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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K





ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT
OF 1934

For the Fiscal Year Ended December 31, 2008

Commission File No. 333-133319





LifeCare Holdings, Inc.







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 51-0372090                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



|                                   |  |         
|---------------------------------- |  | --------
|5560 Tennyson Parkway Plano, Texas |  | 75024   
|Address                            |  | Zip Code

(469) 241-2100

Telephone Number, Including Area Code





Securities registered
pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ̈    No  x

Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  x    No   ̈

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, and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.    x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. Please see definition of accelerated and large accelerated filer in Rule 12b-2 of the Exchange Act.



|                         |  |   |  |                            |  |  
|------------------------ |  | - |  | -------------------------- |  | -
|Large Accelerated Filer: |  |  ̈ |  | Accelerated Filer:         |  |  ̈
|                         |  |   | 
|Non-Accelerated Filer:   |  | x |  | Smaller Reporting Company: |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

None of the registrants common stock is held by non-affiliates of the registrant.

As of March 28, 2009, the registrant had 100 shares
of common stock, par value $0.01 per share, outstanding.









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LIFECARE HOLDINGS, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2008

INDEX



|         |  |                                                                                                              |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                              |  | Page
|PART I   |  |                                                                                                             
|ITEM 1.  |  | Business                                                                                                     |  | 2   
|ITEM 1A. |  | Risk Factors                                                                                                 |  | 14  
|ITEM 1B. |  | Unresolved Staff Comments                                                                                    |  | 20  
|ITEM 2.  |  | Properties                                                                                                   |  | 20  
|ITEM 3.  |  | Legal Proceedings                                                                                            |  | 20  
|ITEM 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 20  
|         |  |                                                                                                             
|PART II  |  |                                                                                                              |  |     
|ITEM 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 20  
|ITEM 6.  |  | Selected Financial Data                                                                                      |  | 21  
|ITEM 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 22  
|ITEM 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 32  
|ITEM 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 32  
|ITEM 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 32  
|ITEM 9A. |  | Controls and Procedures                                                                                      |  | 32  
|ITEM 9B. |  | Other Information                                                                                            |  | 33  
|         |  |                                                                                                             
|PART III |  |                                                                                                              |  |     
|ITEM 10. |  | Directors and Executive Officers of the Registrant                                                           |  | 34  
|ITEM 11. |  | Executive Compensation                                                                                       |  | 35  
|ITEM 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 44  
|ITEM 13. |  | Certain Relationships and Related Transactions                                                               |  | 45  
|ITEM 14. |  | Principal Accounting Fees and Services                                                                       |  | 46  
|         |  |                                                                                                             
|PART IV  |  |                                                                                                              |  |     
|ITEM 15. |  | Exhibits, Financial Statement Schedules                                                                      |  | 46  



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PART 1

FORWARD-LOOKING STATEMENTS

This discussion contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 regarding, among other things, our financial condition, results of operations, plans, objectives, future performance and business. All statements contained in this document other than historical
information are forward-looking statements. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments, and contain words and
phrases such as may, expects, believes, anticipates, estimates, should, or similar expressions. Because these forward-looking statements are based on estimates and assumptions
that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Although we believe that our plans, intentions and
expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks,
uncertainties and assumptions. Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to:



| |  |  | changes in government reimbursement for our services may have an adverse effect on our future revenues and profitability including, for example, the changes
described under Regulatory Changes;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the failure to maintain compliance with our financial covenants could be costly or have a material adverse effect on us;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | the amount of outstanding indebtedness and the restrictive covenants in the agreements governing our indebtedness may limit our operating and financial flexibility;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the condition of the financial markets, including volatility and deterioration in the capital and credit markets, could have a material adverse effect on the
availability and terms of financing sources;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a government investigation or assertion that we have violated applicable regulations may result in increased costs or sanctions that reduce our revenues and
profitability;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | periodic reviews, audits and investigations by federal and government agencies and private payors could result in adverse findings and may negatively impact our
revenues and profitability;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | private third-party payors for our services may undertake future cost containment initiatives that limit our future revenues and profitability;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | actions that may be brought by individuals on the governments behalf under the False Claims Acts qui tam or whistleblower provisions may
expose us to unforeseen liabilities;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the failure of our long-term acute care hospitals to maintain their qualification would cause our revenues and profitability to decline;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the failure of our satellite facilities to qualify for provider-based status with the applicable main facilities may adversely affect our
results of operations;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | development of new facilities may prove difficult or unsuccessful, use significant resources or expose us to unforeseen liabilities;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an increase in uninsured and underinsured patients in our hospitals or the deterioration in the collectibility of the accounts of such patients could harm our
results of operations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the failure to maintain established relationships with the physicians in our markets could reduce our revenues and profitability;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | shortages in qualified nurses, therapists and other healthcare professionals or union activity may significantly increase our operating costs;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | competition may limit our ability to grow and result in a decrease in our revenues and profitability;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the loss of key members of our management team could significantly disrupt our operations;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | the geographic concentration of our facilities in Texas makes us sensitive to economic, regulatory, environmental and other developments in this state;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | adverse changes in individual markets could significantly affect operating results;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the effect of legal actions or other claims associated with the circumstances arising from Hurricane Katrina could subject us to substantial liabilities;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effect of legal actions asserted against us or lack of adequate available insurance could subject us to substantial uninsured liabilities;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an inability to ensure and maintain an effective system of internal controls over financial reporting could expose us to liability;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the failure to comply with the provisions of any of our Master Lease Agreements could materially adversely affect our financial position, results of operations and
liquidity: and,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the failure to prevent damage or interruption to our systems and operations or to conform to regulatory standards for electronic health records could result in
improper functioning, security breaches of our information systems or penalties.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Consequently, such forward-looking
statements should be regarded solely as our current plans, estimates and beliefs. We do not intend, and do not undertake, any obligation to update any forward-looking statements to reflect future events or circumstances after the date of this
report.

For a discussion of those and other factors affecting our business, see the section captioned Risk Factors under
Item 1A of this report.



|Item 1. | BUSINESS
|------- | --------

Company Overview

We began operations in 1993 and have grown our business through developing and acquiring hospitals to become a leading operator of long-term acute care
hospitals in the United States. As of December 31, 2008, we operated 20 hospitals located in 10 states, consisting of nine hospital within a hospital long-term acute care facilities (29% of beds) and 11 freestanding facilities (71%
of beds). Through these 20 long-term acute care (LTAC) hospitals, we operate a total of 1,079 licensed beds and employ approximately 3,100 full-time and part-time personnel, the majority of whom are registered or licensed nurses and
respiratory therapists.

We believe we have developed a reputation for excellence in providing treatment for patients with complex medical
needs requiring extended treatment. Our patients have serious medical conditions such as respiratory failure, chronic pulmonary disease, nervous system disorders, infectious diseases and severe wounds. They generally require a high level of
monitoring and specialized care, yet may not require the continued services of an intensive care unit. Due to their serious medical conditions, our patients are generally not clinically appropriate for admission to a skilled nursing facility or
inpatient rehabilitation facility. By combining general acute care services with a focus on long-term treatment, we believe that our hospitals provide medically complex patients with better and more cost-effective outcomes.

On August 11, 2005, we consummated an acquisition pursuant to which Rainier Acquisition Corp., a Delaware corporation formed by investment funds
associated with The Carlyle Group and certain members of our management and board of directors, merged with and into our company, with our company continuing as the surviving corporation. The funds necessary to consummate the acquisition were
approximately $552.0 million, including approximately $512.2 million to pay the then current stockholders and option holders, approximately $10.7 million to repay existing indebtedness and approximately $29.1 million to pay related fees and
expenses. The effective date of the merger was August 11, 2005. We refer to this acquisition and related financings as the Transactions.

In connection with the Transactions, we borrowed $255.0 million under a new senior credit facility and issued $150.0 million principal amount of outstanding senior subordinated notes. We also entered into a revolving
credit facility that provided up to $75.0 million (amended to $60.0 million in 2007) of borrowing capacity, of which $10.0 million was outstanding in addition to $7.7 million in letters of credits outstanding at December 31, 2008.

Industry Overview

A LTAC hospital serves patients
with serious and complicated illnesses or injuries requiring extended hospitalization. LTAC hospitals are specifically designed to accommodate such patients and provide them with a higher level of care than a skilled nursing facility or an inpatient
rehabilitation facility, each of which is often incapable of treating and delivering the same outcome as a LTAC hospital. Patients are typically referred to a LTAC hospital from a general acute care hospital.

To qualify as a LTAC hospital under Medicare, the Centers for Medicare & Medicaid Services (CMS) requires that a hospital have an
inpatient average length of stay greater than 25 days for Medicare patients. CMS estimates that there are approximately 400 LTAC hospitals in the United States and that Medicare reimbursement to LTAC hospitals will be approximately $4.8 billion in
the year beginning July 1, 2008. There are two general business models for operating LTAC hospitals- hospital within a hospital (HIH) facilities and freestanding facilities. The HIH model refers to facilities that lease
space from a general acute care, or host, hospital but are independently licensed and operated, while freestanding LTAC facilities are not located in or on the campus of a general acute care hospital. In general, HIH facilities are much less
expensive to develop than freestanding facilities, but they are typically smaller and subject to increased regulatory scrutiny by CMS to ensure their independence from their host hospitals.

Recent Regulatory Developments

The American Recovery and
Reinvestment Act of 2009

On February 17, 2009, legislation known as the American Recovery and Reinvestment Act of 2009 (2009
Act) was signed into law. This legislation included certain amendments to the Medicare, Medicaid and SCHIP Extension Act of 2007 (discussed below), including the application of the moratorium granted to LTAC hospitals regarding the 25
Percent Rule as it applies to certain



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grandfathered LTAC satellite hospitals. Prior to the 2009 Act amendment, CMS interpretation of the moratorium provisions were such that
grandfathered satellites were excluded from the moratorium; however, the 2009 Act clarified that the provisions of the moratorium are applicable to grandfathered LTAC satellite hospitals.

The 2008 Final Rule

On May 2, 2008, CMS issued
its annual regulatory update regarding Medicare reimbursement for LTAC hospitals that became effective for all discharges on or after July 1, 2008 (the 2008 Final Rule). The 2008 Final Rule included, among other things, (1) an
increase in the standard federal rate to $39,114, which represented a 2.7% increase, and (2) an increase in the high-cost outlier threshold of $2,222 to $22,960. Additionally, CMS changed the timetable for annual updates to a fiscal year
schedule starting on October 1 instead of July 1, which will result in the 2009 rate year rates being in effect for 15 months beginning July 1, 2008. CMS estimated that the changes for the 2009 rate year, taken as a whole, would
result in an increase of 2.5% in Medicare reimbursement to LTAC hospitals. Individual hospitals, however, are expected to see varying effects of this rule depending on their Medicare patient population and their specific base rate changes due to
geographic location.

CMS Changes to DRG Weighting for Fiscal 2009

On July 31, 2008, CMS issued its final regulations regarding the re-weighting of Medicare-Severity DRGs (MS-LT-DRG) which became effective for discharges on or after October 1, 2008. CMS has
indicated that these changes were made in a budget-neutral manner and that aggregate LTAC hospital payments will be unaffected by these changes. It is likely, however, that individual hospitals will see varying effects of this rule depending upon
the acuity levels of their Medicare patient populations.

The Medicare, Medicaid and SCHIP Extension Act of 2007

On December 29, 2007, legislation known as the Medicare, Medicaid and SCHIP Extension Act of 2007 (the SCHIP Extension Act) was signed
into law and became effective for cost reporting periods beginning after December 29, 2007. This legislation provides for, among other things:



| | 1) | enhanced medical necessity reviews of LTAC hospital cases and a mandated study by the Secretary of Health and Human Services on the establishment of LTAC hospital certification
criteria;
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | three-year moratoriums on the following:
| | -- | ----------------------------------------



| | a. | the establishment of a LTAC hospital or satellite facility, subject to exceptions for facilities under development;
| | -- | -------------------------------------------------------------------------------------------------------------------



| | b. | an increase in the number of beds at a LTAC hospital or satellite facility, subject to exceptions for states where there is only one LTAC hospital or upon request following the
closure or decrease in the number of beds at a LTAC hospital within the state;
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | the application of the so-called 25 Percent Rule to freestanding LTAC hospitals;
| | -- | ----------------------------------------------------------------------------------



| | d. | the very short-stay outlier payment reductions to LTAC hospitals initially implemented on May 11, 2007; and
| | -- | -----------------------------------------------------------------------------------------------------------



| | e. | the application of a one-time budget neutrality adjustment of payment rates to LTAC hospitals under the Long-Term Acute Care Prospective Payment System (PPS);
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | a three-year period during which LTAC hospitals that are co-located within another hospital may admit up to 50% of their patients from the host hospitals and still be paid according
to the LTAC hospital PPS;
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4) | a three-year period during which LTAC hospitals that are co-located with an urban single hospital or a hospital that generates more than 25% of the Medicare discharges in a
metropolitan statistical area (MSA Dominant hospital) may admit up to 75% of their patients from such urban single hospital or MSA Dominant hospital and still be paid according to the LTAC prospective payment system; and
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5) | the elimination of the July 1, 2007 market basket increase in the standard federal payment rate of 0.71%, effective for discharges occurring on or after April 1, 2008.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Additionally, the SCHIP Extension Act expanded the criteria necessary to be certified as a LTAC hospital.
Historically, for a hospital to be certified as a LTAC hospital, the primary requirement was the average length of stay for Medicare patients, measured annually at the end of a cost report period, be in excess of 25 days. The SCHIP Extension Act
modified this definition to include, among other items, that the LTAC hospital has a patient review process that screens patients prior to admission for appropriateness of admission, validates within 48 hours of admission that patients meet
admission criteria, regularly evaluates patients during their stay, provides that the patients have active physician involvement, and assesses available discharge options when patients fail to continue to meet stay criteria.

Our Competitive Strengths

We believe the following
strengths serve as a foundation for our strategy:

Leading market position supported by strong clinical reputation. We were founded
in 1993 by a clinician who recognized an opportunity to provide patients requiring acute care with better sustained treatment than they were receiving in general acute care hospitals. As a result, from the outset we have had a strict commitment to
providing quality medical care to patients with complex medical conditions. With this strong clinical focus, we have grown to become a leading operator of LTAC hospitals in the United States. We believe this approach and our strong market position
help us to attract patients, quality doctors and staff, aid us in our marketing efforts to payors and referral sources and facilitate our efforts in negotiating favorable payor contracts.

Expertise treating patients with the highest acuity levels. We believe we have developed an expertise and a reputation for excellence in providing
treatment for patients with the most severe and complex acute care needs. Generally, the treatment of patients with more complex diagnoses also generates higher reimbursement rates and higher margins for the treatment provider. Additionally, we
believe that these strengths better position us to take advantage of the potential changes in regulations that are presently contemplated by CMS.

Equity investment by experienced private equity firm. We are controlled by investment funds associated with The Carlyle Group, which have invested approximately $176.7 million of equity into our company. The Carlyle Group is a
leading, global private equity firm with approximately $85.5 billion under management and with extensive experience investing in a collection of portfolio companies across various sectors of the healthcare industry including services, payors,
medical devices and products and pharmaceuticals. The Carlyle Healthcare Group includes 21 investment professionals worldwide with experience investing in highly regulated healthcare businesses at stages of development from early-stage venture
investments to leveraged acquisitions.

Our Strategy

The primary components of our business strategy include the following:

Continued focus on the treatment
of higher acuity patients.We are continuing to develop strategies to focus on the admission of higher acuity patients, especially ventilator dependent patients and patients who require significant wound care treatment protocols. This strategy
has included identifying opportunities to increase in certain of our hospitals the capacity to treat these higher acuity patients through the addition of intensive care or high observation rooms, special procedure rooms, and certain diagnostic
equipment.

Growth through selective acquisitions. We may selectively develop or acquire other specialized hospitals where we see
opportunities for attractive returns on our investments, subject to our ability to do so in our current regulatory environment and our ability to finance development and acquisitions. We plan to adhere to selective criteria in our acquisition
analysis and seek to acquire facilities for attractive valuations. We plan to increase margins at acquired facilities by adding clinical programs that attract commercial payors, centralizing administrative functions and implementing our standardized
staffing models and resource management programs.

Provide high quality care and service. We believe that our focus on quality care
and service has established brand loyalty, which allows us to maintain and strengthen our relationships with physicians and payors. To effectively address the high acuity of our patients medical conditions, we have developed three primary
areas of focus and expertise: ventilator management and weaning, wound management and multi-system diagnosis management. We have implemented specific staffing models that are designed to provide patients access to the necessary level of clinical
attention. The quality of the patient care we provide is continually monitored using several measures, including patient, payor and physician satisfaction, as well as clinical outcomes.

Increase higher-margin commercial volume. We typically receive higher reimbursement rates from commercial payors than we do from the federal
Medicare program. As a result, we work to expand relationships with payors to increase the volume of patients covered by commercial insurers. We believe that commercial payors seek to contract with our hospitals because we offer patients high
quality and cost-effective care. Our mix of commercial payors has increased annually since 2002.



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Enhancement of Operating Efficiency and Effectiveness.We are continually seeking to improve the
cost effectiveness of our hospital and corporate operating environment while assuring we maintain the highest quality of patient care and establish an infrastructure that will be capable of executing our strategic plans. The initiatives we are
focused on are:



| |  |  | The standardization of our various facility and corporate processes.
| | - |  | --------------------------------------------------------------------



| |  |  | Enhancement of our information technology applications.
| | - |  | -------------------------------------------------------



| |  |  | Standardization of our facility staffing to assure we can adjust staffing levels based upon changes in patient acuity and our patient census levels.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Development of formal hiring and training programs to assure we attract and retain a highly qualified workforce.
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | Continuing to identify opportunities to consolidate certain administrative functions. We currently have centralized functions such as financial reporting, payroll,
legal, reimbursement, compliance and human resources.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Entering into corporate wide contracts to purchase hospital supplies pursuant to group purchasing contracts.
| | - |  | ------------------------------------------------------------------------------------------------------------

Attracting and Retaining Quality Physicians to Practice in Our Hospitals. Our ability to maintain a high quality clinical setting is in part
dependent on the recruitment and retention of physicians with excellent credentials. The confidence our referral sources have in our ability to deliver quality patient care is often dependent on the quality of the medical staff that practices in our
hospitals. We attempt to identify physicians who have excellent credentials and are respected within the medical community in each of our existing markets. This core group of physicians then assists our hospital staff in recruiting other physicians.

Maintaining Strong Relationships with Referral Sources.Our patients are transferred from other healthcare settings once they are
medically stable and have been determined to be appropriate for receiving clinical care in a LTAC hospital setting. We receive most of our patient referrals from discharge planners at other healthcare facilities, physicians and managed care
organization case managers. As a result, we have clinical liaisons and case managers who focus on maintaining strong relationships with these various referral sources. Specifically our liaisons and case managers utilize face-to-face interaction and
case studies to educate these referral sources on the clinical benefits of our programs as well as to encourage early interventions and the transfer of medically complex patients to our hospitals. We also utilize our corporate managed care resources
to interact with managed care professionals on the clinical and cost effective benefits of our treatment protocols.

Hospital Operations

Our hospitals provide long-term acute care services to patients with serious and often complex medical conditions. Our hospitals have the capability to
treat patients who suffer from conditions such as respiratory failure, chronic pulmonary disease, nervous system disorders, infectious diseases and non-healing wounds. These conditions require a high level of monitoring and specialized care yet may
not necessitate the continued services of an intensive care unit. Due to their serious medical conditions, these patients are not clinically appropriate for admission to a skilled nursing facility or inpatient rehabilitation facility.

Referral Process

Our patients are admitted to
our facilities primarily from general acute care hospitals. Patients are typically referred to us by physicians, payor case managers and community hospital discharge planners. Our facility administrators and marketing staff execute marketing and
strategic plans directed at these referral sources. At each of our facilities, these efforts are under the direction of the facility administrator with significant support from our regional and corporate staff. Our hospital marketing staff works
with specific doctors, community hospital discharge planners and payor case managers to educate these referral sources on the clinical benefits of our programs and to encourage appropriate early intervention and transfer of medically complex
patients.

Hospital Patient Admission

When a patient is referred to one of our facilities, a clinical evaluation is performed to determine the care required and whether the patient meets our medical necessity criteria. Based on the determinations reached in this clinical
evaluation, an admission decision is made by the attending physician.

Upon admission, a transdisciplinary team reviews a new
patients condition. The transdisciplinary team is comprised of a number of clinicians and may include any or all of the following: an attending physician; a specialty nurse; a respiratory therapist; a dietician; a pharmacist; and a case
manager. Upon completion of an initial evaluation by each member of the treatment team, an individualized treatment plan is established and implemented. A case manager, the vast majority of whom are registered nurses, coordinates all aspects of the
patients hospital stay and serves as a liaison with the insurance carriers staff when appropriate. The case manager communicates progress, resource utilization and treatment goals between the patient, the treatment team and the payor.
The transdisciplinary team works with the attending physician throughout the patients hospital stay to make any necessary modification to the patients care plan during the stay, with the goal of achieving the optimal clinical outcome.



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Quality Assessment and Improvement

We maintain an outcomes program that includes a pre-admission evaluation program and concurrent review of all of our patient population against
utilization and quality screenings, as well as quality of outcomes data collection and patient and family satisfaction surveys. In addition, each of our hospitals has an integrated quality assessment and improvement program administered by a quality
review manager that encompasses quality improvement, infection control and risk management. Our objective in these programs is to ensure that patients are appropriately admitted to our hospitals and that we render to our patients quality healthcare
in a cost-effective manner.

We have implemented a program whereby our hospitals will be reviewed annually by internal quality auditors for
compliance with standards of The Joint Commission, a non-profit organization that evaluates and accredits healthcare organizations in the United States. The purposes of this internal review process are to (i) ensure ongoing compliance with
industry recognized standards for our hospitals, (ii) assist management in analyzing each hospitals operations and (iii) provide consulting and educational opportunities for each hospital to identify opportunities to improve patient
care.

Facilities

As of
December 31, 2008, we had nine HIH facilities and 11 freestanding facilities. We own two freestanding LTAC hospitals and lease the remaining LTAC hospitals. We generally seek ten to 15-year leases for our LTAC hospitals, with one or more
five-year renewal options.



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The following table lists our hospital facilities as of December 31, 2008:



|                                       |  |                             |  |              |  |              |  |             
|-------------------------------------- |  | --------------------------- |  | ------------ |  | ------------ |  | ------------
|Facility Name                          |  | Location                    |  | Type         |  | LicensedBeds |  | Owned/Leased
|Existing Facilities                    |  |                             |  |              |  |              |  |             
|Boise Intensive Care Hospital, Inc     |  | Boise, Idaho                |  | Freestanding |  | 60           |  | Leased      
|Colorado Acute Specialty Care Hospital |  | Denver, Colorado            |  | Freestanding |  | 63           |  | Leased      
|LCHLinwood Ave                        |  | Shreveport, Louisiana       |  | Freestanding |  | 65           |  | Leased      
|LCHPierremont                         |  | Shreveport, Louisiana       |  | HIH          |  | 30           |  | Leased      
|LCHWillis-Knighton                    |  | Shreveport, Louisiana       |  | HIH          |  | 24           |  | Leased      
|LCH of Chester County                  |  | West Chester, Pennsylvania  |  | HIH          |  | 39           |  | Leased      
|LCH of Dayton                          |  | Miamisburg, Ohio            |  | HIH          |  | 44           |  | Leased      
|LCH of Wisconsin                       |  | Pewaukee, Wisconsin         |  | Freestanding |  | 62           |  | Leased      
|LCH of North Carolina                  |  | Rocky Mount, North Carolina |  | HIH          |  | 50           |  | Leased      
|LCH of North TexasDallas              |  | Dallas, Texas               |  | Freestanding |  | 64           |  | Leased      
|LCH of North TexasFort Worth          |  | Fort Worth, Texas           |  | Freestanding |  | 80           |  | Owned       
|LCH of North TexasPlano               |  | Plano, Texas                |  | Freestanding |  | 66           |  | Leased      
|LCH of Pittsburgh                      |  | Pittsburgh, Pennsylvania    |  | Freestanding |  | 155          |  | Owned       
|LCH of PittsburghNorth                |  | Pittsburgh, Pennsylvania    |  | HIH          |  | 41           |  | Leased      
|LCH of San Antonio                     |  | San Antonio, Texas          |  | Freestanding |  | 62           |  | Leased      
|LCH of South TexasNorth               |  | McAllen, Texas              |  | Freestanding |  | 32           |  | Leased      
|LCH of South TexasMcAllen             |  | McAllen, Texas              |  | Freestanding |  | 62           |  | Leased      
|LCH of Western Michigan                |  | Muskegon, Michigan          |  | HIH          |  | 20           |  | Leased      
|Tahoe Pacific HospitalMeadows         |  | Reno, Nevada                |  | HIH          |  | 39           |  | Leased      
|Tahoe Pacific HospitalWest            |  | Reno, Nevada                |  | HIH          |  | 21           |  | Leased      
|                                       |  |                             |  |              |  |              |  |             
|Total Facilities 20                    |  |                             |  |              |  | 1,079        |  |             

We lease our non-hospital facilities, including our corporate headquarters, which is located in
Plano, Texas, and several other spaces related to administrative and operational support functions. We believe that our existing facilities are suitable to conduct our operations.

Employees

As of December 31, 2008, we employed approximately 3,100 people throughout the
United States in the locations noted above.

Professional Staff

Each of our hospitals is staffed with a transdisciplinary team of healthcare professionals. A professional nursing staff trained to care for long-term acute patients is on duty 24 hours each day in our hospitals.
Other professional staff include respiratory therapists, physical therapists, occupational therapists, speech therapists, pharmacists and case managers.

Each of our hospitals has a fully credentialed, multi-specialty medical staff to meet the needs of the patients. Each patient is visited at least once a day by a physician. Our credentialed physicians typically
practice in specialties such as critical care, internal medicine, pulmonary medicine, cardiology, hematology, nephrology, infectious diseases, oncology, endocrinology, psychiatry, surgery and wound care.

The physicians at our hospitals generally are not our employees and may also be members of the medical staff at other hospitals. Generally, we do not
enter into exclusive contracts with these physicians to provide services for our patients. We enter into administrative agreements with physicians to provide administrative support and clinical oversight of our clinical programs.

Centralized Management and Operational Oversight

A hospital administrator supervises and is responsible for the day-to-day operations at each of our hospitals. In addition, our hospitals employ a director of nursing to oversee the clinical operations of the hospital and a quality
assurance manager to direct an integrated quality assurance program. Our corporate support center provides services in the areas of system design and development, training, human resource management, payroll, reimbursement expertise, legal advice,
accounting support, centralized billing, insurance/risk management services, managed care expertise, purchasing and facilities management. Financial control is maintained through fiscal and accounting policies that are established at the corporate
level for use at each of our hospitals. We have standardized operating procedures, and we monitor our hospitals to assure consistency of operations.



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We also employ a series of checks and balances designed to ensure that management and operational
decisions at our facilities are made while considering our patients best interests. We have developed a system to monitor operating metrics, such as nursing hours per patient day and non-clinical staff metrics, at each of our facilities. This
monitoring includes a review of clinical staffing levels and measures time devoted to our patients against goals set by management. Our aim is to ensure that we are providing the right staffing and other resources to match our patients acuity
levels.

Payor Relationship Management

It is important to our business to be able to establish relationships with commercial healthcare payors and to maintain our reputation with those payors as a provider of acute care. Our staff includes persons with expertise in the field of
payor contracting and rate modeling. These professionals negotiate contracts with purchasers of group healthcare services, including private employers, managed care companies, preferred provider organizations and health maintenance organizations.
Some payor organizations attempt to obtain discounts from established hospital charges. We focus on demonstrating to these payors how our services can provide them and their customers with the most viable pricing arrangements in circumstances where
they may otherwise be faced with funding treatment at expensive rates at other types of facilities. The importance of obtaining contracts with preferred provider organizations, health maintenance organizations and other organizations varies among
markets, depending on such factors as the number of commercial payors and their relative market strength.

Competition

We compete on the basis of the quality of services we provide, pricing, location and the clinical outcomes we achieve. The primary competitive factors in
the LTAC hospital industry include location, quality of services, charges for services and responsiveness to the needs of patients, families, payors and physicians. Other companies operate LTAC hospitals that compete with our hospitals, including
large operators of similar facilities, such as Kindred Healthcare, Inc. and Select Medical Corporation. Some of these operations have greater financial resources and longer operating histories than we do. In addition, in each of our markets there
are general acute care hospitals that provide services similar to those we provide.

Government Regulations

General

The healthcare industry is required to
comply with many laws and regulations at the federal, state and local levels. These laws and regulations require that hospitals meet various requirements, including those relating to the adequacy of medical care, equipment, personnel, operating
policies and procedures, maintenance of adequate records, compliance with building codes and environmental protection and healthcare fraud and abuse. These laws and regulations are extremely complex and, in many instances, the industry does not have
the benefit of significant regulatory or judicial interpretation. If we fail to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate and our ability to participate in
the Medicare, Medicaid and other federal and state healthcare programs.

As a result of our hospitals state licensures and
certifications under the Medicare and various Medicaid programs, we are subject to regular reviews, audits and investigations conducted by, or on the behalf of, the federal and state agencies that are responsible for the oversight of these programs.
These agencies may review our compliance with participation and payment regulations, including enhanced medical necessity reviews of LTAC hospital cases pursuant to the SCHIP Extension Act, and conduct audits under the CMS Recovery Audit Contractor
(RAC) program. The RAC program has been made permanent and was required to be expanded broadly to healthcare providers pursuant to the Tax Relief and Health Care Act of 2006. The results of the enhanced medical necessity reviews and the
RAC program audits could have an adverse effect on our business, financial position, result of operations and liquidity. To the extent these reviews result in an adverse finding, we may contest the adverse finding vigorously; however, these matters
can result in significant legal expense and consume our resources.

Licensure

Facility Licensure. Our healthcare facilities are subject to state and local licensing regulations ranging from the adequacy of medical care to
compliance with building codes and environmental protection laws. In order to assure continued compliance with these various regulations, governmental and other authorities periodically inspect our facilities.

Some states still require us to get approval under certificate of need regulations when we create, acquire or expand our facilities or services. If we
fail to show public need and obtain approval in these states for our facilities, we may be subject to civil or even criminal penalties, lose our facility license or become ineligible for reimbursement if we proceed with our development or
acquisition of the new facility or service.

Professional Licensure and Corporate Practice. Healthcare professionals at our
hospitals are required to be individually licensed or certified under applicable state law. We take steps to ensure that our employees and agents possess all necessary licenses and certifications.



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Certification. In order to participate in the Medicare program and receive Medicare reimbursement,
each facility must comply with the applicable regulations of the United States Department of Health and Human Services relating to, among other things, the type of facility, its equipment, its personnel and its standards of medical care, as well as
compliance with all applicable state and local laws and regulations. All of our hospitals participate in the Medicare program.

Accreditation. Our hospitals receive accreditation from The Joint Commission, a nationwide commission which establishes standards relating to the physical plant, administration, quality of patient care and operation of medical staffs
of hospitals. The Joint Commission has accredited all of our hospitals.

Overview of U.S. and State Government Reimbursements

Medicare. The Medicare program reimburses healthcare providers for services furnished to Medicare beneficiaries, who are persons generally age 65
and older, those who are chronically disabled, and those suffering from end stage renal disease. The program is governed by the Social Security Act and is administered primarily by the Department of Health and Human Services through its Centers for
Medicare & Medicaid Services. The Medicare program reimburses various types of providers, including LTAC hospitals, using different payment methodologies. We received from Medicare approximately 61.2% of our net patient service revenue in
2008.

The Medicare payment system for LTAC hospitals is currently based upon a PPS specifically designed for LTAC hospitals. Prior to
2002, LTAC hospitals were reimbursed by Medicare based on a reasonable cost methodology.

LTAC hospital PPS is based upon discharged-based MS-LT-DRGs. The basic form of payment under the LTAC hospital PPS provides for three potential payment amounts: (a) a short stay outlier payment, which applies to patients whose length
of stay is less than5/6of the geometric mean length of stay for that MS-LT-DRG; (b) a full DRG payment which applies to
patients whose length of stay is greater than5/6of the geometric mean length of stay and whose cost has not exceeded the
amount of MS-LT-DRG reimbursement plus a fixed cost outlier threshold established each year by CMS; and (c) a high cost outlier payment that will provide a partial coverage of costs for patients whose cost of care exceeds the MS-LT-DRG
reimbursement plus a fixed cost outlier threshold per discharge. For patients in the high cost outlier category, Medicare will reimburse 80% of the costs incurred above the sum of the MS-LT-DRG payment amount plus a fixed cost outlier threshold per
discharge.

Reimbursement for patients whose length of stay is less
than5/6of the geometric mean length of stay is the lesser of (1) a per diem based upon the average payment for that
MS-LT-DRG, (2) the estimated costs of the patients stay, (3) the full MS-LT-DRG payment, or (4) a blend of an amount comparable to what would otherwise be paid under the short-term acute care in-patient payment system
(IPPS) computed as a per diem, capped at the full IPPS MS-DRG comparable payment amount and per diem based upon the average payment for MS-LT-DRG under LTAC PPS. Additionally, for discharges occurring from July 1, 2007 through
December 29, 2007, certain short-stay outlier cases having a length of stay less than or equal to a predetermined IPPS threshold were reimbursed based upon the lesser of (1) a per diem based upon the average payment for that MS-LT-DRG,
(2) the estimated costs of the patients stay, (3) the full MS-LT-DRG payment, or (4) an amount comparable to what would otherwise be paid under IPPS. These payment provisions, which only applied to patients with very short
lengths of stay, were suspended for three years beginning with discharges on or after December 29, 2007, pursuant to the SCHIP Extension Act.

LTAC hospital PPS provides for an adjustment for differences in geographic area wages resulting from salary and benefit variations. There are additional rules for payment for patients who are transferred from a LTAC
hospital to another healthcare setting and are subsequently re-admitted to the LTAC hospital. The LTAC hospital PPS payment rates also are subject to annual adjustments.

Only providers qualified as LTAC hospitals may be paid under this system. To maintain qualification under LTAC hospital PPS among other things, the hospitals average length of stay of Medicare patients must be
more than 25 days measured annually at the end of a cost report period.

Prior to qualifying under the payment system applicable to LTAC
hospitals, a new LTAC hospital initially receives payments under the short-term acute care reimbursement system. The LTAC hospital must continue to be paid under this system for a minimum of six months while meeting certain Medicare LTAC hospital
requirements, the most significant requirement being an average length of stay of more than 25 days.

LTAC Hospital Medicaid
Reimbursement. The Medicaid program is designed to provide medical assistance to individuals unable to afford care. The program is governed by the Social Security Act and administered and funded jointly by each individual state government and
CMS. Medicaid payments are made under a number of different systems, which include cost based reimbursement, prospective payment systems or programs that negotiate payment levels with individual hospitals. In addition, Medicaid programs are subject
to statutory and regulatory changes, administrative rulings, interpretations of policy by the state agencies and certain government funding limitations, all of which may increase or decrease the level of program payments to our hospitals. Medicaid
payments accounted for less than 1% of our net patient service revenue for the year ended December 31, 2008.



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Regulatory Changes

The 2008 Final Rule

On May 2, 2008, CMS issued the 2008 Final Rule regarding Medicare reimbursement for LTAC hospitals
that became effective for all discharges on or after July 31, 2008. The 2008 Final Rule included, among other things, (1) an increase in the standard federal rate to $39,114, which represents a 2.7% increase, and (2) an increase in the
high-cost outlier threshold of $2,222 to $22,960. Additionally, CMS changed the timetable for annual updates to a fiscal year schedule starting on October 1 instead of July 1, which will result in the 2009 rate year rates being in effect
for 15 months beginning July 1, 2008. CMS estimated that the changes for the 2009 rate year, taken as a whole, will result in an increase of 2.5% in Medicare reimbursement to LTAC hospitals. Individual hospitals, however, will see varying
effects of this rule depending on their Medicare patient population and their specific base rate changes due to geographic location.

CMS Changes to DRG
Weighting for Fiscal 2009

On July 31, 2008, CMS issued its final regulations regarding the re-weighting of MS-LT-DRGs that became
effective for discharges on or after October 1, 2008. CMS has indicated that these changes were made in a budget-neutral manner and that aggregate LTAC hospital payments will be unaffected by these changes. It is likely, however, that
individual hospitals will see varying effects of this rule depending upon the acuity levels of their Medicare patient populations.

The 2007 Final Rule

On May 1, 2007, CMS issued its annual regulatory update regarding Medicare reimbursement for LTAC hospitals (the 2007 Final
Rule) that was effective for all discharges on or after July 1, 2007. This rule was amended on June 29, 2007, by revising the high cost outlier threshold. CMS estimated that the impact of the 2007 Final Rule was an overall net
decrease in payments to all Medicare certified LTAC hospitals of approximately 1.2%. The 2007 final rule included, among other things, (1) an increase to the standard federal payment rate of 0.71% (subsequently eliminated effective
April 1, 2008, as provided for in the SCHIP Extension Act as previously discussed); (2) revisions to payment methodologies impacting short-stay outliers, which reduce payments by 0.9% (also subsequently modified by the SCHIP Extension Act
via three-year moratorium on this new provision); (3) adjustments to the wage index component of the federal payment resulting in projected reductions in payment of 0.5%; (4) an increase in the high cost outlier threshold per discharge to
$20,738, resulting is projected reimbursement reductions of 0.4%; and (5) an extension of the policy know as the 25 Percent Rule to all LTAC hospitals, with a three-year phase in, which CMS projects will not result in payment
reductions for the first year of implementation (also subsequently modified by the SCHIP Extension Act via a three-year moratorium on this provision).

A significant policy change contained in the 2007 Final Rule was the application of the so-called 25 Percent Rule to all LTAC hospitals. The result of this policy change was that all LTAC hospitals were to
be paid the LTAC PPS rates for admissions from a single referral source up to 25% of aggregate Medicare admissions. Admissions in excess of the 25% threshold were to be paid at a lesser amount based upon short-term acute care hospital rates.
Patients admitted who had previously reached a high cost outlier status in the referring short-term hospital were not counted when computing compliance with this limitation. As discussed previously, these provisions were modified by the SCHIP
Extension Act and the 2009 Act.

CMS Changes to DRG Weighting for Fiscal 2008

On August 1, 2007, CMS issued final inpatient prospective payment system regulations for fiscal year 2008. These regulations established a new
Medicare severity-based patient classification system for fiscal year 2008 for LTAC hospitals. The MS-LT-DRG system created additional severity-adjusted categories for most diagnoses, resulting in an expansion of the number of DRGs from 538 to 745.
CMS stated that MS-LT-DRG weights were developed in a budget neutral manner and as such, the estimated aggregate payments under LTAC PPS would be unaffected by the annual recalibration of MS-LT-DRG payment weights. CMS provided for a two year
phase-in period to mitigate the transition in payments for short-term acute and LTAC PPS providers. In fiscal 2008, provider reimbursements were based 50% on new MS-LT-DRGs and 50% on existing DRGs. For fiscal 2009, 100% of provider reimbursements
will be based on new MS-LT-DRGs.

CMS also stated that future annual updates to the DRG classifications and relative weights will be made
in a budget neutral manner, effective October 1, 2007. As such, it is expected that the estimated aggregate industry LTAC hospital PPS payments would be unaffected by the annual recalibration of DRG payment weights.

Prior Regulatory Changes

On August 1, 2006, CMS
issued changes to the Medicare hospital payment system, including changes to the relative weights and lengths of stay for the diagnosis related groups treated by LTAC hospitals. This final rule was effective for Medicare discharges



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on or after October 1, 2006. CMS estimated these changes would result in reducing payments to LTAC hospitals by 1.3% based on the current reimbursement
regulations that were previously in place. The final regulations also included (1) changes in the regulations applicable to grandfathered hospitals-within-hospitals and grandfathered satellite facilities, and (2) changes in the methodology
for determining cost-to-charge ratios for LTAC hospitals and the reconciliation of high-cost and short-stay outlier payments under the Medicare payment system for such hospitals.

On May 2, 2006, CMS issued changes in regulations for the 2007 fiscal year starting on July 1, 2006 regarding the prospective payment system
for LTAC hospitals. These rules included, among other things, the annual Medicare updates along with changes in the reimbursement methodology for short-stay outliers and an increase in the high-cost outlier fixed loss threshold. Additionally, this
rule eliminated the annual market basket adjustment and extended until July 1, 2008 CMSs authority to impose a one-time prospective budget neutrality adjustment to LTAC hospital rates. CMS estimated that, exclusive of the freeze of the
federal rate for fiscal 2007, these changes would result in a decrease in Medicare reimbursement of 3.7% per discharge for LTAC hospital providers.

Refer to the Recent Regulatory Development section contained herein for discussion on the Medicare, Medicaid and SCHIP Extension Act of 2007 and the American Recovery and Reinvestment Act of 2009. See
Managements Discussion and Analysis of Financial Condition and Results of Operations for additional discussion regarding the impact of these regulatory changes on our operations.

LTAC Hospital Facility Admission Regulations

Effective for cost reporting years beginning on or after October 1, 2004, LTAC hospitals operated as HIH facilities and freestanding LTAC hospitals located within 250 yards of an acute care hospital, became subject to new regulations
that reduced reimbursement for certain admissions. Subject to certain exemptions under the regulations, the facilities subject to these rules will receive lower rates of reimbursement for those Medicare patients admitted from their host hospitals in
excess of a specified percentage of the HIHs total admitted patients. For new HIH facilities, the Medicare admissions threshold was established at 25%. For HIH facilities that met specified criteria and were in existence as of October 1,
2004, the Medicare admissions thresholds was being phased-in over a four-year period staring with hospital cost reporting periods beginning on or after October 1, 2004. The regulations provide exceptions to the Medicare admissions threshold for
(i) patients who have reached outlier status at the referring short-term acute care hospitals, (ii) HIH facilities located in MSA-dominant hospitals, and (iii) HIH facilities located in rural areas.

As discussed previously under the caption 2007 Final Rule, CMS expanded the so-called 25 Percent Rule to include all LTAC
hospitals. The subsequent SCHIP Extension Act, however, placed a three-year moratorium on the application of this new provision to free-standing hospitals and made certain other modifications to the rules discussed previously that were effective for
cost reporting periods beginning on or after October 1, 2004. In addition, the SCHIP Extension Act provides for a three-year period during which (1) LTAC hospitals that are co-located within another hospital may admit up to 50% of their
patients from their host hospitals and still be paid according to LTAC PPS, and (2) LTAC hospitals that are co-located with an urban single hospital or a MSA Dominant hospital may admit up to 75% of their patients from such urban single or MSA
Dominant hospital and still be paid according to LTAC PPS. As noted previously, the American Recovery and Reinvestment Act of 2009 clarified certain provisions contained in the SCHIP Extension Act regarding the application of the moratorium to
certain grandfathered satellite locations.

As of December 31, 2008, only one of our HIH facilities was subject to
admission limitations at the 25% level. This facility opened after the October 1, 2004 implementation date and has been in compliance with this requirement since opening. As a result of the phase-in of the admission limitations and certain
grandfathering provisions, all of our other HIH facilities have limitations ranging from 50% to 75%. These admission limitation rules have not had a significant effect on our 2006, 2007 or 2008 financial results.

Other Healthcare Regulations

Fraud and
Abuse Enforcement. Various federal laws prohibit the submission of false or fraudulent claims, including claims to obtain payment under Medicare, Medicaid and other government healthcare programs. Penalties for violation of these laws include
civil and criminal fines, imprisonment and exclusion from participation in federal and state healthcare programs. In recent years, federal and state government agencies have increased the level of enforcement resources and activities targeted at the
healthcare industry. In addition, the federal False Claims Act allows an individual to bring lawsuits on behalf of the government, in what are known as qui tam or whistleblower actions, alleging false or fraudulent Medicare or
Medicaid claims or other violations of the statute. The use of these private enforcement actions against healthcare providers has increased dramatically in the recent past, in part because the individual filing the initial complaint is entitled to
share in a portion of any settlement or judgment. See Legal and Administrative Proceedings.

From time to time, various federal
and state agencies, such as the Office of Inspector General of the Department of Health and Human Services, issue a variety of pronouncements, including fraud alerts, the Office of Inspector Generals Annual Work Plan and other reports,
identifying practices that may be subject to heightened scrutiny. These pronouncements can identify issues relating to LTAC hospitals. For example, the Office of Inspector Generals 2008 Work Plan describes the governments intention to
review the



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appropriateness of payments for interrupted stays and short stay outlier payments. In addition, the government expressed its plan to review the application
of special payment provisions for patients who were transferred to onsite providers and readmitted to LTAC hospitals as well as patients who are discharged to collocated or satellite providers. We monitor government publications applicable to us and
focus a portion of our compliance efforts towards these areas targeted for enforcement.

We endeavor to conduct our operations in
compliance with applicable laws, including healthcare fraud and abuse laws. If we identify any practices as being potentially contrary to applicable law, we will take appropriate action to address the matter, including, where appropriate, disclosure
to the proper authorities.

Remuneration and Fraud Measures. The federal anti-kickback statute prohibits some business
practices and relationships under Medicare, Medicaid and other federal healthcare programs. These practices include the payment, receipt, offer or solicitation of remuneration in connection with, to induce, or to arrange for, the referral of
patients covered by a federal or state healthcare program. Violations of the anti-kickback law may be punished by a criminal fine of up to $25,000 or imprisonment for each violation, or both, civil monetary penalties of $50,000 and damages of up to
three times the total amount of remuneration, and exclusion from participation in federal or state healthcare programs.

Sections 1877 and
1903(s) of the Social Security Act, commonly known as the Stark Law, prohibit referrals for designated health services by physicians under the Medicare and Medicaid programs to other healthcare providers in which the physicians have
an ownership or compensation arrangement unless an exception applies. Sanctions for violating the Stark Law include civil monetary penalties of up to $15,000 per prohibited service provided, assessments equal to three times the dollar value of each
such service provided and exclusion from the Medicare and Medicaid programs and other federal and state healthcare programs. The statute also provides a penalty of up to $100,000 for a circumvention scheme. In addition, many states
have adopted or may adopt similar anti-kickback or anti-self-referral statutes. Some of these statutes prohibit the payment or receipt of remuneration for the referral of patients, regardless of the source of the payment for the care.

Provider-Based Status. The designation provider-based refers to circumstances in which a subordinate facility (e.g., a
separately certified Medicare provider, a department of a provider or a satellite facility) is treated as part of a provider for Medicare payment purposes. In these cases, the services of the subordinate facility are included on the main
providers cost report and overhead costs of the main provider can be allocated to the subordinate facility, to the extent that they are shared. We currently operate seven hospitals that are treated as provider-based satellites or remote
locations of certain of our other facilities. These facilities are required to satisfy certain operational standards in order to retain their provider-based status.

Privacy and Security Requirements.There are currently numerous legislative and regulatory initiatives at the state and federal levels addressing the privacy and security of patient health and other identifying
information. The privacy and security regulations promulgated pursuant to HIPAA extensively regulate the use and disclosure of individually identifiable health information and require healthcare providers to implement administrative, physical and
technical safeguards to protect the security of such information. Violations of the regulations may result in civil and criminal penalties. Recently, the American Recovery and Reinvestment Act of 2009 (2009 Act) strengthened the
requirements of the HIPAA privacy and security regulations and significantly increased the penalties for violations, with penalties of up to $50,000 per violation for a maximum civil penalty of $1.5 million in a calendar year for violations of
the same requirement. Under the 2009 Act, the Department of Health and Human Services (DHHS) is required to conduct periodic compliance audits of covered entities and their business associates (entities that handle identifiable health
information on behalf of covered entities). In addition, the 2009 Act authorizes State Attorneys General to bring civil actions seeking either injunction or damages in response to violations of HIPAA privacy and security regulations that threaten
the privacy of state residents. The 2009 Act requires DHHS to issue regulations requiring covered entities to report certain security breaches to individuals affected by the breach and, in some cases, to DHHS or to the public via a website posting.
This reporting obligation will apply broadly to breaches involving unsecured protected health information and will become effective 30 days from the date DHHS issues these regulations.

Our facilities remain subject to any state laws that relate to privacy or the reporting of security breaches that are more restrictive than the
regulations issued under HIPAA and the requirements of the 2009 Act. For example, various state laws and regulations may require us to notify affected individuals in the event of a data breach involving certain individually identifiable health or
financial information.

In addition, the Federal Trade Commission issued a final rule in October 2007 requiring financial institutions
and creditors, which may include healthcare providers, to implement written identity theft prevention programs to detect, prevent, and mitigate identity theft in connection with certain accounts. The compliance date for this rule has been postponed
until May 1, 2009.

Our Compliance Program

We voluntarily adopted a Code of Conduct, which serves as the basis for our company-wide compliance program. Our written Code of Conduct provides guidelines for principles and regulatory rules that are applicable to our patient care and
business activities. These guidelines are implemented by our Corporate Compliance Officer, who works with each facility compliance officer and our corporate HIPAA Privacy and Security Director. We have also established a reporting system, auditing
and monitoring programs and a disciplinary system as a means for enforcing the Code of Conducts policies.



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We focus on integrating our compliance and HIPAA-related responsibilities with operational and staff
functions. We recognize that our compliance with applicable laws and regulations depends upon individual actions as well as company operations. As a result, we have adopted an operations team approach to compliance. Our corporate executives and
staff, with the assistance of both corporate and outside experts, have reviewed and adopted our core compliance program through our Compliance Committee. We utilize facility compliance officers to ensure facility-level implementation of our Code of
Conduct. This approach is intended to reinforce our company-wide commitment to operate in accordance with the laws and regulations that govern our business.

Our Compliance Committee is made up of members of our senior executives and staff. The Compliance Committee meets on a quarterly basis and reviews the activities, reports and operation of our compliance program. In
addition, any significant compliance initiatives are presented to the board of directors. Finally, our Corporate Compliance Officer reports quarterly to our board of directors to review the activities, reports and operation of our compliance
program.

In order to facilitate our employees ability to report known, suspected or potential violations of our Code of Conduct, we
have developed a system of anonymous reporting. This anonymous reporting may be accomplished by communication to our toll-free, third-party compliance hotline provider or directly to the hotline provider by mail. In addition, compliance-related
issues are presented and reviewed by our Corporate Compliance Officer with the assistance of outside counsel as deemed necessary by the Corporate Compliance Officer. The Corporate Compliance Officer and his staff are responsible for reviewing and
investigating compliance incidents in accordance with the compliance departments Policy on Reporting of Potential Issues or Areas of Noncompliance, and presenting the findings to our Chief Executive Officer, the Compliance Committee, or an
executive or administrative officer as necessary. All significant issues are reported to our board of directors.

We train and educate our
employees regarding the Code of Conduct, as well as the legal and regulatory requirements relevant to the employees work environment. New and current employees are annually required to sign a form certifying that the employee has read,
understood, and has agreed to abide by the Code of Conduct.

We review our policies and procedures for our compliance program from to time
to time in order to improve operations and to ensure compliance with requirements of standards, laws and regulations and to reflect the on-going compliance focus areas which have been identified by the Compliance Committee.

Legal and Administrative Proceedings

We are subject
to legal proceedings and claims that arise in the ordinary course of our business, which include malpractice claims covered under our insurance policies. In our opinion, the outcome of these actions will not have a material adverse effect on the
financial position or results of operations of our company.

To cover claims arising out of the operations of our hospitals, we maintain
professional malpractice liability insurance and general liability insurance. We also maintain umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by our other insurance
policies. These insurance policies also do not generally cover punitive damages.

HHS Office of Inspector General Voluntary Disclosure

In July 2003, we made an initial voluntary disclosure to the United States Department of Health & Human Services Office of
Inspector General (OIG) concerning expenses we had included on cost reports submitted to Medicare for fiscal years 1997 through 2001. We made this disclosure pursuant to the Voluntary Disclosure Program established by the OIG to
encourage self-reporting by providers. At that time we initiated an internal compliance investigation and reported its findings to the OIG. In addition in March 2005, we made a supplemental voluntary disclosure to the OIG that we had inadvertently
employed three individuals who furnished patient care services for us while they were excluded from participation in the Medicare program.

On June 12, 2006, we entered into a Settlement Agreement and a Certification of Compliance Agreement (CCA) with the OIG that settled these matters. The amount paid in connection with this settlement was approximately $2.6
million, which was funded out of a specific escrow account established as part of the Transactions that occurred on August 11, 2005. The CCA is effective for three years. It requires, among other things, that we (1) continue to maintain
our corporate compliance program, (2) submit an annual report to the OIG regarding certain specified items, including our ongoing corporate compliance audit findings in areas such as cost reporting, physician contracting and charge master
reviews, and (3) report the occurrence of certain other events. Our annual report was submitted in August 2008 and was subsequently approved by the OIG. We believe that the annual incremental costs to comply with the CCA are not significant
since we currently maintain corporate compliance programs as described above.



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Katrina Related Matters

Refer to Item 3. Legal Proceedings for a discussion of the Katrina related matters.

Additional
Information

We file our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other information
with the SEC under the Exchange Act.

You may read or obtain copies of this information in person or by mail from the Public Reference Room
of the SEC, 100 F Street, NE, Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our filings with the SEC also are available to the public free of charge on the SECs
website at www.sec.gov.

Our website, www.lifecare-hospitals.com,contains additional information on our
company, and our Code of Conduct. Information made available on our website is not a part of this document.

In addition, you may request a
copy of our SEC filings (excluding exhibits) at no cost by writing or telephoning us at the following address or telephone number:



| |  |                                                                                                                |  | 
| |  | -------------------------------------------------------------------------------------------------------------- |  | 
| |  | LifeCare Holdings, Inc 5560 Tennyson Parkway
Plano, TX 75024 Attention: Chief Financial Officer (469) 241-2100 |  | 



|Item 1A. | Risk Factors
|-------- | ------------

We conduct our business in a heavily regulated
industry, and healthcare reform or changes in regulations, including the rates or methods of government reimbursements for our services, may result in reduced net revenues and profitability.

The healthcare industry is subject to extensive federal, state and local laws and regulations relating to:



| |  |  | payment for services
| | - |  | --------------------



| |  |  | facility and professional licensure, including certificates of need;
| | - |  | --------------------------------------------------------------------



| |  |  | conduct of operations, including financial relationships among healthcare providers, Medicare fraud and abuse, and physician self-referral; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | addition of facilities and services and enrollment of newly developed facilities in the Medicare program.
| | - |  | ---------------------------------------------------------------------------------------------------------

During 2006, 2007 and 2008, we derived 71.6%, 64.6% and 61.2%, respectively, of our net patient service revenue from the highly regulated federal
Medicare program. In recent years, through legislative and regulatory actions, the federal government has made substantial changes to various payment systems under the Medicare program. Additional changes to these payment systems have been proposed
or may be proposed and could be adopted, either in Congress or by CMS. Because these kinds of changes may be adopted at any time, the availability, methods and rates of Medicare reimbursements for services of the type furnished at our facilities
could change at any time. Some of these changes and proposed changes could adversely affect our business strategy, operations and financial results. In addition, any increases in Medicare reimbursement rates established by CMS may not fully reflect
increases in our operating costs. Other changes in regulations relating to how we conduct our operations could also result in increased expenses or reduced net revenues. See BusinessGovernment Regulations.

We may not be able to maintain compliance with covenants contained in our senior secured credit facility.

We are significantly leveraged, and our senior secured credit facility requires us to comply on a quarterly basis with certain financial covenants,
including an interest coverage ratio test and a maximum leverage ratio test. These financial covenant tests will become more restrictive over time. We cannot guarantee that we will be able to continue to satisfy these covenant requirements in the
future. The loss of our New Orleans operations during 2005 and the regulatory changes recently enacted by CMS have resulted in operating profits that are significantly less than our operating profits at the time we undertook the increased
indebtedness. Accordingly, the margins by which we adhere to the financial ratios required by our senior secured credit facility (Credit Facility) have consistently decreased.

On May 2, 2007, we entered into Amendment No. 1 to the Credit Facility (Amendment No. 1). Amendment No. 1 modified
certain financial covenants effective March 31, 2007 and increased the spread on the variable interest rate. As of September 30, 2007, we were not in compliance with the financial covenant requirements as set forth in the credit agreement
for the Credit Facility. However, this event of non-compliance was cured on November 14, 2007 through the exercise of a cure right as provided for in the credit agreement. On December 6, 2007, we entered into Amendment No. 2 to our
Credit Facility, which modifies certain financial covenants starting with the rolling 12-month period ending December 31, 2007, provides two additional cure rights and increases the spread on the variable interest rate.



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If we are unable to maintain compliance with the covenants contained in our Credit Facility, an event of
default could occur, unless we are able to obtain a waiver or enter into another amendment with the senior lenders to revise the covenant requirements. If we are required to obtain a waiver or execute another amendment to our Credit Facility, it is
likely we will incur additional fees and expenses, and will be required to pay a higher interest margin on our outstanding indebtedness in subsequent periods. In the event of a default, the lenders under the Credit Facility are entitled to take
various actions, including accelerating amounts due under the Credit Facility, terminating our access to our revolving credit facility and all other actions generally available to a secured creditor. An uncured event of default would have a material
adverse effect on our financial position, results of operations and cash flow.

Our outstanding indebtedness and the restrictive covenants in the
agreements governing our indebtedness limit our operating and financial flexibility.

We are required to make mandatory payments on
our outstanding indebtedness, which requires us to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows to fund working capital, capital expenditures,
and other general corporate purposes and could limit our flexibility in planning for, or reacting to, changes in our business and in the industry.

In addition, the debt instruments impose certain operating and financial restrictions on us and limit managements discretion in operating our businesses. For example, restrictions in our senior secured credit facility require us to
comply with or maintain a minimum interest coverage ratio and maximum leverage ratio and limit or prohibit our ability to, among other things:



| |  |  | incur, assume or permit to exist additional indebtedness or guarantees;
| | - |  | -----------------------------------------------------------------------



| |  |  | incur liens and engage in sale and leaseback transactions;
| | - |  | ----------------------------------------------------------



| |  |  | make capital expenditures;
| | - |  | --------------------------



| |  |  | make loans and investments;
| | - |  | ---------------------------



| |  |  | declare dividends, make payments or redeem or repurchase capital stock;
| | - |  | -----------------------------------------------------------------------



| |  |  | engage in mergers, acquisitions and other business combinations;
| | - |  | ----------------------------------------------------------------



| |  |  | prepay, redeem or purchase certain indebtedness;
| | - |  | ------------------------------------------------



| |  |  | amend or otherwise alter terms or our indebtedness including the notes;
| | - |  | -----------------------------------------------------------------------



| |  |  | enter into agreements limiting subsidiary distributions;
| | - |  | --------------------------------------------------------



| |  |  | sell assets;
| | - |  | ------------



| |  |  | transact business with affiliates; and
| | - |  | --------------------------------------



| |  |  | alter the business that we conduct.
| | - |  | -----------------------------------

The
condition of the financial markets, including volatility and deterioration in the capital and credit markets, could have a material adverse effect on the availability and terms of our financing sources.

Due to the recent turmoil within the financial markets nationally and globally, there is no assurance that the availability of future borrowings under
the revolving credit facility will not be impacted by the ongoing volatility and disruptions in the financial credit markets. Availability of borrowings under a revolving credit facility is one of our primary sources of liquidity. Additionally,
acquiring and developing facilities may involve significant cash expenditures and debt incurrence. We may fail to obtain financing for acquisitions at a reasonable cost, and any such financing might contain restrictive covenants that limit our
operating flexibility. Our revolving credit facility will mature on August 11, 2011, our senior secured credit facility will mature on August 11, 2012 and our senior subordinated notes will mature on August 11, 2013. We cannot assure
that a prolonged downturn in the credit markets or other circumstances will not impact our ability to access our revolving credit facility or to refinance our indebtedness as it matures. Our inability to access our revolving credit facility or
refinance indebtedness would have a material adverse effect on our business, financial position, results of operations and liquidity.

Violations of
federal industry regulations may result in sanctions that reduce our net revenues and profitability or affect our eligibility for government program reimbursement.

In recent years, there have been heightened coordinated civil and criminal enforcement efforts by both federal and state government agencies relating to
the healthcare industry. The investigations relate to, among other things, various referral practices, cost reporting, billing practices, clinical standards physician ownership and joint ventures involving hospitals. In the future, different



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interpretations or enforcement of these laws and regulations could subject our current practices to allegations of impropriety or illegality or could require
us to make changes in our facilities, equipment, personnel, services and capital expenditure programs, increase our operating expenses and reduce our net revenues. Likewise, additional or revised laws and regulations could require us to make
operational changes and incur increased operational expenses. If we fail to comply with these extensive laws and government regulations or if we discover that we have failed to comply in the past, we could become ineligible to receive government
program reimbursement, suffer civil or criminal penalties or be required to make significant changes to our operations. In addition, we could be forced to expend considerable resources responding to an investigation or other enforcement action under
these laws or regulations.

In July 2003, we made a voluntary disclosure to the OIG concerning expenses that had been included on cost
reports submitted to Medicare for fiscal years 1997 through 2001. In addition, in March 2005, we made a supplementary voluntary disclosure to the OIG that we had inadvertently employed three individuals who furnished patient care services for us
while they were excluded from participation in the Medicare program. On June 12, 2006, we entered into a CCA with the OIG that settled these matters. The amount paid in connection with this settlement was approximately $2.6 million, which was
funded out of a specific escrow account established as part of the Transactions that occurred on August 11, 2005. It requires, among other things, that we (1) continue to maintain our corporate compliance program, (2) submit an annual
report to the OIG regarding certain specified items, including our ongoing corporate compliance audit findings in areas such as cost reporting, physician contracting and charge master reviews, and (3) report the occurrence of certain other
events. See BusinessGovernment Regulations and BusinessLegal and Administrative Proceedings.

Federal and state
government agencies and private payors conduct periodic reviews, audits and investigations which could have adverse findings that may negatively impact our business.

We are subject to various governmental reviews, audits and investigations to verify or validate our compliance with applicable laws and regulations
pursuant to our participation in Medicare and Medicaid programs. Additionally, CMS may conduct extensive reviews of claims data and medical and other records to identify improper payments to healthcare providers under the Medicare program, including
enhanced medical necessity reviews pursuant to the SCHIP Extension ACT and the RAC program pursuant to the Tax Relief and Health Care Act of 2006. These reviews and audits may be performed on the behalf of CMS through independent third-party
contractors. Many private payors also reserve the right to conduct audits of billed claims for their covered participants. We may incur significant cost in responding to and defending the outcomes of these reviews, audits and investigations. The
findings of these audits, reviews and investigations, which could include repayment of amounts we have been previously paid, fines, penalties and other sanctions, could have a material adverse effect on our financial position, results of operations
and cash flow.

Future cost containment initiatives undertaken by private third-party payors may limit our future net revenues and profitability.

Initiatives undertaken by major insurers and managed care companies to contain healthcare costs affect the profitability of our
hospitals. These payors attempt to control healthcare costs by contracting with hospitals and other healthcare providers to obtain services on a discounted basis. We believe that this trend will continue and may limit reimbursements for healthcare
services. If insurers or managed care companies from whom we receive substantial payments reduce the amounts they pay for services, our profit margins may decline, or we may lose patients if we choose not to renew our contracts with these insurers
at lower rates.

We may be subjected to actions brought by individuals on the governments behalf under the False Claims Acts qui
tam or whistleblower provisions.

Whistleblower provisions allow private individuals to bring actions on behalf of the
government alleging that the defendant has defrauded the federal government. Because qui tam lawsuits are filed under seal, we could be named in one or more such lawsuits of which we are not aware. Defendants determined to be liable under the
False Claims Act may be required to pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim. Typically, each fraudulent bill submitted by a provider
is considered a separate false claim, and thus the penalties under a false claim case may be substantial. Liability arises when an entity knowingly submits a false claim for reimbursement to the federal government. In some cases, whistleblowers or
the federal government have taken the position that providers who allegedly have violated other statutes, such as the anti-kickback statute or the Stark Law, and have submitted claims to a governmental payor during the time period they allegedly
violated these other statutes have thereby submitted false claims under the False Claims Act. In addition, a number of states have adopted their own false claims provisions as well as their own whistleblower provisions allowing a private party to
file a civil lawsuit in state court. See BusinessGovernment Regulations.



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If our LTAC hospitals fail to maintain their qualification as LTAC hospitals, or if our facilities operated as HIH
facilities fail to qualify as hospitals separate from their host hospitals, then our net revenues and profitability may decline.

If our facilities fail to meet or maintain the standards for qualification as LTAC hospitals, namely minimum average length of patient stay and any other requirements that might be imposed in the future, they will receive payments under the
prospective payment system applicable to general acute care hospitals rather than payment under the system applicable to LTAC hospitals. Payments at rates applicable to general acute care hospitals would likely result in our LTAC hospitals receiving
significantly less Medicare reimbursement than they currently receive for their patient services.

In 2007, one of our hospitals, with
multiple campus locations, failed to achieve the twenty-five day length of stay requirement for the twelve months ended December 31, 2007. The LTAC hospital regulations provide that a hospital may correct this type of deficiency in the
subsequent cost report period following the period in which the twenty-five day length of stay requirement was not achieved. The fiscal intermediary for this hospital reviewed the hospitals discharge information for the five months ending
May 31, 2008 for compliance with the twenty-five day length of stay requirement. Based upon this review, the fiscal intermediary determined that the hospital met the twenty-five day length of stay requirement and issued its recommendation to
CMS that the hospital continue to be certified as an LTAC hospital. The hospital is currently eligible and will continue to be eligible to receive Medicare payments pursuant to LTAC hospital regulations for discharges on or after January 1,
2009. We believe that this hospital, and our remaining hospitals, are currently in compliance with the Medicare regulations regarding LTAC hospitals and will maintain compliance under these regulations.

Nine of our LTAC hospitals operate as HIH facilities and as a result are subject to additional Medicare criteria that require certain indications of
separateness from their host hospitals. If any of our HIH facilities fail to meet the separateness requirements, they will be reimbursed at the lower general acute care hospital rate, which would likely adversely affect our results of operations.
See BusinessGovernment RegulationsOverview of U.S. and State Government Reimbursements.

If one of our satellite
facilities that shares a Medicare provider number with our applicable main facility fails to qualify for provider-based status, then our results of operations may be adversely affected.

Medicare regulations on provider-based status require that when two or more hospital facilities share the same provider number and are considered to be a
single hospital, the remote or satellite facility must meet certain criteria with respect to the main facility. These criteria relate largely to demonstrating a high level of integration between the two
facilities. If the criteria are not met, each facility would need to meet all Medicare requirements independently, including, for example, the minimum average length of patient stay for LTAC hospital qualification. It is advantageous for certain
satellite facilities that may not independently be able to meet these Medicare requirements to maintain provider-based status so that they will be reimbursed at the higher rate for LTAC hospitals under Medicare. If CMS determines that
facilities claiming to be provider-based and being reimbursed accordingly do not meet the integration requirements of the regulations, CMS may recover the amount of any excess reimbursements based on that claimed status. We have several situations
in which multiple facilities share a Medicare provider number, and the failure of any one or more of them to meet the provider-based status regulations could adversely affect our results of operations.

Our business development plan may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities.

As part of our growth strategy and pursuant to our business development plan, we may selectively acquire and develop, as permitted by current
regulations, LTAC hospitals or other specialized hospitals. Acquiring and developing facilities may involve significant cash expenditures, debt incurrence, additional operating losses and expenses that could have a material adverse effect on our
financial condition and results of operations. Acquiring and developing facilities also involves numerous risks, including:



| |  |  | the difficulty and expense of integrating new facilities into our business;
| | - |  | ---------------------------------------------------------------------------



| |  |  | diversion of managements time from existing operations;
| | - |  | --------------------------------------------------------



| |  |  | potential loss of key employees or professional relationships of acquired facilities;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | project delays and cost overruns associated with new hospital development;
| | - |  | --------------------------------------------------------------------------



| |  |  | assumption of the liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for failure to comply with healthcare regulations;
and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | competition for suitable acquisition candidates, may raise the cost of acquisition.
| | - |  | -----------------------------------------------------------------------------------

We may fail to obtain financing for acquisitions at a reasonable cost, and any such financing might contain restrictive covenants that limit our
operating flexibility. We also may be unable to operate acquired hospitals profitably or succeed in achieving improvements in their financial performance.

A deterioration in the collectibility of the accounts receivables could harm our results of operations.

Collection
of receivables from third-party payors and patients is our primary source of cash and is critical to our operating performance. Significant changes in business office operations, payor mix, economic conditions or trends in federal and state
governmental health coverage could affect our collection of accounts receivable, cash flow and results of operations.



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If we fail to maintain established relationships with the physicians in our markets, our net revenues may decrease.

Our success is, in part, dependent upon the admissions and referral practices of the physicians in the markets our hospitals
serve, and our ability to maintain good relations with these physicians. Physicians referring patients to our hospitals are generally not our employees and, in many of the markets that we serve, most physicians have admitting privileges at other
hospitals and are free to refer their patients to other providers. If we are unable to successfully cultivate and maintain strong relationships with these physicians, our hospitals admissions and businesses may decrease, and our net revenues
may decline.

Shortages in qualified nurses or therapists could significantly increase our operating costs.

The market for qualified nurses, therapists and other healthcare professionals is highly competitive. We, like other healthcare providers, have
experienced some difficulty in attracting and retaining qualified personnel such as nurses, certified nurses assistants, nurses aides, therapists and other providers of healthcare services. The difficulty we have experienced in hiring
and retaining qualified personnel has increased our average wage rates and may force us to increase our use of contract personnel.

In
addition, healthcare providers are continuing to see an increase in the amount of union activity across the country. Although we cannot predict the degree to which we will be affected by future union activity, there are continuing legislative
proposals that could result in increased union activity.

Various states in which we operate hospitals have established minimum staffing
requirements or may establish minimum staffing requirements in the future. The implementation of these staffing requirements in some states is not contingent upon any additional appropriation of state funds in any budget act or other statute. Our
ability to satisfy such staffing requirements will depend upon our ability to attract and retain qualified healthcare professionals. Failure to comply with such minimum staffing requirements may result in the imposition of fines or other sanctions.
If states do not appropriate sufficient additional funds (through Medicaid program appropriations or otherwise) to pay for any additional operating costs resulting from such minimum staffing requirements, our profitability may be materially
adversely affected.

We expect to continue to experience increases in our labor costs primarily due to higher wages and greater benefits
required to attract and retain qualified healthcare personnel. Our ability to manage labor costs may significantly affect our future operating results.

If we fail to compete effectively with other hospitals, our net revenues and profitability may decline.

The LTAC
hospital industry is highly competitive. Our hospitals face competition from general acute care hospitals and LTAC hospitals that provide services comparable to those offered by our hospitals. Many competing general acute care hospitals are larger
and more established than our hospitals. Some of our competitors operate newer facilities and may offer services not provided by us or are operated by entities having greater financial and other resources than us. Certain of our competitors are
operated by not-for-profit, non-taxpaying or governmental agencies that can finance capital expenditures on a tax-exempt basis and that receive funds and charitable contributions unavailable to us. Our facilities compete based on factors such as
reputation for quality care; the commitment and expertise of staff and physicians; the quality and comprehensiveness of treatment programs; charges for services; and the physical appearance, location and condition of facilities. We cannot assure you
that we will be able to compete effectively in our markets or that increased competition in the future will not adversely affect our financial position, results of operations and liquidity.

Our business operations could be significantly disrupted if we lose key members of our management team.

Our success depends to a significant degree upon the continued contributions of our new and incumbent senior officers and key employees, both
individually and as a group. Our future performance will be substantially dependent on our ability to retain and motivate these individuals. The loss of the services of any of our senior officers or key employees, particularly our executive officers
named in Management, could prevent us from successfully executing our business strategy and could have a material adverse effect on our results of operations.

Our operations are heavily concentrated in Texas, which makes us sensitive to economic, regulatory, environmental and other developments in Texas.

For the twelve months ended December 31, 2008, 38.6% of our revenues were generated in Texas. Such a concentration increases the risk that, should
any adverse economic, regulatory, environmental or other developments occur within this state, our business, financial position, results of operations or cash flows could be materially adversely affected.

Our business operations could be materially affected if we incurred adverse changes in individual markets in which we had significant operations.

A natural disaster, terrorism or other catastrophic event could affect us more significantly than other companies with less
geographic concentration. In the recent past, hurricanes have had a negative effect on the operations of our hospitals in Louisiana. The three New Orleans hospitals that were closed in the aftermath of Hurricane Katrina contributed 12.4% of our
consolidated net patient service revenue for the eight months ended August 31, 2005 prior to their closure. Any disruptive event in any of our other major markets in the future could have similar negative effects.



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Legal action or other claims arising from Hurricane Katrina could result in significant losses if separate
insurance retention applies to each claim.

Refer to Item 3, Legal Proceedings regarding discussion of Katrina
related matters. To the extent it is ultimately determined that a separate insurance retention applies to each of these claims, we could experience significant losses related to these Katrina matters which would negatively impact our results of
operations.

Significant legal actions as well as the cost and possible lack of available insurance could subject us to substantial uninsured
liabilities.

In recent years, physicians, hospitals and other healthcare providers have become subject to an increasing number of
legal actions alleging malpractice or related legal theories. Many of these actions involve large claims and significant defense costs. We maintain professional malpractice liability insurance and general liability insurance coverage. In order to
obtain malpractice insurance at a reasonable cost, we are required to assume substantial self-insured retentions for our professional liability claims. A self-insured retention is a minimum amount of damages and expenses (including legal fees) that
we must pay for each claim. We use actuarial methods to determine the value of the losses that may occur within this self-insured retention level. Because of the high retention levels, we cannot predict with certainty the actual amount of the losses
we will assume and pay. To the extent that subsequent claims information varies from loss estimates, the liabilities will be adjusted to reflect current loss data. There can be no assurance that in the future malpractice insurance will be available
at a reasonable price or at all or that we will not have to further increase our levels of self-insurance. In addition, our insurance coverage does not cover punitive damages and may not cover all claims against us. See
BusinessGovernment RegulationsOther Healthcare Regulations.

The inability or failure of management in the future to conclude
that we maintain effective internal controls over financial reporting, or the inability of our independent auditor to issue a report attesting to managements assessment of our internal controls over financial reporting, could have a material
adverse effect on our financial position, results of operations and liquidity.

Under the Sarbanes-Oxley Act of 2002, our
management is required to report in our Annual Report on Form 10-K on the effectiveness of our internal controls over financial reporting, and in future periods our independent auditor may be required to attest to managements assessment
of our internal controls over financial reporting. Significant resources are required to establish that we are in full compliance with the financial reporting controls and procedures. If we fail to have effective internal controls and procedures for
financial reporting, we could be unable to provide timely and reliable financial information which could have a material adverse effect on our financial position, results of operations and liquidity.

Our failure to comply with the provisions of any of our Master Lease Agreements could materially adversely affect our financial position, results of operations and
liquidity.

We currently lease three of our hospitals from Health Care REIT, Inc. under our Master Lease Agreements. Our failure to
comply with the provisions of any of our Master Lease Agreements with Health Care REIT, Inc. would result in an Event of Default under such Master Lease Agreement. Upon an Event of Default, remedies available to Health Care REIT, Inc.
include, without limitation, terminating such Master Lease Agreement, repossessing and reletting the leased properties and requiring us to remain liable for all obligations under such Master Lease Agreement, including the difference between the rent
under such Master Lease Agreement and the rent payable as a result of reletting the leased properties, or requiring us to pay the net present value of the rent due for the balance of the term of such Master Lease Agreement. The exercise of such
remedies could have a material adverse effect on our financial condition and our businesses.

We depend on the proper functioning of our information
systems and may incur substantial cost to maintain information systems that conform to regulatory standards.

We are dependent on
the proper functioning and availability of our information systems. Although we have taken steps to protect the security and safety of our information systems, there can be no assurance that those measures will prevent damage or interruption to our
systems and operations and we may incur losses associated with improper functioning or security breaches of our information systems. In addition, the 2009 Act sets a goal for the utilization of a certified electronic health record for each person in
the United States by 2014. It establishes two federal advisory committees on health information technology through which the government will work with the private sector and consumer groups to develop the specifics of a nationwide health information
network. Beginning in 2011, Medicare and Medicaid will provide certain financial incentives to hospitals for meaningful use of health information technology. However, beginning in 2015, hospitals not using certified products in a
meaningful way will be subject to penalties. We may incur substantial costs to maintain information systems that continue to conform to regulatory standards.



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|ITEM 1B. | Unresolved Staff Comments
|-------- | -------------------------

None.



|ITEM 2. | Properties
|------- | ----------

As of December 31, 2008, we leased
nine HIH facilities, owned two and leased nine freestanding hospitals, and leased our corporate headquarters.

We generally seek ten to
fifteen-year leases for our LTAC hospitals, with one or more additional five-year renewal options.

Our corporate headquarters is located
in a 52,000 square foot building in Plano, Texas.



|ITEM 3. | Legal Proceedings
|------- | -----------------

We have been named as a
defendant in various civil lawsuits and actions filed with the Louisiana Patient Compensation Fund by former patients at Memorial Medical Center who allege damages as a result of injuries sustained during Hurricane Katrina. Tenet Healthsystem
Memorial Medical Center, Inc., our former landlord, is also named as a defendant in these actions. In one of these cases, plaintiffs counsel is seeking class action certification to represent other individuals who were also patients or present
at Memorial Medical Center at the time of Hurricane Katrina. In addition to disputing the merits of the allegations in these suits, we believe that certification of a class in these actions is not appropriate and that each of these cases should be
adjudicated independently. We intend to vigorously defend ourselves in these lawsuits, however, we cannot predict the ultimate resolution of the matters. There can be no guarantees that additional legal actions or claims will not be brought against
us related to the circumstances surrounding Hurricane Katrina.

We maintained $15.0 million of general and professional liability insurance
during this period, subject to a $1.0 million per claim retention. We believe that under our insurance policies, only one retention is applicable to the Katrina matters since these matters all arose from a single event, process or condition. Our
insurance carriers are currently paying all costs related to these claims, but have sent reservation of rights letters which challenge, among other things, the application of one retention to the Katrina related matters.

Additionally, our company has certain pending and threatened litigation and claims incurred in the ordinary course of business. We are unable to predict
the ultimate outcome of pending litigation and regulatory and other government investigations, nor can there be any assurance that the resolution of any litigation or investigation, either individually or in the aggregate, would not have a material
adverse effect on our financial position, results or operations or liquidity.



|ITEM 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

There were no matters submitted to a vote of security holders of our company during the quarter ended December 31, 2008.



|ITEM 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|------- | ------------------------------------------------------------------------------------------------------------

LifeCare Holdings, Inc. (the Company) is a wholly-owned by LCI Holdco, LLC (Holdco), which is a wholly owned subsidiary of LCI
Intermediate Holdco, Inc. (Intermediate Holdco), which is a wholly-owned subsidiary of LCI Holding Company, Inc., (Holdings), all of which are privately owned. There is no public trading market for our equity securities or
for those of Holdco, Intermediate Holdco, or Holdings. As of March 28, 2009, there were seven holders of Holdings common stock.

Our senior secured credit facility contains customary restrictions on our ability, Holdings
ability and the ability of certain of our subsidiaries to declare or pay any dividends. The indenture governing our 9 1/4%
senior subordinated notes due 2013 contains customary terms restricting our ability and the ability of certain of our subsidiaries to declare or pay any dividends. The indenture governing Holdings senior floating rate notes due 2013 contains
customary restrictions on Holdings ability, our ability and the ability of certain of our subsidiaries to declare or pay any dividends.



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|ITEM 6. | Selected Financial Data
|------- | -----------------------

The selected historical
consolidated financial and other data set forth below should be read in conjunction with managements discussion and analysis of financial condition and results of operations and the consolidated financial statements and related notes thereto
included elsewhere in this report.



|                                                                |  |                        |         |   |                                       |   |           |   |  |                                         |  |   |                         |   |  |      |         |   |      |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | ---------------------- | ------- | - | ------------------------------------- | - | --------- | - |  | --------------------------------------- |  | - | ----------------------- | - |  | ---- | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                                                |  | Predecessor            |         |   |                                       |   | Successor |  
|                                                                |  | Year EndedDecember 31, |         |   | Period fromJanuary 1throughAugust 10, |   |           |   |  | Period fromAugust 11throughDecember 31, |  |   | Year Ended December 31, |  
|(in thousands)                                                  |  | 2004                   |         |   | 2005                                  |   |           |   |  | 2005                                    |  |   | 2006                    |   |  | 2007 |         |   | 2008 |  
|Statement of Operations Data:                                   |  |                        |         |   |                                       |   |           |   |  |                                         |  |   |                         |   |  |      |         |   |      |   |         |   |  |   |         |  
|                                                                |  |                        |         |   |                                       |   |          
|Net patient service revenue                                     |  | $                      | 324,102 |   |                                       | $ | 221,802   |   |  |                                         |  | $ | 124,468                 |   |  | $    | 325,882 |   |      | $ | 322,215 |   |  | $ | 351,971 |  
|                                                                |  |                        |         |   |                                       |   |           |   |  |                                         |  |   |                         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Salaries, wages and benefits                                    |  |                        | 134,049 |   |                                       |   | 93,853    |   |  |                                         |  |   | 56,471                  |   |  |      | 145,340 |   |      |   | 156,125 |   |  |   | 165,975 |  
|Stock compensation associated with merger                       |  |                        |        |   |                                       |   | 54,530    |   |  |                                         |  |   |                        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Supplies                                                        |  |                        | 29,001  |   |                                       |   | 20,020    |   |  |                                         |  |   | 12,390                  |   |  |      | 32,144  |   |      |   | 33,460  |   |  |   | 35,522  |  
|Rent                                                            |  |                        | 17,330  |   |                                       |   | 11,192    |   |  |                                         |  |   | 6,594                   |   |  |      | 18,080  |   |      |   | 21,644  |   |  |   | 25,579  |  
|Other operating expenses                                        |  |                        | 73,745  |   |                                       |   | 51,756    |   |  |                                         |  |   | 27,624                  |   |  |      | 77,206  |   |      |   | 80,257  |   |  |   | 80,787  |  
|Provision for doubtful accounts                                 |  |                        | 4,582   |   |                                       |   | 3,644     |   |  |                                         |  |   | 5,590                   |   |  |      | 7,673   |   |      |   | 4,740   |   |  |   | 5,234   |  
|Depreciation and amortization                                   |  |                        | 5,741   |   |                                       |   | 3,533     |   |  |                                         |  |   | 5,938                   |   |  |      | 11,856  |   |      |   | 11,254  |   |  |   | 11,595  |  
|Goodwill impairment charge                                      |  |                        |        |   |                                       |   |          |   |  |                                         |  |   | 68,000                  |   |  |      | 43,600  |   |      |   | 38,834  |   |  |   | 18,600  |  
|Identifiable intangible and long-lived asset impairment charges |  |                        |        |   |                                       |   |          |   |  |                                         |  |   | 6,206                   |   |  |      |        |   |      |   |        |   |  |   |        |  
|Business interruption insurance proceeds                        |  |                        |        |   |                                       |   |          |   |  |                                         |  |   | (7,000                  | ) |  |      | (5,333  | ) |      |   |        |   |  |   |        |  
|Gain on early extinguishment of debt                            |  |                        |        |   |                                       |   |          |   |  |                                         |  |   |                        |   |  |      | (1,329  | ) |      |   |        |   |  |   | (9,526  | )
|Loss on disposal of assets                                      |  |                        |        |   |                                       |   |          |   |  |                                         |  |   |                        |   |  |      | 945     |   |      |   |        |   |  |   | 92      |  
|Interest expense, net                                           |  |                        | 3,463   |   |                                       |   | 1,601     |   |  |                                         |  |   | 13,799                  |   |  |      | 32,819  |   |      |   | 35,911  |   |  |   | 37,783  |  
|                                                                |  |                        |         |   |                                       |   |           |   |  |                                         |  |   |                         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Total expenses                                                  |  |                        | 267,911 |   |                                       |   | 240,129   |   |  |                                         |  |   | 195,612                 |   |  |      | 363,001 |   |      |   | 382,225 |   |  |   | 371,641 |  
|                                                                |  |                        |         |   |                                       |   |           |   |  |                                         |  |   |                         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Operating income (loss)                                         |  |                        | 56,191  |   |                                       |   | (18,327   | ) |  |                                         |  |   | (71,144                 | ) |  |      | (37,119 | ) |      |   | (60,010 | ) |  |   | (19,670 | )
|Equity in loss of joint venture                                 |  |                        |        |   |                                       |   |          |   |  |                                         |  |   |                        |   |  |      |        |   |      |   | (695    | ) |  |   |        |  
|                                                                |  |                        |         |   |                                       |   |           |   |  |                                         |  |   |                         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Income (loss) before income taxes                               |  |                        | 56,191  |   |                                       |   | (18,327   | ) |  |                                         |  |   | (71,144                 | ) |  |      | (37,119 | ) |      |   | (60,705 | ) |  |   | (19,670 | )
|Provision for (benefit from) income taxes                       |  |                        | 21,148  |   |                                       |   | (5,462    | ) |  |                                         |  |   | (1,308                  | ) |  |      | 3,707   |   |      |   | 77      |   |  |   | 1,400   |  
|                                                                |  |                        |         |   |                                       |   |           |   |  |                                         |  |   |                         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Net income (loss)                                               |  | $                      | 35,043  |   |                                       | $ | (12,865   | ) |  |                                         |  | $ | (69,836                 | ) |  | $    | (40,826 | ) |      | $ | (60,782 | ) |  | $ | (21,070 | )
|                                                                |  |                        |         |   |                                       |   |           |   |  |                                         |  |   |                         |   |  |      |         |   |      |   |         |   |  |   |         |  
|                                                                |  |                        |         |   |                                       |   |          
|Balance Sheet Data (end of period):                             |  |                        |         |   |                                       |   |           |   |  |                                         |  |   |                         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Cash and cash equivalents                                       |  | $                      | 6,678   |   |                                       |   |           |   |  |                                         |  | $ | 19,843                  |   |  | $    | 33,250  |   |      | $ | 17,816  |   |  | $ | 25,262  |  
|Working capital                                                 |  |                        | 39,917  |   |                                       |   |           |   |  |                                         |  |   | 82,529                  |   |  |      | 64,027  |   |      |   | 48,166  |   |  |   | 37,886  |  
|Total assets                                                    |  |                        | 131,677 |   |                                       |   |           |   |  |                                         |  |   | 544,114                 |   |  |      | 536,418 |   |      |   | 481,756 |   |  |   | 462,830 |  
|Total debt                                                      |  |                        | 20,686  |   |                                       |   |           |   |  |                                         |  |   | 414,494                 |   |  |      | 399,450 |   |      |   | 396,263 |   |  |   | 387,244 |  
|Redeemable preferred stock                                      |  |                        | 36,063  |   |                                       |   |           |   |  |                                         |  |   |                        |   |  |      |        |   |      |   |        |   |  |   |        |  
|Stockholders equity (deficit)                                  |  |                        | 33,547  |   |                                       |   |           |   |  |                                         |  |   | 66,092                  |   |  |      | 50,498  |   |      |   | 233     |   |  |   | (20,549 | )
|                                                                |  |                        |         |   |                                       |   |          
|Other Financial Data:                                           |  |                        |         |   |                                       |   |           |   |  |                                         |  |   |                         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Cash flows provided by (used in):                               |  |                        |         |   |                                       |   |           |   |  |                                         |  |   |                         |   |  |      |         |   |      |   |         |   |  |   |         |  
|Operating activities                                            |  | $                      | 17,294  |   |                                       | $ | 20,387    |   |  |                                         |  | $ | 17,213                  |   |  | $    | 49,673  |   |      | $ | (9,851  | ) |  | $ | 12,295  |  
|Investing activities                                            |  |                        | (11,367 | ) |                                       |   | (2,915    | ) |  |                                         |  |   | (519,582                | ) |  |      | (27,447 | ) |      |   | (16,376 | ) |  |   | (9,284  | )
|Financing activities                                            |  |                        | (7,253  | ) |                                       |   | (14,360   | ) |  |                                         |  |   | 522,212                 |   |  |      | (8,819  | ) |      |   | 10,793  |   |  |   | 4,435   |  
|Capital expenditures                                            |  |                        | 14,812  |   |                                       |   | 8,441     |   |  |                                         |  |   | 1,483                   |   |  |      | 28,235  |   |      |   | 47,480  |   |  |   | 13,106  |  
|Ratio of earnings to fixed charges (1)                          |  |                        | 1:4.8   |   |                                       |   | N/A       |   |  |                                         |  |   | N/A                     |   |  |      | N/A     |   |      |   | N/A     |   |  |   | N/A     |  



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|                                                  |      |                                   |         |      |                                  |   |         |                                   |  |      |         |   |      |   |         |   |  |   |         |  
|------------------------------------------------- | ---- | --------------------------------- | ------- | ---- | -------------------------------- | - | ------- | --------------------------------- |  | ---- | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                                  |      | PredecessorYear EndedDecember 31, |         |      | Successor andPredecessorCombined |   |         | Successor Year Ended December 31, | 
|                                                  | 2004 |                                   |         | 2005 |                                  |   | 2006    |                                   |  | 2007 |         |   | 2008 |  
|Other Operating Data:                             |      |                                   |         |      |                                  |   |         |                                   |  |      |         |   |      |   |         |   |  |   |         |  
|Number of HIH hospitals (end of period)           |      |                                   | 15      |      |                                  |   | 12      |                                   |  |      | 12      |   |      |   | 9       |   |  |   | 9       |  
|Number of freestanding hospitals (end of period)  |      |                                   | 5       |      |                                  |   | 6       |                                   |  |      | 8       |   |      |   | 10      |   |  |   | 11      |  
|                                                  |      |                                   |         |      |                                  |   |         |                                   |  |      |         |   |      |   |         |   |  |   |         |  
|Number of total hospitals (end of period)         |      |                                   | 20      |      |                                  |   | 18      |                                   |  |      | 20      |   |      |   | 19      |   |  |   | 20      |  
|Licensed beds (end of period)                     |      |                                   | 959     |      |                                  |   | 893     |                                   |  |      | 926     |   |      |   | 1,009   |   |  |   | 1,079   |  
|Average licensed beds                             |      |                                   | 954     |      |                                  |   | 969     |                                   |  |      | 889     |   |      |   | 961     |   |  |   | 1,062   |  
|Admissions                                        |      |                                   | 8,872   |      |                                  |   | 9,182   |                                   |  |      | 8,318   |   |      |   | 7,999   |   |  |   | 8,292   |  
|Patient days                                      |      |                                   | 236,403 |      |                                  |   | 242,080 |                                   |  |      | 226,863 |   |      |   | 229,479 |   |  |   | 234,367 |  
|Occupancy rate                                    |      |                                   | 67.7    | %    |                                  |   | 68.5    | %                                 |  |      | 69.9    | % |      |   | 65.4    | % |  |   | 60.3    | %
|Percent net patient service revenue from Medicare |      |                                   | 75.8    | %    |                                  |   | 76.0    | %                                 |  |      | 71.6    | % |      |   | 64.6    | % |  |   | 61.2    | %
|Net patient service revenue per patient day       |      | $                                 | 1,371   |      |                                  | $ | 1,430   |                                   |  | $    | 1,436   |   |      | $ | 1,404   |   |  | $ | 1,502   |  



|(1) | In the period from January 1 through August 10, 2005, the period from August 11 through December 31, 2005 and the years ended December 31, 2006, 2007, and
2008 earnings were insufficient to cover fixed charges by $20,757, $71,144, $37,119, $60,705, and $19,670, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

You should read the following discussion and analysis in conjunction with our consolidated financial statements and the accompanying notes.

Company Overview

We are a leading
operator of LTAC hospitals in the United States. As of December 31, 2008, we operated 20 hospitals located in ten states, consisting of nine HIH facilities (29% of beds) and 11 freestanding facilities (71% of beds). Through these 20 LTAC
hospitals, we operate a total of 1,079 licensed beds and employ approximately 3,100 people, the majority of whom are registered or licensed nurses and respiratory therapists. As a result of Hurricane Katrina in August 2005, our three New Orleans
hospitals were closed and will not re-open. The licensed beds for these hospitals are not included in the total number of facilities or licensed beds discussed above.

We believe we have developed a reputation for excellence in providing treatment for patients with complex medical needs requiring extended treatment. Our patients have serious medical conditions such as respiratory
failure, chronic pulmonary disease, nervous system disorders, infectious diseases and severe wounds. They generally require a high level of monitoring and specialized care, yet may not require the continued services of an intensive care unit. Due to
their serious medical conditions, our patients are generally not clinically appropriate for admission to a skilled nursing facility or inpatient rehabilitation facility. By combining general acute care services with a focus on long-term treatment,
we believe that our hospitals provide medically complex patients with better and more cost-effective outcomes.

The Transactions

On August 11, 2005, we consummated an acquisition pursuant to which Rainier Acquisition Corp., a Delaware corporation formed by investment funds
associated with The Carlyle Group, merged with and into our company, with our company continuing as the surviving corporation. The funds necessary to consummate the Transactions were approximately $552.0 million, including approximately $512.2
million to pay the then current stockholders and option holders, approximately $10.7 million to repay existing indebtedness and approximately $29.1 million to pay related fees and expenses. The effective date of the merger was August 11, 2005.

In connection with the Transactions, we borrowed $255.0 million under a senior credit facility and issued $150.0 million principal amount
of senior subordinated notes. We also entered into a revolving credit facility (Revolver) that provided up to $75.0 million (amended to $60.0 million in 2007) of borrowing capacity, of which $10.0 million is outstanding at
December 31, 2008.

As a result of the Transactions, our assets and liabilities were adjusted to their fair value as of the
consummation of the merger. The excess of the total purchase price over the fair value of our tangible assets and liabilities has been allocated to goodwill and other identifiable intangible assets. Goodwill is subject to an annual impairment test,
and goodwill and identifiable intangible assets are subject to more frequent tests if circumstances warrant such a test. We have also significantly increased our aggregate outstanding indebtedness. Accordingly, interest expense has been and will be
higher in periods following the Transactions.



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Recent Trends and Events

Hospital Openings and Closings

In April 2008, we opened a new 60-bed freestanding facility in Boise, Idaho, and
added 10 beds to our Denver facility. During the first quarter of 2007, we terminated the lease at the Doctors Hospital campus in Shreveport, Louisiana. Eight beds were transferred to another location and the 11 beds remaining at this location were
closed. Eight beds were added to our Denver, Colorado location during the same period. In June 2007, we opened a 62-bed freestanding hospital in San Antonio, Texas, which replaced a 34-bed HIH in San Antonio that was closed in the same month. In
August 2007, 21 additional beds were added to our Denver location. In September 2007, we opened a 62-bed freestanding hospital in Milwaukee, Wisconsin, which replaced a 35-bed HIH in Milwaukee that was closed in the same month. Additionally, during
September 2007 we added 10 ICU level beds to our hospital located in Fort Worth, Texas.

In July 2006, we closed a 40-bed HIH in Edinburgh,
Texas. We opened a 24-bed satellite HIH in Shreveport, Louisiana during August 2006 and a 41-bed satellite HIH in Pittsburgh, Pennsylvania in September 2006. We expanded an existing hospital in Shreveport, Louisiana by seven beds in November 2006,
and opened a satellite 32-bed freestanding hospital in McAllen, Texas in December 2006. The licensed beds at the Shreveport locations were transferred internally among total licensed beds in the Shreveport market; therefore, there was no change in
total beds as a result of these openings during 2006.

The assets formerly located in our hospitals that were closed or relocated are being
used at other locations or were disposed.

Regulatory Matters

Sources of Revenue

We are reimbursed for our services provided to patients by a number of sources,
including the federal Medicare program and commercial payors. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges and per diem rates. Our net patient service revenue consists of the amounts
that we estimate to be reimbursable from each of the applicable non-governmental payors and the Medicare and Medicaid programs. We account for the differences between the estimated reimbursement rates and our standard billing rates as contractual
adjustments, which are deducted from gross revenues to arrive at net revenues. We record accounts receivable resulting from such payment arrangements net of contractual allowances. Net patient service revenue generated directly from the Medicare
program approximated 61.2%, 64.6% and 71.6% of total net patient service revenue for the twelve months ended December 31, 2008, 2007, and 2006, respectively. Net patient service revenue generated from non-Medicare payors were substantially from
commercial payors. The decrease in the percentage of net patient service revenue generated from the Medicare program is principally the result of our continued focus on higher-margin commercial revenue as more fully discussed in Item I. Business
under the caption Our Strategy, and the increasing trend of traditional Medicare patients to elect Medicare coverage through various managed Medicare payors.

Laws and regulations governing provider reimbursement pursuant to the Medicare program are complex and subject to interpretation. The Medicare reimbursement amounts reported in our financial statements are based upon
estimates and, as such, are subject to adjustment until such time as our billings and cost reports are filed and settled with the appropriate regulatory authorities. Federal regulations require that providers participating in the Medicare program
submit annual cost reports associated with services provided to program beneficiaries. In addition, payments under LTAC hospital PPS are subject to review by the regulatory authorities, including enhanced medical necessity reviews pursuant the SCHIP
Extension Act and the RAC program pursuant to the Tax Relief and Health Care Act of 2006. These reviews primarily focus on the accuracy of the DRG assigned to each discharged patient and normally occur after the completion of the billing process.

See Item 1. Business under the caption Government Regulations for additional discussions regarding reimbursements from
governmental payors and related recent regulatory changes.

The annual cost reports are subject to review and adjustment by the CMS through
its fiscal intermediaries. These reviews may not occur until several years after a provider files its cost reports, and often result in adjustments to amounts reported by providers in their cost reports as a result of the complexity of the
regulations and the inherent judgment that is required in the application of certain provisions of provider reimbursement regulations. Since these reviews of filed cost reports occur periodically, there is a possibility that recorded estimated
Medicare reimbursement reflected in our consolidated financial statements and previously filed cost reports may change by a material amount in future periods. We recognize in our consolidated financial statements the impact of adjustments, if any,
to estimated Medicare reimbursement when the amounts can be reasonably determined.

In 2007, one of our hospitals, with multiple campus
locations, failed to achieve the twenty-five day length of stay requirement for the twelve months ended December 31, 2007. The LTAC hospital regulations provide that a hospital may correct this type of deficiency in the subsequent cost report
period following the period in which the twenty-five day length of stay requirement was not achieved. The fiscal intermediary for this hospital reviewed the hospitals discharge information for the five months ending May 31, 2008 for
compliance with the twenty-five day length of stay requirement. Based upon this review, the fiscal intermediary determined



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that the hospital met the twenty-five day length of stay requirement and issued its recommendation to CMS that the hospital continue to be certified as an
LTAC hospital. The hospital is currently eligible and will continue to be eligible to receive Medicare payments pursuant to LTAC hospital regulations for discharges on or after January 1, 2009. We believe that this hospital, and our remaining
hospitals, are currently in compliance with the Medicare regulations regarding LTAC hospitals and will maintain compliance under these regulations.

Total Expenses

Total expenses consist of salaries, wages and benefits, supplies, which includes expenses related to drug
and medical supplies, rent, other operating expenses, provision for doubtful accounts, depreciation and amortization and interest expense. Other operating expenses include expenses such as contract labor, legal and accounting fees, insurance and
services from host hospitals.

Other Operating Metrics

We use certain operating metrics in the management of our facility operations. These include:

Licensed
beds. Licensed beds represent beds for which a facility has been granted approval to operate from the applicable state licensing agency. These licensed beds are used in the determination of average licensed beds and occupancy rates.

Average licensed beds. We compute average licensed beds by computing a weighted average based upon the number of licensed beds in place for
each month within the reporting period.

Admissions. Admissions are the total number of patients admitted to our facilities during
the reporting period.

Patient days. Patient days are the cumulative number of days that licensed beds are occupied in our
facilities for the entire reporting period. We also refer to patient days as our census.

Average length of stay (days). We compute
average length of stay in days by dividing patient days for discharged patients by discharges.

Occupancy rates. We compute our
occupancy rate by determining the percentage of average licensed beds that are occupied for a 24-hour period during a reporting period. The occupancy rate provides a measure of the utilization of inpatient rooms.

Net patient service revenue per patient day. This measure is determined by dividing our total net patient service revenue by the number of patient
days in a reporting period. We use this metric to provide a measure of the net patient service revenue generated for each patient day.

Critical
Accounting Matters

This discussion and analysis of our financial condition and results of operation is based on our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of those financial statements requires the use of estimates and judgments that affect the reported
amounts and related disclosures. We rely on historical experience and other assumptions that we believe are reasonable at the time in forming the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual amounts may differ from these estimates.

We believe that the following critical accounting policies,
among others, affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue
Recognition

Patient service revenue is reported net of provisions for contractual allowances from third-party payors and patients.
We have agreements with third-party payors that provide for payments to us at amounts different from our established rates. The differences between the estimated program reimbursement rates and the standard billing rates are accounted for as
contractual adjustments, which are deducted from gross revenues to arrive at net operating revenues. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Accounts
receivable resulting from such payment arrangements are recorded net of contractual allowances.

Insurance Arrangements

Under a number of our insurance programs, including employee health, general and professional liability, we self-insure a portion of our losses. In these
cases, actuarial methods are used in estimating the losses, which we accrued for in the accounting period. These actuarial estimates of losses are prepared semi-annually. There are many factors used in determining these actuarial estimates,
including amount and timing of historical loss payments, severity of individual cases, anticipated volume of services



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provided and discount rates for future cash flows. The amounts of any ultimate actual payments for general and professional liabilities may not become known
for several years after incurrence. Any factors changing the underlying data used in determining these estimates would result in revisions to the liabilities, which could result in an adjustment to operating expenses in future periods.

Allowance for Doubtful Accounts

Substantially all of our accounts receivable are related to providing healthcare services to patients. Our accounts receivable are primarily due from the Medicare program, managed health care plans, commercial insurance companies and
individual patients.

We estimate and record an allowance for doubtful accounts based on various factors including the age of the accounts,
changes in collection patterns and the composition of patient accounts receivable by payor type. Actual collections of accounts receivable balances in subsequent periods may require changes in the estimated allowance for doubtful accounts. Adverse
changes in business operations, payor mix or patient insurance coverage could affect our collection of accounts receivable and our cash flow from operations. To date, there has not been a material difference between our bad debt allowances and the
ultimate historical collection rates on accounts receivables.

Goodwill

We review our goodwill annually, or more frequently if circumstances warrant a more timely review, to determine if there has been an impairment. Per the
guidance of Financial Accounting Standards Board Emerging Issues Task Force (EITF) Topic No. D-101, Clarification of Reporting Unit Guidance in Paragraph 30 of FASB Statement No. 142, (EITF Topic No. D-101), we
review goodwill based upon one reporting unit, as the Company is managed as one operating segment in accordance with Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and
Related Information, (SFAS 131). In calculating the fair value of the reporting unit, we use various assumptions including projected cash flows and discount rates. If projected future cash flows decline from the current amounts
projected by management, additional impairments may be recorded.

We have recognized impairment charges of $18.6 million, $38.8 million and
$43.6 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Impairment of Long-Lived Assets

Intangible assets of our company that have a finite useful life, consisting primarily of non-compete agreements, are amortized over their respective
estimated useful lives to their estimated residual values on a straight-line basis over 2-5 years and are reviewed for impairment in accordance with SFAS 144, Accounting for Impairment or Disposal of Long-Lived Assets(SFAS 144).

In accordance with SFAS 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization,
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
to the estimated fair value of the asset. If the carrying amount of an asset exceeds our estimated fair value, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Income Taxes

Our provision for
income taxes is based upon our estimate of taxable income. We also establish valuation allowances, as appropriate, to reduce our deferred tax assets to an amount that we believe will more likely than not be realized in future periods. Our state and
federal tax filings are subject to tax audits by various state and federal tax authorities. While we believe the tax return positions we have taken are accurate and supportable, there is no assurance that the various authorities engaged in the
income tax return examinations will not challenge our positions.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (the FASB) issued FASB Statement No. 141(R), Business Combinations(SFAS 141(R)), and FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment to ARB No. 51(SFAS 160). SFAS 141(R) and SFAS 160 require most
identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at full fair value and require noncontrolling interests (previously referred to as minority interests) to be
reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. SFAS
141(R) will be applied to business combinations occurring after the effective date. SFAS 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. All of our subsidiaries are wholly owned,
so the adoption of SFAS 160 is not expected to impact our financial position and results of operations. SFAS 141(R) will impact us to the extent we make future acquisitions.

In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB
Statement No. 133 (SFAS 161). SFAS 161 requires entities that utilize derivative instruments to provide



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qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features
contained within derivatives. SFAS 161 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities (SFAS 133) have been applied, and the impact that hedges have on an entitys financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal
years and interim periods beginning after November 15, 2008. SFAS 161 will impact us if we enter into hedging transactions in future periods.

In April 2008, the FASB issued FASB Staff Position FAS 142-3, Determination of the Useful Life of Intangible Assets(FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the
impact, if any, of adopting FSP FAS 142-3 on our financial position and results of operations.

Results of Operations

A historical summary of operations for the twelve months ended December 31, 2008, 2007, and 2006 appears below (in thousands):



|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                         |  | 2008 |         |   | 2007 |   |         | 2006 | 
|Net patient service revenue              |  | $    | 351,971 |   |      | $ | 322,215 |      |  | $ | 325,882 |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Salaries, wages, and benefits            |  |      | 165,975 |   |      |   | 156,125 |      |  |   | 145,340 |  
|Supplies                                 |  |      | 35,522  |   |      |   | 33,460  |      |  |   | 32,144  |  
|Rent                                     |  |      | 25,579  |   |      |   | 21,644  |      |  |   | 18,080  |  
|Other operating expenses                 |  |      | 80,787  |   |      |   | 80,257  |      |  |   | 77,206  |  
|Provision for doubtful accounts          |  |      | 5,234   |   |      |   | 4,740   |      |  |   | 7,673   |  
|Depreciation and amortization            |  |      | 11,595  |   |      |   | 11,254  |      |  |   | 11,856  |  
|Goodwill impairment charge               |  |      | 18,600  |   |      |   | 38,834  |      |  |   | 43,600  |  
|Business interruption insurance proceeds |  |      |        |   |      |   |        |      |  |   | (5,333  | )
|Gain on early extinguishment of debt     |  |      | (9,526  | ) |      |   |        |      |  |   | (1,329  | )
|Loss on disposal of asset                |  |      | 92      |   |      |   |        |      |  |   | 945     |  
|Interest expense, net                    |  |      | 37,783  |   |      |   | 35,911  |      |  |   | 32,819  |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Total expenses                           |  |      | 371,641 |   |      |   | 382,225 |      |  |   | 363,001 |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Operating loss                           |  |      | (19,670 | ) |      |   | (60,010 | )    |  |   | (37,119 | )
|Equity in loss of joint venture          |  |      |        |   |      |   | (695    | )    |  |   |        |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Loss before income taxes                 |  |      | (19,670 | ) |      |   | (60,705 | )    |  |   | (37,119 | )
|Provision for income taxes               |  |      | 1,400   |   |      |   | 77      |      |  |   | 3,707   |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Net Loss                                 |  | $    | (21,070 | ) |      | $ | (60,782 | )    |  | $ | (40,826 | )
|                                         |  |      |         |   |      |   |         |      |  |   |         |  

Operating Statistics

The following table sets forth operating statistics for each of the periods presented.



|                                                                            |  |                                     |         |   |                                     |   |         |                                     |  |   |         |  
|--------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ----------------------------------- | - | ------- | ----------------------------------- |  | - | ------- | -
|                                                                            |  | Twelve Months EndedDecember 31,2008 |         |   | Twelve Months EndedDecember 31,2007 |   |         | Twelve Months EndedDecember 31,2006 | 
|Number of hospitals within hospitals (end of period)                        |  |                                     | 9       |   |                                     |   | 9       |                                     |  |   | 12      |  
|Number of freestanding hospitals (end of period)                            |  |                                     | 11      |   |                                     |   | 10      |                                     |  |   | 8       |  
|Number of total hospitals (end of period)                                   |  |                                     | 20      |   |                                     |   | 19      |                                     |  |   | 20      |  
|Licensed beds (end of period)                                               |  |                                     | 1,079   |   |                                     |   | 1,009   |                                     |  |   | 926     |  
|Average licensed beds (1)                                                   |  |                                     | 1,062   |   |                                     |   | 961     |                                     |  |   | 889     |  
|Average length of stay                                                      |  |                                     | 27.6    |   |                                     |   | 26.8    |                                     |  |   | 27.3    |  
|Admissions                                                                  |  |                                     | 8,292   |   |                                     |   | 7,999   |                                     |  |   | 8,318   |  
|Patient days                                                                |  |                                     | 234,367 |   |                                     |   | 229,479 |                                     |  |   | 226,863 |  
|Occupancy rate                                                              |  |                                     | 60.3    | % |                                     |   | 65.4    | %                                   |  |   | 69.9    | %
|Percent net patient service revenue from Medicare                           |  |                                     | 61.2    | % |                                     |   | 64.6    | %                                   |  |   | 71.6    | %
|Percent net patient service revenue from commercial payors and Medicaid (2) |  |                                     | 38.8    | % |                                     |   | 35.4    | %                                   |  |   | 28.4    | %
|Net patient service revenue per patient day                                 |  | $                                   | 1,502   |   |                                     | $ | 1,404   |                                     |  | $ | 1,436   |  



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|(1) | The average licensed beds are only calculated on the beds at locations that were open for operations during the applicable periods.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(2) | The percentage of net patient service revenue from Medicaid is less than one percent for each of the years presented.
|--- | ---------------------------------------------------------------------------------------------------------------------

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Net Revenues

Our net patient service revenue increased by $29.8 million, or 9.2%, for the
year-ended December 31, 2008, to $352.0 million from $322.2 million for the comparable period in 2007. Patient days in 2008 were 4,888 greater, or 2.1% greater, than the same period in 2007. Admissions grew by 293, or 3.7%, during the 2008
period to 8,292 from 7,999 for the 2007 period. The increase in patient days and admissions was partially attributable to the expansion of our operations, as discussed previously.

This increase in net patient service revenue was comprised of a favorable $22.9 million variance as the result of increased revenue per patient day and a
$6.9 million favorable benefit from an increase in patient days.

Our net patient service revenue per patient day during the years ended
December 31, 2008 and 2007 was $1,502 and $1,404, respectively, or an increase of 7.0%. The increase in net patient service revenue on a per patient day basis during the 2008 period was primarily the result of inflationary increases in our
standard charge rates and certain of our contracts with commercial payors, an increase in the percentage of our revenues generated from commercial payors, and the marginal increases contained in recent annual regulatory updates implemented by CMS
during 2008.

Total Expenses

Total expenses decreased by $10.6 million to $371.6 million for the year-ended December 31, 2008 as compared to $382.2 million for the comparable period in 2007. Included in the expenses for the 2008 period is an impairment charge of
$18.6 million related to goodwill, and a gain of $9.5 million related to the early extinguishment of debt. Gain on early extinguishment of debt for the year-ended December 31, 2008 was the result of our repurchasing $16.5 million in face amount
of our senior subordinated notes for an amount approximating $6.5 million. Partially offsetting the gain was the write-off of capitalized financing cost of $0.5 million recorded in connection with the retirement of these senior subordinated notes.
Included in the expenses for the year ending December 31, 2007, is a $38.8 million impairment charge related to goodwill and $2.5 million attributable to compensation and benefits accrued in connection with the departure of our former CEO.

Excluding the impairment charge and benefit from the gain on the early extinguishment of debt for 2008, and the impairment charge and the
compensation and benefits accrual for 2007, expenses increased by $21.6 million from the same period in the prior year. Rent expense increased by $3.9 million during the 2008 period in connection with the increases in bed capacity as discussed
previously. Net interest expense increased by $1.9 million during the 2008 period due to interest on the increased amount drawn on the line of credit in 2008 as discussed in the Liquidity and Capital Resources section contained herein. The remaining
$15.8 million increase in expenses was primarily attributable to an increase in salaries, wages and benefits of $12.3 million, and an increase in supplies of $2.1 million. These increases were due to the result of inflationary increases, increases
in patient days, and the increases in bed capacity as previously discussed.

Income Tax Expense

For the year ended December 31, 2008, we recorded income tax expense of $1.4 million which represented the estimated income tax liability for certain
state income taxes based on gross margin and revised estimates to the beginning of the year valuation allowance based on the final filing of amended tax returns for 2003, 2005 and 2006. The federal and state income tax benefit for 2008 and 2007 is
less than expected due to the need for a valuation allowance on deferred tax assets as of December 31, 2008 and 2007.

Net Income

For the year ended December 31, 2008, we reported a net loss of $21.1 million as compared to a net loss of $60.8 million for
the year ended December 31, 2007. Excluding goodwill impairment charges and the gain on the early extinguishment of debt for 2008 and the goodwill impairment charge and $2.5 million attributable to compensation and benefits accrued in
connection with the departure of our former CEO in 2007, the net loss for the year ended December 31, 2008 would be $12.0 million as compared to a net loss of $19.5 million for the year ended December 31, 2007. As discussed above, this
improvement of $7.5 million was principally the result of an increase in net patient service revenue per patient day.



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Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Net Revenues

Our net patient service revenue
decreased by $3.7 million, or 1.1%, for the year-ended December 31, 2007, to $322.2 million from $325.9 million for the comparable period in 2006. Patient days in 2007 were 2,616 greater, or 1.2% greater, than the same period in 2006.

This decrease in net patient service revenue was comprised of an unfavorable $9.5 million variance as the result of decreased revenue per
patient day, offset by a $2.7 million favorable benefit from an increase in patient days and a net increase of $3.1 million attributable to a decrease in unfavorable adjustments related to previously filed cost reports. The increase in patient days
was partially attributable to the expansion of our operations, as discussed previously.

During the years ended December 31, 2007 and
2006, we recorded reductions in net patient service revenue of $1.2 million and $4.3 million, respectively, related to changes in estimates and settlements on cost reports filed with the Medicare program. The adjustment recognized during the year
ended December 31, 2006 related primarily to two of our hospitals. In these cases, the actual cost to charge ratio, which is used to determine the reimbursement for short stay and high cost outliers, was outside the 10% limit of the cost to
charge ratio amount used by CMS to process interim claims such that it resulted in a reconciliation of payments to the actual cost to charge ratio for these cost report periods.

Our net patient service revenue per patient day as reported during the years ended December 31, 2007 and 2006 was $1,404 and $1,436, respectively.
However, exclusive of the cost report reimbursement adjustments discussed previously, net patient service revenue per patient day for the year-ended December 31, 2007 and 2006 was $1,420 and $1,455, respectively, or a decrease of 2.4%. The
decrease in net patient service revenue per patient day, excluding the impact of the cost report reimbursement adjustment, was primarily the result of the unfavorable reimbursement changes, including payment methodology changes and reductions in DRG
weights, implemented by CMS during the latter half of 2006 and during 2007, partially offset by an increase in the percentage of our revenues generated from commercial payors and our continued focus on treating higher acuity patients.

Total Expenses

Total expenses increased by
$19.2 million to $382.2 million for the year-ended December 31, 2007 as compared to $363.0 million for the comparable period in 2006. Included in the expenses for the year ending December 31, 2007, is a $38.8 million impairment charge
related to goodwill and $2.5 million attributable to compensation and benefits accrued in connection with the departure of our former CEO. Included in the expenses for the 2006 period is an impairment charge of $43.6 million related to goodwill, a
gain of $1.3 million related to the early extinguishment of debt, and $5.3 million in insurance recoveries related to Hurricane Katrina. Gain on early extinguishment of debt for the year-ended December 31, 2006 was the result of our
repurchasing $3.0 million in face amount of our senior subordinated notes for an amount approximating $1.5 million. Partially offsetting the gain was the write-off of capitalized financing cost of $0.1 million recorded in connection with the
retirement of these senior subordinated notes.

Excluding the impairment charge and the compensation and benefits accrual for 2007, and the
impairment charge, gain on early extinguishment of debt, and the insurance recovery for 2006, expenses increased by $14.9 million from the same period in the prior year. Rent expense increased by $3.6 million during the 2007 period in connection
with the increases in bed capacity as discussed previously. Net interest expense increased by $3.1 million during the 2007 period from an increase in the LIBOR rates during 2007 and in the margin spread as the result of the amendments to our senior
secured credit facility discussed further in the Liquidity and Capital Resources section contained herein. The remaining $8.2 million increase in expenses was primarily attributable to an increase in salaries, wages and benefits of $8.3 million, and
an increase in outside services, contract labor and other operating expenses of $3.1 million. These increases were due to the result of inflationary increases and the increases in bed capacity as previously discussed. These increases were offset by
a decrease in the provision for doubtful accounts of $2.9 million and a decrease in depreciation and amortization expense of $0.6 million. The provision for doubtful accounts during 2006 included an additional provision for the impact of a
conversion to a new patient accounting system during 2006.

Income Tax Expense

For the year ended December 31, 2007, we recorded income tax expense of $0.1 million which represented an annual effective rate of approximately
0.4%, excluding the impact of the $38.8 million impairment charge, as compared to an income tax expense of $3.7 million for the same period in 2006, which represented an effective rate of 57.2%, excluding the impact of the $43.6 million impairment
charges and certain other adjustments. The federal and state income tax benefit for 2007 is less than expected due to the need for a valuation allowance on deferred tax assets as of December 31, 2007.



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Net Income

For the year ended December 31, 2007, we reported a net loss of $60.8 million as compared to a net loss of $40.8 million for the year ended December 31, 2006. Excluding goodwill impairment charges, the net
loss for the year ended December 31, 2007 would be $22.0 million as compared to net income of $2.8 million for the year ended December 31, 2006. As discussed in the foregoing, this decrease of $24.8 million was principally the result of a
reduction in net patient service revenue per patient day in addition to increased operating expenses associated with inflationary increases and the increases in bed capacity during 2007.

Liquidity and Capital Resources

Our primary sources of liquidity are cash on hand, expected cash
flows generated by operations, and availability of borrowings under a revolving credit facility. Availability of borrowings under our Revolving Credit Facility are generally dependent upon our ability to meet the maximum leverage ratio test included
in the senior secured credit facility. Our primary liquidity requirements are for debt service on our senior secured credit facilities and the notes, capital expenditures and working capital.

At December 31, 2008, our debt structure consisted of $130.5 million aggregate principal amount of senior subordinated notes, a senior secured
credit facility, consisting of (i) a $246.7 million term loan facility which matures on August 11, 2012, and (ii) a $60.0 million revolving credit facility, subject to availability, of which $10.0 million is outstanding, including
sub-facilities for letters of credit and swingline loans, which matures on August 11, 2011. We also have capital lease obligations of $3.1 million with varying maturities. The full amount available under the term loan facility was used in
connection with the Transactions.

The senior secured credit facility requires us to comply on a quarterly basis with certain financial
covenants, including an interest coverage ratio test and a maximum leverage ratio test. These financial covenants become more restrictive on a periodic basis throughout the remaining term of the senior secured credit facility beginning with the
fiscal period ended December 31, 2008. In addition, the senior secured credit facility includes various negative covenants, including limitations on indebtedness, liens, investments, permitted businesses and transaction and other matters, as
well as certain customary representations and warranties, affirmative covenants and events of default including payment defaults, breach of representations and warranties, covenant defaults, cross defaults to certain indebtedness, certain events of
bankruptcy, certain events under ERISA, material judgments, actual or asserted failure of any guaranty or security document supporting the senior secured credit facility to be in full force and effect, change of control, and certain subjective
provisions. We believe we are currently in compliance with the covenants of our senior secured credit facility as amended.

The interest
rates per annum applicable to loans, other than swingline loans, under our senior secured credit facility are, at our option, equal to either an alternate base rate or an adjusted LIBOR rate for a one-, two-, three- or six-month interest period, or
a nine- or twelve-month period if available, in each case, plus an applicable margin. The applicable margins on the loans as amended are currently (1) 3.25% for alternate base rate revolving loans, (2) 4.25% for adjusted LIBOR revolving
loans, (3) 3.25% for alternate base rate term loans and (4) 4.25% for adjusted LIBOR term loans. These margins are subject to reduction based upon the ratio of our total indebtedness to our consolidated adjusted EBITDA (as defined in the
credit agreement governing our senior secured credit facility and amendment number one to the credit agreement). At December 31, 2008, the interest rate applicable to the $246.7 million under our term loan facility was 7.67%, and the rate on
the $10.0 million outstanding balance of the revolving credit facility was 7.79%.

We may not be able to continue to satisfy the covenant
requirements in subsequent periods. If we are unable to maintain compliance with the covenants contained in our senior secured credit facility, an event of default would occur. During the continuation of an event of default, the lenders under the
senior secured credit facility are entitled to take various actions, including accelerating amounts due under the senior secured credit facility, terminating our access to our revolving credit facility and all other actions generally available to a
secured creditor. An uncured event of default would have a material adverse effect on our financial position, results of operations and cash flow. In the event a financial covenant is not met, our senior secured credit facility provides for certain
limited cure rights which provide us the ability to issue permitted cure securities in exchange for cash or otherwise receive cash that would be contributed to our capital in an amount that is necessary to satisfy the financial covenant required on
a pro forma basis. The cure right amount, if exercised, continues to be considered a component of consolidated EBITDA, as defined in the senior secured credit agreement, on a trailing 4 quarter basis. A cure right was exercised for the fiscal
quarter ended September 30, 2007 in the amount of $6.0 million. This cure amount was a component of consolidated EBITDA for financial covenant purposes through the fiscal period ended June 30, 2008. This particular cure amount is not
included for financial covenant test purposes for periods beyond June 20, 2008.

We believe that our cash on hand, expected cash flows
from operations, and potential availability of borrowings under the revolving portion of our senior secured credit facilities will be sufficient to finance our operations, and meet our scheduled debt service requirements for at least the next twelve
months.

We actively seek to identify and evaluate potential acquisition candidates and, from time to time, we review potential
acquisitions of businesses. Any acquisitions may require us to issue additional equity or incur additional indebtedness, subject to the limitations contained in our senior secured credit facility.



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We and our subsidiaries, affiliates or significant stockholders may from time to time seek to retire
or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market
conditions, our liquidity requirements, contractual restrictions and other factors.

Capital Expenditures

On September 1, 2006, a newly formed subsidiary of the Company entered into a Master Lease Agreement (Lease) with Health Care REIT, Inc.
In connection with this Lease, Health Care REIT, Inc. agreed to make available up to $250.0 million for investments in hospital facilities, subject to approval of the Landlord and certain terms and conditions. Our Boise, Idaho facility was the first
facility to be developed under this Lease. This facility was completed in March 2008 with construction cost of approximately $19.1 million. This facility opened in April 2008. The facility under this Lease is accounted for as a lease financing
obligation whereby the asset remains capitalized on our balance sheet. See note 9 in our consolidated financial statements for additional discussion regarding this Lease.

We anticipate that we will incur capital expenditures of approximately $4.8 million in 2009 based on our current plans. The $4.8 million of expected capital expenditures relate to our ongoing maintenance expenditures
in our existing facilities. We may enter into lease arrangements to finance a portion of these equipment expenditures.

Historical Cash Flow

The following table summarizes the net cash provided by (used in) the statement of cash flows for the twelve months ended December 31,
2008, 2007, and 2006 (in thousands):



|                     |  |      |        |   |      |   |         |      |  |   |         |  
|-------------------- |  | ---- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                     |  | 2008 |        |   | 2007 |   |         | 2006 | 
|Operating activities |  | $    | 12,295 |   |      | $ | (9,851  | )    |  | $ | 49,673  |  
|Investing activities |  |      | (9,284 | ) |      |   | (16,376 | )    |  |   | (27,447 | )
|Financing activities |  |      | 4,435  |   |      |   | 10,793  |      |  |   | (8,819  | )

For the year ended December 31, 2008, operating activities generated $12.3 million in cash.
The increase in cash provided by operations as compared to 2007 is partially the result of a lower net loss during 2008. Accounts receivable increased by $5.1 million during 2008 as compared to an increase of $4.2 million during 2007. Days of net
patient service revenue in net accounts receivable at December 31, 2008 was 67.0 as compared to 77.6 at December 31, 2007. The decrease during the 2008 period was primarily the result of improved accounts receivable collections. Accounts
payable and accrued expenses increased by $12.9 million in 2008 compared to a decrease of $5.4 million in 2007, due in part to the timing of payments of interest expense associated with our senior secured credit facility through the rate setting
process, and in part due to the timing of bi-weekly payroll funding requirements.

For the year ended December 31, 2007, operating
activities used $9.9 million in cash. The decline in cash provided by operations as compared to 2006 is the result of the lower operating profits during 2007 and the non-recurring receipt of insurance proceeds in 2006. Accounts receivable increased
by $4.2 million during 2007 as compared to an increase of $11.9 million during 2006. This increase during 2006 was partially attributable to the implementation of a new patient accounting system during the fourth quarter of 2006. Days of net patient
service revenue in net accounts receivable at December 31, 2007 was 77.6 as compared to 77.1 at December 31, 2006. During 2007, income taxes paid and received resulted in a net receipt of $5.7 million, primarily due to federal refunds of
$5.3 million received associated with payments made in 2006.

For the year ended December 31, 2006, operating activities generated
$49.7 million in cash. During 2006, income taxes paid and received resulted in a net receipt of $5.1 million primarily due to the receipt of $14.4 million related to a refund of 2005 federal income tax payments. This tax benefit was the result of
expenses recorded related to the Transactions during 2005. Additionally, during 2006 we received $12.3 million in insurance recoveries, $7.0 million of which was recorded as a receivable at December 31, 2005, as a result of the impact of
Hurricane Katrina on our New Orleans operations. Additionally, during 2006 accounts receivable increased by $11.9 million, due primarily to the implementation of new patient accounting system during the fourth quarter of 2006.

Cash used in investing activities was $9.3 million during 2008. We used $13.1 million to purchase property and equipment during 2008, offset by $3.8
million in reimbursement received from Healthcare REIT, Inc. for our Boise, Idaho project.

Cash used in investing activities was $16.4
million during 2007. Approximately $11.9 million was used for equipment at our new and expanded locations along with renovation and expansion expenditures at our Denver, Colorado and Fort Worth, Texas



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hospitals, and ongoing capital maintenance requirements. Additionally, $16.6 million was used for our new hospital under construction in Boise, Idaho.
Offsetting these amounts are net receipts of approximately $12.1 million principally attributable to the timing of construction payments and related reimbursements from Healthcare REIT, Inc. for our Milwaukee, Wisconsin and San Antonio, Texas
hospitals.

Cash used in investing activities was $27.4 million for 2006. During 2006 we funded all equipment purchases, other than $1.1
million, using our available cash on hand. Additionally, we used $8.8 million to purchase the land and fund construction for our new free-standing facility in the Milwaukee, Wisconsin market and used $7.9 million to fund initial construction for our
new free-standing facility in the San Antonio, Texas market. These amounts were subsequently refunded by Healthcare REIT, Inc. pursuant the Master Lease.

Cash provided by financing activates during 2008 was $4.4 million. This included $10.0 million in borrowings under the revolving line of credit. This was offset by $9.0 million in payments of notes payable and long
term debt, which included $6.5 million paid for the early retirement of $16.5 million in face value of senior subordinated notes.

Cash
provided by financing activities during 2007 was $10.8 million. This is comprised of receipts pursuant to the Master Lease of $15.1 million associated with our capital expenditures on our Boise, Idaho hospital project and the receipt of a cure right
of $6.0 million as discussed previously. These amounts are offset by recurring debt service requirements under our senior secured credit facility and capital leases and amendment fees paid during 2007 of $3.1 million.

Cash used by financing activities during 2006 was $8.8 million, which was primarily attributable to debt service requirements on our senior secured
credit facility and capital leases during 2006.

At December 31, 2008 we had cash and cash equivalents of $25.3 million and working
capital of $37.9 million.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2008 (in thousands):



|                                 |  |                      |         |      |   |           |  |           |         |                |   |         |  |   |       
|-------------------------------- |  | -------------------- | ------- | ---- | - | --------- |  | --------- | ------- | -------------- | - | ------- |  | - | ------
|                                 |  | Payments Due by Year
|Contractual Obligation(1)        |  | Total                |         | 2009 |   | 2010-2011 |  | 2012-2013 |         | 2014 andbeyond
|Senior Secured Credit Facility   |  | $                    | 246,713 |      | $ | 2,550     |  | $         | 5,100   |                | $ | 239,063 |  | $ |      
|9 1/4% Senior
Subordinated Notes |  |                      | 130,531 |      |   |          |  |           |        |                |   | 130,531 |  |   |      
|Revolving credit facility        |  |                      | 10,000  |      |   |          |  |           | 10,000  |                |   |        |  |   |      
|Capital Lease Obligations        |  |                      | 3,088   |      |   | 1,252     |  |           | 1,468   |                |   | 368     |  |   |      
|                                 |  |                      |         |      |   |           |  |           |         |                |   |         |  |   |       
|Total debt                       |  |                      | 390,332 |      |   | 3,802     |  |           | 16,568  |                |   | 369,962 |  |   |      
|Interest(2)                      |  |                      | 123,484 |      |   | 30,907    |  |           | 61,228  |                |   | 31,349  |  |   |      
|Operating leases                 |  |                      | 147,581 |      |   | 17,831    |  |           | 29,862  |                |   | 23,883  |  |   | 76,005
|Other Obligations                |  |                      | 2,615   |      |   | 1,040     |  |           | 1,298   |                |   | 246     |  |   | 31    
|                                 |  |                      |         |      |   |           |  |           |         |                |   |         |  |   |       
|Total contractual obligations    |  | $                    | 664,012 |      | $ | 53,580    |  | $         | 108,956 |                | $ | 425,440 |  | $ | 76,036
|                                 |  |                      |         |      |   |           |  |           |         |                |   |         |  |   |       



|(1) | This table does not include payments that we are required to make under a management agreement with an affiliate of The
Carlyle Group. Under that agreement we pay an annual management fee initially set at $500,000. See Certain Relationships and Related TransactionsManagement Agreement.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The interest obligations were calculated using interest rates as of December 31, 2008 of 7.67% for the senior
secured credit facility, and the stated interest rate of 9 1/4% for the senior subordinated notes.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Seasonality

Our business experiences seasonality as a result of variation in census levels, with historically the highest census in the first quarter of the year and the lowest census in the third quarter of the year.

Inflation

We derive a substantial portion of our
revenue from the Medicare program. LTAC hospital PPS payments are fixed payments that generally are adjusted annually for inflation. However, there can be no assurance that these adjustments, if received, will reflect the actual increase in our
costs for providing healthcare services. As discussed previously, the 2008 Final Rule issued by CMS for LTAC hospitals included a 2.7% increase in the standard federal rate, while the 2007 Final Rule included an increase of 0.71% in the standard
federal rate.



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Labor and supply expenses make up a substantial portion of our operating expense structure. These
expenses can be subject to increase in periods of rising inflation. To date, we have been able to partially offset such increases with the implementation of cost control measures. There can, however, be no assurance that we will be successful in
offsetting future cost increases.



|ITEM 7A. | Qualitative and Quantitative Disclosures about Market Risk
|-------- | ----------------------------------------------------------

At December 31, 2008 we had $246.7 million in senior term loans outstanding, $10.0 million outstanding under our revolving credit facility, and $50.0 million of borrowing availability under our revolving credit facility, each bearing
interest at variable rates. This excludes the letters of credit outstanding of $7.7 million that reduce our borrowing capacity of our revolving credit facility, as they have fixed rates and have maturity dates over the next year. Each 0.125% point
change in interest rates would result in a $0.4 million change in interest expense on our term loans and revolving credit facility loans, assuming that our revolving credit facility is fully drawn. Pursuant to our senior credit facility we were
required to enter into an interest rate swap agreement that provided protection against fluctuations in interest rates on a notional amount of $12.0 million. On November 9, 2005, we entered into such an agreement for a three year period. This
agreement capped the LIBOR rate used to compute interest on the notional amount of our senior term loan at six percent per annum until its expiration on November 9, 2008. In the future, we may enter into additional interest rate swaps,
involving exchange of floating for fixed rate interest payments, to reduce interest rate volatility.



|ITEM 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

See
Consolidated Financial Statements and Notes thereto commencing at Page F-1.



|ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

Not applicable.



|ITEM 9A. | Controls and Procedures
|-------- | -----------------------

Evaluation of Disclosure Controls and
Procedures and Changes in Internal Control Over Financial Reporting

We carried out an evaluation, under the supervision and with the
participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of
the end of the period covered in this report. The disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within required time periods, and include controls and disclosures designed to ensure that this information is accumulated and communicated to the companys management, including its principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required disclosures. Based on this evaluation, our principal executive officer and principal financial officer have concluded that as of December 31, 2008 our disclosure controls and
procedures were effective to provide reasonable assurance that information required to be included in our periodic SEC reports is recorded accurately, and processed, summarized and reported within the time periods specified in the relevant SEC rules
and forms.

In addition, we reviewed our internal controls, and there have been no changes in our internal controls over financial
reporting identified in connection with an evaluation that occurred during the quarter ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Managements Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies and procedures that:



| | (i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect
on the financial statements.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.



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Our management assessed the effectiveness of the Companys internal control over financial reporting
as of December 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based upon our assessment and those criteria, management has concluded that the Company maintained effective internal control over financial reporting as
of December 31, 2008.



|ITEM 9B. | Other Information
|-------- | -----------------

None.



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PART III



|ITEM 10. | Directors and Executive Officers of the Registrant
|-------- | --------------------------------------------------

The following table sets forth information about our executive officers and directors.



|                         |  |     |  |                                                               
|------------------------ |  | --- |  | --------------------------------------------------------------
|Name                     |  | Age |  | Position(s)                                                   
|G. Wayne McAlister       |  | 62  |  | Chairman of the Board of Directors and Chief Executive Officer
|Phillip B. Douglas       |  | 51  |  | President                                                     
|Chris A. Walker          |  | 40  |  | Chief Financial Officer                                       
|Catherine A. Conner      |  | 52  |  | Senior Vice President of Human Resources                      
|Grant B. Asay            |  | 50  |  | Regional Senior Vice President of Operations                  
|Judith K. Hogan          |  | 57  |  | Senior Vice President of Clinical Services                    
|Karen H. Bechtel         |  | 59  |  | Director                                                      
|Stephen H. Wise          |  | 36  |  | Director                                                      
|William Hamburg          |  | 59  |  | Director                                                      
|William P. Johnston      |  | 64  |  | Director                                                      
|William H. McMullan, Jr. |  | 30  |  | Director                                                      

Set forth below is a brief description of the business experience of each of our directors and
executive officers:

G. Wayne McAlister has served as Chairman and Chief Executive Officer since April 15, 2008. From
January 14, 2008 until April 15, 2008, Mr. McAlister served as Director, President, and Chief Executive Officer. Prior to joining LifeCare, he was Senior Vice President of Triad Hospitals, Inc. and a Division President of a large
group of its hospitals, where he was responsible for development, management and financial operations, since 1999.

Phillip B. Douglashas served as our President since April 15, 2008. Previously, he had served as our Chief Financial Officer since January 30, 2006. Prior to joining LifeCare, Mr. Douglas was Chief Financial Officer of Workscape, Inc., a
private-equity owned company, from 2000 until 2005. From 1996 until 1999 Mr. Douglas was founder and Chief Executive Officer of Management and Technology Solutions, Inc., a developer and provider of IT solutions to physician organizations. From
1992 to 1995 Mr. Douglas was the Chief Financial Officer and Co-Founder of HealthSpring, Inc., a physician practice management company that was later acquired by The MetraHealth Companies (MetraHealth). MetraHealth was ultimately
acquired by United HealthCare Corporation, where Mr. Douglas served as Senior Vice President of Finance for the combined companies from 1995 to 1996.

Chris A. Walker, has served as our Chief Financial Officer since April 15, 2008. Prior to April 15, 2008, he served as our Senior Vice PresidentChief Accounting Officer and Treasurer since 1997.
Prior to joining LifeCare, he worked as a Certified Public Accountant with KPMG LLP from 1991 until 1997.

Catherine A. Connerhas
served as the Senior Vice President of Human Resources since May 2006. She was previously the Executive Director of Strategic Staffing with Applebees International, Inc. from 2001 to 2006 and Vice President of Human Resources at Rehab Designs
of America, a prosthetic and orthotic provider, from 1997 to 2000. Ms. Conner also previously served as Director of HR for a Boston Market franchisee and headed up staffing for Houlihans restaurant group.

Grant B. Asay has served as Regional Senior Vice President of Operations for our company since June 2006. From 2002 until June 2006, he served as
a Regional Director for Select Medical Corporation. Prior to joining Select Medical Corporation, Mr. Asay served as the Chief Executive Officer of community hospitals in Montana, Nevada and Alaska.

Judith K. Hogan RN, MSN, has served as VP of Clinical Operations since September 2006. She served as Regional Director of Clinical Operations
South Region for Kindred Healthcare from 2004 to 2006 and Director of Quality Management for Kindred Hospital Dallas from 2001 to 2004. Prior to joining Kindred, Ms. Hogan provided independent consulting services to healthcare providers
and served as Director of Quality Management, Chief Clinical Officer, Chief Operations Officer and Chief Executive Officer for various hospital providers.

Karen H. Bechtelhas served as a director since August 2005 and Chairman from August 2007 until April 2008. Ms. Bechtel is a Managing Director of The Carlyle Group and head of the U.S. buyout group that
focuses on opportunities in the healthcare sector. Previously, Ms. Bechtel was a Managing Director of Morgan Stanleys Private Equity Group, where she was a member of the investment committee. From 1993 to 1997, Ms. Bechtel was
Co-head of the Strategic Finance Group. She was also a founder and head of Princes Gate Private Equity Investors, a $650.0 million bridge equity fund.

Stephen H. Wisehas served as a director since July 2006. Mr. Wise is a Principal of The Carlyle Group focused on U.S. buyout investments in the healthcare industry. Prior to joining Carlyle, Mr. Wise
worked with JLL Partners where he focused on health care related investments. Previously he worked with J. W. Childs, a private equity firm, and prior to that worked in the leverage finance group of Credit Suisse First Boston.



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William Hamburg has served as director since August 2007. Mr. Hamburg served as interim
President and Chief Executive Officer of LifeCare from August 2007 until January 2008. Mr. Hamburg is currently the CEO of Guardian Home Care Holdings, Inc. Mr. Hamburg has served as the interim Chief Operating Officer and interim Chief
Development Officer of HealthSouth during its management transition. He was also interim Chief Executive Officer for Cogent Healthcare, Inc., a privately held hospital company. Previously, Mr. Hamburg was the Chairman, President and Chief
Executive Officer of MediSphere Health Partners, a privately owned, venture capital-backed, alternate site healthcare facility company. Before his services with MediSphere, Mr. Hamburg was President and Chief Operating Officer of Surgical Care
Affiliates, Inc., a NYSE company that was one of the nations largest independent owners and operators of outpatient surgery centers. Prior to his services with Surgical Care Affiliates, Inc., Mr. Hamburg held several senior administrative
positions with several major non-profit acute care hospitals.

William P. Johnston has served as a director since August 2007.
Mr. Johnston is a former Chairman of Renal Care Group and serves as a director and advisor for several healthcare and financial services companies, including The Carlyle Group, the principal owner of our company.

William H. McMullan, Jr. has served as a director since September 2007. Mr. McMullan is a Senior Associate of The
Carlyle Group focused on U.S. buyout investments in the healthcare industry. Prior to joining Carlyle, Mr. McMullan worked with J. W. Childs, a private equity firm. Previously he worked with UBS Investment Bank.

Board

Our Board directs the management of our
business as provided by Delaware law and conducts its business through regularly scheduled meetings. The board reviews and approves, among other matters, the compensation of our Chief Executive Officer, and our equity incentive plans. Furthermore,
the board monitors our corporate financial reporting, external audits, internal control functions and compliance with laws and regulations that could have a significant effect on our financial condition or results of operations. Our board has the
responsibility to appoint and to review fee arrangements with our independent auditors.

Our securities are not listed on a securities
exchange and we are not subject to the corporate governance requirements of a securities exchange. The audit committee is currently the only separate committee of the board of directors. We anticipate we may establish additional standing committees
of the board, including a compensation committee, in the future. We will consider establishing other committees of the board, from time to time, when necessary to address specific issues. Our board of directors consulted with our Chief Executive
Officer concerning the compensation of our executive officers, other than the Chief Executive Officer.

Code of Ethics

We have adopted a written code of business conduct and ethics, known as our code of conduct, which applies to all of our directors, officers, and
employees, including our chief executive officer, our president, and our chief financial officer. Our code of conduct is available on our Internet website, www.lifecare-hospitals.com. Our code of conduct may also be obtained by contacting us
at 469-241-2100. Any amendments to our code of conduct or waivers from the provisions of the code for our chief executive officer, our president, or our chief financial officer will be disclosed on our Internet website promptly following the date of
such amendment or waiver.



|Item 11. | EXECUTIVE COMPENSATION  COMPENSATION DISCUSSION AND ANALYSIS
|-------- | -------------------------------------------------------------

The following analysis relates to compensation for each person who served as our Chief Executive Officer during 2008, our Chief Financial Officer and the three other executive officers who were the most highly
compensated for the year ended December 31, 2008. It also includes information about two additional officers who ceased to serve as executive officers in 2008. We refer to these individuals collectively as our Named Executive
Officers.

Overview of Compensation Process.The Board of Directors sets the compensation of our executive officers,
evaluates their performance and administers our incentive plans. Our securities are not listed on a stock exchange. Accordingly, we are not subject to stock exchange corporate governance standards, such as the requirement to establish a compensation
committee. Although G. Wayne McAlister, who became our Chief Executive Officer on January 14, 2008, and William Hamburg, who served as our interim Chief Executive Officer in 2008 until January 14, 2008, both served on our Board of
Directors, neither of them participated in the determination of their own compensation.

The Board annually reviews executive compensation
and our policies to ensure that the Chief Executive Officer and other executive officers are appropriately rewarded for their contributions to the Company. The Board seeks to align our compensation strategy with the objectives of the Company, as
well as stockholder interests. In addition, the Board solicits the views and



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recommendations of our Chief Executive Officer when setting the salaries of our other executive officers, given his insight into internal pay equity, as well
as executive officer performance. The Board considers these recommendations in the final compensation decisions and gives them significant weight, provided such recommendations are otherwise consistent with our compensation philosophies. However,
the Board makes all final decisions concerning executive officer compensation.

Compensation Philosophy. The fundamental objective
of our compensation program is to attract, retain and motivate executive leadership for the Company who will execute our business strategy, uphold our Company values and enhance the value of the Company. To fulfill this objective, the Board has
developed compensation policies and plans designed to attract, retain and motivate highly qualified and high-performing executives through compensation that is:



| |  |  | Aligned with Stockholder Interests Equity incentives should be used to align the interests of our executive officers with stockholder interests.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Performance-based  A meaningful component of compensation should be tied to our performance.
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | Equitable  Executive compensation should consider internal pay equity as well as compensation paid by similarly situated companies.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------

The Boards compensation philosophy for each executive officer focuses on an analysis of the executive
officers performance for the year, projected responsibilities, importance to the execution of our business strategy, external pay practices and total compensation positioning. The Boards philosophy also takes into account employee
retention, potential recruitment by other companies, compensation policies of other companies, and the expense and difficulty of replacing executives.

Compensation Program for 2008.Based on our compensation philosophy, the Board determined that we should provide executive officers with compensation comprised of three primary elements: (1) base
salary; (2) annual performance awards payable in cash; and (3) long-term equity incentive awards. The analysis regarding the establishment of these three components of executive compensation for 2008 is set forth below.

Base Salary. In 2008, the Company was a party to employment agreements (Employment Agreements) with our Named Executive
Officers, other than William Hamburg. While the Employment Agreements established a base salary for each of these executive officers, their salaries are subject to adjustment after their initial term by the Board of Directors in its sole discretion.
Each year, the Board reviews and approves salaries for our executive officers, including those executive officers who are parties to an employment agreement. The Board seeks to provide base salaries for our executive officers appropriate to their
experience, professional status, job responsibilities and performance. The Boards decision also takes into account factors such as prior year salary, tenure, performance, responsibilities and salaries paid by other companies. However, the
Board did not benchmark the salaries of our executive officers to those of other companies or groups of companies. The Board also considers recommendations presented to the Board by the Chief Executive Officer with respect to the
salaries of the other executive officers. Based on these factors, the Board approved base salaries for our Named Executive Officers (other than Mr. Hamburg) for 2008 in the amounts shown in the table below.



|                    |  |                                                |  |                      |         |  | 
|------------------- |  | ---------------------------------------------- |  | -------------------- | ------- |  | 
|Name                |  | Title                                          |  | Base Salary for 2008 |         | 
|G. Wayne McAlister  |  | Chief Executive Officer, Chairman of the Board |  | $                    | 500,000 | 
|Phillip B. Douglas  |  | President                                      |  |                      | 325,000 | 
|Chris A. Walker     |  | Chief Financial Officer                        |  |                      | 230,000 | 
|Catherine A. Conner |  | Senior Vice President of Human Resources       |  |                      | 215,010 | 
|Grant B. Asay       |  | Regional Senior Vice President of Operations   |  |                      | 250,000 | 

Jill L. Force is not shown in the above table. Ms. Force ceased to serve as Executive Vice
President and General Counsel on January 22, 2008. Pursuant to her employment agreement, Ms. Force will receive total severance equal to $405,007, consisting of salary for a period of 18 months. We will also continue health insurance
benefits for Ms. Force for a period of 18 months. In addition, Ms. Force received $50,000 upon our repurchase of 20,000 shares of stock held by her on March 5, 2008.

Leroy Thompson is not shown in the above table. Mr. Thompson ceased to serve as Regional Senior Vice President of Operations on September 14,
2008. Mr. Thompson will receive total severance of $229,622, consisting of salary for a period of one year.

Mr. Hamburg served
as our interim Chief Executive Officer from August 2007 to January 14, 2008. The terms of his compensation were set forth in his engagement letter, determined by negotiation between Mr. Hamburg and the Company, and designed to compensate
Mr. Hamburg at approximately the same rate as his predecessor. Mr. Hamburg received $1,500 per day and



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was reimbursed for reasonable expenses incurred by him in connection with his service as interim Chief Executive Officer. For his services as interim Chief
Executive Officer during 2008 (the period of January 1 to January 14, 2008), Mr. Hamburg received cash compensation in the amount of $9,750.

The base salaries shown above for Mr. Douglas, Mr. Walker and Mr. Asay became effective on April 15, 2008. We entered into an amendment to an employment agreement with Mr. Douglas effective
April 15, 2008 which increased his annual base salary from $283,296 to $325,000, in connection with his appointment as President of the Company. Prior to that time, Mr. Douglas served as the Companys Vice President and Chief
Financial Officer. We entered into an amended and restated employment agreement with Mr. Walker effective April 15, 2008, which increased his annual base salary from $189,966 to $230,000, in connection with his appointment as Chief
Financial Officer of the Company. Mr. Walker previously served as the Companys Senior Vice President, Chief Accounting Officer and Treasurer. In addition, we entered into an amendment with Mr. Asay to his employment agreement
effective April 15, 2008, which increased his annual base salary from $214,198 to $250,000. Mr. Asays increased salary reflected the Boards assessment of his job responsibilities and performance.

Performance-Based Cash Incentive Awards.In addition to base salary, performance-based cash incentives are provided to our executive
officers based on the extent to which performance targets are met. The Board believes these bonuses reward executives for achieving our shorter-term goals and values. The Board established target cash incentive opportunities for 2008. 75% of our
Named Executive Officers incentive opportunity was based on the achievement of target EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, with the remaining 25% of the incentive opportunity to be paid in the discretion
of the Board of Directors.

For 2008, the base target incentive opportunity was equal to 60% of base salary for our Chief Executive
Officer, President and Chief Financial Officer, 50% for our Senior Vice President of Human Resources and 35% of base salary for our Regional Senior Vice President of Operations. No amounts would be paid unless target EBITDA was achieved. The plan
also provided for the payment of incremental performance-based cash incentives to the extent actual EBITDA exceeds target EBITDA. The Chief Executive Officer, President and Chief Financial Officer were eligible to receive a maximum performance-based
cash incentive of 100% of base salary while the other Named Executive Officers were eligible to receive a maximum performance-based cash incentive of 70% of base salary. The incremental performance-based cash incentive would be earned on a pro-rata
basis for EBITDA in excess of 100% of target up to a maximum of 110% of target.

Based on the foregoing criteria, the Board reviewed our
performance and individual performance objectives of the Named Executive Officers who were serving on December 31, 2008 and determined that the following cash incentive awards would be paid to the Named Executive Officers with respect to the
year ended December 31, 2008: Mr. McAlister, Chief Executive Officer  $243,600; Mr. Douglas, President  $158,340 ; Mr. Walker, Chief Financial Officer  $112,059; Ms. Conner, Senior Vice President of Human
Resources  $65,470; and Mr. Asay, Regional Senior Vice President of Operations  $71,049. Neither Mr. Hamburg, Ms. Force or Mr. Thompson received a cash incentive award with respect to their service to the Company
during 2008.

Long-Term Equity Incentive Compensation.One of our primary compensation philosophies is that long-term equity
compensation should strengthen and align the interests of our executive officers with stockholder interests. The Board believes that the use of stock-based awards is an effective means to enable us to attract and retain high quality executives. In
addition, we believe that stock ownership encourages our executive officers to think and act as stockholders.

Our 2005 Equity Incentive
Plan provides for grants of restricted shares and options to purchase shares of LCI Holding Company, Incs (Holdings) common stock. Employees, as well as independent directors, are eligible to receive grants under the 2005 Equity
Incentive Plan. Awards are generally granted to our executive officers upon hiring and on a periodic basis thereafter as the Board deems appropriate. Typically, the Board approves these awards at its August meeting after considering the actual
performance of our company for the prior year as compared to performance targets set by the Board. The Board may approve additional awards under other circumstances, such as the promotion of a person to a higher position or in recognition of special
contributions made by the executive officer.

Following the naming of Mr. McAlister as our Chief Executive Officer on January 14,
2008 and as provided in this employment agreement, Mr. McAlister was granted an option to purchase 1,000,000 shares of the Holdings stock at an exercise price of $2.50 per share. In addition, Mr. McAlister became eligible to receive a
restricted stock award based on the Companys attainment of fiscal year 2008 financial targets established by the Board. Based on our 2008 financial results, Mr. McAlister was granted 400,000 shares of restricted stock on March 24, 2009.
Following the naming of Mr. Douglas as our President, he was granted an option to purchase 370,000 shares of Holdings stock at an exercise price of $2.50 per share. In accordance with his amended employment agreement, Mr. Douglas was
eligible to receive a restricted stock award based on our attainment of fiscal year 2008 financial targets established by the Board of Directors. Based on our 2008 financial results, Mr. Douglas was granted 300,000 shares of restricted stock on
March 24, 2009. Pursuant to Mr. Walkers amended and restated employment agreement, he was granted an option to purchase 96,000 shares of Holdings stock at an exercise price per share of $2.50. The option price of $2.50 per share at which
the options were granted in 2008 exceeded the fair market value of our shares at the date of grant.



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Retirement Plan.All employees of our company are eligible to participate in our 401(k)
plan, and can contribute up to 50% of their base salary (subject to statutory limitations). We have the discretion to match up to 33.3% of the first six percent of eligible employee contributions to our 401(k) plan. The matching contributions are
made in cash and vest over a three-year period. In 2008, we contributed the following amounts on behalf of our Named Executive Officers: Mr. McAlister, Chief Executive Officer  $2,281; Mr. Douglas, President  $0 ;
Mr. Walker, Chief Financial Officer  $4,555; Ms. Conner, Senior Vice President of Human Resources  $3,691; Ms. Force, Senior Vice President and General Counsel (until 1/22/08)  $2,943; Mr. Thompson, Regional
Senior Vice President of Operations (until 9/14/08)  $2,525; and Mr. Asay, Regional Senior Vice President of Operations  $3,581. Mr. Hamburg, who served as our interim Chief Executive Officer from August 20, 2007 to
January 14, 2008 was not an employee of the Company and was not eligible to participate in our 401(k) plan.

Severance and
Change in Control Benefits.The Board believes that reasonable severance and change in control benefits are necessary in order to secure and retain highly qualified executive officers. These benefits reflect the fact that it may be difficult
for executive officers to find comparable employment within a short period of time. They also reflect the generally competitive recruiting environment within our industry. The Board does not typically consider the value of potential severance and
change in control provisions when assessing annual compensation because these payouts are contingent and have a primary purpose unrelated to those of ordinary compensation.

We have employment agreements in place with each of our Named Executive Officers who continued to serve as of December 31, 2008. In general, these
agreements provide for severance payments where the executive officer is terminated without cause or if the executive officer resigns with good reason. If the executive officers employment is terminated by us
without cause or by the executive officer for good reason (each as defined in the executive officers employment agreement), the executive officer is entitled to receive: (1) all accrued benefits, (2) a
severance payment equal to a continuation of his or her annual base salary for a period of one to two years, (3) in some cases a pro-rated bonus amount; and (4) in some cases payment of health insurance benefits for one to two years
following the date of termination. If certain of the executive officers are terminated as a result of death or disability, the executive officer is entitled to receive accrued salary, unpaid bonus and a bonus (pro-rated through the termination date)
and other benefits required by applicable law or our employee benefit plans. In addition, Ms. Conner and Mr. Asay are entitled to receive additional salary upon their respective deaths or termination of employment due to disability, for
the following periods: Mr. Conner  18 months, and Mr. Asay  one year. Mr. Hamburg was not afforded severance benefits under his compensation arrangement with us, because it was the understanding of Mr. Hamburg and us
that he would serve only in an interim capacity as our Chief Executive Officer. The severance payment provisions for the other Named Executive Officers are described in the table below.



|                    |  |                                              |  |                                                           |  |                                                                                                                                                                                                                                         
|------------------- |  | -------------------------------------------- |  | --------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name                |  | Title                                        |  | SeverancePayment Equal toAnnual BaseSalary for
thisPeriod |  | Bonus Amount Upon Termination Without Cause or by NEO
for Good Reason                                                                                                                                                                   
|G. Wayne McAlister  |  | Chief Executive Officer                      |  | 2 years                                                   |  | 2 times the lesser of 60% of base salary on date of termination or the annual bonus paid in respect of the immediately preceding year (or if no such annual bonus was paid to him in respect of
the preceding fiscal year, $0)*         
|                    |  |                                              | 
|Phillip B. Douglas  |  | President                                    |  | 18 months                                                 |  | 1.5 times the lesser of 60% of base salary on date of termination or the annual bonus paid in respect of the immediately preceding fiscal year (or if no such annual bonus was paid to him in
respect of the preceding fiscal year, $0)*
|                    |  |                                              | 
|Chris A. Walker     |  | Chief Financial Officer                      |  | 1 year                                                    |  | The lesser of 60% of base salary on date of termination or the annual bonus paid in the immediately preceding year (or if no such annual bonus was paid to him in respect of the preceding fiscal
year, $0)*                            
|                    |  |                                              | 
|Catherine A. Conner |  | Senior Vice President of Human Resources     |  | 18 months                                                 |  | None                                                                                                                                                                                                                                    
|                    |  |                                              | 
|Grant B. Asay       |  | Regional Senior Vice President of Operations |  | 1 year                                                    |  | None                                                                                                                                                                                                                                    



|* | If employment is terminated as a result of his death or disability, the bonus amount would be a pro-rated amount determined by multiplying the target annual bonus he would have been
eligible to receive if he had continued to serve for the full fiscal year by a fraction, the numerator of which is the number of days he was employed in the fiscal year divided 365.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Ms. Force ceased to serve as Executive Vice President and General Counsel on January 22, 2008. Pursuant to her
Employment Agreement, Ms. Force will receive total severance equal to $405,007, consisting of salary for a period of 18 months. We will also continue health insurance benefits for Ms. Force for a period of 18 months. In addition,
Ms. Force received $50,000 upon our repurchase of 20,000 shares of stock on March 5, 2008.

Mr. Thompson ceased to serve as Regional Senior
Vice President of Operations on September 14, 2008. Mr. Thompson will receive total severance of $229,622, consisting of salary for a period of one year.

In April 2008, we entered into transaction bonus agreements with certain members of the Companys management, including Messrs. McAlister, Douglas, Walker, Asay and Ms. Conner. The transaction bonus agreements will provide a one-time
bonus opportunity in connection with a change of control transaction (Transaction Bonus Opportunity). The Transaction Bonus Opportunity for each of Messrs. McAlister, Douglas, Walker, Asay and Ms. Conner, as a multiple of such executive
officers base salary, ranges from 1x to 15x for each of Messrs. McAlister and Douglas, from approximately 1x to 10x for Mr. Walker, from approximately 1x to 5x for Mr. Asay and from approximately 0.35x to 1.75x for Ms. Conner. The
actual amount to be paid will be based on the value associated with the Company upon a change of control.

The following table provides the amount of
potential cash severance payable and the estimated value of continuing insurance benefits to each of the Named Executive Officers who were serving in that capacity at December 31, 2008, based on the assumption that the Named Executive
Officers employment terminated on December 31, 2008, under circumstances that entitled the Named Executive Officer to the maximum potential severance payment immediately thereafter. The table also includes the value of accelerated vesting
of options and restricted stock if severance rights are triggered pursuant to a change of control event. Finally, the table includes the maximum Transaction Bonus Opportunity available to Messrs. McAlister, Douglas, Walker, Asay and Ms. Conner. The
table excludes Ms. Force and Mr. Thompson because the amount of their severance has been determined, as discussed above, and they no longer serve as executive officers. The table also excludes Mr. Hamburg, who had no severance
benefits as interim Chief Executive Officer.



|                    |  |                                              |  |                                       |           |                                    |   |                                                 |  |                                    |  |   |          
|------------------- |  | -------------------------------------------- |  | ------------------------------------- | --------- | ---------------------------------- | - | ----------------------------------------------- |  | ---------------------------------- |  | - | ---------
|Name                |  | Title                                        |  | Amount of PotentialSeverance Benefits |           | EstimatedValue ofInsuranceBenefits |   | Accelerationof StockOptions andRestrictedStock1 |  | MaximumTransactionBonusOpportunity
|G. Wayne McAlister  |  | Chief Executive Officer                      |  | $                                     | 1,000,000 |                                    | $ | 38,743                                          |  |                                   |  | $ | 7,500,000
|                    |  |                                              |  |                                       |          
|Phillip B. Douglas  |  | President                                    |  |                                       | 487,500   |                                    |   | 29,057                                          |  |                                   |  |   | 4,500,000
|                    |  |                                              |  |                                       |          
|Chris A. Walker     |  | Chief Financial Officer                      |  |                                       | 230,000   |                                    |   | 19,371                                          |  |                                   |  |   | 2,100,000
|                    |  |                                              |  |                                       |          
|Catherine A. Conner |  | Senior Vice President of Human Resources     |  |                                       | 322,515   |                                    |   |                                                |  |                                   |  |   | 375,000  
|                    |  |                                              |  |                                       |          
|Grant B. Asay       |  | Regional Senior Vice President of Operations |  |                                       | 250,000   |                                    |   |                                                |  |                                   |  |   | 1,500,000



|1 | As of December 31, 2008, the stock option exercise price of $2.50 per share exceeded the per share fair value of
the underlying common stock and the fair value of restricted stock was nominal, based on our valuation. Accordingly, no amounts are shown in this column attributable to the acceleration of stock options or accelerated vesting of restricted stock as
of December 31, 2008.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Non-Competition, Non-Solicitation and Confidentiality.Mr. Hamburg was
subject to confidentiality restrictions as the interim Chief Executive Officer. Each of the other Named Executive Officers is subject to certain confidentiality provisions and to certain non-solicitation and non-competition provisions for a period
of one year to two years following the termination of employment with the Company.



39



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Perquisites and Other Benefits.The Named Executive Officers are eligible for benefits
generally available to other employees of the Company who are exempt for purposes of the Fair Labor Standards Act, including health insurance, disability and life insurance. We also reimburse the Named Executive Officers for reasonable, customary
and necessary business expenses incurred or paid by them in the performance of their duties and responsibilities to the Company.

Named Executive Officer Salaries for 2009.The Boards compensation philosophy and compensation program for executive officers for 2009 remain consistent with those in effect for 2008. The Board granted nominal salary
increases to Ms. Conner, Mr. Asay and Mr. Walker for 2009. The 2009 salaries for the Named Executive Officers will be: Mr. McAlister  $500,000; Mr. Douglas  $325,000; Mr. Walker  $235,664;
Ms. Conner  $221,458; and Mr. Asay  $256,256.

Compensation for New Chief Executive Officer.On
January 14, 2008, the Board appointed Wayne McAlister as our President and Chief Executive Officer, and Mr. Hamburg ceased to serve as interim Chief Executive Officer. On that date, the Company and its parent company, LCI Holding Company,
Inc., entered into an employment agreement with Mr. McAlister. The employment agreement provides for an initial term of two years, subject to automatic one-year renewals thereafter unless the agreement is terminated in accordance with its
terms. Pursuant to the employment agreement, Mr. McAlister is entitled to receive an annual base salary of $500,000 and is eligible for an annual bonus based on achievement of performance objectives established by the Board. The target amount
of the annual bonus is 60% of his base salary and the maximum amount of the annual bonus is 100% of his base salary. We also granted Mr. McAlister an option to purchase 1,000,000 shares of our common stock for $2.50 per share. All options
granted by us, including Mr. McAlisters option, have been granted with an exercise price not less than fair value at date of grant. The employment agreement also specifies that he would receive a restricted stock award of up to 400,000
shares, if certain 2008 financial targets are attained. Based on the attainment of these targets, Mr. McAlister was granted 400,000 restricted shares on March 24, 2009. In addition, the employment agreement provides that Mr. McAlister may
earn an additional one-time bonus in connection with a change of control transaction in an amount ranging from a multiple of 1x to 15x of his base salary. If Mr. McAlister is terminated other than for cause or resigns voluntarily for good
reason, he is entitled to receive continued salary and bonus for two years, with the amount of the annual bonus equal to the lesser of 60% of Mr. McAlisters base salary in effect on the date of termination or the annual bonus paid to him
in the immediately preceding fiscal year. Under the employment agreement, Mr. McAlister is also subject to non-competition, non-solicitation and certain confidentiality provisions for a period of two years following the termination of this
employment.

Performance-Based Cash Incentive Awards  Targets for 2009.As previously discussed,
in addition to base salary, performance-based cash incentives are provided to our Named Executive Officers based on the extent to which performance targets are met. The Board has established target cash incentive opportunities for 2009. 75% of our
Named Executive Officers incentive opportunity will be based on the achievement of target EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, with the remaining 25% of the incentive opportunity paid in the discretion of
the Board of Directors.

For 2009, the base target incentive opportunity will be equal to 60% of base salary for our Chief Executive
Officer, President and Chief Financial Officer, 50% for our Senior Vice President of Human Resources and 35% of base salary for our Senior Vice President of Operations. No amounts will be paid unless target EBITDA is achieved. The plan also provides
for the payment of incremental performance-based cash incentives to the extent actual EBITDA exceeds target EBITDA. The Chief Executive Officer, President and Chief Financial Officer are eligible to receive a maximum performance-based cash incentive
of 100% of base salary while the other Named Executive Officers may receive a maximum performance-based cash incentive of 70% of base salary. The incremental performance-based cash incentive is earned on a pro-rata basis for EBITDA in excess of 100%
of target up to a maximum of 110% of target.



40



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##### Table of Contents

Summary Compensation Table

for the Year Ended December 31, 2008



|                                                                                                                          |      |      |         |           |         |           |        |                  |         |                  |   |                                         |   |                                                           |        |                           |         |          
|------------------------------------------------------------------------------------------------------------------------- | ---- | ---- | ------- | --------- | ------- | --------- | ------ | ---------------- | ------- | ---------------- | - | --------------------------------------- | - | --------------------------------------------------------- | ------ | ------------------------- | ------- | ---------
|Name and Principal Position                                                                                               |      | Year |         | Salary($) |         | Bonus($)1 |        | Stock Awards($)2 |         | OptionAwards($)3 |   | Non-EquityIncentive PlanCompensation($) |   | Change inPension ValueandNonqualifiedDeferredCompensation |        | All OtherCompensation($)4 |         | Total ($)
|William HamburgChief Executive Officer (8/20/07 to 1/14/08)                                                               |      | 2008 |         | 9,750     |         |          |        |                 |         |                 |   |                                        |   |                                                          |        | 2,131                     |         | 11,881   
|                                                                                                                          | 2007 |      | 96,750  |           |        |           |       |                  |        |                  |  |                                         |  |                                                           | 22,984 |                           | 119,734
|                                                                                                                          |      |      |         |           |         |           |        |                  |        
|G. Wayne McAlisterChairman of the Board and Chief Executive Officer (since 4/15/08 and 1/14/08, respectively)             |      | 2008 |         | 471,155   |         | 243,600   |        |                 |         |                 |   |                                        |   |                                                          |        | 7,190                     |         | 721,945  
|                                                                                                                          |      |      |         |           |         |           |        |                  |        
|Phillip B. DouglasPresident (since 4/15/08; Executive Vice President and Chief Financial Officer from 1/30/06 to
4/15/08) |      | 2008 |         | 312,008   |         | 158,340   |        |                 |         | 103,518          |   |                                        |   |                                                          |        | 30,936                    |         | 604,802  
|                                                                                                                          | 2007 |      | 282,661 |           |        |           |       |                  | 103,518 |                  |  |                                         |  |                                                           | 34,202 |                           | 420,381
|                                                                                                                          | 2006 |      | 248,592 |           | 160,193 |           |       |                  | 94,892  |                  |  |                                         |  |                                                           | 32,587 |                           | 536,264
|                                                                                                                          |      |      |         |           |         |           |        |                  |        
|Chris A. WalkerChief Financial Officer (since 4/15/08) and CFO of a subsidiary of the Company (from 6/22/98 to
4/15/08)   |      | 2008 |         | 219,204   |         | 112,059   |        |                 |         | 18,304           |   |                                        |   |                                                          |        | 13,367                    |         | 362,934  
|                                                                                                                          | 2007 |      | 189,139 |           |        |           |       |                  | 18,304  |                  |  |                                         |  |                                                           | 7,499  |                           | 214,942
|                                                                                                                          | 2006 |      | 178,149 |           | 70,617  |           |       |                  | 10,839  |                  |  |                                         |  |                                                           | 5,823  |                           | 265,428
|                                                                                                                          |      |      |         |           |         |           |        |                  |        
|Catherine A. ConnerSenior Vice President of Human Resources                                                               |      | 2008 |         | 215,010   |         | 65,470    |        |                 |         | 43,863           |   |                                        |   |                                                          |        | 9,576                     |         | 333,919  
|                                                                                                                          | 2007 |      | 213,855 |           |        |           |       |                  | 43,863  |                  |  |                                         |  |                                                           | 10,707 |                           | 268,425
|                                                                                                                          | 2006 |      | 130,769 |           | 75,355  |           |       |                  | 16,448  |                  |  |                                         |  |                                                           | 7,922  |                           | 230,494
|                                                                                                                          |      |      |         |           |         |           |        |                  |        
|Grant B. AsayRegional Senior Vice President of Operations                                                                 |      | 2008 |         | 240,078   |         | 71,049    |        |                 |         | 15,926           |   |                                        |   |                                                          |        | 11,104                    |         | 338,157  
|                                                                                                                          | 2007 |      | 213,875 |           |        |           |       |                  | 15,926  |                  |  |                                         |  |                                                           | 66,844 |                           | 296,645
|                                                                                                                          | 2006 |      | 109,038 |           | 98,065  |           |       |                  | 5,972   |                  |  |                                         |  |                                                           | 12,470 |                           | 225,545
|                                                                                                                          |      |      |         |           |         |           |        |                  |        
|Jill L. Force,Executive Vice President and General Counsel (through 1/22/08)                                              |      | 2008 |         | 22,846    |         |          |        | 47,895           |         | 4,974            |   |                                        |   |                                                          |        | 391,940                   |         | 467,655  
|                                                                                                                          | 2007 |      | 269,235 |           |        |           | 71,843 |                  | 59,690  |                  |  |                                         |  |                                                           | 24,371 |                           | 425,139
|                                                                                                                          | 2006 |      | 259,232 |           | 167,554 |           | 71,843 |                  | 42,259  |                  |  |                                         |  |                                                           | 34,832 |                           | 575,720
|                                                                                                                          |      |      |         |           |         |           |        |                  |        
|LeRoy F. Thompson, Jr.Regional Senior Vice President of Operations (through 9/14/08)                                      |      | 2008 |         | 159,569   |         |          |        |                 |         | 14,491           |   |                                        |   |                                                          |        | 261,853                   |         | 435,913  
|                                                                                                                          | 2007 |      | 217,869 |           |        |           |       |                  | 18,304  |                  |  |                                         |  |                                                           | 12,169 |                           | 248,342
|                                                                                                                          | 2006 |      | 211,368 |           | 66,000  |           |       |                  | 13,224  |                  |  |                                         |  |                                                           | 10,847 |                           | 301,439



|1 | Bonuses shown for a specified year relate to amounts earned during that year but which will be paid during the following
year.
|- | ------------------------------------------------------------------------------------------------------------------------------

|2 | Amounts relate to the vesting of restricted stock held by the employee in accordance with the provisions of Statement of
Financial Accounting Standards No. 123R, Share-based Payment (SFAS 123R). The value of these shares pursuant to FASB 123(R) was nominal.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3 | This column represents the expense recorded by us for option awards in accordance with the provisions of SFAS 123R. See
note 3 of the consolidated financial statements regarding assumptions underlying the valuation of equity awards pursuant to SFAS 123R. These amounts reflect our accounting expense, and do not correspond to the actual value that may be recognized by
the Named Executive Officer. The actual value, if any, the Named Executive Officer may realize upon exercise of the options will depend on the excess of the calculated stock price over the exercise price on the date the options are exercised.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|4 | For 2008, All Other Compensation for Mr. Douglas includes travel cost reimbursement and related income taxes of
$16,272. All Other Compensation for Ms. Force includes severance payments of $247,158 made to her during 2008 and accrued severance of $132,268. For 2007, All Other Compensation for Mr. Douglas and Ms. Force includes travel cost
reimbursement and related income taxes of $34,202 and $21,985, respectively, along with our 401(k) matching contribution as previously discussed. For 2007, All Other Compensation for Mr. Asay includes compensation for relocation expenditures
and related income taxes of $61,920, along with our 401(k) matching contribution. For 2006, All Other Compensation for Mr. Douglas and Ms. Force includes travel cost reimbursement and related income taxes of $30,463 and $28,718,
respectively, along with our 401(k) matching contribution. All Other Compensation for Mr. Hamburg for 2007 consisted of travel cost reimbursement of $22,984. All other compensation for Mr. McAlister, Mr. Walker and Ms. Conner
includes insurance payments and our 401(k) matching contribution.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Grants of Plan-Based Awards.During
2008, no new options were granted to our Named Executive Officers, other than an option to purchase 1,000,000 shares granted to Mr. McAlister upon his becoming our Chief Executive Officer, an option to purchase 370,000 shares granted to
Mr. Douglas upon his becoming our President and an option to purchase 96,000 shares granted to Mr. Walker upon his becoming our Chief Financial Officer. Each option has a term of 10 years, vests in four equal annual installments commencing
on the first anniversary of the date of grant and has an option price equal to $2.50 per share, which was in excess of the fair market value of our stock at the date of grant. The options are designed to facilitate our efforts to retain our
executive officers as well as provide incentive to maximize their performance on our behalf.

Agreements with Named Executive
Officers.

Each of our Named Executive Officers (other than Mr. Hamburg, who served as interim Chief Executive Officer until
January 14, 2008, Ms. Force, who ceased to serve as our Executive Vice President and General Counsel on January 22, 2008, and Mr. Thompson, who ceased to serve as Regional Senior Vice President of Operations on September 14,
2008) is employed pursuant to a written employment agreement, terminable at will by either party. Under each employment agreement, the Named Executive Officer is entitled to receive an annual salary and an annual formula bonus based on achievement
of company performance objectives and a discretionary bonus. If the employment of any of the other Named Executive Officers is terminated other than for cause or, in certain cases, if the officer resigns voluntarily for good reason, the officer is
entitled to continue to receive his or her salary for one to two years based upon the terms of his or her individual employment agreement plus any earned but unpaid bonus. The other Named Executive Officers are also subject to a non-competition,
non-solicitation and certain confidentiality provisions for a period of one to two years following the termination of their employment with us.

Management Incentive Plan.On November 4, 2005, our parent companys board of directors and shareholders ratified the 2005 Equity Incentive Plan (Plan) that covers 2,860,000 shares of the our parent
companys common stock, and accordingly, our parent company has reserved a like number of shares out of its authorized, but unissued shares of common stock for issuance under the Plan. Through December 31, 2008, the Board had approved the
issuance of 160,000 restricted stock awards and 3,265,000 stock options to certain of our employees. All stock option granted prior to August 11, 2006 pursuant to the Plan were granted with an exercise price of $10.00 per share and had 10-year
terms. Stock option grants on and after August 11, 2006, have been granted with an exercise price of $6.00 per share and have 10-year terms. On August 10, 2006, we cancelled and regranted the options granted prior to August 10, 2006.
The exercise price of these options was lowered from $10.00 per share to $6.00 per share. No other changes were made to the terms and conditions of these options. On December 11, 2007, we cancelled and regranted all outstanding stock options.
The exercise price of these options was lowered from $6.00 per share to $2.50 per share, but no other changes were made to the terms and conditions of these options.

Following the naming of Mr. McAlister as our Chief Executive Officer on January 14, 2008 and as provided in this employment agreement, Mr. McAlister was granted an option to purchase 1,000,000 shares of
Holdings stock at an exercise price equal to $2.50 per share. In addition, Mr. McAlister became eligible to receive a restricted stock award based on the Companys attainment of fiscal year 2008 financial targets established by the Board.
Based on our 2008 financial results, Mr. McAlister was granted 400,000 shares of restricted stock on March 24, 2009, which vest in three equal annual installments beginning on March 24, 2010. Following the naming of Mr. Douglas as our
President, he was granted an option to purchase 370,000 shares of the Holdings at an exercise price equal to $2.50 per share. In accordance with his amended employment agreement, Mr. Douglas was eligible to receive a restricted stock award
based on our attainment of fiscal year 2008 financial targets established by the Board of Directors. Based on our 2008 financial results, Mr. Douglas was granted 300,000 shares of restricted stock on March 24, 2009, which vest in three
equal annual installments beginning on March 24, 2010. Pursuant to Mr. Walkers amended and restated employment agreement, he was granted an option to purchase 96,000 shares of Holdings stock at an exercise price per share of $2.50. The
option price of $2.50 per share at which the options were granted in 2008 exceeded the fair market value of our shares at the date of grant.

Outstanding Equity Awards at Fiscal Year-End.The following table includes certain information with respect to the value of all unexercised options previously awarded and the vesting of previously awarded restricted stock to
the Named Executive Officers at December 31, 2008. Mr. Hamburg is not included in the chart because he did not hold any options or restricted stock. Ms. Force and Mr. Thompson are not included in the chart because all options and
unvested stock awards held by them were forfeited when they ceased to serve as an executive officer.



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|                    |  |                                                                |  |                                                                  |  |                                                                                       |  |                         |  |                      |  |           |  |                                                      |  |                                                              |  |                                                                                                  |  |                                                                                                               
|------------------- |  | -------------------------------------------------------------- |  | ---------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----------------------- |  | -------------------- |  | --------- |  | ---------------------------------------------------- |  | ------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------
|                    |  | Option Awards                                                  |  | Stock Awards                                                    
|Name                |  | Number ofSecuritiesUnderlyingUnexercisedOptions (#)Exercisable |  | Number ofSecuritiesUnderlyingUnexercisedOptions (#)Unexercisable |  | EquityIncentivePlanAwards:Number
ofSecuritiesUnderlyingUnexercisedUnearnedOptions (#) |  | OptionExercisePrice ($) |  | OptionExpirationDate |  | GrantYear |  | No. of Sharesor Units ofStock thatHad NotVested
(#)1 |  | Market Valueof Shares orUnits ofStock thatHad NotVested ($)2 |  | Equity IncentivePlan Awards:Number ofUnearned Shares,Units or OtherRights that Hadnot Vested
(#) |  | Equity IncentivePlan Awards:Market orPayout
Valueof UnearnedShares, Units orOther Rightsthat Had NotVested ($)
|G. Wayne McAlister  |  |                                                               |  | 1,000,000                                                        |  |                                                                                      |  | 2.50                    |  | 1/14/18              |  | 2008      |  |                                                     |  |                                                             |  |                                                                                                 |  |                                                                                                              
|Phillip B. Douglas  |  |                                                               |  | 370,000                                                          |  |                                                                                      |  | 2.50                    |  | 3/25/18              |  | 2008      |  |                                                     |  |                                                             |  |                                                                                                 |  |                                                                                                              
|                    |  | 12,500                                                         |  | 37,500                                                           |  |                                                                                      |  | 2.50                    |  | 12/11/17             |  | 2007      |  |                                                     |  |                                                             |  |                                                                                                 |  |                                                                                                              
|                    |  | 65,000                                                         |  | 65,000                                                           |  |                                                                                      |  | 2.50                    |  | 8/11/16              |  | 2006      |  |                                                     |  |                                                             |  |                                                                                                 |  |                                                                                                              
|Chris A. Walker     |  |                                                               |  | 96,000                                                           |  |                                                                                      |  | 2.50                    |  | 3/25/18              |  | 2008      |  |                                                     |  |                                                             |  |                                                                                                 |  |                                                                                                              
|                    |  | 3,750                                                          |  | 11,250                                                           |  |                                                                                      |  | 2.50                    |  | 12/11/17             |  | 2007      |  |                                                     |  |                                                             |  |                                                                                                 |  |                                                                                                              
|                    |  | 7,500                                                          |  | 7,500                                                            |  |                                                                                      |  | 2.50                    |  | 8/11/16              |  | 2006      |  |                                                     |  |                                                             |  |                                                                                                 |  |                                                                                                              
|                    |  | 18,000                                                         |  | 6,000                                                            |  |                                                                                      |  | 2.50                    |  | 8/11/15              |  | 2005      |  |                                                     |  |                                                             |  |                                                                                                 |  |                                                                                                              
|Catherine A. Conner |  |                                                               |  | 5,000                                                            |  |                                                                                      |  | 2.50                    |  | 3/25/18              |  | 2008      |  |                                                     |  |                                                             |  |                                                                                                 |  |                                                                                                              
|                    |  | 2,500                                                          |  | 7,500                                                            |  |                                                                                      |  | 2.50                    |  | 12/11/17             |  | 2007      |  |                                                     |  |                                                             |  |                                                                                                 |  |                                                                                                              
|                    |  | 27,500                                                         |  | 27,500                                                           |  |                                                                                      |  | 2.50                    |  | 8/11/16              |  | 2006      |  |                                                     |  |                                                             |  |                                                                                                 |  |                                                                                                              
|Grant B. Asay       |  |                                                               |  | 100,000                                                          |  |                                                                                      |  | 2.50                    |  | 3/25/18              |  | 2008      |  |                                                     |  |                                                             |  |                                                                                                 |  |                                                                                                              
|                    |  | 10,000                                                         |  | 10,000                                                           |  |                                                                                      |  | 2.50                    |  | 8/11/16              |  | 2006      |  |                                                     |  |                                                             |  |                                                                                                 |  |                                                                                                              



|1 | Does not include 400,000 restricted shares granted to Mr. McAlister and 300,000 restricted shares granted to Mr. Douglas on March 24, 2009. These restricted shares vest in three
equal annual installments commencing on March 24, 2010.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2 | The per share fair value is nominal based upon our valuation of the Company as of December 31, 2008 that was
prepared in connection with our annual valuation analysis of goodwill and identifiable intangible assets as more fully discussed in note 6 to our consolidated financial statements. Therefore, no value is calculated for these awards.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Mr. Hamburg did not receive any options during his tenure as the interim Chief Executive Officer of the Company.

Option Exercises and Stock Vested.The following table includes certain information with respect to restricted stock held by the Named
Executive Officers that vested during the year ended December 31, 2008. No options were exercised by the Named Executive Officers in 2008. Mr. Hamburg is not included in the chart because he did not hold any options or restricted stock.
Mr. Thompson is not included in the chart because all options and unvested stock awards held by him were forfeited when he ceased to serve as an executive officer.



|                    |  |                                          |  |                               |  |                                         |  |                                
|------------------- |  | ---------------------------------------- |  | ----------------------------- |  | --------------------------------------- |  | -------------------------------
|                    |  | Option Award                             |  | Stock Award                  
|Name                |  | Number of SharesAcquired on Exercise (#) |  | Value Realizedon Exercise ($) |  | Number of SharesAcquired on Vesting (#) |  | Value Realizedon Vesting ($)(1)
|G. Wayne McAlister  |  |                                         |  |                              |  |                                        |  |                               
|Phillip B. Douglas  |  |                                         |  |                              |  |                                        |  |                               
|Chris A. Walker     |  |                                         |  |                              |  |                                        |  |                               
|Catherine A. Conner |  |                                         |  |                              |  |                                        |  |                               
|Grant B. Asay       |  |                                         |  |                              |  |                                        |  |                               
|Jill L. Force       |  |                                         |  |                              |  | 10,000                                  |  |                               



|1 | The per share fair value is nominal based upon our valuation of the Company as of December 31, 2008 that was
prepared in connection with our annual valuation analysis of goodwill and identifiable intangible assets as more fully discussed in note 6 to our consolidated financial statements. Therefore, no value is calculated for these awards.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Director Compensation

Other than Mr. Johnston and Mr. Hamburg, the members of our board of directors are not separately compensated for their services as directors, other than reimbursement for out-of-pocket expenses incurred in connection with
rendering such services. Mr. Johnston and Mr. Hamburg receive annual compensation of $60,000 annually for their services as a director of our company. The Director fee is paid in the form of cash or shares of our common stock at the
discretion of the director. Beginning on January 1, 2008, each director may elect to have his Director fee deferred pursuant to the Director Deferred Compensation Plan.



43



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##### Table of Contents

The following table includes compensation awarded to the Directors of the Company during the year ended
December 31, 2008.



|                             |  |                                |  |                 |  |                  |  |                                          |  |                                                                      |  |                           |  |          
|---------------------------- |  | ------------------------------ |  | --------------- |  | ---------------- |  | ---------------------------------------- |  | -------------------------------------------------------------------- |  | ------------------------- |  | ---------
|Name                         |  | Fees Earned orPaid in Cash ($) |  | StockAwards ($) |  | OptionAwards ($) |  | Non-EquityIncentive PlanCompensation ($) |  | Change inPensionValue
andNonqualifiedDeferredCompensationon Earnings |  | All OtherCompensation ($) |  | Total ($)
|G. Wayne McAlister (2)       |  |                               |  |                |  |                 |  |                                         |  |                                                                     |  |                          |  |         
|Karen Bechtel (2)            |  |                               |  |                |  |                 |  |                                         |  |                                                                     |  |                          |  |         
|William P. Johnston (1)      |  |                               |  |                |  |                 |  |                                         |  |                                                                     |  |                          |  |         
|William Hamburg (3)          |  | 60,000                         |  |                |  |                 |  |                                         |  |                                                                     |  |                          |  | 60,000   
|William H. McMullan, Jr. (2) |  |                               |  |                |  |                 |  |                                         |  |                                                                     |  |                          |  |         
|Stephen H. Wise (2)          |  |                               |  |                |  |                 |  |                                         |  |                                                                     |  |                          |  |         



|1. | Mr. Johnston elected to receive stock for his compensation for services provided during the year ended December 31, 2008, which he has elected to defer pursuant to the
deferral option of the Director Deferred Compensation Plan. During 2008, his deferral account was credited with 24,000 shares at an agreed upon value of $2.50 per share. The value of these shares pursuant to FASB 123(r) was $0.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | Ms. Bechtel, Mr. McMullan, and Mr. Wise were all employed by The Carlyle Group, our principal stockholder, and Mr. McAlister was employed as our Chief Executive
Officer during the year ended December 31, 2008, and did not receive separate compensation for their services as directors, other than reimbursement for out-of-pocket expenses incurred in connection with rendering such services.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Mr. Hamburg received cash for services provided during the year ended December 31, 2008.
|-- | ----------------------------------------------------------------------------------------

Board Report Concerning Compensation Discussion & Analysis

Although we do not have a
compensation committee, the Board of Directors has reviewed and discussed the foregoing Compensation Discussion & Analysis with management and approved its inclusion in this Annual Report on Form 10-K.

Members of the Board of Directors:



|                   |  |                         
|------------------ |  | ------------------------
|Karen H. Bechtel   |  | William H. McMullan, Jr.
|G. Wayne McAlister |  | William P. Johnston     
|William Hamburg    |  | Stephen H. Wise         



|ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

The following table sets forth information as of March 28, 2009, with respect to the beneficial ownership of our parents capital stock by
(i) our chief executive officer and each of the other named executive officers set forth below (who was serving as a Named Executive Officer during the year ended December 31, 2008, or at this date), (ii) each of our directors,
(iii) all of our directors and executive officers as a group and (iv) each holder of five percent (5%) or more of any class of our parents outstanding capital stock.

A stockholders agreement governs the stockholders exercise of their voting rights with respect to election of directors and certain other
material events and the shares are also subject to a registration rights agreement. See Certain Relationships and Related Transactions. Except as described in the agreements mentioned above, each of the beneficial owners listed has, to
our knowledge, sole voting and investment power with respect to the indicated shares of common stock. Unless otherwise indicated in a footnote, the address for each individual listed below is c/o LifeCare Holdings, Inc., 5560 Tennyson Parkway,
Plano, Texas 75024.



44



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|                                                         |  |                                 |  |                                   
|-------------------------------------------------------- |  | ------------------------------- |  | ----------------------------------
|Name of Beneficial Owner                                 |  | Common SharesBeneficially Owned |  | Percent ofOutstandingCommon Shares
|Carlyle Partners, IV, L.P.(1)                            |  | 17,020,000                      |  | 98.6                              
|G. Wayne McAlister(2)                                    |  |                                |  |                                  
|Phillip B. Douglas(2)                                    |  |                                |  |                                  
|Karen H. Bechtel(3)                                      |  | 17,020,000                      |  | 98.6                              
|William Hamburg(4)                                       |  |                                |  |                                  
|William H. McMullan Jr.(5)                               |  |                                |  |                                  
|William P. Johnston(6)                                   |  | 24,000                          |  | *                                 
|Stephen H. Wise(7)                                       |  |                                |  |                                  
|All directors and named executive officers as a group(8) |  | 17,744,000                      |  | 98.8                              



|* | Less than 1%.
|- | -------------

|(1) | Consists of 16,359,302 shares owned by Carlyle Partners, IV, L.P. and 660,698 shares owned by CP IV Coinvestment, L.P.
The principal executive offices for Carlyle Partners, IV, L.P. and CP IV Coinvestment, L.P. are 1001 Pennsylvania Avenue, NW, Suite 220 South, Washington, D.C. 20004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This table does not include the 400,000 restricted shares
granted to Mr. McAlister nor the 300,000 restricted shares granted to Mr. Douglas on March 24, 2009, as these shares have not yet been issued by the parent company.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Consists of 16,359,302 shares owned by Carlyle Partners, IV, L.P. and 660,698 shares owned by CP IV Coinvestment, L.P.
Ms. Bechtel is a member of Carlyle Partners, IV, L.P. and CP IV Coinvestment, L.P. and accordingly may be deemed to beneficially own the shares owned by such entities. Ms. Bechtel disclaims beneficial ownership of such shares except to the
extent of her pecuniary interest therein. The address for Ms. Bechtel is c/o The Carlyle Group, 520 Madison Avenue, 42ndFloor, New York, NY
10022.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The address for Mr. Hamburg is 12 Breckenridge, Nashville, TN 37215.
|--- | --------------------------------------------------------------------

|(5) | Mr. McMullan is a Senior Associate of The Carlyle Group. The business address for Mr. McMullan is c/o The
Carlyle Group, 520 Madison Avenue, 42ndFloor, New York, NY 10022.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | The principal address for William P. Johnston is 3100 West End Avenue, Suite 875, Nashville, TN 37203. See the
discussion of director compensation in Item 11.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Mr. Wise is a Principal of The Carlyle Group. The business address for Mr. Wise is c/o The Carlyle Group, 520
Madison Avenue, 42ndFloor, New York, NY 10022.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Includes shares held by Carlyle Partners, IV, L.P. and CP IV Coinvestment, L.P.
|--- | -------------------------------------------------------------------------------



|ITEM 13. | Certain Relationships and Related Transactions
|-------- | ----------------------------------------------

Management
Agreement

We and our parent company have entered into a management agreement with an affiliate of The Carlyle Group pursuant to which
The Carlyle Group or its affiliate provides us management services. Pursuant to the agreement, The Carlyle Group or its affiliate receives an aggregate annual management fee of $500,000, reimbursement for out-of-pocket expenses and a fee in the
event that the agreement is terminated in accordance with its terms. In addition, pursuant to the agreement, The Carlyle Group or its affiliates also received a transaction fee of approximately $6.0 million in connection with services provided by
such entities related to the Transactions. In addition, the management agreement provides that The Carlyle Group and its affiliates will receive fees equal to 1% of the gross transaction value in connection with certain subsequent financing and
acquisition transactions. The management agreement includes customary indemnification provisions in favor of The Carlyle Group and its affiliates.

Stockholders Agreement and Registration Rights Agreement

Simultaneously with the closing of the Transactions, we and our stockholders entered into a stockholders agreement. The stockholders agreement includes terms relating to the election of our directors, restrictions on the issuance or
transfer of shares, including the right of a minority stockholder to sell shares in a sale transaction entered into by a majority stockholder, commonly known as a tag-along right, the right of a majority stockholder to force a minority stockholder
to sell shares upon the sale of a majority owners interest, at the same price and on the same terms and conditions as the majority owner, commonly known as a drag-along right, other special corporate governance provisions (including the right
to approve various corporate actions) and customary expense reimbursement provisions. We, our guarantor subsidiaries pursuant to our indenture, and the initial purchasers of our 9 1/4% senior subordinated notes have also entered into a registration rights agreement.

On April 14, 2006, we filed a Form S-4 registration statement with the SEC as required by the Registration Rights Agreement. This filing was
declared effective by the SEC on May 12, 2006. We completed the exchange offer for all outstanding Notes as of June 21, 2006, which satisfied the requirements of the Registration Rights Agreement.



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|ITEM 14. | Principal Accounting Fees and Services
|-------- | --------------------------------------

During
fiscal 2008 and 2007, we incurred the following fees for services performed by KPMG LLP, an independent registered public accounting firm:



|                      |  |             |         |             |   |        
|--------------------- |  | ----------- | ------- | ----------- | - | -------
|                      |  | Fiscal 2008 |         | Fiscal 2007
|Audit Fees(1)         |  | $           | 483,000 |             | $ | 525,000
|Audit-Related Fees(2) |  |             | 30,000  |             |   | 56,000 
|Tax Fees(3)           |  |             | 179,350 |             |   | 280,995
|                      |  |             |         |             |   |        
|Total                 |  | $           | 692,350 |             | $ | 861,995
|                      |  |             |         |             |   |        



|(1) | The Audit Fees for the years ended December 31, 2008 and 2007, were for professional services rendered for the
audits of the consolidated financial statements of our company, consents and assistance with reviews of documents filed with the SEC or in private placements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The Audit Related Fees are primarily for accounting consultations and audits of our companys 401(k) plan.
|--- | ----------------------------------------------------------------------------------------------------------

|(3) | Tax Fees for the years ended December 31, 2008 and 2007 were for services related to tax compliance, tax planning,
and tax advice on mergers and acquisitions and employee benefits.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We became a public filer on May 12, 2006. The
audit committee was not required to approve those services that KPMG LLP was engaged to perform in 2006 prior to May 12, 2006.

Subsequent to May 12, 2006, all services performed by the independent registered public accounting firm have been approved by the board of directors prior to performance.

PART IV



|ITEM 15. | Exhibits, Financial Statement Schedules
|-------- | ---------------------------------------



| | (a) | The financial statements and schedules filed as part of this Annual Report on Form 10-K are described in the Index to Financial Statements appearing on page F-1.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | The exhibits incorporated herein by reference or filed as part of this Annual Report on Form 10-K are set forth in the attached Exhibit Index.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                        |  |     
|------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm |  | F-2 
|                                                        | 
|Consolidated Balance Sheets                             |  | F-3 
|                                                        | 
|Consolidated Statements of Operations                   |  | F-4 
|                                                        | 
|Consolidated Statements of Stockholders Equity         |  | F-5 
|                                                        | 
|Consolidated Statements of Cash Flows                   |  | F-6 
|                                                        | 
|Notes to Consolidated Financial Statements              |  | F-7 
|                                                        | 
|Schedule II - Valuation and Qualifying Accounts         |  | F-31



F-1



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

LifeCare Holdings, Inc.

We have audited the accompanying consolidated balance sheets of LifeCare Holdings, Inc. and subsidiaries as of December 31, 2008, and 2007, and
the related consolidated statements of operations, stockholders equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 2008. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule included in Part IV of the Companys Annual Report on Form 10-K. These consolidated financial statements and consolidated financial statement schedule are the responsibility of
the Companys management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of LifeCare Holdings, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

/s/ KPMG LLP

Dallas, Texas

March 31, 2009



F-2



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##### Table of Contents

LIFECARE HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In
thousands, except share data)



|                                                                                                         |  |      |          |   |      |   |          |  
|-------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                                         |  | 2008 |          |   | 2007 |  
|Assets                                                                                                   |  |      |          |   |      |   |          |  
|Current assets:                                                                                          |  |      |          |   |      |   |          |  
|Cash and cash equivalents                                                                                |  | $    | 25,262   |   |      | $ | 17,816   |  
|Patient accounts receivable, net of allowance for doubtful accounts of $10,144 and $19,394, respectively |  |      | 66,803   |   |      |   | 66,911   |  
|Income taxes receivable                                                                                  |  |      | 1,279    |   |      |   | 2,025    |  
|Other current assets                                                                                     |  |      | 7,735    |   |      |   | 13,597   |  
|                                                                                                         |  |      |          |   |      |   |          |  
|Total current assets                                                                                     |  |      | 101,079  |   |      |   | 100,349  |  
|Property and equipment, net                                                                              |  |      | 86,479   |   |      |   | 83,317   |  
|Other assets, net                                                                                        |  |      | 12,597   |   |      |   | 15,675   |  
|Other identifiable intangibles, net                                                                      |  |      | 17,305   |   |      |   | 18,445   |  
|Goodwill                                                                                                 |  |      | 245,370  |   |      |   | 263,970  |  
|                                                                                                         |  |      |          |   |      |   |          |  
|Total assets                                                                                             |  | $    | 462,830  |   |      | $ | 481,756  |  
|                                                                                                         |  |      |          |   |      |   |          |  
|                                                                                                         |  |     
|Liabilities and Stockholders Equity (Deficit)                                                           |  |      |          |   |      |   |          |  
|Current liabilities:                                                                                     |  |      |          |   |      |   |          |  
|Current installments of long-term debt                                                                   |  | $    | 2,550    |   |      | $ | 2,550    |  
|Current installments of obligations under capital leases                                                 |  |      | 1,252    |   |      |   | 1,604    |  
|Current installments of lease financing obligation                                                       |  |      | 292      |   |      |   |         |  
|Estimated third party payor settlements                                                                  |  |      | 6,231    |   |      |   | 5,744    |  
|Accounts payable                                                                                         |  |      | 26,693   |   |      |   | 23,438   |  
|Accrued payroll                                                                                          |  |      | 9,892    |   |      |   | 6,351    |  
|Accrued vacation                                                                                         |  |      | 3,614    |   |      |   | 3,489    |  
|Accrued insurance                                                                                        |  |      | 900      |   |      |   | 1,087    |  
|Accrued interest                                                                                         |  |      | 8,127    |   |      |   | 5,181    |  
|Accrued other                                                                                            |  |      | 3,642    |   |      |   | 2,739    |  
|                                                                                                         |  |      |          |   |      |   |          |  
|Total current liabilities                                                                                |  |      | 63,193   |   |      |   | 52,183   |  
|Long-term debt, excluding current installments                                                           |  |      | 384,694  |   |      |   | 393,713  |  
|Obligations under capital leases, excluding current installments                                         |  |      | 1,836    |   |      |   | 741      |  
|Lease financing obligation                                                                               |  |      | 20,645   |   |      |   | 16,590   |  
|Accrued insurance                                                                                        |  |      | 3,592    |   |      |   | 4,714    |  
|Deferred income taxes                                                                                    |  |      | 5,500    |   |      |   | 5,500    |  
|Other noncurrent liabilities                                                                             |  |      | 3,919    |   |      |   | 8,082    |  
|                                                                                                         |  |      |          |   |      |   |          |  
|Total liabilities                                                                                        |  |      | 483,379  |   |      |   | 481,523  |  
|                                                                                                         |  |      |          |   |      |   |          |  
|                                                                                                         |  |     
|Commitments and contingencies                                                                            |  |      |          |   |      |   |          |  
|                                                                                                         |  |     
|Stockholders equity (deficit):                                                                          |  |      |          |   |      |   |          |  
|Common stock $0.01 par value, 100 shares authorized, issued and outstanding                              |  |      |         |   |      |   |         |  
|Additional paid-in capital                                                                               |  |      | 171,965  |   |      |   | 171,677  |  
|Accumulated deficit                                                                                      |  |      | (192,514 | ) |      |   | (171,444 | )
|                                                                                                         |  |      |          |   |      |   |          |  
|Total stockholders equity (deficit)                                                                     |  |      | (20,549  | ) |      |   | 233      |  
|                                                                                                         |  |      |          |   |      |   |          |  
|                                                                                                         |  | $    | 462,830  |   |      | $ | 481,756  |  
|                                                                                                         |  |      |          |   |      |   |          |  

See Accompanying Notes to Consolidated Financial Statements



F-3



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##### Table of Contents

LIFECARE HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands)



|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                         |  | 2008 |         |   | 2007 |   |         | 2006 | 
|Net patient service revenue              |  | $    | 351 971 |   |      | $ | 322 215 |      |  | $ | 325,882 |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Salaries, wages and benefits             |  |      | 165,975 |   |      |   | 156,125 |      |  |   | 145,340 |  
|Supplies                                 |  |      | 35,522  |   |      |   | 33,460  |      |  |   | 32,144  |  
|Rent                                     |  |      | 25,579  |   |      |   | 21,644  |      |  |   | 18,080  |  
|Other operating expenses                 |  |      | 80,787  |   |      |   | 80,257  |      |  |   | 77,206  |  
|Provision for doubtful accounts          |  |      | 5,234   |   |      |   | 4,740   |      |  |   | 7,673   |  
|Depreciation and amortization            |  |      | 11,595  |   |      |   | 11,254  |      |  |   | 11,856  |  
|Goodwill impairment charge               |  |      | 18,600  |   |      |   | 38,834  |      |  |   | 43,600  |  
|Business interruption insurance proceeds |  |      |        |   |      |   |        |      |  |   | (5,333  | )
|Gain on early extinguishment of debt     |  |      | (9,526  | ) |      |   |        |      |  |   | (1,329  | )
|Loss on disposal of assets               |  |      | 92      |   |      |   |        |      |  |   | 945     |  
|Interest expense, net                    |  |      | 37,783  |   |      |   | 35,911  |      |  |   | 32,819  |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Total expenses                           |  |      | 371,641 |   |      |   | 382,225 |      |  |   | 363,001 |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Operating loss                           |  |      | (19,670 | ) |      |   | (60,010 | )    |  |   | (37,119 | )
|Equity in loss of joint venture          |  |      |        |   |      |   | (695    | )    |  |   |        |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Loss before income taxes                 |  |      | (19,670 | ) |      |   | (60,705 | )    |  |   | (37,119 | )
|Provision for income taxes               |  |      | 1,400   |   |      |   | 77      |      |  |   | 3,707   |  
|                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Net loss                                 |  | $    | (21,070 | ) |      | $ | (60,782 | )    |  | $ | (40,826 | )
|                                         |  |      |         |   |      |   |         |      |  |   |         |  

See Accompanying Notes to Consolidated Financial Statements



F-4



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##### Table of Contents

LIFECARE HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders Equity (Deficit)

(In thousands)



|                                |  |             |   |                          |   |                    |  |   |                                    |   |  |   |         |  
|------------------------------- |  | ----------- | - | ------------------------ | - | ------------------ |  | - | ---------------------------------- | - |  | - | ------- | -
|                                |  | CommonStock |   | AdditionalPaid-InCapital |   | Accumulateddeficit |  |   | TotalStockholdersEquity (Deficit) |  
|Balance, December 31, 2005      |  | $           |  |                          |   | 135,928            |  |   | (69,836                            | ) |  |   | 66,092  |  
|Restricted stock awards granted |  |             |  |                          |   | 632                |  |   |                                   |   |  |   | 632     |  
|Settlement of purchase escrow   |  |             |  |                          |   | 24,600             |  |   |                                   |   |  |   | 24,600  |  
|Net loss                        |  |             |  |                          |   |                   |  |   | (40,826                            | ) |  |   | (40,826 | )
|                                |  |             |   |                          |   |                    |  |   |                                    |   |  |   |         |  
|Balance, December 31, 2006      |  |             |  |                          |   | 161,160            |  |   | (110,662                           | ) |  |   | 50,498  |  
|Equity compensation             |  |             |  |                          |   | 684                |  |   |                                   |   |  |   | 684     |  
|Settlement of purchase escrow   |  |             |  |                          |   | 3,834              |  |   |                                   |   |  |   | 3,834   |  
|Additional contribution         |  |             |  |                          |   | 5,999              |  |   |                                   |   |  |   | 5,999   |  
|Net loss                        |  |             |  |                          |   |                   |  |   | (60,782                            | ) |  |   | (60,782 | )
|                                |  |             |   |                          |   |                    |  |   |                                    |   |  |   |         |  
|Balance, December 31, 2007      |  |             |  |                          |   | 171,677            |  |   | (171,444                           | ) |  |   | 233     |  
|Equity compensation             |  |             |  |                          |   | 288                |  |   |                                   |   |  |   | 288     |  
|Net loss                        |  |             |  |                          |   |                   |  |   | (21,070                            | ) |  |   | (21,070 | )
|                                |  |             |   |                          |   |                    |  |   |                                    |   |  |   |         |  
|Balance, December 31, 2008      |  | $           |  |                          | $ | 171,965            |  | $ | (192,514                           | ) |  | $ | (20,549 | )
|                                |  |             |   |                          |   |                    |  |   |                                    |   |  |   |         |  

See Accompanying Notes to Consolidated Financial Statements



F-5



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##### Table of Contents

LIFECARE HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)



|                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                          |  | 2008 |         |   | 2007 |   |         | 2006 | 
|Cash flows from operating activities:                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Net loss                                                                                  |  | $    | (21,070 | ) |      | $ | (60,782 | )    |  | $ | (40,826 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |      |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                             |  |      | 13,727  |   |      |   | 12,893  |      |  |   | 13,102  |  
|Provision for doubtful accounts                                                           |  |      | 5,234   |   |      |   | 4,740   |      |  |   | 7,673   |  
|Goodwill Impairment charges                                                               |  |      | 18,600  |   |      |   | 38,834  |      |  |   | 43,600  |  
|Gain on early extinguishment of debt                                                      |  |      | (9,526  | ) |      |   |        |      |  |   | (1,329  | )
|Loss on the disposal of assets                                                            |  |      | 92      |   |      |   |        |      |  |   | 945     |  
|Equity in loss of joint venture                                                           |  |      |        |   |      |   | 695     |      |  |   |        |  
|Deferred income tax expense (benefit)                                                     |  |      | 763     |   |      |   | 1,695   |      |  |   | (2,524  | )
|Equity compensation                                                                       |  |      | 288     |   |      |   | 684     |      |  |   | 632     |  
|Changes in operating assets and liabilities:                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Patient accounts receivable                                                               |  |      | (5,126  | ) |      |   | (4,187  | )    |  |   | (11,854 | )
|Other current assets                                                                      |  |      | 741     |   |      |   | 4,006   |      |  |   | 15,150  |  
|Other assets                                                                              |  |      | 491     |   |      |   | 77      |      |  |   | (1,209  | )
|Estimated third party payor settlements                                                   |  |      | 487     |   |      |   | (2,564  | )    |  |   | 16,574  |  
|Accounts payable and accrued liabilities                                                  |  |      | 12,878  |   |      |   | (5,353  | )    |  |   | 5,962   |  
|Other noncurrent liabilities                                                              |  |      | (5,284  | ) |      |   | (589    | )    |  |   | 3,777   |  
|                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) operating activities                                       |  |      | 12,295  |   |      |   | (9,851  | )    |  |   | 49,673  |  
|                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Purchases of property and equipment                                                       |  |      | (13,106 | ) |      |   | (47,480 | )    |  |   | (28,235 | )
|Sale-leaseback proceeds                                                                   |  |      | 3,822   |   |      |   | 31,104  |      |  |   |        |  
|Insurance recoveries for property and equipment                                           |  |      |        |   |      |   |        |      |  |   | 788     |  
|                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                     |  |      | (9,284  | ) |      |   | (16,376 | )    |  |   | (27,447 | )
|                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Deferred financing costs                                                                  |  |      |        |   |      |   | (3,142  | )    |  |   |        |  
|Proceeds from lease financing obligation                                                  |  |      | 3,975   |   |      |   | 15,113  |      |  |   |        |  
|Payment on lease financing obligation                                                     |  |      | (86     | ) |      |   |        |      |  |   |        |  
|Net change in borrowings under the line of credit                                         |  |      | 10,000  |   |      |   |        |      |  |   |        |  
|Payments of notes payable and long-term debt                                              |  |      | (9,041  | ) |      |   | (3,188  | )    |  |   | (3,443  | )
|Proceeds from capital lease financing                                                     |  |      | 1,802   |   |      |   |        |      |  |   |        |  
|Payments on obligations under capital leases                                              |  |      | (2,215  | ) |      |   | (3,989  | )    |  |   | (5,376  | )
|Equity contribution from parent                                                           |  |      |        |   |      |   | 5,999   |      |  |   |        |  
|                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) financing activities                                       |  |      | 4,435   |   |      |   | 10,793  |      |  |   | (8,819  | )
|                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                      |  |      | 7,446   |   |      |   | (15,434 | )    |  |   | 13,407  |  
|Cash and cash equivalents, beginning of year                                              |  |      | 17,816  |   |      |   | 33,250  |      |  |   | 19,843  |  
|                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents, end of year                                                    |  | $    | 25,262  |   |      | $ | 17,816  |      |  | $ | 33,250  |  
|                                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Supplemental disclosure of cash flow information:                                         |  |      |         |   |      |   |         |      |  |   |         |  
|Cash:                                                                                     |  |      |         |   |      |   |         |      |  |   |         |  
|Interest paid                                                                             |  | $    | 33,353  |   |      | $ | 35,390  |      |  | $ | 34,092  |  
|Net income taxes paid (received)                                                          |  |      | 712     |   |      |   | (5,660  | )    |  |   | (5,080  | )
|Noncash:                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Equipment purchased through capital lease financing                                       |  |      | 1,157   |   |      |   | 499     |      |  |   | 1,053   |  
|Settlement of Merger related escrow                                                       |  |      |        |   |      |   | 3,834   |      |  |   | 24,600  |  

See Accompanying Notes to Consolidated Financial Statements.



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LIFECARE HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1)
Basis of Presentation

On July 19, 2005, LifeCare Holdings, Inc. (the Company) entered into a merger agreement (the
Merger) with Rainier Acquisition Corporation and LCI Holdco, LLC (Holdco), as discussed in note 2, resulting in the Company becoming a wholly owned subsidiary of Holdco. Holdco is a wholly owned subsidiary of LCI Holding
Company, Inc., (Holdings) which is owned by an investor group that includes affiliates of The Carlyle Group and members of our senior management and board of directors. Generally accepted accounting principles require that any amounts
recorded or incurred (such as goodwill and compensation expense) by the parent as a result of the Merger be pushed down and recorded in our consolidated financial statements.

The Companys operations for periods prior to the Merger are referred to as the Predecessor periods, while the Companys operations
for periods following the Merger are referred to as the Successor periods.

(2) Merger and Related Transactions

On August 11, 2005, the Merger transaction was consummated and we became a wholly owned subsidiary of Holdco. The funds necessary to consummate the
Transactions were approximately $552.0 million, including approximately $512.2 million to pay the then current stockholders and option holders, approximately $10.7 million to repay existing indebtedness and approximately $29.1 million to
pay related fees and expenses, of which $5.4 million was paid by Predecessor on behalf of Holdco.

The Merger transactions were financed
by:



| |  |  | a cash investment in shares of common stock of the Company by The Carlyle Group and other equity investors of $130.9 million (net of $40.5 million held in escrow);
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | borrowings by the Company of $255.0 million in term loans under its senior secured credit facility;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | the issuance by the Company of $150.0 million in aggregate principal amount of 91/4% senior subordinated notes; and
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | $16.1 million of cash on hand at the closing date.
| | - |  | --------------------------------------------------

The Merger agreement provided for additional purchase price consideration of $40.5 million that was contingent upon the resolution of certain specific issues. Through December 31, 2008, $37.3 million of the
original amount had been settled and disbursed. The remaining funds in the escrow accounts will be disbursed upon resolution of the remaining contingent issues.

On June 29, 2006, $24.6 million that had been placed into one of the specific escrows for general indemnification matters was made available for distribution to the prior stockholders of the Company since no
general indemnification claims had been made against the escrow prior to its expiration date. This resulted in an increase in the purchase price to be allocated of $24.6 million with a corresponding increase in goodwill. During the three months
ended September 30, 2007, goodwill was increased by $3.8 million due to distributions to the prior stockholders of the Company from the escrow accounts, as the result of the resolution of specific matters. At the time of both of these events,
regulatory and industry trends indicated that the value of the Company had not increased. Therefore, since the increase in goodwill from the above distributions did not add value to the Company and our annual impairment test resulted in an
impairment to goodwill, we recorded an impairment charge equal to the above amounts during the three months ended June 30, 2006 and September 30, 2007, respectively.

In connection with the Merger, we entered into an agreement with The Carlyle Group to pay a $0.5 million annual advisory fee, which has been expensed
each of the years ended December 31, 2008, 2007, and 2006.

(3) Summary of Significant Accounting Policies

(a) Principles of Consolidation

The
consolidated financial statements include the financial statements of LifeCare Holdings, Inc. and its wholly owned subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated in consolidation.

(b) Nature of Business

We develop and
operate hospitals specializing in the treatment of critically ill or injured patients whose average length of stay exceeds 25 days. We operate these hospitals as freestanding facilities or as hospitals within hospitals (HIH), whereby space is leased
from existing unrelated acute-care hospitals and separately licensed as one of our hospitals.



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(c) Use of Estimates

The preparation of the financial statements requires us to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual amounts could differ from those estimates.

(d) Cash and Cash Equivalents

Cash and cash equivalents consist of cash and highly liquid
short-term investments with original maturities at date of purchase of three months or less.

(e) Accounts Receivable

Accounts receivable consist primarily of amounts due from the Medicare program, other government programs, managed care health plans, commercial insurance
companies and individual patients. Estimated provisions for doubtful accounts are recorded to the extent it is probable that a portion or all of a particular account will not be collectible.

In evaluating the collectibility of accounts receivable, we consider a number of factors, including the age of the accounts, changes in collection
patterns, the composition of patient accounts by payor type, the status of ongoing disputes with third party payors and general industry conditions.

(f) Inventories

Inventories, which consist principally of medical and pharmaceutical supplies, are stated at the
lower of cost or market. Cost is determined using the first-in, first-out method.

(g) Estimated Third-Party Payor Settlements

Estimated third-party payor settlements represent the difference between amounts received under interim payment plans from governmental payors, primarily
Medicare, for services rendered and the estimated amounts to be reimbursed by those payors upon settlement of cost reports.

(h) Property and
Equipment

Property and equipment are carried at cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Equipment under capital leases is stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value at the inception of the lease. Equipment under capital leases is
amortized using the straight-line method over the lease term or the estimated useful life of the equipment, as appropriate depending on the nature of the lease. All maintenance and repair costs are charged to expense as incurred.

(i) Goodwill and Other Intangible Assets

Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but
instead are tested for impairment at least annually in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.Per the guidance of Financial Accounting Standards
Board Emerging Issues Task Force (EITF) Topic No. D-101 Clarification of Reporting Unit Guidance in Paragraph 30 of FASB Statement No. 142, (EITF Topic No. D-101), we review goodwill based upon one reporting unit,
as the Company is managed as one operating segment in accordance with Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, (SFAS 131).
The annual evaluation was performed for the years ending December 31, 2008, 2007, and 2006. For the years ended December 31, 2008, 2007 and 2006 we recognized impairment losses as more fully described in note 6.

Intangible assets of our company that have a finite useful life, consisting primarily of non-compete agreements, are amortized over their respective
estimated useful lives to their estimated residual values on a straight-line basis over 2-5 years and are reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets(SFAS
No. 144).

(j) Other assets

Other assets are comprised primarily of deferred financing costs incurred in connection with the Merger. We account for deferred financing costs utilizing the effective interest method.



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(k) Impairment of Long-Lived Assets

In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. See discussion of
impairment charges at note 6.

(l) Insurance Risks

We are liable for a portion of our losses under a number of our insurance programs, which primarily include general and professional liability risk and our employee health insurance programs. Provisions for loss for
these programs are substantially based upon independent actuarially determined estimates. To the extent that subsequent expected ultimate claims costs vary from historical provisions for loss, future earnings will be charged or credited.

(m) Revenue Recognition

Net patient
service revenue is recognized as services are rendered. Patient service revenue is reported net of provisions for contractual allowances from third-party payors and patients. We have agreements with third-party payors that provide for payments to us
at amounts different from our established rates. The differences between the estimated program reimbursement rates and the standard billing rates are accounted for as contractual adjustments, which are deducted from gross patient revenues to arrive
at net patient service revenues. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments.

Laws and regulations governing provider reimbursement pursuant to the Medicare program are complex and subject to interpretation. Since 2003, we have been, in general, reimbursed by the Medicare program pursuant to a
prospective payment system (PPS) methodology. Payments received by us under PPS are subject to review by the regulatory authorities. These reviews primarily focus on the accuracy of the DRG assigned to each discharged patient and
normally occur after the completion of the billing process.

Prior to 2003, the reimbursements received by us pursuant to the Medicare
program were primarily based on a cost-based reimbursement methodology. We submitted annual cost reports to the Medicare program that were the bases for determining the reimbursements received and reported by us in our financial statements for
services provided to program beneficiaries. These annual cost reports are subject to review and adjustment by CMS through its fiscal intermediaries. These reviews may not occur until several years after a provider files its cost reports, and often
result in adjustments to amounts reported by providers in their cost reports as a result of the complexity of the regulations and the inherent judgment that is required in the application of certain provisions of provider reimbursement regulations.
Since these reviews of filed cost reports occur periodically, there is at least a reasonable possibility that recorded estimated Medicare reimbursement reflected in our consolidated financial statements and previously filed cost reports may change
by a material amount in future periods. We recognize in our consolidated financial statements the impact of adjustments, if any, to estimated Medicare reimbursement when the amounts can be reasonably determined. Net revenue in the years ended
December 31, 2008, 2007, and 2006 included (decreases)/increases of $0.9 million, $(1.2) million, and ($4.3) million, respectively, related to changes in estimates and settlements on cost reports filed with the Medicare program.

(n) Income Taxes

Income taxes are accounted
for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance on deferred tax assets is provided to the extent it is not
considered more likely than not that such assets will be realized.

We record accrued interest and penalties, if any, associated with
uncertain tax positions as income tax expense in the consolidated statement of operations.

The federal statute of limitations remains open
for tax years 2005 through 2007. State jurisdictions generally have statutes of limitations ranging from three to five years. The state income tax impact of federal income tax changes remains subject to examination by various states for a period up
to one year after formal notification to the states.



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##### Table of Contents

(o) Stock Compensation

Effective January 1, 2006, we adopted FASB Statement No. 123(R), Share-Based Payment, (FAS 123(R)) using the prospective application transition method. Prior to 2006, we accounted for our
equity compensation using the intrinsic value-based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations (and as allowed by FASB Statement No. 123,
Accounting for Stock-Based Compensation). We had previously only adopted the disclosure requirements of FASB Statement No. 123. The pro forma disclosures were presented utilizing the minimum value methodology as permitted for non-public
companies as defined under that standard. We continued to account for equity compensation based shares granted prior to the adoption of FAS 123(R) pursuant to APB Opinion No. 25, until such time as the shares were modified. The options granted
are options in Holdings, the companys parent.

On August 10, 2006, we modified the exercise price of the options granted prior
to the adoption of FAS 123(R). The exercise price of these options was lowered from $10 per share to $6 per share. No other changes were made to the terms and conditions of these options. As a result of this modification through the cancellation and
regrant of the options previously granted, the shares issued prior to the adoption of FAS 123(R) are now accounted for under FAS 123(R) instead of APB Opinion No. 25. On December 11, 2007, we further modified the exercise price of all
outstanding options. The exercise price of the options was lowered from $6 per share to $2.50 per share. No other changes were made to the terms and conditions of these options.

Pursuant to FAS 123(R), we estimate the fair value of awards on the date of grant, or the date of award modification if applicable, using the
Black-Scholes option pricing model. The weighted average fair value of options granted and the resulting fair value of awards modified during the year ended December 31, 2008 was $0 per share and was calculated based on the following
assumptions: expected volatility of 40%, expected dividend yield of 0%, expected life of 6.25 years, and a risk-free interest rate of 2.17% to 3.39%. Expected volatility was derived using data drawn from other healthcare public companies for five to
seven years prior to the date of grant and award modification. The expected life was computed utilizing the simplified method as permitted by the Securities and Exchange Commissions Staff Accounting Bulletin No. 110, Share-Based
Payment. The expected forfeiture rates are 50% and are based upon a review of our recent history and expectations as segregated between our senior officers and other grantees. The risk-free interest rate is based on the approximate yield on
seven-year United States Treasury Bonds as of the date of grant and award modification. There were 1,743,000 options granted during the year ended December 31, 2008 (see note 13). The weighted average fair value of options granted and the
resulting fair value of awards modified was nominal during the year ended December 31, 2007 and was $3.07 for the year ended December 31, 2006.

(p) Financial Instruments and Hedging

We entered into an interest rate swap agreement to manage interest rate risk
on a portion of our long-term borrowings on November 9, 2005. Prior to this date, we did not have any interest rate swap arrangements. We accounted for our interest rate swap arrangement at fair value pursuant to SFAS No. 133. Changes in
the fair value of the swap arrangement are reported as a component of interest expense. The interest rate swap agreement expired on November 8, 2008. We have not entered into any additional interest rate swap agreements.

(q) Recent Accounting Pronouncements

In
December 2007, the Financial Accounting Standards Board (the FASB) issued FASB Statement No. 141(R), Business Combinations(SFAS 141(R)), and FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements  an amendment to ARB No. 51(SFAS 160). SFAS 141(R) and 160 require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination
to be recorded at full fair value and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest
holders. Both statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. SFAS 141(R) will be applied to business combinations occurring after the effective date. SFAS 160 will be applied
prospectively to all noncontrolling interests, including any that arose before the effective date. All of our subsidiaries are wholly owned, so the adoption of SFAS 160 is not expected to impact our financial position and results of operations.
SFAS 141(R) will impact us to the extent we make future acquisitions.

In March 2008, the FASB issued FASB Statement No. 161,
Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires entities that utilize derivative instruments to provide qualitative disclosures
about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives. SFAS 161 also requires entities to disclose additional information about the
amounts and location of derivatives located within the financial statements, how the provisions of SFAS 133 have been applied, and the impact that hedges have on an entitys financial position, financial performance, and cash flows. SFAS
161 is effective for fiscal years and interim periods beginning after November 15, 2008. SFAS 161 will impact us if we enter into hedging activity in the future.

In April 2008, the FASB issued FASB Staff Position FAS 142-3, Determination of the Useful Life of Intangible Assets(FSP FAS 142-3).
FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. FSP FAS 142-3 is effective for fiscal years beginning
after December 15, 2008. We are currently evaluating the impact, if any, of adopting FSP FAS 142-3 on our financial position and results of operations.



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(r) Reclassifications

Certain reclassifications have been made to the consolidated financial statements for years prior to 2008 to conform to the presentation of the 2008 consolidated financial statements. Such reclassifications had no
impact on net loss or stockholders equity (deficit).

(4) Business Interruption Insurance

Due to the impact of Hurricane Katrina on our New Orleans operations, we recorded $4.5 million of business interruption recoveries and $0.8 million of
asset loss recoveries during the year ended December 31, 2006, related to the loss of our New Orleans operations during 2005. We currently believe that all available amounts have been received pursuant to the policy limits in connection with
our Hurricane Katrina losses.

(5) Property and Equipment

Property and equipment at December 31, 2008 and 2007 consist of the following (in thousands):



|                                          |  |             |  |      |         |   |      |   |         |  
|----------------------------------------- |  | ----------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                          |  | Useful Life |  | 2008 |         |   | 2007 |  
|Land                                      |  |             |  | $    | 4,134   |   |      | $ | 4,134   |  
|Buildings                                 |  | 20-35 years |  |      | 51,617  |   |      |   | 46,579  |  
|Leasehold improvements                    |  | 5-10 years  |  |      | 9,283   |   |      |   | 9,395   |  
|Furniture and equipment                   |  | 3-20 years  |  |      | 52,091  |   |      |   | 44,206  |  
|                                          |  |             |  |      |         |   |      |   |         |  
|                                          |  |             |  |      | 117,125 |   |      |   | 104,314 |  
|Accumulated depreciation and amortization |  |             |  |      | (30,646 | ) |      |   | (20,997 | )
|                                          |  |             |  |      |         |   |      |   |         |  
|Property and equipment, net               |  |             |  | $    | 86,479  |   |      | $ | 83,317  |  
|                                          |  |             |  |      |         |   |      |   |         |  

Depreciation expense for property and equipment for the years ended December 31, 2008, 2007,
and 2006 was $10.5 million, $10.1 million and $10.5 million, respectively.

(6) Goodwill and Other Intangible Assets

Goodwill and other intangible assets at December 31, 2008 and 2007 consist of the following (in thousands):



|                                    |  |                         |         |                         |   |        |  
|----------------------------------- |  | ----------------------- | ------- | ----------------------- | - | ------ | -
|                                    |  | As of December 31, 2008 |        
|                                    |  | GrossCarryingAmount     |         | AccumulatedAmortization |  
|Amortized intangible assets:        |  |                         |         |                         |   |        |  
|Non-compete agreements              |  | $                       | 6,176   |                         | $ | (4,311 | )
|                                    |  |                         |         |                         |   |        |  
|                                    |  |                        
|Indefinite-lived intangible assets: |  |                         |         |                         |   |        |  
|Goodwill                            |  | $                       | 245,370 |                         |   |        |  
|Trademarks                          |  |                         | 14,490  |                         |   |        |  
|Certificates of need                |  |                         | 40      |                         |   |        |  
|Accreditations                      |  |                         | 910     |                         |   |        |  
|                                    |  |                         |         |                         |   |        |  
|Total                               |  | $                       | 260,810 |                         |   |        |  
|                                    |  |                         |         |                         |   |        |  



|                                    |  |                         |         |                         |   |        |  
|----------------------------------- |  | ----------------------- | ------- | ----------------------- | - | ------ | -
|                                    |  | As of December 31, 2007 |        
|                                    |  | GrossCarryingAmount     |         | AccumulatedAmortization |  
|Amortized intangible assets:        |  |                         |         |                         |   |        |  
|Non-compete agreements              |  | $                       | 6,176   |                         | $ | (3,171 | )
|                                    |  |                         |         |                         |   |        |  
|                                    |  |                        
|Indefinite-lived intangible assets: |  |                         |         |                         |   |        |  
|Goodwill                            |  | $                       | 263,970 |                         |   |        |  
|Trademarks                          |  |                         | 14,490  |                         |   |        |  



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|                     |  |                         |         |                         | 
|-------------------- |  | ----------------------- | ------- | ----------------------- | 
|                     |  | As of December 31, 2007
|                     |  | GrossCarryingAmount     |         | AccumulatedAmortization
|Certificates of need |  |                         | 40      |                         | 
|Accreditations       |  |                         | 910     |                         | 
|                     |  |                         |         |                         | 
|Total                |  | $                       | 279,410 |                         | 
|                     |  |                         |         |                         | 

The fair values of the identifiable intangibles acquired and the amount of goodwill recorded as a
result of the Merger were determined based primarily on our valuation. Amortization of intangible assets for the years ended December 31, 2008, 2007, and 2006 was $1.1 million, $1.1 million and $1.3 million, respectively.

Estimated amortization expense is as follows: $1.1 million for the year 2009 and $0.7 million in 2010. This amortization primarily relates to the value
associated with the non-compete agreements entered into in connection with Merger. The useful lives of the non-compete agreements are approximately 5 years.

The changes in the carrying amount of goodwill are as follows (in thousands):



|                                                     |  |   |         |  
|---------------------------------------------------- |  | - | ------- | -
|Goodwill at December 31, 2006                        |  |   | 299,159 |  
|Adjustments in fair value assigned to deferred taxes |  |   | (189    | )
|Additional purchase price allocation                 |  |   | 3,834   |  
|Impairment charge                                    |  |   | (38,834 | )
|                                                     |  |   |         |  
|                                                     | 
|Goodwill at December 31, 2007                        |  |   | 263,970 |  
|Impairment charge                                    |  |   | (18,600 | )
|                                                     |  |   |         |  
|                                                     | 
|Goodwill at December 31, 2008                        |  | $ | 245,370 |  
|                                                     |  |   |         |  

We performed our annual valuation analysis of goodwill and identifiable intangible assets as of
December 31, 2008. As a result of this analysis, we recorded a goodwill impairment charge of $18.6 million during the quarter ended December 31, 2008, principally as the result of unfavorable changes in the market resulting in a lower
valuation for the company regardless of operating results relatively consistent with previous period. The present value of future cash flows was the method used to determine fair value for purposes of these impairment charges.

See note 2 for a discussion regarding the increase in goodwill, and related impairment charge recorded during the quarter ended September 30, 2007.
In the quarter ended December 31, 2007, deferred income taxes were adjusted in relation to a purchase price adjustment in the amount of $189,000 as a result of the federal income tax returns filed for the year ended December 31, 2006. The
offset to this adjustment was a reduction to goodwill. We performed our annual valuation analysis of goodwill and identifiable intangible assets as of December 31, 2007. As a result of this analysis, we recorded a goodwill impairment charge of
$35.0 million during the quarter ended December 31, 2007, principally as the result of continued reduction in Medicare payment rates and other unfavorable changes in Medicare reimbursement policies specific to LTAC hospitals. The present value
of future cash flows was the method used to determine fair value for purposes of these impairment charges.

Note 2 also more fully
discusses the increase in goodwill in the quarter ending June 30, 2006. In conjunction with the Medicare reimbursement changes that became effective on July 1, 2006, we recorded an impairment charge of $24.6 million during the same
quarter. Additionally, we performed our annual valuation analysis of goodwill and identifiable intangible assets as of December 31, 2006. As a result of this analysis, we recorded a goodwill impairment charge of $19.0 million during the quarter
ended December 31, 2006 primarily due to actual operations achieving a lower level of profitability than was expected at June 30, 2006.

(7)
Debt

Long-term debt at December 31, 2008 and 2007 consists of the following (in thousands):



|                                               |  |      |         |   |      |   |         |  
|---------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                               |  | 2008 |         |   | 2007 |  
|Senior secured credit facility-term loan       |  | $    | 246,713 |   |      | $ | 249,263 |  
|91/4senior
subordinated notes                  |  |      | 130,531 |   |      |   | 147,000 |  
|Revolving credit facility                      |  |      | 10,000  |   |      |   |        |  
|                                               |  |      |         |   |      |   |         |  
|Total long-term debt                           |  |      | 387,244 |   |      |   | 396,263 |  
|Current installments of long-term debt         |  |      | (2,550  | ) |      |   | (2,550  | )
|                                               |  |      |         |   |      |   |         |  
|Long-term debt, excluding current installments |  | $    | 384,694 |   |      | $ | 393,713 |  
|                                               |  |      |         |   |      |   |         |  



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During the year ended December 31, 2008, we repurchased $16.5 million of our outstanding senior subordinated notes
for $6.5 million. This resulted in us recording a $9.5 million gain, net of the write-off of $0.5 million of capitalized financing costs, on the early extinguishment of this indebtedness. During the year ended December 31, 2006, we repurchased
$3 million of our outstanding senior subordinated notes for $1.53 million. This resulted in us recording a $1.33 million gain, net of the write-off of $0.14 million of capitalized financing costs, on the early extinguishment of this indebtedness.

Senior Secured Credit Facility and Revolving Credit Facility

Our senior secured credit facility, as amended, consists of the following as of December 31, 2008:



| |  |  | A $60.0 million revolving credit facility, subject to availability, that will terminate on August 11, 2011, which includes a $10.0 million swing line loan sub
facility and;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A $246.7 million term loan facility with a maturity date of August 11, 2012.
| | - |  | ----------------------------------------------------------------------------

Through December 31, 2008 we had $10.0 million outstanding under the revolving credit facility. The ability to borrow under the revolving credit
facility is subject to certain terms and conditions as stated in the senior secured credit facility, including being in compliance with all applicable covenants, including certain financial covenants, as of the time of the requested borrowing and
including the amount of the requested borrowing. The weighted average interest rate for the year ended December 31, 2008 was 7.22%. We had outstanding letters of credit of $7.7 million at December 31, 2008, which reduced our borrowing
capacity under the revolving credit facility to $42.3 million. Fees for the letters of credit for the year ended December 31, 2008 were $0.3 million. The interest rates per annum applicable to the loans, other than swingline loans, under our
senior secured credit facility is, at our option, equal to either an alternate base rate or an adjusted LIBOR rate for a one, two, three or six month interest period, or a nine or twelve month period if available, in each case, plus an applicable
margin percentage. The alternate base rate is the greater of (1) JPMorgan Chase Bank, N.A.s prime rate and (2) one half of 1% over the weighted average of rates on overnight Federal funds as published by the Federal Reserve Bank of
New York. The adjusted LIBOR rate is determined by reference to settlement rates established for deposits in dollars in the London interbank market for a period equal to the interest period of the loan and the maximum reserve percentages established
by the Board of Governors of the United States Federal Reserve to which our lenders are subject. The average interest rate for the years ended December 31, 2008, 2007, and 2006 was 7.84%, 8.33%, and 7.38%, respectively, and the rate at
December 31, 2008 and 2007 was 7.67% and 9.45%, respectively.

On the last business day of each calendar quarter we are required to
pay a commitment fee in respect of any unused commitment under the revolving credit facility. The commitment fee is currently 0.50% annually and is subject to adjustment based upon the ratio of our total indebtedness to our consolidated EBITDA (as
defined in the credit agreement).

The senior secured credit facility requires scheduled quarterly payments on the term loans each equal to
$637,500 per quarter with the balance of the term loans paid in full at maturity.

The senior secured credit facility is secured by
substantially all of our tangible and intangible assets, except for assets held by a subsidiary created during the year ended December 31, 2007, which contains the operations of the Boise Lease, see note 9. This credit facility also requires us
to comply on a quarterly basis with certain financial covenants, including an interest coverage ratio test and a maximum leverage ratio test, which financial covenants will become more restrictive over time. In addition, the senior secured credit
facility includes various negative covenants, including limitations on indebtedness, liens, investments, permitted businesses and transactions and other matters, as well as certain customary representations and warranties, affirmative covenants and
events of default including payment defaults, breach of representations and warranties, covenant defaults, cross defaults to certain indebtedness, certain events of bankruptcy, certain events under ERISA, material judgments, actual or asserted
failure of any guaranty or security document supporting the senior secured credit facility to be in full force and effect, change of control, and certain subjective provisions.

Additionally, the senior secured credit facility provides for certain cure rights, which provide us the right to issue permitted cure securities in
exchange for cash or otherwise receive cash that would be contributed to our capital in an amount that is necessary to satisfy a financial covenant requirement on a pro forma basis in the event a financial covenant test is not achieved. A cure right
capital contribution amount is considered additional consolidated EBITDA, as defined in our credit agreement, for purposes of measuring compliance with the financial covenants for the quarter in which it is contributed and in the subsequent three
quarters. Additionally, the cure amount is limited such that it can be no greater than the amount required for purposes of complying with the financial covenants in the quarter in which it is exercised nor can the cure right be exercised more than
two times in any trailing 4 quarter period, with the exception of the two additional cure rights that were included in Amendment No. 2, as described below.

As of September 30, 2007 we were not in compliance with the financial covenant requirements as set forth in our senior secured credit facility for the trailing-12 months then ended. However, this event of
non-compliance was cured on November 14, 2007 through



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##### Table of Contents

the exercise of a cure right as provided for in the credit agreement. The cure right cash contribution of $6.0 million necessary to cure our non-compliance
with the financial covenants tested as of September 30, 2007, was received by Holdings from affiliates of The Carlyle Group, on November 14, 2007. Holdings in turn contributed these funds to the capital of the Company through certain
intermediate subsidiaries. As a result of the exercise of this cure, we were deemed to have met the financial covenants contained in our senior secured credit facility as of September 30, 2007. This cure amount was a component of consolidated
EBITDA for financial covenant purposes through the fiscal period ended June 30, 2008. This particular cure amount is not included for financial covenant test purposes for periods beyond June 20, 2008.

As of December 31, 2008, we believe we were in compliance with all covenants of the senior secured facility, as amended.

Amendments to the Senior Secured Credit Facility and Revolving Credit Facility

On May 2, 2007, we entered into Amendment No. 1 to our senior secured credit facility (Amendment No. 1). Amendment No. 1 modified certain financial covenants effective March 31,
2007 and increased the spread on the variable interest rate. The applicable margins on the loans as amended were (1) 2.25% for alternate base rate revolving loans, (2) 3.25% for adjusted LIBOR revolving loans, (3) 2.25% for alternate
base rate term loans and (4) 3.25% for adjusted LIBOR term loans. These margins were subject to reduction based upon the ratio of our total indebtedness to our consolidated adjusted EBITDA (as defined in the credit agreement governing the
Credit Facility and Amendment No. 1 to the credit agreement). We incurred $1.1 million in fees to obtain Amendment No. 1, which have been capitalized and are being amortized over the remaining life of the Credit Facility utilizing the
effective interest method.

On December 6, 2007, we entered into Amendment No. 2 to our senior secured credit facility
(Amendment No. 2), which modifies certain financial covenants starting for the period ending December 31, 2007 and increases the spread on the variable interest rate. The applicable margins on the loans as amended are currently
(1) 3.25% for alternate base rate revolving loans, (2) 4.25% for adjusted LIBOR revolving loans, (3) 3.25% for alternate base rate term loans and (4) 4.25% for adjusted LIBOR term loans. The margins for the revolving loans are
subject to reduction based upon the ratio of our total indebtedness to our consolidated adjusted EBITDA (as defined in the credit agreement governing the Credit Facility and Amendment No. 2 to the credit agreement). The revolving credit
facility was reduced by $15.0 million to $60.0 million. It also designated up to two additional cure rights that can be exercised at any time during the term of the loan, provided that for quarters ending on or after June 30, 2008, the leverage
ratio, as defined in the credit Facility, on the last day of such fiscal quarter is not more than 0.50 to 1.00 above the leverage ratio requirement for such quarter. There is no assurance that The Carlyle Group will exercise the cure rights if we
are not in compliance with our covenant requirements. We incurred $2.1 million in fees to obtain Amendment No. 2, which have been capitalized and are being amortized over the remaining life of the Credit Facility utilizing the effective
interest method.

The loss of our New Orleans operations during 2005 and reductions in reimbursement as the result of regulatory changes
enacted by CMS have resulted in operating profits that are significantly less than our operating profits at the time we undertook the increased indebtedness. If we are unable to maintain compliance with the covenants contained in our senior secured
credit facility, including interest coverage and maximum leverage ratios, an event of default could occur, unless we are able to obtain a waiver or enter into another amendment with the senior lenders to revise the covenant requirements. If we are
required to obtain a waiver or execute an amendment to our senior secured credit facility, it is likely we will incur additional fees and expenses, and will be required to pay a higher interest margin on our outstanding indebtedness in subsequent
periods. In the event of a default, the lenders under the senior secured credit facility are entitled to take various actions, including accelerating amounts due under the senior secured credit facility, terminating our access to our revolving
credit facility and all other actions permitted to be taken by a secured creditor. An uncured event of default would have a material adverse effect on our financial position, results of operations and cash flow.

Senior Subordinated Notes

On August 11, 2005, we sold $150.0 million of our 91/4% Senior Subordinated Notes (the
Notes) due 2013. The Notes are unconditionally guaranteed on a senior subordinated basis by substantially all of our wholly owned subsidiaries (the Subsidiary Guarantors) on a joint and several basis, except for assets to be
held by a subsidiary created during the year ended December 31, 2007, as noted previously. See note 18 for the condensed consolidating financial information for LifeCare Holdings, Inc., the Subsidiary Guarantors, and the Non-Guarantor
Subsidiaries. There are no restrictions on our ability to obtain funds from Subsidiary Guarantors. The guarantees of the Notes are subordinated in right of payment to all existing and future senior indebtedness of the Subsidiary Guarantors,
including any borrowings or guarantees by those subsidiaries under the senior credit facility. The Notes rank equally in right of payment with all of our existing and future senior subordinated indebtedness and senior to all of our existing and
future subordinated indebtedness.

On and after August 15, 2009, we will
be entitled at our option to redeem all or a portion of the Notes at the following redemption prices (expressed in percentages of principal amount on the redemption date), plus accrued interest to the redemption date, if redeemed during the 12-month
period commencing on February 1stof the years set forth below:



|                    |  |                  |  
|------------------- |  | ---------------- | -
|Year                |  | Redemption Price |  
|2009                |  | 104.625          | %
|2010                |  | 102.313          | %
|2011 and thereafter |  | 100.000          | %



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##### Table of Contents

Prior to August 15, 2008, we may at our option on one or more occasions, with the net cash proceeds
from certain equity offerings, redeem the Notes in an aggregate principal amount not to exceed 35% of the aggregate principal amount originally issued at a redemption price (expressed as a percentage of principal amount on the redemption date) of
109.25% plus accrued and unpaid interest to the redemption date.

We are not required to make any mandatory redemption or sinking fund
payments with respect to the Notes. However, upon the occurrence of any change of control of our Company, each holder of the Notes shall have the right to require us to repurchase such holders notes at a purchase price in cash equal to 101% of
the principal amount thereof on the date of purchase plus accrued and unpaid interest, if any, to the date of purchase.

The indenture
governing the Notes contains customary events of default and affirmative and negative covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to incur or guarantee additional indebtedness, pay dividends
or make other equity distributions, purchase or redeem capital stock, make certain investments, enter into arrangements that restrict dividends from subsidiaries, transfer and sell assets, engage in certain transactions with affiliates and effect a
consolidation or merger.

Registration Rights Agreement

In connection with the offering of the Notes, we entered into a registration rights agreement with the initial purchasers.

On April 14, 2006, we filed a Form S-4 registration statement with the SEC as required by the Registration Rights Agreement. This filing was declared effective by the SEC on May 12, 2006. We completed the
exchange offer for all outstanding Notes as of June 21, 2006, which satisfied the requirements of the Registration Rights Agreement.

Other

As required by the senior credit facility, we entered into a three-year interest rate swap transaction covering $12.0 million (notional
amount) of the floating rate senior indebtedness on November 9, 2005. The interest rate swap provided us with a cap rate protection of 6.0% (based on three-month LIBOR) on the notional amount during the life of the contract. The interest rate
swap agreement expired on November 8, 2008. We have not entered into any additional interest rate swaps.

Capitalized costs of $15.8
million incurred in obtaining financing under the credit facility including the revolving line of credit, the Notes, and the two amendments to the credit facility as of December 31, 2008 are being amortized over the terms of the related debt
using the interest method.

Amortization expense for capitalized financing costs for the years ended December 31, 2008, 2007, and 2006
was $2.1 million, $1.6 million, and $1.4 million.

Maturities of long-term debt as of December 31, 2008 are as follows (in thousands):



|           |  |   |        
|---------- |  | - | -------
|2009       |  | $ | 2,550  
|2010       |  |   | 2,550  
|2011       |  |   | 12,550 
|2012       |  |   | 239,063
|2013       |  |   | 130,531
|thereafter |  |   |       

(8) Leases

We lease healthcare facilities, corporate office space, and certain equipment under cancelable and noncancelable operating lease agreements with initial terms of one to 15 years with varying renewal terms.

Total future minimum lease payments under all noncancelable operating leases are as follows (in thousands):



|           |  |   |       
|---------- |  | - | ------
|2009       |  | $ | 17,831
|2010       |  |   | 15,867
|2011       |  |   | 13,995
|2012       |  |   | 12,520
|2013       |  |   | 11,363
|Thereafter |  |   | 76,005



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##### Table of Contents

We are obligated under capital equipment leases that expire at various dates. At December 31, 2008
and 2007, equipment under capital lease included in property and equipment totaled $25.7 million and $22.7 million, respectively, less accumulated amortization of $10.2 million and $7.2 million, respectively. Future minimum lease payment obligations
at December 31, 2008 under these leases are as follows (in thousands):



|                                                                 |  |   |        |  
|---------------------------------------------------------------- |  | - | ------ | -
|2009                                                             |  | $ | 1,603  |  
|2010                                                             |  |   | 1,034  |  
|2011                                                             |  |   | 772    |  
|2012                                                             |  |   | 397    |  
|2013                                                             |  |   | 8      |  
|                                                                 |  |   |        |  
|                                                                 |  |   | 3,814  |  
|Amount representing interest                                     |  |   | (726   | )
|                                                                 |  |   |        |  
|Total obligations under capital leases                           |  |   | 3,088  |  
|Current installments of obligations under capital leases         |  |   | (1,252 | )
|                                                                 |  |   |        |  
|Obligations under capital leases, excluding current installments |  | $ | 1,836  |  
|                                                                 |  |   |        |  

For the years ended December 31, 2008, 2007, and 2006, amortization of approximately $3.0
million, $2.8 million, and $2.6 million, respectively, of equipment under capital leases was included in our depreciation and amortization expense.

We, as lessor, also sublease medical office space at our North Texas facility. We have operating leases with tenants with initial terms of one to three years with varying renewal terms. Annual rents collected from these tenants approximate
$0.2 million.

(9) Sale-Leaseback and Lease Financing Obligations

On May 2, 2007, LifeCare REIT 1, Inc. (Tenant), a subsidiary of the Company entered into a Master Lease Agreement (Lease) with Health Care REIT, Inc. and HCRI Texas Properties, LTD
(collectively, the Landlord) in connection with the sale and leaseback of a 62-bed long term acute care hospital being constructed by us in San Antonio, Texas (San Antonio Facility). As of June 30, 2007, the San Antonio
Facility opened for business, at which point the operating lease commenced. The base rent is approximately $1.2 million per year, and is subject to annual inflationary adjustments. The inflationary adjustments, which are not to exceed a cumulative
average of 0.25% per annum, are tied to the Medicare long term acute care market basket inflation rate, as determined by the Centers for Medicare and Medicaid Services. As of December 31, 2007, the Landlord had made payments of $15.5
million to us towards the total purchase price of $15.5 million for the San Antonio Facility. No gain was recognized from this transaction.

On June 6, 2007, Tenant amended the Master Lease Agreement (Amended Lease) with Health Care REIT, Inc., HCRI Texas Properties, LTD and HCRI Wisconsin Properties, LLC (collectively, the Milwaukee Landlord) to
include the sale and leaseback of a 62-bed long term acute care hospital being constructed by the Company in Milwaukee, Wisconsin (Milwaukee Facility). As of September 24, 2007, the Milwaukee Facility opened for business, at which
point the operating lease commenced. The base rent is approximately $2.5 million per year, and is subject to annual inflation adjustments. The inflationary adjustments, which are not to exceed a cumulative average of 0.25% per annum, are tied
to the Medicare long term acute care market basket inflation rate, as determined by the Centers for Medicare and Medicaid Services.

The
initial term of the leases for these facilities is 15 years, and the Tenant has one 15-year renewal option. The initial rent under the Amended Lease is computed based on a predetermined spread over the rate of a 15-year U.S. Treasury Note and will
be subject to an annual inflation adjustment. The Amended Lease is an absolute net lease and contains customary covenants, representations and warranties. We and our subsidiaries, LifeCare Hospitals of Milwaukee, Inc. and San Antonio
Specialty Hospitals, LTD, entered into an Amended and Restated Unconditional and Continuing Lease Guaranty with the Landlord.

On
September 1, 2006, a newly formed subsidiary (Nonguarantor Tenant) of the Company entered into a separate Master Lease Agreement (Nonguarantor Lease) with Health Care REIT, Inc. to acquire and develop hospital facilities
(Nonguarantor Facilities). The Company granted Health Care REIT, Inc. the limited right and option, for a three-year period, to acquire or develop and subsequently lease Nonguarantor Facilities to Nonguarantor Tenant. Nonguarantor Tenant
will sublease each Facility to a wholly-owned subsidiary of Nonguarantor Tenant (Subtenant) and the licensed operator of each Nonguarantor Facility will be the Nonguarantor Tenant or a Subtenant. In connection with this Lease, Health
Care REIT, Inc. has agreed to make available up to $250 million for investments in hospital facilities, subject to certain terms and conditions. The initial term of the Nonguarantor Lease is 15 years and the Nonguarantor Tenant has one 15-year
renewal option. Upon each addition of a Nonguarantor Facility, the term will be extended to a date 15 years from the date of the addition. At the end of the term, the Nonguarantor Tenant may exercise an option to purchase the Nonguarantor Facilities
at a price equal to the greater of the investment amount (which will include acquisition costs, development costs, renovation costs, closing cost and fees) or fair value.



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##### Table of Contents

The initial rent for each Nonguarantor Facility under the Nonguarantor Lease will be computed based on a
predetermined spread over the rate of a 15-year U.S. Treasury Note and is subject to an annual inflation adjustment. Nonguarantor Lease payments are secured by receivables, assignment of leases and rents, assignment of management agreements,
subordination of management fees and distributions, and cross-defaults, as well as a second lien on personal property and equipment owned by the Nonguarantor Tenant. The Nonguarantor Lease contains customary covenants, representations and
warranties.

Our Boise, Idaho facility was the first facility to be developed under this Nonguarantor Lease. This facility was completed in
March 2008 with construction cost of approximately $19.1 million. This particular facility under this Nonguarantor Lease is accounted for as a lease financing obligation whereby the asset remains capitalized on our balance sheet. This facility
opened during April 2008.

In connection with this facility and in accordance with the terms of the Nonguarantor Lease, we have issued $6.1
million in letters of credit through December 31, 2008, payable to the Health Care REIT, Inc. utilizing capacity available for letters of credit under our revolving credit agreement.

The Nonguarantor Tenant and any future subsidiaries established under Nonguarantor Tenant, will
not be guarantors of the Senior Secured Credit Facility or the 9 1/4% Senior Subordinated Notes as discussed in note 7.

(10) Income Taxes

Income tax
expense attributable to loss before income taxes consists of the following for the years ended December 31, 2008, 2007, and 2006 (in thousands):



|                           |  |      |       |      |   |        |      |  |   |        |  
|-------------------------- |  | ---- | ----- | ---- | - | ------ | ---- |  | - | ------ | -
|                           |  | 2008 |       | 2007 |   |        | 2006 | 
|Current:                   |  |      |       |      |   |        |      |  |   |        |  
|Federal                    |  | $    |      |      | $ | (2,252 | )    |  | $ | 4,010  |  
|State                      |  |      | 637   |      |   | 634    |      |  |   | 2,221  |  
|                           |  |      |       |      |   |        |      |  |   |        |  
|Total current              |  |      | 637   |      |   | (1,618 | )    |  |   | 6,231  |  
|Deferred                   |  |      | 763   |      |   | 1,695  |      |  |   | (2,524 | )
|                           |  |      |       |      |   |        |      |  |   |        |  
|                           |  |      |      
|Total income tax provision |  | $    | 1,400 |      | $ | 77     |      |  | $ | 3,707  |  
|                           |  |      |       |      |   |        |      |  |   |        |  

A reconciliation of the expected federal income tax expense attributable to loss from continuing
operations (computed by applying the federal corporate income tax rate of 35% to loss before income taxes) to actual income tax expense attributable to loss from continuing operations follows (in thousands):



|                                           |  |      |        |   |      |   |         |      |  |   |         |  
|------------------------------------------ |  | ---- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                           |  | 2008 |        |   | 2007 |   |         | 2006 | 
|Expected federal income tax benefit        |  | $    | (6,884 | ) |      | $ | (21,247 | )    |  | $ | (12,991 | )
|State income taxes, net of federal benefit |  |      | 533    |   |      |   | 379     |      |  |   | 1,019   |  
|Impairment charges not deductible          |  |      | 6,510  |   |      |   | 13,609  |      |  |   | 15,260  |  
|Other nondeductible expenses               |  |      | 103    |   |      |   | 118     |      |  |   | 229     |  
|Other income tax expense (benefit)         |  |      | 14     |   |      |   | (22     | )    |  |   | 190     |  
|Deferred tax asset valuation allowance     |  |      | 1,124  |   |      |   | 7,240   |      |  |   |        |  
|                                           |  |      |        |   |      |   |         |      |  |   |         |  
|Actual income tax expense                  |  | $    | 1,400  |   |      | $ | 77      |      |  | $ | 3,707   |  
|                                           |  |      |        |   |      |   |         |      |  |   |         |  

The tax effects of temporary differences that give rise to significant portions of the deferred
tax assets and liabilities at December 31, 2008 and 2007, are as follows (in thousands):



|                                                     |  |      |         |   |      |   |         |  
|---------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                     |  | 2008 |         |   | 2007 |  
|Deferred tax assets:                                 |  |      |         |   |      |   |         |  
|Accrued vacation expense                             |  | $    | 1,335   |   |      | $ | 1,280   |  
|Accrued healthcare claims                            |  |      | 578     |   |      |   | 420     |  
|Accrued compensation expense                         |  |      | 2,351   |   |      |   | 1,305   |  
|Allowance for doubtful accounts                      |  |      | 3,748   |   |      |   | 7,114   |  
|Accrued insurance                                    |  |      | 1,659   |   |      |   | 2,117   |  
|Net operating losses and credit carryforwards        |  |      | 7,914   |   |      |   | 3,264   |  
|Other                                                |  |      | 346     |   |      |   | 93      |  
|                                                     |  |      |         |   |      |   |         |  
|Total deferred tax assets before valuation allowance |  |      | 17,931  |   |      |   | 15,593  |  
|Valuation allowance                                  |  |      | (10,016 | ) |      |   | (7,240  | )
|                                                     |  |      |         |   |      |   |         |  
|Total deferred tax assets                            |  |      | 7,915   |   |      |   | 8,353   |  
|                                                     |  |      |         |   |      |   |         |  
|                                                     |  |     
|Deferred tax liabilities:                            |  |      |         |   |      |   |         |  
|Depreciation and amortization                        |  |      | (13,415 | ) |      |   | (13,853 | )
|Other                                                |  |      |        |   |      |   |        |  
|                                                     |  |      |         |   |      |   |         |  
|Total deferred tax liabilities                       |  |      | (13,415 | ) |      |   | (13,853 | )
|                                                     |  |      |         |   |      |   |         |  
|Net deferred tax liabilities                         |  | $    | (5,500  | ) |      | $ | (5,500  | )
|                                                     |  |      |         |   |      |   |         |  



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##### Table of Contents

Pursuant to federal income tax regulations, the Merger discussed in note 2 was considered to be a
non-taxable transaction. The Successor Company has approximately $6.0 million of tax deductible goodwill for federal income tax purposes. Net deferred tax liabilities relate to indefinite lived intangibles and therefore are all long-term.

At December 31, 2008 we had net operating loss carry forwards for federal income tax purposes of approximately $20.4 million, which
are available to offset future taxable income, if any, through 2028.

In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the projections of
future taxable income over the periods in which the deductible temporary differences giving rise to the deferred tax assets are deductible, management believes that it is not more likely than not that we will realize the benefits of these deductible
temporary differences. Accordingly, a valuation allowance of $10.0 million has been recorded as of December 31, 2008.

(11) Insurance Arrangements

Our professional and general liability insurance is provided through a combination of self-insurance, purchased insurance coverage from
commercial carriers, and through participation in certain state-sponsored malpractice programs. Claims are covered under the policy limits in the year the claims are reported. We use independent third party actuarial estimates prepared at least
annually as the basis for our accrual of the ultimate liability related to these claims.

For the plan years beginning January 1, 2008
and 2007, self-insurance for professional and general liability claims was provided up to $1.0 million per occurrence, along with excess liability coverage of $20.0 million and $35.0 million, respectively. Estimated liabilities for general and
professional liability risks were $4.2 million at December 31, 2008 and $5.7 million at December 31, 2007.

Our workers
compensation coverage is provided through a traditional fully insured plan. Under this plan, the regular premiums cover the full cost of any workers compensation claims with no deductibles.

Approximately $0.2 million of short-term investments at December 31, 2008 included in other assets is restricted to use, as we are required by our
insurance company to maintain this balance as security related to the payment of workers compensation claims.

We are self-insured
for employee health and dental claims up to an annual individual stop-loss limitation of $200 with a $2.0 million lifetime maximum benefit. Estimated liabilities for employee health and dental claims were $1.6 million and $1.1 million at
December 31, 2008 and 2007, respectively.

(12) 401(k) Savings Plan

Substantially all employees are eligible to participate in a profit sharing plan (Plan) sponsored by our company. The Plan, designed to qualify under
Section 401(k) of the Internal Revenue Code, also provides for employee deferrals of compensation and discretionary company matching. Employer contributions made to the Plan for the years ended December 31, 2008, 2007, and 2006 totaled
$1.1 million, $1.0 million, and $0.9 million, respectively.

(13) Stock Options

At December 31, 2008, there were 2.9 million shares of common stock of Holdings available under the 2005 Equity Incentive Plan
(Plan) for stock option grants and other incentive awards, including restricted stock units. Options granted generally have an exercise price equal to the estimated fair value of the shares on the date of grant and expire 10 years from
the date of grant. A restricted stock unit is a contractual right to receive one share of Holdings common stock in the future. Options typically vest one-quarter on each of the first four anniversary dates of the grant and restricted stock units
vest one-quarter upon grant and one-quarter each year thereafter.



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##### Table of Contents

Loss for the years ended December 31, 2008, 2007, and 2006 includes $0.3 million, $0.7 million and
$0.6 million, respectively, of pre-tax compensation costs related to stock-based compensation arrangements.



|                             |  |                 |   |  |                              |      
|---------------------------- |  | --------------- | - |  | ---------------------------- | -----
|                             |  | Number ofShares |   |  | Weightedaverageexerciseprice
|Balance at December 31, 2005 |  | 695,000         |   |  | $                            | 10.00
|Granted                      |  | 1,153,000       |   |  |                              | 6.00 
|Cancellations                |  | (511,000        | ) |  |                              | 10.00
|Exercised                    |  |                |   |  |                              |     
|Forfeited                    |  | (305,500        | ) |  |                              | 6.00 
|Expired                      |  | (20,500         | ) |  |                              | 6.00 
|                             |  |                 |   |  |                              |      
|                             |  |                
|Balance at December 31, 2006 |  | 1,011,000       |   |  | $                            | 6.00 
|Granted                      |  | 841,000         |   |  |                              | 2.50 
|Cancellations                |  | (656,000        | ) |  |                              | 6.00 
|Exercised                    |  |                |   |  |                              |     
|Forfeited                    |  | (220,000        | ) |  |                              | 6.00 
|Expired                      |  | (135,000        | ) |  |                              | 6.00 
|                             |  |                 |   |  |                              |      
|                             |  |                
|Balance at December 31, 2007 |  | 841,000         |   |  | $                            | 2.50 
|Granted                      |  | 1,743,000       |   |  |                              | 2.50 
|Cancellations                |  |                |   |  |                              | 2.50 
|Exercised                    |  |                |   |  |                              |      
|Forfeited                    |  | (118,500        | ) |  |                              | 2.50 
|Expired                      |  | (95,500         | ) |  |                              | 2.50 
|                             |  |                 |   |  |                              |      
|Balance at December 31, 2008 |  | 2,370,000       |   |  | $                            | 2.50 
|                             |  |                 |   |  |                              |      

At December 31, 2008 and 2007, there were 290,250 and 219,250, respectively, stock options
vested and exercisable. All of these vested stock options were subject to the modification of the strike price as discussed further in note 3. As of the date of modification, the weighted average fair value was $0 per share. At December 31,
2008 and 2007, the weighted average exercise price of the vested stock options was $2.50, and the remaining weighted average contractual life of the vested stock options was 7.6 and 8.1 years, respectively. The vested stock option shares had no
intrinsic value at December 31, 2008 and 2007.

As of December 31, 2008, there was approximately $0.5 million of total
unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of approximately 1.4 years. At December 31, 2008, the weighted average remaining contractual life of outstanding
options was 8.8 years.

Restricted Stock Awards

The following table summarizes restricted stock award activity:



|                                 |  |                 |   |  |                                     |     
|-------------------------------- |  | --------------- | - |  | ----------------------------------- | ----
|                                 |  | Number ofShares |   |  | WeightedAverage GrantDate FairValue
|Number of unvested shares:       |  |                 |   |  |                                     |     
|Outstanding at December 31, 2007 |  | 10,000          |   |  | $                                   | 5.05
|Vested                           |  | (10,000         | ) |  |                                     | 5.05
|                                 |  |                 |   |  |                                     |     
|Outstanding at December 31, 2008 |  |                |   |  |                                     |     
|                                 |  |                 |   |  |                                     |     

During the year ended December 31, 2006, certain restricted stock award holders resigned from
our company. These restricted stock award holders had vested in 15,000 shares prior to their resignation. During the year ended December 31, 2006, Holdings purchased the 5,000 shares that had previously vested for $10 pursuant to the restricted
stock award agreement. During January 2007, Holdings repurchased the remaining 10,000 shares that had vested for $31.

Another holder of
restricted stock resigned in August of 2007. Prior to his resignation, he had vested in 60,000 restricted shares. At the time of his resignation, he had 20,000 unvested shares which were forfeited.



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##### Table of Contents

One of the holders of restricted stock resigned from the Company during 2008. As part of the separation
agreement, the 10,000 outstanding unvested shares were vested. Additionally, 20,000 shares were purchased from the holder for $2.50 per share.

In March 2009, our chief executive officer and president were granted 400,000 and 300,000 shares, respectively, according to our restricted stock award agreement for meeting certain financial goals for the year ended December 31, 2008.
The grant-date per share fair value of these awards was nominal. The shares vest in three equal annual installments beginning on March 2010.

As of December 31, 2008, there was no unrecognized compensation costs related to restricted stock awards.

(14) Fair Value of Financial
Instruments

The carrying amount of cash and cash equivalents, accounts receivable, third-party payor settlements, short-term
receivables in self insurance trusts, and accounts payable and accrued expenses approximates fair value because of the short-term maturity of these instruments. The carrying amount of these obligations is a reasonable estimate of fair value.

The Senior Secured Credit Facility and the Senior Subordinated Notes are traded in private institutional markets. The carrying amount of
the Senior Secured Credit Facility and the Senior Subordinated Notes was $246.7 million and $130.5 million, respectively, at December 31, 2008. Using available quoted market prices, the fair values of the Senior Secured Credit Facility and the
Senior Subordinated Notes were approximately $139.6 million and $50.9 million, respectively, at December 31, 2008. The fair values are based on quoted market prices at each balance sheet date; however, these quoted market prices represent Level
2 inputs as defined by SFAS No. 157 because the markets in which the Senior Secured Credit Facility and the Senior Subordinated Notes trade are not active.

(15) Business and Credit Concentrations

Our hospitals grant credit to patients under terms requiring timely payment. The
hospitals generally do not require collateral or other security in extending credit to patients; however, they routinely obtain assignment of (or are otherwise entitled to receive) patients benefits payable under patients health
insurance programs, plans, or policies (e.g., Medicare, Medicaid, Blue Cross, and commercial insurance policies). Because of the geographic diversity of our facilities and non-governmental third-party payors, Medicare represents our largest
concentration of credit risk. Net patient service revenue generated directly from the Medicare program represented approximately 61.2% for the year ended December 31, 2008, 64.6% for the year ended December 31, 2007, and 71.6% for the year
ended December 31, 2006 of net patient service revenue. Approximately 34.5% and 34.2% of our gross accounts receivable at December 31, 2008 and 2007, respectively, are from this payor source.

(16) Regulatory Matters

All healthcare providers are
required to comply with a significant number of laws and regulations at the federal and state government levels. These laws are extremely complex, and in many instances, providers do not have the benefit of significant regulatory or judicial
interpretation as to how to interpret and/or apply these laws and regulations. The U.S. Department of Justice and other federal agencies are increasing resources dedicated to regulatory investigations and compliance audits of healthcare providers.
As a healthcare provider, we are subject to these regulatory efforts. Healthcare providers that do not comply with these laws and regulations may be subject to civil or criminal penalties, the loss of their licenses, or restriction in their ability
to participate in various federal and state healthcare programs. We endeavor to conduct our business in compliance with applicable laws and regulations, including healthcare fraud and abuse laws.

We undertake various procedures to assure that our annual cost reports are correctly prepared and filed in accordance with applicable Medicare
regulations governing provider reimbursement. During 2004 and 2003, we conducted an internal review of our previously filed cost reports. As a result of this review, which covered the years 1997 through 2001, we made certain adjustments in 2003 to
our previously reported allowable home office expenses. The findings of this review and proposed amendments to the home office cost reports were submitted to the Office of Inspector General of the Department of Health and Human Services (OIG), which
reviewed our findings. On June 12, 2006, we entered into a Settlement Agreement and a Certification of Compliance Agreement (CCA) with the OIG that settled these matters. The amount paid in connection with this settlement was approximately $2.6
million, which was funded out of a specific escrow account established as part of the Merger that occurred on August 11, 2005. The CCA is effective for three years. It requires, among other things, that we (1) continue to maintain our
corporate compliance program, (2) submit an annual report to the OIG regarding certain specified items, including our ongoing corporate compliance audit findings in areas such as cost reporting, physician contracting and charge master reviews,
and (3) report the occurrence of certain other events.



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(17) Commitments and Contingencies

At the time of Hurricane Katrina, we operated an 82-bed facility in New Orleans located in Memorial Medical Center. In the aftermath of the hurricane, an investigation was conducted by the Louisiana Attorney
Generals office. The investigation culminated in a Grand Jury being convened in February of 2007 to determine if criminal charges should be filed against three individuals, who were not our employees, but who were caring for patients in
Memorial Medical Center after the hurricane. Two of the individuals were subsequently granted immunity and the Grand Jury declined to indict the third. Neither the Company nor its employees have been named in any lawsuits or matters related to
illegal or criminal activities associated with Hurricane Katrina.

We are currently defending ourselves against a variety of Hurricane
Katrina related lawsuits or matters under review by the Louisiana Patient Compensation Fund. We are vigorously defending ourselves in these lawsuits, however, we cannot predict the ultimate resolution of these matters. We maintained $15.0 million of
general and professional liability insurance during this period, subject to a $1.0 million per claim retention. We believe that under our insurance policies, only one retention is applicable to the Hurricane Katrina matters since these matters all
arose from a single event, process or condition. Our insurance carriers are currently paying all costs related to these claims, but have sent reservation of rights letters which challenge, among other things, the application of one retention to the
Hurricane Katrina related matters. To the extent it is ultimately determined that a separate retention applies to each of these claims, we could experience significant losses related to these Hurricane Katrina matters which would negatively impact
our financial position, liquidity and results of operations.

Significant reductions in the patient service revenues earned by a hospital
may occur if we are unable to maintain the certification of the hospital as a long-term acute care (LTAC) hospital in accordance with Medicare regulations. Additionally, many of our hospitals operate in space leased from general acute
care hospitals (host hospitals); consequently, these hospitals within a hospital (HIH) are subject to additional specific Medicare HIH regulations in addition to the general LTAC hospital regulations. The HIH
regulations are designed to ensure that the hospitals are organizationally and functionally independent of their host hospitals. If an LTAC hospital located in a host hospital fails to meet the HIH regulations, it may also lose its status as an LTAC
hospital. The determinations are made on an annual basis.

A provider that loses its ability to receive Medicare payments pursuant to the
Long-Term Acute Care Prospective Payment System (PPS) must go through the same certification process as new LTAC hospital providers must go through to obtain their initial certification to be reimbursed pursuant to PPS. During this
re-certification period, which could range from six to nine months, the provider would be paid for providing services to Medicare beneficiaries at rates that are lower than rates currently paid pursuant to PPS.

In 2007, one of our hospitals, with multiple campus locations, failed to achieve the twenty-five day length of stay requirement for the twelve months
ended December 31, 2007. The LTAC hospital regulations provide that a hospital may correct this type of deficiency in the subsequent cost report period following the period in which the twenty-five day length of stay requirement was not
achieved. The fiscal intermediary for this hospital reviewed the hospitals discharge information for the five months ending May 31, 2008 for compliance with the twenty-five day length of stay requirement. Based upon this review, the
fiscal intermediary determined that the hospital met the twenty-five day length of stay requirement and issued its recommendation to CMS that the hospital continue to be certified as an LTAC hospital. The hospital is currently eligible and will
continue to be eligible to receive Medicare payments pursuant to LTAC hospital regulations for discharges on or after January 1, 2009. We believe that this hospital, and our remaining hospitals, are currently in compliance with the Medicare
regulations regarding LTAC hospitals and will maintain compliance under these regulations.

During December 2006, we entered into an
agreement to form a new joint venture with an unrelated party in the New Orleans market that will own and operate LTAC hospitals. During 2007, we contributed to the joint venture our hospital licenses, Medicare provider numbers and certain remaining
equipment from our former New Orleans operations in exchange for a 49.99% ownership in the joint venture. In connection with this joint venture, we guaranteed, via the issuance of a letter of credit, $0.8 million of a $1.5 million line of credit
established by the new joint venture. The joint ventures line of credit is secured by certain assets, including accounts receivable and moveable equipment of the joint venture, along with our letter of credit. Pursuant to FASB Interpretation
No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, we have established a carrying value of $0.8 million associated with this guarantee, which is recorded in
other noncurrent liabilities. This value was determined based upon our estimates and probabilities of the likelihood that the operations of this joint venture would result in us becoming liable under the established letter of credit.



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We have certain other pending and threatened litigation and claims incurred in the ordinary course of
business. We believe (based, in part, on the advice of legal counsel) that the probable resolution of such contingencies will not exceed our insurance coverage and will not materially affect the consolidated financial position, results of operations
or liquidity of the Company.

(18) Financial Information for Subsidiary Guarantors and Non-guarantor Subsidiaries under the Senior Subordinated Notes

The senior subordinated notes are fully and unconditionally guaranteed by substantially all of our wholly-owned subsidiaries (the
Subsidiary Guarantors), however, certain of our subsidiaries did not guarantee the senior subordinated notes (the Non-Guarantor Subsidiaries).

Presented below is condensed consolidating financial information for LifeCare Holdings, Inc., the Subsidiary Guarantors, and the Non-Guarantor Subsidiaries for the years ended December 31, 2008, 2007, and 2006.
The equity method has been used with respect to investments in subsidiaries. Separate financial statements of the Subsidiary Guarantors are not presented.



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##### Table of Contents

LifeCare Holdings, Inc.

Condensed Consolidating Balance Sheet

December 31, 2008



|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|---------------------------------------------------------------- |  | ------ | -------- | - | --------------------- | - | -------- | ------------------------ |  | - | ------------ | - |  | ------------------ | -------- | - |  | - | -------- | -
|                                                                 |  | Parent |          |   | GuarantorSubsidiaries |   |          | NonguarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedTotals |         
|Assets                                                           |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|Current assets:                                                  |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|Cash and cash equivalents                                        |  | $      |         |   |                       | $ | 25,261   |                          |  | $ | 1            |   |  | $                  |         |   |  | $ | 25,262   |  
|Accounts receivable, net of allowance for doubtful accounts      |  |        |         |   |                       |   | 65,984   |                          |  |   | 819          |   |  |                    |         |   |  |   | 66,803   |  
|Due to/from related parties                                      |  |        | 118,651  |   |                       |   | (108,211 | )                        |  |   | (10,440      | ) |  |                    |         |   |  |   |         |  
|Income taxes receivable                                          |  |        | 1,785    |   |                       |   | (506     | )                        |  |   |             |   |  |                    |         |   |  |   | 1,279    |  
|Other current assets                                             |  |        |         |   |                       |   | 7,407    |                          |  |   | 328          |   |  |                    |         |   |  |   | 7,735    |  
|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|Total current assets                                             |  |        | 120,436  |   |                       |   | (10,065  | )                        |  |   | (9,292       | ) |  |                    |         |   |  |   | 101,079  |  
|Investment in subsidiary                                         |  |        | 250,219  |   |                       |   |         |                          |  |   |             |   |  |                    | (250,219 | ) |  |   |         |  
|Property and equipment, net                                      |  |        |         |   |                       |   | 62,173   |                          |  |   | 24,306       |   |  |                    |         |   |  |   | 86,479   |  
|Other assets, net                                                |  |        | 8,893    |   |                       |   | 3,704    |                          |  |   |             |   |  |                    |         |   |  |   | 12,597   |  
|Other identifiable intangibles, net                              |  |        |         |   |                       |   | 17,305   |                          |  |   |             |   |  |                    |         |   |  |   | 17,305   |  
|Goodwill                                                         |  |        |         |   |                       |   | 245,370  |                          |  |   |             |   |  |                    |         |   |  |   | 245,370  |  
|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|Total Assets                                                     |  | $      | 379,548  |   |                       | $ | 318,487  |                          |  | $ | 15,014       |   |  | $                  | (250,219 | ) |  | $ | 462,830  |  
|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|                                                                 |  |        |          |   |                      
|Liabilities and Stockholders Equity (Deficit)                   |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|Current liabilities:                                             |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|Current installments of long-term debt                           |  | $      | 2,550    |   |                       | $ |         |                          |  | $ |             |   |  | $                  |         |   |  | $ | 2,550    |  
|Current installments of obligations under capital leases         |  |        |         |   |                       |   | 992      |                          |  |   | 260          |   |  |                    |         |   |  |   | 1,252    |  
|Current installment of lease financing obligation                |  |        |         |   |                       |   |         |                          |  |   | 292          |   |  |                    |         |   |  |   | 292      |  
|Estimated third-party payor settlements                          |  |        |         |   |                       |   | 7,075    |                          |  |   | (844         | ) |  |                    |         |   |  |   | 6,231    |  
|Accounts payable                                                 |  |        | (774     | ) |                       |   | 27,309   |                          |  |   | 158          |   |  |                    |         |   |  |   | 26,693   |  
|Accrued payroll                                                  |  |        |         |   |                       |   | 9,758    |                          |  |   | 134          |   |  |                    |         |   |  |   | 9,892    |  
|Accrued vacation                                                 |  |        |         |   |                       |   | 3,526    |                          |  |   | 88           |   |  |                    |         |   |  |   | 3,614    |  
|Accrued insurance                                                |  |        |         |   |                       |   | 900      |                          |  |   |             |   |  |                    |         |   |  |   | 900      |  
|Accrued interest                                                 |  |        | 8,127    |   |                       |   |         |                          |  |   |             |   |  |                    |         |   |  |   | 8,127    |  
|Accrued other                                                    |  |        |         |   |                       |   | 3,468    |                          |  |   | 174          |   |  |                    |         |   |  |   | 3,642    |  
|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|Total current liabilities                                        |  |        | 9,903    |   |                       |   | 53,028   |                          |  |   | 262          |   |  |                    |         |   |  |   | 63,193   |  
|                                                                 |  |        |          |   |                      
|Long-term debt, excluding current installments                   |  |        | 384,694  |   |                       |   |         |                          |  |   |             |   |  |                    |         |   |  |   | 384,694  |  
|Obligations under capital leases, excluding current installments |  |        |         |   |                       |   | 1,466    |                          |  |   | 370          |   |  |                    |         |   |  |   | 1,836    |  
|Lease-financing obligation, excluding current installments       |  |        |         |   |                       |   |         |                          |  |   | 20,645       |   |  |                    |         |   |  |   | 20,645   |  
|Accrued insurance                                                |  |        |         |   |                       |   | 3,592    |                          |  |   |             |   |  |                    |         |   |  |   | 3,592    |  
|Deferred income taxes                                            |  |        | 5,500    |   |                       |   |         |                          |  |   |             |   |  |                    |         |   |  |   | 5,500    |  
|Other noncurrent liabilities                                     |  |        |         |   |                       |   | 3,919    |                          |  |   |             |   |  |                    |         |   |  |   | 3,919    |  
|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|Total liabilities                                                |  |        | 400,097  |   |                       |   | 62,005   |                          |  |   | 21,277       |   |  |                    |         |   |  |   | 483,379  |  
|                                                                 |  |        |          |   |                      
|Commitments and contingencies                                    |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|                                                                 |  |        |          |   |                      
|Stockholders equity (deficit):                                  |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|                                                                 |  |        |          |   |                      
|Common stock                                                     |  |        |         |   |                       |   |         |                          |  |   |             |   |  |                    |         |   |  |   |         |  
|Additional paid-in capital                                       |  |        | 171,965  |   |                       |   | 63       |                          |  |   |             |   |  |                    | (63      | ) |  |   | 171,965  |  
|Retained earnings (deficit)                                      |  |        | (192,514 | ) |                       |   | 256,419  |                          |  |   | (6,263       | ) |  |                    | (250,156 | ) |  |   | (192,514 | )
|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|Total stockholders equity (deficit)                             |  |        | (20,549  | ) |                       |   | 256,482  |                          |  |   | (6,263       | ) |  |                    | (250,219 | ) |  |   | (20,549  | )
|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|                                                                 |  | $      | 379,548  |   |                       | $ | 318,487  |                          |  | $ | 15,014       |   |  | $                  | (250,219 | ) |  | $ | 462,830  |  
|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  



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##### Table of Contents

LifeCare Holdings, Inc.

Condensed Consolidating Balance Sheet

December 31, 2007

(in thousands)



|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|---------------------------------------------------------------- |  | ------ | -------- | - | --------------------- | - | -------- | ------------------------ |  | - | ------------ | - |  | ------------------ | -------- | - |  | - | -------- | -
|                                                                 |  | Parent |          |   | GuarantorSubsidiaries |   |          | NonguarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedTotals |         
|Assets                                                           |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|Current assets:                                                  |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|Cash and cash equivalents                                        |  | $      |         |   |                       | $ | 17,816   |                          |  | $ |             |   |  | $                  |         |   |  | $ | 17,816   |  
|Accounts receivable, net of allowance for doubtful accounts      |  |        |         |   |                       |   | 66,911   |                          |  |   |             |   |  |                    |         |   |  |   | 66,911   |  
|Due to/from related parties                                      |  |        | 171,285  |   |                       |   | (170,336 | )                        |  |   | (949         | ) |  |                    |         |   |  |   |         |  
|Income taxes                                                     |  |        | 2,548    |   |                       |   | (523     | )                        |  |   |             |   |  |                    |         |   |  |   | 2,025    |  
|Other current assets                                             |  |        | 301      |   |                       |   | 11,819   |                          |  |   | 1,477        |   |  |                    |         |   |  |   | 13,597   |  
|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|                                                                 |  |        |          |   |                      
|Total current assets                                             |  |        | 174,134  |   |                       |   | (74,313  | )                        |  |   | 528          |   |  |                    |         |   |  |   | 100,349  |  
|Investment in subsidiary                                         |  |        | 221,638  |   |                       |   |         |                          |  |   |             |   |  |                    | (221,638 | ) |  |   |         |  
|Property and equipment, net                                      |  |        |         |   |                       |   | 66,235   |                          |  |   | 17,082       |   |  |                    |         |   |  |   | 83,317   |  
|Other assets                                                     |  |        | 11,398   |   |                       |   | 4,277    |                          |  |   |             |   |  |                    |         |   |  |   | 15,675   |  
|Identifiable intangibles, net                                    |  |        |         |   |                       |   | 18,445   |                          |  |   |             |   |  |                    |         |   |  |   | 18,445   |  
|Goodwill                                                         |  |        |         |   |                       |   | 263,970  |                          |  |   |             |   |  |                    |         |   |  |   | 263,970  |  
|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|                                                                 |  | $      | 407,170  |   |                       | $ | 278,614  |                          |  | $ | 17,610       |   |  | $                  | (221,638 | ) |  | $ | 481,756  |  
|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|                                                                 |  |        |          |   |                      
|Liabilities and Stockholders Equity (Deficit)                   |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|Current liabilities:                                             |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|Current installments of long-term debt                           |  | $      | 2,550    |   |                       | $ |         |                          |  | $ |             |   |  | $                  |         |   |  | $ | 2,550    |  
|Current installments of obligations under capital leases         |  |        |         |   |                       |   | 1,604    |                          |  |   |             |   |  |                    |         |   |  |   | 1,604    |  
|Estimated third-party payor settlements                          |  |        |         |   |                       |   | 5,744    |                          |  |   |             |   |  |                    |         |   |  |   | 5,744    |  
|Accounts payable                                                 |  |        | (7       | ) |                       |   | 22,317   |                          |  |   | 1,128        |   |  |                    |         |   |  |   | 23,438   |  
|Accrued payroll                                                  |  |        |         |   |                       |   | 6,351    |                          |  |   |             |   |  |                    |         |   |  |   | 6,351    |  
|Accrued vacation                                                 |  |        |         |   |                       |   | 3,489    |                          |  |   |             |   |  |                    |         |   |  |   | 3,489    |  
|Accrued insurance                                                |  |        |         |   |                       |   | 1,087    |                          |  |   |             |   |  |                    |         |   |  |   | 1,087    |  
|Accrued interest                                                 |  |        | 5,181    |   |                       |   |         |                          |  |   |             |   |  |                    |         |   |  |   | 5,181    |  
|Accrued other                                                    |  |        |         |   |                       |   | 2,739    |                          |  |   |             |   |  |                    |         |   |  |   | 2,739    |  
|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|                                                                 |  |        |          |   |                      
|Total current liabilities                                        |  |        | 7,724    |   |                       |   | 43,331   |                          |  |   | 1,128        |   |  |                    |         |   |  |   | 52,183   |  
|Long-term debt, excluding current installments                   |  |        | 393,713  |   |                       |   |         |                          |  |   |             |   |  |                    |         |   |  |   | 393,713  |  
|Obligations under capital leases, excluding current installments |  |        |         |   |                       |   | 741      |                          |  |   |             |   |  |                    |         |   |  |   | 741      |  
|Lease-financing obligation, excluding current installments       |  |        |         |   |                       |   |         |                          |  |   | 16,590       |   |  |                    |         |   |  |   | 16,590   |  
|Accrued insurance                                                |  |        |         |   |                       |   | 4,714    |                          |  |   |             |   |  |                    |         |   |  |   | 4,714    |  
|Other noncurrent liabilities                                     |  |        | 5,500    |   |                       |   | 8,082    |                          |  |   |             |   |  |                    |         |   |  |   | 13,582   |  
|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|Total liabilities                                                |  |        | 406,937  |   |                       |   | 56,868   |                          |  |   | 17,718       |   |  |                    |         |   |  |   | 481,523  |  
|                                                                 |  |        |          |   |                      
|Stockholders equity (deficit):                                  |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|Common stock                                                     |  |        |         |   |                       |   |         |                          |  |   |             |   |  |                    |         |   |  |   |         |  
|Additional paid-in capital                                       |  |        | 171,677  |   |                       |   | 62       |                          |  |   |             |   |  |                    | (62      | ) |  |   | 171,677  |  
|Retained earnings (deficit)                                      |  |        | (171,444 | ) |                       |   | 221,684  |                          |  |   | (108         | ) |  |                    | (221,576 | ) |  |   | (171,444 | )
|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|Total stockholders equity (deficit)                             |  |        | 233      |   |                       |   | 221,746  |                          |  |   | (108         | ) |  |                    | (221,638 | ) |  |   | 233      |  
|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  
|                                                                 |  | $      | 407,170  |   |                       | $ | 278,614  |                          |  | $ | 17,610       |   |  | $                  | (221,638 | ) |  | $ | 481,756  |  
|                                                                 |  |        |          |   |                       |   |          |                          |  |   |              |   |  |                    |          |   |  |   |          |  



F-24



---

##### Table of Contents

LifeCare Holdings, Inc.

Condensed Consolidating Statement of Operations

For the Year Ended
December 31, 2008



|                                        |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|--------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------------ | ------- | - |  | - | ------- | -
|                                        |  | Parent |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedTotals |        
|Net patient service revenue             |  | $      |        |   |                       | $ | 349,862 |                          |  | $ | 2,109        |   |  | $                  |        |   |  | $ | 351,971 |  
|                                        |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                        |  |        |         |   |                      
|Salaries, wages and benefits            |  |        | 300     |   |                       |   | 162,322 |                          |  |   | 3,353        |   |  |                    |        |   |  |   | 165,975 |  
|Supplies                                |  |        |        |   |                       |   | 35,179  |                          |  |   | 343          |   |  |                    |        |   |  |   | 35,522  |  
|Rent                                    |  |        |        |   |                       |   | 25,065  |                          |  |   | 514          |   |  |                    |        |   |  |   | 25,579  |  
|Other operating expenses                |  |        | 1,009   |   |                       |   | 78,253  |                          |  |   | 1,525        |   |  |                    |        |   |  |   | 80,787  |  
|Provision for doubtful accounts         |  |        |        |   |                       |   | 5,208   |                          |  |   | 26           |   |  |                    |        |   |  |   | 5,234   |  
|Depreciation and amortization           |  |        |        |   |                       |   | 10,555  |                          |  |   | 1,040        |   |  |                    |        |   |  |   | 11,595  |  
|Goodwill impairment charge              |  |        |        |   |                       |   | 18,600  |                          |  |   |             |   |  |                    |        |   |  |   | 18,600  |  
|Gain on early extinguishment of debt    |  |        | (9,526  | ) |                       |   |        |                          |  |   |             |   |  |                    |        |   |  |   | (9,526  | )
|Loss on disposal of asset               |  |        |        |   |                       |   | 92      |                          |  |   |             |   |  |                    |        |   |  |   | 92      |  
|Intercompany (income) expenses          |  |        | 20,951  |   |                       |   | (21,039 | )                        |  |   | 88           |   |  |                    |        |   |  |   |        |  
|Interest expense, net                   |  |        | 36,262  |   |                       |   | 147     |                          |  |   | 1,374        |   |  |                    |        |   |  |   | 37,783  |  
|                                        |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                        |  |        |         |   |                      
|Total expenses                          |  |        | 48,996  |   |                       |   | 314,382 |                          |  |   | 8,263        |   |  |                    |        |   |  |   | 371,641 |  
|                                        |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                        |  |        |         |   |                      
|Operating income (loss)                 |  |        | (48,996 | ) |                       |   | 35,480  |                          |  |   | (6,154       | ) |  |                    |        |   |  |   | (19,670 | )
|Earnings in investments in subsidiaries |  |        | (28,581 | ) |                       |   |        |                          |  |   |             |   |  |                    | 28,581  |   |  |   |        |  
|                                        |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                        |  |        |         |   |                      
|Income (loss) before income taxes       |  |        | (20,415 | ) |                       |   | 35,480  |                          |  |   | (6,154       | ) |  |                    | (28,581 | ) |  |   | (19,670 | )
|Provision for income taxes              |  |        | 655     |   |                       |   | 745     |                          |  |   |             |   |  |                    |        |   |  |   | 1,400   |  
|                                        |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                        |  |        |         |   |                      
|Net income (loss)                       |  | $      | (21,070 | ) |                       | $ | 34,735  |                          |  | $ | (6,154       | ) |  | $                  | (28,581 | ) |  | $ | (21,070 | )
|                                        |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  



F-25



---

##### Table of Contents

LifeCare Holdings, Inc.

Condensed Consolidating Statement of Operations

December 31, 2007



|                                               |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|---------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------------ | ------- | - |  | - | ------- | -
|                                               |  | Parent |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedTotals |        
|Net patient service revenue                    |  | $      |        |   |                       | $ | 322,215 |                          |  | $ |             |   |  | $                  |        |   |  | $ | 322,215 |  
|                                               |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                               |  |        |         |   |                      
|Salaries, wages and benefits                   |  |        | 695     |   |                       |   | 155,389 |                          |  |   | 41           |   |  |                    |        |   |  |   | 156,125 |  
|Supplies                                       |  |        |        |   |                       |   | 33,403  |                          |  |   | 57           |   |  |                    |        |   |  |   | 33,460  |  
|Rent                                           |  |        |        |   |                       |   | 21,641  |                          |  |   | 3            |   |  |                    |        |   |  |   | 21,644  |  
|Other operating expenses                       |  |        | 1,033   |   |                       |   | 79,217  |                          |  |   | 7            |   |  |                    |        |   |  |   | 80,257  |  
|Provision for doubtful accounts                |  |        |        |   |                       |   | 4,740   |                          |  |   |             |   |  |                    |        |   |  |   | 4,740   |  
|Depreciation and amortization                  |  |        |        |   |                       |   | 11,254  |                          |  |   |             |   |  |                    |        |   |  |   | 11,254  |  
|Goodwill impairment charge                     |  |        |        |   |                       |   | 38,834  |                          |  |   |             |   |  |                    |        |   |  |   | 38,834  |  
|Intercompany (income) expenses                 |  |        | 44,268  |   |                       |   | (44,268 | )                        |  |   |             |   |  |                    |        |   |  |   |        |  
|Interest expense, net                          |  |        | 36,564  |   |                       |   | (653    | )                        |  |   |             |   |  |                    |        |   |  |   | 35,911  |  
|                                               |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                               |  |        |         |   |                      
|Total expenses                                 |  |        | 82,560  |   |                       |   | 299,557 |                          |  |   | 108          |   |  |                    |        |   |  |   | 382,225 |  
|                                               |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                               |  |        |         |   |                      
|Operating income (loss)                        |  |        | (82,560 | ) |                       |   | 22,658  |                          |  |   | (108         | ) |  |                    |        |   |  |   | (60,010 | )
|Earnings in investments in subsidiaries        |  |        | 21,259  |   |                       |   |        |                          |  |   |             |   |  |                    | (21,259 | ) |  |   |        |  
|Equity in loss of joint venture                |  |        |        |   |                       |   | (695    | )                        |  |   |             |   |  |                    |         |   |  |   | (695    | )
|                                               |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                               |  |        |         |   |                      
|Income (loss) before income taxes              |  |        | (61,301 | ) |                       |   | 21,963  |                          |  |   | (108         | ) |  |                    | (21,259 | ) |  |   | (60,705 | )
|Provision for (benefit from) from income taxes |  |        | (519    | ) |                       |   | 596     |                          |  |   |             |   |  |                    |        |   |  |   | 77      |  
|                                               |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                               |  |        |         |   |                      
|Net income (loss)                              |  | $      | (60,782 | ) |                       | $ | 21,367  |                          |  | $ | (108         | ) |  | $                  | (21,259 | ) |  | $ | (60,782 | )
|                                               |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  



F-26



---

##### Table of Contents

LifeCare Holdings, Inc.

Condensed Consolidating Statement of Operations

December 31, 2006



|                                         |  |        |         |   |                       |   |         |                          |  |              |   |  |                    |         |   |  |   |         |  
|---------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------- | ------------------------ |  | ------------ | - |  | ------------------ | ------- | - |  | - | ------- | -
|                                         |  | Parent |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  | Eliminations |   |  | ConsolidatedTotals |        
|Net patient service revenue              |  | $      |        |   |                       | $ | 325,882 |                          |  | $            |  |  | $                  |        |   |  | $ | 325,882 |  
|                                         |  |        |         |   |                       |   |         |                          |  |              |   |  |                    |         |   |  |   |         |  
|                                         |  |        |         |   |                      
|Salaries, wages and benefits             |  |        | 634     |   |                       |   | 144,706 |                          |  |              |  |  |                    |        |   |  |   | 145,340 |  
|Supplies                                 |  |        |        |   |                       |   | 32,144  |                          |  |              |  |  |                    |        |   |  |   | 32,144  |  
|Rent                                     |  |        |        |   |                       |   | 18,080  |                          |  |              |  |  |                    |        |   |  |   | 18,080  |  
|Other operating expenses                 |  |        | 1,327   |   |                       |   | 75,879  |                          |  |              |  |  |                    |        |   |  |   | 77,206  |  
|Provision for doubtful accounts          |  |        |        |   |                       |   | 7,673   |                          |  |              |  |  |                    |        |   |  |   | 7,673   |  
|Depreciation and amortization            |  |        |        |   |                       |   | 11,856  |                          |  |              |  |  |                    |        |   |  |   | 11,856  |  
|Goodwill impairment charge               |  |        |        |   |                       |   | 43,600  |                          |  |              |  |  |                    |        |   |  |   | 43,600  |  
|Business interruption insurance proceeds |  |        |        |   |                       |   | (5,333  | )                        |  |              |  |  |                    |        |   |  |   | (5,333  | )
|Gain on early extinguishment of debt     |  |        | (1,329  | ) |                       |   |        |                          |  |              |  |  |                    |        |   |  |   | (1,329  | )
|Loss on disposal of asset                |  |        |        |   |                       |   | 945     |                          |  |              |  |  |                    |        |   |  |   | 945     |  
|Intercompany (income) expenses           |  |        | 56,338  |   |                       |   | (56,338 | )                        |  |              |  |  |                    |        |   |  |   |        |  
|Interest expense, net                    |  |        | 33,998  |   |                       |   | (1,179  | )                        |  |              |  |  |                    |        |   |  |   | 32,819  |  
|                                         |  |        |         |   |                       |   |         |                          |  |              |   |  |                    |         |   |  |   |         |  
|                                         |  |        |         |   |                      
|Total expenses                           |  |        | 90,968  |   |                       |   | 272,033 |                          |  |              |  |  |                    |        |   |  |   | 363,001 |  
|                                         |  |        |         |   |                       |   |         |                          |  |              |   |  |                    |         |   |  |   |         |  
|                                         |  |        |         |   |                      
|Operating income (loss)                  |  |        | (90,968 | ) |                       |   | 53,849  |                          |  |              |  |  |                    |        |   |  |   | (37,119 | )
|Earnings in investments in subsidiaries  |  |        | 51,665  |   |                       |   |        |                          |  |              |  |  |                    | (51,665 | ) |  |   |        |  
|                                         |  |        |         |   |                       |   |         |                          |  |              |   |  |                    |         |   |  |   |         |  
|                                         |  |        |         |   |                      
|Income (loss) before income taxes        |  |        | (39,303 | ) |                       |   | 53,849  |                          |  |              |  |  |                    | (51,665 | ) |  |   | (37,119 | )
|Provision for income taxes               |  |        | 1,523   |   |                       |   | 2,184   |                          |  |              |  |  |                    |        |   |  |   | 3,707   |  
|                                         |  |        |         |   |                       |   |         |                          |  |              |   |  |                    |         |   |  |   |         |  
|                                         |  |        |         |   |                      
|Net income (loss)                        |  | $      | (40,826 | ) |                       | $ | 51,665  |                          |  | $            |  |  | $                  | (51,665 | ) |  | $ | (40,826 | )
|                                         |  |        |         |   |                       |   |         |                          |  |              |   |  |                    |         |   |  |   |         |  



F-27



---

##### Table of Contents

LifeCare Holdings, Inc.

Condensed Consolidating Statement of Cash Flows

For the Year Ended
December 31, 2008



|                                                                                          |  |        |         |   |           |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|----------------------------------------------------------------------------------------- |  | ------ | ------- | - | --------- | - | ------- | ------------ |  | - | ------------ | - |  | ------------ | ------- | - |  | - | ------- | -
|                                                                                          |  | Parent |         |   | Guarantor |   |         | Nonguarantor |  |   | Eliminations |   |  | Consolidated |        
|Cash flows from operating activities:                                                     |  |        |         |   |           |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Net income (loss)                                                                         |  | $      | (21,070 | ) |           | $ | 34,735  |              |  | $ | (6,154       | ) |  | $            | (28,581 | ) |  | $ | (21,070 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |        |         |   |           |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Depreciation and amortization                                                             |  |        | 2,132   |   |           |   | 10,555  |              |  |   | 1,040        |   |  |              |        |   |  |   | 13,727  |  
|Provision for doubtful accounts                                                           |  |        |        |   |           |   | 5,208   |              |  |   | 26           |   |  |              |        |   |  |   | 5,234   |  
|Impairment charges                                                                        |  |        |        |   |           |   | 18,600  |              |  |   |             |   |  |              |        |   |  |   | 18,600  |  
|Gain on early extinguishment of debt                                                      |  |        | (9,526  | ) |           |   |        |              |  |   |             |   |  |              |        |   |  |   | (9,526  | )
|Loss on the disposition of assets                                                         |  |        |        |   |           |   | 92      |              |  |   |             |   |  |              |        |   |  |   | 92      |  
|Deferred income tax expense                                                               |  |        | 763     |   |           |   |        |              |  |   |             |   |  |              |        |   |  |   | 763     |  
|Equity compensation amortization                                                          |  |        | 288     |   |           |   |        |              |  |   |             |   |  |              |        |   |  |   | 288     |  
|Changes in operating assets and liabilities:                                              |  |        |         |   |           |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Patient accounts receivable                                                               |  |        |        |   |           |   | (4,280  | )            |  |   | (846         | ) |  |              |        |   |  |   | (5,126  | )
|Other current assets                                                                      |  |        | 298     |   |           |   | (1,162  | )            |  |   | 1,605        |   |  |              |        |   |  |   | 741     |  
|Change in investments in subsidiary                                                       |  |        | (28,581 | ) |           |   |        |              |  |   |             |   |  |              | 28,581  |   |  |   |        |  
|Other assets                                                                              |  |        | (81     | ) |           |   | 572     |              |  |   |             |   |  |              |        |   |  |   | 491     |  
|Due to from related parties                                                               |  |        | 51,687  |   |           |   | (61,179 | )            |  |   | 9,492        |   |  |              |        |   |  |   |        |  
|Estimated third-party payor settlements                                                   |  |        |        |   |           |   | 1,331   |              |  |   | (844         | ) |  |              |        |   |  |   | 487     |  
|Accounts payable and accrued expenses                                                     |  |        | 3,131   |   |           |   | 10,319  |              |  |   | (572         | ) |  |              |        |   |  |   | 12,878  |  
|Other noncurrent liabilities                                                              |  |        |        |   |           |   | (5,284  | )            |  |   |             |   |  |              |        |   |  |   | (5,284  | )
|                                                                                          |  |        |         |   |           |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|                                                                                          |  |        |         |   |          
|Net cash provided by (used in) operating activities                                       |  |        | (959    | ) |           |   | 9,507   |              |  |   | 3,747        |   |  |              |        |   |  |   | 12,295  |  
|                                                                                          |  |        |         |   |           |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|                                                                                          |  |        |         |   |          
|Cash flows from investing activities:                                                     |  |        |         |   |           |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Purchases of property and equipment                                                       |  |        |        |   |           |   | (4,841  | )            |  |   | (8,265       | ) |  |              |        |   |  |   | (13,106 | )
|Sale-leaseback proceeds                                                                   |  |        |        |   |           |   | 3,822   |              |  |   |             |   |  |              |        |   |  |   | 3,822   |  
|                                                                                          |  |        |         |   |           |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Net cash provided by (used in) investing activities                                       |  |        |        |   |           |   | (1,019  | )            |  |   | (8,265       | ) |  |              |        |   |  |   | (9,284  | )
|                                                                                          |  |        |         |   |           |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|                                                                                          |  |        |         |   |          
|Cash flows from financing activities:                                                     |  |        |         |   |           |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|Proceeds from lease financing obligation                                                  |  |        |        |   |           |   |        |              |  |   | 3,975        |   |  |              |        |   |  |   | 3,975   |  
|Payment on lease financing obligation                                                     |  |        |        |   |           |   |        |              |  |   | (86          | ) |  |              |        |   |  |   | (86     | )
|Net change in borrowings under the line of credit                                         |  |        | 10,000  |   |           |   |        |              |  |   |             |   |  |              |        |   |  |   | 10,000  |  
|Payments of notes payable and long-term debt                                              |  |        | (9,041  | ) |           |   |        |              |  |   |             |   |  |              |        |   |  |   | (9,041  | )
|Proceeds from capital lease financing                                                     |  |        |        |   |           |   | 963     |              |  |   | 839          |   |  |              |        |   |  |   | 1,802   |  
|Payments on obligations under capital leases                                              |  |        |        |   |           |   | (2,006  | )            |  |   | (209         | ) |  |              |        |   |  |   | (2,215  | )
|                                                                                          |  |        |         |   |           |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|                                                                                          |  |        |         |   |          
|Net cash provided by (used in) financing activities                                       |  |        | 959     |   |           |   | (1,043  | )            |  |   | 4,519        |   |  |              |        |   |  |   | 4,435   |  
|                                                                                          |  |        |         |   |           |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|                                                                                          |  |        |         |   |          
|Net decrease in cash and cash equivalents                                                 |  |        |        |   |           |   | 7,445   |              |  |   | 1            |   |  |              |        |   |  |   | 7,446   |  
|                                                                                          |  |        |         |   |          
|Cash and cash equivalents, beginning of period                                            |  |        |        |   |           |   | 17,816  |              |  |   |             |   |  |              |        |   |  |   | 17,816  |  
|                                                                                          |  |        |         |   |           |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  
|                                                                                          |  |        |         |   |          
|Cash and cash equivalents, end of period                                                  |  | $      |        |   |           | $ | 25,261  |              |  | $ | 1            |   |  | $            |        |   |  | $ | 25,262  |  
|                                                                                          |  |        |         |   |           |   |         |              |  |   |              |   |  |              |         |   |  |   |         |  



F-28



---

##### Table of Contents

LifeCare Holdings, Inc.

Condensed Consolidating Statement of Cash Flows

December 31, 2007



|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|----------------------------------------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------------ | ------- | - |  | - | ------- | -
|                                                                                          |  | Parent |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedTotals |        
|Cash flows from operating activities:                                                     |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|Net income (loss)                                                                         |  | $      | (60,782 | ) |                       | $ | 21,367  |                          |  | $ | (108         | ) |  | $                  | (21,259 | ) |  | $ | (60,782 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|Depreciation and amortization                                                             |  |        | 1,638   |   |                       |   | 11,255  |                          |  |   |             |   |  |                    |        |   |  |   | 12,893  |  
|Provision for doubtful accounts                                                           |  |        |        |   |                       |   | 4,740   |                          |  |   |             |   |  |                    |        |   |  |   | 4,740   |  
|Impairment charges                                                                        |  |        |        |   |                       |   | 38,834  |                          |  |   |             |   |  |                    |        |   |  |   | 38,834  |  
|Equity in loss of joint venture                                                           |  |        |        |   |                       |   | 695     |                          |  |   |             |   |  |                    |        |   |  |   | 695     |  
|Deferred income tax expense (benefit)                                                     |  |        | 1,695   |   |                       |   |        |                          |  |   |             |   |  |                    |        |   |  |   | 1,695   |  
|Equity compensation amortization                                                          |  |        | 684     |   |                       |   |        |                          |  |   |             |   |  |                    |        |   |  |   | 684     |  
|Changes in operating assets and liabilities:                                              |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|Patient accounts receivable                                                               |  |        |        |   |                       |   | (4,187  | )                        |  |   |             |   |  |                    |        |   |  |   | (4,187  | )
|Other current assets                                                                      |  |        | 4,587   |   |                       |   | (581    | )                        |  |   |             |   |  |                    |        |   |  |   | 4,006   |  
|Change in investments in subsidiary                                                       |  |        | (21,259 | ) |                       |   |        |                          |  |   |             |   |  |                    | 21,259  |   |  |   |        |  
|Other assets                                                                              |  |        | (3,141  | ) |                       |   | 3,218   |                          |  |   |             |   |  |                    |        |   |  |   | 77      |  
|Due to from related parties                                                               |  |        | 74,837  |   |                       |   | (75,658 | )                        |  |   | 821          |   |  |                    |        |   |  |   |        |  
|Estimated third-party payor settlements                                                   |  |        |        |   |                       |   | (2,564  | )                        |  |   |             |   |  |                    |        |   |  |   | (2,564  | )
|Accounts payable and accrued expenses                                                     |  |        | (46     | ) |                       |   | (6,436  | )                        |  |   | 1,129        |   |  |                    |        |   |  |   | (5,353  | )
|Other noncurrent liabilities                                                              |  |        | (1,024  | ) |                       |   | 435     |                          |  |   |             |   |  |                    |        |   |  |   | (589    | )
|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|Net cash provided by (used in) operating activities                                       |  |        | (2,811  | ) |                       |   | (8,882  | )                        |  |   | 1,842        |   |  |                    |        |   |  |   | (9,851  | )
|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                                                                          |  |        |         |   |                      
|Cash from investing activities:                                                           |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|Purchases of property and equipment                                                       |  |        |        |   |                       |   | (30,525 | )                        |  |   | (16,955      | ) |  |                    |        |   |  |   | (47,480 | )
|Sale-leaseback proceeds                                                                   |  |        |        |   |                       |   | 31,104  |                          |  |   |             |   |  |                    |        |   |  |   | 31,104  |  
|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|Net cash provided by (used in) investing activities                                       |  |        |        |   |                       |   | 579     |                          |  |   | (16,955      | ) |  |                    |        |   |  |   | (16,376 | )
|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                                                                          |  |        |         |   |                      
|Cash flows from financing activities:                                                     |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|Deferred financing costs                                                                  |  |        |        |   |                       |   | (3,142  | )                        |  |   |             |   |  |                    |        |   |  |   | (3,142  | )
|Proceeds from lease financing obligation                                                  |  |        |        |   |                       |   |        |                          |  |   | 15,113       |   |  |                    |        |   |  |   | 15,113  |  
|Payments of notes payable and long-term debt                                              |  |        | (3,188  | ) |                       |   |        |                          |  |   |             |   |  |                    |        |   |  |   | (3,188  | )
|Payments on obligations under capital leases                                              |  |        |        |   |                       |   | (3,989  | )                        |  |   |             |   |  |                    |        |   |  |   | (3,989  | )
|Equity contribution from parent                                                           |  |        | 5,999   |   |                       |   |        |                          |  |   |             |   |  |                    |        |   |  |   | 5,999   |  
|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                                                                          |  |        |         |   |                      
|Net cash provided by (used in) financing activities                                       |  |        | 2,811   |   |                       |   | (7,131  | )                        |  |   | 15,113       |   |  |                    |        |   |  |   | 10,793  |  
|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                                                                          |  |        |         |   |                      
|Net decrease in cash and cash equivalents                                                 |  |        |        |   |                       |   | (15,434 | )                        |  |   |             |   |  |                    |        |   |  |   | (15,434 | )
|Cash and cash equivalents, beginning of period                                            |  |        |        |   |                       |   | 33,250  |                          |  |   |             |   |  |                    |        |   |  |   | 33,250  |  
|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                                                                          |  |        |         |   |                      
|Cash and cash equivalents, end of period                                                  |  | $      |        |   |                       | $ | 17,816  |                          |  | $ |             |   |  | $                  |        |   |  | $ | 17,816  |  
|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  



F-29



---

##### Table of Contents

LifeCare Holdings, Inc.

Condensed Consolidating Statement of Cash Flows

December 31, 2006



|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|----------------------------------------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------- | ------------------------ |  | - | ------------ | - |  | ------------------ | ------- | - |  | - | ------- | -
|                                                                                          |  | Parent |         |   | GuarantorSubsidiaries |   |         | NonguarantorSubsidiaries |  |   | Eliminations |   |  | ConsolidatedTotals |        
|Cash flows from operating activities:                                                     |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|Net income (loss)                                                                         |  | $      | (40,826 | ) |                       | $ | 51,665  |                          |  | $ |             |   |  | $                  | (51,665 | ) |  | $ | (40,826 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|Depreciation and amortization                                                             |  |        | 1,385   |   |                       |   | 11,717  |                          |  |   |             |   |  |                    |        |   |  |   | 13,102  |  
|Provision for doubtful accounts                                                           |  |        |        |   |                       |   | 7,673   |                          |  |   |             |   |  |                    |        |   |  |   | 7,673   |  
|Impairment charges                                                                        |  |        |        |   |                       |   | 43,600  |                          |  |   |             |   |  |                    |        |   |  |   | 43,600  |  
|Gain on early extinguishment of debt                                                      |  |        | (1,329  | ) |                       |   |        |                          |  |   |             |   |  |                    |        |   |  |   | (1,329  | )
|Loss on the disposition of assets                                                         |  |        |        |   |                       |   | 945     |                          |  |   |             |   |  |                    |        |   |  |   | 945     |  
|Equity in loss of joint venture                                                           |  |        |        |   |                       |   |        |                          |  |   |             |   |  |                    |        |   |  |   |        |  
|Deferred income tax expense (benefit)                                                     |  |        | (2,524  | ) |                       |   |        |                          |  |   |             |   |  |                    |        |   |  |   | (2,524  | )
|Equity compensation amortization                                                          |  |        | 632     |   |                       |   |        |                          |  |   |             |   |  |                    |        |   |  |   | 632     |  
|Changes in operating assets and liabilities:                                              |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|Patient accounts receivable                                                               |  |        |        |   |                       |   | (11,854 | )                        |  |   |             |   |  |                    |        |   |  |   | (11,854 | )
|Other current assets                                                                      |  |        | 11,280  |   |                       |   | 3,870   |                          |  |   |             |   |  |                    |        |   |  |   | 15,150  |  
|Change in investments in subsidiary                                                       |  |        | (51,665 | ) |                       |   |        |                          |  |   |             |   |  |                    | 51,665  |   |  |   |        |  
|Other assets                                                                              |  |        | (127    | ) |                       |   | (1,082  | )                        |  |   |             |   |  |                    |        |   |  |   | (1,209  | )
|Due to from related parties                                                               |  |        | 74,544  |   |                       |   | (74,671 | )                        |  |   | 127          |   |  |                    |        |   |  |   |        |  
|Estimated third-party payor settlements                                                   |  |        |        |   |                       |   | 16,574  |                          |  |   |             |   |  |                    |        |   |  |   | 16,574  |  
|Accounts payable and accrued expenses                                                     |  |        | (1,242  | ) |                       |   | 7,204   |                          |  |   |             |   |  |                    |        |   |  |   | 5,962   |  
|Other noncurrent liabilities                                                              |  |        | 112     |   |                       |   | 3,665   |                          |  |   |             |   |  |                    |        |   |  |   | 3,777   |  
|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                                                                          |  |        |         |   |                      
|Net cash provided by (used in) operating activities                                       |  |        | (9,760  | ) |                       |   | 59,306  |                          |  |   | 127          |   |  |                    |        |   |  |   | 49,673  |  
|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                                                                          |  |        |         |   |                      
|Cash from investing activities:                                                           |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|Purchases of property and equipment                                                       |  |        |        |   |                       |   | (28,108 | )                        |  |   | (127         | ) |  |                    |        |   |  |   | (28,235 | )
|Insurance recoveries for property and equipment                                           |  |        |        |   |                       |   | 788     |                          |  |   |             |   |  |                    |        |   |  |   | 788     |  
|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|Net cash used in investing activities                                                     |  |        |        |   |                       |   | (27,320 | )                        |  |   | (127         | ) |  |                    |        |   |  |   | (27,447 | )
|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                                                                          |  |        |         |   |                      
|Cash flows from financing activities:                                                     |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|Payments of notes payable and long-term debt                                              |  |        | (3,443  | ) |                       |   |        |                          |  |   |             |   |  |                    |        |   |  |   | (3,443  | )
|Payments on obligations under capital leases                                              |  |        |        |   |                       |   | (5,376  | )                        |  |   |             |   |  |                    |        |   |  |   | (5,376  | )
|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                                                                          |  |        |         |   |                      
|Net cash used in financing activities                                                     |  |        | (3,443  | ) |                       |   | (5,376  | )                        |  |   |             |   |  |                    |        |   |  |   | (8,819  | )
|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                                                                          |  |        |         |   |                      
|Net decrease in cash and cash equivalents                                                 |  |        | (13,203 | ) |                       |   | 26,610  |                          |  |   |             |   |  |                    |        |   |  |   | 13,407  |  
|Cash and cash equivalents, beginning of period                                            |  |        |        |   |                       |   | 19,843  |                          |  |   |             |   |  |                    |        |   |  |   | 19,843  |  
|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  
|                                                                                          |  |        |         |   |                      
|Cash and cash equivalents, end of period                                                  |  | $      | (13,203 | ) |                       | $ | 46,453  |                          |  | $ |             |   |  | $                  |        |   |  | $ | 33,250  |  
|                                                                                          |  |        |         |   |                       |   |         |                          |  |   |              |   |  |                    |         |   |  |   |         |  



F-30



---

##### Table of Contents

(19) Selected Quarterly Financial Information (Unaudited)

The table below sets forth selected unaudited financial data for each quarter or the last two years (in thousands).



|                                  |  |              |        |   |               |   |        |              |  |   |               |   |  |   |         |  
|--------------------------------- |  | ------------ | ------ | - | ------------- | - | ------ | ------------ |  | - | ------------- | - |  | - | ------- | -
|                                  |  | FirstQuarter |        |   | SecondQuarter |   |        | ThirdQuarter |  |   | FourthQuarter |  
|Year ended December 31, 2008      |  |              |        |   |               |   |        |              |  |   |               |   |  |   |         |  
|Net revenues                      |  | $            | 88,761 |   |               | $ | 86,632 |              |  | $ | 82,394        |   |  | $ | 94,184  |  
|Loss before income taxes          |  |              | (2,717 | ) |               |   | (3,902 | )            |  |   | (5,090        | ) |  |   | (7,961  | )
|Net loss                          |  |              | (2,917 | ) |               |   | (4,127 | )            |  |   | (5,925        | ) |  |   | (8,101  | )
|                                  |  |              |        |  
|Year ended December 31, 2007      |  |              |        |   |               |   |        |              |  |   |               |   |  |   |         |  
|Net revenues                      |  | $            | 82,369 |   |               | $ | 82,554 |              |  | $ | 77,553        |   |  | $ | 79,739  |  
|Income (loss) before income taxes |  |              | (2,546 | ) |               |   | (5,049 | )            |  |   | (15,182       | ) |  |   | (37,928 | )
|Net income (loss)                 |  |              | (1,695 | ) |               |   | (5,201 | )            |  |   | (13,229       | ) |  |   | (40,657 | )

Operating results for the fourth quarter of 2008 included pretax income of $1.8 million related to
a favorable adjustment of professional liability cost, impairment charges of $18.6 million associated with goodwill, a $2.5 million favorable adjustment in net patient service revenues associated with changes in estimates on previously filed
Medicare cost reports, and a gain of $9.5 million, net of the write-off of $0.5 million of capitalized financing costs, on the early extinguishment of indebtedness.

Operating results for the fourth quarter of 2007 included pretax income of $2.6 million related to a favorable adjustment of professional liability cost, a pretax benefit of $1.0 million associated with an adjustment
to our allowance for doubtful accounts, impairment charges of $35.0 million associated with goodwill, and $0.9 million favorable adjustment in net patient service revenues associated with a payment correction to Medicare revenues by one of our
Medicare fiscal intermediaries. In addition, an adjustment of $1.9 million was recorded to income taxes to appropriately record the valuation allowance related to deferred tax assets based on a correction to the companys 2005 tax return.

Schedule II

Valuation and Qualifying Accounts



|                                                                      |  |                              |        |                            |   |                |  |   |                        |   |  |   |       
|--------------------------------------------------------------------- |  | ---------------------------- | ------ | -------------------------- | - | -------------- |  | - | ---------------------- | - |  | - | ------
|Description                                                           |  | Balance atbeginningof period |        | Charged toCost andExpenses |   | Deductions (1) |  |   | Balance atend ofPeriod
|Allowance for doubtful accounts for the year ended December, 31, 2008 |  | $                            | 19,394 |                            | $ | 5,234          |  | $ | (14,484                | ) |  | $ | 10,144
|Allowance for doubtful accounts for the year ended December, 31, 2007 |  |                              | 16,392 |                            |   | 4,740          |  |   | (1,738                 | ) |  |   | 19,394
|Allowance for doubtful accounts for the year ended December, 31, 2006 |  |                              | 14,372 |                            |   | 7,673          |  |   | (5,653                 | ) |  |   | 16,392



|(1) | Deductions represent write-offs and other adjustments against the reserve. In 2008, we wrote-off all accounts receivable
related to our old system that had been previously fully reserved.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-31



---

##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.



LIFECARE HOLDINGS, INC./s/ G. Wayne McAlisterG. Wayne McAlisterChief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report is signed
by the following persons of the registrant in the capacities and as of the dates indicated.



|                             |  |                                                                                              |  |               
|---------------------------- |  | -------------------------------------------------------------------------------------------- |  | --------------
|Signature                    |  | Title                                                                                        |  | Date          
|                             |  |                                                                                             
|/s/ G. Wayne McAlister       |  | Chief Executive Officer and Chairman of the Board of Directors (principal executive officer) |  | March 31, 2009
|G. Wayne McAlister           |  |                                                                                              | 
|                             |  |                                                                                             
|/s/ Chris A. Walker          |  | Chief Financial Officer (principal financial officer and principal accounting officer)       |  | March 31, 2009
|Chris A. Walker              |  |                                                                                              | 
|                             |  |                                                                                             
|/s/ Karen H. Bechtel         |  | Director                                                                                     |  | March 31, 2009
|Karen H. Bechtel             |  |                                                                                              |  |               
|                             |  |                                                                                             
|/s/ William P. Johnston      |  | Director                                                                                     |  | March 31, 2009
|William P. Johnston          |  |                                                                                              |  |               
|                             |  |                                                                                             
|/s/ William Hamburg          |  | Director                                                                                     |  | March 31, 2009
|William Hamburg              |  |                                                                                              |  |               
|                             |  |                                                                                             
|/s/ Stephen H. Wise          |  | Director                                                                                     |  | March 31, 2009
|Stephen H. Wise              |  |                                                                                              |  |               
|                             |  |                                                                                             
|/s/ William H. McMullan, Jr. |  | Director                                                                                     |  | March 31, 2009
|William H. McMullan, Jr.     |  |                                                                                              |  |               



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##### Table of Contents

EXHIBIT INDEX



|     |  |                                                                                                                                                                                                                                        
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Certificate of Incorporation of LifeCare Holdings, Inc., filed as Exhibit 3.1 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on
April 14, 2006.                                 
|     | 
|3.2  |  | By-laws of LifeCare Holdings, Inc., filed as Exhibit 3.2 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14,
2006.                                                      
|     | 
|3.3  |  | Certificate of Incorporation of LifeCare Hospitals of Milwaukee, Inc., as amended, filed as Exhibit 3.3 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006.       
|     | 
|3.4  |  | Certificate of Incorporation of LifeCare Hospitals of Northern Nevada, Inc., filed as Exhibit 3.4 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006              
|     | 
|3.5  |  | Certificate of Incorporation of LifeCare Hospitals of South Texas, Inc., filed as Exhibit 3.5 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as
filed on April 14, 2006.                 
|     | 
|3.6  |  | Certificate of Incorporation of NextCARE Specialty Hospital of Denver, Inc., filed as Exhibit 3.6 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006.             
|     | 
|3.7  |  | Articles of Organization of CareRehab Services, LLC, filed as Exhibit 3.7 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on
April 14, 2006.                                     
|     | 
|3.8  |  | Articles of Incorporation of LifeCare Hospitals, Inc., as amended, filed as Exhibit 3.8 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed
on April 14, 2006.                       
|     | 
|3.9  |  | Articles of Organization of LifeCare Hospitals of North Carolina, LLC, as amended, filed as Exhibit 3.9 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006.       
|     | 
|3.10 |  | Articles of Organization of LifeCare Hospitals of New Orleans, LLC, as amended, filed as Exhibit 3.10 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006.         
|     | 
|3.11 |  | Articles of Organization of LifeCare Management Services, LLC, as amended, filed as Exhibit 3.11 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319,
as filed on April 14, 2006.              
|     | 
|3.12 |  | Articles of Organization of Crescent City Hospitals, LLC, filed as Exhibit 3.12 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on
April 14, 2006.                               
|     | 
|3.13 |  | Articles of Incorporation of NextCARE Hospitals/Muskegon, Inc., as amended, filed as Exhibit 3.13 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006.             
|     | 
|3.14 |  | Articles of Incorporation of LifeCare Hospitals of Chester County, Inc., filed as Exhibit 3.14 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319,
as filed on April 14, 2006.                
|     | 
|3.15 |  | Articles of Organization of LifeCare Holding Company of Texas, LLC, as amended, filed as Exhibit 3.15 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006.         
|     | 
|3.16 |  | Articles of Incorporation of LifeCare Hospitals of Dayton, Inc., filed as Exhibit 3.16 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed
on April 14, 2006.                        
|     | 
|3.17 |  | Articles of Incorporation of LifeCare Hospitals of Pittsburgh, Inc., filed as Exhibit 3.17 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as
filed on April 14, 2006.                    
|     | 
|3.18 |  | Articles of Organization of LifeCare Investments, LLC., filed as Exhibit 3.18 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on
April 14, 2006.                                 
|     | 
|3.19 |  | Certificate of Limited Partnership of LifeCare Hospitals of Fort Worth, LP, as amended, filed as Exhibit 3.19 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006. 
|     | 
|3.20 |  | Certificate of Limited Partnership of LifeCare Hospitals of North Texas, LP, as amended, filed as Exhibit 3.20 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006.
|     | 
|3.21 |  | Certificate of Limited Partnership of San Antonio Specialty Hospital, Ltd., as amended, filed as Exhibit 3.21 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006. 
|     | 
|3.22 |  | Bylaws of LifeCare Hospitals of Milwaukee, Inc., filed as Exhibit 3.22 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on
April 14, 2006.                                        
|     | 
|3.23 |  | Bylaws of LifeCare Hospitals of Northern Nevada, Inc., filed as Exhibit 3.23 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on
April 14, 2006.                                  



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##### Table of Contents

|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.24 |  | Bylaws of LifeCare Hospitals of South Texas, Inc., filed as Exhibit 3.24 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on
April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|     | 
|3.25 |  | Bylaws of NextCARE Specialty Hospital of Denver, Inc., filed as Exhibit 3.25 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on
April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     | 
|3.26 |  | Amended and Restated Operating Agreement of CareRehab Services, LLC, filed as Exhibit 3.26 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as
filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     | 
|3.27 |  | First Amended and Restated Bylaws of LifeCare Hospitals, Inc., filed as Exhibit 3.27 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on
April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     | 
|3.28 |  | Amended and Restated Operating Agreement of LifeCare Hospitals of North Carolina, LLC, filed as Exhibit 3.28 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     | 
|3.29 |  | Amended and Restated Operating Agreement of LifeCare Hospitals of New Orleans, LLC, filed as Exhibit 3.29 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     | 
|3.30 |  | Amended and Restated Operating Agreement of LifeCare Management Services, LLC, filed as Exhibit 3.30 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|     | 
|3.31 |  | Operating Agreement of Crescent City Hospitals, LLC, filed as Exhibit 3.31 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on
April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     | 
|3.32 |  | By-laws of NextCARE Hospitals/Muskegon, Inc, filed as Exhibit 3.32 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14,
2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     | 
|3.33 |  | Bylaws of LifeCare Hospitals of Chester County, Inc, filed as Exhibit 3.33 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on
April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|     | 
|3.34 |  | Amended and Restated Operating Agreement of LifeCare Holding Company of Texas, LLC, filed as Exhibit 3.34 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|     | 
|3.35 |  | Bylaws of LifeCare Hospitals of Dayton, Inc, filed as Exhibit 3.35 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14,
2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|     | 
|3.36 |  | Bylaws of LifeCare Hospitals of Pittsburgh, Inc, filed as Exhibit 3.36 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on
April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|     | 
|3.37 |  | Amended and Restated Operating Agreement of LifeCare Investments, LLC, filed as Exhibit 3.37 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as
filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     | 
|3.38 |  | Agreement of Limited Partnership of LifeCare Hospitals of Fort Worth, LP, filed as Exhibit 3.38 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319,
as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|     | 
|3.39 |  | Agreement of Limited Partnership of LifeCare Hospitals of North Texas, LP, filed as Exhibit 3.39 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319,
as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|     | 
|3.40 |  | Agreement of Limited Partnership of San Antonio Specialty Hospital, Ltd, filed as Exhibit 3.40 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319,
as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     | 
|4.1  |  | Indenture dated as of August 11, 2005 between Rainier Acquisition Corp. and U.S. Bank National Association, filed as Exhibit 4.1 to the LifeCare Holdings, Inc. Form S-4 Registration Statement,
Registration No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|     | 
|4.2  |  | Supplemental Indenture dated as of August 11, 2005 among LifeCare Holdings, Inc., LifeCare Hospitals of Milwaukee, Inc., LifeCare Hospitals of Northern Nevada, Inc., LifeCare Hospitals of South
Texas, Inc., NextCARE Specialty Hospital of Denver, Inc., CareRehab Services, LLC, LifeCare Hospitals, Inc., LifeCare Hospitals of North Carolina, LLC, LifeCare Hospitals of New Orleans, LLC, LifeCare Management Services, LLC, Crescent City
Hospitals, LLC, NextCARE Hospitals/Muskegon, Inc., LifeCare Hospitals of Chester County, Inc., LifeCare Holding Company of Texas, LLC, LifeCare Hospitals of Dayton, Inc., LifeCare Hospitals of Pittsburgh, Inc., LifeCare Investments, LLC, LifeCare
Hospitals of Fort Worth, LP, LifeCare Hospitals of North Texas, LP, San Antonio Specialty Hospital, Ltd. and U.S. Bank National Association, filed as Exhibit 4.2 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006.



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##### Table of Contents

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.3     |  | Registration Rights Agreement dated as of August 11, 2005 by and among LifeCare Holdings, Inc., LifeCare Hospitals of Milwaukee, Inc., LifeCare Hospitals of Northern Nevada, Inc., LifeCare
Hospitals of South Texas, Inc., NextCARE Specialty Hospital of Denver, Inc., CareRehab Services, LLC, LifeCare Hospitals, Inc., LifeCare Hospitals of North Carolina, LLC, LifeCare Hospitals of New Orleans, LLC, LifeCare Management Services, LLC,
Crescent City Hospitals, LLC, NextCARE Hospitals/Muskegon, Inc., LifeCare Hospitals of Chester County, Inc., LifeCare Holding Company of Texas, LLC, LifeCare Hospitals of Dayton, Inc., LifeCare Hospitals of Pittsburgh, Inc., LifeCare Investments,
LLC, LifeCare Hospitals of Fort Worth, LP, LifeCare Hospitals of North Texas, LP, San Antonio Specialty Hospital, Ltd., Banc of America Securities LLC, J.P. Morgan Securities Inc. and ING Financial Markets LLC, filed as Exhibit 4.3 to the LifeCare
Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14, 2006.
|        | 
|4.4     |  | Joinder Agreement dated as of August 11, 2005 among LifeCare Holdings, Inc., LifeCare Hospitals of Milwaukee, Inc., LifeCare Hospitals of Northern Nevada, Inc., LifeCare Hospitals of South
Texas, Inc., NextCARE Specialty Hospital of Denver, Inc., CareRehab Services, LLC, LifeCare Hospitals, Inc., LifeCare Hospitals of North Carolina, LLC, LifeCare Hospitals of New Orleans, LLC, LifeCare Management Services, LLC, Crescent City
Hospitals, LLC, NextCARE Hospitals/Muskegon, Inc., LifeCare Hospitals of Chester County, Inc., LifeCare Holding Company of Texas, LLC, LifeCare Hospitals of Dayton, Inc., LifeCare Hospitals of Pittsburgh, Inc., LifeCare Investments, LLC, LifeCare
Hospitals of Fort Worth, LP, LifeCare Hospitals of North Texas, LP, San Antonio Specialty Hospital, Ltd., Banc of America Securities LLC, J.P. Morgan Securities Inc. and ING Financial Markets LLC, filed as Exhibit 4.4 to the LifeCare Holdings, Inc.
Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14, 2006.                   
|        | 
|4.5     |  | Form of 91/4% Senior Subordinated Notes due 2013 (contained in Exhibit
4.2), filed as an exhibit to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 
|10.1    |  | Lease Agreement between Mercy Health Services and NextCARE, Inc. dated as of June 26, 1998, filed as Exhibit 10.1 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 
|10.2    |  | Amendment to Lease Agreement between Mercy Health Services and NextCARE Inc., dated May 1, 2001, filed as Exhibit 10.2 to the LifeCare Holdings, Inc. Form S-4 Registration Statement,
Registration No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 
|10.3    |  | Letter Agreement between Mercy Health Services and NextCARE, Inc. dated October 30, 2003, filed as Exhibit 10.3 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 
|10.4(a) |  | Medical Office Building Lease between Methodist Healthcare System of San Antonio, 3LTD., and San Antonio Specialty Hospital, Ltd. dated November 12, 2003 (Suite 460), filed as Exhibit 10.4(a) to
the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 
|10.4(b) |  | Medical Office Building Lease between Methodist Healthcare System of San Antonio, 3LTD., and San Antonio Specialty Hospital, Ltd. dated November 12, 2003 (Suite 600), filed as Exhibit
10.4(b) to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 
|10.4(c) |  | Medical Office Building Lease between Methodist Healthcare System of San Antonio, 3LTD., and San Antonio Specialty Hospital, Ltd. dated November 12, 2003 (Suite 620), filed as Exhibit 10.4(c) to
the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 
|10.5    |  | Amendment to Medical Office Building Lease between Methodist Healthcare System of San Antonio, 3LTD. and San Antonio Specialty Hospital, Ltd. dated November 6, 2003, filed as Exhibit 10.5 to the
LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 
|10.6    |  | First Amendment to Sublease dated as of July 19, 2005 by and between Shreveport Doctors Hospital 2003, Ltd. and LifeCare Hospitals, Inc., filed as Exhibit 10.6 to the LifeCare Holdings, Inc.
Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 
|10.7    |  | Stockholders Agreement dated as of August 11, 2005 by and among LCI Holding Company, Inc., LCI Intermediate Holdco, Inc., LCI Holdco, LLC, LifeCare Holdings, Inc., each of Carlyle Partners IV,
L.P. and CP IV Coinvestment, L.P., and each other stockholder of LCI Holding Company, Inc. from time to time party thereto, filed as Exhibit 10.7 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as
filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 
|10.8    |  | Registration Rights Agreement dated as of August 11, 2005 by and among LCI Holding Company, Inc., LCI Intermediate Holdco, Inc., LCI Holdco, LLC, LifeCare Holdings, Inc., each of Carlyle
Partners IV, L.P. and CP IV Coinvestment, L.P., and each other stockholder of LCI Holding Company, Inc. from time to time party thereto, filed as Exhibit 10.8 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration
No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 
|10.9    |  | Management Agreement dated as of August 11, 2005 by and among LifeCare Holdings, Inc., LCI Holding Company, Inc., LCI Intermediate Holdco, Inc., LCI Holdco, LLC, Rainier Acquisition Corp.
and TC Group IV, L.L.C., filed as Exhibit 10.9 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 
|10.10   |  | Employment Agreement with W. Earl Reed, III, filed as Exhibit 10.10 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14,
2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



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##### Table of Contents

|      |  |                                                                                                                                                                                                                                                                                                                                                                                         
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.11 |  | Employment Agreement with Bryan D. Burklow, filed as Exhibit 10.11 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14,
2006.                                                                                                                                                                                             
|      | 
|10.12 |  | Employment Agreement with Jill L. Force, filed as Exhibit 10.12 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                
|      | 
|10.13 |  | Employment Agreement with Chris Walker, filed as Exhibit 10.13 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                 
|      | 
|10.14 |  | Employment Agreement with Phil Douglas, filed as Exhibit 10.14 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14, 2006.                                                                                                                                                                                                 
|      | 
|10.15 |  | Purchase Agreement dated as of August 5, 2005 between Rainier Acquisition Corp. and Banc of America Securities LLC, J.P. Morgan Securities Inc. and ING Financial Markets LLC, filed as Exhibit
10.15 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14, 2006.                                                          
|      | 
|10.16 |  | Credit Agreement dated as of August 11, 2005 among Rainier Acquisition Corp., LCI Holdco, LLC, the Lenders named therein and J.P. Morgan Chase Bank, N.A., a national banking association, as
administrative agent and collateral agent, filed as Exhibit 10.16 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14, 2006.
|      | 
|10.17 |  | Security Agreement dated as of August 11, 2005 by Rainier Acquisition Corp. and the Grantors referred to therein to JP Morgan Chase Bank, N.A., as collateral agent, filed as Exhibit 10.17 to the
LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14, 2006.                                                                    
|      | 
|10.18 |  | Chief Executive Officer and Executive Vice President 2006 Bonus Plan Summary, filed as Exhibit 10.18 to the LifeCare Holdings, Inc. Form 10-K report on April 2, 2007.                                                                                                                                                                                                                  
|      | 
|10.19 |  | Amendment No. 1, dated May 2, 2007, to Credit Agreement, dated as of August 11, 2005, filed as Exhibit 10.3 to the LifeCare Holdings, Inc. Form 8-K current report on May 8,
2007.                                                                                                                                                                                                      
|      | 
|10.20 |  | Amendment No. 2, dated December 6, 2007, to Credit Agreement, dated as of August 11, 2005, filed as Exhibit 10.1 to the LifeCare Holdings, Inc. Form 8-K current report on
December 12, 2007.                                                                                                                                                                                           
|      | 
|10.21 |  | Master Lease Agreement dated September 1, 2006 by and between Health Care REIT, Inc. and LCI Healthcare Holdings, Inc., filed as Exhibit 10.1 to the LifeCare Holdings, Inc. Form 8-K current
report on September 8, 2006.                                                                                                                                                              
|      | 
|10.22 |  | Master Lease Agreement dated May 2, 2007 by and between Health Care REIT, Inc. and LifeCare REIT 1, Inc., filed as Exhibit 10.3 to the LifeCare Holdings, Inc. Form 8-K current report on May
8, 2007.                                                                                                                                                                                  
|      | 
|10.23 |  | Amended and Restated Master Lease Agreement dated June 6, 2007 by and between Health Care REIT, Inc., HCRI Texas Properties LTD, HCRI Wisconsin Properties, LLC, and LifeCare REIT 1,
Inc., filed as Exhibit 10.1 to the LifeCare Holdings, Inc. Form 8-K current report on June 12, 2007.                                                                                              
|      | 
|10.24 |  | Letter Agreement with William Hamburg, filed as Exhibit 10.24 to the LifeCare Holdings, Inc. Form 10-K report on March 28, 2008.                                                                                                                                                                                                                                                        
|      | 
|10.25 |  | Employment Agreement with G. Wayne McAlister, filed as Exhibit 10.25 to the LifeCare Holdings, Inc. Form 10-K report on March 28, 2008.                                                                                                                                                                                                                                                 
|      | 
|10.26 |  | Amendment No. 1 to G. Wayne McAlisters employment agreement, filed as Exhibit 10.01 to the LifeCare Holdings, Inc. Form 10-Q report on August 14, 2008.                                                                                                                                                                                                                                
|      | 
|10.27 |  | Amendment No. 1 to Phillip B. Douglas employment agreement, filed as Exhibit 10.02 to the LifeCare Holdings, Inc. Form 10-Q report on August 14, 2008.                                                                                                                                                                                                                                 
|      | 
|10.28 |  | Amended and restated executive employment agreement for Chris A. Walker, filed as Exhibit 10.03 to the LifeCare Holdings, Inc. Form 10-Q report on August 14, 2008.                                                                                                                                                                                                                     
|      | 
|10.29 |  | Employment Agreement with Grant B. Asay, filed as Exhibit 10.04 to the LifeCare Holdings, Inc. Form 10-Q report on August 14, 2008.                                                                                                                                                                                                                                                     
|      | 
|10.30 |  | Amendment No. 1 to Grant B. Asays employment agreement, filed as Exhibit 10.05 to the LifeCare Holdings, Inc. Form 10-Q report on August 14, 2008.                                                                                                                                                                                                                                     



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##### Table of Contents

|      |  |                                                                                                                                                                                     
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.31 |  | Form of Transaction Bonus Agreement, filed as Exhibit 10.06 to the LifeCare Holdings, Inc. Form 10-Q report on August 14, 2008.                                                     
|      | 
|10.32 |  | Employment Agreement with Catherine A. Conner.                                                                                                                                      
|      | 
|12    |  | Statement re: Computation of Ratios.                                                                                                                                                
|      | 
|21    |  | Subsidiaries of LifeCare Holdings, Inc, filed as Exhibit 21 to the LifeCare Holdings, Inc. Form S-4 Registration Statement, Registration No. 133-133319, as filed on April 14, 2006.
|      | 
|31.1  |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                 
|      | 
|31.2  |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                 
|      | 
|32.1  |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                   
|      | 
|32.2  |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.