capital expenditures |  |                                   | 3,055,000   |                |  |           | 1,742,000   |       |  |   | 528,000    |   |  |   | 5,325,000   | 

- 8 -



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A reconciliation of EBITDA to net income is as follows:

|                              |  |                            |            |      |  |   |            |  
|----------------------------- |  | -------------------------- | ---------- | ---- |  | - | ---------- | -
|                              |  | For the Three Months Ended
|                              |  | March 31,                 
|                              |  |                           
|                              |  | 2002                       |            | 2001
|                              |  |                           
|EBITDA                        |  | $                          | 30,056,000 |      |  | $ | 27,032,000 |  
|                             
|                             
|                             
|                             
|Depreciation and amortization |  |                            | (6,026,000 | )    |  |   | (7,816,000 | )
|                             
|                             
|                             
|                             
|Interest income               |  |                            | 71,000     |      |  |   | 241,000    |  
|                             
|                             
|                             
|                             
|Interest expense              |  |                            | (6,778,000 | )    |  |   | (8,016,000 | )
|                             
|                             
|                             
|                             
|Minority interest             |  |                            | (603,000   | )    |  |   | (1,407,000 | )
|                             
|                             
|                             
|                             
|Income tax expense            |  |                            | (6,544,000 | )    |  |   | (3,913,000 | )
|                              |  |                           
|Net income                    |  | $                          | 10,176,000 |      |  | $ | 6,121,000  |  
|                              |  |                           

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 |  |             | (338,000  | )         |  |       | (15,000 | ) |  |   | (353,000  | )
|                     |  |            
|March 31, 2002       |  | $           | 1,349,000 |           |  | $     | 117,000 |   |  | $ | 1,466,000 |  
|                     |  |            

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 quarter ended March 31, 2002
was $194,000. Estimated amortization expense for intangible assets for each of
the five years commencing January 1, 2002 will be approximately $553,000.

- 9 -



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##### Table of Contents



Intangible assets consist of the following:

|                               |       |   |                      |             |              |   |            |   | 
|------------------------------ | ----- | - | -------------------- | ----------- | ------------ | - | ---------- | - | 
|                               |       |   | As of March 31, 2002
|                               |       |   |                     
|                               |       |   | Gross Carrying       |             | Accumulated 
|                               |       |   | Amount               |             | Amortization
|                               |       |   |                     
|Amortized intangible assets    |       |   |                      |             |              |   |            |  
|                              
|                              
|                              
|                              
|Management services agreements |       | $ | 11,404,000           |             |              | $ | (1,963,000 | )
|                              
|                              
|                              
|                              
|Unamortized intangible assets  |       |   |                      |             |              |   |            |  
|                              
|                              
|                              
|                              
|Goodwill                       |       | $ | 199,377,000          |             |              |   |            |  
|                              
|                              
|                              
|                              
|Trademarks                     |       |   | 37,875,000           |             |              |   |            |  
|                               |       |   |                      |             |              |   |            |  
|                               | Total |   | $                    | 237,252,000 |              |   |            |   | 
|                               |       |   |                      |             |              |   |            |  

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 was adopted on January 1, 2001:

|                                 |  |                                 |            |      |  |   |           | 
|-------------------------------- |  | ------------------------------- | ---------- | ---- |  | - | --------- | 
|                                 |  | For the Quarter Ended March 31,
|                                 |  |                                
|                                 |  | 2002                            |            | 2001
|                                 |  |                                 |            |     
|Reported net income              |  | $                               | 10,176,000 |      |  | $ | 6,121,000 | 
|                                
|                                
|                                
|                                
|Add back: Goodwill amortization  |  |                                 |           |      |  |   | 1,232,000 | 
|                                
|                                
|                                
|                                
|Add back: Trademark amortization |  |                                 |           |      |  |   | 152,000   | 
|                                 |  |                                 |            |      |  |   |           | 
|Adjusted net income              |  | $                               | 10,176,000 |      |  | $ | 7,505,000 | 
|                                 |  |                                 |            |      |  |   |           | 
|Basic earnings per share:        |  |                                 |            |      |  |   |           | 
|                                
|                                
|                                
|                                
|Reported net income              |  | $                               | 0.22       |      |  | $ | 0.15      | 
|                                
|                                
|                                
|                                
|Goodwill amortization            |  |                                 |           |      |  |   | 0.04      | 
|                                
|                                
|                                
|                                
|Trademark amortization           |  |                                 |           |      |  |   | 0.01      | 
|                                 |  |                                 |            |      |  |   |           | 
|Adjusted net income              |  | $                               | 0.22       |      |  | $ | 0.20      | 
|                                 |  |                                 |            |      |  |   |           | 
|Diluted earnings per share:      |  |                                 |            |      |  |   |           | 
|                                
|                                
|                                
|                                
|Reported net income              |  | $                               | 0.21       |      |  | $ | 0.13      | 
|                                
|                                
|                                
|                                
|Goodwill amortization            |  |                                 |           |      |  |   | 0.03      | 
|                                
|                                
|                                
|                                
|Trademark amortization           |  |                                 |           |      |  |   | 0.01      | 
|                                 |  |                                 |            |      |  |   |           | 
|Adjusted net income              |  | $                               | 0.21       |      |  | $ | 0.17      | 
|                                 |  |                                 |            |      |  |   |           | 

- 10 -



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##### Table of Contents



The changes in the carrying amount of goodwill for the Companys reportable
segments for the quarter ended March 31, 2002, are as follows:

|                               |  |           |            |                |  |       |             |       |  |   |         |  |  |   |             |  
|------------------------------ |  | --------- | ---------- | -------------- |  | ----- | ----------- | ----- |  | - | ------- |  |  | - | ----------- | -
|                               |  | Specialty |            | Outpatient     |  | All   |             |       |  |  
|                               |  | Hospitals |            | Rehabilitation |  | Other |             | Total
|                               |  |           |            |                |  |       |             |      
|Balance as of January 1, 2002  |  | $         | 84,391,000 |                |  | $     | 114,875,000 |       |  | $ | 584,000 |  |  | $ | 199,850,000 |  
|                              
|                              
|                              
|                              
|Income tax benefits
recognized |  |           |           |                |  |       | (916,000    | )     |  |   |        |  |  |   | (916,000    | )
|                              
|                              
|                              
|                              
|Earn-out payments              |  |           |           |                |  |       | 489,000     |       |  |   |        |  |  |   | 489,000     |  
|                              
|                              
|                              
|                              
|Translation adjustment         |  |           |           |                |  |       | (46,000     | )     |  |   |        |  |  |   | (46,000     | )
|                               |  |           |            |                |  |       |             |       |  |   |         |  |  |   |             |  
|Balance as of March 31, 2002   |  | $         | 84,391,000 |                |  | $     | 114,402,000 |       |  | $ | 584,000 |  |  | $ | 199,377,000 |  
|                               |  |           |            |                |  |       |             |       |  |   |         |  |  |   |             |  

7.     Net Income per Share

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

|                                                                                                    |                                                                                                              |   |                              |            |      |   |            |            | 
|--------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | - | ---------------------------- | ---------- | ---- | - | ---------- | ---------- | 
|                                                                                                    |                                                                                                              |   | Three Months Ended March 31,
|                                                                                                    |                                                                                                              |   |                             
|                                                                                                    |                                                                                                              |   | 2002                         |            | 2001
|                                                                                                    |                                                                                                              |  
|Numerator:                                                                                          |                                                                                                              |   |                              |            |      |   |            |           
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Net income                                                                                          |                                                                                                              | $ | 10,176,000                   |            |      | $ | 6,121,000  |           
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Less: Class A and Class B Preferred
stock dividends                                                          |   |                              |           |      |   |            | 2,306,000  | 
|                                                                                                    |                                                                                                              |  
|                                                                                                    | Numerator for basic earnings per
share  income available to common
stockholders                             |   |                              | 10,176,000 |      |   |            | 3,815,000  | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Effect of dilutive securities:                                                                      |                                                                                                              |   |                              |            |      |   |            |           
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Class B Preferred stock dividends                                                                            |   |                              |           |      |   |            | 1,006,000  | 
|                                                                                                    |                                                                                                              |  
|                                                                                                    | Numerator for diluted earnings per
share  income available to common
stockholders after assumed
conversions |   | $                            | 10,176,000 |      |   | $          | 4,821,000  | 
|                                                                                                    |                                                                                                              |  
|Denominator:                                                                                        |                                                                                                              |   |                              |            |      |   |            |           
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Denominator for basic earnings per
share weighted average shares                                            |   |                              | 46,080,000 |      |   |            | 25,476,000 | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Effect of dilutive securities:                                                                               |   |                              |            |      |   |            |            | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | a) Stock options                                                                                             |   |                              | 1,527,000  |      |   |            | 959,000    | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | b) Warrants                                                                                                  |   |                              | 1,017,000  |      |   |            | 427,000    | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | c) Convertible preferred stock                                                                               |   |                              |           |      |   |            | 9,216,000  | 
|                                                                                                    |                                                                                                              |  
|Denominator for diluted earnings per
share-adjusted weighted average shares
and assumed conversions |                                                                                                              |   | 48,624,000                   |            |      |   | 36,078,000 |           
|                                                                                                    |                                                                                                              |  
|                                                                                                    | Basic income per common share                                                                                |   | $                            | 0.22       |      |   | $          | 0.15       | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Diluted income per common share                                                                              |   | $                            | 0.21       |      |   | $          | 0.13       | 

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##### Table of Contents



8.     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 April
30, 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.

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 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
20 unsettled cases in 11 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 and residency limitations that, if applicable,
may limit or prevent the Company from the recovering from these state guaranty
association funds. At this time, the Company believes that it will meet the
requirements for coverage under 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.

- 12 -



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##### Table of Contents



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

The Company conducts a significant portion of its business through its
subsidiaries. Presented below is condensed consolidating financial information
for the Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries
at March 31, 2002 and December 31, 2001 and for the quarters ended March 31,
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.
TJ Corporation I, LLC

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##### Table of Contents



|                                                       |                                                     |   |                                       |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |         |         |  
|------------------------------------------------------ | --------------------------------------------------- | - | ------------------------------------- | ------- | ---------- | - | ------------- | ------- | ------------ | - | ------------ | ------ | - | - | -------- | -------- | ---- | - | ------- | ------- | -
|                                                       |                                                     |   | Select Medical Corporation           
|                                                       |                                                     |   | Condensed Consolidating Balance Sheet
|                                                       |                                                     |   | March 31, 2002                       
|                                                       |                                                     |   |                                      
|                                                       |                                                     |   | Select Medical                        |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |        
|                                                       |                                                     |   | Corporation                           |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |        
|                                                       |                                                     |   | (Parent Company                       |         | Subsidiary |   | Non-Guarantor |         |              |   |              |        |   |   |         
|                                                       |                                                     |   | Only)                                 |         | Guarantors |   | Subsidiaries  |         | Eliminations |   | Consolidated
|                                                       |                                                     |   |                                       |         |            |   |               |         |              |   |             
|                                                       |                                                     |   | (dollars in thousands)               
|Assets                                                 |                                                     |   |                                       |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Current Assets:                                     |   |                                       |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |         |         |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Cash and cash equivalents                           |   | $                                     | 17,802  |            |   | $             | 5,460   |              |   | $            | 1,754  |   |   | $        |         |      |   | $       | 25,016  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accounts receivable, net                            |   |                                       | (200    | )          |   |               | 193,491 |              |   |              | 30,399 |   |   |          |         |      |   |         | 223,690 |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Current deferred tax asset                          |   |                                       | 1,880   |            |   |               | 27,063  |              |   |              |       |   |   |          |         |      |   |         | 28,943  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Other current assets                                |   |                                       | 2,221   |            |   |               | 12,722  |              |   |              | 2,428  |   |   |          |         |      |   |         | 17,371  |  
|                                                       |                                                     |   |                                       |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |         |         |  
|Total Current Assets                                   |                                                     |   | 21,703                                |         |            |   | 238,736       |         |              |   | 34,581       |        |   |   |         |          |      |   | 295,020 |        
|                                                      
|                                                      
|                                                      
|                                                      
|Property and equipment, net                            |                                                     |   | 7,040                                 |         |            |   | 69,111        |         |              |   | 19,008       |        |   |   |         |          |      |   | 95,159  |        
|                                                      
|                                                      
|                                                      
|                                                      
|Investment in affiliates                               |                                                     |   | 320,458                               |         |            |   | 67,155        |         |              |   |             |        |   |   | (387,613 | )(a)     |      |   |        |        
|                                                      
|                                                      
|                                                      
|                                                      
|Goodwill                                               |                                                     |   | 5,853                                 |         |            |   | 157,074       |         |              |   | 36,450       |        |   |   |         |          |      |   | 199,377 |        
|                                                      
|                                                      
|                                                      
|                                                      
|Trademark                                              |                                                     |   |                                      |         |            |   | 37,875        |         |              |   |             |        |   |   |         |          |      |   | 37,875  |        
|                                                      
|                                                      
|                                                      
|                                                      
|Other
intangibles                                      |                                                     |   |                                      |         |            |   | 1,026         |         |              |   | 8,415        |        |   |   |         |          |      |   | 9,441   |        
|                                                      
|                                                      
|                                                      
|                                                      
|Non-current deferred tax asset                         |                                                     |   | (414                                  | )       |            |   | 6,305         |         |              |   |             |        |   |   |         |          |      |   | 5,891   |        
|                                                      
|                                                      
|                                                      
|                                                      
|Other assets                                           |                                                     |   | 11,601                                |         |            |   | 15,658        |         |              |   | 712          |        |   |   |         |          |      |   | 27,971  |        
|                                                       |                                                     |   |                                       |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |         |         |  
|Total Assets                                           |                                                     | $ | 366,241                               |         |            | $ | 592,940       |         |              | $ | 99,166       |        |   | $ | (387,613 | )        |      | $ | 670,734 |        
|                                                       |                                                     |   |                                       |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |         |         |  
|Liabilities and Stockholders Equity                   |                                                     |   |                                       |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|Current Liabilities:                                   |                                                     |   |                                       |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Bank overdrafts                                     |   | $                                     | 6,678   |            |   | $             |        |              |   | $            |       |   |   | $        |         |      |   | $       | 6,678   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Current portion of long-term debt and notes payable |   |                                       | 110     |            |   |               | 27,293  |              |   |              | 21     |   |   |          |         |      |   |         | 27,424  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accounts payable                                    |   |                                       | 5,014   |            |   |               | 25,307  |              |   |              | 4,132  |   |   |          |         |      |   |         | 34,453  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Intercompany accounts                               |   |                                       | 41,347  |            |   |               | (43,301 | )            |   |              | 1,954  |   |   |          |         |      |   |         |        |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accrued payroll                                     |   |                                       | 318     |            |   |               | 29,081  |              |   |              | 14     |   |   |          |         |      |   |         | 29,413  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accrued vacation                                    |   |                                       | 2,701   |            |   |               | 9,784   |              |   |              | 1,349  |   |   |          |         |      |   |         | 13,834  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accrued restructuring                               |   |                                       | 79      |            |   |               | 1,387   |              |   |              |       |   |   |          |         |      |   |         | 1,466   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accrued other                                       |   |                                       | 15,027  |            |   |               | 14,572  |              |   |              | 600    |   |   |          |         |      |   |         | 30,199  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Income taxes                                        |   |                                       | 5,690   |            |   |               | 1,180   |              |   |              | (3,166 | ) |   |          |         |      |   |         | 3,704   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Due to third party payors                           |   |                                       | (32,651 | )          |   |               | 55,302  |              |   |              | (570   | ) |   |          |         |      |   |         | 22,081  |  
|                                                       |                                                     |   |                                       |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |         |         |  
|Total Current Liabilities                              |                                                     |   | 44,313                                |         |            |   | 120,605       |         |              |   | 4,334        |        |   |   |         |          |      |   | 169,252 |        
|                                                      
|                                                      
|                                                      
|                                                      
|Long-term debt, net of current portion                 |                                                     |   | 75,329                                |         |            |   | 129,505       |         |              |   | 44,434       |        |   |   |         |          |      |   | 249,268 |        
|                                                       |                                                     |   |                                       |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |         |         |  
|Total Liabilities                                      |                                                     |   | 119,642                               |         |            |   | 250,110       |         |              |   | 48,768       |        |   |   |         |          |      |   | 418,520 |        
|                                                      
|                                                      
|                                                      
|                                                      
|Commitments
and Contingencies                          |                                                     |   |                                       |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|Minority interest in consolidated subsidiary companies |                                                     |   |                                      |         |            |   |              |         |              |   | 5,615        |        |   |   |         |          |      |   | 5,615   |        
|                                                      
|                                                      
|                                                      
|                                                      
|Stockholders Equity:                                  |                                                     |   |                                       |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Common stock                                        |   |                                       | 466     |            |   |               |        |              |   |              |       |   |   |          |         |      |   |         | 466     |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Capital in excess of par                            |   |                                       | 232,704 |            |   |               |        |              |   |              |       |   |   |          |         |      |   |         | 232,704 |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Retained earnings                                   |   |                                       | 16,100  |            |   |               | 43,823  |              |   |              | 10,881 |   |   |          | (54,704  | )(b) |   |         | 16,100  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Subsidiary investment                               |   |                                       |        |            |   |               | 299,007 |              |   |              | 33,902 |   |   |          | (332,909 | )(a) |   |         |        |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Treasury stock, at cost                             |   |                                       | (1,560  | )          |   |               |        |              |   |              |       |   |   |          |         |      |   |         | (1,560  | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accumulated other comprehensive loss                |   |                                       | (1,111  | )          |   |               |        |              |   |              |       |   |   |          |         |      |   |         | (1,111  | )
|                                                       |                                                     |   |                                       |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |         |         |  
|Total Stockholders Equity                             |                                                     |   | 246,599                               |         |            |   | 342,830       |         |              |   | 44,783       |        |   |   | (387,613 | )        |      |   | 246,599 |        
|                                                       |                                                     |   |                                       |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |         |         |  
|Total Liabilities and Stockholders Equity             |                                                     | $ | 366,241                               |         |            | $ | 592,940       |         |              | $ | 99,166       |        |   | $ | (387,613 | )        |      | $ | 670,734 |        
|                                                       |                                                     |   |                                       |         |            |   |               |         |              |   |              |        |   |   |          |          |      |   |         |         |  



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

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##### Table of Contents



|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |              |        |  |   |         |      |  |   |         |         | 
|-------------------------------------------------------- | ----------------------------- | - | ----------------------------------------------- | ----- | ---------- | - | ------------ | ------- | ------------ | - | ------------ | ------ |  | - | ------- | ---- |  | - | ------- | ------- | 
|                                                         |                               |   | Select Medical Corporation                     
|                                                         |                               |   | Condensed Consolidating Statement of Operations
|                                                         |                               |   | For the Quarter Ended March 31, 2002           
|                                                         |                               |   |                                                
|                                                         |                               |   | Select Medical                                  |       |            |   |              |         |              |   |              |        |  |   |         |      |  |   |        
|                                                         |                               |   | Corporation                                     |       |            |   |              |         | Non-         |   |              |        |  |   |         |      | 
|                                                         |                               |   | (Parent Company                                 |       | Subsidiary |   | Guarantor    |         |              |   |              |        |  |   |        
|                                                         |                               |   | Only)                                           |       | Guarantors |   | Subsidiaries |         | Eliminations |   | Consolidated
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |             
|                                                         |                               |   | (dollars in thousands)                         
|Net operating revenues                                   |                               | $ | 3,202                                           |       |            | $ | 222,281      |         |              | $ | 46,437       |        |  | $ |        |      |  | $ | 271,920 |        
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |              |        |  |   |         |      |  |   |         |        
|Costs and expenses:                                      |                               |   |                                                 |       |            |   |              |         |              |   |              |        |  |   |         |      |  |   |         |        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Cost of services              |   |                                                 |      |            |   |              | 183,819 |              |   |              | 37,916 |  |   |         |     |  |   |         | 221,735 | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | General and administrative    |   |                                                 | 9,686 |            |   |              |        |              |   |              |       |  |   |         |     |  |   |         | 9,686   | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Bad debt expense              |   |                                                 |      |            |   |              | 8,440   |              |   |              | 2,003  |  |   |         |     |  |   |         | 10,443  | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Depreciation and amortization |   |                                                 | 416   |            |   |              | 4,431   |              |   |              | 1,179  |  |   |         |     |  |   |         | 6,026   | 
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |              |        |  |   |         |      |  |   |         |        
|Total costs and expenses                                 |                               |   | 10,102                                          |       |            |   | 196,690      |         |              |   | 41,098       |        |  |   |        |      |  |   | 247,890 |        
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |              |        |  |   |         |      |  |   |         |        
|Income
(loss) from operations                            |                               |   | (6,900                                          | )     |            |   | 25,591       |         |              |   | 5,339        |        |  |   |        |      |  |   | 24,030  |        
|                                                        
|                                                        
|                                                        
|                                                        
|Other income and expense:                                |                               |   |                                                 |       |            |   |              |         |              |   |              |        |  |   |         |      |  |   |         |        
|                                                        
|                                                        
|                                                        
|                                                        
|Intercompany
interest and royalty fees                   |                               |   | 16,247                                          |       |            |   | (16,396      | )       |              |   | 149          |        |  |   |        |      |  |   |        |        
|                                                        
|                                                        
|                                                        
|                                                        
|Intercompany
management fees                             |                               |   | (12,368                                         | )     |            |   | 11,716       |         |              |   | 652          |        |  |   |        |      |  |   |        |        
|                                                        
|                                                        
|                                                        
|                                                        
|Interest income                                          |                               |   | (61                                             | )     |            |   | (11          | )       |              |   | 1            |        |  |   |        |      |  |   | (71     | )      
|                                                        
|                                                        
|                                                        
|                                                        
|Interest expense                                         |                               |   | 1,588                                           |       |            |   | 4,163        |         |              |   | 1,027        |        |  |   |        |      |  |   | 6,778   |        
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |              |        |  |   |         |      |  |   |         |        
|Income
(loss) before minority interests and income taxes |                               |   | (12,306                                         | )     |            |   | 26,119       |         |              |   | 3,510        |        |  |   |        |      |  |   | 17,323  |        
|                                                        
|                                                        
|                                                        
|                                                        
|Minority interest in consolidated subsidiary companies   |                               |   |                                                |       |            |   |             |         |              |   | 603          |        |  |   |        |      |  |   | 603     |        
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |              |        |  |   |         |      |  |   |         |        
|Income
(loss) before income taxes                        |                               |   | (12,306                                         | )     |            |   | 26,119       |         |              |   | 2,907        |        |  |   |        |      |  |   | 16,720  |        
|                                                        
|                                                        
|                                                        
|                                                        
|Income tax expense                                       |                               |   | 901                                             |       |            |   | 4,953        |         |              |   | 690          |        |  |   |        |      |  |   | 6,544   |        
|                                                        
|                                                        
|                                                        
|                                                        
|Equity in earnings of subsidiaries                       |                               |   | 23,383                                          |       |            |   | 1,052        |         |              |   |             |        |  |   | (24,435 | )(a) |  |   |        |        
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |              |        |  |   |         |      |  |   |         |        
|Net income                                               |                               | $ | 10,176                                          |       |            | $ | 22,218       |         |              | $ | 2,217        |        |  | $ | (24,435 | )    |  | $ | 10,176  |        
|                                                         |                               |   |                                                 |       |            |   |              |         |              |   |              |        |  |   |         |      |  |   |         |        



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

- 15 -



---



##### Table of Contents



|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |              |         |              |        |              |        |   |         |      |        |     |         |        |         |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ----------------------------------------- | ------ | ----------------------------------------------- | ------- | ---------- | ------- | ------------ | ------- | ------------ | ------ | ------------ | ------ | - | ------- | ---- | ------ | --- | ------- | ------ | ------- | -
|                                                                                  |                                                                                             |                                           |        | Select Medical Corporation                     
|                                                                                  |                                                                                             |                                           |        | Condensed Consolidating Statement of Cash Flows
|                                                                                  |                                                                                             |                                           |        | For the Quarter Ended March 31, 2002           
|                                                                                  |                                                                                             |                                           |        |                                                
|                                                                                  |                                                                                             |                                           |        | Select Medical                                  |         |            |         |              |         |              |        |              |        |   |         |      |        |     |         |       
|                                                                                  |                                                                                             |                                           |        | Corporation                                     |         |            |         |              |         | Non-         |        |              |        |   |         |      |        |    
|                                                                                  |                                                                                             |                                           |        | (Parent                                         |         | Subsidiary |         | Guarantor    |         |              |        |              |        |   |         |     
|                                                                                  |                                                                                             |                                           |        | Company Only)                                   |         | Guarantors |         | Subsidiaries |         | Eliminations |        | Consolidated
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |              |         |              |        |             
|                                                                                  |                                                                                             |                                           |        | (dollars in thousands)                         
|Operating activities                                                              |                                                                                             |                                           |        |                                                 |         |            |         |              |         |              |        |              |        |   |         |      |        |     |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income                                                                        |                                                                                             | $                                         | 10,176 |                                                 |         | $          | 22,218  |              |         | $            | 2,217  |              |        | $ | (24,435 | )(a) |        | $   | 10,176  |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                                             |                                           |        |                                                 |         |            |         |              |         |              |        |              |        |   |         |      |        |     |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Depreciation and amortization                                                               |                                           |        | 416                                             |         |            |         | 4,431        |         |              |        | 1,179        |        |   |         |     |        |     |         | 6,026  |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Provision for bad debts                                                                     |                                           |        |                                                |         |            |         | 8,440        |         |              |        | 2,003        |        |   |         |     |        |     |         | 10,443 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Minority interests                                                                          |                                           |        |                                                |         |            |         |             |         |              |        | 603          |        |   |         |     |        |     |         | 603    |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |                                           |        |                                                 |         |            |         |              |         |              |        |              |        |   |         |      |        |     |         |        |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Equity (loss) in earnings of subsidiaries |        |                                                 | (23,383 | )          |         |              | (1,052  | )            |        |              |       |   |         |      | 24,435 | (a) |         |        |        |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Intercompany                              |        |                                                 | 11,993  |            |         |              | (7,167  | )            |        |              | (4,826 | ) |         |      |       |     |         |        |        |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accounts receivable                       |        |                                                 | (291    | )          |         |              | (16,158 | )            |        |              | 695    |   |         |      |       |     |         |        | (15,754 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Other current assets                      |        |                                                 | (257    | )          |         |              | (170    | )            |        |              | 286    |   |         |      |       |     |         |        | (141    | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Other assets                              |        |                                                 | 893     |            |         |              | (1,555  | )            |        |              | 1,123  |   |         |      |       |     |         |        | 461     |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accounts payable                          |        |                                                 | 1,924   |            |         |              | (552    | )            |        |              | (438   | ) |         |      |       |     |         |        | 934     |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Due to third-party payors                 |        |                                                 | (3,200  | )          |         |              | 8,751   |              |        |              | 2,458  |   |         |      |       |     |         |        | 8,009   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accrued expenses                          |        |                                                 | 2,579   |            |         |              | 7,637   |              |        |              | (866   | ) |         |      |       |     |         |        | 9,350   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Income taxes                              |        |                                                 | 5,762   |            |         |              | 1,450   |              |        |              | (3,166 | ) |         |      |       |     |         |        | 4,046   |  
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |              |         |              |        |              |        |   |         |      |        |     |         |       
|Net cash provided by operating activities                                         |                                                                                             |                                           | 6,612  |                                                 |         |            | 26,273  |              |         |              | 1,268  |              |        |   |        |      |        |     | 34,153  |       
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |              |         |              |        |              |        |   |         |      |        |     |         |       
|Investing activities                                                              |                                                                                             |                                           |        |                                                 |         |            |         |              |         |              |        |              |        |   |         |      |        |     |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchases of property and equipment, net                                          |                                                                                             |                                           | (329   | )                                               |         |            | (7,594  | )            |         |              | (1,036 | )            |        |   |        |      |        |     | (8,959  | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Earnout payments                                                                  |                                                                                             |                                           |       |                                                 |         |            | (489    | )            |         |              |       |              |        |   |        |      |        |     | (489    | )     
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |              |         |              |        |              |        |   |         |      |        |     |         |       
|Net cash used in investing activities                                             |                                                                                             |                                           | (329   | )                                               |         |            | (8,083  | )            |         |              | (1,036 | )            |        |   |        |      |        |     | (9,448  | )     
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |              |         |              |        |              |        |   |         |      |        |     |         |       
|Financing activities                                                              |                                                                                             |                                           |        |                                                 |         |            |         |              |         |              |        |              |        |   |         |      |        |     |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Intercompany
debt reallocation                                                    |                                                                                             |                                           | 18,152 |                                                 |         |            | (18,446 | )            |         |              | 294    |              |        |   |        |      |        |     |        |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net repayments on credit facility debt                                            |                                                                                             |                                           | (8,320 | )                                               |         |            |        |              |         |              | (671   | )            |        |   |        |      |        |     | (8,991  | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Principal
payments on seller and other debt                                       |                                                                                             |                                           | (370   | )                                               |         |            | (2,370  | )            |         |              |       |              |        |   |        |      |        |     | (2,740  | )     
|Proceeds
from issuance of common stock                                            |                                                                                             |                                           | 973    |                                                 |         |            |        |              |         |              |       |              |        |   |        |      |        |     | 973     |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from bank overdrafts                                                     |                                                                                             |                                           | 595    |                                                 |         |            |        |              |         |              |       |              |        |   |        |      |        |     | 595     |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Payment of deferred financing costs                                               |                                                                                             |                                           | (67    | )                                               |         |            |        |              |         |              |       |              |        |   |        |      |        |     | (67     | )     
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Distributions to minority interests                                               |                                                                                             |                                           |       |                                                 |         |            |        |              |         |              | (159   | )            |        |   |        |      |        |     | (159    | )     
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |              |         |              |        |              |        |   |         |      |        |     |         |       
|Net
cash provided by (used in) financing activities                               |                                                                                             |                                           | 10,963 |                                                 |         |            | (20,816 | )            |         |              | (536   | )            |        |   |        |      |        |     | (10,389 | )     
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |              |         |              |        |              |        |   |         |      |        |     |         |       
|Effect of exchange rate changes on cash
and cash equivalents                      |                                                                                             |                                           | (3     | )                                               |         |            |        |              |         |              |       |              |        |   |        |      |        |     | (3      | )     
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |              |         |              |        |              |        |   |         |      |        |     |         |       
|Net increase (decrease) in cash and cash equivalents                              |                                                                                             |                                           | 17,243 |                                                 |         |            | (2,626  | )            |         |              | (304   | )            |        |   |        |      |        |     | 14,313  |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash and cash equivalents at beginning of period                                  |                                                                                             |                                           | 559    |                                                 |         |            | 8,086   |              |         |              | 2,058  |              |        |   |        |      |        |     | 10,703  |       
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |              |         |              |        |              |        |   |         |      |        |     |         |       
|Cash and cash equivalents at end of period                                        |                                                                                             | $                                         | 17,802 |                                                 |         | $          | 5,460   |              |         | $            | 1,754  |              |        | $ |        |      |        | $   | 25,016  |       
|                                                                                  |                                                                                             |                                           |        |                                                 |         |            |         |              |         |              |        |              |        |   |         |      |        |     |         |       



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

- 16 -



---



##### Table of Contents



|                                                       |                               |   |                                                 |       |            |   |               |         |              |   |              |        |  |   |        |      |  |   |         |         | 
|------------------------------------------------------ | ----------------------------- | - | ----------------------------------------------- | ----- | ---------- | - | ------------- | ------- | ------------ | - | ------------ | ------ |  | - | ------ | ---- |  | - | ------- | ------- | 
|                                                       |                               |   | Select Medical Corporation                     
|                                                       |                               |   | Condensed Consolidating Statement of Operations
|                                                       |                               |   | For the Quarter Ended March 31, 2001           
|                                                       |                               |   |                                                
|                                                       |                               |   | Select Medical                                  |       |            |   |               |         |              |   |              |        |  |   |        |      |  |   |        
|                                                       |                               |   | Corporation                                     |       |            |   |               |         |              |   |              |        |  |   |        |      |  |   |        
|                                                       |                               |   | (Parent Company                                 |       | Subsidiary |   | Non-Guarantor |         |              |   |              |        |  |   |       
|                                                       |                               |   | Only)                                           |       | Guarantors |   | Subsidiaries  |         | Eliminations |   | Consolidated
|                                                       |                               |   |                                                 |       |            |   |               |         |              |   |             
|                                                       |                               |   | (dollars in thousands)                         
|Net operating revenues                                 |                               | $ | 3,005                                           |       |            | $ | 182,756       |         |              | $ | 39,327       |        |  | $ |       |      |  | $ | 225,088 |        
|                                                       |                               |   |                                                 |       |            |   |               |         |              |   |              |        |  |   |        |      |  |   |         |        
|Costs and expenses:                                    |                               |   |                                                 |       |            |   |               |         |              |   |              |        |  |   |        |      |  |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Cost of services              |   |                                                 |      |            |   |               | 149,717 |              |   |              | 31,556 |  |   |        |     |  |   |         | 181,273 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | General and administrative    |   |                                                 | 8,440 |            |   |               |        |              |   |              |       |  |   |        |     |  |   |         | 8,440   | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Bad debt expense              |   |                                                 |      |            |   |               | 7,206   |              |   |              | 1,137  |  |   |        |     |  |   |         | 8,343   | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Depreciation and amortization |   |                                                 | 525   |            |   |               | 6,121   |              |   |              | 1,170  |  |   |        |     |  |   |         | 7,816   | 
|                                                       |                               |   |                                                 |       |            |   |               |         |              |   |              |        |  |   |        |      |  |   |         |        
|Total costs and expenses                               |                               |   | 8,965                                           |       |            |   | 163,044       |         |              |   | 33,863       |        |  |   |       |      |  |   | 205,872 |        
|                                                       |                               |   |                                                 |       |            |   |               |         |              |   |              |        |  |   |        |      |  |   |         |        
|Income (loss) from operations                          |                               |   | (5,960                                          | )     |            |   | 19,712        |         |              |   | 5,464        |        |  |   |       |      |  |   | 19,216  |        
|                                                      
|                                                      
|                                                      
|                                                      
|Other
income and expense:                              |                               |   |                                                 |       |            |   |               |         |              |   |              |        |  |   |        |      |  |   |         |        
|                                                      
|                                                      
|                                                      
|                                                      
|Intercompany charges                                   |                               |   | (8,335                                          | )     |            |   | 7,917         |         |              |   | 418          |        |  |   |       |      |  |   |        |        
|                                                      
|                                                      
|                                                      
|                                                      
|Interest income                                        |                               |   | (73                                             | )     |            |   | (167          | )       |              |   | (1           | )      |  |   |       |      |  |   | (241    | )      
|                                                      
|                                                      
|                                                      
|                                                      
|Interest expense                                       |                               |   | 2,121                                           |       |            |   | 4,195         |         |              |   | 1,700        |        |  |   |       |      |  |   | 8,016   |        
|                                                       |                               |   |                                                 |       |            |   |               |         |              |   |              |        |  |   |        |      |  |   |         |        
|Income before minority interests and income taxes      |                               |   | 327                                             |       |            |   | 7,767         |         |              |   | 3,347        |        |  |   |       |      |  |   | 11,441  |        
|                                                      
|                                                      
|                                                      
|                                                      
|Minority interest in consolidated subsidiary companies |                               |   |                                                |       |            |   | 386           |         |              |   | 1,021        |        |  |   |       |      |  |   | 1,407   |        
|                                                       |                               |   |                                                 |       |            |   |               |         |              |   |              |        |  |   |        |      |  |   |         |        
|Income before income taxes                             |                               |   | 327                                             |       |            |   | 7,381         |         |              |   | 2,326        |        |  |   |       |      |  |   | 10,034  |        
|                                                      
|                                                      
|                                                      
|                                                      
|Income tax expense                                     |                               |   | 170                                             |       |            |   | 3,643         |         |              |   | 100          |        |  |   |       |      |  |   | 3,913   |        
|                                                      
|                                                      
|                                                      
|                                                      
|Equity in earnings of subsidiaries                     |                               |   | 5,964                                           |       |            |   | 1,811         |         |              |   |             |        |  |   | (7,775 | )(a) |  |   |        |        
|                                                       |                               |   |                                                 |       |            |   |               |         |              |   |              |        |  |   |        |      |  |   |         |        
|Net income                                             |                               | $ | 6,121                                           |       |            | $ | 5,549         |         |              | $ | 2,226        |        |  | $ | (7,775 | )    |  | $ | 6,121   |        
|                                                       |                               |   |                                                 |       |            |   |               |         |              |   |              |        |  |   |        |      |  |   |         |        



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

- 17 -



---



##### Table of Contents



|                                                                                  |                                                                                             |                                           |        |                                                 |        |            |         |              |         |              |        |              |        |   |        |      |       |     |         |       |         |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ----------------------------------------- | ------ | ----------------------------------------------- | ------ | ---------- | ------- | ------------ | ------- | ------------ | ------ | ------------ | ------ | - | ------ | ---- | ----- | --- | ------- | ----- | ------- | -
|                                                                                  |                                                                                             |                                           |        | Select Medical Corporation                     
|                                                                                  |                                                                                             |                                           |        | Condensed Consolidating Statement of Cash Flows
|                                                                                  |                                                                                             |                                           |        | For the Quarter Ended March 31, 2001           
|                                                                                  |                                                                                             |                                           |        |                                                
|                                                                                  |                                                                                             |                                           |        | Select Medical                                  |        |            |         |              |         | Non-         |        |              |        |   |        |      |       |    
|                                                                                  |                                                                                             |                                           |        | Corporation (Parent                             |        | Subsidiary |         | Guarantor    |         |              |        |              |        |   |        |     
|                                                                                  |                                                                                             |                                           |        | Company Only)                                   |        | Guarantors |         | Subsidiaries |         | Eliminations |        | Consolidated
|                                                                                  |                                                                                             |                                           |        |                                                 |        |            |         |              |         |              |        |             
|                                                                                  |                                                                                             |                                           |        | (dollars in thousands)                         
|Operating activities                                                              |                                                                                             |                                           |        |                                                 |        |            |         |              |         |              |        |              |        |   |        |      |       |     |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income                                                                        |                                                                                             | $                                         | 6,121  |                                                 |        | $          | 5,549   |              |         | $            | 2,226  |              |        | $ | (7,775 | )(a) |       | $   | 6,121   |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                                                             |                                           |        |                                                 |        |            |         |              |         |              |        |              |        |   |        |      |       |     |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Depreciation and amortization                                                               |                                           |        | 525                                             |        |            |         | 6,121        |         |              |        | 1,170        |        |   |        |     |       |     |         | 7,816 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Provision for bad debts                                                                     |                                           |        |                                                |        |            |         | 7,206        |         |              |        | 1,137        |        |   |        |     |       |     |         | 8,343 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Minority interests                                                                          |                                           |        |                                                |        |            |         | 386          |         |              |        | 1,021        |        |   |        |     |       |     |         | 1,407 |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Changes in operating assets and liabilities, net of
effects from acquisition of businesses: |                                           |        |                                                 |        |            |         |              |         |              |        |              |        |   |        |      |       |     |         |       |        
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Equity (loss) in earnings of subsidiaries |        |                                                 | (5,964 | )          |         |              | (1,811  | )            |        |              |       |   |        |      | 7,775 | (a) |         |       |        |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Intercompany                              |        |                                                 | 7,492  |            |         |              | (10,424 | )            |        |              | 2,932  |   |        |      |      |     |         |       |        |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accounts receivable                       |        |                                                 | (163   | )          |         |              | (10,065 | )            |        |              | (3,505 | ) |        |      |      |     |         |       | (13,733 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Other current assets                      |        |                                                 | (268   | )          |         |              | 2,353   |              |        |              | 141    |   |        |      |      |     |         |       | 2,226   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Other assets                              |        |                                                 | 8,675  |            |         |              | (1,804  | )            |        |              | (3,403 | ) |        |      |      |     |         |       | 3,468   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accounts payable                          |        |                                                 | 977    |            |         |              | (702    | )            |        |              | (12    | ) |        |      |      |     |         |       | 263     |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Due to third-party payors                 |        |                                                 | (3,000 | )          |         |              | 853     |              |        |              | 272    |   |        |      |      |     |         |       | (1,875  | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Accrued expenses                          |        |                                                 | (2,164 | )          |         |              | 10,097  |              |        |              | 193    |   |        |      |      |     |         |       | 8,126   |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                             | Income taxes                              |        |                                                 | (7,849 | )          |         |              | 10,217  |              |        |              | 289    |   |        |      |      |     |         |       | 2,657   |  
|                                                                                  |                                                                                             |                                           |        |                                                 |        |            |         |              |         |              |        |              |        |   |        |      |       |     |         |      
|Net cash provided by operating activities                                         |                                                                                             |                                           | 4,382  |                                                 |        |            | 17,976  |              |         |              | 2,461  |              |        |   |       |      |       |     | 24,819  |      
|                                                                                  |                                                                                             |                                           |        |                                                 |        |            |         |              |         |              |        |              |        |   |        |      |       |     |         |      
|Investing activities                                                              |                                                                                             |                                           |        |                                                 |        |            |         |              |         |              |        |              |        |   |        |      |       |     |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchases of property and equipment, net                                          |                                                                                             |                                           | (528   | )                                               |        |            | (4,146  | )            |         |              | (651   | )            |        |   |        |      |       |     | (5,325  | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Earnout payments                                                                  |                                                                                             |                                           |       |                                                 |        |            | (505    | )            |         |              |       |              |        |   |       |      |       |     | (505    | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Acquisition of businesses, net of cash acquired                                   |                                                                                             |                                           | (1,375 | )                                               |        |            |        |              |         |              |       |              |        |   |        |      |       |     | (1,375  | )    
|                                                                                  |                                                                                             |                                           |        |                                                 |        |            |         |              |         |              |        |              |        |   |        |      |       |     |         |      
|Net cash used in investing activities                                             |                                                                                             |                                           | (1,903 | )                                               |        |            | (4,651  | )            |         |              | (651   | )            |        |   |       |      |       |     | (7,205  | )    
|                                                                                  |                                                                                             |                                           |        |                                                 |        |            |         |              |         |              |        |              |        |   |        |      |       |     |         |      
|Financing activities                                                              |                                                                                             |                                           |        |                                                 |        |            |         |              |         |              |        |              |        |   |        |      |       |     |         |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net repayments on credit facility debt                                            |                                                                                             |                                           | (7,000 | )                                               |        |            |        |              |         |              |       |              |        |   |       |      |       |     | (7,000  | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Principal payments on seller and other debt                                       |                                                                                             |                                           | (1,524 | )                                               |        |            | (4,921  | )            |         |              |       |              |        |   |       |      |       |     | (6,445  | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from issuance of common stock                                            |                                                                                             |                                           | 2      |                                                 |        |            |        |              |         |              |       |              |        |   |       |      |       |     | 2       |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from (repayment of) bank overdrafts                                      |                                                                                             |                                           | 6,103  |                                                 |        |            | (8,448  | )            |         |              | (2,346 | )            |        |   |       |      |       |     | (4,691  | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Distributions to minority interests                                               |                                                                                             |                                           |       |                                                 |        |            |        |              |         |              | (397   | )            |        |   |       |      |       |     | (397    | )    
|                                                                                  |                                                                                             |                                           |        |                                                 |        |            |         |              |         |              |        |              |        |   |        |      |       |     |         |      
|Net cash used in financing activities                                             |                                                                                             |                                           | (2,419 | )                                               |        |            | (13,369 | )            |         |              | (2,743 | )            |        |   |       |      |       |     | (18,531 | )    
|                                                                                  |                                                                                             |                                           |        |                                                 |        |            |         |              |         |              |        |              |        |   |        |      |       |     |         |      
|Effect of exchange rate changes on cash
and cash equivalents                      |                                                                                             |                                           | (60    | )                                               |        |            |        |              |         |              |       |              |        |   |       |      |       |     | (60     | )    
|                                                                                  |                                                                                             |                                           |        |                                                 |        |            |         |              |         |              |        |              |        |   |        |      |       |     |         |      
|Net increase (decrease) in cash and cash equivalents                              |                                                                                             |                                           |       |                                                 |        |            | (44     | )            |         |              | (933   | )            |        |   |       |      |       |     | (977    | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash and cash equivalents at beginning of period                                  |                                                                                             |                                           |       |                                                 |        |            | 1,015   |              |         |              | 2,136  |              |        |   |       |      |       |     | 3,151   |      
|                                                                                  |                                                                                             |                                           |        |                                                 |        |            |         |              |         |              |        |              |        |   |        |      |       |     |         |      
|Cash and cash equivalents at end of period                                        |                                                                                             | $                                         |       |                                                 |        | $          | 971     |              |         | $            | 1,203  |              |        | $ |       |      |       | $   | 2,174   |      
|                                                                                  |                                                                                             |                                           |        |                                                 |        |            |         |              |         |              |        |              |        |   |        |      |       |     |         |      



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

- 18 -



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##### 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 March 31, 2002,
we operated 64 specialty acute care hospitals in 22 states and 720 outpatient
rehabilitation clinics in 31 states, the District of Columbia and seven
Canadian provinces. We began operations in 1997 under the leadership of our
current management team.

We operate through two business segments, our specialty acute care
hospital segment and our outpatient rehabilitation segment. For the three
months ended March 31, 2002, we had net operating revenues of $271.9 million.
Of this total, we earned 56% of our net operating revenues from our specialty
hospitals and 44% 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.

- 19 -



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##### 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
|                               |                                          |                                       |   |                   
|                               |                                          |                                       |   | March 31,         
|                               |                                          |                                       |   |                   
|                               |                                          |                                       |   | 2002               |    | 2001
|                               |                                          |                                       |   |                    |    |     
|Specialty Hospital Data        |                                          |                                       |   |                    |    |      |   |        
|                              
|                              
|                              
|                              
|                               | # of Hospitals  Start of Period         |                                       |   | 64                 |    |      |   | 54      |   
|                              
|                              
|                              
|                              
|                               |                                          | # of Hospital Start-ups               |   |                    | 0  |      |   |         | 2  | 
|                              
|                              
|                              
|                              
|                               | # of Hospitals  End of Period           |                                       |   | 64                 |    |      |   | 56      |   
|                              
|                              
|                              
|                              
|                               | # of Licensed Beds                       |                                       |   | 2,307              |    |      |   | 2,068   |   
|                              
|                              
|                              
|                              
|                               | # of Admissions                          |                                       |   | 5,211              |    |      |   | 4,191   |   
|                              
|                              
|                              
|                              
|                               | # of Patient Days                        |                                       |   | 149,869            |    |      |   | 123,740 |   
|                              
|                              
|                              
|                              
|                               | Average Length of Stay                   |                                       |   | 30                 |    |      |   | 31      |   
|                              
|                              
|                              
|                              
|                               | Net Revenue Per Patient Day (a)          |                                       | $ | 993                |    |      | $ | 913     |   
|                              
|                              
|                              
|                              
|                               | Occupancy Rate                           |                                       |   | 72                 | %  |      |   | 68      | % 
|                              
|                              
|                              
|                              
|                               | % Patient Days  Medicare                |                                       |   | 77                 | %  |      |   | 76      | % 
|                              
|                              
|                              
|                              
|Outpatient Rehabilitation Data |                                          |                                       |   |                    |    |      |   |        
|                              
|                              
|                              
|                              
|                               | # of Clinics Owned  Start of Period     |                                       |   | 664                |    |      |   | 636     |   
|                              
|                              
|                              
|                              
|                               |                                          | # of Clinics Acquired                 |   |                    | 1  |      |   |         | 0  | 
|                              
|                              
|                              
|                              
|                               |                                          | # of Clinic Start-ups                 |   |                    | 14 |      |   |         | 9  | 
|                              
|                              
|                              
|                              
|                               |                                          | # of Clinics Closed/Sold/Consolidated |   |                    | 12 |      |   |         | 21 | 
|                              
|                              
|                              
|                              
|                               | # of Clinics Owned  End of Period       |                                       |   | 667                |    |      |   | 624     |   
|                              
|                              
|                              
|                              
|                               | # of Clinics Managed  End of Period     |                                       |   | 53                 |    |      |   | 51      |   
|                              
|                              
|                              
|                              
|                               | Total # of Clinics (All)  End of Period |                                       |   | 720                |    |      |   | 675     |   
|                              
|                              
|                              
|                              
|                               | # of Visits (U.S)                        |                                       |   | 964,416            |    |      |   | 946,180 |   
|                              
|                              
|                              
|                              
|                               | Net Revenue Per Visit (U.S.) (b)         |                                       | $ | 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.

- 20 -



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##### 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 December 31, 2001 and March 31, 2002, we had a net amount due
to Medicare of $3.4 million and $5.0 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 care hospitals such as ours. CMS
is accepting comments on the proposed rule until 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. We are currently evaluating
this proposed rule and preparing our comments that we will file with CMS.

Results of Operations

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

|                                                   |  |                    |       |      |  |  |       |  
|-------------------------------------------------- |  | ------------------ | ----- | ---- |  |  | ----- | -
|                                                   |  | Three
Months Ended
|                                                   |  | March
31,         
|                                                   |  |                   
|                                                   |  | 2002               |       | 2001
|                                                   |  |                    |       |     
|Net operating revenues                             |  |                    | 100.0 | %    |  |  | 100.0 | %
|                                                   |  |                    |       |      |  |  |       |  
|Cost of services (a)                               |  |                    | 81.5  | %    |  |  | 80.6  | %
|                                                  
|                                                  
|                                                  
|                                                  
|General and administrative                         |  |                    | 3.6   | %    |  |  | 3.7   | %
|                                                  
|                                                  
|                                                  
|                                                  
|Bad debt expense                                   |  |                    | 3.8   | %    |  |  | 3.7   | %
|                                                   |  |                    |       |      |  |  |       |  
|EBITDA (b)                                         |  |                    | 11.1  | %    |  |  | 12.0  | %
|                                                  
|                                                  
|                                                  
|                                                  
|Depreciation and amortization                      |  |                    | 2.2   | %    |  |  | 3.5   | %
|                                                   |  |                    |       |      |  |  |       |  
|Income from operations                             |  |                    | 8.9   | %    |  |  | 8.5   | %
|                                                  
|                                                  
|                                                  
|                                                  
|Interest expense, net                              |  |                    | 2.5   | %    |  |  | 3.5   | %
|                                                   |  |                    |       |      |  |  |       |  
|Income before minority interests, and income taxes |  |                    | 6.4   | %    |  |  | 5.0   | %
|                                                  
|                                                  
|                                                  
|                                                  
|Minority interests                                 |  |                    | 0.2   | %    |  |  | 0.6   | %
|                                                   |  |                    |       |      |  |  |       |  
|Income before income taxes                         |  |                    | 6.2   | %    |  |  | 4.4   | %
|                                                  
|                                                  
|                                                  
|                                                  
|Income tax expense                                 |  |                    | 2.5   | %    |  |  | 1.7   | %
|                                                   |  |                    |       |      |  |  |       |  
|Net income                                         |  |                    | 3.7   | %    |  |  | 2.7   | %
|                                                   |  |                    |       |      |  |  |       |  

- 21 -



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##### Table of Contents



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

|                                          |                           |               |   |                        |         |      |   |         |         |  |  |       |      |  
|----------------------------------------- | ------------------------- | ------------- | - | ---------------------- | ------- | ---- | - | ------- | ------- |  |  | ----- | ---- | -
|                                          |                           |               |   | Three Months Ended     |         |      |   |        
|                                          |                           |               |   | March 31,              |         |      |   |        
|                                          |                           |               |   |                        |         | %   
|                                          |                           |               |   | 2002                   |         | 2001 |   | Change 
|                                          |                           |               |   |                        |         |      |   |        
|                                          |                           |               |   | (dollars in thousands)
|Net operating revenues:                   |                           |               |   |                        |         |      |   |         |         |  |  |      
|                                         
|                                         
|                                         
|                                         
|                                          | Specialty hospitals       |               | $ | 148,828                |         |      | $ | 113,150 |         |  |  | 31.5  | %   
|                                         
|                                         
|                                         
|                                         
|                                          | Outpatient rehabilitation |               |   | 119,694                |         |      |   | 108,673 |         |  |  | 10.1  |     
|                                         
|                                         
|                                         
|                                         
|                                          | Other                     |               |   | 3,398                  |         |      |   | 3,265   |         |  |  | 4.1   |     
|                                          |                           |               |   |                        |         |      |   |         |         |  |  |       |     
|                                          |                           | Total company |   | $                      | 271,920 |      |   | $       | 225,088 |  |  |       | 20.8 | %
|                                          |                           |               |   |                        |         |      |   |         |         |  |  |       |     
|EBITDA: (b)                               |                           |               |   |                        |         |      |   |         |         |  |  |      
|                                         
|                                         
|                                         
|                                         
|                                          | Specialty hospitals       |               | $ | 15,667                 |         |      | $ | 13,395  |         |  |  | 17.0  | %   
|                                         
|                                         
|                                         
|                                         
|                                          | Outpatient rehabilitation |               |   | 21,048                 |         |      |   | 19,056  |         |  |  | 10.5  |     
|                                         
|                                         
|                                         
|                                         
|                                          | Other                     |               |   | (6,659                 | )       |      |   | (5,419  | )       |  |  | (22.9 | )   
|                                          |                           |               |   |                        |         |      |   |         |         |  |  |       |     
|                                          |                           | Total company |   | $                      | 30,056  |      |   | $       | 27,032  |  |  |       | 11.2 | %
|                                          |                           |               |   |                        |         |      |   |         |         |  |  |       |     
|Income (loss) from operations:            |                           |               |   |                        |         |      |   |         |         |  |  |      
|                                         
|                                         
|                                         
|                                         
|                                          | Specialty hospitals       |               | $ | 12,619                 |         |      | $ | 10,915  |         |  |  | 15.6  | %   
|                                         
|                                         
|                                         
|                                         
|                                          | Outpatient rehabilitation |               |   | 18,522                 |         |      |   | 15,351  |         |  |  | 20.7  |     
|                                         
|                                         
|                                         
|                                         
|                                          | Other                     |               |   | (7,111                 | )       |      |   | (7,050  | )       |  |  | (0.9  | )   
|                                          |                           |               |   |                        |         |      |   |         |         |  |  |       |     
|                                          |                           | Total company |   | $                      | 24,030  |      |   | $       | 19,216  |  |  |       | 25.1 | %
|                                          |                           |               |   |                        |         |      |   |         |         |  |  |       |     
|EBITDA margins: (b)                       |                           |               |   |                        |         |      |   |         |         |  |  |      
|                                         
|                                         
|                                         
|                                         
|                                          | Specialty hospitals       |               |   | 10.5                   | %       |      |   | 11.8    | %       |  |  | (11.1 | )%  
|                                         
|                                         
|                                         
|                                         
|                                          | Outpatient rehabilitation |               |   | 17.6                   |         |      |   | 17.5    |         |  |  | 0.3   |     
|                                         
|                                         
|                                         
|                                         
|                                          | Other                     |               |   | N/M                    |         |      |   | N/M     |         |  |  | N/M   |     
|                                          |                           |               |   |                        |         |      |   |         |         |  |  |       |     
|                                          | Total company             |               |   | 11.1                   | %       |      |   | 12.0    | %       |  |  | (8.0  | )%  
|                                          |                           |               |   |                        |         |      |   |         |         |  |  |       |     
|Total assets:                             |                           |               |   |                        |         |      |   |         |         |  |  |      
|                                         
|                                         
|                                         
|                                         
|                                          | Specialty hospitals       |               | $ | 298,352                |         |      | $ | 255,290 |         |  |  |       |     
|                                         
|                                         
|                                         
|                                         
|                                          | Outpatient rehabilitation |               |   | 327,591                |         |      |   | 314,962 |         |  |  |       |     
|                                         
|                                         
|                                         
|                                         
|                                          | Other                     |               |   | 44,791                 |         |      |   | 11,144  |         |  |  |       |     
|                                          |                           |               |   |                        |         |      |   |         |         |  |  |      
|                                          | Total company             |               | $ | 670,734                |         |      | $ | 581,396 |         |  |  |       |     
|                                          |                           |               |   |                        |         |      |   |         |         |  |  |      
|Purchases of property and
equipment, net: |                           |               |   |                        |         |      |   |         |         |  |  |      
|                                         
|                                         
|                                         
|                                         
|                                          | Specialty hospitals       |               | $ | 6,183                  |         |      | $ | 3,055   |         |  |  |       |     
|                                         
|                                         
|                                         
|                                         
|                                          | Outpatient rehabilitation |               |   | 2,435                  |         |      |   | 1,742   |         |  |  |       |     
|                                         
|                                         
|                                         
|                                         
|                                          | Other                     |               |   | 341                    |         |      |   | 528     |         |  |  |       |     
|                                          |                           |               |   |                        |         |      |   |         |         |  |  |      
|                                          | Total company             |               | $ | 8,959                  |         |      | $ | 5,325   |         |  |  |       |     
|                                          |                           |               |   |                        |         |      |   |         |         |  |  |      

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 special charges, 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 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

- 22 -



---



##### Table of Contents





| |  | 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:

|                              |  |                            |        |      |  |   |        |  
|----------------------------- |  | -------------------------- | ------ | ---- |  | - | ------ | -
|                              |  | For the Three Months Ended
|                              |  | March 31,                 
|                              |  |                           
|                              |  | 2002                       |        | 2001
|                              |  |                            |        |     
|                              |  | (in thousands)            
|EBITDA                        |  | $                          | 30,056 |      |  | $ | 27,032 |  
|                             
|                             
|                             
|                             
|Depreciation and amortization |  |                            | (6,026 | )    |  |   | (7,816 | )
|                             
|                             
|                             
|                             
|Interest income               |  |                            | 71     |      |  |   | 241    |  
|                             
|                             
|                             
|                             
|Interest expense              |  |                            | (6,778 | )    |  |   | (8,016 | )
|                             
|                             
|                             
|                             
|Minority interest             |  |                            | (603   | )    |  |   | (1,407 | )
|                             
|                             
|                             
|                             
|Income tax expense            |  |                            | (6,544 | )    |  |   | (3,913 | )
|                              |  |                            |        |      |  |   |        |  
|Net income                    |  | $                          | 10,176 |      |  | $ | 6,121  |  
|                              |  |                            |        |      |  |   |        |  

Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001

Net Operating Revenues

Our net operating revenues increased by 20.8% to $271.9 million for the
three months ended March 31, 2002 compared to $225.1 million for the three
months ended March 31, 2001.

Specialty Acute Care Hospitals.Our specialty hospital net operating
revenues increased 31.5% to $148.8 million for the three months ended March 31,
2002 compared to $113.2 million for the three months ended March 31, 2001. Net
operating revenues for the specialty hospitals opened before January 1, 2001
and operated throughout both periods increased 22.1% to $137.5 million for the
three months ended March 31, 2002 from $112.6 million for the three months
ended March 31, 2001. This resulted from a higher occupancy rate and a higher
net revenue per patient day. The remaining increase of $10.7 million resulted
from the internal development of new specialty hospitals that commenced
operations in 2001.

Outpatient Rehabilitation.Our outpatient rehabilitation net operating
revenues increased 10.1% to $119.7 million for the three months ended March 31,
2002 compared to $108.7 million for the three months ended March 31, 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 two acquisitions that occurred in
the third and fourth quarters of 2001.

Other.Our other revenues increased to $3.4 million for the three months
ended March 31, 2002 compared to $3.3 million for the three months ended March
31, 2001. The increase in other revenue reflects higher corporate general and
administrative costs in 2002, which resulted in higher Medicare reimbursements
for those costs.

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Operating Expenses

Our operating expenses increased by 22.1% to $241.9 million for the three
months ended March 31, 2002 compared to $198.1 million for the three months
ended March 31, 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. As a percentage of our net operating revenues, our
operating expenses were 88.9% for the three months ended March 31, 2002
compared to 88.0% for the three months ended March 31, 2001. Cost of services as a percentage of operating revenues
increased to 81.5% for the three months ended March 31, 2002 from 80.6% for the
three months ended March 31, 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 3.6% for the three months ended March 31, 2002 from 3.7%
for the three months ended March 31, 2001. Our bad debt expense as a
percentage of net operating revenues was 3.8% for the three months ended March
31, 2002 compared to 3.7% for the three months ended March 31, 2001.

EBITDA

Our total EBITDA increased 11.2% to $30.1 million for the three months
ended March 31, 2002 compared to $27.0 million for the three months ended March
31, 2001. Our EBITDA margins declined to 11.1% for the three months ended March
31, 2002 compared to 12.0% for the three months ended March 31, 2001. The
decline in EBITDA margins is due to the losses incurred at our start-up
hospitals. Excluding the hospitals opened in 2001 and our pre-opening
hospitals, our EBITDA margins would be 12.5% for the three months ended March
31, 2002 compared to 12.3% for the three months ended March 31, 2001. For cash
flow information, see -Capital Resources and Liquidity.

Specialty Acute Care Hospitals.EBITDA increased by 17.0% to $15.7
million for the three months ended March 31, 2002 compared to $13.4 million for
the three months ended March 31, 2001. Our EBITDA margins declined to 10.5%
for the three months ended March 31, 2002 from 11.8% for the three months ended
March 31, 2001. The hospitals opened before January 1, 2001 and operated
throughout both periods had EBITDA of $18.1 million, an increase of 28.8% 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 13.2% from 12.5%.

Outpatient Rehabilitation.EBITDA increased by 10.5% to $21.0 million
for the three months ended March 31, 2002 compared to $19.1 million for the
three months ended March 31, 2001. Our EBITDA margins increased to 17.6% for
the three months ended March 31, 2002 from 17.5% for the three months ended
March 31, 2001.

Other.The EBITDA loss increased to $6.7 million for the three months
ended March 31, 2002 compared to a loss of $5.4 million for the three months
ended March 31, 2001. This increase resulted from the higher general and
administrative costs needed to support the growth of the organization,
principally our new hospital development.

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Income from Operations

Income from operations increased 25.1% to $24.0 million for the three
months ended March 31, 2002 compared to $19.2 million for the three months
ended March 31, 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.

Interest Expense

Interest expense decreased by $1.2 million to $6.8 million for the three
months ended March 31, 2002 from $8.0 million for the three months ended March
31, 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 57.1% to $0.6
million for the three months ended March 31, 2002 compared to $1.4 million for
the three months ended March 31, 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 $6.5 million for the three months ended
March 31, 2002. The expense represented an effective tax rate of 39.1% and
approximates the federal and state statutory tax rates. We recorded income tax
expense of $3.9 million for the three months ended March 31, 2001. This
expense represented an effective tax rate of 39.0%.

Capital Resources and Liquidity

For the three months ended March 31, 2002 operating activities provided
$34.2 million of cash flow compared to $24.8 million for the three months ended
March 31, 2001. The increase in cash flow is attributable to improved operating
income, continued management of payables and our income tax payments and lower
accounts receivable days outstanding. Our accounts receivable days outstanding
were 74 days at March 31, 2002 compared to 77 days at December 31, 2001 and 81
days at March 31, 2001.

Investing activities used $9.4 and $7.2 million of cash flow for the three
months ended March 31, 2002 and 2001, respectively. This usage resulted from
purchases of property and equipment of $9.0 and $5.3 million in 2002 and 2001,
respectively that relate principally to new hospital development.
Additionally, we incurred earnout related payments of $0.5 million in both 2002
and 2001 and acquisition payments of $1.4 million in 2001.

Financing activities used $10.4 and $18.5 million of cash for the three
months ended March 31, 2002 and 2001, respectively. This was due principally
to the repayment of credit facility, seller and other debt which when
aggregated amount to $11.7 and $13.4 million in 2002 and 2001, respectively.
In 2001, we also used $4.7 million to repay bank overdrafts.

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Capital Resources

Net working capital remained approximately the same at $125.8 million as
of March 31, 2002 compared to $126.7 million at December 31, 2001.

We have a credit agreement with a group of banks. Our credit facility
consists of a term facility of $87.8 million and a revolving credit facility
of $152.4 million. As of March 31, 2002 we had borrowed all of our available
loans under the U.S. and Canadian term loans and had availability to borrow an
additional $148.0 million under our revolving facility subject to certain
limitations. We have $4.4 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 March 31, 2002,
our weighted average interest rate under our credit agreement was approximately
7.6%. 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.

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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 before the end of 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 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.

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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 in the first
quarter of 2001 would have been approximately $2.3 million less. This would
have increased fully diluted earnings per share by approximately $0.04.




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 for the three months
ended March 31, 2002. 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 March 31,
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.

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##### 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 April 30, 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.




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

None.

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##### 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 31 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: May 15, 2002

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EXHIBIT INDEX

|        |  |                                                                                                                                                                       
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                           
|        |  |                                                                                                                                                                       
|        |  |                                                                                                                                                                       
|       
|       
|       
|       
|10.1    |  | Consulting Agreement between LeRoy S. Zimmerman and Select Medical
Corporation dated as of January 1, 2002                                                            
|       
|       
|       
|       
|        |  |                                                                                                                                                                       
|       
|       
|       
|       
|10.2    |  | Second Amendment
to Cost Sharing Agreement dated as of February 12, 2002 by and
among Select Medical Corporation, Select Transport Inc. and Select
Air II Corporation.
|       
|       
|       
|       
|        |  |                                                                                                                                                                       
|       
|       
|       
|       
|10.3    |  | Select Medical Corporation Amended and Restated 2002 Non-Employee
Directors Plan                                                                                     

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