Pursuant to Rule 424(b)(3)
Registration Statement No. 333-63828

PROSPECTUS

[LOGO OF SELECT MEDICAL CORPORATION]

OFFER TO EXCHANGE

9 1/2% Senior Subordinated Notes due 2009 for all outstanding
9 1/2% Senior Subordinated Notes due 2009

SELECT MEDICAL CORPORATION

THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON AUGUST 13, 2001, UNLESS EXTENDED.

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Terms of the exchange offer:

-- We will exchange all old notes that are validly tendered and not
withdrawn prior to the expiration of the exchange offer.

-- You may withdraw tenders of old notes at any time prior to the
expiration of the exchange offer.

-- We believe that the exchange of old notes will not be a taxable event
for U.S. federal income tax purposes, but you should see "United
States Federal Income Tax Considerations" on page 142 for more
information.

-- We will not receive any proceeds from the exchange offer.

-- The terms of the new notes are substantially identical to the old
notes, except that the new notes are registered under the Securities
Act of 1933 and the transfer restrictions and registration rights
applicable to the old notes do not apply to the new notes.

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See "Risk Factors" beginning on page 16 for a discussion of risks that
should be considered by holders prior to tendering their old notes.

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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus.
Any representation to the contrary is a criminal offense.

The date of this prospectus is July 11, 2001.

In making your investment decision, you should rely only on the
information contained in this prospectus. We have not authorized any other
person to provide you with different information. If anyone provides you with
different or inconsistent information, you should not rely on it. You should
assume that the information appearing in this prospectus is accurate as of the
date on the front cover of this prospectus only. Our business, financial
condition, results of operations and prospects may have changed since that
date. Neither the delivery of this prospectus nor any sale made hereunder shall
under any circumstances imply that the information herein is correct as of any
date subsequent to the date on the cover of this prospectus.

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TABLE OF CONTENTS

Page
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Summary............................. 1
Risk Factors........................ 16
Use of Proceeds..................... 26
Capitalization...................... 27
Selected Consolidated Financial and
Other Data......................... 29
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 35
Our Business........................ 49
The Exchange Offer.................. 67
Management.......................... 75
Related Party Transactions.......... 84

Page
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Principal Stockholders............. 91
Description of Notes............... 94
Description of Other Indebtedness.. 135
Book-Entry Settlement and
Clearance......................... 137
Exchange and Registration Rights
Agreement......................... 139
United States Federal Income Tax
Consequences ..................... 142
Plan of Distribution............... 146
Legal Matters...................... 147
Experts............................ 147
Where You Can Find More
Information....................... 147
Index to Consolidated Financial
Statements........................ F-1

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Select Medical Corporation is a Delaware corporation. Our principal
executive offices are located at 4716 Old Gettysburg Road, Mechanicsburg,
Pennsylvania 17055, and our telephone number at that address is (717) 972-1100.
Our World Wide Web site address is www.selectmedicalcorp.com. The information
in our web site is not part of this prospectus. Our common stock is listed on
the Nasdaq National Market under the symbol "SLMC."

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Each broker-dealer that receives new notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of new notes. The letter of transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act of 1933, as amended, which we refer to as the Securities Act.
This prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of new notes received in
exchange for old notes where the old notes were acquired by the broker-dealer
as a result of market-making activities or other trading activities. We have
agreed that, for a period of 180 days after the expiration date, we will make
this prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution."

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INDUSTRY AND MARKET DATA

In this prospectus we rely on and refer to information and statistics
regarding the healthcare industry. We obtained this information and these
statistics from various third-party sources, discussions with our customers and
our own internal estimates. We believe that these sources and estimates are
reliable, but we have not independently verified them and cannot guarantee
their accuracy or completeness.

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FORWARD-LOOKING STATEMENTS

Statements contained in this prospectus that are not historical facts may
be forward-looking statements within the meaning of U.S. federal securities
law. Such forward-looking statements reflect management's beliefs and
assumptions and are based on information currently available to management.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company or industry results to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such risks, uncertainties and other factors include, among
others:

. general economic, demographic and business conditions, both
nationally and in regions where we operate;

. the effect of existing or future governmental regulation and federal
and state legislative and enforcement initiatives on our business,
including the Balanced Budget Act of 1997;

. changes in Medicare reimbursement levels;

. our ability to implement successfully our acquisition and development
strategies, and the unforeseen risks to which our future acquisitions
may expose us;

. the availability and terms of financing to fund the expansion of our
business, including the acquisition of additional long term acute
care hospitals and outpatient rehabilitation clinics;

. our ability to attract and retain qualified management personnel and
to recruit and retain nurses and other healthcare personnel;

. the failure of our long term acute care hospitals to maintain their
status as such;

. our ability to enter into managed care provider arrangements on terms
attractive to us, and the effect of cost containment initiatives
undertaken by third party payors of our services;

. changes in generally accepted accounting principles that may affect
our reported results of operations;

. the effect of liability and other claims asserted against us; and

. the effect of competition in the markets we serve.

All subsequent written and oral forward-looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements set forth or referred to above. We are
not obligated to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.

You can identify forward-looking statements by those that are not
historical in nature, particularly those that use terminology such as "may,"
"will," "should," "expect," "anticipate," "contemplate," "estimate," "believe,"
"plan," "project," "predict," "potential," "continue" or the negative of these
or similar terms. In evaluating these forward-looking statements, you should
consider various factors, including the risk factors described in this
prospectus. Such factors may cause our actual results to differ materially from
any forward-looking Statement.

SUMMARY

This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including the
financial statements and related notes and the risks of investing discussed
under "Risk Factors," before investing.

In this prospectus, "Company," "we," "our," "us" and "Select" refer to
Select Medical Corporation, With respect to the descriptions of our business
contained in this prospectus, such terms refer to Select Medical Corporation
and our subsidiaries.

Summary

The Exchange Offer

On June 11, 2001, we issued and sold $175.0 million aggregate principal
amount of 9 1/2% Senior Subordinated Notes due 2009, referred to as the old
notes. In connection with that sale, we entered into a registration rights
agreement with the initial purchasers of the old notes in which we agreed to
deliver this prospectus to you and to complete an exchange offer for the old
notes. As requested by the registration rights agreement, we are offering to
exchange $175.0 million aggregate principal amount of our new 9 1/2% Senior
Subordinated Notes due 2009, referred to as the new notes, the issuance of
which will be registered under the Securities Act, for a like aggregate
principal amount of our old notes. We refer to this offer to exchange new notes
for old notes in accordance with the terms set forth in this prospectus and the
accompanying letter of transmittal as the exchange offer. You are entitled to
exchange your old notes for new notes. We urge you to read the discussions
under the headings "The Exchange Offer" and "The New Notes" in this summary for
further information regarding the exchange offer and the new notes.

Company Overview

We are the second largest operator of specialty acute care hospitals for
long term stay patients in the United States based on the number of our
facilities. We are also the second largest operator of outpatient
rehabilitation clinics in the United States based on the number of our clinics.
As of March 31, 2001, we operated 56 specialty acute care hospitals in 21
states and 675 outpatient rehabilitation clinics in 29 states, the District of
Columbia and seven Canadian provinces. We began operations in 1997 under the
leadership of our current management team, including our co-founders, Rocco A.
Ortenzio and Robert A. Ortenzio, both of whom have significant experience in
the healthcare industry. Under this leadership, we have grown our business
through strategic acquisitions and internal development initiatives. For the
twelve months ended March 31, 2001, we had net operating revenues of $834.3
million and EBITDA of $96.5 million. For the same period, we earned 50.2% of
our net operating revenues from our outpatient rehabilitation business and
49.8% from our specialty acute care hospitals. In April 2001, we completed a
$98.3 million initial public offering of our common stock.

Competitive Strengths

Leading Market Position

Since beginning our operations in 1997, we believe we have developed a
reputation as a high quality, cost-effective health care provider in the
markets we serve. We are the second largest operator of specialty acute care
hospitals for long term stay patients in the United States and the second
largest operator of outpatient rehabilitation clinics in the United States. As
of March 31, 2001, we operated 56 specialty hospitals with 2,068 available
licensed beds in 21 states, and we also operated 675 outpatient rehabilitation
clinics in 29 states, the District of Columbia and seven Canadian provinces.
Our leadership positions allow us to attract and retain patients, aid us in our
marketing efforts to payors and referral sources and help us negotiate more
favorable contracts.

Experienced and Proven Management Team

Our Chief Executive Officer has founded and operated four healthcare
companies, two of which he co-founded with our President. Our five senior
operations executives have an average of 23 years of experience in the
healthcare industry. In addition, 17 of the Company's 23 officers have worked
together in previous healthcare companies.

Significant Scale

Our specialty acute care hospitals and outpatient rehabilitation clinics
provide us with significant scale and advantages over many of our competitors.
These advantages allow us to leverage our operating costs by centralizing
administrative functions at our corporate office and spreading the costs of
operating these functions over a large base of operations. We believe that our
size also gives us an advantage in negotiating contracts with commercial
insurers.

Multiple Business Lines and Geographic Diversity

We have a leading presence in two attractive segments of the healthcare
industry, which we believe diversifies our business risk. Because we provide
both inpatient care in our specialty acute care hospitals and outpatient care
in our rehabilitation clinics, we do not rely exclusively on a single business
line for our net operating revenues or EBITDA. Our geographic diversification
and the mix of our business also reduces our exposure to any single
governmental or commercial reimbursement source.

Proven Operating Performance

We have established a track record of improving the financial performance
of the hospitals and clinics we operate. A significant reason for our strong
operating performance over the past several years has been our disciplined
approach to growth and intense focus on margin improvement and cash flow
preservation, which is evidenced by:

. a 2.1 percentage point increase in EBITDA margins for the fiscal year
2000 compared to the fiscal year 1999;

. our ability to reduce costs by standardizing procedures and
centralizing administrative functions; and

. a reduction in accounts receivable days outstanding from 119 as of
December 31, 1999 to 81 as of March 31, 2001.

Experience in Successfully Completing and Integrating Acquisitions

Since we began operations in 1997, we have completed three significant
acquisitions for approximately $366 million in aggregate consideration, as well
as a number of smaller acquisitions. We believe we have significantly improved
the operating performance of the facilities we have acquired. We are selective
in identifying and pursuing acquisitions, focusing on strategic opportunities
where we can leverage management's expertise and enhance operating performance.

Demonstrated Development Expertise

From our inception through March 31, 2001, we developed 20 new specialty
acute care hospitals and 66 outpatient rehabilitation clinics. These
initiatives have demonstrated our ability to effectively identify new
opportunities and implement start-up plans.

Specialty Acute Care Hospitals

Our specialty hospitals treat patients with serious and often complex
medical conditions such as respiratory failure, neuromuscular disorders,
cardiac disorders, non-healing wounds, renal disorders and cancer. Patients are
admitted to our specialty acute care hospitals from general acute care
hospitals in our markets. These patients generally require longer stays and a
higher level of clinical attention than patients in general acute care
hospitals. Furthermore, general acute care hospitals usually are not adequately
compensated for the treatment of this type of patient. The differences in
clinical expertise and reimbursement rates provide general acute care hospitals
and their physicians with incentives to discharge longer stay, medically
complex patients to our facilities. For the twelve months ended March 31, 2001
we generated revenue of $404.7 million and EBITDA of $48.0 million in our
specialty acute care hospital business.

Nearly all of our facilities are located in leased space within general
acute care hospitals. The leased spaces are commonly referred to as a "hospital
within a hospital." We believe this model provides several advantages to
patients, host hospitals, physicians and us:

. Patients benefit from being in a setting specialized to meet their
unique medical needs without having the disruption of being
transferred to another location.

. In addition to being provided with a place to transfer high-cost,
long-stay patients, host hospitals benefit by receiving payments from
us for rent and ancillary services.

. Physicians affiliated with the host hospital are provided with the
convenience of being able to monitor the progress of their patients
without traveling to another location.

. We benefit from the ability to operate specialty hospitals without the
capital investment often associated with buying or building a
freestanding facility. We also gain operating cost efficiencies by
contracting with these host hospitals for selected services at
discounted rates.

The key elements of our specialty acute care hospital strategy are to:

. Provide High Quality and Cost Effective Care

To effectively address the complex nature of our patients' medical
conditions, we have developed specialized treatment programs focused
on their needs. Additionally, our staffing models are designed to
ensure that patients have access to the necessary level of clinical
attention and that our resources are being deployed in an efficient,
cost-effective manner. The quality of the patient care we provide is
continually monitored using several measures, including patient,
payor and physician satisfaction surveys, as well as clinical
outcomes.

. Reduce Costs

We continually seek to improve operating efficiency and reduce costs
at our hospitals by standardizing and centralizing key administrative
functions. We believe that by optimizing staffing based on our
occupancy and the clinical needs of our patients, we can lower our
variable cost per patient. Additionally, as part of our operating
philosophy, we continue to focus on initiatives that will reduce
expenses, such as group purchasing arrangements to receive discounts
for pharmaceutical and medical supplies.

. Increase Higher Margin Commercial Volume

We typically receive higher reimbursement rates from commercial
insurers than we do from the federal Medicare program. As a result,
we work to expand relationships with insurers to increase commercial
patient volume. Although the level of care we provide is complex and
staff intensive, we typically have lower operating expenses because
of our "hospital within a hospital" operating

model and we provide a much narrower range of patient services than a
general acute care hospital. As a result of these lower costs, we
offer more attractive rates to commercial payors. We also believe
that we offer commercial enrollees customized treatment programs not
offered in traditional acute care facilities.

. Develop New Specialty Acute Care Hospitals

Our goal is to develop 10 new specialty acute care hospitals each
year using our "hospital within a hospital" model by leasing space
from general acute care hospitals with leading market positions and
significant scale. We seek to contract with various types of general
hospitals, including for-profit, not-for-profit and university
affiliates. We intend to continue to expand our high quality facility
base while maintaining our high standards of care.

. Pursue Opportunistic Acquisitions

In addition to our development initiatives, we intend to grow our
network of specialty hospitals
through strategic acquisitions. We adhere to selective criteria in
our analysis and have historically been able to obtain assets for
what we believe are attractive valuations. We have a focused team of
professionals that formulates and executes an integration plan, and
we have generally been able to increase margins at acquired
facilities by streamlining various functions and standardizing our
staffing models.

Outpatient Rehabilitation

Our outpatient rehabilitation clinics provide physical, occupational and
speech therapy typically to patients with musculoskeletal impairments that
restrict their ability to perform normal activities of daily living. We also
provide rehabilitation management services and staffing on a contract basis to
other healthcare providers. Patients are generally referred or directed to our
clinics by a physician, employer or health insurer
who believes that a patient can benefit from our services. We believe that our
services are attractive to healthcare payors who are seeking to provide the
most cost-effective level of care to their members. For the twelve months ended
March 31, 2001 we generated revenue of $418.6 million and EBITDA of $67.3
million from our outpatient rehabilitation business.

The key elements of our outpatient rehabilitation strategy are to:

. Increase Market Share

Having a strong market share in our local markets allows us to
benefit from heightened brand awareness, economies of scale and
increased leverage when negotiating payor contracts. To increase our
market share, we seek to expand the services and programs we provide
and generate loyalty with patients and referral sources by providing
high quality care and strong customer service.

. Optimize the Profitability of Our Payor Contracts

We continually review new and existing payor contracts to determine
how each of the contracts affects our profitability. We create a
retention strategy for each of our top performing contracts and a re-
negotiation strategy for contracts that do not meet our defined
criteria.

. Improve Margins

To improve operating margins we continually revise and streamline
operational processes. We consistently seek to utilize labor
efficiently. Additionally, we have been successful in reducing
overhead costs following acquisitions. We believe that we will be
able to improve margins in the future by continuing to combine
administrative functions, improve labor utilization, and consolidate
information systems.

. Grow Through New Development and Disciplined Acquisitions

We intend to open new clinics in our current markets where we believe
we can benefit from existing referral relationships and brand
awareness to produce incremental growth and operating leverage.
Additionally, we intend to continually evaluate acquisition
opportunities that may enhance the scale of our business and expand
our geographic reach.

. Maintain Strong Employee Relations

We seek to retain, motivate and educate our employees whose
relationships with referral sources, such as physicians and
healthcare case managers, are key to our success. We attempt to
motivate them by implementing a performance-based program, a defined
career path, timely and open communication on company developments,
and internal training programs. We also focus on empowering our
employees by giving them a high degree of autonomy in determining
local market strategy. This management approach reflects the unique
nature of each market we operate in and the importance of encouraging
our employees to assume responsibility for their clinic's
performance.

Industry Overview

According to the Health Care Financing Administration (the name of which
is being changed to the Centers for Medicare & Medicaid Services), total U.S.
healthcare spending is estimated to grow 6.6% in 2001 and at an annual average
rate of 6.5% from 2001 through 2008. By these estimates, healthcare
expenditures will account for approximately $2.2 trillion, or 16.2%, of the
total U.S. gross domestic product by 2008.

Demographic considerations also affect long term growth projections for
healthcare spending. According to the U.S. Census Bureau, there are
approximately 35 million Americans aged 65 or older in the U.S. today, who
comprise approximately 13% of the total U.S. population. By the year 2030 the
number of elderly is expected to climb to 70 million, or 20% of the total
population. In addition to this aging population, there is also an increasing
life expectancy among Americans, with the number of people aged 85 years and
older expected to increase from 4.3 million to 8.9 million by the year 2030. We
believe that this increase in life expectancy will increase demand for
healthcare services and, as importantly, the demand for innovative, more
sophisticated means of delivering those services.

We believe that growth in spending will create opportunities for low
cost, high quality healthcare providers like us. We believe that continued
spending pressure will encourage efficiency by directing patients toward lower-
cost settings such as our specialty acute care hospitals and outpatient
rehabilitation clinics.

The Exchange Offer

Notes Offered.................. $175,000,000 aggregate principal amount of 9
1/2% Senior Subordinated Notes due 2009. The
terms of the new notes and old notes are
identical in all material respects, except
for transfer restrictions and registration
rights relating to the old notes.

The Exchange Offer............. We are offering the new notes to you in
exchange for a like principal amount of old
notes. Old notes may be exchanged only in
integral multiples of $1,000. We intend by
the issuance of the new notes to satisfy our
obligations contained in the Exchange and
Registration Rights Agreement. See "Exchange
and Registration Rights Agreement."

Expiration Date; Withdrawal of
Tender........................ The exchange offer will expire at 5:00 p.m.,
New York City time, on August 13, 2001, or
such later date and time to which it may be
extended by us. The tender of old notes
pursuant to the exchange offer may be
withdrawn at any time prior to the expiration
date of the exchange offer. Any old notes not
accepted for exchange for any reason will be
returned without expense to the tendering
holder thereof as promptly as practicable
after the expiration or termination of the
exchange offer.

Conditions to the Exchange
Offer......................... Our obligation to accept for exchange, or to
issue new notes in exchange for, any old
notes is subject to customary conditions
relating to compliance with any applicable
law or any applicable interpretation by the
staff of the Securities and Exchange
Commission, the receipt of any applicable
governmental approvals and the absence of any
actions or proceedings of any governmental
agency or court which could materially impair
our ability to consummate the exchange offer.
We currently expect that each of the
conditions will be satisfied and that no
waivers will be necessary. See "The Exchange
Offer -- Conditions to the Exchange Offer."

Procedures for Tendering Old
Notes......................... If you wish to participate in the exchange
offer and tender your old notes, you must
complete, sign and date the letter of
transmittal, or a facsimile of the letter of
transmittal, in accordance with its
instructions and the instructions in this
prospectus, and mail or otherwise deliver the
letter of transmittal, or the facsimile,
together with the old notes and any other
required documentation, to the exchange agent
at the address set forth herein. See "The
Exchange Offer-- Procedures for Tendering Old
Notes."

Use of Proceeds................ We will not receive any proceeds from the
exchange offer.

Exchange Agent................. State Street Bank and Trust Company is
serving as the exchange agent in connection
with the exchange offer.

Federal Income Tax We believe that the exchange of notes
Consequences.................. pursuant to the exchange offer will not be a
taxable event for U.S. federal income tax
purposes. See "United States Federal Income
Tax Consequences."

Consequences of Exchanging Old Notes Pursuant to the Exchange Offer

Based on certain interpretive letters issued by the staff of the
Securities and Exchange Commission to third parties in unrelated transactions,
we believe that holders of old notes (other than any holder who is an
"affiliate" of our company within the meaning of Rule 405 under the Securities
Act) who exchange their old notes for new notes pursuant to the exchange offer
generally may offer the new notes for resale, resell the new notes and
otherwise transfer the new notes without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided:

. the new notes are acquired in the ordinary course of the holders'
business;

. the holders have no arrangement with any person to participate in a
distribution of the new notes; and

. neither the holder nor any other person is engaging in or intends to
engage in a distribution of the new notes.

Each broker-dealer that receives new notes for its own account in
exchange for old notes must acknowledge that it will deliver a prospectus in
connection with any resale of the new notes. See "Plan of Distribution." In
addition, to comply with the securities laws of applicable jurisdictions, the
new notes may not be offered or sold unless they have been registered or
qualified for sale in the applicable jurisdiction or in compliance with an
available exemption from registration or qualification. We have agreed, under
the Exchange and Registration Rights Agreement and subject to limitations
specified in the Exchange and Registration Rights Agreement, to register or
qualify the new notes for offer or sale under the securities or blue sky laws
of the applicable jurisdictions as any holder of the notes reasonably requests
in writing. If a holder of old notes does not exchange the old notes for new
notes according to the terms of the exchange offer, the old notes will continue
to be subject to the restrictions on transfer contained in the legend printed
on the old notes. In general, the old notes may not be offered or sold, unless
registered under the Securities Act, except under an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. Holders of old notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law in connection with the exchange
offer. See "The Exchange Offer -- Consequences of Failure to Exchange; Resales
of New Notes."

The old notes are currently eligible for trading in the Private
Offerings, Resales and Trading through Automated Linkages (PORTAL) market.
Following commencement of the exchange offer but prior to its completion, the
old notes may continue to be traded in the PORTAL market. Following completion
of the exchange offer, the new notes will not be eligible for PORTAL trading.

The New Notes

The terms of the new notes and the old notes are identical in all
material respects, except for transfer restrictions and registration rights
relating to the old notes.

Issuer......................... Select Medical Corporation

Maturity Date.................. June 15, 2009.

Interest Payment Dates......... June 15 and December 15 of each year,
commencing December 15, 2001.

Optional Redemption............ On or after June 15, 2005, Select may redeem
some or all of the notes at the redemption
prices listed in the section entitled
"Description of Notes--Optional Redemption."
Select may not redeem the notes before June
15, 2005, except that at any time before June
15, 2004, Select may redeem up to 35% of the
original principal amount of the notes with
the proceeds of certain offerings of common
equity at a redemption price equal to 109
1/2% of the principal amount of the notes,
together with accrued and unpaid interest, so
long as 65% of the original principal amount
of the notes remain outstanding after each
permitted redemption made with equity
proceeds.

Change of Control.............. Upon a change of control, each holder of the
notes may require Select to repurchase such
holder's notes, in whole or in part, at a
purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid
interest to the purchase date.

Guarantees..................... Substantially all of Select's operations are
conducted through its subsidiaries. Select's
obligations under the new notes will be fully
and unconditionally guaranteed on a senior
subordinated basis by all of its wholly owned
domestic subsidiaries. For the twelve months
ended March 31, 2001, Select's wholly owned
domestic subsidiaries generated approximately
76% of Select's EBITDA. At March 31, 2001,
those subsidiaries represented approximately
84% of Select's total assets.

Ranking........................ The new notes will be subordinated in right
of payment to all of Select's existing and
future senior indebtedness, including
Select's obligations in respect of the senior
credit facility. The guarantees of the new
notes will be 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 new notes will rank equally in
right of payment with all of Select's
existing and future senior subordinated
indebtedness and senior to all of Select's
other existing and future subordinated
indebtedness. The guarantees of the new notes
will rank equally in right of payment with
all senior subordinated indebtedness and
senior to all subordinated indebtedness of
the subsidiary guarantors.

As of March 31, 2001, on a pro forma as
adjusted basis for the sale of the old notes,
and giving effect to $25.6 million of net
borrowings under Select's senior credit
facility subsequent to that date, Select and
its subsidiaries would have had approximately
$112.8 million of
indebtedness to which the new notes would
have been subordinated, and approximately
$4.6 million of indebtedness to which the new
notes would rank equally. This amount
includes $103.2 million in borrowings under
Select's senior credit facility but does not
include up to an additional $149.3 million
available to Select and its subsidiaries
under its senior credit facility.

As of March 31, 2001 on the basis described
above, Select's subsidiary guarantors would
have had $108.3 million of guarantor senior
indebtedness to which their respective
guarantees of the new notes would be
subordinated. The subsidiary guarantors would
have had approximately $4.6 million of
guarantor senior subordinated indebtedness
with which their respective guarantees of the
new notes would rank equally.

Certain Covenants.............. The notes are governed by an indenture with
State Street Bank and Trust Company, as
trustee. The indenture, among other things,
restricts our ability to:

.incur additional debt;

.incur debt that is junior to our senior debt
but senior to the notes;

.pay dividends and redeem stock or redeem
subordinated debt;

.incur or permit to exist certain liens;

.enter into agreements that restrict
dividends from subsidiaries;

.sell assets;

.enter into transactions with affiliates;

.sell capital stock of subsidiaries;

.merge or consolidate; and

.enter different lines of business.

The covenants listed above are subject to
certain exceptions and limitations described
in the indenture.

For a more detailed discussion of the new notes, see "Description of
Notes."

You should refer to the section entitled "Risk Factors" for an
explanation of certain risks in investing in the new notes.

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

You should read the summary consolidated financial and other data below in
conjunction with our consolidated financial statements and the accompanying
notes. We derived the historical financial data for the periods ended December
31, 1998, 1999 and 2000 from our audited consolidated financial statements. We
derived the historical financial data for the three months ended March 31, 2000
and March 31, 2001, and as of March 31, 2001, from our unaudited interim
consolidated financial statements. You should also read "Selected Consolidated
Financial and Other Data" and the accompanying "Management's Discussion and
Analysis of Financial Condition and Results of Operations." All of these
materials are contained later in this prospectus. The pro forma as adjusted
consolidated statement of operations data for the year ended December 31, 2000
are pro forma for our initial public offering and the application of the net
proceeds therefrom as if these events had been completed on January 1, 2000,
and as adjusted for the sale of the old notes and use of proceeds from that
sale as if it had been completed on January 1, 2000, and exclude extraordinary
items. The pro forma as adjusted consolidated balance sheet data as of March
31, 2001 are pro forma for our initial public offering and the application of
the net proceeds therefrom and as adjusted to give effect to the sale of the
old notes and use of proceeds from that sale as if these events had been
completed on March 31, 2001. The pro forma as adjusted statement of operations
data for the three months ended March 31, 2001 are pro forma for our initial
public offering and the application of the net proceeds therefrom and as
adjusted to give effect to the sale of the old notes and use of proceeds from
that sale as if these events had been completed on January 1, 2001. The data
for the twelve month period ended March 31, 2001, which we refer to as the pro
forma as adjusted LTM period, are unaudited and are derived by adding data for
the year ended December 31, 2000 and for the three month period ended March 31,
2001, and subtracting therefrom the data from the three month period ended
March 31, 2000, and pro forma for our initial public offering and the
application of the net proceeds therefrom and as adjusted for the sale of the
old notes and use of proceeds from that sale as if it had been completed on
April 1, 2000, and excludes extraordinary items.

For the three months ended
Year Ended December 31, March 31,
---------------------------------------------- -------------------------------
Pro Forma
As Adjusted
Pro Forma Pro Forma LTM ended
As Adjusted As Adjusted March 31,
1998 1999 2000 2000(h) 2000 2001 2001(i) 2001(j)
--------- --------- --------- ----------- -------- -------- ----------- -----------
(in thousands, except per share data)

Consolidated Statement
of Operations Data
Net operating revenues.. $ 149,043 $ 455,975 $ 805,897 $ 805,897 $196,722 $225,088 $225,088 $834,263
Operating expenses (a).. 145,450 413,731 714,227 714,227 174,471 198,056 198,056 737,812
Depreciation and
amortization........... 4,942 16,741 30,401 30,401 7,021 7,816 7,816 31,196
Special charges (b)..... 10,157 5,223 -- -- -- -- -- --
--------- --------- --------- --------- -------- -------- -------- --------
Income (loss) from
operations............. (11,506) 20,280 61,269 61,269 15,230 19,216 19,216 65,255
Other income............ -- -- -- -- -- -- -- --
Interest expense
(income), net.......... 4,976 21,099 35,187 30,220 8,765 7,775 6,926 29,623
--------- --------- --------- --------- -------- -------- -------- --------
Income (loss) before
minority interests,
income taxes and
extraordinary items.... (16,482) (819) 26,082 31,049 6,465 11,441 12,290 35,632
Minority interests (c).. 1,744 3,662 4,144 4,144 1,118 1,407 1,407 4,433
--------- --------- --------- --------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary item..... (18,226) (4,481) 21,938 26,905 5,347 10,034 10,883 31,199
Income tax provision
(benefit).............. (182) 2,811 9,979 11,966 2,513 3,913 4,244 13,200
--------- --------- --------- --------- -------- -------- -------- --------
Net income (loss) before
extraordinary item..... (18,044) (7,292) 11,959 14,939 2,834 6,121 6,639 17,999
Extraordinary item (d).. -- 5,814 6,247 -- -- -- -- --
--------- --------- --------- --------- -------- -------- -------- --------
Net income (loss)....... (18,044) (13,106) 5,712 14,939 2,834 6,121 6,639 17,999
Less: Preferred
dividends ............. (2,540) (5,175) (8,780) -- (2,117) (2,306) -- --
--------- --------- --------- --------- -------- -------- -------- --------
Net income (loss)
available to common
stockholders .......... $ (20,584) $ (18,281) $ (3,068) $ 14,939 $ 717 $ 3,815 $ 6,639 $ 17,999
========= ========= ========= ========= ======== ======== ======== ========
Net income (loss) per
common share:
Basic:
Net income (loss)
before extraordinary
item................ $ (1.64) $ (0.50) $ 0.13 $ 0.33 $ 0.03 $ 0.15 $ 0.15 $ 0.40
Extraordinary item... -- (0.24) (0.25) -- -- -- -- --
--------- --------- --------- --------- -------- -------- -------- --------
Net income (loss).... $ (1.64) $ (0.74) $ (0.12) $ 0.33 $ 0.03 $ 0.15 $ 0.15 $ 0.40
========= ========= ========= ========= ======== ======== ======== ========
Diluted:
Net income (loss)
before extraordinary
item................ $ (1.64) $ (0.50) $ 0.12 $ 0.32 $ 0.03 $ 0.13 $ 0.14 $ 0.39
Extraordinary item... -- (0.24) (0.24) -- -- -- -- -
--------- --------- --------- --------- -------- -------- -------- --------
Net income (loss).... $ (1.64) $ (0.74) $ (0.12) $ 0.32 $ 0.03 $ 0.13 $ 0.14 $ 0.39
========= ========= ========= ========= ======== ======== ======== ========
Weighted average common
shares outstanding (e):
Basic.................. 12,517 24,557 25,457 44,783 25,492 25,476 44,802 44,793
Diluted................ 12,517 24,557 25,907 46,025 25,504 36,078 46,188 46,107
Other data:
EBITDA (f).............. $ 3,593 $ 42,244 $ 91,670 $ 91,670 $ 22,251 $ 27,032 $ 27,032 $ 96,451
EBITDA as a % of net
revenue................ 2.4 % 9.3 % 11.4% 11.4% 11.3% 12.0% 12.0% 11.6%
Capital expenditures.... $ 6,423 $ 10,896 $ 22,430 $ 22,430 $ 5,934 $ 5,325 $ 5,325 $ 21,821
Ratio of EBITDA to net
interest............... 3.3x
Cash Flow Data:
Cash flow (used in)
provided by operating
activities............ $ (24,702) $ (25,157) $ 22,513 $ 8,491 $ 24,819
Cash flow (used in)
provided by investing
activities............ (209,481) (181,262) 14,197 (7,456) (7,205)
Cash flow provided by
(used in) financing
activities............ 242,298 197,480 (37,616) (877) (18,531)
Ratio of Earnings to
fixed charges (g)..... n/a n/a 1.1x 1.6x 1.2x 1.4x 1.9x

(footnotes begin on page 13)

As of March 31, 2001
------------------------
Pro Forma
Actual As Adjusted (k)
-------- ---------------
(in thousands)

Consolidated Balance Sheet Data
Cash and cash equivalents.............................. $ 2,174 $ 3,351
Working capital........................................ 110,733 92,869
Total assets........................................... 581,396 588,073
Total debt............................................. 289,426 272,500
Preferred stock........................................ 131,879 --
Total stockholders' equity............................. 52,320 201,241

Selected Operating Data

The following table sets forth operating statistics for our specialty
acute care hospitals and our outpatient rehabilitation business for each of the
periods presented. The data in the table reflect the changes in the number of
specialty acute care hospitals and outpatient rehabilitation clinics we operate
that resulted from acquisitions, start-up activities and closures. The
operating statistics reflect data for the period of time these operations were
managed by us. The same specialty hospital data include hospitals operated by
us for the comparable periods. Further information on our acquisition
activities can be found in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the notes to our consolidated
financial statements.

Three months ended
Year Ended December 31, March 31,
---------------------------- --------------------
1998 1999 2000 2000 2001
-------- -------- -------- --------- ---------
(dollars in thousands)

Specialty Hospital Data:
Number of hospitals--start
of period................. -- 39 44 44 54
Number of hospitals
acquired................ 37 -- -- -- --
Number of hospital start-
ups..................... 2 6 10 3 2
Number of hospitals
closed.................. -- 1 -- -- --
-------- -------- -------- --------- ---------
Number of hospitals--end of
period (l)................ 39 44 54 47 56
-------- -------- -------- --------- ---------
Available licensed beds
(m)....................... 1,428 1,649 1,982 1,770 2,068
Admissions (n)............. 2,640 12,421 14,210 3,613 4,191
Patient days (o)........... 74,418 358,304 427,448 103,301 123,740
Average length of stay
(p)....................... 29 30 30 29 31
Occupancy rate (q)......... 52% 63% 63% 66% 68%
Percent patient days--
Medicare (r).............. 78% 78% 76% 77% 76%
EBITDA (f)................. $ 3,147 $ 35,929 $ 44,550 $ 9,911 $ 13,395
Same Specialty Hospital
Data:
Admissions (n)........... 11,796 12,415 3,520 3,738
Patient days (o)......... 342,417 375,653 101,695 111,475
Average length of stay
(p)..................... 30 30 29 31
Occupancy rate (q)....... 65% 70% 67% 74%
Percent patient days--
Medicare (r)............ 78% 76% 77% 76%
EBITDA (f)............... $ 36,942 $ 42,192 $ 10,686 $ 13,638
Outpatient Rehabilitation
Data:
Number of clinics--start of
period.................... 66 94 620 620 636
Number of clinics
acquired................ 21 516 17 1 --
Number of clinics start-
ups..................... 11 14 32 6 9
Number of clinics
closed/sold............. 4 4 33 8 21
-------- -------- -------- --------- ---------
Number of clinics owned--
end of period............. 94 620 636 619 624
Number of clinics managed--
end of period (s)......... 21 38 43 41 51
-------- -------- -------- --------- ---------
Total number of clinics.... 115 658 679 660 675
-------- -------- -------- --------- ---------
EBITDA (f)................. $ 12,598 $ 22,697 $ 65,420 $ 17,173 $ 19,056

(footnotes on following page)

(a) Operating expenses include cost of services, general and administrative
expenses, and bad debt expenses.
(b) Reflects asset impairments of $6.3 million and litigation settlement costs
of $3.8 million in 1998 and asset impairments of $5.2 million in 1999.
(c) Reflects interests held by other parties in subsidiaries, limited liability
companies and limited partnerships owned and controlled by us.
(d) Reflects the write-off of deferred financing costs that resulted from the
refinancing of our senior credit facility in November 1999 and September
2000.
(e) For information concerning calculation of weighted average shares
outstanding, see note 14 to the consolidated financial statements.
(f) We define EBITDA as net income (loss) before interest, income taxes,
depreciation and amortization and special charges, other income, minority
interest, and extraordinary items. EBITDA is not a measure of financial
performance under generally accepted accounting principles. Items excluded
from EBITDA are significant components in understanding and assessing
financial performance. EBITDA is a measure commonly used by financial
analysts and investors to evaluate the financial results of companies in
our industry, and we believe it therefore provides useful information to
investors. EBITDA should not be considered in isolation or as an
alternative to net income, cash flows generated by operations, investing or
financing activities, or other financial statement data presented in the
consolidated financial statements as indicators of financial performance or
liquidity. Because EBITDA is not a measurement determined in accordance
with generally accepted accounting principles and is susceptible to varying
calculations, EBITDA as presented may not be comparable to similarly titled
measures of other companies. For purposes of the covenants in the indenture
governing the notes offered hereby, EBITDA is defined differently.

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

For the three months ended
Year Ended December 31, March 31, Pro Forma
----------------------------------------- ----------------------------- As Adjusted
Pro Forma Pro Forma LTM ended
As Adjusted As Adjusted March 31,
1998 1999 2000 2000 2000 2001 2001 2001
-------- -------- -------- ----------- ------- ------- ----------- -----------
(in thousands)

EBITDA................. $ 3,593 $ 42,244 $ 91,670 $ 91,670 $22,251 $27,032 $27,032 $ 96,451
Depreciation and
amortization.......... (4,942) (16,741) (30,401) (30,401) (7,021) (7,816) (7,816) (31,196)
Special charge......... (10,157) (5,223) -- -- -- -- -- --
Other income........... -- -- -- -- -- -- -- --
Interest income........ 406 362 939 939 82 241 241 1,098
Interest expense....... (5,382) (21,461) (36,126) (31,159) (8,847) (8,016) (7,167) (30,721)
Minority interest...... (1,744) (3,662) (4,144) (4,144) (1,118) (1,407) (1,407) (4,433)
Income tax (expense)
benefit............... 182 (2,811) (9,979) (11,966) (2,513) (3,913) (4,244) (13,200)
Extraordinary item..... -- (5,814) (6,247) -- -- -- -- --
-------- -------- -------- -------- ------- ------- ------- ---------
Net income (loss)...... $(18,044) $(13,106) $ 5,712 $ 14,939 $ 2,834 $ 6,121 $ 6,639 $ 17,999
======== ======== ======== ======== ======= ======= ======= =========

(h) The pro forma as adjusted consolidated statement of operations for the year
ended December 31, 2000 reflects the following adjustments as a result of
our initial public offering and the sale of the old notes as if each had
occurred on January 1, 2000:
. a reduction in interest expense of $5.0 million (which includes $0.9
million of discount amortization related to our 10% Senior Subordinated
Notes) resulting from: (i) the repayment of $114.9 million of 10.2%
indebtedness under our senior credit facility and (ii) the repayment of
$90.0 million of our 10% Senior Subordinated Notes offset by (iii)
interest expense associated with the notes. See footnote (k).
. additional tax expense of $2.0 million related to the $5.0 million
interest expense decrease described above.
. the reversal of $3.7 million of preferred dividends on our Class B
Preferred Stock which converted into common stock upon the completion of
our initial public offering, and the reversal of $5.1 million of
dividends on Class A Preferred Stock as if such stock were redeemed on
January 1, 2000.
. an additional 792,000 options and warrants that become dilutive based on
a stock price of $9.50 on January 1, 2000.
. an additional 9,000,000 shares of common stock for our initial public
offering, 1,350,000 shares for the exercise of the overallotments by the
underwriters and 9,216,000 shares for the automatic conversion of our
Class B Preferred Stock upon our initial public offering.
. the transfer of 240,048 shares back to us at no additional cost upon the
repayment in full of the 10% Senior Subordinated Notes.
. excludes extraordinary items.
(i) The pro forma as adjusted consolidated statement of operations for the
quarter ended March 31, 2001 reflects the following adjustments as a result
of our initial public offering and the sale of the old notes as if each had
occurred on January 1, 2001:
. a reduction in interest expense of $0.8 million (which includes $0.2
million of discount amortization related to our 10% Senior Subordinated
Notes) resulting from: (i) the repayment of $114.9 million of 8.8%
indebtedness under our senior credit facility and (ii) the repayment of
$90 million of our 10% Senior Subordinated Notes offset by (iii)
interest expense associated with the notes. See footnote (k).
. additional tax expense of $0.3 million related to the $0.8 million
interest expense decrease described above.
. the reversal of $1.0 million of preferred dividends on our Class B
Preferred Stock which converted into common stock upon the completion of
our initial public offering, and the reversal of $1.3 million of
dividends on our Class A Preferred Stock as if such stock were redeemed
on January 1, 2001.
. an additional 9,000,000 shares of common stock for our initial public
offering, 1,350,000 shares for the exercise of the overallotments by the
underwriters, 9,216,000 shares for the automatic conversion of our Class
B Preferred Stock upon our initial public offering.
. the transfer of 240,048 shares back to us at no additional cost upon the
repayment in full of the 10% Senior Subordinated Notes.
. excludes estimated extraordinary item of approximately $14.4 million
related to the early extinguishment of debt resulting from this
offering.
(j) The pro forma as adjusted LTM consolidated statement of operations was
derived by adding the results for the year ended December 31, 2000 and the
results for the three months ended March 31, 2001 and subtracting therefrom
the results for the three months ended March 31, 2000. The results for the
LTM consolidated statement of operations were adjusted to reflect the
following as a result of our initial public offering and the sale of the
old notes as if each had occurred on April 1, 2000:
. a reduction in interest expense of $4.6 million (which includes $0.9
million of discount amortization associated with our 10% Senior
Subordinated Notes) resulting from: (i) the repayment of $114.9 million
of 9.9% indebtedness under our senior credit facility and (ii) the
repayment of $90.0 million of our 10% Senior Subordinated Notes offset
by (iii) the interest expense associated with the notes. See footnote
(k).

. additional tax expense of $1.8 million related to the $4.6 million
interest expense decrease described above.
. the reversal of $3.8 million of preferred dividends on our Class B
Preferred Stock which converted into common stock upon the completion of
our initial public offering, and the reversal of $5.2 million of
preferred dividends on Class A Preferred Stock as if such stock were
redeemed on March 31, 2000.
. an additional 9,000,000 shares of common stock for our initial public
offering, 1,350,000 shares for the exercise of the overallotments by the
underwriters, 9,216,000 shares for the automatic conversion of our Class
B Preferred Stock upon our initial public offering.
. the transfer of 240,048 shares back to us at no additional cost upon the
repayment in full of the 10% Senior Subordinated Notes.
. excludes estimated extraordinary loss of approximately $14.4 million
related to the early extinguishment of debt resulting from this
offering.
(k) We reflected:
. the application of the net proceeds from the initial public offering
including $35.9 million to repay loans under our senior credit facility,
$52.8 million to redeem our Class A Preferred Stock and $0.7 million for
general corporate purposes.
. the application of the proceeds from the sale of old notes including
$90.0 million to repay our 10% Senior Subordinated Notes, $79.0 million
to repay loans under our senior credit facility, $5.5 million for
offering fees and $0.5 million for general corporate purposes.
In addition, during the period from March 31, 2001 to June 6, 2001, we have
incurred an additional $25.6 million of indebtedness under our senior
credit facility that is not reflected in the pro forma as adjusted total
debt as of March 31, 2001.
(l) As of March 31, 2001, we owned 100% of all of our hospitals except for two
hospitals that had a 20% minority owner and three hospitals that had a 3%
minority owner.
(m) Available licensed beds are the number of beds that are licensed with the
appropriate state agency and which are readily available for patient use at
the end of the period indicated.
(n) Admissions represent the number of patients admitted for treatment.
(o) Patient days represent the total number of days of care provided to
patients.
(p) Average length of stay (days) represents the average number of days
patients stay in our hospitals per admission, calculated by dividing total
patient days by the number of discharges for the period.
(q) We calculate occupancy rate by dividing the average daily number of
patients in our hospitals by the weighted average number of available
licensed beds over the period indicated.
(r) We calculate percentage by dividing the number of Medicare patient days by
the total number of patient days.
(s) Managed clinics are clinics that we operate through long term management
arrangements and clinics operated through unconsolidated joint ventures.

RISK FACTORS

Our business involves a number of risks, some of which are beyond our
control. You should carefully consider each of the risks and uncertainties we
describe below and all of the other information in this prospectus before
making an investment decision. The risks and uncertainties we describe below
are not the only ones we face. Additional risks and uncertainties that we do
not currently know or that we currently believe to be immaterial may also
adversely affect our business.

RISKS RELATING TO OUR BUSINESS

Our substantial indebtedness may limit cash flow available to invest in the
ongoing needs of our business to generate future cash flow, which could
prevent us from fulfilling our obligations under the notes.

We have a significant amount of indebtedness. The following chart sets
forth important credit information on a pro forma as adjusted basis after
giving effect to our initial public offering and the use of proceeds therefrom
and as adjusted for the sale of the old notes and the use of the proceeds from
that sale as of March 31, 2001, or at the beginning of the period, specified
below:

At March 31, 2001
------------------
(dollars in
millions)

Total indebtedness........................................... $272.5
Stockholders' equity......................................... 201.2

Three months ended
March 31, 2001
------------------

Ratio of earnings to fixed charges........................... 1.9x

As of June 6, 2001, after giving effect to the sale of the old notes and
the amendment to our senior credit facility, we would have had approximately
$149.3 million of availability under our senior credit facility, subject to
specific requirements, including compliance with financial covenants.

Our substantial indebtedness could have important consequences to you.
For example, it could:

. require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, reducing the availability
of our cash flow to fund working capital, capital expenditures,
research and development efforts and other general corporate
purposes;

. increase the amount of interest expense that we have to pay, because
certain of our borrowings are at variable rates of interest, which,
if interest rates increase, could result in higher interest expense;

. increase our vulnerability to adverse general economic or industry
conditions;

. limit our flexibility in planning for, or reacting to, changes in our
business or the industry in which we operate;

. prevent us from raising the funds necessary to repurchase all notes
tendered to us upon the occurrence of specific changes of control in
our ownership, which failure to repurchase would constitute a default
under the indenture governing our notes; or

. place us at a competitive disadvantage compared to our competitors
that have less indebtedness.

See "Capitalization," "Summary Consolidated Financial and Other Data,"
"Selected Consolidated Financial and Other Data," and "Description of Other
Indebtedness."

Despite our level of indebtedness, we and our subsidiaries will be able to
incur more debt. This could further exacerbate the risks described above.

We and our subsidiaries may be able to incur additional indebtedness in
the future. Although the indenture governing the notes contains restrictions on
the incurrence of additional indebtedness, these restrictions are subject to a
number of qualifications and exceptions, and the indebtedness incurred in
compliance with these restrictions could be substantial. Also, these
restrictions do not prevent us or our subsidiaries from incurring obligations
that do not constitute indebtedness. As of June 6, 2001, we had approximately
$149.3 million of availability under our senior credit facility, subject to
specific requirements, including compliance with financial covenants, all of
which would be senior to the notes. To the extent new debt is added to our and
our subsidiaries' currently anticipated debt levels, the substantial leverage
risks described above would increase. See "Description of Notes" and
"Description of Other Indebtedness."

If there are changes in the rates or methods of government reimbursements for
our services, our net operating revenues and net income could decline.

Approximately 35% of our net operating revenues for the year ended
December 31, 2000 came from the highly regulated federal Medicare program. The
methods and rates of Medicare reimbursements may change at any time. Our
specialty acute care hospitals operate as Medicare-designated long term acute
care hospitals. As long term acute care hospitals, they receive reimbursements
from Medicare based on the actual costs incurred during the treatment of a
patient, subject to a cap. Many other types of healthcare providers, including
general acute care hospitals, receive reimbursements from Medicare under
prospective payment systems. These systems reimburse providers fixed amounts,
subject to adjustments, based on each patient's expected cost of treatment.
Congress has directed the Secretary of the U.S. Department of Health and Human
Services to develop a prospective payment system applicable to long term acute
care hospitals. The Secretary has not developed such a prospective payment
system to date but may do so in the future. The application of a prospective
payment system to long term acute care hospitals could reduce the level of
reimbursement we receive from the Medicare program for our services and
negatively affect our profit margins.

Our outpatient rehabilitation clinics receive payments from the Medicare
program under a fee schedule. These payments were to be subject to annual
limits, originally $1,500 per patient, effective January 1, 1999. Congress has
imposed a moratorium on these limits through 2002. The Secretary of the
Department of Health and Human Services is required to review this annual limit
and make a proposal to Congress to revise the payment system for outpatient
rehabilitation. Any changes adopted by Congress, which could include reduced
annual limits or a new payment system, could have an adverse effect on our
outpatient rehabilitation business. See "Our Business--Government Regulations--
Overview of U.S. and State Government Reimbursements."

To service our indebtedness, we will require a significant amount of cash. Our
ability to generate cash depends on many factors beyond our control, including
possible changes in government reimbursement rates or methods. If we cannot
generate the required cash, we may not be able to make the required payments
under the notes.

Our ability to make payments on our indebtedness, including the notes,
and to fund planned capital expenditures will depend on our ability to generate
cash in the future. Our future financial results would be subject to
substantial fluctuations upon a significant change in government reimbursement
rates or methods. We cannot assure you that our business will generate
sufficient cash flow from operations, or that future borrowings will be
available to us in an amount sufficient to enable us to pay our indebtedness,
including the notes, or to fund our other liquidity needs. Our inability to pay
our debts would require us to pursue one or more alternative strategies, such
as selling assets, refinancing or restructuring our indebtedness or selling
equity capital. However, we cannot assure you that any alternative strategies
will be feasible at the time or prove

adequate. Also, some alternative strategies would require the prior consent of
our senior secured lenders, which we may not be able to obtain. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and "Description of Other Indebtedness."

If our hospitals fail to maintain their exemption from the Medicare
prospective payment system or fail to qualify as hospitals separate from their
host hospitals, our profitability may decline.

As of March 31, 2001, 50 of our 56 hospitals were certified as Medicare
long term acute care hospitals, and the remaining six were in the process of
becoming certified as Medicare long term acute care hospitals. If our
hospitals fail to meet or maintain the standards for certification as long
term acute care hospitals, such as average minimum length of patient stay,
they will not receive cost-based reimbursement but will instead receive
predetermined payments applicable to general acute care hospitals under the
prospective payment system. Such predetermined payments would likely result in
our hospitals receiving less Medicare reimbursement than they currently
receive for their patient services. Moreover, nearly all of our hospitals are
subject to additional Medicare criteria because they operate as separate
hospitals located in space leased from, and located in, a general acute care
hospital, known as a host hospital. This is known as a "hospital within a
hospital" model. These additional criteria include limitations on services
purchased from the host hospital and other requirements concerning
separateness from the host hospital. If several of our hospitals were to lose
their cost-based reimbursement status or failed to comply with the
separateness requirements, our profit margins would likely decrease. See "Our
Business--Government Regulations--Overview of U.S. and State Government
Reimbursements--Long Term Acute Care Hospital Medicare Reimbursement."

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

Initiatives undertaken by major insurers and managed care companies to
contain healthcare costs affect the profitability of our specialty acute care
hospitals and outpatient rehabilitation clinics. 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
may continue and may limit reimbursements for healthcare services. If insurers
or managed care companies from whom we receive substantial payments were to
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 conduct business in a heavily regulated industry, and changes in
regulations or violations of regulations may result in increased costs or
sanctions that reduce our net operating revenues and profitability.

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

. 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;

. addition of facilities and services; and

. payment for services.

Recently, there have been heightened coordinated civil and criminal
enforcement efforts by both federal and state government agencies relating to
the healthcare industry, including the specialty acute care hospital and
outpatient rehabilitation clinic businesses. The ongoing investigations relate
to, among other things, various referral practices, cost reporting, billing
practices, physician ownership and joint ventures involving hospitals. In the
future, different 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, and increase our operating expenses.
If we fail to comply with these extensive laws and government regulations, 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. See "Our Business--Government Regulations."

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

Our success is, in part, dependent upon the admissions and referral
practices of the physicians in the communities our hospitals and our outpatient
rehabilitation clinics serve, and our ability to maintain good relations with
these physicians. Physicians referring patients to our hospitals and clinics
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 clinics' businesses may decrease, and our net operating revenues
may decline.

Shortages in qualified nurses could increase our operating costs significantly.

Our specialty acute care hospitals are highly dependent on nurses for
patient care. The availability of qualified nurses has declined in recent
years, and the salaries for nurses have risen accordingly. We cannot assure you
that we will be able to attract and retain qualified nurses in the future.
Additionally, the cost of attracting and retaining nurses may be higher than we
anticipate, and as a result, our profitability could decline.

Future acquisitions may use significant resources, may be unsuccessful and
could expose us to unforeseen liabilities.

As part of our growth strategy, we intend to pursue acquisitions of
specialty acute care hospitals and outpatient rehabilitation clinics.
Acquisitions may involve significant cash expenditures, debt incurrence,
additional operating losses, amortization of the intangible assets of acquired
companies, dilutive issuances of equity securities and expenses that could have
a material adverse effect on our financial condition and results of operations.
Acquisitions involve numerous risks, including:

. difficulties integrating acquired personnel and harmonizing distinct
cultures into our business;

. diversion of management's time from existing operations;

. potential loss of key employees or customers of acquired companies;
and

. assumption of the liabilities and exposure to unforeseen liabilities
of acquired companies, including liabilities for failure to comply
with healthcare regulations.

For example, following two acquisitions in 1998, we recorded a special
charge of $6.3 million related to impairment of assets. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Special Charges." In addition, following our acquisition of Intensiva
Healthcare Corporation, we determined that one of the hospitals owned by
Intensiva was underperforming, and we closed that hospital in the following
year at a cost of $3.5 million.

We cannot assure you that we will succeed in obtaining financing for
acquisitions at a reasonable cost, or that such financing will not contain
restrictive covenants that limit our operating flexibility. We also may be
unable to operate acquired hospitals and outpatient rehabilitation clinics
profitably or succeed in achieving improvements in their financial performance.

If our assumptions regarding the beneficial life of our intangible assets prove
to be inaccurate, or subsequently change, our current earnings may be
overstated and future earnings also may be adversely affected.

Our balance sheet has an amount designated as "intangible assets" that
represents 43% of our assets and 475% of our stockholders' equity at March 31,
2001. Upon the consummation of an acquisition, we undertake a process to value
the tangible and intangible assets of the acquired business to determine the
appropriate allocation of the purchase price. In this process, we consider the
value of tangible assets such as property and equipment, unrecorded assets and
various intangible assets. Intangible assets consist primarily of goodwill,
trademarks, management service agreements and assembled workforce. Goodwill
arises when an acquirer pays more for a business than the fair value of the
tangible and separately measurable intangible net assets. Generally accepted
accounting principles require the amortization of goodwill and all other
intangible assets over the period benefited. The current estimated useful life
is 40 years for our goodwill and trademarks, 20 years for our management
service agreements and 7 years for our assembled workforce. We have determined
the useful lives of these intangible assets by examining the attributes of each
of the intangible assets at the time of acquisition. In making this
determination of useful lives, we have reviewed with our independent
accountants the significant factors that we considered in arriving at the
consideration we paid for, and the expected period of benefit from, the
acquired business.

We continuously review the appropriateness of the amortization periods we
are using and may in the future change them as necessary to reflect any revised
expectations. This information is also reviewed with our independent
accountants. If the factors we considered, and which give rise to our
intangible assets, result in an actual beneficial period shorter than our
determined useful life, earnings reported in the periods immediately following
some acquisitions would be overstated. In addition, in later years, we would be
burdened by a continuing charge against earnings without the associated benefit
to income. Earnings in later years could also be affected significantly if we
subsequently determine that the remaining balance of an intangible has been
impaired.

Competition may limit our ability to acquire hospitals and clinics and
adversely affect our growth.

We have historically faced limited competition in acquiring specialty
acute care hospitals and outpatient rehabilitation clinics, but we may face
heightened competition in the future. Our competitors may acquire or seek to
acquire many of the hospitals and clinics that would be suitable candidates for
us. This could limit our ability to grow by acquisitions or make our cost of
acquisitions higher and less profitable.

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

The healthcare business is highly competitive, and we compete with other
hospitals, rehabilitation clinics and other healthcare providers for patients.
If we are unable to compete effectively in the specialty acute care hospital
and outpatient rehabilitation businesses, our net operating revenues and
profitability may decline. More than half of our specialty hospitals operate in
geographic areas where we compete with at least one other hospital that
provides similar services. Our outpatient rehabilitation clinics face
competition from a variety of local and national outpatient rehabilitation
providers. Other outpatient rehabilitation clinics in markets we serve may have
greater name recognition and longer operating histories than our clinics. The
managers of these clinics may also have stronger relationships with physicians
in their communities, which could give them a competitive advantage for patient
referrals.

Significant legal actions could subject us to substantial uninsured
liabilities.

In recent years, physicians, hospital and other healthcare providers have
become subject to an increasing number of legal actions alleging malpractice,
product liability or related legal theories. Many of these actions involve
large claims and significant defense costs. To protect ourselves from the cost
of these

claims, we maintain professional malpractice liability insurance and general
liability insurance coverage in amounts and with deductibles that we believe to
be appropriate for our operations, with policy limits generally equal to $1.0
million per claim and annual aggregate limits of $3.0 million. We also maintain
$20.0 million in excess liability coverage. However, our insurance coverage
does not cover punitive damages and may not cover all claims against us or
continue to be available at a reasonable cost. If we are unable to maintain
adequate insurance coverage or are required to pay punitive damages, we may be
exposed to substantial liabilities. We are also subject to lawsuits under a
federal whistleblower statute designed to combat fraud and abuse in the
healthcare industry. These lawsuits can involve significant monetary damages
and award bounties to private plaintiffs who successfully bring the suits. See
"Our Business--Legal Proceedings" and "Our Business--Government Regulations--
Other Healthcare Regulations."

We may experience difficulties integrating the information systems relating to
our outpatient rehabilitation business, which could cause business
interruption.

We currently manage our outpatient rehabilitation business using seven
billing systems. During the next 18 months, we plan to transition gradually to
a common system to manage all of our scheduling, billing, collecting and
patient information for our outpatient rehabilitation clinics. If our systems
integration fails or works improperly, we could face interruption in the
segments of our business undergoing the transition while we correct the
problem. The interruption in the affected segment of our business could include
our inability to bill patients and payors for the services we provide. A
sustained inability to bill and collect payments would have a material adverse
effect on our cash flows and results of operations.

RISK RELATING TO THE OFFERING

Your right to receive payments on the new notes, like the old notes, is junior
to our existing senior indebtedness and the existing senior indebtedness of the
subsidiary guarantors and possibly all of our and their future indebtedness.
Further, claims of creditors of our non-guarantor subsidiaries will generally
have priority with respect to the assets of those subsidiaries over your
claims.

The new notes, like the old notes, and the subsidiary guarantees will be
subordinated to the prior payment in full of our and the subsidiary guarantors'
respective current and future senior indebtedness to the extent set forth in
the indenture. As of March 31, 2001, on a pro forma as adjusted basis for the
sale of the old notes, and giving effect to approximately $25.6 million of net
borrowings under our senior credit facility subsequent to that date, we and our
subsidiaries would have had approximately $112.8 million of indebtedness to
which the notes would have been subordinated. Because of the subordination
provisions of the notes, in the event of the bankruptcy, liquidation or
dissolution of our company or any guarantor, our assets or the assets of the
guarantors would be available to pay obligations under the notes and our other
senior subordinated obligations only after all payments had been made on our
senior indebtedness or the senior indebtedness of our subsidiary guarantors.
Sufficient assets may not remain after all these payments have been made to
make any payments on the notes and our other senior subordinated obligations,
including payments of interest when due. In addition, all payments on the notes
and the guarantees will be prohibited in the event of a payment default on our
senior indebtedness (including borrowings under the senior credit facilities)
and, for limited periods, upon the occurrence of other defaults under the
senior credit facilities.

We conduct all of our business through our subsidiaries. The aggregate
net operating revenues and EBITDA for the three months ended March 31, 2001 of
our subsidiaries that are not guaranteeing the notes were $39.3 million and
$5.2 million, respectively, and at March 31, 2001, those subsidiaries had total
assets of $93.5 million (these amounts do not include the net operating
revenues, EBITDA and assets of a number of third party professional
corporations that are treated as "Subsidiaries" for purposes of the indenture
governing the notes, but are not consolidated with our financial results).
Claims of creditors of the non-guarantor subsidiaries, including trade
creditors, secured creditors and unsecured creditors, and claims of preferred
stockholders (if any) of the non-guarantor subsidiaries, will generally have
priority with respect to their assets and earnings over the claims of creditors
of our company, including holders of the notes, even if the obligations of the
subsidiaries do not constitute senior indebtedness. See "Description of Notes--
Ranking" and "Description of Notes--Certain Covenants--Limitation on
Indebtedness." See also "Description of Notes--Subsidiary Guarantees" and Note
20 to Select's audited consolidated financial statements included herein.

The new notes, like the old notes, are not secured by our assets and those of
our subsidiaries, and the lenders under the senior credit facility will be
entitled to remedies available to a secured lender, which gives them priority
over the note holders to collect amounts due on our debt.

In addition to being subordinated to all of our existing and future
senior indebtedness, the new notes, like the old notes, and the subsidiary
guarantees will not be secured by any of our assets. Our obligations under the
senior credit facility are secured by, among other things, a first priority
pledge of all of our capital stock, mortgages upon all of the real property
owned by us in the U.S. and by substantially all of the assets of our company
and each of our existing and subsequently acquired or organized material
domestic (and, to the extent no adverse tax consequences will result, foreign)
subsidiaries. If we become insolvent or are liquidated, or if payment under the
senior credit facility or in respect of any other secured senior indebtedness
is accelerated, the lenders under the senior credit facility or holders of
other secured senior indebtedness will be entitled to exercise the remedies
available to a secured lender under applicable law (in addition to any remedies
that may be available under documents pertaining to the senior credit facility
or the other senior debt). Upon the occurrence of any default under the senior
credit facility (and even without accelerating the indebtedness under the
senior credit facility), the lenders may be able to prohibit the payment of the
notes and guarantees either by limiting our ability to access our cash flow or
under the subordination provisions contained in the indenture governing the
notes. In addition, we and or the subsidiary guarantors may incur additional
secured senior indebtedness, the holders of which will also be entitled to the
remedies available to a secured lender. See "Description of Other Indebtedness"
and "Description of Notes."

Restrictions imposed by our senior credit facility and the indenture governing
these notes limit our ability to engage in or enter into business, operating
and financing arrangements, which could prevent us from taking advantage of
potentially profitable business opportunities.

The operating and financial restrictions and covenants in our debt
instruments, including the senior credit facility and these notes, may affect
adversely our ability to finance our future operations or capital needs or
engage in other business activities that may be in our interest. For example,
our senior credit facility restricts our ability to, among other things:

. incur additional debt;

. pay dividends;

. make certain investments;

. incur or permit to exist certain liens;

. enter into transactions with affiliates;

. merge, consolidate or amalgamate with another company;

. transfer or otherwise dispose of assets;

. redeem subordinated debt;

. incur capital expenditures; and

. incur contingent obligations.

The indenture governing the notes offered hereby includes similar restrictions.
See "Description of Notes." Our senior credit facility also requires us to
maintain certain financial ratios which become more restrictive over time. Our
ability to comply with these ratios may be affected by events beyond our
control. A breach of any of these covenants or our inability to comply with the
required financial ratios could result in a default under our senior credit
facility. In the event of any default under our senior credit facility, the
lenders under our senior credit facility could elect to declare all borrowings
outstanding together with accrued and unpaid interest and other fees, to be due
and payable, to require us to apply all of our available cash to repay these
borrowings or to prevent us from making debt service payments on these notes,
any of which would be an event of default under these notes. See "Description
of Notes" and "Description of Other Indebtedness."

We may not have the ability to raise the funds necessary to finance the change
of control offer required by the indenture governing the notes, which would
violate the terms of the notes.

Upon the occurrence of a change of control, we will be required to offer
to repurchase all these notes. We cannot assure you that there will be
sufficient funds available for us to make any required repurchases of the
notes, upon a change of control. In addition, our senior credit facility will
prohibit us from purchasing any notes and provide that the occurrence of a
change of control constitutes a default. If we do not repay all borrowings
under our senior credit facility or obtain a consent of our lenders under our
senior credit facility to repurchase the notes, we will be prohibited from
purchasing the notes. Our failure to purchase tendered notes would constitute a
default under the indenture governing the notes, which, in turn, would
constitute a default under our senior credit facility. See "Description of
Notes--Change of Control."

A subsidiary guarantee could be voided if it constitutes a fraudulent transfer
under U.S. bankruptcy laws or comparable state laws, which could result in the
holders of the notes not being able to rely on that subsidiary guarantor to
satisfy claims.

Under U.S. bankruptcy law and comparable provisions of state fraudulent
transfer laws, a guarantee can be voided, or claims under a guarantee may be
subordinated to all other debts of that guarantor if, among other things, the
guarantor, at the time it incurred the indebtedness evidenced by its guarantee:

. intended to hinder, delay or defraud any present or future creditor
or received less than reasonably equivalent value or fair
consideration for the incurrence of the guarantee; and

. the guarantor:

. was insolvent or rendered insolvent by reason of the incurrence;

. was engaged in a business or transaction for which the
guarantor's remaining assets constituted unreasonably small
capital; or

. intended to incur, or believed that it would incur, debts beyond
its ability to pay those debts as they mature.

In addition, any payment by that guarantor under a guarantee could be voided
and required to be returned to the guarantor or to a fund for the benefit of
the creditors of the guarantor.

The measures of insolvency for purposes of fraudulent transfer laws will
vary depending upon the governing law. Generally, a guarantor would be
considered insolvent if:

. the sum of its debts, including contingent liabilities, was greater
than the fair saleable value of all of its assets;

. the present fair salable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or

. it could not pay its debts as they become due.

There is no public trading market for the new notes and an active trading
market may not develop for the new notes.

The old notes are currently eligible for trading in the PORTAL Market, a
screen-based market operated by the National Association of Securities Dealers.
The PORTAL market is limited to qualified institutional investors as defined by
Rule 144A of the Securities Act. The new notes are new securities for which
there is no established trading market. We do not intend to apply for listing
or quotation of the notes on any securities exchange or stock market.

J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Credit Suisse First Boston Corporation, CIBC World Markets Corp.
and First Union Securities, Inc. acted as initial purchasers in connection with
the offer and sale of the old notes. The initial purchasers have informed us
that they intend to make a market in the new notes. However, these initial
purchasers may cease their market-making at any time. In addition, the
liquidity of the trading market in the new notes, and the market price quoted
for the new notes, may be adversely affected by changes in the overall market
for high yield securities and by changes in our financial performance or
prospects or in the prospects for companies in our industry generally. As a
result, we cannot assure you that an active trading market will develop for the
new notes.

Failure to tender your old notes for new notes could limit your ability to
resell the old notes.

The old notes were not registered under the Securities Act or under the
securities laws of any state and may not be resold, offered for resale or
otherwise transferred unless they are subsequently registered or resold under
an exemption from the registration requirements of the Securities Act and
applicable state securities laws. If you do not exchange your old notes for new
notes in the exchange offer, you will not be able to resell, offer to resell or
otherwise transfer the old notes unless they are registered under the
Securities Act or unless you resell them, offer to resell or otherwise transfer
them under an exemption from the registration requirements of, or in a
transaction not subject to, the Securities Act. In addition, we will no longer
be under an obligation to register the old notes under the Securities Act
except in the limited circumstances provided under the registration rights
agreement. If you want to exchange your old notes in the exchange offer for the
purpose of participating in a distribution of the new notes, you may be deemed
to have received restricted securities, and, if so, will be required to comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale transaction.

RISK RELATING TO OUR STRUCTURE

We have a holding company structure and will depend on distributions from our
operating subsidiaries to pay these notes. Contractual or legal restrictions
applicable to our subsidiaries could limit distributions from them.

We are a holding company and derive all of our operating income from, and
hold substantially all of our assets through, our subsidiaries. The effect of
this structure is that we will depend on the earnings of our subsidiaries, and
the payment or other distributions to us of these earnings, to meet our
obligations under our senior credit facility and these notes. Provisions of
law, like those requiring that dividends be paid only out of surplus, and
provisions of our senior indebtedness limit the ability of our subsidiaries to
make payments or other distributions to us. Our subsidiaries also could agree
to other contractual restrictions on their ability to make distributions. See
"Description of Other Indebtedness."

Because certain of our significant stockholders and our senior management
control us, they will be able to determine the outcome of all matters submitted
to our stockholders for approval, regardless of the preferences of the minority
stockholders.

Affiliates of Welsh, Carson, Anderson & Stowe VII, L.P., GTCR Golder
Rauner, LLC, Thoma Cressey Equity Partners, and our directors and executive
officers together own a majority of our outstanding common stock. Accordingly,
they are able to:

. elect our entire board of directors;

. control our management and policies; and

. determine, without the consent of our other stockholders, the outcome
of any corporate transaction or other matter submitted to our
stockholders for approval, including mergers, consolidations and the
sale of all or substantially all of our assets.

Affiliates of Welsh, Carson, Anderson & Stowe VII, L.P., GTCR Golder
Rauner, LLC, Thoma Cressey Equity Partners, and our management are also able to
prevent or cause a change in control of us and will be able to amend our
certificate of incorporation and by-laws without the approval of any other of
our stockholders.

If provisions in our corporate documents and Delaware law delay or prevent a
change in control of our company, we may be unable to consummate a transaction
that our stockholders consider favorable.

Our certificate of incorporation and by-laws may discourage, delay, or
prevent a merger or acquisition involving us that our stockholders may consider
favorable by:

. authorizing the issuance of preferred stock, the terms of which may
be determined at the sole discretion of the board of directors;

. providing for a classified board of directors with staggered three-
year terms;

. establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted
on by stockholders at meetings; and

. providing for the establishment of a shareholder rights plan.

USE OF PROCEEDS

We will not receive any proceeds from the exchange offer. In
consideration for issuing the new notes, we will receive in exchange old notes
of like principal amount, the terms of which are identical in all material
respects to the new notes. The old notes surrendered in exchange for new notes
will be retired and canceled and cannot be reissued. Accordingly, issuance of
the new notes will not result in any increase in our indebtedness. We have
agreed to bear the expenses of the exchange offer. No underwriter is being used
in connection with the exchange offer.

The net proceeds from the sale of the old notes was about $169.5 million,
after deducting discounts, commissions and expenses of this offering. We used
$92.2 million of the net proceeds of the old notes to retire our 10% Senior
Subordinated Notes which were issued to WCAS Capital Partners III, L.P., in
December 1998, February 1999 and November 1999. The 10% Senior Subordinated
Notes issued in December 1998 and February 1999 were to mature on December 15,
2008, and the 10% Senior Subordinated Note issued in November 1999 was to
mature on November 19, 2009. We used about $79.0 million of the net proceeds of
the old notes to repay part of our senior indebtedness under both the term loan
and revolving portions of our senior credit facility. The remaining net
proceeds were used for general corporate purposes. Our senior credit facility
matures in September 2005 and bears interest at a fluctuating rate, which as of
March 31, 2001, was a weighted average interest rate of approximately 8.8%. The
senior credit facility indebtedness that we repaid with the proceeds from the
sale of the old notes was incurred to refinance existing bank debt. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Resources and Liquidity," and "Description of Other
Indebtedness."

CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2001 on
an actual basis, on a pro forma basis to give effect to our initial public
offering and the use of the proceeds therefrom, and on a pro forma as adjusted
basis to give effect to the sale of the old notes and the use of proceeds from
that sale.

On April 10, 2001 we completed an initial public offering of 9,000,000
shares of our common stock. Our net proceeds after deducting estimated expenses
and underwriting discounts and commissions was approximately $77.5 million. On
April 20, 2001 the underwriters exercised their option to purchase an
additional 1,350,000 shares of common stock to cover overallotments. The net
proceeds from the exercise of this option was $11.9 million after deduction of
the underwriters' discount. The combined net proceeds were used to repay $35.9
million of our senior indebtedness under our senior credit facility, to redeem
$52.8 million of our Class A Preferred Stock and the remainder was used for
general corporate purposes. Upon the consummation of our initial public
offering, all outstanding shares of our Class B Preferred Stock converted
automatically into .576 shares of our common stock. As June 6, 2001, we had
total indebtedness outstanding under our senior credit facility of $178.8
million, excluding $3.4 million of letters of credit.

Common stock data excludes shares of common stock reserved for issuance
under our Amended and Restated 1997 Stock Option Plan, under which options to
purchase 4,849,475 shares were outstanding as of March 31, 2001 at a weighted
average exercise price of $7.00 per share, and under warrants outstanding to
purchase 1,873,283 shares at an exercise price of $6.08 per share. You should
read this table in conjunction with our "Selected Consolidated Financial and
Other Data," our "Consolidated Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included elsewhere in this prospectus.

As of March 31, 2001
----------------------------------
Pro Pro Forma
Actual Forma(e) As Adjusted(f)
-------- -------- --------------
(dollars in thousands)

Long term debt:
Senior credit facility.................... $188,763 $152,836 $ 73,836
9 1/2% senior subordinated notes due
2009..................................... -- -- 175,000
10% senior subordinated notes due
2008(a).................................. 56,840 56,840 --
10% senior subordinated note due 2009(a).. 20,159 20,159 --
Seller notes(b)........................... 21,367 21,367 21,367
Other..................................... 2,297 2,297 2,297
-------- -------- --------
Total debt.................................. 289,426 253,499 272,500
Preferred stock, $.01 par value
Class A: 55,000 shares authorized, 52,838
shares issued and outstanding--actual; no
share authorized, issued and
outstanding--pro forma and pro forma as
adjusted(c).............................. 66,781 -- --
Class B: 16,000,000 shares authorized,
16,000,000 shares issued and
outstanding--actual; no shares
authorized, issued and outstanding--pro
forma and pro forma as adjusted(c)....... 65,098 -- --
Undesignated preferred stock, no shares
authorized or outstanding--actual;
10,000,000 shares authorized, no shares
issued and outstanding--pro forma and pro
forma as adjusted........................ -- -- --
Stockholders' equity:
Common stock, $.01 par value; 78,000,000
shares authorized, 25,697,164 shares
issued--actual; 45,263,164 shares
issued--pro forma; 200,000,000 shares
authorized, 45,023,116 shares issued--pro
forma as adjusted........................ 257 452 450
Capital in excess of par.................... 70,765 220,012 219,493
Accumulated deficit(d)...................... (17,636) (17,636) (17,636)
Treasury stock, at cost; 221,411 shares..... (1,039) (1,039) (1,039)
Cumulative translation adjustment........... (27) (27) (27)
-------- -------- --------
Total stockholders' equity.................. 52,320 201,762 201,241
-------- -------- --------
Total capitalization........................ $473,625 $455,261 $473,741
======== ======== ========

(footnotes on following page)

(a) Our 10% senior subordinated notes due 2008 and 2009 had 240,048 common
shares attached which were recorded at the estimated fair value on the
date of issuance. The common shares issued were recorded at a discount and
were amortized over the life of the debt. These shares were transferred
back to us at no additional cost upon the repayment in full of the 10%
Senior Subordinated Notes, which we repaid with a portion of the proceeds
from the sale of the old notes.
(b) Seller notes consist of notes issued or assumed by us as past
consideration for some of our acquired businesses. They generally bear
interest at 6% per annum and mature at various times.
(c) On April 3, 2001 we amended our Restated Certificates of Incorporation to
provide that the Class A Preferred Stock may be redeemed without paying
the accrued and unpaid dividends thereon. On April 4, 2001, we amended our
Certificate of Incorporation to provide that the Class B Preferred Stock
may be converted without paying the accrued and unpaid dividends thereon.
In addition, the amendment changed the required minimum price per share
paid by the public necessary for the conversion of the Class B Preferred
Stock to Common Stock to $9.50. The $19.3 million of accrued and unpaid
dividends on the Class A Preferred Stock and Class B Preferred Stock were
paid on May 2, 2001.
(d) We excluded the estimated extraordinary loss of approximately $14.4
million resulting from the repayment of the senior credit facility and the
10% Senior Subordinated Notes.
(e) The pro forma reflects the following adjustments.
. the application of the net proceeds from our initial public offering of
approximately $77.5 million and the underwriters exercise of their
overallotment option of $11.9 million to redeem $52.8 million of our
Class A Preferred Stock and to repay $35.9 million of debt under our
senior credit facility,
. the conversion of 16,000,000 shares of our Class B Preferred Stock with
a value of $60 million into 9,216,000 shares of our common stock.
(f) The pro forma as adjusted reflects the following additional adjustments:
. the issuance of $175 million principal amount of the old notes.
. the repayment of the 10% senior subordinated notes due 2008 and 2009 of
$90.0 million.
. the repayment of $79 million of borrowings under the senior credit
facility.
. the return of 240,048 common shares attached to the 10% senior
subordinated notes due 2008 and 2009. See footnote (a) above for further
description of these shares.

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

You should read the following selected consolidated historical financial
and other data in conjunction with our consolidated financial statements and
the accompanying notes. You should also read "Management's Discussion and
Analysis of Financial Condition and Results of Operations." All of these
materials are contained in this prospectus. We were formed in December 1996,
but capitalization and operations did not commence until February 7, 1997 when
we acquired all of the outstanding common stock of our predecessor company,
Sports and Orthopedic Rehabilitation Services, P.A. The predecessor company
data as of December 31, 1996, for the period ended December 31, 1996 and for
the period from January 1, 1997 through February 6, 1997 has been derived from
unaudited financial statements, which are not included in this prospectus.
Because of substantial differences in the predecessor company's capital
structure, per share information for the predecessor company has been excluded.
The data as of December 31, 1997, 1998, 1999 and 2000 and for the years ended
December 31, 1997, 1998, 1999 and 2000 have been derived from consolidated
financial statements audited by PricewaterhouseCoopers LLP, independent
accountants. Consolidated balance sheets at December 31, 1999 and 2000 and the
related statements of operations, stockholders' equity and cash flows for the
periods ended December 31, 1998, 1999, and 2000 and the related notes appear
elsewhere in this prospectus. The data for the three months ended March 31,
2000 and 2001 have been derived from unaudited consolidated financial
statements also contained in this prospectus and which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the unaudited
interim period. The pro forma as adjusted consolidated statement of operations
data for the year ended December 31, 2000 are pro forma for our initial public
offering and the use of proceeds therefrom, and as adjusted for the sale of the
old notes and the use of proceeds from that sale as if it had been completed on
January 1, 2000, and exclude extraordinary items. The pro forma as adjusted
consolidated balance sheet data as of December 31, 2000 are pro forma for our
initial public offering and the use of proceeds therefrom and as adjusted to
give effect to the sale of the old notes and the use of proceeds from that sale
as if these events had been completed on December 31, 2000. The pro forma as
adjusted consolidated balance sheet data as of March 31, 2001 are pro forma for
our initial public offering and the use of proceeds therefrom and as adjusted
to give effect to the sale of the old notes and the use of proceeds from that
sale as if these events had been completed on March 31, 2001. The pro forma as
adjusted statement of operations data for the three months ended March 31, 2001
are pro forma for our initial public offering and the use of proceeds therefrom
and as adjusted to give effect to the sale of the old notes and the use of
proceeds from that sale as if these events had been completed on January 1,
2001.

Predecessor Company
------------------------
January 1, Year Ended December 31,
1997 ------------------------------------------------------
Year Ended Through Pro Forma
December 31, February 6, As Adjusted
1996 1997 1997 1998 1999 2000 2000(h)
------------ ----------- ------- -------- -------- -------- -----------
(in thousands, except per share data)

Consolidated Statement
of Operations Data
Net operating revenues.. $3,323 $ 456 $11,194 $149,043 $455,975 $805,897 $805,897
Operating expenses (a).. 2,828 300 13,740 145,450 413,731 714,227 714,227
Depreciation and
amortization........... 112 8 285 4,942 16,741 30,401 30,401
Special charge (b)...... -- -- -- 10,157 5,223 -- --
------ ------ ------- -------- -------- -------- --------
Income (loss) from
operations............. 383 148 (2,831) (11,506) 20,280 61,269 61,269
Other income............ 74 -- 6,022 -- -- -- --
Interest expense
(income), net.......... 62 9 (64) 4,976 21,099 35,187 30,220
------ ------ ------- -------- -------- -------- --------
Income (loss) before
minority interests,
income taxes and
extraordinary item..... 395 139 3,255 (16,482) (819) 26,082 31,049
Minority interests (c).. -- -- -- 1,744 3,662 4,144 4,144
------ ------ ------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary item..... 395 139 3,255 (18,226) (4,481) 21,938 26,905
Income tax provision
(benefit).............. 195 38 1,308 (182) 2,811 9,979 11,966
------ ------ ------- -------- -------- -------- --------
Net income (loss) before
extraordinary item..... 200 101 1,947 (18,044) (7,292) 11,959 14,939
Extraordinary item (d).. -- -- -- -- 5,814 6,247 --
------ ------ ------- -------- -------- -------- --------
Net income (loss)....... $ 200 $ 101 1,947 (18,044) (13,106) 5,712 14,939
====== ======
Less: Preferred
dividends.............. (266) (2,540) (5,175) (8,780) --
------- -------- -------- -------- --------
Net income (loss)
available to common
stockholders........... $ 1,681 $(20,584) $(18,281) $ (3,068) $ 14,939
======= ======== ======== ======== ========
Net income (loss) per
common share:
Basic:
Net income (loss)
before extraordinary
item.................. $ 0.26 $ (1.64) $ (0.50) $ 0.13 $ 0.33
Extraordinary item..... -- -- (0.24) (0.25) --
------- -------- -------- -------- --------
Net income (loss) per
common share.......... $ 0.26 $ (1.64) $ (0.74) $ (0.12) $ 0.33
======= ======== ======== ======== ========
Diluted:
Net income (loss)
before extraordinary
item.................. $ 0.26 $ (1.64) $ (0.50) $ 0.12 $ 0.32
Extraordinary item..... -- -- (0.24) (0.24) --
------- -------- -------- -------- --------
Net income (loss) per
common share.......... $ 0.26 $ (1.64) $ (0.74) $ (0.12) $ 0.32
======= ======== ======== ======== ========
Weighted average common
shares outstanding (e):
Basic.................. 6,557 12,517 24,557 25,457 44,783
Diluted................ 6,564 12,517 24,557 25,907 46,025

Other data:
EBITDA (f).............. $ 495 $ 156 $(2,546) $ 3,593 $ 42,244 $ 91,670 $ 91,670
EBITDA as a % of net
revenue................ 14.9% 34.2% (22.7)% 2.4 % 9.3 % 11.4 % 11.4%
Capital Expenditures.... 1,319 6,423 10,896 22,430 22,430
Cash flow data:
Cash flow (used in)
provided by operating
activities............ $(2,367) $(24,702) $(25,157) $ 22,513
Cash flow (used in)
provided by investing
activities............ (671) (209,481) (181,262) 14,197
Cash flow provided by
(used in) financing
activities............ 7,897 242,298 197,480 (37,616)
Ratio of earnings to
fixed charges (g)...... 3.4x n/a n/a 1.1x 1.6x

(footnotes begin on page 32)

Predecessor
Company As of December 31,
------------ ----------------------------------------------
Pro Forma
As of As
December 31, Adjusted(i)
1996 1997 1998 1999 2000 2000
------------ ------- -------- -------- -------- -----------
(in thousands)

Consolidated Balance
Sheet Data
Cash and cash
equivalents............ $ 15 $ 4,859 $ 13,001 $ 4,067 $ 3,151 $ 4,328
Working capital......... (331) 4,248 39,807 132,598 109,243 91,379
Total assets............ 1,825 18,191 336,949 620,718 586,800 593,477
Total debt.............. 272 3,059 156,080 340,821 302,788 285,862
Preferred stock......... -- 5,717 55,843 120,804 129,573 --
Total stockholders'
equity................. 207 5,052 60,494 49,437 48,498 197,419

For the three months
ended March 31,
----------------------------------
(unaudited) Pro Forma
------------------ As Adjusted(j)
2000 2001 2001
-------- -------- --------------

Consolidated Statement of Operations Data
Net operating revenues..................... $196,722 $225,088 $225,088
Operating expenses (a)..................... 174,471 198,056 198,056
Depreciation and amortization.............. 7,021 7,816 7,816
Special charges (b)........................ -- -- --
-------- -------- --------
Income from operations..................... 15,230 19,216 19,216
Other income............................... -- -- --
Interest expense (income), net............. 8,765 7,775 6,926
-------- -------- --------
Income before minority interests, income
taxes and extraordinary items............. 6,465 11,441 12,290
Minority interests (c)..................... 1,118 1,407 1,407
-------- -------- --------
Income before income taxes and
extraordinary item........................ 5,347 10,034 10,883
Income tax provision (benefit)............. 2,513 3,913 4,244
-------- -------- --------
Net income before extraordinary item....... 2,834 6,121 6,639
Extraordinary item (d)..................... -- -- --
-------- -------- --------
Net income ................................ 2,834 6,121 6,639
Less: Preferred dividends ................. (2,117) (2,306) --
-------- -------- --------
Net income available to common stockholders
.......................................... $ 717 $ 3,815 $ 6,639
======== ======== ========
Net income per common share:
Basic:
Net income before extraordinary item.... $ 0.03 $ 0.15 $ 0.15
Extraordinary item...................... -- -- --
-------- -------- --------
Net income.............................. $ 0.03 $ 0.15 $ 0.15
======== ======== ========
Diluted:
Net income before extraordinary item.... $ 0.03 $ 0.13 $ 0.14
Extraordinary item...................... -- -- --
-------- -------- --------
Net income.............................. $ 0.03 $ 0.13 $ 0.14
======== ======== ========
Weighted average common shares
outstanding (e):
Basic..................................... 25,492 25,476 44,802
Diluted................................... 25,504 36,078 46,188
Other data:
EBITDA (f)................................. $ 22,251 $ 27,032 $ 27,032
EBITDA as a % of net revenue............... 11.3% 12.0% 12.0%
Capital Expenditures....................... 5,934 5,325 5,325
Cash flow data:
Cash flow (used in) provided by operating
activities............................... $ 8,491 $ 24,819
Cash flow (used in) provided by investing
activities............................... (7,456) (7,205)
Cash flow provided by (used in) financing
activities............................... (877) (18,531)
Ratio of earnings to fixed charges (g)..... 1.2x 1.4x 1.9x

As of March 31, 2001
-----------------------
Pro Forma
Actual As Adjusted(i)
-------- --------------
(in thousands)

Consolidated Balance Sheet Data
Cash and cash equivalents............................... $ 2,174 $ 3,351
Working capital......................................... 110,733 92,869
Total assets............................................ 581,396 588,073
Total debt.............................................. 289,426 272,500
Preferred stock......................................... 131,879 --
Total stockholders' equity.............................. 52,320 201,241

(footnotes begin on the following page)

Selected Operating Data

The following table sets forth operating statistics for our specialty
acute care hospitals and our outpatient rehabilitation clinics for each of the
periods presented. The data in the table reflect the changes in the number of
specialty acute care hospitals and outpatient rehabilitation clinics we operate
that resulted from acquisitions, start-up activities and closures. The same
specialty hospital data include hospitals operated by us for the comparable
periods. The operating statistics reflect data for the period of time these
operations were managed by us. Further information on our acquisition
activities can be found in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the notes to our consolidated
financial statements.

Year Ended Three months
December 31 ended March 31,
--------------------------- -----------------
1998 1999 2000 2000 2001
------- -------- -------- ------- --------
(dollars in thousands)

Specialty Hospital Data:
Number of hospitals--start of
period....................... -- 39 44 44 54
Number of hospitals
acquired................... 37 -- -- 0 0
Number of hospital start-
ups........................ 2 6 10 3 2
Number of hospitals closed.. -- 1 -- 0 0
------- -------- -------- ------- --------
Number of hospitals--end of
period (k)................... 39 44 54 47 56
------- -------- -------- ------- --------
Available licensed beds (l)... 1,428 1,649 1,982 1,770 2,068
Admissions (m)................ 2,640 12,421 14,210 3,613 4,191
Patient days (n).............. 74,418 358,304 427,448 103,301 123,740
Average length of stay (o).... 29 30 30 29 31
Occupancy rate (p)............ 52% 63% 63% 66% 68%
Percent patient days--
Medicare (q)................. 78% 78% 76% 77% 76%
EBITDA (f).................... $ 3,147 $ 35,929 $ 44,550 $ 9,911 $ 13,395
Same Specialty Hospital Data:
Admissions (l).............. 11,796 12,415 3,520 3,738
Patient days (m)............ 342,417 375,653 101,695 111,475
Average length of stay (n).. 30 30 29 31
Occupancy rate (o).......... 65% 70% 67% 74%
Percent patient days--
Medicare (p)............... 78% 76% 77% 76%
EBITDA (f).................. $ 36,942 $ 42,192 $10,686 $ 13,638
Outpatient Rehabilitation Data:
Number of clinics--start of
period....................... 66 94 620 620 636
Number of clinics acquired.. 21 516 17 1 0
Number of clinics start-
ups........................ 11 14 32 6 9
Number of clinics
closed/sold................ 4 4 33 8 21
------- -------- -------- ------- --------
Number of clinics owned--end
of period.................... 94 620 636 619 624
Number of clinics managed--
end of period (r)............ 21 38 43 41 51
------- -------- -------- ------- --------
Total number of clinics....... 115 658 679 660 675
------- -------- -------- ------- --------
EBITDA (f).................... $12,598 $ 22,697 $ 65,420 $17,173 $ 19,056

(f) We define EBITDA as net income (loss) before interest, income taxes,
depreciation and amortization and special charges, other income, minority
interest, and extraordinary items. EBITDA is not a measure of financial
performance under generally accepted accounting principles. Items excluded
from EBITDA are significant components in understanding and assessing
financial performance. EBITDA is a measure commonly used by financial
analysts and investors to evaluate the financial results of companies in
our industry, and we believe it therefore provides useful information to
investors. EBITDA should not be considered in isolation or as an
alternative to net income, cash flows generated by operations, investing or
financing activities, or other financial statement data presented in the
consolidated financial statements as indicators of financial performance or
liquidity. Because EBITDA is not a measurement determined in accordance
with generally accepted accounting principles and is susceptible to varying
calculations, EBITDA as presented may not be comparable to similarly titled
measures of other companies. For purposes of the covenants in the indenture
governing the notes offered hereby, EBITDA is defined differently.

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

For the three months
Year Ended December 31, ended March 31,
----------------------------------------- -----------------------------
Pro Forma Pro Forma
As Adjusted As Adjusted
1998 1999 2000 2000 2000 2001 2001
-------- -------- -------- ----------- ------- ------- -----------
(in thousands)

EBITDA.................. $ 3,593 $ 42,244 $ 91,670 $ 91,670 $22,251 $27,032 $27,032
Depreciation and
amortization........... (4,942) (16,741) (30,401) (30,401) (7,021) (7,816) (7,816)
Special charge.......... (10,157) (5,223) -- -- -- -- --
Other income............ -- -- -- -- -- -- --
Interest income......... 406 362 939 939 82 241 241
Interest expense........ (5,382) (21,461) 36,126 (31,159) (8,847) (8,016) (7,167)
Minority interest....... (1,744) (3,662) (4,144) (4,144) (1,118) (1,407) (1,407)
Income tax (expense)
benefit................ 182 (2,811) (9,979) (11,966) (2,513) (3,913) (4,244)
Extraordinary item...... -- (5,814) (6,247) -- -- -- --
-------- -------- -------- -------- ------- ------- -------
Net income (loss)....... $(18,044) $(13,106) $ 5,712 $ 14,939 $ 2,834 $ 6,121 $ 6,639
======== ======== ======== ======== ======= ======= =======

(g) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income from continuing operations before income taxes, fixed
charges, minority interest in income of subsidiaries and income (loss) from
unconsolidated joint ventures. Fixed charges include preferred dividend
requirement of subsidiary, deemed dividend on preferred stock conversion,
interest expense and the portion of operating rents that is deemed
representative of an interest factor. Due to our losses in 1998 and 1999,
the ratio coverage was less than 1:1. We would have had to generate
additional earnings of approximately $19.0 million and $14.7 million in
1998 and 1999, respectively, to achieve a coverage ratio of 1:1.
(h) The pro forma as adjusted consolidated statement of operations for the year
ended December 31, 2000 reflects the following adjustments as a result of
an initial public offering and the sale of the old notes as if each had
occurred on January 1, 2000:
. a reduction in interest expense of $5.0 million (which includes $0.9
million of discount amortization related to our 10% Senior Subordinated
Notes) resulting from: (i) the repayment of $114.9 million of 10.2%
senior debt under our senior credit facility and (ii) the repayment of
$90.0 million of our 10% Senior Subordinated Notes offset by (iii)
interest expense associated with the notes. See footnote (i).
. additional tax expense of $2.0 million related to the $5.0 million
interest expense decrease described above.
. the reversal of $3.7 million of preferred dividends on our Class B
Preferred Stock which converted into common stock upon the completion of
our initial public offering, and the reversal of $5.1 million dividends
on Class A Preferred Stock as if such stock were redeemed on January 1,
2000.
(footnotes on following page)

. an additional 792,000 options and warrants that became dilutive based on
a stock price of $9.50 on January 1, 2000.
. an additional 9,000,000 shares of common stock for our initial public
offering, 1,350,000 shares for the exercise of the overallotments by the
underwriters and 9,216,000 shares for the automatic conversion of our
Class B Preferred Stock upon our initial public offering.
. the transfer of 240,048 shares back to us at no additional cost upon the
repayment in full of the 10% Senior Subordinated Notes.
(i) We reflected:
. the application of the net proceeds from the initial public offering
including $35.9 million to repay loans under our senior credit facility,
$52.8 million to redeem our Class A Preferred Stock and $0.7 million for
general corporate purposes.
. the application of the proceeds from the sale of the old notes,
including $90.0 million to repay our 10% Senior Subordinated Notes,
$79.0 million to repay loans under our senior credit facility, $5.5
million for offering fees and $0.5 million for general corporate
purposes.
In addition, during the period from March 31, 2001 to June 6, 2001, we have
incurred an additional $25.6 million of indebtedness under our senior
credit facility that is not reflected in the pro forma as adjusted total
debt as of March 31, 2001.
(j) The pro forma as adjusted consolidated statement of operations for the
quarter ended March 31, 2001 reflects the following adjustments as a result
of our initial public offering and the sale of the old notes as if each had
occurred on January 1, 2001:
. a reduction in interest expense of $0.8 million (which includes $0.2
million of discount amortization related to our 10% Senior Subordinated
Notes) resulting from: (i) the repayment of $114.9 million of 8.8%
senior indebtedness under our bank credit facility and (ii) the
repayment of $90 million of Senior Subordinated Notes offset by (iii)
interest expense associated with the notes. See footnote (i).
. additional tax expense of $0.3 million related to the $0.8 million
interest expense decrease described above.
. the reversal of $1.0 million of preferred dividends on our Class B
Preferred Stock which converted into common stock upon the completion of
our initial public offering, and the reversal of $1.3 million of
dividends on our Class A Preferred Stock as if such stock were redeemed
on January 1, 2001.
. an additional 9,000,000 shares of common stock for our initial public
offering, 1,350,000 shares for the exercise of the overallotments by the
underwriters and 9,216,000 shares for the automatic conversion of our
Class B Preferred Stock upon our initial public offering.
. the transfer of 240,048 shares back to us at no additional cost upon the
repayment in full of the 10% Senior Subordinated Notes.
(k) As of March 31, 2001 we owned 100% of all of our hospitals except for two
hospitals that had a 20% minority owner and three hospitals that had a 3%
minority owner.
(l) Available licensed beds are the number of beds that are licensed with the
appropriate state agency and which are readily available for patient use at
the end of the period indicated.
(m) Admissions represent the number of patient admitted for treatment.
(n) Patient days represent the total number of days of care provided to
patients.
(o) Average length of stay (days) represents the average number of days
patients stay in our hospitals per admission, calculated by dividing total
patient days by the number of discharges for the period.
(p) We calculate occupancy rate by dividing the average daily number of
patients in our hospitals by the weighted average number of available
licensed beds over the period indicated.
(q) We calculate percentage by dividing the number of Medicare patient days by
the total number of patient days.
(r) Managed clinics are clinics that we operate through long term management
arrangements and clinics operated through unconsolidated joint ventures.

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read this discussion together with our consolidated financial
statements and the accompanying notes and Selected Consolidated Financial and
Other Data included elsewhere in this prospectus.

Overview

We operate through two business segments, our specialty acute care
hospital segment and our outpatient rehabilitation segment. For the three
months ended March 31, 2001, we had net operating revenues of $225.1 million.
Of this total, we earned 48.3% of our net operating revenues from our
outpatient rehabilitation business and 51.7% from our specialty hospitals.

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

Significant Acquisitions

Since our formation, we have completed three significant acquisitions for
an aggregate consideration of $366.4 million, excluding subsequent purchase
price adjustments for accounting purposes. As a result of these acquisitions,
the results from period to period are not comparable.

On November 19, 1999, we acquired the Physical Rehabilitation and
Occupational Health Division of NovaCare, Inc. for approximately $200 million
consisting of cash and the assumption of seller notes. The purchase was funded
through the sale of Class B Preferred Stock, common stock, issuance of senior
subordinated debt, and borrowings under our credit facility. At the time of
acquisition, NovaCare operated approximately 500 physical rehabilitation
clinics and 35 occupational health centers. Following the completion of the
acquisition, we closed or sold 28 of these occupational health centers.

On December 15, 1998, we acquired Intensiva Healthcare Corporation for
$103.6 million in cash. The purchase was funded through the sale of common
stock, issuance of senior subordinated debt and borrowings under our credit
facility. At the time of acquisition, Intensiva Healthcare operated 22
specialty acute care hospitals and had others in development.

On June 30, 1998, we acquired American Transitional Hospitals, Inc., a
wholly-owned subsidiary of Beverly Enterprises, Inc., for $62.8 million in
cash. We funded this purchase through borrowings under our credit facility. At
the time of acquisition, American Transitional Hospitals operated 15 specialty
acute care hospitals. For a discussion of the factors we consider in
acquisitions, see "Our Business--Specialty Acute Care Hospital Strategy" and
"Our Business--Outpatient Strategy."

Development of New Specialty Acute Care Hospitals

Our goal is to open approximately 10 new specialty acute care hospitals
each year, utilizing our "hospital within a hospital" model. We internally
developed and opened two hospitals in 1998, six hospitals in

1999, ten hospitals in 2000 and two hospitals for the quarter ended March 31,
2001. Each internally developed hospital has typically required approximately
$450,000 for leasehold improvements and approximately $250,000 for equipment.
During the initial year of operations, each newly developed hospital has
typically incurred losses of approximately $400,000 and required an additional
investment of $2.0 million to fund working capital.

Sources of Revenue

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

Our specialty hospitals are paid by Medicare under a cost-based
reimbursement methodology. These payments are subject to final cost report
settlements based on administrative review and audit by third parties. An
annual cost report is filed for each provider to report the cost of providing
services and to settle the difference between the interim payments we receive
and final costs. We record adjustments to the original estimates in the periods
that such adjustments become known. Because our routine payments from Medicare
are different than the final reimbursement due to us under the cost based
reimbursement system, we record a receivable or payable for the difference. Net
amount due to Medicare was $13.1 million as of December 31, 1999. We recorded
this amount as due to third party payors on our balance sheet. As of December
31, 2000 and March 31, 2001 we had a receivable from Medicare of $2.8 million
and $4.7 million, respectively. Substantially all Medicare cost reports are
settled through 1997.

Net operating revenues generated directly from the Medicare program
represented approximately 35.9% of net operating revenues for the quarter ended
March 31, 2001 and 35.1%, 48.1% and 37.9% for the years ended December 31,
2000, 1999 and 1998, respectively. The decline in the percentage of our net
operating revenue coming from Medicare during the year ended December 31, 2000
was principally related to the acquisition of the NovaCare Physical
Rehabilitation and Occupational Health Division, which receives a comparatively
lower percentage of its revenues from Medicare.

Legislative and regulatory action has resulted in continuing uncertainty
about the Medicare reimbursement programs. The federal government might, in the
future, reduce the funds available under that program or require more stringent
utilization and quality reviews of hospital facilities. For example, because
Congress has directed the Secretary of the Department of Health and Human
Services to develop a prospective payment system for long term acute care
hospitals, the way in which our specialty hospitals are reimbursed may change.
The Secretary has not developed such a system to date, but may do so in the
future. This change, if implemented, could reduce the reimbursements we receive
from the Medicare program. Additionally, there may be a continued rise in
managed care programs or future restructuring of the financing and delivery of
healthcare in the United States. These events could have an adverse effect on
our future financial results.

Other revenue primarily represents amounts the Medicare program
reimburses us for a portion of our corporate expenses that are related to our
specialty hospital operations.

Results of Operations

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

Year Ended Three Months Ended
December 31, March 31,
--------------------- --------------------
1998 1999 2000 2000 2001
----- ----- ----- --------- ---------

Net operating revenues........... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services (a)............. 86.5 84.1 81.5 82.0 80.6
General and administrative....... 8.4 4.7 3.5 3.7 3.7
Bad debt expense................. 2.7 1.9 3.6 3.0 3.7
----- ----- ----- --------- ---------
EBITDA (b)....................... 2.4 9.3 11.4 11.3 12.0
Depreciation and amortization.... 3.3 3.7 3.8 3.6 3.5
Special charges.................. 6.8 1.2 -- -- --
----- ----- ----- --------- ---------
Income (loss) from operations.... (7.7) 4.4 7.6 7.7 8.5
Other income..................... -- -- -- -- --
Interest expense, net............ 3.3 4.6 4.4 4.4 3.5
----- ----- ----- --------- ---------
Income (loss) before minority
interests, income taxes and
extraordinary item.............. (11.0) (0.2) 3.2 3.3 5.0
Minority interests............... 1.2 0.8 0.5 0.6 0.6
----- ----- ----- --------- ---------
Income (loss) before income taxes
and extraordinary item.......... (12.2) (1.0) 2.7 2.7 4.4
Income tax (benefit)............. (0.1) 0.6 1.2 1.3 1.7
----- ----- ----- --------- ---------
Net income (loss) before
extraordinary item.............. (12.1) (1.6) 1.5 1.4 2.7
Extraordinary item............... -- 1.3 0.8 -- --
----- ----- ----- --------- ---------
Net income (loss)................ (12.1)% (2.9)% 0.7% 1.4% 2.7%
===== ===== ===== ========= =========

(footnotes on following page)

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

Three
Months Ended
Year Ended December 31, March 31,
---------------------------- ------------------ Increase
1998 1999 2000 2000 2001 (Decrease)
-------- -------- -------- -------- -------- ----------
(dollars in thousands)

Net operating revenues:
Specialty hospitals.... $ 62,715 $307,464 $378,910 $ 87,351 $113,150 29.5%
Outpatient
rehabilitation........ 83,059 141,740 416,775 106,869 108,673 1.7
Other.................. 3,269 6,771 10,212 2,502 3,265 30.5
-------- -------- -------- -------- -------- -----
Total company.......... $149,043 $455,975 $805,897 $196,722 $225,088 14.4%
======== ======== ======== ======== ======== =====
EBITDA: (b)
Specialty hospitals.... $ 3,147 $ 35,929 $ 44,550 $ 9,911 $ 13,395 35.2%
Outpatient
rehabilitation........ 12,598 22,697 65,420 17,173 19,056 11.0
Other.................. (12,150) (16,382) (18,300) (4,833) (5,419) (12.2)
-------- -------- -------- -------- -------- -----
Total company.......... $ 3,595 $ 42,244 $ 91,670 $ 22,251 $ 27,032 21.5%
======== ======== ======== ======== ======== =====
Income (loss) from
operations:
Specialty hospitals.... $ 1,182 $ 28,016 $ 35,421 $ 8,180 $ 10,915 33.4%
Outpatient
rehabilitation........ 4,323 16,222 49,258 13,134 15,351 16.9
Other.................. (17,011) (23,958) (23,410) (6,084) (7,050) (15.9)
-------- -------- -------- -------- -------- -----
Total company.......... $(11,506) $ 20,280 $ 61,269 $ 15,230 $ 19,216 26.2%
======== ======== ======== ======== ======== =====
EBITDA margins: (b)
Specialty hospitals.... 5.0% 11.7% 11.8% 11.3% 11.8% 4.3%
Outpatient
rehabilitation........ 15.2 16.0 15.7 16.1 17.5 9.1
Other.................. NM NM NM N/M N/M N/M
-------- -------- -------- -------- -------- -----
Total company.......... 2.4% 9.3% 11.4% 11.3% 12.0% 6.2%
======== ======== ======== ======== ======== =====
Total assets:
Specialty hospitals.... $240,266 $250,034 $246,495 $259,945 $255,290
Outpatient
rehabilitation........ 90,267 350,419 329,874 353,649 314,962
Other.................. 6,416 20,265 10,431 22,497 11,144
-------- -------- -------- -------- --------
Total company.......... $336,949 $620,718 $586,800 $636,091 $581,396
======== ======== ======== ======== ========
Capital expenditures:
Speciality hospitals... $ 3,632 $ 7,243 $ 13,677 $ 3,865 $ 3,055
Outpatient
rehabilitation........ 2,042 3,085 6,399 1,215 1,742
Other.................. 749 568 2,354 854 528
-------- -------- -------- -------- --------
Total company.......... $ 6,423 $ 10,896 $ 22,430 $ 5,934 $ 5,325
======== ======== ======== ======== ========

- -------
NM-Not Meaningful.
(a) Cost of services include salaries, wages and benefits, operating supplies,
lease and rent expense and other operating costs.
(b) We define EBITDA as net income (loss) before interest, income taxes,
depreciation and amortization and special charges, other income, minority
interest and extraordinary items. EBITDA is not a measure of financial
performance under generally accepted accounting principles. Items excluded
from EBITDA are significant components in understanding and assessing
financial performance. EBITDA is a measure commonly used by financial
analysts and investors to evaluate the financial results of companies in
our industry, and we believe it therefore provides useful information to
investors. EBITDA should not be considered in isolation or as an
alternative to net income, cash flows generated by operations, investing
or financing activities, or other financial statement data presented in
the consolidated financial statements as indicators of financial
performance or liquidity. Because EBITDA is not a measurement determined
in accordance with generally accepted accounting principles and is
susceptible to varying calculations, EBITDA as presented may not be
comparable to similarly titled measures of other companies. For purposes
of the covenants in the indenture governing the notes offered hereby,
EBITDA is defined differently.

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

For the three
months ended
Year Ended December 31, March 31,
---------------------------- ----------------
1998 1999 2000 2000 2001
-------- -------- -------- ------- -------
(in thousands)

EBITDA....................... $ 3,593 $ 42,244 $ 91,670 $22,251 $27,032
Depreciation and
amortization................ (4,942) (16,741) (30,401) (7,021) (7,816)
Special charge............... (10,157) (5,223) -- -- --
Other income................. -- -- -- -- --
Interest income.............. 406 362 939 82 241
Interest expense............. (5,382) (21,461) (36,126) (8,847) (8,016)
Minority interest............ (1,744) (3,662) (4,144) (1,118) (1,407)
Income tax (expense)
benefit..................... 182 (2,811) (9,979) (2,513) (3,913)
Extraordinary item........... -- (5,814) (6,247) -- --
-------- -------- -------- ------- -------
Net income (loss)............ $(18,044) $(13,106) $ 5,712 $ 2,834 $ 6,121
======== ======== ======== ======= =======

Special Charges

In 1999 we recorded a special charge of $5.2 million related to the
impairment of goodwill, leasehold improvements and equipment that resulted from
closures and relocations of certain hospitals and clinics in December 1999.

In 1998 we recorded a special charge of $10.2 million. This charge
consisted of $6.3 million of impairment charges relating to assets acquired in
two smaller acquisitions in 1998 that were identified in accordance with our
policy on impairments, and based upon a review of the facts and circumstances
related to those identified assets. The majority of the charge was determined
based upon the comparison of the future discounted cash flows resulting from
the assets and the carrying value of these assets. The remainder of the charge
of $3.8 million related to the settlement of litigation. In June 1999, we
participated in the settlement of litigation initiated during 1997 by
Horizon/CMS Healthcare Corporation and certain of its affiliates against us,
and some of our subsidiaries, officers and employees. See Note 10 to Select
Medical Corporation's Consolidated Financial Statements.

Three Months Ended March 31, 2001 Compared to March 31, 2000

Net Operating Revenues

Our net operating revenues increased by 14.4% to $225.1 million for the
three months ended March 31, 2001 compared to $196.7 million for the three
months ended March 31, 2000.

Specialty Acute Care Hospitals. Our specialty hospital net operating
revenues increased 29.5% to $113.2 million for the three months ended March 31,
2001 compared to $87.4 million for the three months end March 31, 2000. Net
operating revenues for the specialty hospitals operated throughout both periods
increased 17.3% to $100.6 million for the three months ended March 31, 2001
from $85.8 million for the three months ended March 31, 2000. This resulted
from an improved occupancy rate and a higher non-Medicare payor mix. The
remaining increase of $11.0 million resulted from the internal development of
new specialty hospitals that commenced operations in 2000 and 2001.

Outpatient Rehabilitation. Our outpatient rehabilitation net operating
revenues increased 1.7% to $108.7 million for the three months ended March 31,
2001 compared to $106.9 million for the three months ended March 31, 2000. The
increase was related principally to same store growth experienced at our
outpatient locations.

Other. Our other revenues increased 30.5% to $3.3 million for the three
months ended March 31, 2001 compared to $2.5 million for the three months ended
March 31, 2000. The increase in other revenue reflects higher corporate general
and administrative costs in 2001, which resulted in higher Medicare
reimbursements for those costs.

Operating Expenses

Our operating expenses increased by 13.5% to $198.1 million for the three
months ended March 31, 2001 compared to $174.4 million for the year ended March
31, 2000. The increase in operating expenses was principally related to the
internal development of new specialty hospitals that commenced operations in
2000 and 2001. As a percent of our net operating revenues, our operating
expenses declined to 88.0% for the three months ended March 31, 2001 from 88.7%
for the three months ended March 31, 2000. Our operating expenses include our
cost of services, general and administrative expense and bad debt expense. Cost
of services as a percent of operating revenues declined to 80.6% for the three
months ended March 31, 2001 from 82.0% for the three months ended March 31,
2000. These costs primarily reflect our labor expenses. The relative reduction
in cost of services as percentage of net operating revenue resulted from lower
relative labor costs in both our specialty hospital and outpatient
rehabilitation business segments. During the same time period, general and
administrative expense as a percentage of net operating revenues remained
consistent at 3.7%. Our bad debt expense as a percentage of net operating
revenues increased to 3.7% for the three months ended March 31, 2001 compared
to 3.0% for the three months ended March 31, 2000. This increase is due to the
higher bad debt provisions recorded in our specialty hospital segment in
response to our increase in non-Medicare source revenue.

EBITDA

Our total EBITDA increased 21.5% to $27.0 million for the three months
ended March 31, 2001 compared to $22.3 million for the three months ended March
31, 2000. Our EBITDA margins increased to 12% for the three months ended March
31, 2001 compared to 11.3% for the three months ended March 31, 2000. For cash
flow information, see "--Capital Resources and Liquidity."

Specialty Acute Care Hospitals. EBITDA increased by 35.2% to $13.4
million for the three months ended March 31, 2001 compared to $9.9 million for
the three months ended March 31, 2000. Our EBITDA margins increased to 11.8%
for the three months ended March 31, 2001 from 11.3% for the three months ended
March 31, 2000. Our margins improved because of a greater number of mature
hospitals in 2001. The hospitals we operated throughout both periods accounted
for $3.0 million of the increase. The EBITDA increase in the same store
hospitals resulted from an increase in non-Medicare patient days and its
associated revenue per patient day. Our same hospital EBITDA margin increased
from 12.5% to 13.6%. The balance of the increase of $0.5 million resulted from
our newly developed hospitals.

Outpatient Rehabilitation. EBITDA increased by 11.0% to $19.1 million for
the three months ended March 31, 2001 compared to $17.2 million for the three
months ended March 31, 2000. Our EBITDA margins increased to 17.5% for the
three months ended March 31, 2001 from 16.1% for the three months ended March
31, 2000. The increase was related principally to same store growth experienced
at our outpatient locations.

Other. The EBITDA loss increased by 12.2% to a loss of $5.4 million for
the three months ended March 31, 2001 compared to a loss of $4.8 million for
the three months ended March 31, 2000. This increase resulted from the increase
in general and administrative costs needed to support the growth of the
organization, principally NovaCare and our new hospital development.

Income from Operations

Income from operations increased 26.2% to $19.2 million for the three
months ended March 31, 2001 compared to $15.2 million for the three months
ended March 31, 2000. The increase in income from operations

resulted from the EBITDA increases described above, offset by an increase in
amortization and depreciation. Depreciation and Amortization increased by 11.3%
to $7.8 million for the three months ending March 31, 2001 from $7.0 million
for the three months ended March 31, 2000. The increase resulted primarily from
increases in depreciation on fixed asset additions that are principally related
to new hospital development.

Interest Expense

Interest expense decreased by $0.8 million to $8.0 million for the three
months ended March 31, 2001 from $8.8 million for the three months ended March
31, 2000. The decline in interest expense is due to the lower debt levels
outstanding in 2001 compared to 2000. The lower debt levels resulted from the
significant repayment of debt that occurred in the third and fourth quarters of
2000 as a result of the NovaCare settlement, divestiture of the NovaCare
Occupational Health businesses and operating cash flow.

Minority Interests

Minority interests in consolidated earnings increased by $0.3 million to
$1.4 million for the three months ended March 31, 2001 compared to $1.1 million
for the three months ended March 31, 2000. This increase resulted from improved
operating performance in our operating subsidiaries that are structured with a
minority interest component.

Income Taxes

We recorded income tax expense of $3.9 million for the three months ended
March 31, 2001. The expense represented an effective tax rate of 39.0% and
approximates the federal and state tax rates. We recorded income tax expense of
$2.5 million for the three months ended March 31, 2000. This expense
represented an effective tax rate of 47.0%. This exceeded the statutory rates
primarily due to non-deductible goodwill. In 2001, we were able to utilize
carryover net operating losses to offset our non-deductible goodwill.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Net Operating Revenues

Our net operating revenues increased 76.7% to $805.9 million for the year
ended December 31, 2000 compared to $456.0 million for the year ended December
31, 1999. The percentage of our net operating revenues coming from Medicare
declined to 35.1% during the year ended December 31, 2000 from 48.1% for 1999.
This decline was principally related to the acquisition of NovaCare, which
receives a comparatively lower percentage of its revenue from Medicare.

Specialty Acute Care Hospitals. Our specialty hospital revenues increased
23.2% to $378.9 million for the year ended December 31, 2000 compared to $307.5
million for the year ended December 31, 1999. Net operating revenues for the
specialty hospitals operated throughout both periods increased 11.0% to $325.3
million for 2000 from $293.1 million for 1999. This increase resulted from an
improved occupancy rate and a higher non-Medicare payor mix. The remaining
increase of $39.2 million resulted from the internal development of new
specialty hospitals that commenced operations in 1999 and 2000.

Outpatient Rehabilitation. Our outpatient rehabilitation revenues
increased 194.0% to $416.8 million for the year ended December 31, 2000
compared to $141.7 million for the year ended December 31, 1999. This increase
was principally related to the acquisition of the NovaCare Physical
Rehabilitation and Occupational Health Division in November 1999, which
accounted for $261.8 million of the increase. The remaining increase resulted
primarily from increased volume in existing businesses.

Other. Our other revenues increased 50.8% to $10.2 million for the year
ended December 31, 2000 compared to $6.8 million for the year ended December
31, 1999. The increase in other revenue reflects higher corporate general and
administrative costs in 2000, which resulted in higher Medicare reimbursements
for those costs.

Operating Expenses

Our operating expenses increased by $300.5 million to $714.2 million for
the year ended December 31, 2000 compared to $413.7 million for the year ended
December 31, 1999. The increase in operating expenses was principally related
to the acquisition of the NovaCare Physical Rehabilitation and Occupational
Health Division, which accounted for $220.0 million of the increase. Our
specialty hospital segment experienced an increase in operating expenses of
$62.8 million. This increase principally related to growth in operating
expenses associated with the hospitals opened in 1999 and 2000. As a percent of
our net operating revenues, our operating expenses declined to 88.6% in 2000
from 90.7% in 1999. Our operating expenses include our cost of services,
general and administrative expense and bad debt expense. Cost of services as a
percent of net operating revenues declined to 81.5% during 2000 from 84.1%
during 1999. These costs primarily reflect our labor expenses. During the same
time period, general and administrative expense as a percent of net operating
revenues declined to 3.5% from 4.7%. The relative reductions in cost of
services and general and administrative expense were primarily the result of
our acquisition of NovaCare and the lower cost associated with providing
outpatient rehabilitation services relative to our specialty hospital services.
Bad debt expense as a percent of net operating revenues increased to 3.6%
during 2000 compared to 1.9% during 1999. This increase resulted primarily from
our acquisition of the NovaCare Physical Rehabilitation and Occupational Health
Division, which incurs higher bad debt as a percentage of net operating
revenues because of the large volume of relatively difficult to collect,
smaller dollar accounts receivables generated in an outpatient environment.

EBITDA

Our total EBITDA increased 117.0% to $91.7 million for the year ended
December 31, 2000 compared to $42.2 million for the year ended December 31,
1999. Our EBITDA margins increased to 11.4% for 2000 compared to 9.3% for 1999.
For cash flow information, see "--Capital Resources and Liquidity."

Specialty Acute Care Hospitals. EBITDA increased 24.0% to $44.6 million
for the year ended December 31, 2000 compared to $35.9 million for the year
ended December 31, 1999. Our EBITDA margins remained consistent at 11.8% and
11.7% in 2000 and 1999, respectively. The hospitals we operated throughout both
periods accounted for $5.3 million of the increase. This increase in same
hospital EBITDA resulted from an increase in non-Medicare payor mix. Our same
hospital EBITDA margin increased from 12.6% to 13.0%. The balance of the
increase of $3.4 million resulted from our newly developed hospitals.

Outpatient Rehabilitation. EBITDA increased by 188.2% to $65.4 million
for the year ended December 31, 2000 compared to $22.7 million for the year
ended December 31, 1999. The major contributor to this increase was the
NovaCare Physical Rehabilitation and Occupational Health Division acquisition
that accounted for $41.9 million of the increase. The remaining increase of
$0.8 million resulted from growth in our existing business. Our EBITDA margins
declined to 15.7% during 2000 from 16.0% during 1999. This decline resulted
from the acquisition of the NovaCare Physical Rehabilitation and Occupational
Health Division, which historically had lower margins than our existing
outpatient rehabilitation business. These lower margins were the result of
higher bad debt expense and costs of services as a percentage of net operating
revenues.

Other. EBITDA loss increased by 11.7% to a loss of $18.3 million for the
year ended December 31, 2000 compared to a loss of $16.4 million for the year
ended December 31, 1999. This increase resulted from the increase in general
and administrative expenses associated with the growth of the organization,
principally the addition of the NovaCare division and our new hospital
development.

Income from Operations

Income from operations increased 202.1% to $61.3 million for the year
ended December 31, 2000 compared to $20.3 million for the year ended December
31, 1999. The increase in income from operations resulted from EBITDA increases
described above and from a reduction in the amount recorded as a special

charge, offset by an increase in depreciation and amortization. Depreciation
and amortization increased by 81.6% to $30.4 million for 2000 compared to $16.7
million for 1999. Approximately $10.3 million of the increase in the
depreciation and amortization was related to the amortization of goodwill and
identifiable intangibles resulting from the NovaCare acquisition and the
depreciation of the acquired NovaCare fixed assets. The remaining increase
resulted from depreciation of new fixed assets.

Interest Expense

Interest expense increased to $36.1 million for the year ended December
31, 2000 from $21.5 million for the year ended December 31, 1999. The increase
in interest expense resulted from higher average debt levels outstanding in
2000 compared to 1999, including the debt assumed as a result of the NovaCare
acquisition, and an increase in the average interest rate associated with
borrowings.

Minority Interests

Minority interests increased by $0.4 million to $4.1 million for the year
ended December 31, 2000 compared to $3.7 million for the year ended December
31, 1999. This increase resulted from improved operating performance in our
operating subsidiaries that are structured with a minority interest component.

Income Taxes

We recorded income tax expense of $10.0 million for the year ended
December 31, 2000. The expense represented an effective tax rate of 45.5% and
exceeded statutory federal and state tax rates as a result of non-deductible
goodwill. We recorded income tax expense of $2.8 million for the year ended
December 31, 1999. This expense represented an effective tax rate of 62.7%. We
had a higher effective tax rate in this period as a result of non-deductible
goodwill and state income taxes in the jurisdictions where we reported taxable
income.

Extraordinary Item

On September 22, 2000, we entered into a new $230 million senior credit
facility with a syndicate of banks that replaced our $225 million credit
facility dated November 19, 1999. The extraordinary item consists of the
unamortized deferred financing costs of $6.2 million related to the November
19, 1999 credit facility.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Net Operating Revenues

Our net operating revenues increased 205.9% to $456.0 million for the
year ended December 31, 1999 compared to $149.0 million for the year ended
December 31, 1998. The major reason for the increase was the significant
acquisitions that occurred during 1998. The percentage of our revenue coming
directly from Medicare increased to 48.1% in 1999 from 37.9% in 1998. This
increase resulted from the full year effect of the acquisitions of specialty
acute care hospitals that occurred during 1998. A specialty hospital has
significantly higher Medicare utilization than operations in our outpatient
rehabilitation segment. See "--Significant Acquisitions."

Specialty Acute Care Hospitals. Our specialty hospital revenues increased
390.3% to $307.5 million for the year ended December 31, 1999 compared to $62.7
million for the year ended December 31, 1998. This increase resulted from the
expanded base of specialty hospitals that we operated as a result of the
significant acquisitions during 1998, and, to a lesser extent, our new hospital
development activity. We opened two hospitals in 1998 and six hospitals in
1999. We also closed one hospital in late 1999 that we acquired as part of our
Intensiva Healthcare acquisition due to that hospital's operating performance.

Outpatient Rehabilitation. Our outpatient rehabilitation revenues
increased 70.7% to $141.7 million for the year ended December 31, 1999 compared
to $83.1 million for the year ended December 31, 1998. Of this increase, $29.4
million resulted from the acquisition of NovaCare on November 19, 1999. The
remaining increase of $29.2 million resulted principally from the effect of
acquisitions that occurred in 1998 and early 1999.

Other. Our other revenues increased 107.1% to $6.8 million for the year
ended December 31, 1999 compared to $3.3 million for the year ended December
31, 1998. The increase in other revenue reflects higher corporate general and
administrative costs in 1999, which resulted in higher Medicare reimbursements
for those costs.

Operating Expenses

Our operating expenses increased by $268.3 million to $413.7 million for
the year ended December 31, 1999 compared to $145.5 million for the year ended
December 31, 1998. As a percentage of net operating revenues, our operating
expenses decreased to 90.7% from 97.6% during the same time period. The
decrease in operating expenses as a percentage of net operating revenues was
largely the result of our increased efficiencies and cost saving initiatives.
These efficiencies were realized as a result of our ability to spread our
support function costs over a larger operating group. We expect this trend to
continue as we grow our business. Cost savings have been achieved through
renegotiation of supply contracts and improved management of clinical staffing
levels at our hospitals. Cost of services as a percentage of net operating
revenues decreased to 84.1% during the year ended December 31, 1999 compared to
86.5% during the year ended December 31, 1998. During the same time period and
as a percentage of net operating revenues, general and administrative expense
decreased to 4.7% from 8.4% and bad debt expense decreased to 1.9% from 2.7%.

EBITDA

Our total EBITDA increased by $38.7 million to $42.2 million for the year
ended December 31, 1999 compared to $3.6 million for the year ended December
31, 1998. EBITDA margins increased to 9.3% in 1999 from 2.4% in 1998. For cash
flow information, see "--Capital Resources and Liquidity."

Specialty Acute Care Hospitals. EBITDA increased by $32.8 million to
$35.9 million for the year ended December 31, 1999 compared to $3.1 million for
the year ended December 31, 1998. This resulted from an expanded base of
specialty hospitals that we operated as a result of the significant
acquisitions in 1998 and an improvement in our EBITDA margins in 1999 to 11.7%
from 5.0% in 1998. Our EBITDA margins improved as a result of operational
changes that were implemented after the acquisitions and as a result of cost
reduction initiatives. These cost reduction initiatives are discussed above
under "Operating Expenses."

Outpatient Rehabilitation. EBITDA increased by $10.1 million to $22.7
million for the year ended December 31, 1999 compared to $12.6 million for the
year ended December 31, 1998. This resulted principally from 1998 acquisitions
which accounted for approximately $7.0 million of the increase. An additional
$1.0 million of the increase resulted from the operations of NovaCare and the
balance resulted from our internal business development.

Other. EBITDA loss increased by $4.2 million to a loss of $16.4 million
for the year ended December 31, 1999 compared to a loss of $12.2 million for
the year ended December 1998. This increase resulted from higher administrative
costs in 1999 to manage the increased size of our company.

Income from Operations

Income from operations increased by $31.8 million to $20.3 million for
the year ended December 31, 1999 compared to a loss of $11.5 million for the
year ended December 31, 1998. The increase in income from

operations resulted from the EBITDA increase described above and from a
reduction in the amount recorded as a special charge, offset by an increase in
depreciation and amortization. Depreciation and amortization increased to $16.7
million for the year ended December 31, 1999 compared to $4.9 million for the
year ended December 31, 1998. The increase resulted from the amortization of
goodwill and identifiable intangibles resulting from the numerous acquisitions
we made during these periods and the depreciation of fixed assets acquired in
these acquisitions.

Interest Expense

Interest expense increased to $21.5 million for the year ended December
31, 1999 from $5.4 million for the year ended December 31, 1998 due to higher
outstanding debt levels and an increase in the average interest rates
associated with borrowing. Additional debt was incurred and assumed as a result
of our acquisition activity.

Minority Interests

Minority interests increased by $2.0 million to $3.7 million for the year
ended December 31, 1999 compared to $1.7 million for the year ended December
31, 1998. This increase resulted from acquisitions completed during 1998 that
were structured with a minority interest component and from improved earnings
in these businesses.

Income Taxes

We recorded income tax expense of $2.8 million for 1999. This tax expense
reflects federal income taxes of $1.3 million and state income taxes of $1.5
million. Even though we had an overall pre-tax loss, we had a federal tax
expense due to non-deductible goodwill and other permanent differences. We
recorded a state tax expense as a result of taxable income generated in certain
jurisdictions. For 1998, we recorded a benefit of $0.2 million as a result of
our pre-tax loss.

Extraordinary Item

On November 19, 1999, we entered into a new $225 million senior credit
facility in connection with the NovaCare acquisition. This senior credit
facility replaced our $155 million credit facility from February 9, 1999. The
extraordinary item consists of the unamortized deferred financing costs of $5.8
million related to the February 9, 1999 credit facility.

Capital Resources and Liquidity

Three months ended March 31, 2001 compared to three months ended March 31, 2000

For the three months ended March 31, 2001 operating activities provided
$24.8 million of cash compared to $8.5 million for the three months ended March
31, 2000. The increase in cash flow is attributable to improved earnings,
aggressive management of payables and lower day sales outstanding. Our days
sales outstanding were 81 days at March 31, 2001 compared to 102 days at March
31, 2000.

Investing activities used $7.2 million and $7.5 million of cash flow for
the three months ended March 31, 2001 and 2000, respectively. This usage in
both 2001 and 2000 resulted from purchases of property and equipment of $5.3
million and $5.9 million, respectively related principally to new hospital
development. Additionally, we incurred earnout and acquisition payments of $1.9
million and $1.5 million in 2001 and 2000, respectively. The earnout payments
relate to obligations we assumed as part of the NovaCare acquisition.

Financing activities used $18.5 million and $0.9 million of cash for the
three months ended March 31, 2001 and 2000, respectively. This was due
principally to the repayment of debt.

Years Ended December 31, 2000, 1999 and 1998

Operating activities generated $22.5 million in cash during the year
ended December 31, 2000 compared to cash usages of $25.2 million and $24.7
million in the years ended December 31, 1999 and 1998,
respectively. The increase in cash flow in 2000 is attributable to increased
earnings and improved working capital management. The use of cash in 1999 and
1998 was primarily attributable to net losses and an increase in accounts
receivable that resulted from our growth.

Investing activities provided $14.2 million of cash flow during 2000
compared to cash usages of $181.3 million and $209.5 million in the years ended
December 31, 1999 and 1998, respectively. For the year ended December 31, 2000,
we received proceeds of $29.9 million from two escrow funds established as part
of the NovaCare acquisition and proceeds of $13.0 million from the sale of the
occupational health centers. These occupational health centers were an
operating division of NovaCare. The claim against the escrow fund resulted from
an increase in uncollectible accounts receivable, which were paid with the
proceeds from the escrow fund. Cash inflows were offset principally by the
purchases of $22.4 million of equipment and acquisition and earnout payments of
$9.3 million. The increase in property and equipment purchases reflects the
growth in new hospital development during 2000. The principal usage of cash in
1999 and 1998 was to fund acquisitions. Our investment in property and
equipment during 1999 and 1998 was not material because our operations required
minimal capital expenditures on an ongoing basis, and most of our locations
were leased. Our investment in equipment is mostly related to development of
new hospitals.

Financing activities used $37.6 million of cash for the year ended
December 31, 2000. This was due principally to the repayment of debt. In 1999
and 1998 we had cash inflows of $197.5 million and $242.3 million,
respectively. We raised capital through the issuance of common and preferred
stock, senior subordinated debt and borrowings under our senior credit
facility. We incurred debt in connection with the acquisitions of American
Transitional Hospitals, Intensiva Healthcare and the NovaCare Physical
Rehabilitation and Occupational Health Division. A description of these
financing arrangements can be found in Note 6 to Select Medical Corporation's
Consolidated Financial Statements included elsewhere in this prospectus.

Capital Resources

Net working capital was $110.7 million at March 31, 2001 compared to
$105.6 million at December 31, 2000. The increase in net working capital was
primarily attributable to a reduction in current liabilities which resulted
from payments of seller debt.

On September 22, 2000, we entered into a new credit agreement that
refinanced our existing bank debt. The new credit agreement provides $175.0
million in term loans, approximately 10% of which is denominated in Canadian
dollars. The term debt begins quarterly amortization in September 2001, with a
final maturity date of September 2005. The credit agreement also provides for a
revolving facility of $55.0 million to be used for general corporate purposes.
The revolving facility terminates in September 2005.

In April 2001, certain provisions in an amendment to our credit agreement
became effective. The amendment required us to apply $24.0 million of the net
proceeds from our recent stock offering to repay the U.S. term loan portion of
our credit facility. In addition, the amendment permitted us to use $53 million
of the net proceeds of the stock offering to redeem our Class A Preferred
Stock. Our revolving credit facility was also increased by $20 million.

Borrowings under the credit agreement bear interest at a fluctuating rate
of interest based upon financial covenant ratio tests. As of March 31, 2001,
our weighted average interest rate under our credit agreement was approximately
8.8%. As of March 31, 2001 we had borrowed all of our available loans under the
U.S. and Canadian term loans and had availability to borrow an additional $37.2
million under our revolving facility.

We entered into an amendment to our senior credit facility, the terms of
which will become effective upon the consummation of this offering. The
amendment will increase our revolving credit facility up to $152.5 million.

We are required to pay a quarterly commitment fee at a rate that ranges
from .375% to .500%, based upon financial covenant ratio tests. This fee
applies to unused commitments under the revolving credit facility.

The terms of the credit agreement include various restrictive covenants.
These covenants include:

. restrictions against incurring additional indebtedness,

. disposing of assets,

. incurring capital expenditures,

. making investments,

. restrictions against paying certain dividends.

. engaging in transactions with affiliates,

. incurring contingent obligations, and

. allowing or causing fundamental changes.

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

We believe that existing cash balances, internally generated cash flows
and borrowings under our revolving credit facility will be sufficient to
finance acquisitions, capital expenditures and working capital requirements
for at least the next twelve months. We have opened two specialty hospitals in
2001 and plan to open an additional eight hospitals before the end of 2001. A
new specialty hospital has historically required approximately $3.1 million
per hospital over the initial year of operations to fund leasehold
improvements, equipment, start-up losses and working capital. From time to
time, we may complete small acquisitions of specialty hospitals and outpatient
rehabilitation businesses. These types of acquisitions typically involve
consideration of less than $5.0 million. If funds required for future
acquisitions exceed existing sources of capital, we will need to increase our
credit facilities or obtain additional capital by other means.

Inflation

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

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest rate changes, primarily as a result of a
floating interest rates on borrowings under our senior credit facility. A
change in interest rates by one percentage point on variable rate debt would
have resulted in interest expense fluctuating approximately $1.3 million for
1999 and $2.0 million for 2000 and approximately $0.5 million for the three
months ended March 31, 2001. As required by our credit agreement, on March 30,
2001 we entered into an interest rate swap agreement that fixes the interest
rate cost to us on 50% of the amount of the term loans outstanding under our
senior credit facility for a period of four years.

Approximately 10% of our term loan borrowings under our credit agreement
are denominated in Canadian dollars. Although we are not required by our credit
agreement to maintain a hedge on our foreign currency risk, we have entered
into a five year hedge agreement that allows us to limit the cost of Canadian
dollars to a range of US$0.6631 to US$0.6711 per Canadian dollar to limit our
risk on the potential fluctuation in the exchange rate of the Canadian dollar
to the U.S. dollar.

Subsequent Events

On April 10, 2001 we completed an initial public offering of 9,000,000
shares of our common stock. Our net proceeds after deducting estimated expenses
and underwriting discounts and commissions was approximately $77.5 million. On
April 20, 2001 the underwriters exercised their option to purchase and
additional 1,350,000 shares of common stock to cover overallotments. The net
proceeds from the exercise of this option was $11.9 million after deduction of
the underwriters' discount. The proceeds were used to repay $35.9 million of
our senior debt under our senior credit facility, to redeem $52.8 million of
our Class A Preferred Stock and the remainder was used for general corporate
purposes. Additionally, on May 2, 2001, we paid all accrued dividends on our
Class A Preferred and Class B Preferred stock. Payments of Class A Preferred
and Class B Preferred dividends totaled $14.1 million and $5.2 million,
respectively.

Some of our outpatient rehabilitation businesses have minority equity
owners who we do not control. These minority interests were retained by the
previous owners of the businesses when we acquired them and typically are about
20% of the business. We consolidate these majority-owned entities' results of
operations.

The terms of our agreements with some of these minority owners allow them
to sell their minority interests back to us upon the completion of our initial
public offering. As of June 6, 2001 we have paid these minority owners $13.7
million for their ownership interests. Of this amount, $9.7 million has been
paid in cash and $4.0 million has been paid in stock. We expect to complete the
purchase of the balance of the interests from these owners in the near future
for an additional $1.1 million in cash.

OUR BUSINESS

Overview

We are the second largest operator of specialty acute care hospitals for
long term stay patients in the United States based on the number of our
facilities. We are also the second largest operator of outpatient
rehabilitation clinics in the United States based on the number of our clinics.
As of March 31, 2001, we operated 56 specialty acute care hospitals in 21
states and 675 outpatient rehabilitation clinics in 29 states, the District of
Columbia and seven Canadian provinces. We began operations in 1997 under the
leadership of our current management team, including our co-founders, Rocco A.
Ortenzio and Robert A. Ortenzio, both of whom have significant experience in
the healthcare industry. Under this leadership, we have grown our business
through strategic acquisitions and internal development initiatives. For the
twelve months ended March 31, 2001, we had net operating revenues of $834.3
million and EBITDA of $96.5 million. We earned 50.2% of our net operating
revenues from our outpatient rehabilitation business and 49.8% from our
specialty acute care hospitals. In April 2001, we completed a $98.3 million
initial public offering of our common stock.

Competitive Strengths

. Experienced and Proven Management Team. Our five senior operations
executives have an average of 23 years of experience in the
healthcare industry. In addition, 17 of the Company's 23 officers
have worked together in previous healthcare companies, both public
and private.

. Significant Scale. Our specialty acute care hospitals and outpatient
rehabilitation clinics provide us with significant scale and
advantages over many of our competitors. These advantages allow us to
leverage our operating costs by centralizing administrative functions
at our corporate office and spreading the costs of operating these
functions over a large base of operations. We believe that our size
also gives us an advantage in negotiating contracts with commercial
insurers.

. Multiple Business Lines and Geographic Diversity. We have a leading
presence in two segments of the healthcare industry. We believe that
this operating strategy reduces our risk profile. Because we provide
both inpatient care in our specialty acute care hospitals and
outpatient care in our rehabilitation clinics, we do not rely
exclusively on a single business line for our net operating revenues
or EBITDA. Our geographic diversification and the mix of our business
also reduces our exposure to any single governmental or commercial
reimbursement source.

. Proven Operating Performance. We have established a track record of
improving the financial performance of the hospitals and clinics we
operate. Our EBITDA margins improved by 2.1 percentage points for the
fiscal year ended December 31, 2000 compared to the fiscal year ended
December 31, 1999. This improvement is the result, in part, of our
ability to grow our revenues by expanding referral relationships and
payor contracts as well as our ability to reduce costs by
standardizing procedures and centralizing administrative functions.
We also focus on working capital management and have decreased the
number of accounts receivable days outstanding from 119 days as of
December 31, 1999 to 81 days as of March 31, 2001.

. Experience in Successfully Completing and Integrating
Acquisitions. Since we began operations in 1997, we have completed
three significant acquisitions for approximately $366 million in
aggregate consideration, as well as a number of smaller acquisitions.
We are selective in identifying and pursuing acquisitions, focusing
on strategic opportunities where we can enhance operating
performance.

. Demonstrated Development Expertise. From our inception through March
31, 2001, we developed 20 new specialty acute care hospitals and 66
outpatient rehabilitation clinics. These initiatives have
demonstrated our ability to effectively identify new opportunities
and implement start-up plans.

. Significant Financial Resources. We have access to significant
financial resources that give us the flexibility to pursue an active
growth strategy. As adjusted for our initial public offering and

this offering, as of March 31, 2001, we had $3.4 million in cash, and
our total debt of $272.5 million represented 57.5% of our
capitalization.

Specialty Acute Care Hospitals

As of March 31, 2001, we operated 56 specialty acute care hospitals, 50
of which were certified by the federal Medicare program as long term acute
care hospitals. These hospitals generally have 35 to 40 beds, and as of March
31, 2001, we operated a total of 2,068 available licensed beds. Our specialty
acute care hospitals employ approximately 6,100 people, with the majority
being registered or licensed nurses and respiratory therapists. In these
specialty hospitals we treat patients with serious and often complex medical
conditions such as respiratory failure, neuromuscular disorders, cardiac
disorders, non-healing wounds, renal disorders and cancer.

Patients are admitted to our specialty acute care hospitals from general
acute care hospitals in our markets. These general acute care hospitals are
frequently not the optimum setting in which to treat these patients, because
they require longer stays and a higher level of clinical attention than the
typical acute care patient. Furthermore, general acute care hospitals'
reimbursement rates usually do not adequately compensate them for the
treatment of this type of patient. The differences in clinical expertise and
reimbursement rates provide general acute care hospitals and their physicians
with incentives to discharge longer stay, medically complex patients to our
facilities. As a result of these dynamics, we continually seek to increase our
admissions by expanding and improving our relationships with the physicians
and general acute care hospitals in our markets that refer patients to our
facilities.

Below is a table that shows the typical distribution by medical condition
of patients in our hospitals.

Distribution
Medical Condition of Patients
- ----------------- ------------

Respiratory failure................................................ 33%
Neuromuscular disorder............................................. 23
Cardiac disorder................................................... 14
Wound care......................................................... 9
Renal disorder..................................................... 5
Cancer............................................................. 4
Other.............................................................. 12
---
Total............................................................ 100%
===

When a patient is referred to one of our hospitals by a physician, case
manager, health maintenance organization or insurance company, a nurse liaison
makes an assessment to determine the degree of care required and expected
length of stay. This initial patient assessment is critical to our ability to
provide the appropriate level of patient care. Based on the determinations
reached in this clinical assessment, an admission decision is made by the
attending physician.

Upon admission, an interdisciplinary team reviews a new patient's
condition. The interdisciplinary team comprises a number of clinicians,
including the attending physician, a specialty nurse, 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. The case manager coordinates all aspects of the
patient's hospital stay and serves as a liaison with the insurance carrier's
case management staff when appropriate. The case manager communicates
progress, resource utilization, and treatment goals between the patient, the
treatment team and the payor.

Each of our specialty hospitals has an onsite management team consisting
of a chief executive officer, a director of clinical services and a director
of provider relations. These teams manage local strategy and day-

to-day operations, including oversight of per patient costs and average length
of stay. They also assume primary responsibility for developing relationships
with the general acute care providers and clinicians in our markets that refer
patients to our specialty hospitals. We provide our hospitals with centralized
accounting, payroll, legal, reimbursement, human resources, compliance,
management information systems, billing and collecting services. The
centralization of these services improves efficiency and permits hospital staff
to spend more time on patient care.

"Hospital within a Hospital" Model

Of the 56 specialty hospitals we operated as of March 31, 2001, two are
freestanding facilities and 54 are located in leased space within a host
general acute care hospital. These leased spaces are separately licensed and
are commonly referred to as a "hospital within a hospital." We operate the
largest number of specialty acute care hospitals operating with this "hospital
within a hospital" model in the United States. We believe this model provides
several advantages to patients, host hospitals, physicians and us.

. The host hospital's patients benefit from being admitted to a setting
specialized to meet their unique medical needs without having the
disruption of being transferred to another location.

. In addition to being provided with a place to transfer high-cost,
long-stay patients, host hospitals benefit by receiving payments from
us for rent and ancillary services.

. Physicians affiliated with the host hospital are provided with the
convenience of being able to monitor the progress of their patients
without traveling to another location.

. We benefit from the ability to operate specialty hospitals without
the capital investment often associated with buying or building a
freestanding facility. We also gain operating cost efficiencies by
contracting with these host hospitals for selected services at
discounted rates.

In addition, our specialty hospitals serve the broader community where
they operate, treating patients from other general acute care hospitals in the
local market. During the quarter ended March 31, 2001, 52% of the patients in
our "hospital within a hospital" facilities were referred to us from general
acute care hospitals other than the host hospitals.

Specialty Acute Care Hospital Strategy

Provide High Quality and Cost Effective Care

We believe that our patients benefit from our experience in addressing
the complex medical needs of long term stay patients. A typical patient
admitted to our specialty hospitals has multiple medical conditions and
requires a high level of attention by our clinical staff. To effectively
address the complex nature of our patients' medical conditions, we have
developed specialized treatment programs focused solely on their needs. We have
also implemented specific staffing models that are designed to ensure that
patients have access to the necessary level of clinical attention. These
staffing models also allow us to allocate our resources efficiently, which
reduces costs.

Our treatment and staffing programs benefit patients because they give
our clinicians access to the regimens that we have found to be most effective
in treating various conditions such as respiratory failure, non-healing wounds
and neuromuscular disorders. In addition, we often combine or modify these
programs to provide a treatment plan tailored to meet a patient's unique needs.

We continually monitor the quality of our patient care by several
measures, including patient, payor and physician satisfaction, as well as
clinical outcomes. Quality measures are collected monthly and reported
quarterly and annually. In order to benchmark ourselves against other
healthcare organizations, we have contracted with outside vendors to collect
our clinical and patient satisfaction information and compare it to other
healthcare organizations. The information collected is reported back to each
hospital, to the corporate

office, and directly to the Joint Commission on Accreditation of Healthcare
Organizations. As of March 31, 2001, all but seven of our our most recently
opened hospitals had been accredited by the Joint Commission on Accreditation
of Healthcare Organizations. See "--Government Regulations--Licensure--
Accreditation."

Reduce Costs

We continually seek to improve operating efficiency and reduce costs at
our hospitals by standardizing operations and centralizing key administrative
functions. These initiatives include:

. optimizing staffing based on our occupancy and the clinical needs of
our patients;

. centralizing administrative functions such as accounting, payroll,
legal, reimbursement, compliance and human resources;

. standardizing management information systems to aid in financial
reporting as well as billing and collecting; and

. participating in group purchasing arrangements to receive discounted
prices for pharmaceuticals and medical supplies.

Increase Higher Margin Commercial Volume

We typically receive higher reimbursement rates from commercial insurers
than we do from the federal Medicare program. As a result, we work to expand
relationships with insurers to increase commercial patient volume. Each of our
hospitals has employees who focus on commercial contracting initiatives within
their regions. Contracting professionals in our central office work with these
hospital employees to ensure that our corporate contracting standards are met.
Our goal in commercial contracting is to give discounted rates to those
commercial payors that we expect to add significant patient volume to our
hospitals.

We believe that commercial payors seek to contract with our hospitals
because we offer patients quality, cost effective care. Although the level of
care we provide is complex and staff intensive, we typically have lower
operating expenses than a freestanding general acute care facility's intensive
care unit because of our "hospital within a hospital" operating model. General
acute care hospitals incur substantial overhead costs in order to provide a
wide array of patient services. We provide a much narrower range of patient
services, and our hospitals within a hospital lease underutilized space within
a general acute care hospital. These factors permit our hospitals to operate
with lower overhead costs per patient than general acute care hospitals can. As
a result of these lower costs, we offer more attractive rates to commercial
payors. Additionally, we provide their enrollees with customized treatment
programs not offered in traditional acute care facilities.

Develop New Specialty Acute Care Hospitals

Our goal is to open approximately 10 new specialty acute care hospitals
each year using our "hospital within a hospital" model. We seek to lease space
from general acute care hospitals with leadership positions in the markets in
which they operate. We have successfully contracted with various types of
general hospitals, including for-profit, not-for-profit and university
affiliated. Our relationships include hospitals operated by many of the leading
names in the healthcare industry, such as HCA--The Healthcare Company, Health
Management Associates, Mercy Health System, Tenet Healthcare and Ohio State
University Medical Center. We have a standardized approach to development that
begins with the evaluation of new opportunities. We identify development
opportunities by targeting host hospitals with:

. 250 beds or more;

. sufficient space available to lease;

. high patient volume; and

. market populations of at least 500,000 to 750,000.

We have a dedicated development team with significant market experience.
When we target a host hospital, the development team conducts an extensive
review of all of its discharges to determine the number of referrals we would
have likely received from it on a historical basis. Next, we review the host
hospital's contracts with commercial insurers to determine the market's general
reimbursement trends and payor mix. Ultimately, when we sign a lease with a new
host hospital, the project is transitioned to our start-up team, which is
experienced in preparing a specialty hospital for opening. The start-up team
oversees facility improvements, equipment purchases, licensure procedures, and
the recruitment of a full-time management team. After the facility is opened,
responsibility for its management is transitioned to this new management team
and our corporate operations group.

From our inception through March 31, 2001, we had completed the
development and opening of the following 20 specialty acute care hospitals:

Hospital Name City State Opening Date Licensed Beds
------------- ------------ ----- -------------- -------------

SSH-Biloxi Biloxi MS May 1998 42
SSH-West Columbus Columbus OH December 1998 37
SSH-Wilmington Wilmington DE January 1999 35
SSH-Milwaukee Milwaukee WI March 1999 34
SSH-Youngstown Youngstown OH April 1999 31
SSH-Mesa Mesa AZ September 1999 37
SSH-Battle Creek Battle Creek MI October 1999 32
SSH-Omaha Omaha NE October 1999 40
SSH-Gulfport Gulfport MS January 2000 38
SSH-Denver Denver CO February 2000 32
SSH-Tri-Cities Bristol TN March 2000 25
SSH-St. Louis St. Louis MO April 2000 33
SSH-Wichita Wichita KS June 2000 35
SSH-San Antonio* San Antonio TX July 2000 34
SSH-Greensburg* Greensburg PA August 2000 31
SSH-Erie* Erie PA October 2000 35
SSH-North Dallas Dallas TX November 2000 11
SSH-Fort Smith* Fort Smith AR December 2000 34
SSH-Birmingham* Birmingham AL February 2001 38
SSH-Jefferson Parish* New Orleans LA February 2001 34
---
Total 668
===

- --------
* As of March 31, 2001, certification as a long term acute care hospital
pending, subject to successful completion of a start-up period. See "--
Governmental Regulations--Licensure--Certification."

Pursue Opportunistic Acquisitions

In addition to our development initiatives, we intend to grow our network
of specialty hospitals through strategic acquisitions. When we acquire a
hospital or a group of hospitals, a team of our professionals is responsible
for formulating and executing an integration plan. We have generally been able
to increase margins at acquired facilities by centralizing administrative
functions and implementing our standardized staffing models and resource
management programs. Since 1997 we have acquired and integrated 37 hospitals
which all share our centralized billing and purchasing programs and operate
standardized management information systems.

Outpatient Rehabilitation

We are the second largest operator of outpatient rehabilitation clinics
in the United States, based on the number of our clinics. As of March 31, 2001,
we operated 589 clinics throughout 29 states and the District of Columbia and
86 clinics in seven provinces throughout Canada. Our outpatient rehabilitation
division employs approximately 7,800 people. Typically, each of our clinics is
located in a freestanding facility in a highly visible medical complex or
retail location. In addition to providing therapy in our outpatient clinics, we
provide rehabilitation management services and staffing on a contract basis to
hospitals, schools, nursing facilities and home health agencies.

In our clinics and through our contractual relationships, we provide
physical, occupational and speech rehabilitation programs and services. Our
patients are typically diagnosed with musculoskeletal impairments that restrict
their ability to perform normal activities of daily living. These impairments
are often associated with accidents, sports injuries, strokes, heart attacks
and other medical conditions. Our rehabilitation programs and services are
designed to help these patients minimize physical and cognitive impairments and
maximize functional ability. We also design services to prevent short-term
disabilities from becoming chronic conditions. Our rehabilitation services are
provided by our professionals including licensed physical therapists,
occupational therapists, certified athletic trainers, psychiatrists, speech-
language pathologists, respiratory therapists, exercise physiologists and
physical rehabilitation counselors.

Patients are generally referred or directed to our clinics by a
physician, employer or health insurer who believes that a patient, employee or
member can benefit from the level of therapy we provide in an outpatient
setting. Outpatient rehabilitation services not only seek to improve the
patients' quality of life but also have been shown to result in overall savings
in healthcare costs. A study by the Health Insurance Association of America
conducted in December of 1999 found that $13 in savings is generated for every
dollar spent by insurers on rehabilitation services. As a result of these cost
savings we believe that our services are attractive to healthcare payors who
are seeking to provide the most cost-effective level of care to their members.
In our outpatient rehabilitation division, approximately 92% of our net
operating revenues come from rehabilitation management services and commercial
payors, including healthcare insurers, managed care organizations and workers'
compensation programs. The balance of our reimbursement is derived from
Medicare and other government sponsored programs.

We have grown our outpatient rehabilitation business through acquisitions
and new development. Our most significant outpatient acquisition was the
purchase of the Physical Rehabilitation and Occupational Health Division of
NovaCare, Inc. in November of 1999 through which we added approximately 500
outpatient rehabilitation clinics.

Outpatient Strategy

Increase Market Share

Our goal is to be a leading provider of outpatient rehabilitation
services in our local markets. Having a strong market share in our local
markets allows us to benefit from heightened brand awareness, economies of
scale and increased leverage when negotiating payor contracts. To increase our
market share, we seek to expand the services and programs we provide and
generate loyalty with patients and referral sources by providing high quality
care and strong customer service.

. Expand Rehabilitation Programs and Services. We assess the healthcare
needs of our markets and implement programs and services targeted to
meet the demands of the local community. In designing these programs
we benefit from the knowledge we gain through our national network of
clinics. This knowledge is used to design programs that optimize
treatment methods and measure changes in health status, clinical
outcomes and patient satisfaction. Our programs and services include,
among others, back care and rehabilitation; work injury management
and

prevention; sports rehabilitation and athletic training; and health,
safety and prevention programs. Other services that vary by location
include aquatic therapy, speech therapy, neurological rehabilitation
and post-treatment care.

. Provide High Quality Care and Service. We believe that by focusing on
quality care and offering a high level of customer service we develop
brand loyalty in our markets. This loyalty allows us to retain
patients and strengthen our relationships with the physicians,
employers, and health insurers in our markets who refer or direct
additional patients to us. We are focused on providing a high level
of service to our patients throughout their entire course of
treatment. To measure satisfaction with our service we have developed
surveys for both patients and physicians. Our clinics utilize the
feedback from these surveys to continuously refine and improve
service levels.

Optimize the Profitability of Our Payor Contracts

Before we enter into a new contract with a commercial payor, we evaluate
it with the aid of our contract management system. We assess potential
profitability by evaluating past and projected patient volume, clinic
capacity, and expense trends. Each contract we enter into is continually re-
evaluated to determine how it is affecting our profitability. We create a
retention strategy for each of the top performing contracts and a re-
negotiation strategy for contracts that do not meet our defined criteria.

Improve Margins

To improve operating margins and efficiencies, we continually revise and
streamline operational processes. We evaluate our clinical staff productivity
monthly against specific benchmarks to ensure efficient utilization of labor
for services provided. Furthermore, following our acquisition of NovaCare,
Inc.'s Physical Rehabilitation and Occupational Health Division, we have
implemented initiatives to reduce overhead costs. As part of those efforts we
have reduced the number of central business offices we operate from seven to
five during 2000. During the next six months we expect to further consolidate
operations to enhance administrative efficiencies. We have also developed a
phased plan that, in the course of the next two years, will link all of our
clinics together via a wide area network. This linkage will provide us with
the opportunity to implement centralized scheduling, improve the timing of
billing transactions and provide a base for dissemination of clinical and
contractual information to all of our clinics.

Grow Through New Development and Disciplined Acquisitions

We intend to open new clinics in our current markets where we believe
that we can benefit from existing referral relationships and brand awareness
to produce incremental growth. From time to time, we also intend to also
evaluate acquisition opportunities that may enhance the scale of our business
and expand our geographic reach. Potential acquisitions are closely evaluated
and we seek to buy only those assets that are complementary to our business
and that are expected to give us a strong return on our invested capital.

Maintain Strong Employee Relations

We believe that the relationships between our employees and the referral
sources in their communities are critical to our success. Our referral
sources, such as physicians and healthcare case managers, send their patients
to our clinics based on three factors: the quality of our care, the service we
provide and their familiarity with our therapists. We seek to retain and
motivate our therapists by implementing a performance-based bonus program, a
defined career path with the ability to be promoted from within, timely
communication on company developments, and internal training programs. We also
focus on empowering our employees by giving them a high degree of autonomy in
determining local market strategy. This management approach reflects the
unique nature of each market we operate in and the importance of encouraging
our employees to assume responsibility for their clinic's performance.

Overview of Healthcare Spending

The U.S. Health Care Financing Administration (the name of which is being
changed to the Centers for Medicare & Medicaid Services) estimated that in
1999, total U.S. healthcare expenditures grew 6.0% to approximately $1.2
trillion. From 1995 to 1999, healthcare spending grew at a compounded annual
rate of 5.4%, compared to 7.3% in the first half of the decade and 11.0% in the
1980s. The decline in spending growth during the latter half of the decade has
been attributed to the result of increased membership in managed care plans
which negotiated discounted rates with healthcare providers.

Growth in healthcare expenditures is expected to rebound during the
current decade. According to the Health Care Financing Administration, total
U.S. healthcare spending is estimated to grow 6.6% in 2001 and at an average
annual rate of 6.5% from 2001 through 2008. By these estimates, healthcare
expenditures will account for approximately $2.2 trillion, or 16.2% of the
total U.S. gross domestic product by 2008.

We expect future spending to be influenced by various factors including:

. slower managed care enrollment growth and a movement towards less
restrictive forms of managed care, or hybrids;

. increased state and federal regulation of health plans;

. proposed Medicare reimbursement relief for healthcare providers;

. continued increases in pharmaceutical expenditures; and

. continued technological advancement.

Demographic considerations also affect long term growth projections for
healthcare spending. According to the U.S. Census Bureau, there are
approximately 35 million Americans aged 65 or older in the U.S. today, who
comprise approximately 13% of the total U.S. population. By the year 2030 the
number of elderly is expected to climb to 70 million, or 20% of the total
population. Due to the increasing life expectancy of Americans, the number of
people aged 85 years and older is also expected to increase from 4.3 million to
8.9 million by the year 2030. We believe that this increase in life expectancy
will increase demand for healthcare services and, as importantly, the demand
for innovative, more sophisticated means of delivering those services.

Based on projections of future healthcare expenditures, according to the
Health Care Financing Administration, payments to healthcare providers will
increase by nearly $1.0 trillion in the next decade. Despite pressures from
payors to reduce spending, we believe that the growth in spending will create
opportunities for low cost, quality healthcare providers like us. Continued
spending pressure will encourage efficiency by directing business toward lower-
cost settings such as our outpatient rehabilitation clinics and specialty acute
care hospitals.

Sources of Net Operating Revenues

The following table presents the approximate percentages by source of net
operating revenue received for healthcare services we provided for the periods
indicated.

Year ended Three months
December 31, ended
------------------- March 31,
Net Operating Revenues by Payor Source 1998 1999 2000 2001
- -------------------------------------- ----- ----- ----- ------------ ---

Commercial insurance (a).................. 37.6% 34.6% 51.2% 47.8%
Medicare.................................. 37.9 48.1 35.1 35.9
Private and other (b)..................... 24.5 15.7 12.4 15.3
Medicaid (c).............................. -- 1.6 1.3 1.0
----- ----- ----- -----
Total................................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====

- --------
(a) Includes commercial healthcare insurance carriers, health maintenance
organizations, preferred provider organizations, workers' compensation and
managed care programs.
(b) Includes self payors, Canadian revenues, fees from management services
agreements and contract management services.
(c) In 1998, we did not separately track Medicaid payments because the amounts
were immaterial.

Non-Government Sources

A majority of our net operating revenues come from private payor sources.
These sources include insurance companies, workers' compensation programs,
health maintenance organizations, preferred provider organizations, other
managed care companies, and employers, as well as by patients directly.
Patients are generally not responsible for any difference between customary
charges for our services and amounts paid by Medicare and Medicaid programs,
insurance companies, workers' compensation companies, health maintenance
organizations, preferred provider organizations, and other managed care
companies, but are responsible for services not covered by these programs or
plans, as well as for deductibles and co-insurance obligations of their
coverage. The amount of these deductibles and co-insurance obligations has
increased in recent years. Collection of amounts due from individuals is
typically more difficult than collection of amounts due from government or
business payors. To further reduce their healthcare costs, an increasing number
of insurance companies, health maintenance organizations, preferred provider
organizations, and other managed care companies are negotiating discounted fee
structures or fixed amounts for hospital services performed, rather than paying
healthcare providers the amounts billed. If an increased number of insurance
companies, health maintenance organizations, preferred provider organizations,
and other managed care companies succeed in negotiating discounted fee
structures or fixed amounts, our results of operations may be negatively
affected.

Government Sources

Medicare is a federal program that provides medical insurance benefits to
persons age 65 and over, some disabled persons, and persons with end-stage
renal disease. Medicaid is a federal-state funded program, administered by the
states, which provides medical benefits to individuals who are unable to afford
healthcare. All of our hospitals are certified as providers of Medicare, and
our outpatient rehabilitation clinics regularly receive Medicare payments for
their services. Additionally, our specialty hospitals participate in two state
Medicaid programs. Amounts received under the Medicare and Medicaid programs
are generally less than the customary charges for the services provided. In
recent years, changes made to the Medicare and Medicaid programs have further
reduced payment to healthcare providers. Since an important portion of our
revenues comes from patients under the Medicare program, our ability to operate
our business successfully in the future will depend in large measure on our
ability to adapt to changes in the Medicare program. See "--Government
Regulations--Overview of U.S. and State Government Reimbursements."

Government Regulations

General

The healthcare industry is required to comply with many laws and
regulations at the federal, state and local government levels. These laws and
regulations require that hospitals and outpatient rehabilitation clinics 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.
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.

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. We believe all of our
hospitals are properly licensed under appropriate state laws. We believe that
all of our outpatient rehabilitation clinics in states that require licensing
of such facilities are properly licensed.

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
creation or acquisition of the new facility or service.

Professional Licensure and Corporate Practice. Healthcare professionals
at our hospitals and outpatient rehabilitation clinics 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, and we believe that our employees and agents, including
rehabilitation agency therapists, comply with all applicable state laws.

In some states, business corporations such as ours are restricted from
practicing therapy through the direct employment of therapists. In those
states, in order to comply with the restrictions imposed, we either contract to
obtain therapy services from an entity permitted to employ therapists, or we
manage the physical therapy practice owned by licensed therapists through which
the therapy services are provided.

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 56 hospitals
participate in the Medicare program. In addition, we provide the majority of
our outpatient rehabilitation services through clinics certified by Medicare as
rehabilitation agencies or "rehab agencies."

Accreditation. Our hospitals receive accreditation from the Joint
Commission on Accreditation of Healthcare Organizations, a nationwide
commission which establishes standards relating to the physical plant,
administration, quality of patient care and operation of medical staffs of
hospitals. Generally, our hospitals have to be in operation for at least six
months before they are eligible for accreditation. As of March 31, 2001, all
but seven of our most recently opened hospitals had been accredited by the
Joint Commission on Accreditation of Healthcare Organizations.

Overview of U.S. and State Government Reimbursements

Medicare. The Medicare program reimburses healthcare providers for
services furnished to Medicare beneficiaries, which are generally persons 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 of 1965
and is administered primarily by the Department of Health and Human Services
and the Health Care Financing Administration, the name of which is being
changed to the Centers for Medicare & Medicaid Services and will be known as
"CMS." For the three months ended March 31, 2001, we received approximately 35%
of our revenue from Medicare.

Long Term Acute Care Hospital Medicare Reimbursement. Our long-term acute
care hospitals receive cost reimbursement, subject to a maximum cap. In
contrast, Medicare inpatient costs for short-term acute care hospitals are
reimbursed based upon a fixed payment amount per discharge using diagnosis
related groups, commonly referred to as DRGs. The DRG payment under a
prospective payment system is based upon the national average cost of treating
a Medicare patient's condition. Although the average length of stay varies for
each DRG, the average stay for all Medicare patients subject to prospective
payment system is approximately six days. Thus, a prospective payment system
creates an economic incentive for general short-term acute care hospitals to
discharge medically complex Medicare patients as soon as clinically possible.
We believe that the incentive for short-term acute care hospitals to discharge
medically complex patients as soon as clinically possible creates a substantial
referral source for our long term acute care hospitals.

Prior to qualifying as an exempt long-term acute care hospital, a new
long-term acute care hospital initially receives payment under the acute care
DRG-based reimbursement system. The long-term acute care hospital must continue
to be paid DRGs for a minimum of six months while meeting certain Medicare
long-term acute care hospital requirements, the most significant requirement
being an average length of stay of more than 25 days. A "hospital within a
hospital" facility must also establish itself as a hospital separate from its
host by, among other things, obtaining separate licensure and certification,
and limiting the services it purchases directly from its host to 15% of its
total operating costs, or limiting the number of patient admissions from its
host to 25% of total admissions.

Once the hospital qualifies for exempt status, long-term acute care
hospitals currently are paid on the basis of Medicare reasonable costs per case
subject to limits. Under cost-based reimbursement, costs accepted for
reimbursement depend on a number of factors, including necessity,
reasonableness, related-party principles and relatedness to patient care.
Qualifying costs under Medicare's cost-reimbursement system typically include
all operating costs and also capital costs that include interest expense,
depreciation, amortization, and rental expense. Non-qualifying costs include
marketing costs.

The cost reimbursement received by a long-term acute care hospital is
subject to per-discharge payment limits. During a long-term acute care
hospital's initial operations, Medicare payment is capped at the average
national target rate established by the Tax Equity and Fiscal Responsibility
Act of 1982, commonly known as TEFRA. After the second year of operations,
payment is subject to a target amount based on the lesser of the hospital's
cost-per-discharge or the national ceiling in the applicable base year.
Legislation enacted in December 2000, the "Medicare, Medicaid, and SCHIP
Benefits Improvement and Protection Act of 2000," increases the target amount
by 25 percent and the national ceiling by 2 percent for cost reporting periods
beginning after October 1, 2000.

Congress has required the Secretary of the Department Health and Human
Services to submit to Congress by October 1, 1999 a proposal to establish a
prospective payment system for long-term acute care hospitals. This requirement
was later extended until October 1, 2001. Current law provides that a
prospective payment system is to be effective for cost reporting periods
beginning on or after October 1, 2002. When developing the prospective payment
system, the December 2000 legislation requires the Secretary to examine the
feasibility and impact of basing payment on the existing (or refined) short
term acute hospital DRGs and the most recently available hospital discharge
data. The Secretary is required to implement a prospective

payment system using the existing short term acute hospital DRGs that have been
modified where feasible, unless a different prospective payment system is
implemented by October 1, 2002.

Outpatient Rehabilitation Services Medicare Reimbursement. We provide the
majority of our outpatient rehabilitation services in our rehabilitation
clinics. Through our contract services agreements, we also provide outpatient
rehabilitation services in the following settings:

. schools;

. physician-directed clinics;

. hospitals; and

. skilled nursing facilities.

Essentially, all of our outpatient rehabilitation services are provided in
rehabilitation agencies and are not provided through rehabilitation hospitals.

Prior to January 1, 1999, outpatient physical therapy, occupational
therapy, and speech-language pathology services, which we refer to as
outpatient therapy services, were reimbursed on the basis of the lower of 90%
of reasonable costs or actual charges. Beginning January 1, 1999, outpatient
rehabilitation services were reimbursed on a fee schedule, subject to annual
limits. These outpatient rehabilitation providers receive a fixed fee for each
procedure performed, which is adjusted by the geographical area in which the
facility is located. Beginning on January 1, 1999, the following annual limits
per Medicare beneficiary were to have become effective:

. $1,500 for outpatient rehabilitation services (including speech-
language pathology services), and

. $1,500 for outpatient occupational health services.

In November 1999, the Balanced Budget Refinement Act provided some relief
to providers by unbundling speech-language pathology services from other
outpatient rehabilitation services. The following lists the new annual limits
by services offered:

. $1,500 for outpatient physical therapy services,

. $1,500 for speech-language pathology services, and

. $1,500 for outpatient occupational health services.

A moratorium has since been placed on these limits for the years 2000 through
2002 pending a review by the Secretary of the Department of Health and Human
Services of the clinical needs of these patients and the appropriate level of
limitations.

The Secretary of the U.S. Department of Health and Human Services is
required to report the results of this review to Congress, together with any
relevant legislative recommendations, potentially including revised coverage
policies as an alternative to the therapy caps. The Secretary is also required
to study therapy utilization patterns and report the findings to Congress. The
December 2000 legislation also requires the Secretary to study the implications
of eliminating the "in the room" supervision requirement for Medicare payment
for physical therapy assistants who are supervised by physical therapists and
the implications of this requirement on the physical therapy cap.

Historically, outpatient rehabilitation services have been subject to
scrutiny by the Medicare program for, among other things, medical necessity for
services, appropriate documentation for services, billing for group therapy,
and Medicare billing practices by skilled nursing facilities. In addition,
payment for rehabilitation services furnished to patients of skilled nursing
facilities has been affected by the establishment of a Medicare prospective
payment system and consolidated billing requirement for skilled nursing
facilities.

The resulting pressure on skilled nursing facilities to reduce their costs by
negotiating lower payments to therapy providers, such as our contract therapy
services, and the inability of the therapy providers to bill the Medicare
program directly for their services have tended to reduce the amounts that
rehabilitation providers can receive for services furnished to many skilled
nursing facility residents.

Long Term Acute Care 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 of 1965 and
administered and funded jointly by each individual state government and the
Health Care Financing Administration. Most state Medicaid payments are made
under a prospective payment system or under 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 materially increase or decrease the level of program payments to our
hospitals. Medicaid payments accounted for about 1.7% of our net operating
revenues for the three months ended March 31, 2001.

Workers' Compensation. Workers' compensation programs accounted for
approximately 18.6% of our revenue from outpatient rehabilitation services for
the three months ended March 31, 2001. Workers' compensation is a state-
mandated, comprehensive insurance program that requires employers to fund or
insure medical expenses, lost wages and other costs resulting from work-related
injuries and illnesses. Workers' compensation benefits and arrangements vary on
a state-by-state basis and are often highly complex. In some states, payment
for services covered by workers' compensation programs are subject to cost
containment features, such as requirements that all workers' compensation
injuries be treated through a managed care program, or the imposition of
payment caps. In addition, these workers' compensation programs may impose
requirements that affect the operations of our outpatient rehabilitation
services.

Canadian Reimbursement

In 1996, approximately 70% of all funding for the Canadian healthcare
system was derived from public sources, according to Health Canada. The Canada
Health Act governs the Canadian healthcare system, and provides for federal
funding to be transferred to provincial health systems. Our Canadian outpatient
rehabilitation clinics receive funding primarily through workers' compensation
benefits, which are administered by provincial workers' compensation boards.
The workers' compensation boards assess employers' fees based on their industry
and past claims history. These fees are then distributed independently by each
provincial workers' compensation board as payments for healthcare services.
Therefore, the payments each of our rehabilitation clinics receive for similar
services can vary substantially because of the different payment regulations in
each province. For the three months ended March 31, 2001, we derived about 4.2%
of our total net operating revenues from our operations in Canada.

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.

From time to time, various federal and state agencies, such as 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 long-term acute
care hospitals or outpatient rehabilitation services or providers. For example,
the Office of Inspector General's 2001 Work Plan describes the government's
intention to study providers' use of the "hospital within a hospital" model for
furnishing long term acute care hospital services and the effectiveness of
Health Care Financing Administration's payment safeguards relating to such
services. We monitor these issuances to ensure that our resources are focused
on compliance with 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, Fraud and Anti-dumping 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 money in connection with
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
$50,000 or imprisonment for each violation, 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 health care programs.

Section 1877 of the Social Security Act, commonly known as the "Stark
Law," was amended in 1995 to 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 twice the dollar value of each such service provided and
exclusion from the Medicare and Medicaid 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.

Medicare-participating hospitals are also subject to the Emergency
Medical Treatment and Active Labor Act, an "anti-dumping" statute commonly
referred to as EMTALA. If a patient with an emergency condition enters a
hospital with an emergency department, this federal law requires the hospital
to stabilize a patient suffering from this emergency condition or make an
appropriate transfer of the patient to a facility that can handle the
condition. There are severe penalties under EMTALA if a hospital refuses to
screen or appropriately stabilize or transfer a patient or if the hospital
delays appropriate treatment in order to first inquire about the patient's
ability to pay. Although none of our hospitals operate emergency departments,
the government has interpreted EMTALA broadly to cover situations in which any
type of hospital inpatient is transferred in an unstable condition.

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 operate five long
term acute care hospitals that are treated as provider-based satellites of
certain of our other facilities and we provide rehabilitation management and
staffing services to hospital rehabilitation departments that may be treated as
provider-based. On April 7, 2000, the Health Care Financing Administration
finalized new regulatory standards for determinations that a facility or
service has provider-based status. As a result of the December 2000
legislation, however, subordinate facilities that were treated as provider-
based prior to October 1, 2000 will not

have to comply with the new standards until October 1, 2002. Subordinate
facilities that are established after October 1, 2000 will be required to
satisfy the new standards for cost reporting periods beginning on or after
January 10, 2001. The December 2000 legislation also moderated the geographic
proximity requirement for provider-based status under the new standards,
thereby removing an obstacle to provider-based status for certain subordinate
facilities, and many long term acute care hospital satellites, in particular.

Health Information Practices. In addition to broadening the scope of the
fraud and abuse laws, the Health Insurance Portability and Accountability Act
also mandates, among other things, the adoption of standards for the exchange
of electronic health information in an effort to encourage overall
administrative simplification and enhance the effectiveness and efficiency of
the healthcare industry. Among the standards that the Department of Health and
Human Services will adopt pursuant to the Health Insurance Portability and
Accountability Act are standards for the following:

. electronic transactions and code sets;

. unique identifiers for providers, employers, health plans and
individuals;

. security and electronic signatures;

. privacy; and

. enforcement.

Although the Health Insurance Portability and Accountability Act was
intended ultimately to reduce administrative expenses and burdens faced within
the healthcare industry, we believe the law will initially bring about
significant and, in some cases, costly changes. The Department of Health and
Human Services has finalized two rules to date mandating the use of new
standards with respect to certain healthcare transactions and health
information. The first rule requires the use of uniform standards for common
healthcare transactions, including healthcare claims information, plan
eligibility, referral certification and authorization, claims status, plan
enrollment and disenrollment, payment and remittance advice, plan premium
payments and coordination of benefits, and it establishes standards for the use
of electronic signatures.

Second, the Department of Health and Human Services has finalized new
standards relating to the privacy of individually identifiably health
information. These standards not only require our compliance with rules
governing the use and disclosure of protected health information, but they also
require us to impose those rules, by contract, on any business associate to
whom such information is disclosed. Rules governing the security of health
information have been proposed but have not yet been issued in final form.

The Department of Health and Human Services finalized the new transaction
standards on August 17, 2000, and we will be required to comply with them by
October 16, 2002. The privacy standards under the Health Insurance Portability
and Accountability Act were issued on December 28, 2000, and became effective
on April 14, 2001. We will be required to comply with them by April 14, 2003.
Once the security regulations are issued in final form, we will have
approximately two years to be fully compliant. Sanctions for failing to comply
with the Health Insurance Portability and Accountability Act include criminal
penalties and civil sanctions.

We are evaluating the effect of the Health Insurance Portability and
Accountability Act and have recently developed a task force to address the
Health Insurance Portability and Accountability Act regulations as they have
been adopted to date and as additional standards are adopted in the coming
months. At this time, we anticipate that we will be able to fully comply with
those Health Insurance Portability and Accountability Act requirements that
have been adopted. However, we cannot at this time estimate the cost of such
compliance, nor can we estimate the cost of compliance with standards that have
not yet been finalized by the Department of Health and Human Services. Although
the new and proposed health information standards are likely to have a
significant effect on the manner in which we handle health data and communicate
with payors, based on our current knowledge, we believe that the cost of our
compliance will not have a material adverse effect on our business, financial
condition or results of operations.

Employees

As of March 31, 2001 we employed approximately 14,300 people throughout
the United States and Canada. A total of approximately 8,800 of our employees
are full-time and the remaining approximately 5,500 are part-time employees.
Outpatient, contract therapy and physical rehabilitation and occupational
health employees totaled approximately 7,800 and inpatient employees totaled
approximately 6,100.

Legal Proceedings

On June 9, 1998, a complaint was filed naming our subsidiary, American
Transitional Hospitals, Inc., and its former parent, Beverly Enterprises, Inc.,
as defendants. This qui tam action seeks triple damages and penalties under the
False Claims Act against American Transitional Hospitals. The Department of
Justice did not intervene in this action. It is alleged in the complaint that
prior to the acquisition, American Transitional Hospitals fraudulently billed
Medicare for services that were not rendered and supplies and medications that
were not needed. Beverly Enterprises has agreed to indemnify us against all
losses that result from this litigation up to a cap of $62.8 million, other
than for lost profits or consequential damages. Beverly Enterprises is
undertaking the legal defense in this case.

On August 10, 1998 a complaint was filed that named NovaCare, Inc. (now
known as NAHC, Inc.), other named defendants and 100 defendants who were to be
named at a later time. This qui tam action seeks triple damages and penalties
under the False Claims Act against NAHC. The Department of Justice did not
intervene in this action. The allegations involve, among other things the
distinction between individual and group billing in physical rehabilitation
clinics that we acquired from NovaCare. On February 1, 2000 the unnamed
defendants were dismissed with prejudice, however the relator plaintiff has
recently made a motion to name us and some of the subsidiaries we acquired in
the NovaCare acquisition as defendants in this case. NAHC has agreed to fully
indemnify us for any losses which could result from this case. NAHC has sold
all of its operating entities. Based on our review of the complaint, we do not
believe that this lawsuit is meritorious, and if we or any of the NovaCare
companies we acquired are named as a defendant, we intend to vigorously defend
against this action. However, because of the uncertain nature of the
litigation, we cannot predict the outcome of this matter.

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

Competition

We compete primarily on the basis of pricing and quality of the patient
services we provide. Our specialty acute care hospitals face competition
principally from general acute care hospitals in the communities in which we
operate. General acute care hospitals often have the capability to provide the
same services we provide. Our hospitals also face competition from large
national operators of similar facilities, such as Kindred Healthcare, Inc.

Our outpatient rehabilitation clinics face competition principally from
locally owned and managed outpatient rehabilitation clinics in the communities
they serve. Many of these clinics have longer operating histories and greater
name recognition in these communities than our clinics, and they may have
stronger relations with physicians in these communities on whom we rely for
patient referrals. In addition, HealthSouth Corporation, which operates more
outpatient rehabilitation clinics in the United States than we do, competes
with us in many of our markets.

Compliance Program

Our Compliance Program

In late 1998, we voluntarily adopted our code of conduct, which is 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 a
compliance officer, a director of compliance who assists the compliance
officer, a compliance committee and sub-committees, and employee education and
training. We also have established a reporting system, auditing and monitoring
programs, and a disciplinary system as a means for enforcing the code's
policies.

Operating Our Compliance Program

We focus on integrating compliance responsibilities with operational
functions. We recognize that our compliance with applicable laws and
regulations depends upon individual employee actions as well as company
operations. We therefore have adopted an operations team approach to
compliance, and we utilize corporate experts for the program design efforts of
our compliance committee. We use facility leaders in our compliance sub-
committees for employee-level implementation of our code of conduct. This
approach is intended to enforce our company-wide commitment to operate in
accordance with the laws and regulations that govern our business.

Compliance Committee

Our compliance committee is made up of members of our senior management
and in-house counsel. The compliance committee meets on a quarterly basis and
reviews the activities, reports and operation of our compliance program. In
addition, the compliance sub-committees meet on a regular basis and review
compliance for each of our business divisions.

Compliance Issue Reporting

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 through our
toll-free compliance hotline or our compliance post office box. The compliance
officer and the compliance committee are responsible for reviewing and
investigating each compliance incident in accordance with the compliance
department's investigation policy.

Compliance Monitoring and Auditing/Comprehensive Training and Education

Monitoring reports and the results of compliance for each of our business
divisions are reported to the compliance committee on a quarterly basis. We
train and educate our employees regarding the code of conduct, as well as the
legal and regulatory requirements relevant to each employee's work environment.
New and current employees are required to sign a compliance certification form
certifying that the employee has read, understood, and has agreed to abide by
the code of conduct.

Policies and Procedures Reflecting Compliance Focus Areas

We review our current policies and procedures for our compliance program,
and we intend to continue to review them on an annual basis 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.

Facilities

We currently lease most of our facilities, including clinics, offices,
long term acute care hospitals and the corporate headquarters. We lease all of
our clinics and related offices, which, as of March 31, 2001, included
approximately 675 outpatient rehabilitation clinics throughout the United
States and Canada. The outpatient rehabilitation clinics generally have a five-
year lease term with two three-year renewals.

We also lease all of our hospital facilities except for one 176,000
square foot facility located in Houston, Texas. As of March 31, 2001, we had 54
hospital within a hospital leases and one freestanding building lease.

We generally seek a five-year lease for our hospitals, with an additional
five-year renewal at our option. We lease our corporate headquarters, which is
approximately 63,214 square feet, located in Mechanicsburg, Pennsylvania. We
lease several other administrative spaces related to administrative and
operational support functions. As of March 31, 2001, this was comprised of 13
locations throughout the U.S. with approximately 106,000 square feet in total.

THE EXCHANGE OFFER

Purpose and Effect of the Exchange Offer

We issued and sold the old notes to the initial purchasers on June 11,
2001. The initial purchasers subsequently sold the old notes to qualified
institutional buyers in reliance on Rule 144A under the Securities Act. Because
the old notes are subject to transfer restrictions, we, the subsidiary
guarantors and the initial purchasers entered into an Exchange and Registration
Rights Agreement dated June 11, 2001 under which we agreed:

. on or before August 25, 2001, to prepare and file with the Securities
and Exchange Commission the registration statement of which this
prospectus is a part;

. to use our best efforts to cause the registration statement to become
effective under the Securities Act on or before November 18, 2001,
and to consummate the exchange offer on or before December 8, 2001;

. upon the effectiveness of the registration statement, to offer the
new notes in exchange for surrender of the old notes; and

. to keep the exchange offer open for not less than 30 days (or longer
if required by applicable law) after the date notice of the exchange
offer is mailed to the holders of the old notes.

The registration statement is intended to satisfy in part our obligations
relating to the old notes under the registration rights agreement.

Under existing interpretations of the Securities and Exchange Commission,
the new notes will be freely transferable by holders other than our affiliates
after the exchange offer without further registration under the Securities Act
if the holder of the new notes represents that:

. it is acquiring the new notes in the ordinary course of its business;

. it has no arrangement or understanding with any person to participate
in the distribution of the new notes; and

. it is not our affiliate, as that term is interpreted by the
Securities and Exchange Commission.

However, broker-dealers receiving new notes in the exchange offer will have a
prospectus delivery requirement regarding resales of the new notes. The
Securities and Exchange Commission has taken the position that broker-dealers
receiving new notes in the exchange offer may fulfill their prospectus delivery
requirements relating to new notes (other than a resale of an unsold allotment
from the original sale of the old notes) with this prospectus. Under the
Exchange and Registration Rights Agreement, we are required to allow broker-
dealers receiving new notes in the exchange offer and other persons, if any,
with similar prospectus delivery requirements to use this prospectus in
connection with the resale of the new notes. Each broker-dealer that receives
new notes for its own account in exchange for old notes, where the notes were
acquired by the broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of the new notes. See "Plan of Distribution."

Terms of The Exchange Offer; Period For Tendering Old Notes

Upon the terms and subject to the conditions set forth in this prospectus
and in the accompanying letter of transmittal (which together constitute the
exchange offer), we will accept for exchange old notes which are properly
tendered on or prior to the expiration date of the exchange offer and not
withdrawn as permitted below. The expiration date of the exchange offer shall
be 5:00 p.m., New York City time, on August 13, 2001, unless extended by us, in
our sole discretion.

As of the date of this prospectus, $175.0 million aggregate principal
amount of the old notes are outstanding. This prospectus, together with the
letter of transmittal, is first being sent on or about July 12, 2001 to all
holders of old notes known to us. Our obligation to accept old notes for
exchange pursuant to the exchange offer is subject to conditions as set forth
under "--Conditions to the Exchange Offer" below.

We expressly reserve the right, at any time or from time to time, to
extend the period of time during which the exchange offer is open, and thereby
delay acceptance for any exchange of any old notes, by giving notice of the
extension to the holders of old notes as described below. During any extension,
all old notes previously tendered will remain subject to the exchange offer and
may be accepted for exchange by us. Any old notes not accepted for exchange for
any reason will be returned without expense to the tendering holder as promptly
as practicable after the expiration or termination of the exchange offer.

We expressly reserve the right to amend or terminate the exchange offer,
and not to accept for exchange any old notes not previously accepted for
exchange, upon the occurrence of any of the conditions of the exchange offer
specified below under "--Conditions to the Exchange Offer." We will give notice
of any extension, amendment, non-acceptance or termination to the holders of
the old notes as promptly as practicable, the notice in the case of any
extension to be issued no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled expiration date of the exchange
offer.

Holders of old notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law in connection with the exchange
offer.

Procedures for Tendering Old Notes

The tender to us of old notes by a holder of old notes as set forth below
and the acceptance of the tender by us will constitute a binding agreement
between the tendering holder and us upon the terms and subject to the
conditions set forth in this prospectus and in the accompanying letter of
transmittal. Except as set forth below, a holder who wishes to tender old notes
for exchange under the exchange offer must transmit a properly completed and
duly executed letter of transmittal, including all other documents required by
the letter of transmittal, to State Street Bank and Trust Company, N.A. at the
address set forth below under "--Exchange Agent" on or prior to the expiration
date of the exchange offer. In addition, the exchange agent must receive:

. certificates for the old notes along with the letter of transmittal,
or

. prior to the expiration date of the exchange offer, a timely
confirmation of a book-entry transfer of the old notes into the
exchange agent's account at The Depository Trust Company in
accordance with the procedure for book-entry transfer described
below, or

. the holder must comply with the guaranteed delivery procedure
described below.

The method of delivery of old notes, letters of transmittal and all other
required documents is at your election and risk. If delivery is by mail, we
recommend that you use registered mail, properly insured, with return receipt
requested. In all cases, you should allow sufficient time to assure timely
delivery. You should not send letters of transmittal or old notes to us.

Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the old notes surrendered for exchange
are tendered:

. by a registered holder of the old notes who has not completed the box
entitled "Special Issuance Instruction" or "Special Delivery
Instruction" on the letter of transmittal; or

. for the account of a firm which is a member of a registered national
securities exchange or a member of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having
an office or correspondent in the United States.

In the event that signatures on a letter of transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, the guarantees
must be by a firm which is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc.
or by a commercial bank or trust company having an office or correspondent in
the United States. If old notes are registered in the name of a person other
than a signer of the letter of transmittal, the old notes surrendered for
exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by us
in our sole discretion, duly executed by the registered holder with the
signature on the old notes or the written instrument or instruments of
transfer or exchange guaranteed by a firm which is a member of a registered
national securities exchange or a member of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an
office or correspondent in the United States.

Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee, and who
wishes to tender, should contact the registered holder promptly and instruct
the registered holder to tender on the beneficial owner's behalf. If the
beneficial owner wishes to tender on the owner's own behalf, the owner must,
prior to completing and executing the letter of transmittal and delivering the
owner's old notes, either (1) make appropriate arrangements to register
ownership of the old notes in the owner's name or (2) obtain a properly
completed bond power from the registered holder. The transfer of registered
ownership may take considerable time.

All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of old notes tendered for exchange will be determined
by us in our sole discretion. This determination shall be final and binding.
We reserve the absolute right to reject any and all tenders of any old notes
not properly tendered or to not accept any old notes which acceptance might,
in our judgment or our counsel's judgment, be unlawful. We also reserve the
absolute right to waive any defects or irregularities or conditions of the
exchange offer as to any particular old notes either before or after the
expiration date of the exchange offer (including the right to waive the
ineligibility of any holder who seeks to tender old notes in the exchange
offer). The interpretation of the terms and conditions of the exchange offer
as to any old notes either before or after the expiration date of the exchange
offer (including the letter of transmittal and the instructions to the letter
of transmittal) by us shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of old notes
for exchange must be cured within a reasonable period of time as we shall
determine. Neither we, the exchange agent nor any other person shall be under
any duty to give notification of any defect or irregularity regarding any
tender of old notes for exchange, nor shall any of them incur any liability
for failure to give notification.

If the letter of transmittal or any old notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, these persons should so indicate when signing, and, unless waived by
us, proper evidence satisfactory to us of their authority to so act must be
submitted.

By tendering, each holder of old notes will represent to us in writing
that, among other things:

. the new notes acquired in the exchange offer are being obtained in
the ordinary course of business of the holder and any beneficial
holder;

. neither the holder nor any beneficial holder has an arrangement or
understanding with any person to participate in the distribution of
the new notes; and

. neither the holder nor any other person is an "affiliate," as defined
under Rule 405 of the Securities Act, of our company. If the holder
is not a broker-dealer, the holder must represent that it is not
engaged in nor does it intend to engage in distribution of the new
notes.

If any holder or any other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of ours, or is engaged in, or intends to
engage in, or has an arrangement or understanding with any person to

participate in, a distribution of the new notes to be acquired in the exchange
offer, the holder or any other person must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction.

If the holder is a broker-dealer, the holder must represent that it will
receive new notes for its own account in exchange for old notes that were
acquired as a result of market-making activities or other trading activities.
Each broker-dealer that receives new notes for its own account in exchange for
old notes, where the old notes were acquired by the broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of the new notes.
See "Plan of Distribution."

Acceptance of Old Notes For Exchange; Delivery Of New Notes

Upon satisfaction or waiver of all of the conditions to the exchange
offer, we will accept, promptly after the expiration date of the exchange
offer, all old notes properly tendered, and will issue the new notes promptly
after acceptance of the old notes. See "--Conditions to the Exchange Offer"
below. For purposes of the exchange offer, we shall be deemed to have accepted
properly tendered old notes for exchange when, as and if we have given oral and
written notice to the exchange agent.

The new notes will bear interest from the most recent date to which
interest has been paid on the old notes, or if no interest has been paid on the
old notes, from June 11, 2001. Accordingly, registered holders of new notes on
the relevant record date for the first interest payment date following the
consummation of the exchange offer will receive interest accruing from the most
recent date to which interest has been paid or, if no interest has been paid,
from June 11, 2001. Old notes accepted for exchange will cease to accrue
interest from and after the date of consummation of the exchange offer. Holders
of old notes whose old notes are accepted for exchange will not receive any
payment for accrued interest on the old notes otherwise payable on any interest
payment date the record date for which occurs on or after consummation of the
exchange offer and will be deemed to have waived their rights to receive
accrued interest on the old notes.

In all cases, issuance of new notes for old notes that are accepted for
exchange in the exchange offer will be made only after timely receipt by the
exchange agent of (1) certificates for the old notes or a timely confirmation
of a book-entry transfer of the old notes into the exchange agent's account at
The Depository Trust Company, (2) a properly completed and duly executed letter
of transmittal and (3) all other required documents. If any tendered old notes
are not accepted for any reason set forth in the terms and conditions of the
exchange offer or if old notes are submitted for a greater principal amount
than the holder desires to exchange, the unaccepted or non-exchanged old notes
will be returned without expense to the tendering holder of the old notes (or,
in the case of old notes tendered by book-entry transfer into the exchange
agent's account at The Depository Trust Company according to the book-entry
transfer procedures described below, the non-exchanged old notes will be
credited to an account maintained with the Depository Trust Company) as
promptly as practicable after the expiration of the exchange offer.

Book-Entry Transfer

Any financial institution that is a participant in The Depository Trust
Company's systems may make book-entry delivery of old notes by causing The
Depository Trust Company to transfer the old notes into the exchange agent's
account at The Depository Trust Company in accordance with The Depository Trust
Company's procedures for transfer. However, although delivery of old notes may
be effected through book-entry transfer at The Depository Trust Company, the
letter of transmittal or facsimile of the letter of transmittal with any
required signature guarantees and any other required documents must, in any
case, be transmitted to and received by the exchange agent at the address set
forth below under "--Exchange Agent" on or prior to the expiration date of the
exchange offer, unless the holder has strictly complied with the guaranteed
delivery procedures described below.

We understand that the exchange agent has confirmed with The Depository
Trust Company that any financial institution that is a participant in The
Depository Trust Company's system may utilize The Depository Trust Company's
Automated Tender Offer Program to tender old notes. We further understand that
the exchange agent will request, within two business days after the date the
exchange offer commences, that The Depository Trust Company establish an
account for the old notes for the purpose of facilitating the exchange offer,
and any participant may make book-entry delivery of old notes by causing The
Depository Trust Company to transfer the old notes into the exchange agent's
account in accordance with The Depository Trust Company's Automated Tender
Offer Program procedures for transfer. However, the exchange of the old notes
so tendered will only be made after timely confirmation of the book-entry
transfer and timely receipt by the exchange agent of, in addition to any other
documents required, an appropriate letter of transmittal with any required
signature guarantee and an agent's message, which is a message, transmitted by
The Depository Trust Company and received by the exchange agent and forming
part of a confirmation of a book-entry transfer, which states that The
Depository Trust Company has received an express acknowledgment from a
participant tendering old notes which are the subject of the confirmation of a
book-entry transfer and that the participant has received and agrees to be
bound by the terms of the letter of transmittal and that we may enforce the
agreement against that participant.

Guaranteed Delivery Procedures

If a registered holder of the old notes desires to tender the old notes
and the old notes are not immediately available, or time will not permit the
holder's old notes or other required documents to reach the exchange agent
before the expiration date of the exchange offer, or the procedure for book-
entry transfer cannot be completed on a timely basis, a tender may nonetheless
be effected if:

. the tender is made through a firm which is a member of a registered
national securities exchange or a member of the National Association
of Securities Dealers, Inc. or a commercial bank or trust company
having an office or correspondent in the United States;

. prior to the expiration date of the exchange offer, the exchange
agent received from the firm which is a member of a registered
national securities exchange or a member of the National Association
of Securities Dealers, Inc. or commercial bank or trust company
having an office or correspondent in the United States a properly
completed and duly executed letter of transmittal (or a facsimile of
the letter of transmittal) and Notice of Guaranteed Delivery,
substantially in the form provided by us (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the
name and address of the holder of old notes and the amount of old
notes tendered, stating that the tender is being made and
guaranteeing that within five New York Stock Exchange trading days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered old notes, in proper form
for transfer, or a confirmation of a book-entry transfer, as the case
may be, and any other documents required by the letter of transmittal
will be deposited by the firm which is a member of a registered
national securities exchange or a member of the National Association
of Securities Dealers, Inc. or commercial bank or trust company
having an office or correspondent in the United States with the
exchange agent; and

. the certificates for all physically tendered old notes, in proper
form for transfer, or a confirmation of a book-entry transfer, as the
case may be, and all other documents required by the letter of
transmittal are received by the exchange agent within five New York
Stock Exchange trading days after the date of execution of the Notice
of Guaranteed Delivery.

Withdrawal Rights

Tenders of old notes may be withdrawn at any time prior to the expiration
date of the exchange offer. For a withdrawal to be effective, a written notice
of withdrawal must be received by the exchange agent at the address set forth
below under "--Exchange Agent." Any notice of withdrawal must:

. specify the name of the person having tendered the old notes to be
withdrawn;

. identify the old notes to be withdrawn (including the principal
amount of the old notes); and

. where certificates for old notes have been transmitted specify the
name in which the old notes are registered, if different from that of
the withdrawing holder.

If certificates for old notes have been delivered or otherwise identified
to the exchange agent, then, prior to the release of the certificates, the
withdrawing holder must also submit the serial numbers of the particular
certificates to be withdrawn and a signed notice of withdrawal with signatures
guaranteed by a firm which is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc. or
a commercial bank or trust company having an office or correspondent in the
United States unless the holder is a firm which is a member of a registered
national securities exchange or a member of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an office
or correspondent in the United States.

If old notes have been tendered in accordance with the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at The Depository Trust Company to be credited
with the withdrawn old notes and otherwise comply with the procedures of the
facility. All questions as to the validity, form and eligibility (including
time of receipt) of the notices will be determined by us, whose determination
shall be final and binding on all parties. Any old notes so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
exchange offer. Any old notes which have been tendered for exchange but which
are not exchanged for any reason will be returned to the holder without cost to
the holder (or in the case of old notes tendered by book-entry transfer into
the exchange agent's account at The Depository Trust Company according to the
book-entry transfer procedures described above, the old notes will be credited
to an account maintained with The Depository Trust Company for the old notes)
as soon as practicable after withdrawal, rejection of tender or termination of
the exchange offer. Properly withdrawn old notes may be retendered by following
one of the procedures described under "--Procedures for Tendering Old Notes"
above at any time on or prior to the expiration date of the exchange offer.

Conditions To The Exchange Offer

Notwithstanding any other provision of the exchange offer, we shall not
be required to accept for exchange, or to issue new notes in exchange for, any
old notes and may terminate or amend the exchange offer if at any time before
the acceptance of the old notes for exchange or the exchange of new notes for
the old notes, we determine that:

. the exchange offer does not comply with any applicable law or any
applicable interpretation of the staff of the Securities and Exchange
Commission;

. we have not received all applicable governmental approvals; or

. any actions or proceedings of any governmental agency or court exist
which could materially impair our ability to consummate the exchange
offer.

The foregoing conditions are for our sole benefit and may be asserted by
us regardless of the circumstances giving rise to any condition or may be
waived by us in whole or in part at any time and from

time to time in our reasonable discretion. Our failure at any time to exercise
any of the foregoing rights shall not be deemed a waiver of that right and each
right shall be deemed an ongoing right which may be asserted at any time and
from time to time.

In addition, we will not accept for exchange any old notes tendered, and
no new notes will be issued in exchange for any old notes, if at that time any
stop order shall be threatened or in effect with respect to the registration
statement of which this prospectus constitutes a part or the qualification of
the indenture under the Trust Indenture Act of 1939, as amended. In any event
we are required to use every reasonable effort to obtain the withdrawal of any
stop order at the earliest possible time.

Exchange Agent

State Street Bank and Trust Company has been appointed as the exchange
agent for the exchange offer. All executed letters of transmittal should be
directed to the exchange agent at the address set forth below. Questions and
requests for assistance, requests for additional copies of this prospectus or
of the letter of transmittal and requests for Notices of Guaranteed Delivery
should be directed to the exchange agent addressed as follows:

By Hand before 4:30 p.m.
State Street Bank and Trust Company
By Mail: 2 Avenue De Lafayette
State Street Bank and Trust Company 5th Floor
2 Avenue De Lafayette Boston, Massachusetts 02111-1724
5th Floor
Boston, Massachusetts 02111-1724 Attention: Mackenzie Elijah

Attention: Mackenzie Elijah By Facsimile:
(617) 662-1452
By Overnight Courier and on the
Expiration Date Confirm by Telephone:
only by Hand after 4:30 p.m.: (617) 662-1525
State Street Bank and Trust Company
2 Avenue De Lafayette
5th Floor
Boston, Massachusetts 02111-1724

Attention: Mackenzie Elijah

Delivery other than as set forth above will not constitute a valid
delivery.

Fees and Expenses

We will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. The principal solicitation is being made by
mail; however, additional solicitations may be made in person or by telephone
by our officers and employees.

The expenses to be incurred in connection with the exchange offer will be
paid by us. These expenses include fees and expenses of the exchange agent and
trustee under the indenture governing the notes, accounting and legal fees and
printing costs, among others.

Accounting Treatment

The new notes will be recorded at the same carrying amount as the old
notes, which is the principal amount as reflected in our accounting records on
the date of the exchange and, accordingly, no gain or loss will be recognized.
The debt issuance costs will be capitalized and amortized to interest expense
over the term of the new notes.

Transfer Taxes

Holders who tender their old notes for exchange will not be obligated to
pay any transfer taxes in connection with the tender, except that holders who
instruct us to register new notes in the name of, or request that old notes not
tendered or not accepted in the exchange offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.

Consequences Of Failure To Exchange; Resales Of New Notes

Holders of old notes who do not exchange their old notes for new notes in
the exchange offer will continue to be subject to the restrictions on transfer
of the old notes as set forth in the legend on the old notes as a consequence
of the issuance of the old notes in accordance with exemptions from, or in
transactions not subject to, the registration requirements of, the Securities
Act and applicable state securities laws. Old notes not exchanged in accordance
with the exchange offer will continue to accrue interest at 9 1/2% per annum
and will otherwise remain outstanding in accordance with their terms. Holders
of old notes do not have any appraisal or dissenters' rights under the Delaware
General Corporation Law in connection with the exchange offer. In general, the
old notes may not be offered or sold unless registered under the Securities
Act, except in accordance with an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. We do not
currently anticipate that we will register the old notes under the Securities
Act. However, (1) if because of any change in law or in applicable
interpretations by the staff of the Securities and Exchange Commission, we are
not permitted to effect the exchange offer, (2) if the exchange offer is not
consummated by December 8, 2001, (3) if any initial purchaser so requests that
the old notes not eligible be exchanged for new notes in the exchange offer and
held by it following consummation of the exchange offer or (4) if any holder of
old notes (other than a broker-dealer that receives new notes for its own
account in exchange for old notes, where the old notes were acquired by the
broker-dealer as a result of market-making or other trading activities) is not
eligible to participate in the exchange offer or, in the case of any holder of
old notes (other than a broker-dealer that receives new notes for its own
account in exchange for old notes, where the old notes were acquired by the
broker-dealer as a result of market-making or other trading activities) that
participates in the exchange offer, does not receive new notes in exchange for
old notes that may be sold without restriction under state and federal
securities laws, we are obligated to file a shelf registration statement on the
appropriate form under the Securities Act relating to the old notes held by
such persons.

Based on interpretive letters issued by the staff of the Securities and
Exchange Commission to third parties in unrelated transactions, we are of the
view that new notes issued in accordance with the exchange offer may be offered
for resale, resold or otherwise transferred by the holders (other than (1) any
holder which is an "affiliate" of us within the meaning of Rule 405 under the
Securities Act or (2) any broker-dealer that purchases notes from us to resell
in accordance with Rule 144A or any other available exemption) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that the new notes are acquired in the ordinary course
of the holders' business and the holders have no arrangement or understanding
with any person to participate in the distribution of the new notes. If any
holder has any arrangement or understanding regarding the distribution of the
new notes to be acquired in accordance with the exchange offer, the holder (1)
could not rely on the applicable interpretations of the staff of the Securities
and Exchange Commission and (2) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. A broker-dealer who holds old notes that were
acquired for its own account as a result of market-making or other trading
activities may be deemed to be an "underwriter" within the meaning of the
Securities Act and must, therefore, deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of new notes.
Each broker-dealer that receives new notes for its own account in exchange for
old notes, where the old notes were acquired by the broker-dealer as a result
of market-making activities or other trading activities, must acknowledge in
the letter of transmittal that it will deliver a prospectus in connection with
any resale of the new notes. See "Plan of Distribution." We have not requested
the staff of the Securities and Exchange Commission to consider the exchange
offer in the context of a no-action letter, and there can be no assurance that
the staff would take positions similar to those taken in the interpretive
letters referred to above if we were to make a no-action request.

In addition, to comply with the securities laws of applicable
jurisdictions, the new notes may not be offered or sold unless they have been
registered or qualified for sale in the applicable jurisdictions or an
exemption from registration or qualification is available and is complied with.
We have agreed, under the Exchange and Registration Rights Agreement and
subject to specified limitations therein, to register or qualify the new notes
for offer or sale under the securities or blue sky laws of the applicable
jurisdictions in the United States as any selling holder of the notes
reasonably requests in writing.

MANAGEMENT

Directors and Executive Officers

Our directors and executive officers, their ages and their positions are
as follows:

Name Age Position
---- --- --------

Rocco A. Ortenzio................... 68 Chairman and Chief Executive Officer
Director, President and Chief
Robert A. Ortenzio.................. 44 Operating Officer
Russell L. Carson................... 57 Director
Bryan C. Cressey.................... 51 Director
James E. Dalton, Jr. ............... 58 Director
Donald J. Edwards................... 35 Director
Meyer Feldberg...................... 59 Director
Leopold Swergold.................... 61 Director
Director and Executive Vice
LeRoy S. Zimmerman.................. 66 President, Public Policy
Executive Vice President of
Patricia A. Rice.................... 54 Operations
Senior Vice President and Chief
David W. Cross...................... 54 Development Officer
Senior Vice President, Human
S. Frank Fritsch.................... 49 Resources
Senior Vice President and Chief
Martin F. Jackson................... 47 Financial Officer
Senior Vice President, General
Michael E. Tarvin................... 41 Counsel and Secretary
President, NovaCare Rehabilitation
Edward R. Miersch................... 44 Division
Vice President, Controller and Chief
Scott A. Romberger.................. 41 Accounting Officer

Rocco A. Ortenzio co-founded our company and has served as Chairman and
Chief Executive Officer since February 1997. In 1986, he co-founded Continental
Medical Systems, Inc., a provider of comprehensive medical rehabilitation
services, and served as its Chairman and Chief Executive Officer until July
1995, when it merged with Horizon Healthcare Corporation. In 1979, Mr. Ortenzio
founded Rehab Hospital Services Corporation, a hospital chain acquired by
National Medical Enterprises, Inc. (now called Tenet Healthcare Corporation) in
January 1985, and served as its Chairman and Chief Executive Officer until June
1986. In 1969, Mr. Ortenzio founded Rehab Corporation and served as its
Chairman and Chief Executive Officer until 1974, when it merged with American
Sterilizer Company. From 1996 to 1999, he served on the Board of Governors of
the Pennsylvania State System of Higher Education. Mr. Ortenzio serves as a
fund advisor to HLM Partners, Inc., a venture capital firm located in Boston,
Massachusetts, and Dauphin Capital Partners, a venture capital fund located in
Locust Valley, New York. Mr. Ortenzio is the father of Robert A. Ortenzio, our
President and Chief Operating Officer.

Robert A. Ortenzio co-founded our company and has served as a director
and President and Chief Operating Officer since February 1997. He was an
Executive Vice President and a director of Horizon/CMS Healthcare Corporation
from July 1995 until July 1996. Mr. Ortenzio co-founded Continental Medical
Systems, Inc. and served as its President and Chief Executive Officer from May
1989 and July 1995, respectively, until August 1996. Prior to that time, he
served as Chief Operating Officer of Continental Medical Systems, Inc. from
April 1988 to July 1995. Mr. Ortenzio joined Continental Medical Systems, Inc.
as a Senior Vice President in February 1986. Before then, he was a Vice
President of Rehab Hospital Services Corporation. Mr. Ortenzio serves as a
director of U.S. Oncology, Inc. Mr. Ortenzio is the son of Rocco A. Ortenzio,
our Chief Executive Officer.

Russell L. Carson has been a director since February 1997. He co-founded
Welsh, Carson, Anderson & Stowe in 1978 and has focused on healthcare
investments. Welsh, Carson, Anderson & Stowe has created 12 institutionally
funded limited partnerships with total capital of $11 billion and has invested
in more than 200 companies. Before co-founding Welsh, Carson, Anderson & Stowe,
Mr. Carson was employed by Citicorp

Venture Capital Ltd., a subsidiary of Citigroup, Inc., and served as its
Chairman and Chief Executive Officer from 1974 to 1978. Mr. Carson serves as a
director of Triad Hospitals, Inc. and U.S. Oncology, Inc.

Bryan C. Cressey has been a director since February 1997. He has been a
principal at Thoma Cressey Equity Partners since its founding in June 1998 and
prior to that time was a principal and partner at Golder, Thoma, Cressey and
Rauner, the predecessor of GTCR Golder Rauner, LLC, since 1980. He serves as a
director of Clarion Technologies Inc. and as a director and chairman of Cable
Design Technologies Corp.

James E. Dalton, Jr. has been a director since December, 2000. Mr. Dalton
served as President, Chief Executive Officer and as a director of Quorom Health
Group, Inc. from May 1, 1990 until it was acquired by Triad Hospitals, Inc. Mr.
Dalton currently serves as a director of Triad Hospitals. Prior to joining
Quorom, he served as Regional Vice President, Southwest Region for HealthTrust,
Inc., as division Vice President of HCA, and as Regional Vice President of HCA
Management Company. Mr. Dalton is on the board of directors of the Nashville
Health Care Council, and is on the board of directors and past chairman of the
Federation of American Health Systems. He was elected to the American Hospital
Association's Board of Trustees on January 1, 2000. He also serves on the board
of directors of AmSouth Bancorporation, and U.S. Oncology, Inc. He serves as a
Trustee for the Universal Health Services Realty Income Trust. Mr. Dalton is a
Fellow of the American College of Healthcare Executives.

Donald J. Edwards has been a director since February 1997. He has been a
principal at GTCR Golder Rauner, LLC since 1996 and was an associate there from
1994 to 1996. He serves as a director of Dynacare, Inc., American Medical
Laboratories and a number of private companies.

Meyer Feldberg has been a director since September 2000. He has served as
professor of management and the dean of Columbia Business School since 1989. He
serves as a director of Federated Department Stores, Revlon, Inc., Primedia
Inc. and PaineWebber Mutual Funds.

Leopold Swergold has been a director since May, 2001. In 1983, Mr.
Swergold formed Swergold Chefitz & Company, a healthcare investment banking
firm. In 1989, Swergold, Chefitz & Company merged into what is now ING Furman
Selz Asset Management. Since 1989, Mr. Swergold has served as the Head of
Healthcare Investment Banking and as a member of the Board of Directors of ING
Furman Selz Asset Management. Mr. Swergold also serves on the Board of Trustees
of the Beth Israel Medical Center, the Board of Trustees of St. Luke's--
Roosevelt Hospital Center, and the Rockefeller University Council.

LeRoy S. Zimmerman has served as Executive Vice President of Public
Policy since September 2000 and as a director since October 1998. He was an
equity member of the law firm Eckert Seamans Cherin & Mellott, LLC, from April
1989 to September 2000. At Eckert Seamans, he served as Chairman of the Board
of Directors from January 1994 to September 2000, and Chairman of its Executive
Committee from June 1997 to September 2000. Before joining Eckert Seamans, Mr.
Zimmerman served as Pennsylvania's first elected Attorney General from January
1981 to January 1989, and District Attorney of Dauphin County, Pennsylvania
from to 1965 to 1980.

Patricia A. Rice has served as Executive Vice President of Operations
since November 1999. She served as Senior Vice President of Hospital Operations
from December 1997 to November 1999. She was Executive Vice President of the
Hospital Operations Division for Continental Medical Systems, Inc. from August
1996 until December 1997. Prior to that time, she served in various management
positions at Continental Medical Systems, Inc. from 1987 to 1996.

David W. Cross has served as Senior Vice President & Chief Development
Officer since December 1998. Before joining us, he was President and Chief
Executive Officer of Intensiva Healthcare Corporation from 1994 until we
acquired it. Mr. Cross was a founder, the President and Chief Executive
Officer, and a director of Advanced Rehabilitation Resources, Inc., and served
in each of these capacities from 1990 to 1993. From 1987 to 1990, he was Senior
Vice President of Business Development for RehabCare Group, Inc., a publicly
traded rehabilitation care company, and in 1993 and 1994 served as Executive
Vice President and Chief Development Officer of RehabCare Group, Inc.

S. Frank Fritsch has served as Senior Vice President of Human Resources
since November 1999. He served as our Vice President of Human Resources from
June 1997 to November 1999. Prior to June 1997, he was Senior Vice President--
Human Resources for Integrated Health Services from May 1996 until June 1997.
Prior to that time, Mr. Fritsch was Senior Vice President--Human Resources for
Continental Medical Systems from August 1992 to April 1996. From 1980 to 1992,
Mr. Fritsch held senior human resources positions with Mercy Health Systems,
Rorer Pharmaceuticals, ARA Mark and American Hospital Supply Corporation.

Martin F. Jackson has served as Senior Vice President and Chief
Financial Officer since May 1999. Mr. Jackson previously served as a Managing
Director in the Health Care Investment Banking Group for CIBC Oppenheimer from
January 1997 to May 1999. Prior to that time, he served as Senior Vice
President, Health
Care Finance with McDonald & Company Securities, Inc. from January 1994 to
January 1997. Prior to 1994, Mr. Jackson held senior financial positions with
Van Kampen Merritt, Touche Ross, Honeywell and L'Nard Associates.

Michael E. Tarvin has served as Senior Vice President, General Counsel
and Secretary since November 1999. He served as our Vice President, General
Counsel and Secretary from February 1997 to November 1999. He was Vice
President--Senior Counsel of Continental Medical Systems from February 1993
until February 1997. Prior to that time, he was Associate Counsel of
Continental Medical Systems from March 1992. Mr. Tarvin was an associate at
the Philadelphia law firm of Drinker Biddle & Reath, LLP from September 1985
until March 1992.

Edward R. Miersch has served as President of our NovaCare Rehabilitation
Division since January 2000. Prior to that time, Mr. Miersch was Vice
President of Ambulatory Services of Mercy Health System from December 1998 to
October 1999. From March 1996 until October 1998, Mr. Miersch served first as
Vice President--Operations and then as Senior Vice President and Chief
Operating Officer of U.S. Physicians, Inc., an integrator and manager of
physician practices that declared bankruptcy in November 1998. From September
1993 until March 1996, Mr. Miersch served as Eastern Region President of the
Outpatient Rehabilitation Division of the former NovaCare, Inc. He served as
President of Sports Physical Therapists, Inc. from September 1980 until
September 1993, when that company was acquired by RehabClinics, Inc., a
company which was itself in turn acquired by NovaCare, Inc. in early 1994. Mr.
Miersch also served as Director of Physical Therapy and Sports Medicine at
Haverford Community Hospital from September 1980 to January 1986.

Scott A. Romberger has served as Vice President and Controller since
February 1997. In addition, he became Chief Accounting Officer in December,
2000. Prior to February 1997, he was Vice President--Controller of Continental
Medical Systems from January 1991 until January 1997. Prior to that time, he
served as Acting Corporate Controller and Assistant Controller of Continental
Medical Systems from June 1990 and December 1988, respectively. Mr. Romberger
is a certified public accountant and was employed by a national accounting
firm from April 1985 until December 1988.

Classes of the Board

Our board of directors is divided into three classes that serve
staggered three-year terms as follows:

Class Expiration Member
------------------------ ---------- -------------------------------------------

Class I 2002 Messrs. Edwards, Feldberg and Zimmerman
Class II 2003 Messrs. Cressey, Dalton and Robert Ortenzio
Class III 2004 Messrs. Carson, Rocco Ortenzio and Swergold

Board Committees

The compensation committee reviews and makes recommendations to the
board regarding the compensation to be provided to our Chief Executive Officer
and our directors. The compensation committee consists of Russell L. Carson,
Bryan C. Cressey and Meyer Feldberg. Messrs. Cressey and Feldberg are two of
our nonemployee directors and constitute the members of the sub-committee of
the compensation committee,

which administers certain aspects of our Amended and Restated 1997 Stock Option
Plan. In addition, the compensation committee reviews compensation arrangements
for our other executive officers. The compensation committee also administers
our equity compensation plans.

The audit committee reviews and 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. In addition, the audit committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, our independent auditors. Messrs. Feldberg, Swergold and
Dalton are currently the three members of our audit committee.

Director Compensation and Other Arrangements

We do not pay cash compensation to our employee directors, however they
are reimbursed for the expenses they incur in attending meetings of the board
or board committees. Non-employee directors, other than non-employee directors
appointed by Welsh, Carson, Anderson & Stowe; GTCR Golder Rauner, LLC and Thoma
Cressey Equity Partners, receive cash compensation in the amount of $5,000 per
quarter and $1,250 per board meeting attended. All non-employee directors are
also reimbursed for the expenses they incur in attending meetings of the board
or board committees. In addition, non-employee directors are eligible to
receive options to purchase common stock awarded under our Amended and Restated
1997 Stock Option Plan. See-- "Select Medical Corporation Amended and Restated
1997 Stock Option Plan."

Compensation Committee Interlocks and Insider Participation

Our compensation committee makes all compensation decisions regarding our
executives. Messrs. Carson and Cressey served as the only members of the
compensation committee since we formed the committee in 1997, until Mr.
Feldberg became a member of the compensation committee in 2000.

Executive Compensation

The following table provides summary information concerning the
compensation earned by our Chief Executive Officer and our four most highly
paid executive officers other than our Chief Executive Officer employed by us
during the fiscal year ended December 31, 2000.

Summary Compensation Table

Long-Term
Annual Compensation Compensation
---------------------------------- ------------
Securities
Name and Principal Other Underlying All Other
Position Salary Bonus Compensation (a) Options/SARs Compensation
- ------------------ -------- -------- ---------------- ------------ ------------

Rocco A. Ortenzio (b)
Chairman and Chief
Executive Officer..... 2000 $581,667 $287,500 $ -- -- $7,690
1999 387,222 193,611 -- 655,044
Robert A. Ortenzio (c)
President and Chief
Operating Officer..... 2000 507,692 256,250 5,250 -- --
1999 334,669 165,446 3,976 436,697
Patricia A. Rice (c)
Executive Vice
President of
Operations............ 2000 365,385 147,500 5,250 201,600 --
1999 233,450 90,000 4,611 --
Martin F. Jackson (c)
Senior Vice President
and Chief Financial
Officer............... 2000 234,616 94,000 5,250 120,960 --
Edward R. Miersch (c)
President of NovaCare
Division.............. 2000 294,231 122,500 2,100 259,200 --

- --------
(a) The value of certain perquisites and other personal benefits is not
included in the amounts disclosed because it did not exceed for any officer
in the table above the lesser of either $50,000 or 10% of the total annual
salary and bonus reported for such officer.
(b) Represents the benefit to Rocco A. Ortenzio of premiums we paid in
connection with life insurance policies owned by the Rocco A. Ortenzio
Irrevocable Trust. See "--Employment Agreements." Under this arrangement we
paid no premiums in respect of term life insurance, and the value of the
premiums paid by us reflects the present value of an interest free loan to
Mr. Ortenzio through the end of the fiscal year.
(c) Other compensation represents employer matching contributions to the 401(k)
plan.

Option Grants During the Year Ended December 31, 2000

The following tables set forth certain information concerning grants to
purchase shares of our common stock of each of the officers named in the
summary compensation table above during the year ended December 31, 2000.

Potential Realizable Value at
Number of Percentage of Assumed Annual Rates of Stock
Securities Total Options Price Appreciation for
Underlying Granted to Exercise Option Term (c)
Options Employees in Price per -----------------------------
Name Granted (a) 2000 Share (b) Expiration Date 5% 10%
- ---- ---------- ------------- ----------- --------------- -----------------------------

Patricia A. Rice........ 201,600 10.7% $6.51-10.42 1/3/10-10/13/10 $250,318 $1,242,664
Martin F. Jackson....... 120,960 6.4% 6.51-10.42 1/3/10-10/13/10 198,874 836,445
Edward R. Miersch....... 259,200 13.8% 6.51-10.42 1/3/10-10/13/10 266,621 1,464,094

- --------
(a) All options granted to employees are either incentive stock options or
nonqualified stock options and generally vest over five years at the rate
of 20% of the shares subject to the option per year. Unvested options lapse
upon termination of employment. Options expire ten years from the date of
grant.

(b) We granted options at an exercise price equal to or greater than the fair
market value of our common stock on the date of grant, as determined by our
board of directors.
(c) These amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration dates. These assumptions are not intended to forecast
future appreciation of our stock price. The potential realizable value
computation does not take into account federal or state income tax
consequences of option exercises or sales of appreciated stock. If the
hypothetical gains in these columns were calculated using the price of our
common stock on the date of our initial public offering of $9.50 per share,
then the potential realizable value of the option grants would be as
follows: Ms. Rice- $1,653,668 (at 5%) and $3,254,434 (at 10%); Mr. Jackson-
$963,491 (at 5%) and $1,920,722 (at 10%); and Mr. Miersch $2,206,557 (at
5%) and $4,266,385 (at 10%).

Year End December 31, 2000 Option Values

The following table sets forth certain information concerning option
exercises by each of the officers named in the above summary compensation
table.

Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at Fiscal Year The Money Options at
Shares End Fiscal Year End (a)
Acquired on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------

Rocco A. Ortenzio....... 0 $ 0 1,605,444 0 $5,206,536 $ 0
Robert A. Ortenzio...... 0 0 753,497 0 2,387,525 0
Patricia A. Rice........ 0 0 0 201,600 0 516,000
Martin F. Jackson....... 0 0 11,520 167,040 39,400 450,000
Edward R. Miersch....... 0 0 0 259,200 0 722,400

- --------
(a) Based on our initial public offering price of $9.50 per share, less the
exercise price, multiplied by the number of shares underlying the option.

Employment Agreements

In March 2000, we entered into three-year employment agreements with
three of our executive officers, Rocco A. Ortenzio, Robert A. Ortenzio and
Patricia A. Rice. Under these agreements, which were amended on August 8, 2000
and February 3, 2001, the executive officers are to be paid an annual salary of
$800,000, $700,000 and $500,000, respectively, subject to adjustment by our
board of directors. In addition, these executives are eligible for bonus
compensation. The employment agreements also provide that the executive
officers will receive long term disability insurance. In the event Rocco A.
Ortenzio's employment is terminated due to his disability, we must make salary
continuation payments to him equal to 100% of his annual base salary for ten
years after his date of termination or until he is physically able to become
gainfully employed in an occupation consistent with his education, training and
experience. We are also obligated to make disability payments to Robert A.
Ortenzio and Patricia A. Rice for the same period; however, payments to them
must equal 50% of their annual base salary. In addition, Rocco A. Ortenzio and
Robert A. Ortenzio are each entitled to six weeks paid vacation. Patricia A.
Rice is entitled to four weeks paid vacation.

Under the terms of each of these executive officers' employment
agreements, their employment term begins on March 1, 2000 and expires on March
1, 2003. At the end of each 12-month period beginning March 1, 2000, the term
of each employment agreement automatically extends for an additional year
unless one of the executives or we give written notice to the other not less
than three months prior to the end of that 12-month period that we or they do
not want the term of the employment agreement to continue. Thus, in the absence
of written notice given by one of the executives or us, the remaining term of
each employment agreement will be three years from each anniversary of March 1,
2000. In each employment agreement, for the term of the agreement and for two
years after the termination of employment, the executive may not participate in
any business that competes with us within a twenty-five mile radius of any of
our hospitals or outpatient rehabilitation clinics. The executive also may not
solicit any of our employees for one year after the termination of the
executive's employment.

These three employment agreements also contain a change of control
provision. If, within the one-year period immediately following a change of
control of Select, we terminate Rocco A. Ortenzio or Robert A. Ortenzio without
cause or Rocco A. Ortenzio or Robert A. Ortenzio terminates his employment
agreement for any reason, we are obligated to pay them a lump sum cash payment
equal to their base salary plus bonus for the previous three completed calendar
years. If, within the one-year period immediately following a change of control
of Select, Patricia A. Rice terminates her employment for certain specified
reasons or, within the five-year period immediately following a change of
control, is terminated without cause, has her compensation reduced from that in
effect prior to the change of control or is relocated to a location more than
25 miles from Mechanicsburg, Pennsylvania, we are obligated to pay her a lump
sum cash payment equal to her base salary plus bonus for the previously three
completed calendar years. In addition, all of their unvested and unexercised
stock options will vest. A change in control is generally defined to include
the following: the acquisition by a person or group, other than our current
stockholders who own 12% or more of the common stock, of more than 50% of our
total voting shares; a business combination following which there is an
increase in share ownership by any person or group, other than the executive or
any group of which the executive is a part, by an amount equal to or greater
than 33% of our total voting shares; our current directors, or any director
elected after the date of the respective employment agreement whose election
was approved by a majority of the then current directors, cease to constitute
at least a majority of our board; a business combination following which our
stockholders cease to own shares representing more than 50% of the voting power
of the surviving corporation; or a sale of substantially all of our assets
other than to an entity controlled by our shareholders prior to the sale.
Notwithstanding the foregoing, no change in control will be deemed to have
occurred unless the transaction provides our stockholders with consideration
equal to or greater than $6.51 per share of common stock. Otherwise, if any of
the executives' services are terminated by us other than for cause or they
terminate their employment for good reason, we are obligated to pay them a pro-
rated bonus for the year of termination equal to the product of the target
bonus established for that year, or if no target bonus is established the bonus
paid or payable to them for the year prior to their termination, in either case
multiplied by the fraction of the year of termination they were employed. In
addition, we would also be obligated to pay these executives their base salary
as of the date of termination for the balance of the term of the agreement.
Finally, all vested and unexercised stock options will vest immediately.

Under amendments to Rocco A. Ortenzio's senior management and employment
agreements, we are obligated to pay premiums on life insurance policies held in
the Rocco A. Ortenzio Irrevocable Trust, provided that Mr. Ortenzio remains an
employee, director, consultant, advisor or independent contractor of ours. We
are obligated under these arrangements to pay approximately $2.0 million in
premiums in 2000, and $1.25 million for each of the years 2001 through 2010.
Under a related collateral assignment agreement, upon Mr. Ortenzio's death, or
if the trust surrenders these policies, we are entitled to be repaid, at our
election, by the trust for the amount of the premiums we have paid over the
life of the policies. In the event of Mr. Ortenzio's death, we will be repaid
from the death proceeds of the policies. In the event the policy is surrendered
or canceled, we will be repaid from the cash surrender value of the policies.
At any time prior to Mr. Ortenzio's death, we can be paid by loan, partial
surrender or withdrawal of premiums paid prior to the time of loans, surrender
or withdrawal.

We have also entered into a deferred compensation agreement with Rocco A.
Ortenzio, pursuant to which Mr. Ortenzio has deferred all of his compensation,
including his salary and bonus, since March 1, 1997. This amount accrued
interest at a rate of 6% from March 1, 1997 to December 31, 1999, and no
interest thereafter. We will pay these funds to his spouse or his estate within
60 days after his death. The agreement does not apply to compensation earned
after December 31, 2000.

In December 1999, we entered into a three year employment agreement with
Mr. Edward R. Miersch, which remains in effect for successive one year periods,
unless terminated by 180 days prior notice by either party. Under this
agreement, we granted him options to purchase 241,920 shares of our common
stock at an exercise price of $6.51 per share with the options vesting over
five years. Mr. Miersch is entitled to receive an annual salary of $300,000 and
incentive compensation in an amount of up to 40% of his base salary. Further,
Mr. Miersch is entitled to any employment and fringe benefits under our
policies as they exist from time to time and which are made available to
substantially all of our employees. During the employment term and for two

years after the termination of his employment, Mr. Miersch may not solicit any
of our employees or participate in any business that competes with us within a
twenty mile radius of any of our facilities or businesses.

In March 2000, we entered into change of control agreements with Mr.
Miersch and Mr. Martin F. Jackson, which were each amended on February 23,
2001. These agreements provide that if within a five-year period immediately
following a change of control of Select, we terminate Mr. Jackson or Mr.
Miersch without cause, reduce either of their compensation from that in effect
prior to the change of control or relocate Mr. Jackson to a location more than
25 miles from Mechanicsburg, Pennsylvania or Mr. Miersch to a location more
than 25 miles from King of Prussia, Pennsylvania, we are obligated to pay the
affected individual a lump sum cash payment equal to his base salary plus bonus
for the previous three completed calendar years. If at the time we terminate
Mr. Jackson or Mr. Miersch without cause or Mr. Jackson or Mr. Miersch
terminates his employment for good reason in connection with a change in
control, Mr. Jackson or Mr. Miersch has been employed by us for less than three
years, we must pay the terminated individual three times his average total
annual cash compensation (base salary and bonus) for his years of service. In
addition, the agreements provide that all unvested stock options will vest upon
termination. A change in control has the same definition as in the employment
agreements of Rocco A. Ortenzio, Robert A. Ortenzio and Patricia A Rice, as
described above.

Select Medical Corporation Amended and Restated 1997 Stock Option Plan

The board of directors adopted the Select Medical Corporation 1997 Stock
Option Plan effective as of October 30, 1997 and amended and restated as of
February 22, 2001. The plan provides for the grant of stock options to
designated officers, key employees, and consultants of ours and our
subsidiaries and our non-employee directors.

Purpose. The purpose of the plan is to promote our interests and the
interests of our stockholders by attracting and retaining valued officers, key
employees, non-employee directors and consultants, and to motivate these
persons to exercise their best efforts on our behalf.

Administration. A committee comprised of at least two non-employee,
outside directors, has been appointed by the board of directors to administer
the plan. The committee has full authority, subject to the terms of the plan,
to do the following:

. interpret and administer the plan;

. select who among the eligible individuals will participate in the
plan;

. determine the terms, conditions and types of awards given under the
plan; and

. resolve all controversies and claims arising under the plan.

All determinations made by the committee are conclusive and binding on all
persons.

Eligibility. Any officer, key employee (including any director who is
also an employee), or consultant providing services to us or our subsidiaries
and our non-employee directors are eligible to participate in the plan,
provided that non-employee directors and consultants are not be eligible to
receive incentive stock options.

Number of Shares. The plan provides for the issuance of up to a total of
5,760,000 shares of our common stock, plus any additional amount (the
additional amount will be calculated by the committee from time to time)
necessary to make the total shares available for issuance under the plan equal
to the sum of 5,760,000 plus 14% of the total issued and outstanding common
stock in excess of 34,560,000 shares, subject to adjustments for stock splits,
stock dividends and similar changes in our capitalization. If any awards expire
or otherwise terminate prior to being exercised, then the shares of common
stock subject to the awards will be available again for grants under the plan.
In addition, when an option is exercised, the number of shares issued

in connection with the option will be added to the amount available under the
plan, so that the total number of shares available for awards under the plan
will never be less than 14% of our total outstanding common stock. No
individual key employee or officer may receive awards covering more than
8,640,000 shares (subject to adjustment for stock splits, dividends and the
like) under the plan during any calendar year or over the life of the plan.

Types of Awards. The plan provides for the grant of stock options. A
stock option is a grant by us of the right to purchase a specified number of
shares of our common stock for a specified time period at a fixed price.
Options may be either incentive stock options meeting the requirements of
Section 422 of the Internal Revenue Code or non-qualified stock options. All
options are evidenced by written option agreements containing the term and
conditions of the options.

The exercise price of an option is determined by the committee, but, in
the case of incentive stock options, the exercise price will not be less than
the fair market value of a share of common stock on the date of grant (or 110%
of such fair market value if the option is granted to any key employee or
officer who owns more than 10% of the combined voting power of the company or
any of our subsidiaries at the time the option is granted to him). The exercise
price of a non-qualified stock option may be at less than the fair market value
on the date of grant. The term of an option may not be greater than ten years
(or five years for an incentive stock option granted to an employee or officer
who owns more than 10% of the combined voting power of the company or any of
our subsidiaries). Options are generally not transferable during the optionee's
lifetime, but the committee may provide in an option agreement that a non-
qualified stock option is transferable pursuant to limitations and conditions
determined by the committee.

Options may be exercised in several ways, including by payment of the
exercise price in cash or its equivalent, by delivery of qualified shares of
our common stock, or any combination of such methods, or, if permitted by the
committee, with the proceeds of a loan from us. Any such loan could be secured
by the stock acquired pursuant to the exercise of the option or by any other
security as determined by the committee. All outstanding unvested options will
vest upon a change in control, as defined in the plan.

Amendment and Termination. The plan will terminate on midnight of
February 21, 2011, unless terminated earlier by the board of directors. The
board of directors has authority to amend, suspend or terminate the plan at any
time. However, no termination or amendment of the plan may materially impair
the rights of an option holder without the consent of the holder. In addition,
the following amendments will require prior stockholder approval:

. with respect to incentive stock options any amendment that would, if
it were not approved by the stockholders, change the class of
employees eligible to participate in the plan;

. any amendment that would, if it were not approved by the
stockholders, increase the maximum number of shares of common stock
with respect to which incentive stock options may be granted, except
as permitted under the terms of the plan;

. any amendment that would, if it were not approved by the
stockholders, extend the duration of the plan with respect to any
incentive stock options granted under the plan; or

. any amendment for which shareholder approval is required pursuant to
Treas. Reg. Section 1.162-27(e)(4)(vi) or its successor.

RELATED PARTY TRANSACTIONS

Rocco A. Ortenzio and Robert A. Ortenzio, two of our directors and
executive officers, Golder, Thoma, Cressey, Rauner Fund V L.P. ("Golder Thoma")
and Welsh, Carson, Anderson & Stowe ("Welsh Carson"), were involved in our
founding and organization and may be considered our promoters. In December of
1998 Rocco A. Ortenzio and Robert A. Ortenzio received options under our 1997
Stock Option Plan to purchase 950,400 and 316,800 shares of our common stock,
respectively, at an exercise price of $6.08 per share. In November 1999, Rocco
A. Ortenzio and Robert A. Ortenzio received options to purchase 655,044 and
436,697 shares of our common stock, respectively, at an exercise price of $6.51
per share. On April 26, 2001 Rocco A. Ortenzio and Robert A. Ortenzio each
received additional options to purchase 900,000 shares of our common stock at
an exercise price of $11.75 per share, the closing price of our common stock on
that day.

Rocco A. Ortenzio, Robert A. Ortenzio, Golder Thoma and Welsh Carson
participated in our initial funding and from time to time since our founding
have each purchased common and preferred stock from us. The following table
sets forth the number of shares of our common and preferred stock (as adjusted
for subsequent stock splits) purchased by Rocco A. Ortenzio, Robert A.
Ortenzio, Golder Thoma and its affiliates, and Welsh Carson and its affiliates,
the date of each purchase and the amounts received by us from each of the
purchases of our capital stock. As adjusted for stock splits, our common stock
was sold for $0.29 per share until September 19, 1998, $6.08 per share until
November 19, 1999 and for $6.51 per share thereafter. Our Class A Preferred
Stock was sold for $1,000 per share, and our Class B Preferred Stock was sold
for $3.75 per share. Each share of Class A Preferred Stock was redeemed upon
the completion of our initial public offering for a cash payment of $1,000.
Each share of Class B Preferred Stock was converted into .576 shares of our
Common Stock upon the completion of our initial public offering.

Shares of Shares of
Shares of Class A Class B
Common Preferred Preferred Amount
Stock Stock Stock Received by
Name Date Purchased Purchased Purchased Select
---- -------- --------- --------- --------- -----------

Rocco A. Ortenzio (a)... 2/5/97 1,299,025 -- -- $ 375,875
5/7/97 147,583 128 -- 170,248
6/18/97 -- 109 -- 108,490
2/9/98 -- 502 -- 501,640
4/29/98 -- 355 -- 354,609
6/3/98 -- 563 -- 562,186
6/30/98 -- 173 -- 172,978
7/20/98 140,838 -- -- 40,760
10/21/98 -- 468 -- 467,168
12/16/98 363,234 -- -- 2,207,152
2/29/00 38,592 -- -- 251,250

Robert A. Ortenzio (b).. 2/5/97 794,370 -- -- $ 229,852
5/7/97 88,270 66 -- 90,777
6/18/97 -- 56 -- 55,494
2/9/98 -- 257 -- 256,590
4/29/98 -- 182 -- 181,383
6/3/98 -- 288 -- 287,560
6/30/98 -- 89 -- 88,478
10/21/98 -- 239 -- 238,969
12/16/98 79,864 -- -- 485,287
2/29/00 19,238 -- -- 125,250

Welsh, Carson Anderson &
Stowe VII, L.P., and
affiliates............. 2/5/97 2,986,986 -- -- $ 864,290
5/7/97 1,123,062 1,254 -- 1,578,960
6/18/97 -- 1,069 -- 1,068,910
2/9/98 -- 4,940 -- 4,939,130
4/29/98 -- 3,494 -- 3,493,290
6/3/98 -- 5,535 -- 5,534,760
6/30/98 -- 1,704 -- 1,703,380
10/21/98 -- 4,603 -- 4,602,280
12/16/98 6,162,081(c) -- -- 28,157,498
11/19/99 960,162(d) -- 7,531,424 28,242,841

Affiliates of GTCR
Golder Rauner, LLC..... 2/5/97 3,139,569 -- -- $ 908,440
5/7/97 1,180,431 1,319 -- 1,660,560
6/18/97 -- 1,123 -- 1,122,910
2/9/98 -- 5,193 -- 5,192,130
4/29/98 -- 3,671 -- 3,670,290
6/3/98 -- 5,819 -- 5,818,760
6/30/98 -- 1,791 -- 1,790,380
10/21/98 -- 4,837 -- 4,836,530
12/16/98 2,454,171 -- -- 14,912,499
11/19/99 -- -- 1,983,333 7,437,499

- --------
(a) Includes 223,545 common shares and 526 Class A Preferred shares originally
purchased by Select Investments II and 434,085 common shares and 1,769
Class A Preferred shares originally purchased by Select Partners, L.P.,
which were later distributed to Rocco A. Ortenzio upon the dissolution of
those partnerships.
(b) Includes 195,602 common shares and 461 Class A Preferred shares originally
purchased by Select Investments II and 175,125 common shares and 714 Class
A Preferred shares originally purchased by Select Partners, L.P., which
were later distributed to Robert A. Ortenzio upon the dissolution of those
partnerships.
(c) Includes 1,528,163 common shares that were purchased along with a $35
million principal amount Senior Subordinated Note for $35 million.
(d) These common shares were purchased along with a $25 million principal
amount Senior Subordinated Note for $25 million. Welsh Carson returned to
us 240,048 of these shares when we repaid in full the 10% Senior
Subordinated Notes with the proceeds from the sale of the old notes.

In 1997 we entered into a shareholders agreement with our principal
stockholders, including Welsh Carson, Golder Thoma, Mr. Rocco A. Ortenzio and
Mr. Robert A. Ortenzio. The shareholders agreement terminated by its terms upon
the completion of our initial public offering. Members of our management have
also been granted preemptive rights with respect to our capital stock. These
arrangements were also terminated prior to the completion of our initial public
offering.

Pursuant to the Warrant Agreement dated June 30, 1998, as amended on
February 9, 1999 and amended and restated on November 19, 1999, to induce our
financial sponsors, Welsh Carson and Golder Thoma to partially guarantee our
senior debt, Rocco A. Ortenzio and Robert A. Ortenzio each agreed to make
contributions to those financial sponsors if those guarantees were enforced by
our senior lenders. In exchange for the promise of these guarantees by our
financial sponsors and the promise of contributions by Rocco A. Ortenzio and
Robert A. Ortenzio, we have issued warrants to purchase shares of our common
stock to Golder Thoma, Rocco A. Ortenzio, Robert A. Ortenzio and two affiliates
of Welsh Carson. The following table sets forth the dates of the grants and the
number of shares issuable on exercise of the warrants. All warrants expire on
June 30, 2003 and are exercisable at $6.08 per share.

Golder, Thoma,
Welsh, Carson, WCAS Capital Cressey,
Date of Anderson & Stowe, Partners, III, Rauner Fund Rocco A. Robert A.
Issue VII, L.P. L.P. V, L.P. Ortenzio Ortenzio
------- ----------------- -------------- -------------- -------- ---------

06/30/98 216,789 -- 216,789 -- 44,974
07/11/98 -- -- -- 97,448 --
10/31/98 108,395 -- 108,395 48,724 22,487
01/29/99 108,395 -- 108,395 48,724 22,487
04/30/99 10,324 1,865 12,189 5,479 2,529
07/31/99 22,239 4,018 26,257 11,802 5,447
10/31/99 22,370 4,041 26,411 11,871 5,479
01/31/00 47,783 9,011 56,794 18,563 8,757
04/30/00 54,553 10,391 64,944 19,325 9,187
07/31/00 54,553 10,391 64,944 19,325 9,187
09/22/00 31,427 5,986 37,414 11,133 5,292
------- ------ ---------- ------- -------
676,828 45,703 722,532/1/ 292,394 135,826

- --------
/1 /Golder, Thoma, Cressey, Rauner Fund V, L.P. subsequently transferred 30,717
warrants to GTCR Fund VI, L.P. and 90,804 warrants to Thoma Cressey Fund VI,
L.P.

On December 15, 1998, we issued an aggregate of 12,225,306 shares of our
common stock. Of this amount, 2,343,086 common shares were purchased by Thoma
Cressey Fund VI, L.P., 82,286 shares were purchased by Bryan C. Cressey and
68,631 common shares were purchased by Russell L. Carson. Also, Select
Healthcare Investors, L.P., in which the general partner is partially owned by
Rocco A. Ortenzio and Robert A. Ortenzio, purchased 246,857 common shares. WCAS
Capital Partners III, L.P. purchased 1,528,163 of these shares and a 10% Senior
Subordinated Note for an aggregate purchase price of $35 million. WCAS Capital
Partners III, L.P. then purchased an additional $30 million principal amount of
Senior Subordinated Notes from us for $30 million in cash. These 10% Senior
Subordinated Notes were repaid in full with the proceeds from the sale of the
old notes. We paid Welsh Carson, Golder Thoma, Rocco A. Ortenzio and Robert A.
Ortenzio an investment fee equal to 1% of the cash consideration they and their
affiliates paid for the securities purchased in this offering.

On November 19, 1999, in connection with the NovaCare acquisition, we
issued an aggregate of 16,000,000 shares of our Class B Preferred Stock at a
price of $3.75 per share. Of this amount, 7,531,424 shares were purchased by
affiliates of Welsh Carson, 111,216 shares were purchased by Russell L. Carson,
1,983,333 shares were purchased by affiliates of Golder Thoma and 5,950,000
shares were purchased by Thoma Cressey. At the same time, WCAS Capital Partners
III, L.P. purchased 960,192 shares of our common stock and a 10% Senior
Subordinated Note for an aggregate purchase price of $25 million. The Note was
repaid in full with the proceeds from the sale of the old notes, at which time
WCAS Capital Partners III, L.P. transferred 240,048 shares of our common stock
to us. We paid Welsh Carson and Golder Thoma an investment fee equal to 1% of
the cash consideration they and their affiliates paid for the securities
purchased in this offering.

On May 5, 1999 we loaned $120,000 to Martin F. Jackson, our Chief
Financial Officer, to assist him in purchasing 19,749 shares of our common
stock at a price of $6.08 per share. The loan is interest-free, and will be
forgiven in principal amounts of $20,000 every six months from the date of the
loan. As of the date of this prospectus, $40,000 remains outstanding on this
loan.

In April 2000, we sold all of the assets of Georgia Health Group, Inc. to
Concentra Health Services, Inc. for $5 million. Welsh Carson beneficially owns
63.6% of the capital stock of Concentra Health Services. We believe the terms
of this transaction were no less favorable to us than they would have been in
an arm's length transaction with a third party.

In 1997, in connection with a terminated acquisition, the company we were
to acquire paid a break-up fee to us and our financial sponsors. Based on the
relative amounts of their financing commitment, $9,120,400 was paid to Welsh
Carson, $1,884,480 was paid to Golder Thoma, $89,170 was paid to Rocco A.
Ortenzio, $55,089 was paid to Robert A. Ortenzio and $121,500 was paid to
partnerships owned by Rocco A. Ortenzio, Robert A. Ortenzio, Martin J. Ortenzio
and John M. Ortenzio. We received a payment of $6,022,000. Martin Ortenzio and
John Ortenzio are the sons or Rocco A. Ortenzio, and the brothers of Robert A.
Ortenzio. These partnerships have since been liquidated.

In 1998, to finance acquisitions and for working capital, we received two
loans of $1.0 million each from Rocco A. Ortenzio. The loans were at an annual
interest rate of 10%, and were payable six months from the date of the loan. We
repaid the loan in full in 1998 with a lump sum payment of $2,014,000.

We lease our corporate office space in Mechanicsburg, Pennsylvania from
Old Gettysburg Associates I and Old Gettysburg Associates III, two general
partnerships that are owned by Rocco A. Ortenzio, Robert A. Ortenzio, Martin J.
Ortenzio and John M. Ortenzio. In 1997, 1998, 1999 and 2000, we paid to these
partnerships an aggregate amount of $11l,861, $151,266, $501,719 and
$1,131,251, respectively, for office rent, for various improvements to our
office space and miscellaneous expenses, and in the three months ended
March 31, 2001 we paid these partnerships an additional $193,741. These amounts
included $145,460 paid in 1999 to CCI Construction Company, Inc., a company
owned by John M. Ortenzio, for improvements to the leased facilities. Our
current lease for 43,919 square feet of office space at 4716 Old Gettysburg
Road and our

lease for 12,400 square feet of office space at 4718 Old Gettysburg Road expire
on December 31, 2014. On May 15, 2001 we entered into a lease for 7,214 square
feet of additional office space at 4720 Old Gettysburg Road in Mechanicsburg,
Pennsylvania with Old Gettysburg Associates II, a general partnership owned by
Rocco A. Ortenzio, Robert A. Ortenzio, John M. Ortenzio and Select Capital
Corporation. We currently pay approximately $1,154,295 per year in rent for
this office space.

We also lease office equipment and furnishings from Select Capital
Corporation, a Pennsylvania corporation whose principal offices are located in
Mechanicsburg, Pennsylvania. Rocco A. Ortenzio, Robert A. Ortenzio, Martin J.
Ortenzio and John M. Ortenzio each own 25% of Select Capital Corporation. This
lease commenced on April 1, 1997, and terminates on March 31, 2002. We have the
option to extend the lease for an additional year on the same terms. We pay
approximately $58,000 per year under the agreement. Since our inception through
March 31, 2001, we have paid a total of $434,503 to Select Capital Corporation
for equipment rental, improvements, maintenance, limousine and telephone
expenses. We believe that this lease and these arrangements were on terms no
less favorable to us than those that would be available to us in an arm's
length transaction with a third party.

In 2000, we paid $7,953 to Select Security, Inc. for security card
readers and related expenses. Robert A. Ortenzio owns 18%, Rocco A. Ortenzio
and Martin J. Ortenzio each own 10%, and John M. Ortenzio owns 2% of the
outstanding capital stock of Select Security, Inc. We believe that the terms of
these transactions were no less favorable to us than they would have been in an
arm's length transaction with a third party.

On December 1, 1999, we purchased all of the stock of Select Air
Corporation, a Delaware corporation, from Rocco A. Ortenzio for $2.7 million.
The only asset of Select Air Corporation was one HS 125 400-731 aircraft. We
obtained an appraisal at the time of purchase that supported the price we paid
for Select Air. In October 2000, we sold the airplane to an unaffiliated third
party for approximately $2.5 million. Pursuant to a Cost Sharing Agreement also
dated December 1, 1999, we paid $3,250 each month to Select Transport, Inc., a
company owned by Rocco A. Ortenzio, for expenses relating to the storage,
maintenance and operation of the aircraft. Rocco A. Ortenzio also paid us fees
from time to time under this agreement for various services, including the use
of pilots who are our employees. In October 2000, we terminated the December 1,
1999 Cost Sharing Agreement and entered into a new Cost Sharing Agreement with
Select Transport and Select Air II Corporation, a corporation owned by Rocco A.
Ortenzio. Under the new Cost Sharing Agreement, which was amended on April 1,
2001, we and Select Air II will each pay to Select Transport $3,250 for the use
of hangar facility. We will employ a full-time mechanic and Select Air II will
pay us 25% of our out of pocket costs to employ the mechanic. We will continue
to hire two full-time pilots, and Select Air II will reimburse us for the cost
of their services on a per diem basis. The cost sharing agreement also allows
for aircraft swapping at prescribed rates.

In 1997 we paid $4,000 to Old Gettysburg Associates II to lease office
space at 4720 Old Gettysburg Road in Mechanicsburg, Pennsylvania. We no longer
lease this space. Old Gettysburg Associates II is a general partnership owned
by Rocco A. Ortenzio, Robert A. Ortenzio, Martin J. Ortenzio and John M.
Ortenzio.

We also have entered into compensatory and other employment-related
contracts with Mr. Rocco A. Ortenzio and Mr. Robert A. Ortenzio. See
"Management--Employment Agreements."

The law firm of Eckert Seamans Cherin & Mellot, LLC, of which LeRoy S.
Zimmerman was formerly a member, has in the past provided, and may continue to
provide, legal services to us and our subsidiaries.

On April 10, 2001 we used a portion of the proceeds from our initial
public offering to redeem all of the outstanding shares of our Class A
Preferred Stock for a price of $1,000 per share. The table below sets forth the
number of shares of our Class A Preferred Stock that we redeemed which were
owned by certain of our stockholders:

Shares of
Class A
Preferred
Stock
Stockholder Redeemed
- ----------- ---------

Entities affiliated with Welsh Carson................................. 22,596
Entities affiliated with GTCR Golder Rauner, LLC...................... 23,571
Russell Carson........................................................ 333
Rocco A. Ortenzio..................................................... 2,295
Robert A. Ortenzio.................................................... 1,174
Patricia A. Rice...................................................... 143
S. Frank Fritsch...................................................... 95

On May 2, 2001 we paid all accrued and unpaid dividends on our Class A
Preferred and Class B Preferred Stock. Each share of our Class B Preferred
Stock automatically converted into .576 shares of common stock upon the
consummation of our initial public offering. The table below sets forth the
Class A Preferred accrued dividends which were paid to certain of our
stockholders:

Payment
for
Class A
Preferred
Stockholder Dividends
- ----------- ----------

Entities affiliated with Welsh Carson (a)............................ $6,026,626
Entities affiliated with GTCR Golder Rauner, LLC (b)................. 6,333,654
Russell Carson....................................................... 88,328
Rocco A. Ortenzio.................................................... 611,945
Robert A. Ortenzio................................................... 313,103
Patricia A. Rice..................................................... 36,902
S. Frank Fritsch..................................................... 25,264

The table below sets forth the Class B Preferred accrued dividends which
were paid to certain of our stockholders:

Payment
for
Class B
Preferred
Stockholder Dividends
- ----------- ----------

Entities affiliated with Welsh Carson (a)........................... $2,428,201
Entities affiliated with GTCR Golder Rauner, LLC (b)................ 639,445
Entities affiliated with Thoma Cressey Equity Partners, Inc. (c).... 1,918,336
Entities affiliated with Anvers, L.P. (d)........................... 42,988
Russell Carson...................................................... 35,857

- --------
(a) Russell Carson is a general partner of WCAS VII Partners, L.P. and WCAS HP
Partners, L.P., and a managing member of WCAS CP III, L.L.C. These entities
are the general partners of Welsh, Carson, Anderson & Stowe, L.P., WCAS
Healthcare Partners, L.P. and WCAS Capital Partners III, L.P.,
respectively.
(b) Donald Edwards and Bryan Cressey are principals of Golder, Thoma, Cressey,
Rauner Inc., which is the general partner of GTCR V L.P. GTCR V L.P. is the
general partner of Golder, Thoma, Cressey, Rauner Fund V, L.P. and the
managing general partner of GTCR Associates V. Donald Edwards is also a
principal of GTCR Golder Rauner, LLC, which is the general partner of GTCR
Partners VI, L.P. GTCR Partners VI, L.P. is the general partner of GTCR
Fund VI, L.P. and GTCR Executive Fund VI, L.P., and the managing general
partner of GTCR Associates VI.

(c) Bryan Cressey is a principal of Thoma Cressey Equity Partners, Inc., which
is the general partner of TC Partners VI, L.P. TC Partners VI, L.P. is the
general partner of Thoma Cressey Fund VI, L.P. and Thoma Cressey Friends
Fund VI, L.P.
(d) Leopold Swergold is the senior managing director of FSIP, LLC, which is the
general partner of Anvers, L.P., Anvers II, L.P. and Anvers Healthcare
Investments, L.P.

A portion of the net proceeds from the sale of the old notes was used to
repay $92.2 million, the entire principal amount and accrued interest of our
10% senior subordinated notes, which were issued to WCAS Capital Partners III,
L.P. in December 1998, February 1999 and November 1999. Russell C. Carson is a
general Partner of WCAS Capital Partners III, L.P.

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of our common stock as of April 30, 2001. The table includes:

. each person (or group of affiliated persons) who is known by us to
own more than five percent of the outstanding shares of our common
stock;

. each of our executive officers and directors; and

. all of our executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Unless otherwise noted, we believe that all
persons named in the table have sole voting and sole investment power with
respect to all shares beneficially owned by them. All share amounts include
shares of common stock issuable upon the exercise of options or warrants
exercisable within 60 days of the date of this prospectus. Options or warrants
that are exercisable for common stock and other ownership rights in common
stock that vest within 60 days of the date of this prospectus are deemed to be
outstanding and to be beneficially owned by the person holding such options or
warrants for the purpose of computing the percentage ownership of such person
but are not treated as outstanding for the purpose of computing the percentage
ownership of any other person. The table below also assumes the transfer of
240,048 shares to us by WCAS Capital Partners III, L.P. upon the repayment of
the 10% senior subordinated note due 2009, which occurred on June 11, 2001, and
the issuance of 523,452 shares of common stock to owners of minority interests
in certain of our subsidiaries. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Subsequent Events."

Common Stock
Beneficially Owned
------------------
Number Percent
---------- -------

5% Beneficial Owners, Directors, Nominees for Director and
Named Executive Officers
Entities affiliated with Welsh, Carson, Anderson & Stowe
VII, L.P.(a).............................................. 16,052,905 34.9%
Entities affiliated with GTCR Golder, Rauner, LLC (b)...... 8,548,300 18.4
Entities affiliated with Thoma Cressey Equity Partners
(c)....................................................... 5,861,090 12.9
Rocco A. Ortenzio (d)...................................... 5,170,667 10.9
Robert A. Ortenzio (e)..................................... 2,138,923 4.6
Russell L. Carson (f)...................................... 16,246,076 35.3
Bryan C. Cressey (g)....................................... 12,510,102 27.2
Donald J. Edwards (h)...................................... 8,548,300 18.4
Meyer Feldberg............................................. -- --
James E. Dalton, Jr. ...................................... -- --
LeRoy S. Zimmerman (i)..................................... 13,939 *
Leopold Swergold (j)....................................... 301,371 *
Patricia A. Rice (k)....................................... 245,182 *
Martin F. Jackson (l)...................................... 93,124 *
Edward R. Miersch (m)...................................... 50,803 *
---------- ----
All executive officers and directors as a group (16
persons).................................................. 38,832,416 77.4%
========== ====

- --------
* Less than 1%
(a) Common shares held include 2,248,307 shares and warrants to purchase 45,703
shares held by WCAS Capital Partners III, L.P., 12,654,556 shares and
warrants to purchase 676,828 shares held by Welsh, Carson, Anderson & Stowe
VII, L.P. and 427,511 shares held by Welsh, Carson, Anderson & Stowe
Healthcare Partners, L.P. The general partners of Welsh, Carson, Anderson &
Stowe VII, L.P. and WCAS

Capital Partners III, L.P. are WCAS VII Partners, L.P. and WCAS CP III,
L.L.C., respectively. Bruce K. Anderson, Russell L. Carson, Anthony J.
DeNicola, Thomas E. McInerney, Robert A. Minicucci, Paul B. Queally,
Jonathan Rather, Rudolph E. Rupert, Lawrence B. Sorrel and Patrick J.
Welsh are general partners of WCAS VII Partners and managing members of
WCAS CP III. The general partner of WCAS Healthcare Partners, L.P. is WCAS
HP Partners. Russell L. Carson and Patrick J. Welsh are partners of WCAS
HP Partners. Accordingly, each of the individuals listed above may be
deemed a beneficial owner of the shares owned by these entities. These
individuals own 531,199 common shares of record in the aggregate. Shares
listed as beneficially owned by affiliates of Welsh, Carson, Anderson &
Stowe VII, L.P. do not include any shares owned of record by these
individuals. Welsh, Carson, Anderson & Stowe VII, L.P.'s business address
is 320 Park Avenue, Suite 2500, New York, New York 10022.
(b) Common shares held include 10,408 shares held by GTCR Associates V, 4,376
shares held by GTCR Associates VI, 1,932,626 shares and warrants to
purchase 30,717 shares owned by GTCR Fund VI, L.P., 13,855 shares held by
GTCR VI Executive Fund L.P. and 5,955,307 shares and warrants to purchase
601,011 shares owned by Golder, Thoma, Cressey, Rauner Fund V, L.P. GTCR
V, L.P. is the general partner of Golder, Thoma, Cressey, Rauner Fund V,
L.P., and the managing general partner of GTCR Associates V. Golder,
Thoma, Cressey, Rauner, Inc. is the general partner of GTCR V., L.P. GTCR
Partners VI, L.P. is the general partner of GTCR Fund VI, L.P. and GTCR
Executive Fund VI, L.P., and the managing general partner of GTCR
Associates VI. GTCR Golder Rauner, LLC is the general partner of GTCR
Partners VI, L.P. GTCR Golder Rauner, LLC's business address is 6100 Sears
Tower, 233 S. Wacker Drive, Chicago, IL 60606-6402.
(c) Common shares held include 5,713,160 shares and warrants to purchase
90,804 shares owned by Thoma Cressey Fund VI, L.P. and 57,126 shares held
by Thoma Cressey Friends Fund VI, L.P. TC Partners VI, L.P. is the general
partner of Thoma Cressey Fund VI, L.P. and Thoma Cressey Friends Fund VI,
L.P. Thoma Cressey Equity Partners, Inc. is the general partner of the TC
Partners VI, L.P. Thoma Cressey Fund VI, L.P.'s business address is Sears
Tower, 92nd Floor, 233 S. Wacker Drive, Chicago, IL 60606-6402.
(d) Includes options to purchase 2,505,444 common shares that are currently
exercisable or exercisable within 60 days of the date of this prospectus,
warrants to purchase 292,394 common shares and 246,857 common shares owned
by Select Healthcare Investors I, L.P. Select Capital Corporation, of
which Mr. Ortenzio is a 25% owner, Director and Chief Executive Officer,
is the general partner of Select Healthcare Investors I, L.P. Mr. Ortenzio
disclaims beneficial ownership of the shares held by Select Healthcare
Investors I, L.P. Also includes 5,200 shares held by Nancy Ortenzio,
spouse of Rocco A. Ortenzio, 10,500 shares held as a life tenant with John
M. Ortenzio as remainderman, 10,500 shares held as a life tenant with
Martin J. Ortenzio as remainderman and 10,500 shares held as a life tenant
with Robert A. Ortenzio as remainderman. Rocco A. Ortenzio's business
address is 4716 Old Gettysburg Road, P.O. Box 2034, Mechanicsburg, PA
17055.
(e) Includes options to purchase 753,497 common shares that are currently
exercisable or exercisable within 60 days of the date of this prospectus
and warrants to purchase 135,826 common shares. Also includes 43,414
common shares owned by the Ortenzio Family Partnership, L.P., of which
Robert A. Ortenzio is the general partner, and 246,857 common shares owned
by Select Healthcare Investors I, L.P. Select Capital Corporation, of
which Mr. Ortenzio is a 25% owner, Director and President, is the general
partner of Select Healthcare Investors I, L.P. Mr. Ortenzio disclaims
beneficial ownership of the shares held by Select Healthcare Investors I,
L.P.
(f) Includes 16,052,905 common shares, owned by Welsh, Carson, Anderson &
Stowe VII, L.P. and its affiliates. Mr. Carson is a principal of Welsh,
Carson, Anderson & Stowe VII, L.P.
(g) Includes 5,861,090 common shares owned by Thoma Cressey Fund VI, L.P. and
its affiliates. Mr. Cressey is a principal of Thoma Cressey Equity
Partners. Common shares beneficially owned also include 5,955,307 common
shares and 601,011 warrants to purchase common shares owned by Golder,
Thoma, Cressey, Rauner Fund V, L.P., and 10,408 common shares owned by
GTCR Associates V. Mr. Cressey is a principal of Golder, Thoma, Cressey,
Rauner, Inc., which is the general partner of GTCR V, L.P. Mr. Cressey
disclaims beneficial ownership of any shares that exceed his pecuniary
interest in the entities affiliated with GTCR Golder Rauner, LLC and Thoma
Cressey Equity Partners.

(h) Includes 8,548,300 common shares, owned by affiliates of GTCR Golder,
Rauner, LLC and Golder, Thoma, Cressey Rauner, Inc. Mr. Edwards is a
principal of Golder, Thoma, Cressey Rauner, Inc. and GTCR Golder Rauner,
LLC. Mr. Edwards disclaims beneficial ownership of any shares that exceed
his pecuniary interest therein.
(i) Includes options to purchase 5,760 common shares which are currently
exercisable or exercisable within 60 days of the date of this prospectus.
(j) Common shares held include 160,731 shares owned by Anvers, L.P., 80,640
shares owned by Anvers II, L.P. and 60,000 shares owned by Anvers
Healthcare Investments, L.P. Mr. Swergold is the senior managing director
of FSIP, LLC, which is the general partner of Anvers, L.P., Anvers II, L.P.
and Anvers Healthcare Investments, L.P.
(k) Includes 16,457 common shares issued to Patricia A. Rice and Jesse W. Rice
as Trustees under the Patricia Ann Rice Living Trust, 32,832 common shares
held in an I.R.A. with Mellon PSFS as custodian for the benefit of Patricia
A. Rice and options to purchase 34,560 common shares that are currently
exercisable or exercisable within 60 days of the date of this prospectus.
(l) Includes options to purchase 42,624 common shares that are currently
exercisable or exercisable within 60 days of the date of this prospectus
and 2,000 shares owned by children living in the same household.
(m) Includes options to purchase 48,384 common shares which are currently
exercisable or exercisable within 60 days of the date of this prospectus.

DESCRIPTION OF NOTES

We issued the old notes to the initial purchasers on June 11, 2001. The
initial purchasers sold all of the outstanding notes to "qualified
institutional buyers," as defined in Rule 144A under the Securities Act. The
terms of the new notes are identical in all material respects to the old notes,
except for certain transfer restrictions and other rights relating to this
exchange offer.

Select issued the old notes under the Indenture (the "Indenture") among
itself, the Subsidiary Guarantors and State Street Bank and Trust Company,
N.A., as trustee (the "Trustee"), in a private transaction that was not subject
to the registration requirements of the Securities Act. The terms of the
Indenture apply to the old notes and the new notes to be issued in exchange for
the old notes in this exchange offer (all such notes being referred to herein
collectively as the "Notes"). The terms of the Notes include those expressly
set forth in the Indenture and those made part of the Indenture by reference to
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act").

This description of notes is intended to be a useful overview of the
material provisions of the Notes and the Indenture. Since this description of
notes is only a summary, you should refer to the Indenture for a complete
description of the obligations of Select and your rights.

The section entitled "Certain Definitions" includes the definitions of a
number of the capitalized terms used in this description. For definitions of
other capitalized terms, please refer to the Indenture. References in this
description to "Select," "we," "our," and "us" mean only Select Medical
Corporation and not its subsidiaries.

General

The Notes. The Notes:

. are general unsecured, senior subordinated obligations of Select;

. mature on June 15, 2009;

. will be issued in denominations of $1,000 and integral multiples of
$1,000;

. are represented by one or more registered Notes in global form, but
in certain circumstances may be represented by Notes in definitive
form. See "Book-Entry Settlement and Clearance";

. are subordinated in right of payment to all existing and future
Senior Indebtedness of Select, including, among other things, Bank
Indebtedness;

. rank equally in right of payment to any future Senior Subordinated
Indebtedness of Select;

. are unconditionally guaranteed on a senior subordinated basis by each
Domestic Subsidiary of Select other than specified Existing Joint
Venture Subsidiaries and New Joint Venture Subsidiaries. See
"Subsidiary Guarantees"; and

. are eligible for trading in the PORTAL market.

Additional Notes. The Indenture provides for the issuance of additional
notes (the "Additional Notes") in one or more series from time to time, subject
to the limitations set forth in the covenant described under "Certain
Covenants--Limitation on Indebtedness." Any Additional Notes may vote as a
class with the Notes and otherwise be treated as Notes for the purposes of the
Indenture.

Interest. Interest on the Notes will compound semi-annually and:

. accrue at the rate of 9 1/2% per annum;

. accrue from the date of issuance or the most recent interest payment
date;

. be payable in cash semi-annually in arrears on June 15 and December
15, commencing on December 15, 2001;

. be payable to the Holders of record on June 1 and December 1
immediately preceding the related interest payment dates; and

. be computed on the basis of a 360-day year composed of twelve 30-day
months.

Payments on the Notes.

Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of
Select in the Borough of Manhattan, The City of New York (which initially will
be an office of an Affiliate of the Trustee in New York, New York); at the
option of Select, however, payment of interest may be made by check mailed to
the address of the Holders as such address appears in the Note Register; and in
addition, if a Holder of at least $1 million in aggregate principal amount of
Notes has given wire transfer instructions to us prior to the record date for a
payment, we will make such payment of principal of, premium, if any, and
interest on, such Holder's Notes in accordance with those instructions. Payment
of principal of, premium, if any, and interest on, Notes in global form
registered in the name of or held by the Depositary or its nominee will be made
by wire transfer of immediately available funds to the Depositary or its
nominee, as the case may be, as the registered Holder of such global Note. No
service charge will be made for any registration of transfer or exchange of
Notes, but Select may require payment of a sum sufficient to cover any transfer
tax or other similar governmental charge payable in connection therewith.

Paying Agent and Registrar.

The Trustee will initially act as Paying Agent and Registrar. Select may
change the Paying Agent or Registrar without prior notice to the Holders of the
Notes, and Select or any of its Domestic Subsidiaries may act as Paying Agent
or Registrar.

Transfer and Exchange.

A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and Select may require
a Holder to pay any taxes and fees required by law or permitted by the
Indenture. Select is not required to transfer or exchange any Note selected for
redemption. Also, Select is not required to transfer or exchange any Note
during the 15-day period before a selection of Notes to be redeemed.

The registered Holder of a Note will be treated as the owner of it for
all purposes.

Optional Redemption

Except as described below, the Notes are not redeemable until June 15,
2005. On and after June 15, 2005, Select may redeem all or a part of the Notes
from time to time upon not less than 30 nor more than 60 days' notice, at the
following redemption prices (expressed as a percentage of principal amount)
plus accrued and unpaid interest on the Notes, if any, to the applicable
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the twelve-month period beginning on June 15 of the years
indicated below:

Year Percentage
---- ----------

2005.......................................................... 104.750%
2006.......................................................... 103.167%
2007.......................................................... 101.583%
2008 and thereafter........................................... 100.000%

Before June 15, 2004, Select may on any one or more occasions redeem up
to 35% of the aggregate principal amount of the Notes (including any Additional
Notes) with the Net Cash Proceeds of one or more

Equity Offerings at a redemption price of 109.5% of the principal amount of the
Notes, plus accrued and unpaid interest, if any, to the redemption date,
subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date; provided that

(1) at least 65% of the aggregate principal amount of the Notes
(including any Additional Notes) remains outstanding after each such
redemption; and

(2) the redemption occurs within 90 days after the closing of such
Equity Offering.

In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not listed, then on a pro rata basis, by lot or by
such other method as the Trustee in its sole discretion then deems to be fair
and appropriate, although no Note of $1,000 in original principal amount or
less will be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note will state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal
to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note.

Ranking and Subordination

The payment of the principal of, premium, if any, and interest on the
Notes and any other payment obligations in respect of the Notes, including any
obligation to repurchase the Notes, will be subordinated to the prior payment
in full in cash or Cash Equivalents when due of all Senior Indebtedness of
Select. However, payment from the money or the proceeds of U.S. Government
Obligations held in any defeasance trust (as described under "Defeasance"
below), and payment in the form of Permitted Junior Securities, are not
subordinate to any Senior Indebtedness or subject to these restrictions.

As a result of the subordination provisions described below, Holders of
the Notes may recover less than creditors of Select who are holders of Senior
Indebtedness in the event of an insolvency, bankruptcy, reorganization,
receivership or similar proceedings relating to Select. Moreover, the Notes
will be structurally subordinated to the liabilities of the non-guarantor
Subsidiaries of Select. At March 31, 2001, on a pro forma as adjusted basis to
give effect to: (i) the sale of the Notes, including the application of the net
proceeds thereof to repay existing indebtedness; (ii) the application of the
net proceeds from Select's initial public offering; and (iii) net borrowings
under our senior credit facility between April 1, 2001 and June 6, 2001:

. Outstanding Senior Indebtedness would have been $112.8 million. This
amount does not include up to $149.3 million in undrawn but available
borrowing commitments under the Senior Credit Agreement, all of which
would be secured.

. Select would have had no Senior Subordinated Indebtedness other than
the Notes. The Subsidiary Guarantors would have had $4.6 million of
Indebtedness that would rank pari passu to the Notes.

. Our Subsidiary Guarantors would have had $108.3 million of Guarantor
Senior Indebtedness including $103.2 million guaranteed under the
Senior Credit Agreement, all of which would be secured.

Although the Indenture limits the amount of indebtedness that Select and its
Restricted Subsidiaries may incur, such indebtedness may be substantial and all
of it may be Senior Indebtedness or Guarantor Senior Indebtedness, as the case
may be, and all or some of it may be secured.

Only Indebtedness of Select that is Senior Indebtedness ranks senior to
the Notes in accordance with the provisions of the Indenture. The Notes in all
respects rank equally with all other Senior Subordinated Indebtedness of
Select. Unsecured Indebtedness is not deemed to be subordinate or junior to
secured Indebtedness merely because it is unsecured. As described in "Certain
Covenants--Limitation on Layering," Select may not incur any indebtedness that
is senior in right of payment to the Notes, but junior in right of payment to
Senior Indebtedness.

Select may not pay principal of, premium on, if any, interest on, or
other payment obligations in respect of, the Notes or make any deposit pursuant
to the provisions described under "Defeasance" below and may not otherwise
purchase, redeem or retire any Notes (collectively, "pay the Notes") if:

(1) any Designated Senior Indebtedness is not paid when due in cash or
Cash Equivalents; or

(2) any other default on Designated Senior Indebtedness occurs and the
maturity of such Senior Indebtedness is accelerated in accordance
with its terms unless, in either case, the default has been cured or
waived and any such acceleration has been rescinded or such Senior
Indebtedness has been paid in full in cash or Cash Equivalents.

However, Select may pay the Notes if Select and the Trustee receive
written notice approving such payment from the Representative of the Senior
Indebtedness with respect to which either of the events set forth in clause (1)
or (2) of the immediately preceding sentence has occurred and is continuing.

Select also will not be permitted to pay the Notes for a Payment Blockage
Period (as defined below) during the continuance of any default, other than a
default described in clause (1) or a default resulting in acceleration
described in clause (2) of the preceding paragraph, on any Designated Senior
Indebtedness that permits the holders of the Designated Senior Indebtedness to
accelerate its maturity immediately without either further notice (except such
notice as may be required to effect such acceleration) or the expiration of any
applicable grace periods.

A "Payment Blockage Period" commences on the receipt by the Trustee (with
a copy to Select) of written notice (a "Blockage Notice") of a default of the
kind described in the immediately preceding paragraph from the Representative
of the holders of such Designated Senior Indebtedness specifying an election to
effect a Payment Blockage Period and ends 179 days after receipt of the notice.
The Payment Blockage Period will end earlier if such Payment Blockage Period is
terminated:

(1) by written notice to the Trustee and Select from the Person or
Persons who gave such Blockage Notice;

(2) because the default giving rise to such Blockage Notice is no longer
continuing; or

(3) because such Designated Senior Indebtedness has been repaid in full.

Select may resume payments on the Notes after the end of the Payment
Blockage Period, unless the holders of such Designated Senior Indebtedness or
the Representative of such holders have accelerated the maturity of such
Designated Senior Indebtedness. Not more than one Blockage Notice may be given
in any consecutive 360-day period, irrespective of the number of defaults with
respect to Designated Senior Indebtedness during such period.

In the event of:

(1) a total or partial liquidation or a dissolution of Select;

(2) a reorganization, bankruptcy, insolvency, receivership of or similar
proceeding relating to Select or its property; or

(3) an assignment for the benefit of creditors or marshaling of Select's
assets and liabilities, then

the holders of Senior Indebtedness will be entitled to receive payment in full
in cash or Cash Equivalents in respect of Senior Indebtedness (including
interest accruing after, or which would accrue but for, the commencement of any
proceeding at the rate specified in the applicable Senior Indebtedness, whether
or not a claim for such interest would be allowed) before the Holders of the
Notes will be entitled to receive any payment or distribution, if any, of the
assets or securities of Select. In addition, until the Senior Indebtedness is
paid in full in cash or Cash Equivalents, any payment or distribution to which
Holders of the Notes would be

entitled but for the subordination provisions of the Indenture will be made to
Holders of the Senior Indebtedness as their interests may appear. If a payment
or distribution is made to holders of the Notes that, due to the subordination
provisions, should not have been made to them, such holders are required to
hold it in trust for the holders of Senior Indebtedness and pay the payment or
distribution over to holders of Senior Indebtedness as their interests may
appear.

Subsidiary Guarantees

The Subsidiary Guarantors jointly and severally unconditionally guarantee
Select's obligations under the Notes and all obligations under the Indenture.
Each Subsidiary Guarantee is subordinated to the prior payment in full of all
Guarantor Senior Indebtedness in the same manner and to the same extent that
the Notes are subordinated to Senior Indebtedness. Each Subsidiary Guarantee
ranks equally with all other Guarantor Senior Subordinated Indebtedness of that
Subsidiary Guarantor. The Subsidiary Guarantors are not be permitted to incur
indebtedness that is senior in right of payment to the Subsidiary Guarantee,
but junior in right of payment to Guarantor Senior Indebtedness.

At March 31, 2001, on a pro forma as adjusted basis to give effect to:
(i) the sale of the Notes, including the application of the net proceeds
thereof to repay existing indebtedness; (ii) the application of the net
proceeds from Select's initial public offering; and (iii) net borrowings under
Select's senior credit facility between April 1, 2001 and June 6, 2001:

. outstanding Guarantor Senior Indebtedness would have been $108.3
million, including $103.2 million borrowed under the Senior Credit
Agreement, all of which would have been secured; and

. the Subsidiary Guarantors would have had $4.6 million of Indebtedness
that would rank equally with the Subsidiary Guarantees.

Although the Indenture limits the amount of indebtedness that Select and its
Restricted Subsidiaries may incur, such indebtedness may be substantial and all
of it may be Guarantor Senior Indebtedness, and all or some of it may be
secured.

The obligations of each Subsidiary Guarantor under its Subsidiary
Guarantee are limited as necessary to prevent that Subsidiary Guarantee from
constituting a fraudulent conveyance or fraudulent transfer under applicable
law.

In the event a Subsidiary Guarantor is sold or disposed of (whether by
merger, consolidation, the sale of its Capital Stock or the sale of all or
substantially all of its assets (other than by lease)) and whether or not the
Subsidiary Guarantor is the surviving corporation in such transaction to a
Person which is not Select or a Restricted Subsidiary of Select, such
Subsidiary Guarantor will be released from its obligations under its Subsidiary
Guarantee if:

(1) the sale or other disposition is in compliance with the Indenture,
including the covenants described under "Certain Covenants--
Limitation on Sales of Assets and Subsidiary Stock" and "Certain
Covenants--Limitation on Sales of Capital Stock of Restricted
Subsidiaries;" and

(2) all the obligations of such Subsidiary Guarantor under the Senior
Credit Agreement and related documentation, and under any other
agreements relating to any other Indebtedness of Select or any of
its other Restricted Subsidiaries, terminate upon consummation of
such transaction.

In addition, a Subsidiary Guarantor will be released from its obligations
under the Indenture, the Subsidiary Guarantee and the Registration Rights
Agreement if Select designates such Subsidiary as an Unrestricted Subsidiary
and such designation complies with the other applicable provisions of the
Indenture. There will be no Unrestricted Subsidiaries on the Issue Date.

Change of Control

If a Change of Control occurs, each Holder will have the right to require
Select to repurchase all or any part (in integral multiples of $1,000) of such
Holder's Notes at a purchase price in cash equal to 101% of the principal
amount of the Notes plus accrued and unpaid interest, if any, to the date of
purchase (subject to the right of Holders of record on the relevant record date
to receive interest due on the relevant interest payment date).

Within 30 days following any Change of Control, Select will mail a notice
(the "Change of Control Offer") to each Holder, with a copy to the Trustee,
stating:

(1) that a Change of Control has occurred and that such Holder has the
right to require Select to purchase its Notes at a purchase price in
cash equal to 101% of the principal amount of the Notes plus accrued
and unpaid interest, if any, to the date of purchase (subject to the
right of Holders of record on a record date to receive interest on
the relevant interest payment date) (the "Change of Control
Payment");

(2) the repurchase date, which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed (the "Change
of Control Payment Date"); and

(3) the procedures determined by Select, consistent with the Indenture,
that a Holder must follow in order to have its Notes repurchased.

On the Change of Control Payment Date, Select will, to the extent lawful:

(1) accept for payment all Notes or portions of Notes in integral
multiples of $1,000 properly tendered under the Change of Control
Offer;

(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all Notes or portions of Notes so
tendered; and

(3) deliver or cause to be delivered to the Trustee the Notes so
accepted, together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions of Notes being
purchased by Select.

The paying agent will promptly mail to each Holder of Notes so tendered
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail, or cause to be transferred by book entry, to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note will be in a principal
amount of $1,000 or an integral multiple of $1,000.

If the Change of Control Payment Date is on or after an interest record
date and on or before the related interest payment date, any accrued and unpaid
interest, if any, will be paid to the Person in whose name a Note is registered
at the close of business on such record date, and no additional interest will
be payable to Holders who tender pursuant to the Change of Control Offer.

The Change of Control provisions described above will be applicable
whether or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders to require that Select repurchase or
redeem the Notes in the event of a takeover, recapitalization or similar
transaction.

Prior to mailing a Change of Control Offer, and as a condition to such
mailing, (i) all Senior Indebtedness must be repaid in full, or Select must
offer to repay all Senior Indebtedness and repay all Senior Indebtedness held
by holders who accept such offer or (ii) the requisite holders of each issue of
Senior Indebtedness shall have consented to such Change of Control Offer being
made to the extent such consent is

required under the terms of such Senior Indebtedness and shall have waived any
event of default under such Senior Indebtedness, caused by the Change of
Control. Select covenants to effect such repayment or obtain such consent and
waiver within 30 days following any Change of Control, it being a default of
the Change of Control provision of the Indenture if Select fails to comply with
such covenant. A default under the Indenture may result in a cross-default
under the Senior Credit Agreement. In the event of a default under the Senior
Credit Agreement, the subordination provisions of the Indenture would likely
restrict payments to the Holders of the Notes.

Select will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by Select
and purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.

Select will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of the Indenture, Select will comply with the applicable securities
laws and regulations and will not be deemed to have breached its obligations
described in the Indenture by virtue of the conflict.

Select's ability to repurchase Notes pursuant to a Change of Control
Offer may be limited by a number of factors. The occurrence of specified events
that constitute a Change of Control may constitute a default under the Senior
Credit Agreement. In addition, certain events that may constitute a change of
control under the Senior Credit Agreement and cause a default under agreement
may not constitute a Change of Control under the Indenture. Future Indebtedness
of Select and its Subsidiaries may also contain prohibitions of certain events
that would constitute a Change of Control or require such Indebtedness to be
repurchased upon a Change of Control. Moreover, the exercise by the Holders of
their right to require Select to repurchase the Notes could cause a default
under such Indebtedness, even if the Change of Control itself does not, due to
the financial effect of such repurchase on Select. Finally, Select's ability to
pay cash to the Holders upon a repurchase may be limited by Select's then
existing financial resources. There can be no assurance that sufficient funds
will be available when necessary to make any required repurchases.

Even if sufficient funds were otherwise available, the terms of the
Senior Credit Agreement may (and other Indebtedness may) prohibit Select's
prepayment of Notes before their scheduled maturity. Consequently, if Select is
not able to prepay the Bank Indebtedness and any such other Indebtedness
containing similar restrictions or obtain any required consents, Select will be
unable to fulfill its repurchase obligations if Holders of Notes exercise their
repurchase rights following a Change of Control, resulting in a default under
the Indenture. A default under the Indenture will result in a cross-default
under the Senior Credit Agreement. In the event of a default under the Senior
Credit Agreement, the subordination provisions of the Indenture would likely
restrict payments to the Holders of the Notes.

The Change of Control provisions described above may deter certain
mergers, tender offers and other takeover attempts involving Select by
increasing the capital required to effectuate such transactions. The definition
of "Change of Control" includes a disposition of all or substantially all of
the property and assets of Select and its Restricted Subsidiaries, taken as a
whole, to any Person. Although there is a limited body of case law interpreting
the phrase "substantially all," there is no precise established definition of
the phrase under applicable law. Accordingly, in certain circumstances there
may be a degree of uncertainty as to whether a particular transaction would
involve a disposition of "all or substantially all" of the property or assets
of a Person. As a result, it may be unclear whether a Change of Control has
occurred and whether a Holder of Notes may require Select to make an offer to
repurchase the Notes as described above.

100

Certain Covenants

Limitation on Indebtedness.

Select will not, and will not permit any of its Restricted Subsidiaries
to, Incur any Indebtedness; provided, however, that Select and the Subsidiary
Guarantors may Incur Indebtedness if on the date of the Incurrence:

(1) the Consolidated Coverage Ratio for Select and its Restricted
Subsidiaries is at least (a) 2.25 to 1.00; and

(2) no Default or Event of Default has occurred or is continuing or
would occur as a consequence of Incurring the Indebtedness.

The first paragraph of this covenant will not prohibit the incurrence of
the following Indebtedness:

(1) Indebtedness Incurred pursuant to the Senior Credit Agreement in an
aggregate principal amount up to $260.0 million at any one time
outstanding less the aggregate principal amount of all principal
repayments made as a result of the receipt of proceeds of Asset
Dispositions, which repayments (in the case of the revolving credit
facility thereunder) permanently reduce the commitments thereunder;

(2) Indebtedness of Select owing to and held by any Restricted
Subsidiary or Indebtedness of a Restricted Subsidiary owing to and
held by Select or any Restricted Subsidiary; provided, however,

(a) if Select or any Subsidiary Guarantor is the obligor on such
Indebtedness, such Indebtedness is expressly subordinated to the
prior payment in full in cash of all obligations with respect to
the Notes or the Subsidiary Guarantees, as the case may be; and

(b)(i) any subsequent issuance or transfer of Capital Stock or any
other event that results in any such Indebtedness being
beneficially held by a Person other than Select or a
Restricted Subsidiary of Select, and

(ii) any sale or other transfer of any such Indebtedness to a
Person other than Select or a Restricted Subsidiary of Select

shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness by Select or such Subsidiary, as the case may be.

(3) Indebtedness represented by (a) the Notes (including any Exchange
Notes, but excluding any Additional Notes), (b) any Indebtedness
(other than the Indebtedness described in clauses (1), (2), (5),
(6), (7), (8) and (9)) outstanding on the Issue Date and (c) any
Refinancing Indebtedness Incurred in respect of any Indebtedness
described in this clause (3) or clause (4) or Incurred pursuant to
the first paragraph of this covenant

(4) Indebtedness of a Restricted Subsidiary Incurred and outstanding on
the date on which such Restricted Subsidiary is acquired by Select
after the Issue Date (other than Indebtedness Incurred (a) to
provide all or any portion of the funds utilized to consummate the
transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary or was
otherwise acquired by Select or (b) otherwise in connection with, or
in contemplation of, such acquisition); provided, however, that at
the time such Restricted Subsidiary is acquired by Select, Select
would have been able to Incur $1.00 of additional Indebtedness
pursuant to the first paragraph of this covenant after giving effect
to the Incurrence of such Indebtedness pursuant to this clause (4);

(5) Indebtedness of Select or any Subsidiary Guarantor under (x)
Currency Agreements that are related to business transactions of
Select or its Restricted Subsidiaries entered into in the ordinary

101

course of business, or (y) Currency Agreements or Interest Rate
Agreements that are entered into for bona fide hedging purposes of
Select or its Restricted Subsidiaries and substantially correspond in
terms of notional amount, duration, currencies and interest rates, as
applicable, to Indebtedness of Select or its Restricted Subsidiaries
Incurred without violation of the Indenture;

(6) the Subsidiary Guarantees and other Guarantees by the Subsidiary
Guarantors of Indebtedness Incurred in accordance with the
provisions of the Indenture; provided that in the event such
Indebtedness that is being Guaranteed (a) ranks equally in right of
payment with the Notes or any Subsidiary Guarantee, then the
related Guarantee shall rank equally in right of payment to the
Subsidiary Guarantees or (b) is a Subordinated Obligation or a
Guarantor Subordinated Obligation, then the related Guarantee shall
be subordinated in right of payment to the Subsidiary Guarantees;

(7) Indebtedness incurred to insurance carriers in respect of workers'
compensation claims or self-insurance obligations, or to issuers of
performance, bid, surety and similar bonds or letters of credit or
guarantees supporting performance of contracts (other than for
borrowed money), in each case in the ordinary course of business;

(8) Indebtedness arising from agreements of Select or a Restricted
Subsidiary providing for indemnification, adjustment of purchase
price or similar obligations, in each case, incurred or assumed in
connection with the disposition of any business, assets or Capital
Stock of a Restricted Subsidiary, or for contingent earn-out
payments based on performance of any business acquired by Select or
any Restricted Subsidiary, provided that (in the case of any such
disposition) the maximum aggregate liability in respect of all such
Indebtedness shall at no time exceed the gross proceeds actually
received by Select and its Restricted Subsidiaries in connection
with such disposition;

(9) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument (except in the
case of daylight overdrafts) drawn against insufficient funds in
the ordinary course of business, provided, however, that such
Indebtedness is extinguished within five business days of
Incurrence;

(10) Purchase Money Indebtedness and Capitalized Lease Obligations Incurred
to finance the acquisition by the Company or a Restricted Subsidiary of
any assets in the ordinary course of business that, together with all
Refinancing Indebtedness Incurred in respect of Indebtedness previously
Incurred pursuant to this clause (10), does not exceed $15.0 million in
the aggregate at any time outstanding;

(11) Indebtedness of Select or any Subsidiary Guarantor, to the extent the
proceeds thereof are immediately used after the Incurrence thereof to
purchase Notes tendered in an offer to purchase made as a result of a
Change of Control;

(12) Indebtedness of any Foreign Subsidiary in Canada under any working
capital facility in an aggregate principal amount not to exceed Cdn.
$5.0 million outstanding at any time; and

(13) in addition to the items referred to in clauses (1) through (12) above,
Indebtedness of Select and the Restricted Subsidiaries in an aggregate
outstanding principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to this
clause (13) and then outstanding, will not exceed $35.0 million.

Select and the Subsidiary Guarantors will not Incur any Indebtedness if
the proceeds thereof are used, directly or indirectly, to refinance any
Subordinated Obligations or any Guarantor Subordinated Obligations unless such
refinancing Indebtedness will be subordinated to the Notes and the Subsidiary
Guarantees to at least the same extent as such Subordinated Obligations or
Guarantor Subordinated Obligations. Select and the Subsidiary Guarantors will
not Incur any Indebtedness if the proceeds thereof are used, directly or
indirectly, to refinance any Indebtedness that ranks equally in right of
payment with the Notes or any Subsidiary Guarantee

102

unless such refinancing Indebtedness is Senior Subordinated Indebtedness or
Subordinated Obligations (in the case of Select) or Guarantor Senior
Subordinated Indebtedness or Guarantor Subordinated Obligations (in the case of
a Subsidiary Guarantor). No Restricted Subsidiary other than a Subsidiary
Guarantor may Incur any Indebtedness if the proceeds are used, directly or
indirectly, to refinance Indebtedness of Select or a Subsidiary Guarantor.

For purposes of determining compliance with, and the outstanding
principal amount of any particular Indebtedness incurred pursuant to and in
compliance with, this covenant:

(1) in the event that Indebtedness meets the criteria of more than one
of the types of Indebtedness described in the first and second
paragraphs of this covenant, Select, in its sole discretion, will
classify such item of Indebtedness on the date of Incurrence and
only be required to include the amount and type of such Indebtedness
in one of such clauses; provided that (a) any Indebtedness
classified as Incurred pursuant to clause (13) of the second
paragraph of this covenant may subsequently be reclassified as
Incurred pursuant to the first paragraph of this covenant from and
after the first date on which Select could Incur such Indebtedness
under such first paragraph if deemed Incurred on such date, and (b)
all Indebtedness incurred or outstanding under the Senior Credit
Agreement on the Issue Date shall, be deemed Incurred exclusively
pursuant to clause (1) of the second paragraph of this covenant; and

(2) the amount of Indebtedness issued at a price that is less than the
principal amount thereof will be equal to the amount of the
liability in respect thereof determined in accordance with GAAP.

Accrual of interest, accrual of dividends, the accretion of accreted
value or fluctuations in exchange rates or commodity prices will not be deemed
to be an Incurrence of Indebtedness for purposes of this covenant. The amount
of any Indebtedness outstanding as of any date shall be (i) the accreted value
of the Indebtedness in the case of any Indebtedness issued with original issue
discount and (ii) the principal amount or liquidation preference thereof,
together with any interest thereon that is more than 30 days past due, in the
case of any other Indebtedness.

In addition, Select will not permit any of its Unrestricted Subsidiaries
to Incur any Indebtedness or issue any shares of Disqualified Stock, other than
Non-Recourse Debt. If at any time an Unrestricted Subsidiary becomes a
Restricted Subsidiary, any Indebtedness of such Subsidiary shall be deemed to
be Incurred by a Restricted Subsidiary of Select as of such date (and, if such
Indebtedness is not permitted to be Incurred as of such date under this
"Limitation on Indebtedness" covenant, Select shall be in default of this
covenant).

Limitation on Layering.

Select will not Incur any Indebtedness that is subordinate or junior in
ranking in any respect to any Senior Indebtedness unless such Indebtedness is
Senior Subordinated Indebtedness or is contractually subordinated in right of
payment to all Senior Subordinated Indebtedness, including the Notes. No
Subsidiary Guarantor will Incur any Indebtedness that is subordinate or junior
in ranking in any respect to any Guarantor Senior Indebtedness of such
Subsidiary Guarantor unless such Indebtedness is Guarantor Senior Subordinated
Indebtedness of such Subsidiary Guarantor or is contractually subordinated in
right of payment to all Guarantor Senior Subordinated Indebtedness of such
Subsidiary Guarantor, including its Subsidiary Guarantee.

Limitation on Restricted Payments.

Select will not, and will not permit any of its Restricted Subsidiaries,
directly or indirectly, to:

(1) declare or pay any dividend or make any distribution on or in
respect of any Capital Stock of Select or any Restricted Subsidiary
(including any payment in connection with any merger or
consolidation involving Select or any of its Restricted
Subsidiaries) except:

(a) dividends or distributions payable in Capital Stock of Select
(other than Disqualified Stock) or in options, warrants or other
rights to purchase such Capital Stock of Select; and

103

(b) dividends or distributions payable to Select or a Restricted
Subsidiary of Select (and if such Restricted Subsidiary is not a
Wholly-Owned Subsidiary, to its other holders of common Capital
Stock on a pro rata basis);

(2) purchase, redeem, retire or otherwise acquire for value any Capital
Stock of Select, or any Capital Stock of any Restricted Subsidiary
or any direct or indirect parent of Select held by Persons other
than Select or a Restricted Subsidiary of Select, other than in
exchange for Capital Stock of Select (other than Disqualified
Stock);

(3) purchase, repurchase, redeem, defease or otherwise acquire or retire
for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment, any Subordinated Obligations or
Guarantor Subordinated Obligations (other than the purchase,
repurchase or other acquisition of Subordinated Obligations or
Guarantor Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final
maturity, in each case due within one year of the date of purchase,
repurchase or acquisition); or

(4) make any Restricted Investment in any Person

(any such dividend, distribution, purchase, redemption, repurchase, defeasance,
other acquisition, retirement or Restricted Investment referred to in clauses
(1) through (4) shall be referred to herein as a "Restricted Payment"), if at
the time Select or such Restricted Subsidiary makes such Restricted Payment:

(a) a Default or Event of Default shall have occurred and be continuing
(or would result from the Restricted Payment); or

(b) Select is not able to incur an additional $1.00 of Indebtedness
pursuant to the first paragraph under the "Limitation on
Indebtedness" covenant after giving effect to such Restricted
Payment; or

(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made subsequent to the Issue Date
would exceed the sum of:

(i) 50% of Consolidated Net Income for the period (treated as one
accounting period) from the beginning of the first fiscal
quarter commencing after the Issue Date to the end of the most
recent fiscal quarter ending prior to the date of such
Restricted Payment for which consolidated financial statements
of Select have been delivered to the Trustee in accordance with
the "SEC Reports" covenant (or, in case such Consolidated Net
Income is a deficit, minus 100% of such deficit);

(ii) the aggregate Net Cash Proceeds received by Select from the
issue or sale of its Capital Stock (other than Disqualified
Stock) or other capital contributions subsequent to the Issue
Date (other than Net Cash Proceeds received from an issuance or
sale of such Capital Stock to a Subsidiary of Select or to an
employee stock ownership plan, option plan or similar trust to
the extent such sale to an employee stock ownership plan,
option plan or similar trust is financed by loans from or
guaranteed by Select or any Restricted Subsidiary unless such
loans have been repaid with cash on or prior to the date of
determination);

(iii) the amount by which Indebtedness of Select is reduced on
Select's balance sheet upon the conversion or exchange (other
than by a Subsidiary of Select) subsequent to the Issue Date of
any Indebtedness of Select convertible or exchangeable for
Capital Stock (other than Disqualified Stock) of Select (less
the amount of any cash, or other property, distributed by
Select upon such conversion or exchange); and

(iv) the amount equal to the net reduction in Restricted Investments
made by Select or any of its Restricted Subsidiaries in any
Person resulting from:

(A) repurchases or redemptions of such Restricted Investments by
such Person, proceeds realized upon the sale of such
Restricted Investment to an unaffiliated purchaser, or
repayments of loans or advances or other transfers of assets
(including by way of dividend or distribution) by such Person
to Select or any Restricted Subsidiary of Select; or

104

(B) the redesignation of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the
definition of "Investment") not to exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously
made by Select or any Restricted Subsidiary in such
Unrestricted Subsidiary,

which amount in each case under this clause (iv) was included in the
calculation of the amount of Restricted Payments; provided, however,
that no amount will be included under this clause (iv) to the extent
it is already included in Consolidated Net Income.

The provisions of the preceding paragraph will not prohibit:

(1) any purchase or redemption of Capital Stock or Subordinated
Obligations of Select made by exchange for, or out of the proceeds
of the substantially concurrent sale of, Capital Stock of Select
(other than Disqualified Stock and other than Capital Stock issued
or sold to a Subsidiary or an employee stock ownership plan or
similar trust to the extent such sale to an employee stock
ownership plan or similar trust is financed by loans from or
guaranteed by Select or any Restricted Subsidiary unless such loans
have been repaid with cash on or prior to the date of
determination); provided, however, that (a) such purchase or
redemption will be excluded in the calculation of the amount of
Restricted Payments and (b) the Net Cash Proceeds from such sale
will be excluded from clause (c)(ii) of the preceding paragraph;

(2) any purchase or redemption of Subordinated Obligations of Select
made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Subordinated Obligations of Select that
qualifies as Refinancing Indebtedness; provided, however, that such
purchase or redemption will be excluded in the calculation of the
amount of Restricted Payments;

(3) so long as no Default or Event of Default has occurred and is
continuing, any purchase or redemption of Subordinated Obligations
from Net Available Cash to the extent permitted under the
"Limitation on Sales of Assets and Subsidiary Stock" covenant;
provided, however, that such purchase or redemption will be
excluded in the calculation of the amount of Restricted Payments;

(4) dividends paid within 60 days after the date of declaration if at
such date of declaration such dividend would have complied with
this covenant; provided, however, that such dividends will be
included in the calculation of the amount of Restricted Payments;

(5) so long as no Default or Event of Default has occurred and is
continuing (or would result therefrom) loans or advances to
employees or directors of Select or any Subsidiary of Select the
proceeds of which are used to purchase Capital Stock of Select
other than Disqualified Stock (or repurchases of such Capital Stock
in exchange for cancellation of such loans or advances), in an
aggregate amount not in excess of $2.0 million at any one time
outstanding; provided, however, that (a) the amount of such loans
and advances will be included in the calculation of the amount of
Restricted Payments and (b) the Net Cash Proceeds from any such
sale of Capital Stock of Select will be excluded from clause
(c)(ii) of the preceding paragraph;

(6) repurchases of Capital Stock deemed to occur upon the exercise of
stock options if such Capital Stock represents a portion of the
exercise price thereof, provided, however, that such repurchases
will be excluded from the calculation of the amount of Restricted
Payments;

(7) any purchase or redemption of (A) Disqualified Stock of Select made
by exchange for, or out of the proceeds of the substantially
concurrent sale of, Disqualified Stock of Select that qualifies as
Refinancing Indebtedness or (B) Disqualified Stock of a Restricted
Subsidiary made by exchange for, or out of the proceeds of the
substantially concurrent sale of, Disqualified Stock of such
Restricted Subsidiary or Select that qualifies as Refinancing
Indebtedness; provided, however, in each case under this clause (7)
that (i) such Refinancing Indebtedness is not issued or sold to a
Subsidiary or an employee stock ownership plan or similar trust to
the extent such sale to an employee stock ownership plan or similar
trust is financed by loans from or guaranteed by Select

105

or any Restricted Subsidiary unless such loans have been repaid with
cash on or prior to the date of determination, (ii) at the time of
such exchange, no Default or Event of Default shall have occurred and
be continuing or would result therefrom and (iii) such purchase or
redemption will be excluded in the calculation of the amount of
Restricted Payments;

(8) upon the occurrence of a Change of Control and within 60 days after
the completion of the offer to repurchase the Notes pursuant to the
covenant described under "Change of Control" above (including the
purchase of all Notes tendered), any purchase or redemption of
Subordinated Obligations required pursuant to the terms thereof as
a result of such Change of Control at a purchase or redemption
price not to exceed the outstanding principal amount thereof, plus
accrued and unpaid interest thereon, if any; provided, however,
that (A) at the time of such purchase or redemption, no Default
shall have occurred and be continuing (or would result therefrom),
(B) Select would be able to Incur an additional $1.00 of
Indebtedness pursuant to the first paragraph of the covenant
described under "--Limitation on Indebtedness" after giving
pro forma effect to such Restricted Payment, (C) such purchase or
redemption is not made, directly or indirectly, from the proceeds
of (or made in anticipation of) any Incurrence of Indebtedness by
Select or any Subsidiary and (D) such purchase or redemption will
be included in the calculation of the amount of Restricted
Payments;

(9) purchases of Capital Stock of Restricted Subsidiaries from minority
holders, provided that upon giving effect to any such purchase of
Capital Stock of any Restricted Subsidiary, such Subsidiary shall
be a Subsidiary Guarantor; provided, however, that such purchases
will be excluded in the calculation of the amount of Restricted
Payments;

(10) so long as no Default or Event of Default has occurred and is
continuing (or would result therefrom), an Investment in a minority
interest in a Person not engaged in any business other than a
Related Business, together with all other Investments pursuant to
this clause (10), in an aggregate amount at the time of such
Investment not to exceed $10.0 million outstanding at any one time
(the amount of such Investment outstanding at any time to be equal
to its original cost minus the net proceeds realized by Select upon
repurchase, repayment or redemption thereof, or sale thereof to an
unaffiliated purchaser, but not less than zero) (any such Person, a
"Permitted Joint Venture"); provided, however, that such
Investments (a) will be included in the calculation of the amount
of Restricted Payments and (b) will be excluded in calculating any
net reduction in Restricted Investments for purposes of clause
(c)(iv) of the preceding paragraph; and

(11) Restricted Payments in an amount not to exceed $20.0 million in the
aggregate.

The amount of all Restricted Payments, other than cash, shall be the
fair market value on the date of such Restricted Payment of the asset(s) or
securities proposed to be paid, transferred or issued by Select or such
Restricted Subsidiary, as the case may be, pursuant to such Restricted
Payment. The fair market value of any cash Restricted Payment shall be its
face amount and any non-cash Restricted Payment shall be determined by the
Board of Directors acting in good faith whose resolution with respect thereto
shall be delivered in writing to the Trustee. Not later than the date of
making any Restricted Payment, Select shall deliver to the Trustee an
Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by the
"Restricted Payments" covenant were computed, together with a copy of any
fairness opinion or appraisal required by the Indenture.

Limitation on Liens.

Select will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur or suffer to exist any Lien (other
than Permitted Liens) upon any property or assets of Select or any of its
Restricted Subsidiaries (including Capital Stock), whether owned on the date
of the Indenture or acquired after that date, securing any Indebtedness that
ranks equally with, or is subordinate or junior to, the Notes or any
Subsidiary Guarantee in right of payment, unless contemporaneously with the
incurrence of such Lien effective

106

provision is made to secure the Indebtedness due under the Indenture and the
Notes or, in the case of a Lien on any Restricted Subsidiary's property or
assets, any Subsidiary Guarantee of such Restricted Subsidiary, equally and
ratably with (or prior to, in the case of Liens with respect to Indebtedness
that is subordinate or junior in right of payment to the Notes or any
Subsidiary Guarantee, as the case may be) the Indebtedness secured by such
Lien for so long as such Indebtedness is so secured.

Limitation on Restrictions on Distributions from Restricted Subsidiaries.

Select will not, and will not permit any Restricted Subsidiary to, create
or otherwise cause or permit to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to:

(1) pay dividends or make any other distributions on its Capital Stock or
pay any Indebtedness or other obligations owed to Select or any
Restricted Subsidiary;

(2) make any loans or advances to Select or any Restricted Subsidiary; or

(3)transfer any of its property or assets to Select or any Restricted
Subsidiary.

The preceding paragraph will not prohibit:

(i) any encumbrance or restriction pursuant to an agreement as in
effect at or entered into on the Issue Date, including, without
limitation, the Indenture and the Senior Credit Agreement and any
governing agreements or instruments of Existing Joint Venture
Subsidiaries, in each case as in effect on such date;

(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by a Restricted Subsidiary on or before the date on which
such Restricted Subsidiary was acquired by Select (other than
Indebtedness Incurred as consideration in, or to provide all or
any portion of the funds utilized to consummate, the transaction
or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary or was
acquired by Select, or in contemplation of the transaction) and
outstanding on such date;

(iii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement effecting a refinancing of
Indebtedness Incurred pursuant to an agreement referred to in
clause (i) or (ii) of this paragraph or this clause (iii) or
contained in any amendment to an agreement referred to in clause
(i) or (ii) of this paragraph or this clause (iii); provided,
however, that the encumbrances and restrictions with respect to
such Restricted Subsidiary contained in any such agreement or
amendment are not less favorable to the Holders of the Notes than
the encumbrances and restrictions contained in such agreements
referred to in clause (i) or (ii) of this paragraph on the Issue
Date or the date such Restricted Subsidiary became a Restricted
Subsidiary, as applicable;

(iv) in the case of clause (3) of the first paragraph of this covenant,
any encumbrance or restriction:

(a) that restricts in a customary manner the subletting, assignment
or transfer of any property or asset that is subject to a lease,
license or similar contract, or the assignment or transfer of
any such lease, license or other contract;

(b) contained in mortgages, pledges or other security agreements
permitted under the Indenture securing Indebtedness of Select or
a Restricted Subsidiary to the extent such encumbrances or
restrictions restrict the transfer of the property subject to
such mortgages, pledges or other security agreements;

(c) pursuant to customary provisions restricting dispositions of
real property interests set forth in any reciprocal easement
agreements of Select or any Restricted Subsidiary; or

(d) imposed by purchase money obligations for property acquired in
the ordinary course of business, on the property so acquired;

107

(v) any restriction with respect to a Restricted Subsidiary (or any
of its property or assets) imposed pursuant to an agreement
entered into for the direct or indirect sale or disposition of
all or substantially all the Capital Stock or assets of such
Restricted Subsidiary (or the property or assets that are subject
to such restriction) pending the closing of such sale or
disposition;

(vi) any restriction with respect to a Restricted Subsidiary contained
in any agreement or instrument governing Capital Stock (other
than Disqualified Stock) of any Restricted Subsidiary that is in
effect on the date such Restricted Subsidiary is acquired by
Select (and is not incurred in contemplation of such
transaction);

(vii) encumbrances or restrictions arising or existing by reason of
applicable law or any applicable rule, regulation or order; and

(viii) encumbrances or restrictions arising under provisions in
governing joint venture agreements or instruments of any New
Joint Venture Subsidiaries, provided that such encumbrances and
restrictions are not less favorable to the Holders of the Notes
than the encumbrances and restrictions contained in the governing
joint venture agreements or instruments of Existing Joint Venture
Subsidiaries referred to in clause (i) of this paragraph as in
effect on the Issue Date.

Limitation on Sales of Assets and Subsidiary Stock.

Select will not, and will not permit any of its Restricted Subsidiaries
to, make any Asset Disposition unless:

(1) Select or such Restricted Subsidiary receives consideration at the
time of such Asset Disposition at least equal to the fair market
value (including as to the value of all non-cash consideration), as
determined in good faith by the Board of Directors, of the shares
and assets subject to such Asset Disposition;

(2) at least 75% of the consideration from such Asset Disposition
received by Select or such Restricted Subsidiary, as the case may
be, is in the form of cash or Cash Equivalents; and

(3) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by Select or such Restricted Subsidiary, as
the case may be:

(a) first, to the extent Select or any Restricted Subsidiary, as the
case may be, elects (or is required by the terms of any Senior
Indebtedness or Guarantor Senior Indebtedness), to prepay, repay
or purchase Senior Indebtedness, Guarantor Senior Indebtedness
or, if such Restricted Subsidiary is a Foreign Subsidiary,
Indebtedness (other than any Preferred Stock or any Indebtedness
that is subordinate or junior in right of payment to any other
Indebtedness) of such Foreign Subsidiary (in each case other than
Indebtedness owed to Select or an Affiliate of Select) within 360
days from the later of the date of such Asset Disposition or the
receipt of such Net Available Cash; provided, however, that, in
connection with any prepayment, repayment or purchase of
Indebtedness pursuant to this clause (a), Select or such
Restricted Subsidiary will retire such Indebtedness and will
cause the related commitment (if any) to be permanently reduced
in an amount equal to the principal amount so prepaid, repaid or
purchased; and

(b) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (a), to the extent
Select or such Restricted Subsidiary elects, to invest in
Additional Assets within 360 days from the later of the date of
such Asset Disposition or the receipt of such Net Available Cash.

Any Net Available Cash from Asset Sales that are not applied or invested
as provided in the preceding paragraph will be deemed to constitute "Excess
Proceeds." On the 361st day after an Asset Disposition, if the aggregate amount
of Excess Proceeds exceeds $15.0 million, Select will be required to make an
offer ("Asset

108

Sale Offer") to all Holders of Notes and, to the extent required by the terms
of other Senior Subordinated Indebtedness, to all holders of other Senior
Subordinated Indebtedness outstanding with similar provisions requiring Select
to make an offer to purchase such Senior Subordinated Indebtedness with the
proceeds from any Asset Disposition ("Pari Passu Notes"), to purchase the
maximum principal amount of Notes and any such Pari Passu Notes to which the
Asset Sale Offer applies that may be purchased out of the Excess Proceeds, in
accordance with the procedures set forth in the Indenture or the agreements
governing the Pari Passu Notes, as applicable, in each case in integral
multiples of $1,000 at an offer price in cash in an amount equal to (x) in the
case of the Notes, 100% of the principal amount of the Notes, plus accrued and
unpaid interest to the date of purchase, and (y) in the case of the Pari Passu
Notes, 100% of the lesser of the then accreted value (if applicable) and the
principal amount of the Pari Passu Notes, plus accrued and unpaid interest to
the date of purchase. To the extent that the aggregate amount of Notes and Pari
Passu Notes so validly tendered and not properly withdrawn pursuant to an Asset
Sale Offer is less than the Excess Proceeds, Select may use any remaining
Excess Proceeds for general corporate purposes, subject to the other covenants
contained in the Indenture. If the aggregate principal amount of Notes
surrendered by Holders of the Notes and other Pari Passu Notes surrendered by
holders or lenders, collectively, exceeds the amount of Excess Proceeds, Select
shall select the Notes and Pari Passu Notes to be purchased on a pro rata basis
on the basis of the aggregate principal amount of tendered Notes and the lesser
of the then aggregate accreted value and the aggregate principal amount of the
tendered Pari Passu Notes. Upon completion of such Asset Sale Offer, the amount
of Excess Proceeds shall be reset at zero.

The Asset Sale Offer will remain open for a period of 20 Business Days
following its commencement, except to the extent that a longer period is
required by applicable law (the "Asset Sale Offer Period"). No later than five
Business Days after the termination of the Asset Sale Offer Period (the "Asset
Sale Purchase Date"), Select will purchase the principal amount of Notes and
Pari Passu Notes required to be purchased pursuant to this covenant (the "Asset
Sale Offer Amount") or, if less than the Asset Sale Offer Amount has been so
validly tendered, all Notes and Pari Passu Notes validly tendered in response
to the Asset Sale Offer.

If the Asset Sale Purchase Date is on or after an interest record date
and on or before the related interest payment date, any accrued and unpaid
interest will be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest will be
payable to Holders who tender Notes pursuant to the Asset Sale Offer.

On or before the Asset Sale Purchase Date, Select will, to the extent
lawful, accept for payment, on a pro rata basis to the extent necessary, the
Asset Sale Offer Amount of Notes and Pari Passu Notes or portions of Notes and
Pari Passu Notes so validly tendered and not properly withdrawn pursuant to the
Asset Sale Offer, or if less than the Asset Sale Offer Amount has been validly
tendered and not properly withdrawn, all Notes and Pari Passu Notes so validly
tendered and not properly withdrawn, in each case in integral multiples of
$1,000. Select will deliver to the Trustee an Officers' Certificate stating
that such Notes or portions thereof were accepted for payment by Select in
accordance with the terms of this covenant and, in addition, Select will
deliver all certificates and notes required, if any, by the agreements
governing the Pari Passu Notes. Select will promptly (but in any case not later
than five Business Days after the termination of the Asset Sale Offer Period)
mail or deliver to each tendering Holder of Notes or holder or lender of Pari
Passu Notes, as the case may be, an amount equal to the purchase price of the
Notes or Pari Passu Notes so validly tendered and not properly withdrawn by
such Holder or lender, as the case may be, and accepted by Select for purchase,
and Select will promptly issue a new Note, and the Trustee, upon delivery of an
Officers' Certificate from Select will authenticate and mail or deliver such
new Note to such Holder, in a principal amount equal to any unpurchased portion
of the Note surrendered; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple of $1,000. In addition,
Select will take any and all other actions required by the agreements governing
the Pari Passu Notes. Any Note not so accepted will be promptly mailed or
delivered by Select to the Holder thereof. Select will publicly announce the
results of the Asset Sale Offer on the Asset Sale Purchase Date.

For the purposes of this covenant, securities, notes or other obligations
received by Select or any Restricted Subsidiary of Select from the transferee
in such Asset Disposition that are promptly converted by Select or such
Restricted Subsidiary into cash, will be deemed to be cash.

109

Select will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to the Indenture. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, Select will comply with the applicable securities
laws and regulations and will not be deemed to have breached its obligations
under the Indenture by virtue of any conflict.

Limitation on Affiliate Transactions.

Select will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into or conduct any transaction or series of
related transactions (including the purchase, sale, lease or exchange of any
property or the rendering of any service) with any Affiliate of Select or any
Restricted Subsidiary (such transaction or transactions an "Affiliate
Transaction") unless:

(1) the terms of such Affiliate Transaction are no less favorable to
Select or such Restricted Subsidiary, as the case may be, than those
that could be obtained in a comparable transaction at the time of
such transaction in arm's-length dealings with a Person who is not
such an Affiliate;

(2) in the event such Affiliate Transaction involves an aggregate amount
in excess of $5.0 million, the terms of such Affiliate Transaction
have been approved by a majority of the members of the Board of
Directors of Select and by a majority of members of such Board
having no direct or indirect financial or other interest in such
Affiliate Transaction (and each such majority determines that such
Affiliate Transaction satisfies the criteria in clause (1) above;
and

(3) in the event such Affiliate Transaction involves an aggregate amount
in excess of $15.0 million, Select has received a written opinion
from an independent investment banking firm of nationally recognized
standing that such Affiliate Transaction is not less favorable than
those that might reasonably have been obtained in a comparable
transaction at such time on an arms-length basis from a Person that
is not an Affiliate.

The preceding paragraph will not apply to:

(1) any Restricted Payment (other than a Restricted Investment)
permitted to be made pursuant to the "Limitation on Restricted
Payments" covenant;

(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans and
other fees, compensation, benefits and indemnities paid or entered
into by Select or its Restricted Subsidiaries in the ordinary course
of business to or with officers, directors or employees of Select
and its Restricted Subsidiaries;

(3) loans or advances to employees in the ordinary course of business of
Select or any of its Restricted Subsidiaries;

(4) the payment of reasonable and customary fees paid to, and indemnity
provided on behalf of, officers, directors or employees of Select or
any Restricted Subsidiary of Select;

(5) any transaction between Select and a Subsidiary Guarantor or between
Subsidiary Guarantors;

(6) any transaction with a Non-Guarantor Subsidiary or Permitted Joint
Venture in the ordinary course of business that complies with the
requirements of clause (1) of the first paragraph of this covenant;

(7) the performance of obligations of Select or any of its Restricted
Subsidiaries under the terms of any agreement to which Select or any
of its Restricted Subsidiaries is a party on the Issue Date and
identified on a schedule to the Indenture on the Issue Date, as
these agreements may be amended, modified or supplemented from time
to time in compliance with the first paragraph of this covenant; and

(8) the issuance or sale of any Capital Stock (other than Disqualified
Stock) of Select.

110

Limitation on Sale of Capital Stock of Restricted Subsidiaries.

Select will not, and will not permit any Restricted Subsidiary of Select
to, transfer, convey, sell, lease or otherwise dispose of, (including, but not
limited to, by means of a merger, consolidation, or similar transaction) any
Voting Stock of any Restricted Subsidiary or to issue any of the Voting Stock
of a Restricted Subsidiary (other than, if required by applicable law, shares
of its Voting Stock constituting directors' qualifying shares) to, or merge or
consolidate or engage in any similar transaction with, any Person except:

(1) to or into Select or a Wholly-Owned Subsidiary; or

(2) for the sale of all of the Voting Stock of a Restricted Subsidiary
to a Person other than Select or a Subsidiary of Select in
compliance with the "Limitation on Sales of Assets and Subsidiary
Stock" covenant.

SEC Reports.

Notwithstanding that Select may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, to the extent
permitted by the Exchange Act or the Commission, Select will file with the
Commission, and provide the Trustee and the Holders of the Notes with, the
annual reports and the information, documents and other reports (or copies of
such portions of any of the foregoing as the Commission may by rules and
regulations prescribe) that are specified in Sections 13 and 15(d) of the
Exchange Act (or the rules of the Commission promulgated thereunder) within the
time periods specified therein. In the event that Select is not permitted to
file such reports, documents and information with the Commission pursuant to
the Exchange Act, Select will nevertheless provide such Exchange Act
information to the Trustee and the Holders of the Notes as if Select were
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act within the time periods specified therein.

If Select has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph shall include a reasonably detailed presentation,
either on the face of the financial statements or in the footnotes to the
financial, statements, and in Management's Discussion and Analysis of Results
of Operations and Financial Condition, of the financial condition and results
of operations of Select and its Restricted Subsidiaries.

Merger and Consolidation.

Select will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to any Person, unless:

(1) the resulting, surviving or transferee Person (the "Successor
Company") will be a corporation organized and existing under the
laws of the United States of America, any State of the United States
of America or the District of Columbia and the Successor Company (if
not Select) expressly assumes, by supplemental indenture, executed
and delivered to the Trustee, in form satisfactory to the Trustee,
all the obligations of Select under the Notes, the Indenture and the
Registration Rights Agreement;

(2) immediately after giving effect to such transaction, and treating
any Indebtedness that becomes an obligation of the Successor Company
or any Subsidiary of the Successor Company as a result of such
transaction as having been Incurred by the Successor Company or such
Subsidiary at the time of such transaction, no Default or Event of
Default shall have occurred and be continuing;

(3) immediately after giving effect to such transaction, the Successor
Company would be able to Incur at least an additional $1.00 of
Indebtedness pursuant to the first paragraph of the "Limitation on
Indebtedness" covenant;

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(4) each Subsidiary Guarantor (unless it is the other party to the
transactions above, in which case clause (1) shall apply) shall have
by supplemental indenture confirmed that its Subsidiary Guarantee
shall apply to the Successor Company obligations in respect of the
Indenture and the Notes and its obligations under the Registration
Rights Agreement shall continue to be in effect; and

(5) Select shall have delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and each such supplemental indenture comply with
the Indenture.

For purposes of this covenant, the sale, lease, conveyance, assignment,
transfer or other disposition of all or substantially all of the properties and
assets of one or more Subsidiaries of Select, which properties and assets, if
held by Select instead of such Subsidiaries, would constitute all or
substantially all of the properties and assets of Select on a consolidated
basis, shall be deemed to be the transfer of all or substantially all of the
properties and assets of Select.

The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, Select under the Indenture, but, in the case
of a lease of all or substantially all its assets, Select will not be released
from the obligation to pay the principal of and interest on the Notes.

Although there is a limited body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, in certain circumstances there may be a
degree of uncertainty as to whether a particular transaction would involve "all
or substantially all" of the property or assets of a Person.

Notwithstanding the preceding clause (3), (x) any Restricted Subsidiary
of Select may consolidate with, merge into or transfer all or part of its
properties and assets to Select and (y) Select may merge with an Affiliate
incorporated solely for the purpose of reincorporating Select in another
jurisdiction to realize tax or other benefits.

Future Subsidiary Guarantors.

On the Issue Date, all Domestic Subsidiaries will be Subsidiary
Guarantors, other than Existing Joint Venture Subsidiaries. After the Issue
Date, Select will cause each Restricted Subsidiary that is not then a
Subsidiary Guarantor, other than any Foreign Subsidiary, any New Joint Venture
Subsidiary or any Existing Joint Venture Subsidiary, to execute and deliver to
the Trustee a supplemental indenture providing a Subsidiary Guarantee pursuant
to which such Subsidiary Guarantor will unconditionally Guarantee, on a joint
and several basis, the full and prompt payment of the principal of, premium, if
any, and interest on the Notes on a senior subordinated basis.

The obligations of each Subsidiary Guarantor under its Subsidiary
Guarantee will be limited as necessary to prevent that Subsidiary Guarantee
from constituting a fraudulent conveyance or fraudulent transfer under
applicable law.

Select will cause any Domestic Subsidiary that becomes "100% owned" (as
defined in Section 3-10(h)(1) of Regulation S-X (Title 17, Code of Federal
Regulations, Part 210)) by Select after the Issue Date to become a Subsidiary
Guarantor pursuant to this covenant.

Notwithstanding the exception to the first paragraph of this covenant,
neither Select nor any Restricted Subsidiary shall create or acquire any Non-
Guarantor Subsidiary or designate any Restricted Subsidiary to be an
Unrestricted Subsidiary unless after giving effect to such creation,
acquisition or designation, all Non-Guarantor Subsidiaries and Unrestricted
Subsidiaries taken as a whole on a combined basis (including such Non-Guarantor
Subsidiary or Unrestricted Subsidiary) shall not account for more than 25% of
EBITDA,

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and shall not have total assets in an amount exceeding 17% of the total assets
of Select and its Subsidiaries on a combined basis (including any
unconsolidated Subsidiaries, and adjusted to eliminate any intercompany
balances) as at the end of and for, the most recently ended four consecutive
fiscal quarters of Select for which consolidated financial statements of Select
have been delivered to the Trustee, in accordance with the "SEC Reports"
covenant, giving effect to such creation, acquisition or designation on a pro
forma basis as if such transaction had occurred at the beginning of such four-
quarter period.

Limitation on Lines of Business.

Select will not, and will not permit any Restricted Subsidiary to, engage
in any business other than a Related Business.

Payments for Consent.

Neither Select nor any of its Restricted Subsidiaries will, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fees or otherwise, to any Holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to be paid or is
paid to all Holders of the Notes that consent, waive or agree to amend in the
time frame set forth in the solicitation documents relating to such consent,
waiver or amendment.

Events of Default

Each of the following is an Event of Default:

(1) default in any payment of interest or additional interest (as
required by the Registration Rights Agreement) on any Note when due,
continued for 30 days, whether or not such payment is prohibited by
the provisions described under "Ranking and Subordination";

(2) default in the payment of principal of or premium, if any, on any
Note when due at its Stated Maturity, upon optional redemption, upon
required repurchase, upon declaration of acceleration or otherwise,
whether or not such payment is prohibited by the provisions
described under "Ranking and Subordination";

(3) failure by Select or any Subsidiary Guarantor to comply with its
obligations under the covenants described under "Change of Control"
or "Certain Covenants--Merger and Consolidation";

(4) failure by Select to comply for 30 days after notice with any of its
obligations under the covenants described under "Certain Covenants"
above (in each case, other than a failure so to comply covered by
clause (2) or (3) above);

(5) failure by Select to comply for 60 days after notice with its other
agreements contained in the Indenture;

(6) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced
any Indebtedness of Select or any of its Restricted Subsidiaries (or
the payment of which is Guaranteed by Select or any of its
Restricted Subsidiaries), other than Indebtedness owed to Select or
a Restricted Subsidiary, whether such Indebtedness or Guarantee now
exists or is created after the date of the Indenture, which default:

(a) is caused by a failure to pay principal of, or interest or
premium, if any, on such Indebtedness before the expiration of
the grace period provided in such Indebtedness ("payment
default"); or

(b) results in the acceleration of such Indebtedness prior to its
maturity (the "cross acceleration provision");

and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness
under which there has been a payment default or the maturity of which
has been so accelerated, aggregates $5.0 million or more;

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(7) certain events of bankruptcy, insolvency or reorganization of Select
or any Restricted Subsidiary (the "bankruptcy provisions");

(8) failure by Select or any Restricted Subsidiary to pay final
judgments aggregating in excess of $5.0 million (net of any amounts
that a reputable and creditworthy insurance company has acknowledged
liability for in writing), which judgments are not paid, discharged
or stayed for a period of 60 days (the "judgment default
provision"); or

(9) any Subsidiary Guarantee of any Subsidiary Guarantor ceases to be in
full force and effect (except as contemplated by the terms of the
Indenture) or is declared null and void in a judicial proceeding or
any Subsidiary Guarantor denies or disaffirms its obligations under
the Indenture or its Subsidiary Guarantee.

However, a default under clauses (4) and (5) of this paragraph will not
constitute an Event of Default until the Trustee or the Holders of at least 25%
in principal amount of the outstanding Notes notify Select of the default and
Select does not cure such default within the time specified in clauses (4) and
(5) of this paragraph after receipt of such notice.

If an Event of Default (other than an Event of Default described in
clause (7) above) occurs and is continuing, the Trustee by notice to Select, or
the Holders of at least 25% in principal amount of the outstanding Notes by
notice to Select and the Trustee, may, and the Trustee at the request of such
Holders shall, declare the principal of, premium, if any, and accrued and
unpaid interest, if any, on all the Notes to be due and payable. Upon such a
declaration, such principal, premium and accrued and unpaid interest will be
due and payable immediately. If an Event of Default described in clause (7)
above occurs and is continuing, the principal of, premium, if any, and accrued
and unpaid interest on all the Notes will become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holders. The Holders of a majority in principal amount of the outstanding Notes
may waive all past defaults (except with respect to nonpayment of principal,
premium or interest) and rescind any such acceleration with respect to the
Notes and its consequences if (1) rescission would not conflict with any
judgment or decree of a court of competent jurisdiction and (2) all existing
Events of Default, other than the nonpayment of the principal of, premium, if
any, and interest on the Notes that have become due solely by such declaration
of acceleration, have been cured or waived.

Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the Holders unless such Holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium, if any, or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless:

(1) such Holder has previously given the Trustee notice that an Event of
Default is continuing;

(2) Holders of at least 25% in principal amount of the outstanding Notes
have requested the Trustee to pursue the remedy;

(3) such Holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense;

(4) the Trustee has not complied with such request within 60 days after
the receipt of the request and the offer of security or indemnity;
and

(5) the Holders of a majority in principal amount of the outstanding
Notes have not given the Trustee a direction that, in the opinion of
the Trustee, is inconsistent with such request within such 60-day
period.

Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available

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to the Trustee or of exercising any trust or power conferred on the Trustee.
The Trustee, however, may refuse to follow any direction that conflicts with
law or the Indenture or that the Trustee determines is unduly prejudicial to
the rights of any other Holder or that would involve the Trustee in personal
liability. Prior to taking any action under the Indenture, the Trustee will be
entitled to indemnification satisfactory to it in its sole discretion against
all losses and expenses caused by taking or not taking such action.

The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the
Default within 90 days after it occurs. Except in the case of a Default in the
payment of principal of, premium, if any, or interest on any Note, the Trustee
may withhold notice if and so long as a committee of trust officers of the
Trustee in good faith determines that withholding notice is in the interests of
the Holders. In addition, Select is required to deliver to the Trustee, within
120 days after the end of each fiscal year, a certificate indicating whether
the signers thereof know of any Default that occurred during the previous year.
Select also is required to deliver to the Trustee, within 30 days after the
occurrence of a Default, written notice of any events that would constitute
certain Defaults, their status and what action Select is taking or proposes to
take in respect thereof.

Amendments and Waivers

Subject to specified exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding (including without limitation, consents obtained in connection with
a purchase of, or tender offer or exchange offer for, Notes) and, subject to
specified exceptions, any past default or compliance with any provisions may be
waived with the consent of the Holders of a majority in principal amount of the
Notes then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes).
However, without the consent of each Holder of an outstanding Note affected, no
amendment may, among other things:

(1) reduce the amount of Notes whose Holders must consent to an
amendment;

(2) reduce the stated rate of or extend the stated time for payment of
interest on any Note;

(3) reduce the principal of or extend the Stated Maturity of any Note;

(4) reduce the premium payable upon the redemption or repurchase of any
Note or change the time at which any Note may be or may be required
to be redeemed or repurchased as described above under "Optional
Redemption," or any similar provision, whether through an amendment
or waiver of provisions in the covenants or any related definition
or otherwise;

(5) make any Note payable in money other than that stated in the Note;

(6) impair the right of any Holder to receive payment of, premium, if
any, principal of and interest on such Holder's Notes on or after
the due dates therefor or to institute suit for the enforcement of
any payment on or with respect to such Holder's Notes; or

(7) make any change in the amendment provisions which require each
Holder's consent or in the waiver provisions.

Without the consent of any Holder, Select, the Subsidiary Guarantors and
the Trustee may amend the Indenture to:

(1) cure any ambiguity, omission, defect or inconsistency;

(2) provide for the assumption by a successor corporation of the
obligations of Select under the Indenture;

(3) provide for uncertificated Notes in addition to or in place of
certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the
Code, or in a manner such that the uncertificated Notes are
described in Section 163(f) (2) (B) of the Code);

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(4) add Guarantees with respect to the Notes;

(5) secure the Notes;

(6) add to the covenants of Select for the benefit of the Holders or
surrender any right or power conferred upon Select;

(7) make any change that does not adversely affect the rights of any
Holder; or

(8) comply with any requirement of the Commission in connection with the
qualification of the Indenture under the Trust Indenture Act.

However, no amendment may be made to the subordination provisions of the
Indenture that adversely affects the rights of any holder of Senior
Indebtedness then outstanding unless the holders of such Senior Indebtedness
(or any group or representative thereof authorized to give a consent) consent
to such change.

The consent of the Holders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment. After an amendment
under the Indenture becomes effective, Select is required to mail to the
Holders a notice briefly describing such amendment. However, the failure to
give such notice to all the Holders, or any defect in the notice, will not
impair or affect the validity of the amendment.

Defeasance

Select may, at its option and at any time, elect to have all of its
obligations and the obligations of the Subsidiary Guarantors discharged under
the Notes and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Notes, to replace mutilated,
destroyed, lost or stolen Notes, to maintain a registrar and paying agent in
respect of the Notes and the rights of the Holders of the outstanding Notes to
receive payment in respect of the principal of, premium, if any, and interest
on such Notes when such payments are due from the trust. If Select exercises
its legal defeasance option, the Subsidiary Guarantees in effect at such time
will terminate.

Select at any time may terminate its obligations under covenants
described under "Certain Covenants" (other than "Merger and Consolidation"),
the operation of the cross-default upon a payment default, the cross
acceleration provisions, the bankruptcy provisions, the judgment default
provision and the Subsidiary Guarantee provision described under "Events of
Default" above and the limitations contained in clause (3) under "Certain
Covenants--Merger and Consolidation" above ("covenant defeasance").

Select may exercise its legal defeasance option notwithstanding its prior
exercise of its covenant defeasance option. If Select exercises its legal
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default with respect to the Notes. If Select exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (4), (5), (6), (7) (with respect only to
Restricted Subsidiaries), (8) or (9) under "Events of Default" above or because
of the failure of Select to comply with clause (3) under "Certain Covenants--
Merger and Consolidation" above.

In order to exercise either defeasance option, Select must irrevocably
deposit in trust (the "defeasance trust") with the Trustee, for the benefit of
Holders of the Notes, cash or U.S. Government Obligations, or a combination
thereof, in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, for the payment of
principal, premium, if any, and interest on the Notes to redemption or
maturity, as the case may be, and must comply with certain other conditions,
including delivery to the Trustee of an Opinion of Counsel (subject to
customary exceptions and exclusions) to the effect that Holders of the Notes
will not recognize income, gain or loss for Federal income tax purposes as a
result of such deposit and defeasance and will be subject to Federal income tax
on the same amount and in the same manner and at the same times as would have
been the case if such deposit and defeasance had not occurred.

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In the case of legal defeasance only, such Opinion of Counsel must be based on
a ruling of the Internal Revenue Service or other change in applicable Federal
income tax law.

No Personal Liability of Directors, Officers, Employees and Stockholders

No director, officer, employee, incorporator or stockholder of Select or
any Subsidiary Guarantor, as such, shall have any liability for any
obligations of Select or any Subsidiary Guarantor under the Notes, the
Indenture or the Subsidiary Guarantees or for any claim based on, in respect
of, or by reason of, such obligations or their creation. Each Holder by
accepting a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Notes. Such waiver
may not be effective to waive liabilities under the federal securities laws
and it is the view of the Commission that such a waiver is against public
policy.

Concerning the Trustee

State Street Bank and Trust Company is the Trustee under the Indenture
and has been appointed by Select as Registrar and Paying Agent with regard to
the Notes.

Governing Law

The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York.

Certain Definitions

"Additional Assets" means:

(1) any property or assets (other than Indebtedness and Capital Stock)
to be used by Select or a Restricted Subsidiary in a Related
Business;

(2) the Capital Stock of a Person that becomes a Restricted Subsidiary
as a result of the acquisition of such Capital Stock by Select or a
Restricted Subsidiary of Select; or

(3) Capital Stock constituting a minority interest in any Person that at
such time is a Restricted Subsidiary of Select;

provided, however, that, in the case of clauses (2) and (3), such Restricted
Subsidiary is not engaged in any business other than a Related Business.

"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing; provided that beneficial ownership of 10% or more of the Voting
Stock of a Person shall be deemed to be control.

"Asset Disposition" means any direct or indirect sale, lease, transfer,
issuance or other disposition, or a series of related sales, leases,
transfers, issuances or dispositions, of shares of Capital Stock of a
Subsidiary (other than directors' qualifying shares to the extent required by
applicable law), property or other assets (each referred to for the purposes
of this definition as a "disposition") by Select or any of its Restricted
Subsidiaries, including any disposition by means of a merger, consolidation or
similar transaction.

Notwithstanding the preceding, the following items shall not be deemed
to be Asset Dispositions:

(1) a disposition by a Restricted Subsidiary to Select or by Select or a
Restricted Subsidiary to a Wholly-Owned Subsidiary;

117

(2) the sale of cash or Cash Equivalents in the ordinary course of
business;

(3) a disposition of inventory in the ordinary course of business;

(4) a disposition of obsolete or worn out equipment or equipment that is
no longer useful in the conduct of the business of Select and its
Restricted Subsidiaries and that in each case is disposed of in the
ordinary course of business;

(5) transactions governed by and permitted under "Certain Covenants--
Merger and Consolidation";

(6) an issuance of Capital Stock by a Restricted Subsidiary of Select to
Select or to a Wholly-Owned Subsidiary;

(7) for purposes of the covenant described under "Certain Covenants--
Limitation on Sales of Assets and Subsidiary Stock" only, the making
of a disposition governed by and subject to the covenant described
under "Certain Covenants--Limitation on Restricted Payments";

(8) any disposition or series of related dispositions of assets with an
aggregate fair market value, and for net proceeds, of less than $1.0
million; and

(9) the licensing or sublicensing of intellectual property or other
general intangibles and any license, lease or sublease of other
property, in each case that is in the ordinary course of business
and does not materially interfere with the business of Select and
its Restricted Subsidiaries.

"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Notes, compounded semi-annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).

"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (1) the
sum of the products of the numbers of years from the date of determination to
the dates of each successive scheduled principal payment of such Indebtedness
or redemption or similar payment with respect to such Preferred Stock
multiplied by the amount of such payment by (2) the sum of all such payments.

"Bank Indebtedness" means any and all amounts, whether outstanding on the
Issue Date or Incurred after the Issue Date, payable under or in respect of the
Senior Credit Agreement and any related notes, collateral documents, letters of
credit and guarantees and any Interest Rate Agreement entered into in
connection with the Senior Credit Agreement, including principal, any premium,
interest (including interest accruing after or that would accrue but for the
filing of any petition in bankruptcy or for reorganization relating to Select
or any Subsidiary thereof at the rate specified therein whether or not a claim
for post filing interest is allowed in such proceedings), fees, charges,
expenses, reimbursement obligations, guarantees and all other amounts payable
thereunder or in respect thereof.

"Board of Directors" means, as to any Person, the board of directors of
such Person.

"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participation or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities exchangeable for or
convertible into such equity.

"Capitalized Lease Obligations" means an obligation that is required to
be classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation will be the capitalized amount of such obligation at the time
any determination thereof is to be made as determined in accordance with GAAP,
and the Stated Maturity thereof will be the date of the last payment of rent or
any other amount due under such lease prior to the first date such lease may be
terminated without penalty.

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"Cash Equivalents" means:

(1) securities issued or directly and fully guaranteed or insured by the
United States Government or any agency or instrumentality thereof
(provided that the full faith and credit of the United States is
pledged in support thereof), having maturities of not more than one
year from the date of acquisition;

(2) marketable general obligations issued by any state of the United
States of America or any political subdivision of any such state or
any public instrumentality thereof maturing within one year from the
date of acquisition thereof (provided that the full faith and credit
of the United States is pledged in support thereof) and, at the time
of acquisition thereof, having one of the two highest credit ratings
obtainable from both Standard & Poor's Ratings Services and Moody's
Investors Service, Inc.;

(3) certificates of deposit, time deposits, eurodollar time deposits,
overnight bank deposits or bankers' acceptances having maturities of
not more than one year from the date of acquisition thereof issued
by any commercial bank organized in the United States of America,
the long-term debt of which is rated at the time of acquisition
thereof in one of the two highest categories obtainable from both
Standard & Poor's Ratings Services and Moody's Investors Service,
Inc., and having combined capital and surplus in excess of $500.0
million;

(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (1), (2) and
(3) entered into with any bank meeting the qualifications specified
in clause (3) above;

(5) commercial paper rated at the time of acquisition thereof in one of
the two highest categories obtainable from both Standard & Poor's
Ratings Services and Moody's Investors Service, Inc., or carrying an
equivalent rating by a nationally recognized rating agency, if both
of the two named rating agencies cease publishing ratings of
investments, and in any case maturing within one year after the date
of acquisition thereof; and

(6) interests in any investment company or money market fund which
invests solely in instruments of the type specified in clauses (1)
through (5) above.

"Change of Control" means:

(1) any "person" or "group" of related persons (as such terms are used
in Sections 13(d) and 14(d) of the Exchange Act), other than
Permitted Holders, is or becomes the beneficial owner (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that such
person or group shall be deemed to have "beneficial ownership" of
all shares that any such person or group has the right to acquire,
whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 35% of the
total voting power of the Voting Stock of Select (or its successor
by merger, consolidation or purchase of all or substantially all of
its assets) (for the purposes of this clause, such person or group
shall be deemed to beneficially own any Voting Stock of Select held
by an entity, if such person or group "beneficially owns" (as
defined above), directly or indirectly, more than 35% of the voting
power of the Voting Stock of such entity; or

(2) the first day on which a majority of the members of the Board of
Directors of Select are not Continuing Directors; or

(3) the sale, lease, transfer, conveyance or other disposition (other
than by way of merger or consolidation), in one or a series of
related transactions, of all or substantially all of the assets of
Select and its Restricted Subsidiaries taken as a whole to any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act); or

(4) the adoption by the stockholders of Select of a plan or proposal for
the liquidation or dissolution of Select.

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"Code" means the Internal Revenue Code of 1986, as amended.

"Consolidated Coverage Ratio" means as of any date of determination, with
respect to any Person, the ratio of (x) the aggregate amount of Consolidated
EBITDA of such Person for the period of the most recent four consecutive fiscal
quarters ending prior to the date of such determination for which consolidated
financial statements of Select have been delivered to the Trustee in accordance
with the covenant described under "Certain Covenants--SEC Reports" to (y)
Consolidated Interest Expense for such four fiscal quarters, provided, however,
that:

(1) if Select or any Restricted Subsidiary:

(a) has Incurred any Indebtedness since the beginning of such period
that remains outstanding on such date of determination or if the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, Consolidated
EBITDA and Consolidated Interest Expense for such period will be
calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been Incurred on the
first day of such period (except that in making such computation,
the amount of Indebtedness under any revolving credit facility
outstanding on the date of such calculation will be computed
based on (i) the average daily balance of such Indebtedness
during such four fiscal quarters or such shorter period for which
such facility was outstanding or (ii) if such facility was
created after the end of such four fiscal quarters, the average
daily balance of such Indebtedness during the period from the
date of creation of such facility to the date of such
calculation) and the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds
of such new Indebtedness as if such discharge had occurred on the
first day of such period; or

(b) has repaid, repurchased, defeased or otherwise discharged any
Indebtedness since the beginning of the period that is no longer
outstanding on such date of determination or if the transaction
giving rise to the need to calculate the Consolidated Coverage
Ratio involves a discharge of Indebtedness (in each case other
than Indebtedness incurred under any revolving credit facility
unless such Indebtedness has been permanently repaid and the
related commitment terminated), Consolidated EBITDA and
Consolidated Interest Expense for such period will be calculated
after giving effect on a pro forma basis to such discharge of
such Indebtedness, including with the proceeds of such new
Indebtedness, as if such discharge had occurred on the first day
of such period;

(2) if since the beginning of such period Select or any Restricted
Subsidiary will have made any Asset Disposition or if the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Asset Disposition:

(a) the Consolidated EBITDA for such period will be reduced by an
amount equal to the Consolidated EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset
Disposition for such period or increased by an amount equal to
the Consolidated EBITDA (if negative) directly attributable
thereto for such period; and

(b) Consolidated Interest Expense for such period will be reduced by
an amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of Select or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged
with respect to Select and its continuing Restricted Subsidiaries
in connection with such Asset Disposition for such period (or, if
the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary so
long as Select and its continuing Restricted Subsidiaries have
been completely and unconditionally released from all liability
with respect to such Indebtedness after such sale);

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(3) if since the beginning of such period Select or any Restricted
Subsidiary (by merger or otherwise) will have made an Investment in
any Restricted Subsidiary (or any Person that becomes a Restricted
Subsidiary or is merged with or into Select) or an acquisition of
assets, including any acquisition of assets occurring in connection
with a transaction causing a calculation to be made hereunder, that
constitutes all or substantially all of an operating unit, division
or line of business, Consolidated EBITDA and Consolidated Interest
Expense for such period will be calculated after giving pro forma
effect thereto (including the Incurrence of any Indebtedness) as if
such Investment or acquisition occurred on the first day of such
period; and

(4) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into Select or
any Restricted Subsidiary since the beginning of such period) will
have made any Asset Disposition or any Investment or acquisition of
assets that would have required an adjustment pursuant to clause (2)
or (3) above if made by Select or a Restricted Subsidiary during
such period, Consolidated EBITDA and Consolidated Interest Expense
for such period will be calculated after giving pro forma effect
thereto as if such Asset Disposition or Investment or acquisition of
assets occurred on the first day of such period.

If any Indebtedness bears a floating rate of interest and is being given
pro forma effect, the interest expense on such Indebtedness will be calculated
as if the rate in effect on the date of determination had been the applicable
rate for the entire period (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term in excess of 12 months).

"Consolidated EBITDA" for any period means, without duplication, the
Consolidated Net Income for such period, plus the following to the extent
deducted in calculating such Consolidated Net Income:

(1) Consolidated Interest Expense;

(2) Consolidated Income Taxes;

(3) consolidated depreciation expense;

(4) consolidated amortization of intangibles;

(5) minority interest in consolidated subsidiary companies (minus the
amount of any mandatory cash distribution with respect to any
minority interest other than in connection with a proportionate
discretionary cash distribution with respect to the interest held by
Select or any Restricted Subsidiary); and

(6) other non-cash charges reducing Consolidated Net Income (excluding
any such non-cash charge to the extent it represents an accrual of
or reserve for cash charges in any future period or amortization of
a prepaid cash expense that was paid in a prior period not included
in the calculation).

Notwithstanding the preceding sentence, clauses (2) through (6) relating to
amounts of a Restricted Subsidiary of a Person will be added to Consolidated
Net Income to compute Consolidated EBITDA of such Person only to the extent
(and in the same proportion) that the net income (loss) of such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person and, to the extent the amounts set forth in clauses (2) through (6) are
in excess of those necessary to offset a net loss of such Restricted Subsidiary
or if such Restricted Subsidiary has net income for such period included in
Consolidated Net Income, only if a corresponding amount would be permitted at
the date of determination to be dividended to Select by such Restricted
Subsidiary without prior approval (that has not been obtained), pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.

"Consolidated Income Taxes" means, with respect to any Person for any
period, taxes imposed upon such Person or other payments required to be made by
such Person by any governmental authority, which taxes

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or other payments are calculated by reference to the income or profits of such
Person or such Person and its Restricted Subsidiaries (to the extent such
income or profits were included in computing Consolidated Net Income for such
period), regardless of whether such taxes or payments are required to be
remitted to any governmental authority.

"Consolidated Interest Expense" means, for any period, the total interest
expense of Select and its consolidated Restricted Subsidiaries, whether paid or
accrued, plus, to the extent not included in such interest expense:

(1) interest expense attributable to Capitalized Lease Obligations and
the interest portion of rent expense associated with Attributable
Indebtedness in respect of the relevant lease giving rise thereto,
determined as if such lease were a capitalized lease in accordance
with GAAP and the interest component of any deferred payment
obligations;

(2) amortization of debt discount;

(3) non-cash interest expense;

(4) commissions, discounts and other fees and charges owed with respect
to letters of credit and bankers' acceptance financing;

(5) the interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or
secured by a Lien on assets of such Person or one of its Restricted
Subsidiaries;

(6) net costs associated with Hedging Obligations (including
amortization of fees);

(7) the consolidated interest expense of such Person and its Restricted
Subsidiaries that was capitalized during such period;

(8) the product of (a) all dividends paid or payable in cash, Cash
Equivalents or Indebtedness or accrued during such period on any
series of Disqualified Stock of such Person or on Preferred Stock of
its Restricted Subsidiaries, payable to a Person other than Select
or a Wholly-Owned Subsidiary (excluding, in the case of Select,
dividends paid prior to the Issue Date on its Class A or Class B
preferred stock outstanding on April 4, 2001), times (b) a fraction,
the numerator of which is one and the denominator of which is one
minus the then current combined federal, state, provincial and local
statutory tax rate of such Person, expressed as a decimal, in each
case, on a consolidated basis and in accordance with GAAP; and

(9) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan
or trust to pay interest or fees to any Person (other than Select)
in connection with Indebtedness Incurred by such plan or trust;
provided, however, that there will be excluded therefrom any such
interest expense of any Unrestricted Subsidiary to the extent the
related Indebtedness is not Guaranteed or paid by Select or any
Restricted Subsidiary.

For purposes of the foregoing, total interest expense will be determined
after giving effect to any net payments made or received by Select and
its Subsidiaries with respect to Interest Rate Agreements.

"Consolidated Net Income" means, for any period, the net income (loss) of
Select and its consolidated Restricted Subsidiaries determined in accordance
with GAAP; provided, however, that there will not be included in such
Consolidated Net Income:

(1) any net income (loss) of any Person if such Person is not a
Restricted Subsidiary, except that:

(a) subject to the limitations contained in clauses (4), (5) and (6)
below, Select's equity in the net income of any such Person for
such period will be included in such Consolidated Net Income up
to the aggregate amount of cash that could have been distributed
by such Person

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during such period to Select or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend
or other distribution to a Restricted Subsidiary, to the
limitations contained in clause (3) below); and

(b) Select's equity in a net loss of any such Person (other than an
Unrestricted Subsidiary) for such period will be included in
determining such Consolidated Net Income;

(2) any net income (loss) of any Person acquired by Select or a
Subsidiary in a pooling of interests transaction for any period
prior to the date of such acquisition;

(3) any net income (but not loss) of any Restricted Subsidiary if such
Subsidiary is subject to restrictions, directly or indirectly, on
the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to Select, except
that:

(a) subject to the limitations contained in clauses (4), (5) and (6)
below, Select's equity in the net income of any such Restricted
Subsidiary for such period will be included in such Consolidated
Net Income up to the aggregate amount of cash that could have
been distributed by such Restricted Subsidiary during such period
to Select or another Restricted Subsidiary as a dividend
(subject, in the case of a dividend to another Restricted
Subsidiary, to the limitation contained in this clause); and

(b) Select's equity in a net loss of any such Restricted Subsidiary
for such period will be included in determining such Consolidated
Net Income;

(4) any gain (loss) realized upon the sale or other disposition of any
property, plant or equipment of Select or its consolidated
Restricted Subsidiaries (including pursuant to any Sale/Leaseback
Transaction) that is not sold or otherwise disposed of in the
ordinary course of business and any gain (loss) realized upon the
sale or other disposition of any Capital Stock of any Person;

(5) any extraordinary gain or loss; and

(6) the cumulative effect of a change in accounting principles.

"Continuing Directors" means, as of any date of determination, any
member of the Board of Directors of Select who:

(1) was a member of such Board of Directors on the date of the
Indenture; or

(2) was nominated for election or elected to such Board of Directors
with the approval of a majority of the Continuing Directors who were
members of such Board at the time of such nomination or election.

"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.

"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.

"Designated Senior Indebtedness" means the Bank Indebtedness.

"Disqualified Stock" means, with respect to any Person, any Capital
Stock of such Person that by its terms (or by the terms of any security into
which it is convertible or for which it is exchangeable) or upon the happening
of any event:

(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;

(2) is convertible or exchangeable for Indebtedness or Disqualified
Stock (excluding Capital Stock that is convertible or exchangeable
solely at the option of Select or a Restricted Subsidiary); or

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(3) is redeemable at the option of the holder of the Capital Stock, in
whole or in part,

in each case on or prior to the date that is 91 days after the date (a)
on which the Notes mature or (b) on which there are no Notes
outstanding.

"Domestic Subsidiary" means any Restricted Subsidiary that is organized
under the laws of, or conducts a majority of its business or operations in, the
United States of America or any state thereof or the District of Columbia.

"EBITDA" for any period means, without duplication, the net income (loss)
of Select and its Subsidiaries on a combined basis, plus the following to the
extent deducted in calculating such net income (loss), in each case determined
in accordance with GAAP: (1) total interest expense, whether paid or accrued,
(2) taxes imposed upon income or profits included in such net income (loss),
(3) depreciation expense, (4) amortization of intangibles and (5) other non-
cash charges reducing such net income (excluding any such non-cash charge to
the extent it represents an accrual of or reserve for cash charges in any
future period or amortization of a prepaid cash expense that was paid in a
prior period not included in the calculation).

"Equity Offering" means an underwritten primary public offering for cash
by Select of its common stock, or options, warrants or rights with respect to
its common stock, pursuant to an effective registration statement under the
Securities Act (whether alone or in connection with any secondary public
offering).

"Existing Joint Venture Subsidiary" means any Domestic Subsidiary in
existence on the Issue Date that is not engaged in any business other than a
Related Business and is not "100% owned" (as defined in Section 3-10(h)(1) of
Regulation S-X (Title 17, Code of Federal Regulations, Part 210)) by Select,
and is listed in a schedule to the Indenture.

"Foreign Subsidiary" means any Restricted Subsidiary that is not a
Domestic Subsidiary.

"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the date of the Indenture, including those
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture will be computed in conformity with GAAP.

"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing or in effect guaranteeing any Indebtedness
of any other Person and any obligation, direct or indirect, contingent or
otherwise, of such Person:

(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other Person (whether arising
by virtue of partnership arrangements, or by agreement to keep-well,
to purchase assets, goods, securities or services, to take-or-pay,
or to maintain financial statement conditions or otherwise); or

(2) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect
such obligee against loss in respect thereof (in whole or in part);

provided, however, that the term "Guarantee" will not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.

"Guarantor Senior Indebtedness" means, with respect to a Subsidiary
Guarantor, the following whether outstanding on the Issue Date or thereafter
issued, created, Incurred or assumed, without duplication:

(1) the Bank Indebtedness Incurred by such Subsidiary Guarantor;

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(2) all Guarantees by such Subsidiary Guarantor of Senior Indebtedness
of Select or Guarantor Senior Indebtedness of any other Subsidiary
Guarantor; and

(3) all obligations consisting of principal of, premium on, if any,
accrued and unpaid interest on, and fees and other amounts relating
to, all other Indebtedness of the Subsidiary Guarantor.

Guarantor Senior Indebtedness includes interest accruing after, or that
would accrue but for, the filing of any petition in bankruptcy or for
reorganization relating to the Subsidiary Guarantor at the rate specified in
the documentation with respect thereto, whether or not post-filing interest is
allowed in such proceeding.

Notwithstanding anything to the contrary in the preceding paragraph,
Guarantor Senior Indebtedness will not include:

(1) any Indebtedness with respect to which, in the instrument creating
or evidencing the same or pursuant to which the same is outstanding,
it is provided that the obligations in respect of such Indebtedness
are not superior in right of, or are subordinate to, payment of the
Notes or any Subsidiary Guarantee;

(2) any obligations of such Subsidiary Guarantor to another Subsidiary
or to Select;

(3) any liability for Federal, state, local, foreign or other taxes owed
or owing by such Subsidiary Guarantor;

(4) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities);

(5) any Indebtedness, Guarantee or obligation of such Subsidiary
Guarantor that is subordinate or junior in right of payment to any
other Indebtedness, Guarantee or obligation of such Subsidiary
Guarantor, including, without limitation, any Guarantor Senior
Subordinated Indebtedness and Guarantor Subordinated Obligations of
such Guarantor;

(6) any obligations in respect of Capital Stock or Attributable
Indebtedness;

(7) any Indebtedness Incurred in violation of the Indenture; or

(8) any Indebtedness described in the last paragraph of the definition
of the term "Indebtedness.

"Guarantor Senior Subordinated Indebtedness" means, with respect to a
Subsidiary Guarantor, the obligations of such Subsidiary Guarantor under the
Subsidiary Guarantee and any other Indebtedness of such Subsidiary Guarantor
(whether outstanding on the Issue Date or thereafter Incurred) that
specifically provides that such Indebtedness is to rank equally in right of
payment with the obligations of such Subsidiary Guarantor under the Subsidiary
Guarantee and is not subordinated in right of payment to any Indebtedness of
such Subsidiary Guarantor that is not Guarantor Senior Indebtedness of such
Subsidiary Guarantor.

"Guarantor Subordinated Obligation" means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor (whether outstanding
on the Issue Date or thereafter Incurred) that is subordinate or junior in
right of payment to the obligations of such Subsidiary Guarantor under its
Subsidiary Guarantee.

"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.

"Incur" means issue, create, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Restricted Subsidiary
(whether by merger, consolidation, acquisition or otherwise) will be deemed to
be Incurred by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary; and the terms "Incurred" and "Incurrence" have meanings correlative
to the foregoing.

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"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):

(1) the principal of and premium, if any, in respect of indebtedness of
such Person for borrowed money;

(2) the principal of and premium, if any, in respect of obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments;

(3) all obligations of such Person in respect of letters of credit,
bankers' acceptances or other similar instruments (including
reimbursement obligations with respect thereto except to the extent
such reimbursement obligation relates to a trade payable and such
obligation is satisfied within 10 days of Incurrence);

(4) all obligations of such Person to pay the deferred and unpaid
purchase price of property (or services), which purchase price is due
more than six months after the date of placing such property in
service or taking delivery and title thereto or completion of such
services;

(5) Capitalized Lease Obligations and all Attributable Indebtedness of
such Person;

(6) all obligations of such Person with respect to the redemption,
repayment or other repurchase of any Disqualified Stock or, with
respect to any Subsidiary, any Preferred Stock (but excluding, in
each case, any accrued dividends);

(7) Indebtedness of other Persons secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of such Indebtedness will be the
lesser of (a) the fair market value of such asset at such date of
determination and (b) the amount of such Indebtedness of such other
Persons;

(8) Indebtedness of other Persons to the extent Guaranteed by such
Person; and

(9) to the extent not otherwise included in this definition, net
obligations of such Person under Currency Agreements and Interest
Rate Agreements (the amount of any such obligations to be equal at
any time to the termination value of such agreement or arrangement
giving rise to such obligation that would be payable by such Person
at such time).

The amount of Indebtedness of any Person at any date will be the outstanding
balance at such date of all unconditional obligations as described above and
the maximum liability, upon the occurrence of the contingency giving rise to
the obligation, of any contingent obligations at such date.

In addition, "Indebtedness" of any Person shall include Indebtedness of a
type described in the preceding paragraph that would not appear as a liability
on the balance sheet of such Person if:

(1) such Indebtedness is the obligation of a partnership or joint venture
that is not a Restricted Subsidiary (a "Joint Venture");

(2) such Person or a Restricted Subsidiary of such Person is a general
partner of the Joint Venture (a "General Partner"); and

(3) there is recourse, by contract or operation of law, with respect to
the payment of such Indebtedness to property or assets of such Person
or a Restricted Subsidiary of such Person;

and then such Indebtedness shall be included in an amount not to exceed:

(a) the lesser of (i) the net assets of the General Partner and (ii)
the amount of such obligations to the extent that there is
recourse, by contract or operation of law, to the property or
assets of such Person or a Restricted Subsidiary of such Person;
or

(b) if less than the amount determined pursuant to clause (a)
immediately above, the actual amount of such Indebtedness that is
recourse to such Person or a Restricted Subsidiary of

126

such Person, if the Indebtedness is evidenced by a writing and is
for a determinable amount and the related interest expense shall
be included in Consolidated Interest Expense.

"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate
option agreement, interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate hedge agreement or other similar
agreement or arrangement as to which such Person is party or a beneficiary.

"Investment" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) including (a) any direct or
indirect advance, loan (other than advances to customers in the ordinary
course of business) or other extension of credit (including by way of
Guarantee or similar arrangement, but excluding any bank deposit (other than a
time deposit) in the ordinary course of business, to the extent the same may
be deemed an extension of credit to the depository bank) or capital
contribution to (by means of any transfer of cash or other property to others
or any payment for property or services for the account or use of others), or
any purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by, any other Person, and (b) all other items that are or
would be classified as investments on a balance sheet prepared in accordance
with GAAP.

For purposes of "Certain Covenants--Limitation on Restricted Payments",

(1) "Investment" will include the portion (proportionate to Select's
equity interest in a Restricted Subsidiary to be designated as an
Unrestricted Subsidiary) of the fair market value of the net assets
(computed excluding any liability or obligation owing to Select or
any Restricted Subsidiary) of such Restricted Subsidiary of Select
at the time that such Restricted Subsidiary is designated an
Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, Select
will be deemed to continue to have a permanent "Investment" in an
Unrestricted Subsidiary in an amount (if positive) equal to (a)
Select's "Investment" in such Subsidiary at the time of such
redesignation less (b) the portion (proportionate to Select's equity
interest in such Subsidiary) of the fair market value of the net
assets (as determined by the Board of Directors of Select in good
faith, as evidenced by a resolution in writing delivered to the
Trustee) of such Subsidiary at the time that such Subsidiary is so
re-designated a Restricted Subsidiary;

(2) any property transferred to or from an Unrestricted Subsidiary will
be valued at its fair market value at the time of such transfer, in
each case as determined in good faith by the Board of Directors of
Select; and

(3) if Select or any Restricted Subsidiary of Select sells or otherwise
disposes of any Voting Stock of any Restricted Subsidiary of Select
such that, after giving effect to any such sale or disposition, such
entity is no longer a Subsidiary of Select, Select shall be deemed
to have made an Investment on the date of any such sale or
disposition equal to the fair market value (as determined by the
Board of Directors of Select in good faith, as evidenced by a
resolution in writing delivered to the Trustee) of the Capital Stock
of such Subsidiary not sold or disposed of (computed excluding any
liability or obligation owing to Select or any Restricted
Subsidiary).

"Issue Date" means June 11, 2000, the date on which the Notes were
originally issued.

"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).

"Net Available Cash" from an Asset Disposition means cash payments
received (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only
as and when received) therefrom, in each case net of:

127

(1) all legal, accounting, investment banking, title and recording tax
expenses, commissions and other fees and expenses reasonably
incurred, and all Federal, state, provincial, foreign and local
taxes required to be paid or accrued as a liability under GAAP
(after taking into account any available tax credits or deductions
and any tax sharing agreements), as a consequence of such Asset
Disposition;

(2) all payments made on any Indebtedness that is secured by any assets
subject to such Asset Disposition, in accordance with and as
required by the terms of any Lien upon such assets;

(3) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of
such Asset Disposition; and

(4) the deduction of reasonable and appropriate amounts to be provided
by the seller as a reserve, in accordance with GAAP, against any
liabilities associated with the assets disposed of in such Asset
Disposition and retained by Select or any Restricted Subsidiary
after such Asset Disposition (provided that upon any reduction or
reversal of any such reserve, the amount of such resolution or
reversal shall constitute Net Available Cash).

"Net Cash Proceeds", with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys'
fees, accountants' fees, underwriters' or placement agents' fees, listing
fees, discounts or commissions and brokerage, consultant and other fees and
charges reasonably incurred in connection with such issuance or sale and net
of taxes paid or payable as a result of such issuance or sale (after taking
into account any available tax credit or deductions and any tax sharing
arrangements).

"New Joint Venture Subsidiary" means any Person acquired by Select or
any Restricted Subsidiary after the Issue Date that (1) is a Domestic
Subsidiary, (2) is not engaged in any business other than a Related Business,
(3) is not "100% owned" (as defined in Section 3-10(h)(1) of Regulation S-X
(Title 17, Code of Federal Regulations, Part 210)) by Select and (4) has no
Capital Stock owned by any Person other than Select, a Subsidiary Guarantor, a
physician, a physician group, or one or more other medical professionals.

"Non-Guarantor Subsidiary" means any Restricted Subsidiary that is not a
Subsidiary Guarantor.

"Non-Recourse Debt" means Indebtedness:

(1) as to which neither Select nor any Restricted Subsidiary (a)
provides any Guarantee or credit support of any kind (including any
undertaking, guarantee, indemnity, agreement or instrument that
would constitute Indebtedness) or (b) is directly or indirectly
liable (as a guarantor or otherwise);

(2) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit (upon notice, lapse of time or
both) any holder of any other Indebtedness of Select or any
Restricted Subsidiary to declare a default under such other
Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity; and

(3) in the case of Indebtedness having a principal amount in excess of
$100,000 in the aggregate, the express terms of which provide there
is no recourse against any of Select or its Restricted Subsidiaries
or any of their respective property or assets.

"Officer" means the Chairman of the Board, the Chief Executive Officer,
the President, the Chief Operating Officer, any Executive Vice President or
Senior Vice President, the Treasurer, Controller and Chief Accounting Officer
or the Secretary of Select.

"Officers' Certificate" means a certificate signed by two Officers.

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"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to
Select or the Trustee.

"Permitted Holder" means any of Welsh, Carson, Anderson & Stowe VII,
L.P., Golder, Thoma, Cressey, Rauner, Inc. GTCR Golder Rauner, LLC, and their
respective investment fund Affiliates.

"Permitted Investment" means an Investment by Select or any Restricted
Subsidiary in:

(1) Select;

(2) a Restricted Subsidiary or a Person that will, upon the making of
such Investment, become a Restricted Subsidiary; provided, however,
that the primary business of such Person is a Related Business;

(3) another Person if as a result of such Investment such other Person
is merged or consolidated with or into, or transfers or conveys all
or substantially all its assets to, Select or a Subsidiary
Guarantor; provided, however, that such Person's primary business is
a Related Business;

(4) cash and Cash Equivalents;

(5) receivables owing to Select or any Restricted Subsidiary created or
acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms;

(6) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary
course of business;

(7) loans or advances to employees made in the ordinary course of
business consistent with past practices of Select or such Restricted
Subsidiary;

(8) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to Select or
any Restricted Subsidiary or in satisfaction of judgments or
pursuant to any plan of reorganization or similar arrangement upon
the bankruptcy or insolvency of a debtor;

(9) Investments arising from the receipt of non-cash consideration from
an Asset Disposition that was made pursuant to and in compliance
with the covenant described under "Certain Covenants--Limitation on
Sales of Assets and Subsidiary Stock";

(10) Investments in existence on the Issue Date;

(11) Currency Agreements, Interest Rate Agreements and related Hedging
Obligations, which transactions or obligations are Incurred in
compliance with the covenant described under "Certain Covenants--
Limitation on Indebtedness";

(12) Hedging Obligations entered into in the ordinary course of business
and in compliance with the Indenture;

(13) endorsements of negotiable instruments and documents in the
ordinary course of business; and

(14) assets, Capital Stock or other securities by Select or a Restricted
Subsidiary to the extent the consideration therefor consists solely
of common stock of Select (other than Disqualified Stock).

"Permitted Junior Securities" means (1) Capital Stock of Select or any
Subsidiary Guarantor or (2) debt securities of Select or any Subsidiary
Guarantor that are subordinated to all Senior Indebtedness and any debt
securities issued in exchange for Senior Indebtedness to substantially the same
extent as, or to a greater extent than, the Notes and the Subsidiary Guarantees
are subordinated to Senior Indebtedness and Guarantor Senior Indebtedness
pursuant to the Indenture.

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"Permitted Liens" means, with respect to any Person:

(1) pledges or deposits by such Person under worker's compensation laws,
unemployment insurance laws or similar legislation, or good faith
deposits in connection with bids, tenders, contracts (other than for
Indebtedness) or operating leases to which such Person is a party,
or deposits to secure public or statutory obligations of such Person
or deposit of cash or United States government bonds to secure
surety, performance or appeal bonds to which such Person is a party,
or deposits as security for contested taxes or import or customs
duties or for the payment of rent, in each case in the ordinary
course of business;

(2) Liens imposed by law and arising in the ordinary course of business,
including carriers', warehousemen's and mechanics' Liens, in each
case for sums not yet due or being contested in good faith by
appropriate proceedings if a reserve or other appropriate
provisions, if any, as shall be required by GAAP shall have been
made in respect thereof;

(3) Liens for taxes, assessments or other governmental charges not yet
subject to penalties for non-payment or which are being contested in
good faith by appropriate proceedings provided appropriate reserves
required pursuant to GAAP have been made in respect thereof;

(4) encumbrances, easements or reservations of, or rights of others for,
licenses, rights of way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other
restrictions as to the use of real properties or liens incidental to
the conduct of the business of such Person or to the ownership of
its properties that do not in the aggregate materially adversely
affect the value of said properties or materially impair their use
in the operation of the business of Select and its Restricted
Subsidiaries;

(5) Liens securing Hedging Obligations so long as the related
Indebtedness is, and is permitted to be under the Indenture, secured
by a Lien on the same property securing such Hedging Obligation;

(6) leases and subleases of real property that do not materially
interfere with the ordinary conduct of the business of Select or
any of its Restricted Subsidiaries;

(7) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal
proceedings that may have been duly initiated for the review of
such judgment have not been finally terminated or the period within
which such proceedings may be initiated has not expired;

(8) Liens arising solely by virtue of any statutory or common law
provisions relating to banker's Liens, rights of set-off or similar
rights and remedies as to deposit accounts or other funds
maintained with a depositary institution; provided that:

(a) such deposit account is not a dedicated cash collateral account
and is not subject to restrictions against access by Select in
excess of those set forth by regulations promulgated by the
Federal Reserve Board; and

(b) such deposit account is not intended by Select or any Restricted
Subsidiary to provide collateral to the depository institution;

(9) Liens on property or shares of stock of a Person at the time such
Person becomes a Restricted Subsidiary; provided, however, that
such Liens are not created, incurred or assumed in connection with,
or in contemplation of, such other Person becoming a Restricted
Subsidiary; provided further, however, that any such Lien may not
extend to any other property owned by Select or any Restricted
Subsidiary;

(10) Liens on property at the time Select or a Restricted Subsidiary
acquired the property, including any acquisition by means of a
merger or consolidation with or into Select or any Restricted
Subsidiary; provided, however, that such Liens are not created,
incurred or assumed in connection with, or in contemplation of,
such acquisition; provided further, however, that such Liens may
not extend to any other property owned by Select or any Restricted
Subsidiary;

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(11) Liens securing Indebtedness or other obligations of a Restricted
Subsidiary owing to Select or a Subsidiary Guarantor;

(12) Liens securing the Notes and the Subsidiary Guarantees; and

(13) Liens securing Refinancing Indebtedness incurred to refinance
Indebtedness that was previously so secured, provided that any such
Lien is limited to all or part of the same property or assets (plus
improvements, accessions, proceeds or dividends or distributions in
respect thereof) that secured (or, under the written arrangements
under which the original Lien arose, could secure) the Indebtedness
being refinanced.

"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company, government or any agency or political subdivision thereof or
any other entity.

"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such Person.

"Purchase Money Indebtedness" means Indebtedness:

(1) consisting of the deferred purchase price of property, conditional
sale obligations, obligations under any title retention agreement,
other purchase money obligations and obligations in respect of
industrial revenue bonds or similar Indebtedness, in each case where
the maturity of such Indebtedness does not exceed the anticipated
useful life of the asset being financed; and

(2) incurred to finance the acquisition by Select or a Restricted
Subsidiary of such asset, including additions and improvements;

provided, however, that any Lien arising in connection with any such
Indebtedness shall be limited to the specified asset being financed or, in the
case of real property or fixtures, including additions and improvements, the
real property on which such asset is attached; and provided further, however,
that such Indebtedness is Incurred within 90 days after such acquisition of
such asset by Select or a Restricted Subsidiary.

"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, renew, repay or extend (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinance", "refinances", and "refinanced"
shall have a correlative meaning) any Indebtedness existing on the date of the
Indenture or Incurred in compliance with the Indenture including Indebtedness
that refinances Refinancing Indebtedness, provided, however, that:

(1) (a) if the Stated Maturity of the Indebtedness being refinanced is
earlier than or the same as the Stated Maturity of the Notes, the
Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being refinanced or (b) if the
Stated Maturity of the Indebtedness being refinanced is later than
the Stated Maturity of the Notes, the Refinancing Indebtedness has a
Stated Maturity at least 91 days later than the Stated Maturity of
the Notes;

(2) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater
than the Average Life of the Indebtedness being refinanced;

(3) such Refinancing Indebtedness is Incurred in an aggregate principal
amount (or if issued with original issue discount, an aggregate
issue price) that is equal to or less than the sum of the aggregate
principal amount (or if issued with original issue discount, the
aggregate accreted value) then outstanding of the Indebtedness being
refinanced (plus, without duplication, any additional Indebtedness
incurred to pay reasonable fees in connection therewith); and

131

(4) if the Indebtedness being refinanced is subordinated in right of
payment to the Notes or the Subsidiary Guarantee, such Refinancing
Indebtedness is subordinated in right of payment to the Notes or the
Subsidiary Guarantee on terms at least as favorable to the Holders
as those contained in the documentation governing the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded;

provided that Refinancing Indebtedness shall not include (x) Indebtedness of a
Non-Guarantor Subsidiary that refinances Indebtedness of Select or a
Subsidiary Guarantor or (y) Indebtedness of Select or a Restricted Subsidiary
that refinances Indebtedness of an Unrestricted Subsidiary.

"Related Business" means any of the businesses of Select and its
Restricted Subsidiaries on the Issue Date, any other business of providing
health care services, and any business that is related, ancillary or
complementary to any thereof.

"Related Business Assets" means assets used or useful in a Related
Business.

"Representative" means any trustee, agent or representative (if any) of
an issue of Senior Indebtedness; provided that when used in connection with
the Senior Credit Agreement, the term "Representative" shall refer to the
administrative agent under the Senior Credit Agreement (so long as there shall
be an administrative agent).

"Restricted Investment" means any Investment other than a Permitted
Investment.

"Restricted Subsidiary" means any Subsidiary of Select other than an
Unrestricted Subsidiary.

"Sale/Leaseback Transaction" means an arrangement relating to property
now owned or hereafter acquired whereby Select or a Restricted Subsidiary
transfers such property to a Person and Select or a Restricted Subsidiary
leases it from such Person.

"Senior Credit Agreement" means one or more debt facilities (including,
without limitation, the Credit Agreement, dated as of September 22, 2000 among
Select, Canadian Back Institute Limited, the Lenders party thereto, The Chase
Manhattan Bank, as Administrative Agent for the US Facilities, The Chase
Manhattan Bank of Canada, as Administrative Agent for the Canadian Facilities,
Banc of America Securities LLC, as Syndication Agent and CIBC, Inc., as
Documentation Agent) or commercial paper facilities to which Select is a party
with banks or other institutional lenders providing for revolving credit
loans, term loans, or letters of credit, in each case, as amended, restated,
modified, renewed, refunded, replaced or refinanced in whole or in part from
time to time (and whether or not with the original administrative agent and
lenders or another administrative agent or agents or other lenders and whether
provided under the original credit agreement or any other credit or other
agreement or indenture).

"Senior Indebtedness" means, with respect to Select, the following,
whether outstanding on the Issue Date or thereafter issued, created, Incurred
or assumed, without duplication:

(1) the Bank Indebtedness Incurred by Select, and

(2) all obligations consisting of principal of, premium on, if any,
accrued and unpaid interest on, and fees and other amounts relating
to, all other Indebtedness of Select.

Senior Indebtedness includes interest accruing after, or that would
accrue but for, the filing of any petition in bankruptcy or for reorganization
relating to Select at the rate specified in the documentation with respect
thereto, whether or not a claim for post-filing interest is allowed in such
proceeding) and fees relating thereto.

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Notwithstanding anything to the contrary in the preceding paragraph,
Senior Indebtedness will not include:

(1) any Indebtedness with respect to which, in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it
is provided that the obligations in respect of such Indebtedness are
not superior in right of, or are subordinate to, payment of the Notes
or any Subsidiary Guarantee;

(2) any obligation of Select to any Subsidiary;

(3) any liability for Federal, state, foreign, local or other taxes owed
or owing by Select;

(4) any accounts payable or other liability to trade creditors arising in
the ordinary course of business (including Guarantees thereof or
instruments evidencing such liabilities);

(5) any Indebtedness, Guarantee or obligation of Select that is
subordinate or junior in right of payment to any other Indebtedness,
Guarantee or obligation of Select, including, without limitation, any
Senior Subordinated Indebtedness and any Subordinated Obligations;

(6) any obligations in respect of Capital Stock or Attributable
Indebtedness;

(7) any Indebtedness Incurred in violation of the Indentures; or

(8) any Indebtedness described in the last paragraph of the definition of
the term "Indebtedness."

"Senior Subordinated Indebtedness" means the Notes and any other
Indebtedness of Select that specifically provides that such Indebtedness is to
rank equally with the Notes in right of payment and is not subordinated by its
terms in right of payment to any Indebtedness or other obligation of Select
that is not Senior Indebtedness.

"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision, but shall not include any contingent obligations to repay, redeem
or repurchase any such principal prior to the date originally scheduled for
the payment thereof.

"Subordinated Obligation" means any Indebtedness of Select (whether
outstanding on the Issue Date or thereafter Incurred) that is subordinate or
junior in right of payment to the Notes.

"Subsidiary Guarantee" means, individually, any Guarantee of payment of
the Notes by a Subsidiary Guarantor pursuant to the terms of the Indenture and
any supplemental indenture thereto, and, collectively, all such Guarantees.
Each such Subsidiary Guarantee will be in the form prescribed by the
Indenture.

"Subsidiary Guarantor" means each Restricted Subsidiary after the Issue
Date, that provides a Subsidiary Guarantee in accordance with the terms of the
Indenture.

"Subsidiary" of any Person means any corporation, association,
partnership, joint venture, limited liability company or other business entity

(1) of which more than 50% of the total voting power of shares of Capital
Stock or other interests (including partnership and joint venture
interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or
indirectly, by (a) such Person, (b) such Person and one or more
Subsidiaries of such Person or (c) one or more Subsidiaries of such
Person, or

(2) that is a third party professional corporation or similar entity
controlled by Select with which Select or any Subsidiary has an
exclusive management arrangement under which it manages the business
of such entity, provided that any such entity shall be treated as a
consolidated Subsidiary of Select for purposes of calculating
Consolidated EBITDA, Consolidated Interest Expense and Consolidated
Net Income.

133

Unless otherwise specified herein, each reference to a Subsidiary will
refer to a Subsidiary of Select.

"Unrestricted Subsidiary" means:

(1) any Subsidiary of Select that at the time of determination shall be
designated an Unrestricted Subsidiary by the Board of Directors of
Select in the manner provided below; and

(2) any Subsidiary of an Unrestricted Subsidiary.

The Board of Directors of Select may designate any Subsidiary of Select
(including any newly acquired or newly formed Subsidiary or a Person becoming a
Subsidiary through merger or consolidation or Investment therein) to be an
Unrestricted Subsidiary only if:

(1) such Subsidiary or any of its Subsidiaries does not own any Capital
Stock or Indebtedness of or have any Investment in, or own or hold
any Lien on any property of, any other Subsidiary of Select that is
not a Subsidiary of the Subsidiary to be so designated or otherwise
an Unrestricted Subsidiary;

(2) all the Indebtedness of such Subsidiary and its Subsidiaries shall,
at the date of designation, and will at all times thereafter,
consist of Non-Recourse Debt;

(3) such designation and the Investment of Select and its Restricted
Subsidiaries in such Subsidiary complies with "Certain Covenants--
Limitation on Restricted Payments";

(4) such Subsidiary, either alone or in the aggregate with all other
Unrestricted Subsidiaries, does not operate, directly or indirectly,
all or substantially all of the business of Select and its
Subsidiaries;

(5) such Subsidiary is a Person with respect to which neither Select nor
any of its Restricted Subsidiaries has any direct or indirect
obligation:

(a) to subscribe for additional Capital Stock of such Person; or

(b) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating
results; and

(6) on the date such Subsidiary is designated an Unrestricted
Subsidiary, such Subsidiary is not a party to any agreement,
contract, arrangement or understanding with Select or any Restricted
Subsidiary with terms substantially less favorable to Select than
those that might have been obtained from Persons who are not
Affiliates of Select.

Any such designation by the Board of Directors of Select shall be
evidenced to the Trustee by filing with the Trustee a resolution of the Board
of Directors of Select giving effect to such designation and an Officers'
Certificate certifying that such designation complies with the foregoing
conditions. If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be Incurred as of such date.

The Board of Directors of Select may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that immediately after
giving effect to such designation, no Default or Event of Default shall have
occurred and be continuing or would occur as a consequence thereof and Select
could incur at least $1.00 of additional Indebtedness under the first paragraph
of the "Limitation on Indebtedness" covenant on a pro forma basis taking into
account such designation.

"Voting Stock" of a Person means all classes of Capital Stock of such
Person then outstanding and normally entitled to vote in the election of
directors or other governing body.

"Wholly-Owned Subsidiary" means a Restricted Subsidiary of Select, all of
the Capital Stock of which (other than directors' qualifying shares required by
applicable law) is owned by Select or another Wholly-Owned Subsidiary.

134

DESCRIPTION OF OTHER INDEBTEDNESS

Senior Credit Facility

We are party to a credit facility with a syndicate of banks led by The
Chase Manhattan Bank, as lender and administrative agent for the U.S.
facilities, and The Chase Manhattan Bank of Canada, as lender and
administrative agent for the Canadian facilities. We have, and in the future
are permitted, to borrow under this credit facility. We and a majority of our
subsidiaries have guaranteed our performance under this credit facility. The
senior credit facility consists of the following:

Balance Outstanding
----------------------
(as of March 31, 2001)

U.S. Term Loans.......................................... US$158,000,000
U.S. Revolving Loans..................................... US$ 14,000,000
Canadian Term Loans...................................... C$ 25,279,000

The U.S. loans bear interest, at our option, at either of the following
rates:

(a) the higher of:

--the rate from time to time publicly announced by The Chase
Manhattan Bank in New York as its prime rate; and

--the federal funds rate from time to time, plus .50%;

in each case plus an applicable rate which is:

--based on a pricing grid depending on our leverage ratio at that
time, ranging from 1.50% to 2.75% as the leverage ratio varies
from below 2.00 to equal or above 3.50; or

(b) a Eurodollar rate plus an applicable rate which varies
depending on our leverage ratio at that time, ranging from 2.50%
to 3.75% as the leverage ratio varies from below 2.00 to equal or
above 3.50.

The Canadian term loans bear interest, at our option, at either of the
following rates:

the higher of:

--the rate from time to time publicly announced by The Chase
Manhattan Bank of Canada in Toronto as its reference rate for
commercial loans denominated in Canadian dollars; and

--the average discount rate applicable to bankers' acceptances
denominated in Canadian dollars appearing on the Reuters Screen
CDOR Page plus .50% per annum;

--in each case plus an applicable rate which is:

--based on a pricing grid depending on our Canadian leverage ratio
at that time, ranging from 1.50% to 2.75% as the leverage ratio
varies from below 2.00 to equal or above 3.50.

The U.S. and Canadian term loans are repayable in quarterly installments
pursuant to a predetermined payment schedule through September 22, 2005.

We also pay a commitment fee for the daily average unused commitment
under the U.S. revolving credit commitment. The commitment fee is based on a
pricing grid depending on the applicable rate in effect for revolving credit
loans. The commitment fee is payable quarterly in arrears and on the revolving
credit

135

termination date with respect to the available revolving credit commitments. We
also pay participation and fronting fees for each letter of credit under the
credit facility.

We pay an acceptance fee on each date that a Canadian bill of exchange is
accepted. The acceptance fee is based on the amount of the bill of exchange
multiplied by the applicable rate as determined by using a pricing grid
depending on the applicable rate, and the length of term of the bill of
exchange.

Loans under the U.S. revolving credit facility can be made at any time
provided that all letters of credit issued under the credit facility expire on
or before September 15, 2005. The revolving commitments mature no later than
September 22, 2005. The total borrowings we were permitted to have outstanding
at March 31, 2001 under our U.S. revolving credit facility was $55 million.

We have the right to prepay any of the loans outstanding under the senior
credit facility. There is no penalty if we prepay outstanding loans, except in
limited circumstances involving Eurodollar loans. We also have the right to
reduce or terminate the commitments of any class of lender under the credit
facility. Any termination or reduction of the commitments of a class will be
permanent.

The loans must be prepaid with the net proceeds in excess of $2 million
in the aggregate of:

. specified asset sales;

. proceeds received from the loss of assets where the proceeds are not
applied to the replacement of the lost assets;

. the issuance of equity interests by us or any of our subsidiaries;
and

. the incurrence of indebtedness not permitted by the credit agreement.

These net proceeds will be applied to prepay the outstanding balances of
the term loans and the revolving loans. Depending on the leverage ratio at the
applicable time, not more than 50% of the net proceeds from the issuance of
equity interests by us or by our subsidiaries will be applied to prepay the
outstanding balances of the loans under the senior credit facility. If the
leverage ratio at the applicable time is not greater than 2.5 to 1.0, none of
the net proceeds from the issuance of equity interests will be applied to
prepay the outstanding balances of the credit facility loans.

The senior credit facility contains covenants and provisions that
restrict, among other things, our ability to change the business we are
conducting, declare dividends, make acquisitions over a specific dollar amount,
grant liens, incur additional indebtedness, sell assets, enter into joint
ventures over a specific dollar amount, make payments to reduce amounts of
outstanding subordinated indebtedness and fall below a minimum interest
coverage ratio. These restrictive provisions also apply to the Canadian
facility.

Seller Notes

We are obligated to repay seller notes that we issued or assumed as a
result of certain acquisitions we have made. These seller notes typically have
three to five year terms, with varying interest rates. Some, but not all of the
notes, are subordinated to our senior indebtedness. At March 31, 2001, the
aggregate outstanding principal amount we owed under these seller notes was
$21.37 million.

136

BOOK-ENTRY SETTLEMENT AND CLEARANCE

The Global Notes

The old notes were, and the new notes will be, issued in the form of one
or more registered notes in global form, without interest coupons (the "global
notes").

Upon issuance, each of the global notes will be deposited with the
Trustee as custodian for The Depository Trust Company and registered in the
name of Cede & Co., as nominee of DTC.

Ownership of beneficial interests in each global note will be limited to
persons who have accounts with DTC ("DTC participants") or persons who hold
interests through DTC participants. We expect that under procedures established
by DTC:

. upon deposit of each global note with DTC's custodian, DTC will
credit portions of the principal amount of the global note to the
accounts of the DTC participants designated by the initial
purchasers; and

. ownership of beneficial interests in each global note will be shown
on, and transfer of ownership of those interests will be effected
only through, records maintained by DTC (with respect to interests of
DTC participants) and the records of DTC participants (with respect
to other owners of beneficial interests in the global note).

Beneficial interests in the global notes may not be exchanged for notes
in physical, certificated form except in the limited circumstances described
below.

Book-Entry Procedures for the Global Notes

All interests in the global notes will be subject to the operations and
procedures of DTC. We provide the following summaries of those operations and
procedures solely for the convenience of investors. The operations and
procedures of each settlement system are controlled by that settlement system
and may be changed at any time. Neither we nor the initial purchasers are
responsible for those operations or procedures.

DTC has advised us that it is:

. a limited purpose trust company organized under the laws of the State
of New York;

. a "banking organization" within the meaning of the New York State
Banking Law;

. a member of the Federal Reserve System;

. a "clearing corporation" within the meaning of the Uniform Commercial
Code; and

. a "clearing agency" registered under Section 17A of the Securities
Exchange Act of 1934.

DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between its
participants through electronic book-entry changes to the accounts of its
participants. DTC's participants include securities brokers and dealers,
including the initial purchasers; banks and trust companies; clearing
corporations and other organizations. Indirect access to DTC's system is also
available to others such as banks, brokers, dealers and trust companies; these
indirect participants clear through or maintain a custodial relationship with a
DTC participant, either directly or indirectly. Investors who are not DTC
participants may beneficially own securities held by or on behalf of DTC only
through DTC participants or indirect participants in DTC.

137

So long as DTC's nominee is the registered owner of a global note, that
nominee will be considered the sole owner or holder of the notes represented by
that global note for all purposes under the Indenture. Except as provided
below, owners of beneficial interests in a global note:

. will not be entitled to have notes represented by the global note
registered in their names;

. will not receive or be entitled to receive physical, certificated
notes; and

. will not be considered the owners or holders of the notes under the
Indenture for any purpose, including with respect to the giving of
any direction, instruction or approval to the Trustee under the
Indenture.

As a result, each investor who owns a beneficial interest in a global
note must rely on the procedures of DTC to exercise any rights of a holder of
notes under the Indenture (and, if the investor is not a participant or an
indirect participant in DTC, on the procedures of the DTC participant through
which the investor owns its interest).

Payments of principal, premium (if any) and interest with respect to the
notes represented by a global note will be made by the Trustee to DTC's nominee
as the registered holder of the global note. Neither we nor the Trustee will
have any responsibility or liability for the payment of amounts to owners of
beneficial interests in a global note, for any aspect of the records relating
to or payments made on account of those interests by DTC, or for maintaining,
supervising or reviewing any records of DTC relating to those interests.

Payments by participants and indirect participants in DTC to the owners
of beneficial interests in a global note will be governed by standing
instructions and customary industry practice and will be the responsibility of
those participants or indirect participants and DTC.

Transfers between participants in DTC will be effected under DTC's
procedures and will be settled in same-day funds.

DTC has agreed to the above procedures to facilitate transfers of
interests in the global notes among participants in that settlement system.
However, the settlement system is not obligated to perform these procedures and
may discontinue or change these procedures at any time. Neither we nor the
Trustee will have any responsibility for the performance by DTC, or its
participants or indirect participants of their obligations under the rules and
procedures governing their operations.

Certificated Notes

Notes in physical, certificated form will be issued and delivered to each
person that DTC identifies as a beneficial owner of the related notes only if:

. DTC notifies us at any time that it is unwilling or unable to
continue as depositary for the global notes and a successor
depositary is not appointed within 90 days;

. DTC ceases to be registered as a clearing agency under the Securities
Exchange Act of 1934 and a successor depositary is not appointed
within 90 days;

. we, at our option, notify the Trustee that we elect to cause the
issuance of certificated notes; or

. certain other events provided in the Indenture should occur.

138

EXCHANGE AND REGISTRATION RIGHTS AGREEMENT

We and the initial purchasers of the old notes entered into the exchange
and registration rights agreement on the closing date. Under that agreement, we
and the subsidiary guarantors agreed to:

. file with the Securities and Exchange Commission within 75 days after
the closing date a registration statement on an appropriate form
under the Securities Act of 1933 relating to a registered exchange
offer for the notes; and

. use our reasonable best efforts to cause that exchange offer
registration statement to be declared effective under the Securities
Act of 1933 within 150 days after the closing date.

After the effectiveness of the exchange offer registration statement, we
will offer to the holders of transfer restricted securities (as defined below)
the opportunity to exchange their transfer restricted securities for a new
series of exchange notes. These exchange notes will be identical in all
material respects to the notes except that the exchange notes will not be
subject to transfer restrictions, will be registered under the Securities Act
of 1933 and will contain no provisions regarding additional interest. We will
keep the exchange offer open for at least 30 days, or longer if required by
applicable law, after the date on which notice of the exchange offer is mailed
to the holders of the notes.

We and the subsidiary guarantors also agreed that we will file a shelf
registration statement covering resales of transfer restricted securities if:

. we are not permitted to effect the exchange offer because of any
change in law or applicable interpretations of the law by the staff
of the Securities and Exchange Commission;

. any notes validly tendered in the exchange offer are not exchanged
for exchange notes within 180 days after being accepted in the
exchange offer;

. any initial purchaser so requests with respect to notes that are not
eligible to be exchanged for exchange notes in the exchange offer;

. any applicable law or interpretations do not permit any holder of
notes to participate in the exchange offer;

. any holder of notes that participates in the exchange offer does not
receive freely transferable exchange notes in exchange for tendered
notes; or

. we so elect.

If a shelf registration statement is required or requested as described
above, we will use our reasonable best efforts to file the shelf registration
statement with the Securities and Exchange Commission as promptly as
practicable, but not more than 30 days after so required or requested. This
deadline is called the "shelf filing date".

"Transfer restricted securities" means each note, until the earliest to
occur of:

. the date on which that note has been exchanged for a freely
transferable exchange note in the exchange offer;

. the date on which that note has been effectively registered under the
Securities Act of 1933 and sold under the shelf registration
statement; or

. the date on which that note is distributed to the public under Rule
144 under the Securities Act of 1933 or may be sold under Rule 144(k)
under the Securities Act of 1933.

We will use our reasonable best efforts to have the exchange offer
registration statement or, if applicable, the shelf registration statement
declared effective by the Securities and Exchange Commission as

139

promptly as practicable after it is filed. Unless the exchange offer would not
be permitted by a policy of the Securities and Exchange Commission, we and the
subsidiary guarantors will commence the exchange offer and will use our
reasonable best efforts to complete the exchange offer no later than 180 days
after the closing date. If applicable, we will use our reasonable best efforts
to keep the shelf registration statement effective for a period ending on the
earlier of two years after the closing date and the date all transfer
restricted securities become eligible for resale without volume restrictions
under Rule 144 under the Securities Act of 1933.

We will be obligated to pay additional interest to the holders of the
notes if any of the following events occurs:

. the exchange offer registration statement is not filed with the
Securities and Exchange Commission within 75 days after the closing
date or the shelf registration statement is not filed with the
Securities and Exchange Commission on or before the shelf filing
date;

. the exchange offer registration statement or the shelf registration
statement is not declared effective within 150 days after the closing
date or, in the case of a shelf registration statement filed in
response to a change in law or applicable interpretations of the law
by the staff of the Securities Exchange Commission, if later, the
shelf registration statement is not declared effective within 60 days
after publication of such change in law or interpretation;

. the exchange offer is not completed within 180 days after the closing
date; or

. the shelf registration statement is filed and declared effective
within 150 days after the closing date or, in the case at a shelf
registration statement filed in response to a change in law or
applicable interpretation of the law by the staff of the Securities
and Exchange Commission, within 60 days after the publication of such
change in law or interpretation, but thereafter ceases to be
effective without being succeeded within 30 days by an additional
registration statement filed and declared effective.

During any period that one or more of the above registration defaults
exists, we will pay additional interest to each holder of transfer restricted
securities in an amount equal to $0.192 per week per $1,000 principal amount of
the notes constituting transfer restricted securities held by the holder until
the applicable registration statement is filed, the exchange offer registration
statement is declared effective and the exchange offer is completed, or the
shelf registration statement is declared effective or again becomes effective,
as the case may be. All accrued additional interest will be paid to holders in
the same manner as interest payments on the notes, on semi-annual payment dates
that correspond to interest payment dates for the notes. Additional interest
will accrue only during a registration default.

The exchange and registration rights agreement also provides that we
will:

. make available, for a period ending the earlier of 180 days after
completion of the exchange offer and the date when all broker-dealers
have sold all exchange securities, a prospectus meeting the
requirements of the Securities Act of 1933 to any broker-dealer for
use in connection with any resale of any exchange notes; and

. pay all expenses incident to the exchange offer, including the
reasonable expenses of one counsel to the holders of the notes, and
indemnify certain holders of the notes, including any broker-dealer,
against certain liabilities, including liabilities under the
Securities Act of 1933.

A broker-dealer that delivers a prospectus to purchasers in connection
with resales of the exchange notes will be subject to certain of the civil
liability provisions under the Securities Act of 1933 and will be bound by the
provisions of the exchange and registration rights agreement, including
indemnification rights and obligations.

Each holder of notes who wishes to exchange its notes for exchange notes
in the exchange offer will be required to make representations, including
representations that:

140

. any exchange notes to be received by it will be acquired in the
ordinary course of its business;

. it has no arrangement or understanding with any person to participate
in the distribution of the exchange notes;

. it is not an affiliate (as defined in Rule 405 under the Securities
Act of 1933) of ours or, if it is an affiliate, that it will comply
with the registration and prospectus delivery requirements of the
Securities Act of 1933 to the extent applicable.

If the holder is not a broker-dealer, it will be required to represent
that it is not engaged in, and does not intend to engage in, the distribution
of the exchange notes. If the holder is a broker-dealer that will receive
exchange notes for its own account in exchange for notes that were acquired as
a result of market-making activities or other trading activities, it will be
required to acknowledge that it will deliver a prospectus in connection with
any resale of its exchange notes.

Holders of the notes will be required to make representations to us, as
described above, in order to participate in the exchange offer. They will also
be required to deliver information to be used in connection with any shelf
registration statement in order to have their notes included in the shelf
registration statement and benefit from the provisions regarding additional
interest set forth in the preceding paragraphs. A holder who sells notes under
the shelf registration statement generally will be required to be named as a
selling securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act of 1933 in connection with these sales and must agree in
writing to be bound by all the provisions of the exchange and registration
rights agreement that are applicable to such a holder, including
indemnification obligations.

For so long as the transfer restricted notes are outstanding, we will
continue to provide to holders of the notes the information required by Rule
144A(d)(4) under the Securities Act of 1933.

The above description of the exchange and registration rights agreement
is a summary only. It is not complete and does not describe all the provisions
of the exchange and registration rights agreement. We will provide a copy of
the exchange and registration rights agreement upon request to any purchaser of
notes who is identified to us by an initial purchaser.

141

UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

This section summarizes certain U.S. federal income tax considerations
relating to the exchange offer, ownership, and disposition of the new notes.
This summary is based on the following materials, all as of the date of this
prospectus:

. the Internal Revenue Code of 1986, as amended (the "Code"),

. current, temporary and proposed Treasury Regulations promulgated
under the Code,

. current administrative interpretations of the Internal Revenue
Service (the "IRS"), and

. court decisions.

Legislation, judicial decisions or administrative changes may be forthcoming
that could affect the accuracy of the statements included in this summary,
possibly on a retroactive basis. There can be no assurance that the IRS will
not challenge one or more of the tax results described herein, and we have not
obtained, nor do we intend to obtain, a ruling from the IRS with respect to the
U.S. federal income tax consequences described below.

This summary generally applies only to "U.S. Holders" that received the
new notes in the exchange offer in exchange for old notes that were purchased
for cash on original issue. This summary also assumes that the old notes were
and the new notes are held as "capital assets" (generally, property held for
investment). For this purpose, U.S. Holders include the following:

. citizens or residents of the United States,

. corporations organized under the laws of the United States or any
state,

. estates, if the income of the estates subject to U.S. federal income
taxation regardless of its source, and

. trusts, if the administration of the trusts subject to the primary
supervision of a U.S. court and one or more U.S. persons have the
authority to control all substantial decisions of the trusts.

Special rules apply to "Non-U.S. Holders," including nonresident alien
individuals and foreign corporations, estates or trusts. This summary describes
some, but not all, of these special rules. Income earned through a foreign or
domestic partnership is subject to special rules that are generally not
discussed here. This discussion does not purport to address all tax
considerations that may be important to a particular holder in light of the
holder's circumstances. For example, special rules not discussed here may apply
to a holder who is:

. a broker-dealer, a dealer in securities or a financial institution;

. an insurance company;

. a tax-exempt organization;

. subject to the alternative minimum tax provisions of the Code;

. holding the notes as part of a hedge, conversion or constructive sale
transaction, straddle or other risk reduction transaction;

. a person with a "functional currency"other than U.S. dollar; or

. a person who has ceased to be a U.S. citizen or ceased to be taxed as
a resident alien.

Finally, this summary does not describe any tax considerations arising under
the laws of any applicable foreign, state, or local jurisdiction.

142

Investors should consult their own tax advisors regarding the application
of the U.S. federal income tax laws to their particular situations and the
consequences of U.S. federal estate or gift tax laws, foreign, state, or local
laws, and tax treaties.

U.S. Holders

The Exchange Offer

The exchange of old notes for new notes in the exchange offer should not
be a taxable event for holders because there should not be a significant
modification of the terms of the notes. Instead, the new notes will be treated
as a continuation of the old notes for federal income tax purposes. Therefore,
if a U.S. Holder exchanges old notes for new notes pursuant to the exchange
offer, the U.S. Holder:

. will not recognize gain or loss in connection with the exchange
offer;

. will have the same tax basis in the new notes the U.S. Holder had in
the old notes immediately prior to the exchange offer;

. will have the same holding period in the new notes that the U.S.
Holder had in the old notes immediately prior to the exchange; and

. the federal income tax consequences associated with owning the old
notes will continue to apply to the new notes.

Interest on New Notes

U.S. Holders will be required to recognize as ordinary income any
interest paid or accrued on the notes, in accordance with their regular method
of accounting for federal income tax purposes.

Sale or Other Taxable Disposition of New Notes

A U.S. Holder will generally recognize capital gain or loss on the sale,
redemption, exchange, retirement or other taxable disposition of new notes. The
holder's gain or loss will equal the difference between the holder's adjusted
tax basis in the new note and the proceeds received by the holder, excluding
any proceeds attributable to accrued interest which will be recognized as
ordinary interest income to the extent that the holder has not previously
included the accrued interest in income. The proceeds received by the holder
will include the amount of any cash and the fair market value of any other
property received for the new note. The holder's tax basis in the new note will
generally equal the amount the holder paid for the new note (or, for U.S.
Holders participating in the exchange offer, the basis in the old note will
carryover and become the basis of the new note). The gain or loss will be long-
term capital gain or loss if the holder held the new note for more than one
year. A U.S. Holder's holding period for the old notes will be added to the
U.S. Holder's holding period in the new notes if the U.S. Holder participates
in the exchange offer. Long-term capital gains of individuals, estates and
trusts are generally taxed at a maximum rate of 20%. Capital losses generally
may be deducted only against capital gain income and may be subject to
additional limitations on deductibility

Information Reporting and Backup Withholding

Information reporting and backup withholding at a rate of 31% may apply
to payments of principal and interest on a new note or the proceeds from the
sale or other disposition of a new note with respect to certain non-corporate
U.S. Holders. Such U.S. Holders generally will be subject to backup withholding
unless the U.S. Holder provides to the payor a correct taxpayer identification
number and certain other information, certified under penalties of perjury, or
otherwise establishes an exemption. Any amount withheld under the backup
withholding rules may be credited against the U.S. Holder's federal income tax
liability and any excess may be refundable if the proper information is
provided to the IRS.

143

Non-U.S. Holders

Interest on New Notes

Payments of interest on the new notes to Non-U.S. Holders will generally
qualify as "portfolio interest" and thus will be exempt from the withholding of
U.S. federal income tax if the Non-U.S. Holder properly certifies as to its
foreign status as described below and the interest income is not effectively
connected with a U.S. trade or business of the Non-U.S. Holder. The portfolio
interest exception will not apply to payments of interest to a Non-U.S. Holder
that:

. owns, directly or indirectly, at least 10% of our voting stock, or

. is a "controlled foreign corporation" that is related to us.

If the portfolio interest exception does not apply, then payments of
interest to a Non-U.S. Holder will generally be subject to U.S. federal income
tax withholding at a rate of 30%, unless reduced by an applicable tax treaty.

The portfolio interest exception and several of the special rules for
Non-U.S. Holders described below generally apply only if the Non-U.S. Holder
appropriately certifies as to its foreign status. A Non-U.S. Holder can
generally meet this certification requirement by providing a properly executed
Form W-8BEN or appropriate substitute form to us, or our Paying Agent. If the
holder holds the note through a financial institution or other agent acting on
the holder's behalf, the holder may be required to provide appropriate
certifications to the agent. The holder's agent will then generally be required
to provide appropriate certifications to us or our Paying Agent, either
directly or through other intermediaries. Special rules apply to foreign
partnerships, estates and trusts, and in certain circumstances certifications
as to foreign status of partners, trust owners or beneficiaries may have to be
provided to us or our Paying Agent. In addition, special rules apply to
qualified intermediaries that enter into withholding agreements with the IRS,
and such intermediaries generally are not required to forward any certification
forms received from Non-U.S. Holders.

Sale or Other Taxable Disposition of New Notes

A Non-U.S. Holder generally will not be subject to U.S. federal income
tax on any gain realized on the sale, redemption, exchange, retirement or other
taxable disposition of a new note. This general rule, however, is subject to
several exceptions. For example, the gain will be subject to U.S. federal
income tax if:

. the gain is effectively connected with the conduct by the Non-U.S.
Holder of a U.S. trade or business,

. the Non-U.S. Holder is an individual that has been present in the
United States for a period or periods totalling 183 days or more in
the taxable year of disposition and certain other requirements are
met, or

. the Non-U.S. Holder was a citizen or resident of the United States
and is subject to special rules that apply to certain expatriates.

Income or Gain Effectively Connected With a U.S. Trade or Business

The preceding discussion of the tax consequences of the ownership and
disposition of new notes by a Non-U.S. Holder generally assumes that the holder
is not engaged in a U.S. trade or business. If any interest on the notes or
gain from the sale, exchange or other taxable disposition of the new notes is
effectively connected with a U.S. trade or business conducted by the Non-U.S.
Holder, then the income or gain will be subject to U.S. federal income tax at
regular graduated income tax rates, but will not be subject to withholding tax
if certain certification requirements are satisfied. If the Non-U.S. Holder is
eligible for the benefits of a tax treaty between the United States and the
holder's country of residence, any "effectively connected" income or gain

144

will generally be subject to U.S. federal income tax only if it is also
attributable to a permanent establishment maintained by the holder in the
United States. If the Non-U.S. Holder is a corporation, that portion of its
earnings and profits that is effectively connected with its U.S. trade or
business will generally be subject to a "branch profits tax" at a 30% rate,
although an applicable tax treaty may provide for a lower rate.

U.S. Federal Estate Tax

If a Non-U.S. Holder qualifies for the portfolio interest exemption under
the rules described above when he or she dies, the new notes will not be
included in his or her estate for U.S. federal estate tax purposes, unless the
income on the new notes is effectively connected with his or her conduct of a
trade or business in the United States.

Information Reporting and Backup Withholding

In general, information reporting will apply to payments of interest and
principal on the new notes and backup withholding at a rate of 31% will apply
with respect to such payments unless the Non-U.S. Holder appropriately
certifies as to its foreign status or otherwise establishes an exemption.

United States backup withholding tax will not apply to payments on the
new notes to a Non-U.S. Holder if the certifications described in "Interest on
Notes" are duly provided by the Non-U.S. Holder, provided that the payor does
not have actual knowledge that the Holder is a U.S. person. Information
reporting may still apply with respect to payments of interest.

Information reporting requirements and backup withholding tax generally
will not apply to any payment of the proceeds of the sale of a note effected
outside the United States by a foreign office of a foreign "broker" (as defined
in applicable Treasury regulations). However, unless such broker has
documentary evidence in its records that the beneficial owner is a Non-U.S.
Holder and certain other conditions are met, or the beneficial owner otherwise
establishes an exemption, information reporting, but generally not backup
withholding, will apply to any payment of the proceeds of the sale of a note
effected outside the United States by such a broker if it:

. derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States,

. is a controlled foreign corporation for U.S. federal income tax
purposes, or

. is a foreign partnership that, at any time during its taxable year,
has 50% or more of its income or capital interests owned by U.S.
persons or is engaged in the conduct of a U.S. trade or business.

Payment of the proceeds of a sale of a new note effected by the U.S.
office of a broker will be subject to information reporting requirements and
backup withholding tax unless the Non-U.S. Holder properly certifies under
penalties of perjury as to its foreign status and certain other conditions are
met or it otherwise establishes an exemption.

Any amount withheld under the backup withholding rules may be credited
against the Non-U.S. Holder's U.S. federal income tax liability and any excess
may be refundable if the proper information is provided to the IRS.

The preceding discussion of certain U.S. federal income tax
considerations is for general information only and is not tax advice. Each
prospective investor should consult its own tax advisor regarding the
particular U.S. federal, state, local, and foreign tax consequences of holding
and disposing of our new notes, including the consequences of any proposed
change in applicable laws.

145

PLAN OF DISTRIBUTION

Each broker-dealer that receives new notes for its own account pursuant
to the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of the new notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of new notes received in exchange for old notes where
the old notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, for a period of 180 days after the
expiration date of the exchange offer, we will make this prospectus, as amended
or supplemented, available to any broker-dealer for use in connection with any
such resale. In addition, until October 9, 2001 (90 days after the date of this
prospectus), all dealers effecting transactions in the new notes may be
required to deliver a prospectus.

We will not receive any proceeds from any sale of new notes by broker-
dealers. New notes received by broker-dealers for their own account pursuant to
the exchange offer may be sold from time to time in one or more transactions in
the over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or a combination of those methods of resale, at market
prices prevailing at the time of resale, at prices related to prevailing market
prices or negotiated prices. Any resale may be made directly to purchasers or
to or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer or the purchasers of any
of the new notes. Any broker-dealer that resells new notes that were received
by it for its own account pursuant to the exchange offer and any broker or
dealer that participates in a distribution of the new notes may be deemed to be
an "underwriter" within the meaning of the Securities Act and any profit on any
resale of new notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that, by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act.

For a period of 180 days after the expiration date of the exchange offer,
we will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to
the exchange offer (including the expenses of one counsel for the holders of
the notes) other than commissions or concessions of any brokers or dealers and
will indemnify the holders of the securities (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.

146

LEGAL MATTERS

The validity of the new notes offered by this prospectus will be passed
upon for us by Dechert, Philadelphia, Pennsylvania. Dechert beneficially owns
10,000 shares of our common stock.

EXPERTS

The financial statements of Select Medical Corporation as of December 31,
2000 and December 31, 1999 and for each of the three years in the period ended
December 31, 2000, included in this prospectus have been so included in the
reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.

The combined financial statements of NovaCare Physical Rehabilitation and
Occupational Health Group as of November 19, 1999, June 30, 1999 and 1998 and
for the period from July 1, 1999 to November 19, 1999 and the years ended June
30, 1999, 1998 and 1997, included in this prospectus have been included in
reliance of the reports of PricewaterhouseCoopers LLP, independent accountants,
upon the authority of said firm as experts in auditing and accounting.

The consolidated financial statements of Intensiva Healthcare Corporation
and subsidiaries as of December 15, 1998 and December 31, 1997 and for the
period from January 1, 1998 to December 15, 1998 and the year ended December
31, 1997 included in this prospectus have been included in reliance of the
report of KPMG LLP, independent certified public accountants, upon the
authority of said firm as experts in auditing and accounting.

The consolidated financial statements of American Transitional Hospitals,
Inc. as of June 29, 1998 and for the period from January 1, 1998 to June 29,
1998 included in this prospectus have been included in reliance of the report
of Ernst & Young LLP, independent auditors, given on the authority of said firm
as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

Select Medical Corporation files annual and quarterly reports with the
Commission. These documents include specific information regarding Select
Medical Corporation. These documents, including exhibits and schedules thereto,
may be inspected without charge at the Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and at 7 World Trade Center, 13th Floor, New York, New York 10048 after payment
of fees prescribed by the Commission. The Commission also maintains a World
Wide Web site which provides online access to reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission at the address http://www.sec.gov.

We have filed with the SEC a registration statement on Form S-4 under the
Securities Act of 1933, covering the notes to be issued in the exchange offer
(Registration No. 333-63828). This prospectus, which is a part of the
registration statement, does not contain all of the information included in the
registration statement. Any statement made in this prospectus concerning the
contents of any contract, agreement or other document is not necessarily
complete. For further information regarding our company and the notes to be
issued in the exchange offer, please reference the registration statement,
including its exhibits. If we have filed any contract, agreement or other
document as an exhibit to the registration statement, you should read the
exhibit for a more complete understanding of the documents or matter involved.

147

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
-----

SELECT MEDICAL CORPORATION

Unaudited Financial Statements
Consolidated Balance Sheets............................................ F-2
Consolidated Statement of Operations................................... F-3
Consolidated Statement of Changes in Stockholder's Equity.............. F-4
Consolidated Statement of Cash Flows................................... F-5
Notes to Consolidated Financial Statements............................. F-6
Consolidated Financial Statements:
Report of Independent Accountants...................................... F-15
Consolidated Balance Sheets............................................ F-16
Consolidated Statements of Operations.................................. F-17
Consolidated Statements of Changes in Stockholder's Equity............. F-18
Consolidated Statements of Cash Flows.................................. F-19
Notes to Consolidated Financial Statements............................. F-20

NOVACARE PHYSICAL REHABILITATION AND OCCUPATIONAL HEALTH GROUP

Combined Financial Statements as of November 19, 1999 and for the Period
July 1, 1999 to November 19, 1999
Report of Independent Accountants..................................... F-51
Combined Balance Sheet................................................ F-52
Combined Statement of Operations...................................... F-53
Combined Statement of NovaCare, Inc. Net Investment................... F-54
Combined Statement of Cash Flows...................................... F-55
Notes to Combined Financial Statements................................ F-56

NOVACARE PHYSICAL REHABILITATION AND OCCUPATIONAL HEALTH GROUP

Combined Financial Statements as of June 30, 1999 and for June 30, 1998
and for the Three Years Ended June 30, 1999
Report of Independent Accountants..................................... F-68
Combined Balance Sheets............................................... F-69
Combined Statements of Operations..................................... F-70
Combined Statements of NovaCare, Inc. Net Investment.................. F-71
Combined Statements of Cash Flows..................................... F-72
Notes to Combined Financial Statements................................ F-73

INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

Independent Auditors' Report............................................ F-85
Consolidated Balance Sheets............................................. F-86
Consolidated Statements of Operations................................... F-87
Consolidated Statements of Stockholders' Equity......................... F-88
Consolidated Statements of Cash Flows................................... F-89
Notes to Consolidated Financial Statements.............................. F-90

AMERICAN TRANSITIONAL HOSPITALS, INC.

Report of Independent Auditors.......................................... F-100
Consolidated Balance Sheet.............................................. F-101
Consolidated Statement of Operations.................................... F-102
Consolidated Statement of Changes in Equity of Parent................... F-103
Consolidated Statement of Cash Flows.................................... F-104
Notes to Consolidated Financial Statements.............................. F-105

F-1

Select Medical Corporation

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

March 31, December 31,
2001 2000
---------- ------------
(unaudited)

Assets
Current Assets:
Cash and cash equivalents................ $ 2,174 $ 3,151
Accounts receivable, net of allowance for
doubtful accounts of $75,517 and $74,307
in 2000 and 2001, respectively.......... 201,586 196,505
Prepaid income taxes..................... 312 1,093
Other current assets..................... 15,535 17,407
-------- --------
Total Current Assets...................... 219,607 218,156
Property and equipment, net............... 88,373 84,976
Intangible assets......................... 248,276 251,399
Other assets.............................. 25,140 32,269
-------- --------
Total Assets.............................. $581,396 $586,800
======== ========
Liabilities and Stockholders' Equity

Pro forma
(unaudited)

Current Liabilities:
Bank overdrafts.......................... $ 9,527 $ 14,218
Current portion of long-term debt and
notes payable........................... 13,934 18,746
Accounts payable......................... 28,930 28,795
Accrued payroll.......................... 24,786 21,466
Accrued vacation......................... 9,035 7,701
Accrued restructuring.................... 3,955 4,701
Accrued other............................ 18,707 15,451
Due to third party payors................ -- 1,511
-------- --------
Total Current Liabilities................. 108,874 112,589
Long-term debt, net of current portion.... 275,492 284,042
-------- --------
Total liabilities......................... 384,366 396,631
Commitments and Contingencies
Minority interest in consolidated
subsidiary companies..................... 12,831 12,098
Preferred stock--Class A, non-voting,
$1,000 per share redemption value
Authorized shares--55,000 Issued and
outstanding shares--52,838............... 66,781 65,481 66,781
Convertible Preferred stock--Class B, non-
voting, $3.75 per share
Authorized shares--16,000,000 Issued and
outstanding shares--16,000,000........... 65,098 64,092 5,098
Stockholders' Equity:
Common stock--$.01 par value: Authorized
shares--78,000,000,
Issued shares--25,697,000 in 2000 and
2001 and 34,913,000 pro forma........... 257 257 349
Capital in excess of par................. 70,765 73,069 130,673
Accumulated deficit...................... (17,636) (23,757) (17,636)
Treasury stock, at cost--221,000 shares.. (1,039) (1,039) (1,039)
Accumulated other comprehensive loss..... (27) (32) (27)
-------- -------- -------
Total Stockholders' Equity................ 52,320 48,498 112,320
-------- -------- -------
Total Liabilities and Stockholders'
Equity................................... $581,396 $586,800
======== ========

See accompanying notes.

F-2

Select Medical Corporation

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

For the Quarter
Ended March 31,
------------------
2001 2000
-------- --------

Net operating revenues..................................... $225,088 $196,722
-------- --------
Costs and expenses:
Cost of services......................................... 181,273 161,225
General and administrative............................... 8,440 7,328
Bad debt expense......................................... 8,343 5,918
Depreciation and amortization............................ 7,816 7,021
-------- --------
Total costs and expenses................................... 205,872 181,492
-------- --------
Income from operations..................................... 19,216 15,230
Other income and expense:
Interest income............................................ (241) (82)
Interest expense........................................... 8,016 8,847
-------- --------
Income before minority interests and income taxes.......... 11,441 6,465
Minority interest in consolidated subsidiary companies..... 1,407 1,118
-------- --------
Income before income taxes................................. 10,034 5,347
Income tax expense......................................... 3,913 2,513
-------- --------
Net income................................................. $ 6,121 $ 2,834
Less: Preferred dividends.................................. (2,306) (2,117)
-------- --------
Net income available to common stockholders................ $ 3,815 $ 717
======== ========
Net income per common share:
Basic:
Income per common share................................ $ 0.15 $ 0.03
Diluted:
Income per common share................................ $ 0.13 $ 0.03
Weighted average shares outstanding:
Basic.................................................... 25,476 25,492
Diluted.................................................. 36,078 25,504

See accompanying notes.

F-3

Select Medical Corporation

Consolidated Statement of Stockholders' Equity
(in thousands)
(unaudited)

Accumulated
Common Capital in Other
Common Stock Par Excess of Accumulated Treasury Comprehensive Comprehensive
Stock Value Par Deficit Stock Loss Income
------ --------- ---------- ----------- -------- ------------- -------------

Balance at December 31,
2000................... 25,697 $257 $73,069 $(23,757) $(1,039) $(32)
Net income............. 6,121 $6,121
Adjustment to other
comprehensive income.. 5 5
------
Total comprehensive
income................ $6,126
======
Issuance of common
stock................. 2
Preferred stock
dividends............. (2,306)
------ ---- ------- -------- ------- ----
Balance at March 31,
2001................... 25,697 $257 $70,765 $(17,636) $(1,039) $(27)
====== ==== ======= ======== ======= ====

See accompanying notes.

F-4

Select Medical Corporation

Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

For the Quarter
Ended March 31,
------------------
2001 2000
-------- --------

Operating activities
Net income................................................ $ 6,121 $ 2,834
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................ 7,816 7,021
Provision for bad debts.................................. 8,343 5,918
Minority interests....................................... 1,407 1,118
Changes in operating assets and liabilities, net of
effects from acquisition of businesses:
Accounts receivable..................................... (13,733) (13,188)
Other current assets.................................... 2,226 (2,995)
Other assets............................................ 3,468 (1,836)
Accounts payable........................................ 263 1,474
Due to third-party payors............................... (1,875) 162
Accrued expenses........................................ 8,126 6,006
Income taxes............................................ 2,657 1,977
-------- --------
Net cash provided by operating activities................. 24,819 8,491
-------- --------
Investing activities
Purchases of property and equipment, net.................. (5,325) (5,934)
Earnout payments.......................................... (505) (1,272)
Acquisition of businesses, net of cash acquired........... (1,375) (250)
-------- --------
Net cash used in investing activities..................... (7,205) (7,456)
-------- --------
Financing activities
Net repayments on credit facility debt.................... (7,000) --
Principal payments on seller and other debt............... (6,445) (6,826)
Proceeds from issuance of common stock.................... 2 910
Proceeds from (repayment of) bank overdrafts.............. (4,691) 5,696
Distributions to minority interests....................... (397) (657)
-------- --------
Net cash used in financing activities..................... (18,531) (877)
-------- --------
Effect of exchange rate changes on cash and cash
equivalents.............................................. (60) (15)
-------- --------
Net increase (decrease) in cash and cash equivalents...... (977) 143
Cash and cash equivalents at beginning of period.......... 3,151 4,067
-------- --------
Cash and cash equivalents at end of period................ $ 2,174 $ 4,210
======== ========
Supplemental Cash Flow Information
Cash paid for interest.................................... $ 8,016 $ 8,846
Cash paid for income taxes................................ $ 1,249 $ 290

See accompanying notes.

F-5

Select Medical Corporation

Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation

The unaudited condensed consolidated financial statements of Select
Medical Corporation (the "Company") as of and for the three month periods ended
March 31, 2001 and 2000, have been prepared in accordance with generally
accepted accounting principles. In the opinion of management, such information
contains all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results for such periods. All
intercompany transactions and balances have been eliminated. The results of
operations for the three months ended March 31, 2001 are not necessarily
indicative of the results to be expected for the full fiscal year ending
December 31, 2001.

Certain information and disclosures normally included in the notes to
consolidated financial statements have been condensed or omitted as permitted
by the rules and regulations of the Securities and Exchange Commission,
although the Company believes the disclosure is adequate to make the
information presented not misleading. The accompanying unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 2000
contained in the Company's Registration Statement on Form S-1, as amended
(Registration No. 333-48856).

2. Accounting Policies

Reclassifications

Certain amounts on the December 31, 2000 consolidated balance sheet have
been reclassified to conform to the classifications used on the March 31, 2001
consolidated balance sheet.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement, as amended by SFAS No.
137, is effective for all fiscal quarters of fiscal years beginning after June
15, 2000 and is therefore effective for the Company beginning with its fiscal
quarter ending March 31, 2001. In June 2000, FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Hedging Activities-an
amendment of FASB Statement No. 133." SFAS No. 138 is required to be adopted
concurrently with SFAS No. 133 and is therefore effective for the Company
beginning with its fiscal quarter ending March 31, 2001. The adoption of SFAS
133 and SFAS 138 had no effect on the Company's consolidated financial
statement.

3. Stock Option Plan

During the first three months of 2001, the Company granted stock options
under its 1997 Stock Option Plan for 373,211 shares of Common Stock at exercise
prices ranging from $9.50 to $11.28 per share.

F-6

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

4. Redeemable Preferred Stock and Stockholders' Equity

Class B Preferred Stock

Upon the completion of the Company's initial public offering on April
10, 2001, each share of the outstanding Class B Preferred Stock automatically
converted into .576 shares of common stock. The effects of this conversion
have been reflected as pro forma unaudited amounts in the accompanying
Consolidated Balance Sheet.

Common Stock

On March 28, 2001, the Company effected a 1 for .576 reverse split of
its common stock. Accordingly, all common issued and outstanding share and per
share information has been retroactively restated to reflect the effects of
this proposed stock split.

5. Segment Information

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

Three Months Ended March 31, 2000
----------------------------------------------------
Specialty Outpatient
Hospitals Rehabilitation All Other Total
----------- -------------- ----------- ------------

Net revenue................ $87,351,000 $106,869,000 $ 2,502,000 $196,722,000
EBITDA (a)................. 9,911,000 17,173,000 (4,833,000) 22,251,000
Total assets............... 259,945,000 353,649,000 22,497,000 636,091,000
Capital expenditures....... 3,865,000 1,215,000 854,000 5,934,000

Three Months Ended March 31, 2001
-----------------------------------------------------
Specialty Outpatient
Hospitals Rehabilitation All Other Total
------------ -------------- ----------- ------------

Net revenue............... $113,150,000 $108,673,000 $ 3,265,000 $225,088,000
EBITDA (a)................ 13,395,000 19,056,000 (5,419,000) 27,032,000
Total assets.............. 255,290,000 314,962,000 11,144,000 581,396,000
Capital expenditures...... 3,055,000 1,742,000 528,000 5,325,000

- --------
(a) EBITDA is defined as earnings before interest, minority interest, income
taxes, extraordinary items, special charges, depreciation and
amortization.

F-7

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

6. Restructuring Charges

The following summarizes the Company's restructuring activity:

Lease
Termination
Costs Severance Other Total
----------- --------- -------- ----------

January 1, 2001.................... $3,685,000 $ 940,000 $ 76,000 $4,701,000
Amounts paid in 2001............... (299,000) (371,000) (76,000) (746,000)
---------- --------- -------- ----------
March 31, 2001..................... $3,386,000 $ 569,000 $ -- $3,955,000
========== ========= ======== ==========

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

7. Net Income per Share

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

Three Months Ended
March 31,
---------------------
2000 2001
---------- ----------

Numerator:
Net income............................................ $2,834,000 $6,121,000
Less: Class A and Class B Preferred stock dividends... 2,117,000 2,306,000
---------- ----------
Numerator for basic earnings per share-income
available to common stockholders..................... 717,000 3,815,000
Effect of dilutive securities:
Class B Preferred stock dividends..................... -- 1,006,000
---------- ----------
Numerator for diluted earnings per share-income
available to common stockholders after assumed
conversions.......................................... $ 717,000 $4,821,000
========== ==========
Denominator:
Denominator for basic earnings per share-weighted
average shares....................................... 25,492 25,476
Effect of dilutive securities:
a) Stock options.................................... 12 959
b) Warrants......................................... -- 427
c) Convertible preferred stock...................... -- 9,216
---------- ----------
Denominator for diluted earnings per share-adjusted
weighted average shares and assumed conversions........ 25,504 36,078
========== ==========
Basic income per common share........................... $ 0.03 $ 0.15
Diluted income per common share......................... $ 0.03 $ 0.13

8. Subsequent Events

F-8

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

8. Subsequent Events (continued)

The overallotment offering closed on April 25, 2001. The net proceeds of the
initial offering and the overallotment offering of $89.4 million were used to
repay senior debt under the term and revolving loan portions of the Company's
credit facility and to redeem Class A Preferred Stock. All 52,838 shares of the
Class A Preferred Stock were redeemed on April 10, 2001 for $52,838,000. In
addition, the Company's Class B Preferred Stock automatically converted into
9,216,000 shares of common stock upon completion of the offering.

On May 2, 2001, the Company paid all accrued dividends on its Class A and
Class B Preferred Stock. Payments of Class A and Class B Preferred dividends
totaled $14.1 million and $5.2 million, respectively.

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

The Company conducts a significant portion of its business through
subsidiaries. The Company has issued $175 million of senior subordinated notes.
These notes will be fully and unconditionally guaranteed, jointly and
severally, by certain wholly-owned subsidiaries (the Subsidiary Guarantors).
Certain of the Company's subsidiaries will not guarantee notes (the Non-
Guarantor Subsidiaries). The claims of creditors of Non-Guarantor Subsidiaries
have priority over the rights of the Company to receive dividends or
distributions from such subsidiaries.

Presented below is condensed consolidating financial information for the
Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries at March
31, 2001 and for the quarters ended March 31, 2001 and 2000.

During April and May of 2001, the Company has repurchased outstanding
minority interests of certain subsidiaries for $10.8 million in cash and the
issuance of 523,452 shares of common stock. To the extent the Company now owns
100% of the outstanding equity interests of these subsidiaries they have been
included as Subsidiary Guarantors in the following condensed consolidating
financial information.

On October 1, 2000, the Company transferred the operating assets of one
of its subsidiaries into a newly organized partnership and simultaneously sold
partnership units to unaffiliated investors. The operations of this business
through a 100% owned subsidiary occurring before October 1, 2000 have been
included as a Subsidiary Guarantor. The operations commencing on October 1,
2000 through a minority owned partnership are presented as a Non-Guarantor
Subsidiary.

The equity method has been used by the Company with respect to
investments in subsidiaries. The equity method has been used by Subsidiary
Guarantors with respect to investments in Non-Guarantor Subsidiaries. Separate
financial statements for Subsidiary Guarantors are not presented.

The table below sets forth the following Non-Guarantor Subsidiaries:

Canadian Back Institute
Kentucky Orthopedic Rehabilitation, LLC.
Medical Information Management Systems, LLC.
Millenium Rehab Services, LLC.
Rehab Advantage Therapy Services, LLC.
Select-Houston Partners, L.P.
Select Management Services, LLC.
Select Specialty Hospital-Biloxi, Inc.
TJ Corporation I, LLC.

There are professional corporations that meet the definition of Non-
Guarantors in the indenture governing the senior subordinated notes that are
not included on the following table because the Company does not own any of
their equity interests.

F-9

Select Medical Corporation

Condensed Consolidating Balance Sheets

March 31, 2001
-------------------------------------------------------------------------
Select Medical
Corporation (Parent Subsidiary Non-Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------------- ---------- ------------- ------------ ------------

Assets
Current Assets:
Cash and cash
equivalents........... $ -- $ 971 $ 1,203 $ -- $ 2,174
Accounts receivable,
net................... (137) 171,823 29,900 -- 201,586
Prepaid income taxes... -- 312 -- -- 312
Other current assets... 1,260 12,653 1,622 -- 15,535
-------- -------- ------- --------- --------
Total Current Assets.... 1,123 185,759 32,725 -- 219,607
Property and equipment,
net.................... 4,664 64,748 18,961 -- 88,373
Investment in
affiliates............. 216,582 25,853 -- (242,435)(a) --
Intangible assets....... 5,905 201,377 40,994 -- 248,276
Other assets............ 5,977 18,340 823 -- 25,140
-------- -------- ------- --------- --------
Total Assets............ $234,251 $496,077 $93,503 $(242,435) $581,396
======== ======== ======= ========= ========
Liabilities and
Stockholders' Equity
Current Liabilities:
Bank overdrafts........ $ 7,614 $ 1,491 $ 422 $ -- $ 9,527
Current portion of
long-term debt and
notes payable......... 3,921 9,904 109 -- 13,934
Accounts payable....... 3,324 21,713 3,893 -- 28,930
Intercompany accounts.. (3,622) 3,748 (126) -- --
Accrued payroll........ 323 24,305 158 -- 24,786
Accrued vacation....... 1,657 6,300 1,078 -- 9,035
Accrued restructuring.. -- 3,955 -- -- 3,955
Accrued other.......... 4,232 12,324 2,151 -- 18,707
Income taxes........... 341 (116) (225) -- --
Due to third party
payors................ (18,770) 22,907 (4,137) -- --
-------- -------- ------- --------- --------
Total Current
Liabilities............ (980) 106,531 3,323 -- 108,874
Long-term debt, net of
current portion........ 51,005 174,851 49,636 -- 275,492
-------- -------- ------- --------- --------
Total liabilities....... 50,025 281,382 52,959 -- 384,366
Commitments and
Contingencies
Minority interest in
consolidated subsidiary
companies.............. -- 4,871 7,960 -- 12,831
Preferred stock--Class
A...................... 66,781 -- -- -- 66,781
Convertible Preferred
stock--Class B......... 65,098 -- -- -- 65,098
Stockholders' Equity:
Common stock........... 257 -- -- -- 257
Capital in excess of
par................... 70,765 -- -- -- 70,765
Accumulated deficit.... (17,636) (4,858) 6,335 (1,477)(b) (17,636)
Subsidiary investment.. -- 214,682 26,276 (240,958)(a) --
Treasury stock, at
cost.................. (1,039) -- -- -- (1,039)
Accumulated other
comprehensive loss.... -- -- (27) -- (27)
-------- -------- ------- --------- --------
Total Stockholders'
Equity................. 52,347 209,824 32,584 (242,435) 52,320
-------- -------- ------- --------- --------
Total Liabilities and
Stockholders' Equity... $234,251 $496,077 $93,503 $(242,435) $581,396
======== ======== ======= ========= ========

(a) Elimination of investments in subsidiaries.
(b) Elimination of investments in subsidiaries' earnings.

F-10

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Quarter Ended March 31, 2001
------------------------------------------------------------------------
Select Medical
Corporation (Parent Subsidiary Non-Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------------- ---------- ------------- ------------ ------------

Net operating revenues.. $3,005 $182,756 $39,327 $ -- $225,088
------ -------- ------- ------- --------
Costs and expenses:
Cost of services...... -- 149,717 31,556 -- 181,273
General and
administrative....... 8,440 -- -- -- 8,440
Bad debt expense...... -- 7,206 1,137 -- 8,343
Depreciation and
amortization......... 525 6,121 1,170 -- 7,816
------ -------- ------- ------- --------
Total costs and
expenses............... 8,965 163,044 33,863 -- 205,872
------ -------- ------- ------- --------
Income (loss) from
operations............. (5,960) 19,712 5,464 -- 19,216
Other income and
expense:
Intercompany charges.... (8,335) 7,917 418 -- --
Interest income......... (73) (167) (1) -- (241)
Interest expense........ 2,121 4,195 1,700 -- 8,016
------ -------- ------- ------- --------
Income (loss) before
minority interests,
income taxes and equity
in earnings of
subsidiaries........... 327 7,767 3,347 -- 11,441
Minority interest in
consolidated subsidiary
companies.............. -- 386 1,021 -- 1,407
------ -------- ------- ------- --------
Income (loss) before
income taxes and equity
in earnings of
subsidiaries........... 327 7,381 2,326 -- 10,034
Income tax expense...... 170 3,643 100 -- 3,913
Equity in earnings of
subsidiaries........... 5,964 1,811 -- (7,775)(a) --
------ -------- ------- ------- --------
Net income (loss)....... $6,121 $ 5,549 $ 2,226 $(7,775) $ 6,121
====== ======== ======= ======= ========

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

F-11

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

Operating activities
Net income (loss)....... $ 6,121 $ 5,549 $ 2,226 $(7,775)(a) $ 6,121
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization.......... 525 6,121 1,170 -- 7,816
Provision for bad
debts................. -- 7,206 1,137 -- 8,343
Minority interests..... -- 386 1,021 -- 1,407
Changes in operating
assets and
liabilities, net of
effects from
acquisition of
businesses:
Equity (loss) in
earnings of
subsidiaries......... (5,964) (1,811) -- 7,775(a) --
Intercompany......... 7,432 (10,424) 2,992 -- --
Accounts receivable... (163) (10,065) (3,505) -- (13,733)
Other current
assets............... (268) 2,353 141 -- 2,226
Other assets.......... 8,675 (1,804) (3,403) -- 3,468
Accounts payable...... 977 (702) (12) -- 263
Due to third-party
payors............... (3,000) 853 272 -- (1,875)
Accrued expenses...... (2,164) 10,097 193 -- 8,126
Income taxes.......... (7,849) 10,217 289 -- 2,657
------- -------- ------- ------- --------
Net cash provided by
operating activities... 4,322 17,976 2,521 -- 24,819
------- -------- ------- ------- --------
Investing activities
Purchases of property
and equipment, net..... (528) (4,146) (651) -- (5,325)
Earnout payments........ -- (505) -- -- (505)
Acquisition of
businesses, net of cash
acquired............... (1,375) -- -- -- (1,375)
------- -------- ------- ------- --------
Net cash used in
investing activities... (1,903) (4,651) (651) -- (7,205)
------- -------- ------- ------- --------
Financing activities
Net repayments on credit
facility debt.......... (7,000) -- -- -- (7,000)
Principal payments on
seller and other debt.. (1,524) (4,921) -- -- (6,445)
Proceeds from issuance
of common stock........ 2 -- -- -- 2
Proceeds from (repayment
of) bank overdrafts.... 6,103 (8,448) (2,346) -- (4,691)
Distributions to
minority interests..... -- -- (397) -- (397)
------- -------- ------- ------- --------
Net cash used in
financing activities... (2,419) (13,369) (2,743) -- (18,531)
------- -------- ------- ------- --------
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- (60) -- (60)
------- -------- ------- ------- --------
Net decrease in cash and
cash equivalents....... -- (44) (933) -- (977)
Cash and cash
equivalents at
beginning of period.... -- 1,015 2,136 -- 3,151
------- -------- ------- ------- --------
Cash and cash
equivalents at end of
period................. $ -- $ 971 $ 1,203 $ -- $ 2,174
======= ======== ======= ======= ========

(a) Elimination of equity in earnings of subsidiary.

F-12

Condensed Consolidating Statement of Operations
For the Quarter Ended March 31, 2000
-----------------------------------------------------------------------
Select Medical Non-
Corporation (Parent Subsidiary Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------------- ---------- ------------ ------------ ------------

Net operating revenues.. $ 2,502 $163,031 $31,189 $ -- $196,722
------- -------- ------- ------- --------
Costs and expenses:
Cost of services...... -- 135,209 26,016 -- 161,225
General and
administrative....... 7,328 -- -- -- 7,328
Bad debt expense...... -- 5,409 509 -- 5,918
Depreciation and
amortization......... 382 5,666 973 -- 7,021
------- -------- ------- ------- --------
Total costs and
expenses............... 7,710 146,284 27,498 -- 181,492
------- -------- ------- ------- --------
Income (loss) from
operations............. (5,208) 16,747 3,691 -- 15,230
Other income and
expense:
Intercompany charges.... (10,702) 10,371 331 -- --
Interest income......... (66) (16) -- -- (82)
Interest expense........ 2,183 5,364 1,300 -- 8,847
------- -------- ------- ------- --------
Income before minority
interests and income
taxes.................. 3,377 1,028 2,060 -- 6,465
Minority interest in
consolidated subsidiary
companies.............. -- 415 703 -- 1,118
------- -------- ------- ------- --------
Income before income
taxes.................. 3,377 613 1,357 -- 5,347
Income tax expense...... 1,197 1,241 75 -- 2,513
Equity in earnings of
subsidiaries........... 654 1,100 -- (1,754)(a) --
------- -------- ------- ------- --------
Net income.............. $ 2,834 $ 472 $ 1,282 $(1,754) $ 2,834
======= ======== ======= ======= ========

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

F-13

Condensed Consolidating Statement of Cash Flows
For the Quarter Ended March 31, 2000
-----------------------------------------------------------------------
Select Medical Non-
Corporation (Parent Subsidiary Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------------- ---------- ------------ ------------ ------------

Operating activities
Net income.............. $2,834 $ 472 $1,282 $(1,754)(a) $ 2,834
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization......... 382 5,666 973 -- 7,021
Provision for bad
debts................ -- 5,409 509 -- 5,918
Minority interests.... -- 415 703 -- 1,118
Changes in operating
assets and
liabilities, net of
effects from
acquisition of
businesses:
Equity (loss) in
earnings of
subsidiaries....... (654) (1,100) -- 1,754 (a) --
Intercompany........ (6,820) 2,407 4,413 -- --
Accounts
receivable......... (52) (9,961) (3,175) -- (13,188)
Other current
assets............. (364) (1,906) (725) -- (2,995)
Other assets........ 4,134 (2,527) (3,443) -- (1,836)
Accounts payable.... 279 1,275 (80) -- 1,474
Due to third-party
payors............. (2,500) 2,222 440 -- 162
Accrued expenses.... (798) 5,808 996 -- 6,006
Income taxes........ 1,206 977 (206) -- 1,977
------ ------ ------ ------- -------
Net cash provided by
(used in) operating
activities............. (2,353) 9,157 1,687 -- 8,491
------ ------ ------ ------- -------
Investing activities
Purchases of property
and equipment, net..... (854) (3,958) (1,122) -- (5,934)
Earnout payments........ -- (1,272) -- -- (1,272)
Acquisition of
businesses, net of cash
acquired............... (250) -- -- -- (250)
------ ------ ------ ------- -------
Net cash used in
investing activities... (1,104) (5,230) (1,122) -- (7,456)
------ ------ ------ ------- -------
Financing activities
Net repayments on credit
facility debt.......... -- -- -- -- --
Principal payments on
seller and other debt.. (910) (5,916) -- -- (6,826)
Proceeds from issuance
of common stock........ 910 -- -- -- 910
Proceeds from (repayment
of) bank overdrafts.... 3,457 2,282 (43) -- 5,696
Distributions to
minority interests..... -- (293) (364) -- (657)
------ ------ ------ ------- -------
Net cash provided by
(used in) financing
activities............. 3,457 (3,927) (407) -- (877)
------ ------ ------ ------- -------
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- (15) -- (15)
------ ------ ------ ------- -------
Net increase in cash and
cash equivalents....... -- -- 143 -- 143
Cash and cash
equivalents at
beginning of period.... -- 1,475 2,592 -- 4,067
------ ------ ------ ------- -------
Cash and cash
equivalents at end of
period................. $ -- $1,475 $2,735 $ -- $ 4,210
====== ====== ====== ======= =======

(a) Elimination of equity in earnings of subsidiary.

F-14

Report of Independent Accountants

To the Board of Directors and Stockholders
of Select Medical Corporation

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Select Medical Corporation and its subsidiaries (the Company) as of December
31, 2000 and 1999, and the results of their operations and their cash flows for
each of the three years ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. These
consolidated financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
Harrisburg, Pennsylvania
February 16, 2001, except for
paragraphs 8 and 2 of Note 7, Note 19 and Note 20
which are dated
March 28, 2001, April 3, 2001, May 2, 2001 and June 11, 2001, respectively

F-15

Select Medical Corporation

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

December 31,
1999 2000
-------- --------

Assets
Current Assets:
Cash and cash equivalents.................... $ 4,067 $ 3,151
Escrow receivable............................ 29,948 --
Accounts receivable, net of allowance for
doubtful accounts of $69,492 and $75,517 in
1999 and 2000, respectively................. 184,148 196,505
Prepaid income taxes......................... 283 1,093
Assets held for sale......................... 13,000 --
Other current assets......................... 21,264 21,083
-------- --------
Total Current Assets.......................... 252,710 221,832
Property and equipment, net................... 85,072 84,976
Intangible assets............................. 258,079 251,399
Other assets.................................. 24,857 28,593
-------- --------
Total Assets.................................. $620,718 $586,800
======== ========
Liabilities and Stockholders' Equity

Pro forma,
(unaudited)

Current Liabilities:
Bank overdrafts.............................. $ 6,966 $ 14,218
Current portion of long-term debt and notes
payable..................................... 21,127 18,746
Accounts payable............................. 27,489 28,795
Accrued payroll.............................. 17,865 21,466
Accrued vacation............................. 4,065 7,701
Accrued restructuring........................ 9,357 4,701
Accrued other................................ 15,621 15,451
Due to third party payors.................... 17,622 1,511
-------- --------
Total Current Liabilities..................... 120,112 112,589
Long-term debt, net of current portion........ 319,694 284,042
-------- --------
Total liabilities............................. 439,806 396,631
Commitments and Contingencies (Note 17)
Minority interest in consolidated subsidiary
companies..................................... 10,671 12,098
Preferred stock--Class A, non-voting, $1,000
per share redemption value
Authorized shares--55,000, Issued and
outstanding shares--52,848 and 52,838 in
1999 and 2000, respectively................. 60,398 65,481 $ 65,481
Convertible preferred stock--Class B, non-
voting, $3.75 per share redemption value:
Authorized shares--16,000,000, Issued and
outstanding shares--16,000,000............... 60,406 64,092 4,092
Stockholders' Equity:
Common stock--$.01 par value: Authorized
shares--78,000,000, Issued shares--
25,525,000, 25,697,000 and 34,913,000
(unaudited) in 1999, 2000 and pro forma,
respectively................................ 255 257 349
Capital in excess of par..................... 79,502 73,069 132,977
Accumulated deficit.......................... (29,469) (23,757) (23,757)
Treasury stock, at cost--189,000 and 221,000
shares in 1999 and 2000, respectively....... (829) (1,039) (1,039)
Accumulated other comprehensive loss......... (22) (32) (32)
-------- -------- --------
Total Stockholders' Equity.................... 49,437 48,498 $108,498
-------- -------- --------
Total Liabilities and Stockholders' Equity.... $620,718 $586,800
======== ========

The accompanying notes are an integral part of these financial statements.

F-16

Select Medical Corporation

Consolidated Statements of Operations
(in thousands, except per share amounts)

For the Year Ended
December 31,
----------------------------
1998 1999 2000
-------- -------- --------

Net operating revenues.......................... $149,043 $455,975 $805,897
-------- -------- --------
Costs and expenses:
Cost of services.............................. 128,910 383,453 656,461
General and administrative.................... 12,526 21,420 28,431
Bad debt expense.............................. 4,014 8,858 29,335
Depreciation and amortization................. 4,942 16,741 30,401
Special charge................................ 10,157 5,223 --
-------- -------- --------
Total costs and expenses........................ 160,549 435,695 744,628
-------- -------- --------
Income (loss) from operations................... (11,506) 20,280 61,269
Other income and expense:
Interest income................................. (406) (362) (939)
Interest expense................................ 5,382 21,461 36,126
-------- -------- --------
Income (loss) before minority interests and
income taxes................................... (16,482) (819) 26,082
Minority interest in consolidated subsidiary
companies...................................... 1,744 3,662 4,144
-------- -------- --------
Income (loss) before income taxes............... (18,226) (4,481) 21,938
Income tax expense (benefit).................... (182) 2,811 9,979
-------- -------- --------
Net income (loss) before extraordinary item..... (18,044) (7,292) 11,959
Extraordinary item.............................. -- 5,814 6,247
-------- -------- --------
Net income (loss)............................... $(18,044) $(13,106) $ 5,712
Less: Preferred dividends....................... 2,540 5,175 8,780
-------- -------- --------
Net loss available to common stockholders....... $(20,584) $(18,281) $ (3,068)
======== ======== ========
Net income (loss) per common share:
Basic:
Income (loss) before extraordinary item..... $ (1.64) $ (0.50) $ 0.13
Extraordinary item.......................... -- (0.24) (0.25)
-------- -------- --------
Loss per common share....................... $ (1.64) $ (0.74) $ (0.12)
Diluted:
Income (loss) before extraordinary item..... $ (1.64) $ (0.50) $ 0.12
Extraordinary item.......................... -- (0.24) (0.24)
-------- -------- --------
Loss........................................ $ (1.64) $ (0.74) $ (0.12)
Weighted average shares outstanding:
Basic......................................... 12,517 24,557 25,457
Diluted....................................... 12,517 24,557 25,907

The accompanying notes are an integral part of these financial statements.

F-17

Select Medical Corporation

Consolidated Statements of Changes in Stockholders' Equity
(in thousands)

Common Retained Accumulated
Stock Capital Earnings/ Other
Common Par in Excess (Accumulated Treasury Comprehensive Comprehensive
Stock Value of Par Deficit) Stock Loss Income (Loss)
------ ------ --------- ------------ -------- ------------- -------------

Balance at December 31,
1997.................... 11,685 $ 117 $ 3,264 $ 1,681 $ -- $ --
Net loss............... -- -- -- (18,044) -- -- $(18,044)
Accumulated other
comprehensive loss.... -- -- -- -- -- (27) (27)
--------
Total comprehensive
loss.................. -- -- -- -- -- -- $(18,071)
========
Issuance of common
stock................. 12,708 127 74,878 -- -- --
Issuance of warrants... -- -- 1,086 -- -- --
Redemption of common
stock................. -- -- -- -- (48) --
Preferred stock
dividends............. -- -- (2,540) -- -- --
------ ----- -------- -------- ------- ----
Balance at December 31,
1998.................... 24,393 244 76,688 (16,363) (48) (27)
Net loss............... -- -- -- (13,106) -- -- $(13,106)
Accumulated other
comprehensive income.. -- -- -- -- -- 5 5
--------
Total comprehensive
loss.................. -- -- -- -- -- -- $(13,101)
========
Issuance of common
stock................. 1,132 11 6,239 -- -- --
Accretion of preferred
stock issuance costs.. -- -- (639) -- -- --
Issuance of warrants... -- -- 2,389 -- -- --
Purchase of treasury
stock................. -- -- -- -- (781) --
Preferred stock
dividends............. -- -- (5,175) -- -- --
------ ----- -------- -------- ------- ----
Balance at December 31,
1999.................... 25,525 255 79,502 (29,469) (829) (22)
Net income............. -- -- -- 5,712 -- -- $ 5,712
Accumulated other
comprehensive loss.... -- -- -- -- -- (10) (10)
--------
Total comprehensive
income................ -- -- -- -- -- -- $ 5,702
========
Issuance of common
stock................. 172 2 1,116 -- -- --
Purchase of treasury
shares................ -- -- -- -- (210) --
Issuance of warrants... -- -- 1,104 -- -- --
Valuation of non-
employee options...... -- -- 127 -- -- --
Preferred stock
dividends............. -- -- (8,780) -- -- --
------ ----- -------- -------- ------- ----
Balance at December 31,
2000.................... 25,697 $ 257 $ 73,069 $(23,757) $(1,039) $(32)
====== ===== ======== ======== ======= ====

The accompanying notes are an integral part of these financial statements.

F-18

Select Medical Corporation

Consolidated Statements of Cash Flows
(in thousands)

For the Year Ended
December 31,
------------------------------
1998 1999 2000
--------- --------- --------

Operating activities
Net income (loss)............................. $ (18,044) $ (13,106) $ 5,712
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................ 4,942 16,741 30,401
Provision for bad debts...................... 4,014 8,858 29,335
Special charge............................... 10,157 5,223 --
Extraordinary item........................... -- 5,814 6,247
Loss (gain) on sale of assets................ -- (215) 111
Minority interests........................... 1,744 3,662 4,144
Changes in operating assets and liabilities,
net of effects from acquisition
of businesses:
Accounts receivable........................ (17,513) (47,290) (36,964)
Other current assets....................... 3,229 (1,728) (2,692)
Other assets............................... (1,539) (10,868) (5,019)
Accounts payable........................... (2,591) 29 1,380
Due to third-party payors.................. (1,279) 8,715 (17,673)
Accrued expenses........................... (5,535) (2,688) (17)
Income taxes............................... (2,287) 1,696 7,548
--------- --------- --------
Net cash provided by (used in) operating
activities.................................... (24,702) (25,157) 22,513
--------- --------- --------
Investing activities
Purchases of property and equipment, net...... (6,423) (10,896) (22,430)
Escrow receivable............................. -- -- 29,948
Proceeds from disposal of assets held for
sale.......................................... -- -- 13,000
Proceeds from disposal of assets.............. -- 988 2,947
Earnout payments.............................. -- -- (3,430)
Acquisition of businesses, net of cash
acquired...................................... (203,058) (171,354) (5,838)
--------- --------- --------
Net cash provided by (used in) investing
activities.................................... (209,481) (181,262) 14,197
--------- --------- --------
Financing activities
Proceeds from issuance of debt................ 103,898 68,194 --
Net proceeds (repayments) on credit facility
debt.......................................... 31,173 86,655 (12,000)
Principal payments on seller and other debt... (6,482) (10,064) (27,577)
Net proceeds from issuance of Class A
redeemable preferred stock.................... 47,616 -- --
Net proceeds from issuance of Class B
convertible preferred stock................... -- 59,361 --
Proceeds from issuance of common stock........ 65,719 1,041 1,118
Purchase of treasury stock.................... (48) (781) (210)
Redemption of preferred stock................. (19) (214) (11)
Proceeds from bank overdrafts................. 2,073 4,893 7,253
Payment of deferred financing costs........... (1,314) (10,883) (4,563)
Distributions to minority interests........... (318) (722) (1,626)
--------- --------- --------
Net cash provided by (used in) financing
activities.................................... 242,298 197,480 (37,616)
--------- --------- --------
Effect of exchange rate changes on cash and
cash equivalents.............................. 27 5 (10)
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents................................... 8,142 (8,934) (916)
Cash and cash equivalents at beginning of
year.......................................... 4,859 13,001 4,067
--------- --------- --------
Cash and cash equivalents at end of year...... $ 13,001 $ 4,067 $ 3,151
========= ========= ========
Supplemental Cash Flow Information
Cash paid for interest........................ $ 2,185 $ 15,500 $ 36,125
Cash paid for income taxes.................... $ 261 $ 2,112 $ 3,476

The accompanying notes are an integral part of these financial statements.

F-19

Select Medical Corporation

Notes to Consolidated Financial Statements

1. Organization and Accounting Policies

Business Description

Select Medical Corporation and its subsidiaries (the "Company") was
formed in December 1996 and commenced operations during February 1997 upon the
completion of its first acquisition. The Company provides long-term acute care
hospital services through its Select Specialty Hospital division and provides
physical, occupational, and speech rehabilitation services through its
outpatient divisions. Select Specialty Hospital division owns and operates
long-term acute care hospitals. These hospitals, which average approximately 35
to 40 beds in size, operate generally in space leased within general acute care
hospitals. These hospitals offer intensive nursing care, vent weaning, and
therapy services to high acuity patients who require long lengths of hospital
care before being discharged to a nursing home or home care environment. At
December 31, 1998, 1999 and 2000, the Company operated 39, 44 and 54 long-term
acute care hospitals, respectively. The Company's outpatient divisions provide
rehabilitation services in outpatient clinics owned or managed by the Company
and under therapy contracts with nursing homes, schools, hospitals, and home
care agencies. At December 31, 1998, 1999 and 2000, the Company had operations
in Canada and 19, 33 and 35 states, respectively.

Principles of Consolidation

The consolidated financial statements include the accounts of the
Company, its majority owned subsidiaries, limited liability companies and
limited partnerships the Company and its subsidiaries control through ownership
of general and limited partnership interests. All significant intercompany
balances and transactions are eliminated in consolidation. The Company does not
consolidate professional corporations where it has a long-term management
contract because the Company does not have a long-term controlling interest in
the affiliated practices as defined in "Emerging Issues Task Force No 97-2."
Instead the Company reports management services revenue earned under the terms
of the agreements.

Use of Estimates

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalents
are stated at cost which approximates market.

Property and Equipment

Property and equipment are stated at cost net of accumulated
depreciation. Depreciation and amortization are computed using the straight-
line method over the estimated useful lives of the assets or the term of the
lease, as appropriate. The general range of useful lives is as follows:

Leasehold improvements....................................... 5 years
Furniture and equipment...................................... 2--10 years
Buildings.................................................... 40 years

F-20

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

1. Organization and Accounting Policies (continued)

Qualified internally developed software costs for internal use are
capitalized subsequent to both the preliminary project stage and when
management has committed to funding, in accordance with Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The carrying value of all internally developed software costs
was $1,416,000, $2,541,000 and $2,210,000 at December 31, 1998, 1999 and 2000,
respectively.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to
concentration of credit risk consist primarily of cash balances and accounts
receivable. The Company invests its excess cash with large banks. The Company
grants unsecured credit to its patients, most of whom reside in the service
area of the Company's facilities and are insured under third-party payor
agreements. Because of the geographic diversity of the Company's facilities and
non-governmental third-party payors, Medicare represents the Company's only
concentration of credit risk.

Assets Held for Sale

Assets held for sale were stated at their net realizable value less
approximated costs to sell. The results of operations related to the assets
held for sale were excluded from the Company's operating results and were
reflected as an adjustment to the purchase price when the assets were sold. No
depreciation or amortization was recognized on the assets held for sale.

Income Taxes

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Management provides a valuation allowance for net deferred tax assets when it
is more likely than not that a portion of such net deferred tax assets will not
be recovered.

Intangible Assets

Identifiable assets and liabilities acquired in connection with business
combinations accounted for under the purchase method are recorded at their
respective fair values. Deferred taxes have been recorded to the extent of
differences between the fair value and the tax basis of the assets acquired and
liabilities assumed. The excess of the purchase price over the fair value of
tangible net assets acquired is amortized on a straight-line basis over the
estimated useful life of the intangible assets. Company management performed
allocation of intangible assets between identifiable intangibles and goodwill.
Intangible assets other than goodwill primarily consist of the values assigned
to trademarks and assembled work force. Management Service Agreements ("MSA's")
represent consideration paid to therapists groups for entering into MSA's with
the Company. The Company's MSA's are for a term of 20 years with renewal
options. Management believes that the estimated useful lives established at the
dates of each transaction were reasonable based on the economic factors
applicable to each of the businesses.

F-21

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

1. Organization and Accounting Policies (continued)

The useful life for each class of intangible asset is as follows:

Goodwill........................................................ 40 years
Trademarks...................................................... 40 years
Management service agreements................................... 20 years
Assembled workforce............................................. 7 years

The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS 121"), which establishes accounting standards for the
impairment of long-lived assets, certain identified intangible assets and
goodwill related to those assets to be held and used and for long-lived assets
and certain intangible assets to be disposed. In accordance with SFAS 121, the
Company reviews the realizability of long-lived assets, certain intangible
assets and goodwill whenever events or circumstances occur which indicate
recorded costs may not be recoverable. In addition, the Company also analyzes
the recovery of long-lived assets on an enterprise basis.

If the expected future cash flows (undiscounted) are less than the
carrying amount of such assets, the Company recognizes an impairment loss for
the difference between the carrying amount of the assets and their estimated
fair value (Note 10).

Due to Third-Party Payors

Due to third-party payors represents the difference between amounts
received under interim payment plans from third-party payors for services
rendered and amounts estimated to be reimbursed by those third-party payors
upon settlement of cost reports.

Insurance Risk Programs

The Company is insured for malpractice claims based on a claims made or
claims incurred policy purchased in the commercial market. A liability is
estimated for the premium cost for such coverage. The Company has the
unilateral right to purchase tail coverage for its claims made policy at a
fixed price.

Certain insurable risks such as workers' compensation are self-insured by
the Company. Accruals for claims under the Company's self-insurance program are
recorded on a claim-incurred basis.

Minority Interests

The interests held by other parties in subsidiaries, limited liability
companies and limited partnerships owned and controlled by the Company are
reported on the consolidated balance sheets as minority interests. Minority
interests reported in the consolidated statements of operations reflect the
respective interests in the income or loss of the subsidiaries, limited
liability companies and limited partnerships attributable to the other parties,
the effect of which is removed from the Company's consolidated results of
operations.

Treasury Stock

Treasury stock is carried at cost, determined by the first-in, first-out
method.

F-22

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

1. Organization and Accounting Policies (continued)

Revenue Recognition

Net operating revenues consists of patient, contract therapy, and
management services revenues and are recognized as services are rendered.

Patient service revenue is reported net of provisions for contractual
allowances from third party payors and patients. The Company has agreements
with third-party payors that provide for payments to the Company at amounts
different from its established rates. The differences between the estimated
program reimbursement rates and 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. Net patient service revenue is reported net of provision for
contractual allowance from third-party payors, patients and others for services
rendered, including retroactive adjustments under reimbursement agreements with
third-party payors. Retroactive adjustments are accrued on an estimated basis
in the period the related services are rendered and adjusted in future periods
as final settlements are determined. Accounts receivables resulting from such
payment arrangements are recorded net of contractual allowances. Net operating
revenues generated directly from the Medicare program represented approximately
38%, 48%, and 35% of the Company's consolidated net operating revenues for the
years ended December 31, 1998, 1999 and 2000, respectively. Approximately 33%
and 31% of the Company's gross accounts receivable at December 31, 1999 and
2000, respectively, are from this payor source.

Management services revenues represent revenues earned under management
service agreements with professional corporations and associations in the
business of providing physical, occupational, and speech therapy. Management
fee receivables resulting from such management services are included in other
assets.

Significant reductions in the patient service revenues generated in a
hospital may occur if the Company is unable to maintain the certification of
the hospital as a long-term acute care hospital (LTACH) in accordance with
Medicare regulations. Additionally, the majority of the Company's hospitals
operate in space leased from general acute care hospitals (host hospitals);
consequently, these hospitals are also subject to Medicare "Hospital within
Hospital" (HIH) regulations in addition to the general LTACH regulations. The
HIH regulations are designed to ensure that the hospitals are organizationally
and functionally independent of their host hospital. If an LTACH located in a
host hospital fails to meet the HIH regulations it also loses its status as an
LTACH. These determinations are made on an annual basis. Management believes
its LTACH's are in compliance with the Medicare regulations regarding HIH's and
LTACH's and that it will be able to meet the tests to maintain the future
status of its hospitals as LTACH's under the current Medicare regulations.

Foreign Currency Translations

The Company uses the local currency as the functional currency for its
Canadian operations. All assets and liabilities of foreign operations are
translated into U.S. dollars at year-end exchange rates. Income statement items
are translated at average exchange rates prevailing during the year. The
resulting translation adjustments impacting comprehensive income (loss) are
recorded as a separate component of stockholders' equity.

Basic and Diluted Net Income (Loss) Per Share

Basic net income (loss) per common share is based on the weighted average
number of shares of common stock outstanding during each year. Diluted net
income (loss) per common share is based on the

F-23

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

1. Organization and Accounting Policies (continued)

weighted average number of shares of common stock outstanding during each year,
adjusted for the effect of common stock equivalents arising from the assumed
exercise of stock options, warrants and convertible preferred stock, if
dilutive.

Recent Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement for financial position and measure those
instruments at fair value. SFAS No. 137, issued by the FASB in July 1999,
establishes a new effective date for SFAS No. 133. This statement, as amended
by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000 and is therefore effective for the Company beginning with
its fiscal quarter ending March 31, 2001. In June 2000, FASB issued SFAS No.
138, "Accounting for Certain Derivative Instruments and Hedging Activities--an
amendment of FASB Statement No. 133." SFAS No. 138 addresses a limited number
of issues causing implementation difficulties for SFAS No. 133. SFAS No. 138 is
required to be adopted concurrently with SFAS No. 133 and is therefore
effective for the Company beginning with its fiscal quarter ending March 31,
2001. Because of the limited use of derivative instruments, management does not
believe that there will be a material effect on the Company's consolidated
financial statements.

In March 2000, the FASB issued interpretation No. 44, or FIN 44
"Accounting for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principles Board Opinion No. 25, or APB Opinion
25. This interpretation, which clarifies the definition of an employee
noncompensatory plan, accounting consequences of various modifications to
previously fixed stock options or awards and the exchange of stock compensation
awards in a business combination. The adoption of FIN 44 did not have an impact
on the Company's consolidated financial statements.

2. Acquisitions, Disposal and Management Services Agreements

For the year ended December 31, 1998

On January 16, 1998, the Company acquired an 80% undivided interest in
certain assets of NW Rehabilitation Associates, Inc. and Medical Temporary
Specialists, Inc. These and the remaining 20% undivided interests were then
contributed to NW Rehabilitation Associates, LLC (NW Rehab), which is 80% owned
by the Company. NW Rehab provides rehabilitation services to third parties on a
contract basis and to various homecare providers.

On February 28, 1998, the Company acquired approximately 73% of the
outstanding stock of Canadian Back Institute Limited (CBIL). CBIL provides
rehabilitation services in clinics across Canada. CBIL carries on these
activities through various limited partnerships and corporations. In some cases
CBIL is the general partner only (through its wholly owned subsidiaries), in
certain other cases CBIL is also a limited partner (either directly or through
its wholly owned subsidiaries) and in other cases CBIL carries on its
activities through wholly owned or partially-owned subsidiaries.

On June 4, 1998, the Company acquired 80% of the outstanding common stock
of PT Services, Inc. (PTS). PTS operates rehabilitation clinics and provides
contract therapy services.

F-24

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

2. Acquisitions, Disposal and Management Services Agreements (continued)

On June 30, 1998, the Company acquired 100% of the outstanding stock of
American Transitional Hospitals (ATH), a wholly-owned subsidiary of Beverly
Enterprises, Inc., for $62,800,000 cash and $14,944,000 liabilities assumed.
ATH provides long-term acute care hospital services.

On December 16, 1998, the Company completed a public tender of the
outstanding stock of Intensiva Healthcare Corporation (Intensiva) for
$103,600,000 cash and $56,491,000 liabilities assumed. The purchase was funded
through the sale of 10,697,000 shares of Select common stock and subordinate
and bank debt. As part of the acquisition, the Company accrued $7.6 million of
costs related principally to severance and other restructuring costs. Intensiva
provides long-term acute care hospital services.

During 1998, the Company acquired controlling interests in two outpatient
therapy businesses. The Company also acquired the non-medical assets of three
outpatient therapy businesses and executed long-term Management Services
Agreements (MSA) with the related professional corporations. Outpatient therapy
acquisitions consisted of The Summit Group on May 1, 1998 and Avalon
Rehabilitation on October 30, 1998. MSA's were executed with H&M Hecker, P.T,
P.C. on January 31, 1998, Professional Management Bureau, Inc. on February 28,
1998 and Cedar Bridge Physical Therapy, P.C., Cedar Bridge Rehab Services,
Inc., and KC Services, Inc. (collectively Cedar Bridge) on May 1, 1998.

For the Year Ended December 31, 1999

On January 8, 1999, the Company acquired 80% of the undivided interest in
the business and certain assets of Kentucky Orthopedic Rehab Team, PSC (KORT).
KORT operates rehabilitation clinics.

On November 19, 1999, the Company acquired 100% of the outstanding stock
of NovaCare Physical Rehabilitation and Occupational Health Group (NovaCare)
for $160,416,000 cash and $64,734,000 of liabilities assumed. The purchase was
funded through the sale of 16,000,000 shares of Select Class B Convertible
Preferred stock and subordinate and bank debt. The Company is indemnified
against certain risks including receivables collection and certain joint
venture agreements through a $36,800,000 escrow account. In November 1999, the
Company recorded a $29,948,000 receivable related to the receivable collection
and severance indemnification. Of this amount $29,400,000 represents the change
in estimate for allowance for doubtful accounts recorded in the NovaCare July
1, 1999 to November 19, 1999 financial statements. On July 6, 2000, the Company
received proceeds of $29,948,000 from the escrow account established in
connection with its acquisition of NovaCare from NovaCare's former owner, NAHC,
Inc. The Company also received $1.95 million in notes in satisfaction of
certain severance and other obligations NAHC, Inc. had to the Company under the
purchase agreement. As a part of the acquisition, the Company accrued $5.7
million of costs related to the planned closure of approximately 60 outpatient
rehab clinics, the downsizing and relocation of the NovaCare corporate
headquarters and transaction-related expenses. NovaCare provides outpatient
physical therapy and rehabilitation services.

The Company divested the Occupational Health segment of NovaCare with
total sale proceeds of $13,000,000. The net proceeds of this sale and the cash
flows of this segment until it was sold were allocated to assets held for sale
in the allocation of the NovaCare purchase price. Differences between the
actual and expected amount were recorded as an adjustment to goodwill during
2000.

Certain purchase agreements require additional payments to the former
owners if specific financial targets are met. At December 31, 2000, aggregate
contingent payments in connection with all acquisitions of

F-25

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

2. Acquisitions, Disposal and Management Services Agreements (continued)

approximately $7,400,000 have not been included in the initial cost of the
business since the additional amount of such contingent consideration that may
be paid in the future, if any, is not presently determinable.

During 1999, the Company acquired controlling interests in four
outpatient therapy businesses. Outpatient therapy acquisitions consisted of
Sports Rehabilitation and Physical Therapy Center, P.A. on March 1, 1999,
Senior Rehab, Inc. on March 31, 1999, Central Jersey Rehabilitation Services,
Inc. on May 15, 1999 and Hunsel Physical Therapy Services, Inc. on July 15,
1999.

For the Year Ended December 31, 2000

During 2000, the Company acquired controlling interests in four
outpatient therapy businesses. Outpatient therapy acquisitions consisted of
Delta Rehab Group, Inc. on January 20, 2000, S.T.A.R. Rehab, Inc. on March 31,
2000, Crisan Physiotherapy and Sports Medicine Center, P.A. on May 31, 2000 and
Rehab Health, Inc. on July 31, 2000.

The acquisitions were accounted for using the purchase method of
accounting, and results of operations from acquired companies are included in
these consolidated financial statements from the dates of acquisition.

The following unaudited results of operations have been prepared assuming
all acquisitions consummated on or before December 31, 1999 had occurred as of
the beginning of the periods presented. The acquisitions completed during 2000
are not significant for pro forma disclosure. These results are not necessarily
indicative of results of future operations nor of the results that would have
occurred had the acquisitions been consummated as of the beginning of the
periods presented.

For the year ended
December 31,
--------------------------
1998 1999
------------ ------------
(unaudited) (unaudited)

Revenues............................................ $572,021,000 $720,116,000
Loss before extraordinary items..................... (26,764,000) (78,569,000)
Net loss............................................ (26,764,000) (84,383,000)

F-26

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

2. Acquisitions, Disposal and Management Services Agreements (continued)

Information with respect to businesses acquired in purchase transactions
is as follows:

For the year ended December 31,
------------------------------------
1998 1999 2000
------------ ------------ ----------

Cash paid (net of cash acquired).......... $203,058,000 $171,354,000 $5,838,000
Notes issued.............................. 18,343,000 7,783,000 3,207,000
Other consideration....................... 785,000 -- --
------------ ------------ ----------
222,186,000 179,137,000 9,045,000
Liabilities assumed....................... 105,286,000 65,744,000 255,000
------------ ------------ ----------
327,472,000 244,881,000 9,300,000
Fair value of assets acquired, principally
accounts receivable and property and
equipment................................ 159,554,000 144,623,000 1,606,000
Trademarks................................ -- 40,000,000 --
Management services agreements............ 8,829,000 1,520,000 --
Assembled workforce....................... 8,480,000 9,200,000 --
------------ ------------ ----------
Cost in excess of fair value of net
assets acquired.......................... $150,609,000 $ 49,538,000 $7,694,000
============ ============ ==========

3. Property and Equipment

Property and equipment consists of the following:

December 31,
-----------------------
1999 2000
----------- -----------

Land................................................... $ 501,000 $ 501,000
Leasehold improvements................................. 19,800,000 29,836,000
Buildings.............................................. 17,000,000 17,000,000
Furniture and equipment................................ 64,572,000 74,170,000
Construction in progress............................... 661,000 366,000
----------- -----------
102,534,000 121,873,000
Less: accumulated depreciation and amortization........ 17,462,000 36,897,000
----------- -----------
Total property and equipment........................... $85,072,000 $84,976,000
=========== ===========

F-27

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

4. Intangible Assets

Intangible assets consist of the following:

December 31,
--------------------------
1999 2000
------------ ------------

Goodwill.......................................... $198,254,000 $201,171,000
Trademarks........................................ 40,000,000 40,000,000
Management services agreements.................... 10,343,000 10,343,000
Assembled workforce............................... 17,544,000 17,544,000
------------ ------------
266,141,000 269,058,000
Less: accumulated amortization.................... 8,062,000 17,659,000
------------ ------------
Total intangible assets........................... $258,079,000 $251,399,000
============ ============

The following summarizes the Company's intangible asset activity:

December 31,
--------------------------
1999 2000
------------ ------------

Beginning balance of intangibles, net............. $171,378,000 $258,079,000
Intangibles recorded for companies purchased in
current year..................................... 100,258,000 7,694,000
Intangibles adjusted for companies purchased in
prior year for:
Asset impairments................................. (3,691,000) --
Income tax benefits recognized.................... (1,314,000) (8,402,000)
Translation adjustment............................ 671,000 (441,000)
Other............................................. (3,471,000) 635,000
Earn out payments................................. -- 3,430,000
Amortization...................................... (5,752,000) (9,596,000)
------------ ------------
Net increase (decrease) in intangibles............ 86,701,000 (6,680,000)
------------ ------------
Ending balance of intangibles, net................ $258,079,000 $251,399,000
============ ============

5. Restructuring Charges

During December 1998, the Company recorded a $7,648,000 restructuring
reserve in connection with the acquisition of Intensiva. The Company also
recorded a restructuring reserve in 1999 related to the NovaCare acquisition of
$5,743,000. The reserves primarily included costs associated with workforce
reductions of 25 and 162 employees in 1998 and 1999, respectively, and lease
buyouts in accordance with the Company's qualified restructuring plan. During
2000, the Company revised its estimates for the NovaCare termination costs,
severance liabilities and the anticipated closure of two central billing
offices related to the NovaCare acquisition. The reserves for the billing
office closures primarily included costs associated with lease buyouts and
workforce reductions of 67 employees. These changes in estimates have been
reflected as an adjustment to the purchase price of NovaCare.

F-28

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

5. Restructuring Charges (continued)

The following summarizes the Company's restructuring activity:

Lease
Termination
Costs Severance Other Total
----------- ----------- ----------- -----------

January 1, 1999........... $ 536,000 $ 5,914,000 $ 1,198,000 $ 7,648,000
Amounts paid in 1999...... (109,000) (5,914,000) (1,198,000) (7,221,000)
1999 restructuring
liabilities assumed...... 3,187,000 -- -- 3,187,000
1999 acquisition
restructuring costs...... 3,600,000 700,000 1,443,000 5,743,000
----------- ----------- ----------- -----------
December 31, 1999......... 7,214,000 700,000 1,443,000 9,357,000
Revision of estimate...... 214,000 841,000 184,000 1,239,000
Amounts paid in 2000...... (3,743,000) (601,000) (1,551,000) (5,895,000)
----------- ----------- ----------- -----------
December 31, 2000......... $ 3,685,000 $ 940,000 $ 76,000 $ 4,701,000
=========== =========== =========== ===========

Management expects to pay out the remaining restructuring reserves
through 2003.

6. Long-Term Debt and Notes Payable

The components of long-term debt and notes payable are shown in the
following table:

December 31,
-------------------------
1999 2000
------------ ------------

Credit facility...................................... $209,076,000 $195,877,000
10% Senior Subordinated Notes, net of discount of
$9,286,000, $14,096,000 and $13,228,000 in 1998,
1999 and 2000, respectively......................... 75,904,000 76,772,000
Seller notes......................................... 53,702,000 27,888,000
Other................................................ 2,139,000 2,251,000
------------ ------------
Total debt........................................... 340,821,000 302,788,000
Less: current maturities............................. 21,127,000 18,746,000
------------ ------------
Total long-term debt................................. $319,694,000 $284,042,000
============ ============

The Company refinanced its existing credit facility in September 2000.
The new credit agreement consists of a $175 million term commitment and a $55
million revolving commitment. The credit facility replaced the Company's
November 19, 1999 credit facility. The term debt begins quarterly amortization
in September 2001, with a final maturity date of September 2005. The revolving
commitment also matures in September 2005. The credit agreement requires
mandatory repayment of a portion of the credit facility based on leverage ratio
in the event the Company successfully completes an initial public offering of
common stock. Borrowings under the facility bear interest at either LIBOR or
prime rate, plus applicable margins based on financial covenant ratio tests
(approximately 10.2% at December 31, 2000). Deferred financing costs related to
the existing credit facility of approximately $6,247,000 were charged to
expense as an extraordinary item during 2000. A commitment fee of .5% per annum
was charged on the unused portion of the credit facility. The unused portion of
the Revolving Commitment at December 31, 2000 was approximately $34 million.
The credit facility is collateralized by equity interest in the Company and
includes restrictions on certain payments by the Company including dividend
payments, minimum net worth requirements and other covenants. The Company was
authorized to issue up to $10,000,000 in letters of credit. Letters of credit
reduced the capacity under the Revolving Commitment and bear interest at 3.5%.
Approximately $3,600,000 in letters of credit were issued at December 31, 2000.

F-29

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

6. Long-Term Debt and Notes Payable (continued)

The Company hedges foreign currency transactions related to its Canadian
debt obligations by entering into forward exchange contracts. Gains and losses
associated with currency rate changes on forward contracts hedging foreign
currency transactions are recorded currently in earnings.

On November 19, 1999, the Company entered into a $225 million credit
facility which would have expired on November 19, 2002. This credit facility
replaced the Company's U.S. Credit Facility and its Canadian Credit Facility
dated February 9, 1999. Proceeds from the facility were used for acquisitions
and hospital development activities. The facility consisted of a $200 million
Term Commitment and a $25 million Revolving Commitment. Borrowings bore
interest at LIBOR plus 3.5% or Base Rate (approximately 10% at December 31,
1999) as defined in the agreement.

The Senior Subordinated Notes were issued to a principal stockholder of
the Company and have common shares attached which were recorded at the
estimated fair market value on the date of issuance. The common shares issued
were recorded as a discount to the Senior Subordinated Notes and will be
amortized over the life of the debt using the interest method. Senior
Subordinated Notes were issued as follows during 1999 and 1998:

Shares Share
Date of issuance Principal issued value Discount Maturity
- ---------------- ----------- --------- ----- ----------- -----------------

December 15, 1998.... $35,000,000 1,528,000 $6.08 $ 9,286,000 December 15, 2008
February 9, 1999..... 30,000,000 -- -- -- December 15, 2008
November 19, 1999.... 25,000,000 960,000 6.51 5,209,000 November 19, 2009
----------- --------- ----- -----------
Total................ $90,000,000 2,488,000 -- $14,495,000

In the event the Company repays the November 19, 1999 promissory notes on
or before November 19, 2001, 240,048 shares of common stock attached to the
notes will be transferred back to the Company.

The Company's obligations under its previous credit agreements were
collateralized by guarantees of two of the Company's principal stockholders. In
connection with the debt guarantees, the Company and certain shareholders
entered into a warrant agreement. The Company issued 864,000, 460,000 and
549,000 warrants to these shareholders in 1998, 1999 and 2000, respectively,
that entitle the holder of each warrant to purchase one share of common stock
at an exercise price of $6.08 per share or at a price equal to the lowest
selling price of common shares sold by the Company after June 30, 1998. The
warrants expire on June 30, 2003. The value of the warrants is being accounted
for as financing costs and the related amortization is included as a component
of interest expense.

The Seller Notes relate to the acquisition of related businesses and
require periodic payments of principal and interest through maturity. Also,
certain of the notes contain minimum net worth requirements. Interest rates are
generally at 6% per annum.

Maturities of long-term debt for the years after 2001 are approximately
as follows:

2002........................................................ $ 18,226,000
2003........................................................ 44,133,000
2004........................................................ 51,180,000
2005........................................................ 93,643,000
2006 and beyond............................................. 76,860,000

F-30

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

7. Redeemable Preferred Stock and Stockholders' Equity

Class A Preferred Stock

The Company is authorized to issue 55,000 shares of cumulative, non-
voting Class A Preferred Stock (52,838 shares outstanding at December 31, 1999
and 2000). The Company sold 48,000 shares of Class A Preferred Stock during
1998 with total proceeds of $47,616,000 used primarily to fund acquisitions and
provide working capital. The Class A Preferred Stock ranks senior to the Common
Stock as to dividends, liquidation, and redemption rights. The Company may at
any time and from time to time redeem all or any portion of the shares of Class
A Preferred Stock. The Company is required to redeem 50% of the outstanding
shares of Class A Preferred Stock on December 31, 2004 and 50% on December 31,
2005. At the request of the holders of a majority of the Class A Preferred
Stock, the Company is required to (i) apply the net cash proceeds from any
Public Offering to redeem shares of Class A Preferred Stock and (ii) redeem
shares of Class A Preferred Stock upon a change in control or other events as
defined. The redemption price per share is $1,000 plus all accrued and unpaid
dividends thereon. The Class A Preferred Stock has an annual cash dividend rate
of 8% per share, which accrues on a daily basis. Included in the Class A
Preferred Stock amount at December 31, 1998, 1999 and 2000 are $2,805,000,
$7,550,000 and $12,643,000, respectively, of accrued and undeclared dividends.

On April 3, 2001, the Company amended its Restated Certificate of
Incorporation to provide that the Class A Preferred Stock may be redeemed
without paying the accrued and unpaid dividends thereon, while allowing all
accrued and unpaid dividends to be paid on the Class B Preferred Stock. The
accrued and unpaid dividends on the Class A preferred stock will remain a
general unsecured obligation of the Company, but will not accrue additional
interest until March 31, 2006. The Company must pay these dividends by March
31, 2006, but may pay these dividends at any time prior to that date.

Class B Preferred Stock

In connection with the NovaCare acquisition (Note 2), the Company sold
16,000,000 shares of Class B Preferred Stock at a price of $3.75 per share for
net proceeds of $59,361,000. The Class B Preferred Stock ranks senior to the
Class A Preferred Stock and Common Stock as to dividends, liquidation, and
redemption rights. The Company may at any time and from time to time redeem all
or any portion of the shares of Class B Preferred Stock. At the request of the
holders of a majority of the Class B Preferred Stock, the Company is required
to (i) apply the net cash proceeds from any Public Offering to redeem shares of
Class B Preferred Stock and (ii) redeem shares of Class B Preferred Stock upon
a change in control or other events as defined. The redemption price per share
is $3.75 plus all accrued and unpaid dividends thereon. Each share of Class B
preferred stock is convertible at any time, at the option of the stockholder,
into .576 shares of common stock. The Class B Preferred Stock has an annual
cash dividend rate of 6% per share, which accrues on a daily basis. Included in
the Class B Preferred Stock amount at December 31, 1999 and 2000 are $406,000
and $4,092,000, respectively, of accrued and undeclared dividends.

If at any time the Company effects a public offering of its Common Stock
in which (i) the price per share paid by the public is at least $9.77 and (ii)
the aggregate price paid for such shares is at least $25,000,000 (Qualified
Public Offering), each share of the outstanding Class B Preferred Stock
automatically converts into .576 shares of Common Stock. Since the Company
expects that the proceeds and per share price of the planned public offering
will be a Qualified Public Offering. The effects of the mandatory conversion
have been reflected as pro forma unaudited amounts in the accompanying
Consolidated Balance Sheet.

Common Stock

In connection with the Intensiva acquisition in December 1998, the
Company sold 10,697,000 shares of common stock at a price of $6.08 cash for
proceeds, net of issuance costs of $685,000 totaling $64,362,000.

F-31

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

7. Redeemable Preferred Stock and Stockholders' Equity (continued)

In addition, 1,528,000 shares of common stock were issued in conjunction with
the Senior Subordinated Notes to fund the acquisition of Intensiva (Note 6).
Other shares of common stock issued in 1998 totaled 483,000. These shares were
sold to management at prices ranging from $0.29 (adjusted for stock splits) to
$6.08 cash for proceeds totaling $1,357,000.

Shares of common stock sold in 1999 totaled 172,000. The shares were sold
to management at prices ranging from $6.08 to $6.51 for proceeds totaling
$1,041,000. The Company purchased 173,000 shares as treasury stock during 1999
for $781,000. In addition, 960,000 shares of common stock were sold in
conjunction with the Senior Subordinated Notes dated November 19, 1999 (Note
6).

Shares of common stock sold during 2000 totaled 172,000. The shares were
sold to management at $6.51 for proceeds totaling $1,118,000. The Company
purchased 32,000 shares as treasury stock during 2000 for $210,000.

A Restated Certificate of Incorporation was amended on August 28, 1998,
December 15, 1998, and November 19, 1999 to increase the authorized shares of
common stock to 24,000,000, 63,000,000 and 78,000,000, respectively. The
November 19, 1999 amendment also authorized the issuance of 16,000,000 shares
of Class B Preferred Stock.

On March 28, 2001, the Company effected a 1 for .576 reverse common stock
split of its common stock. Accordingly, all common issued and outstanding share
and per share information has been retroactively restated to reflect the
effects of this proposed stock split.

8. Stock Option Plan

The Company has a 1997 Stock Option Plan that provides for the granting
of options to purchase shares of Company stock to certain executives, employees
and directors.

Under the 1997 Stock Option Plan, options to acquire up to 5,760,000
shares of the stock may be granted. Options under the plan carry various
restrictions. Under the Plan, certain options granted to employees will be
qualified incentive stock options within the meaning of Section 422A of the
Internal Revenue Code and other options will be considered nonqualified stock
options. Generally, both incentive stock options and nonqualified stock options
may be granted for no less than market value at the day of the grant and expire
no later than ten years after the date of the grant.

The plan was amended and restated to provide for the issuance of up to
5,760,000 shares of common stock plus any additional amount necessary to make
the total shares available for issuance under the plan equal to the sum of
5,760,000 plus 14% of the total issued and outstanding common stock in excess
of 34,560,000 shares, subject to adjustments for stock splits, stock dividends
and similar changes in capitalization.

F-32

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

8. Stock Option Plan (continued)

Transactions and other information related to the Stock Option Plan are
as follows:

Weighted
Average
Price Exercise
Per Share Shares Price
-------------- --------- --------

Balance, December 31, 1997................... $ 1.74 41,000 $1.74
Granted...................................... 6.08 1,567,000 6.08
Exercised.................................... -- -- --
Forfeited.................................... 1.74 to 6.08 (29,000) 1.77
-------------- --------- -----
Balance, December 31, 1998................... 1.74 to 6.08 1,579,000 6.02
Granted...................................... 6.08 to 6.51 1,270,000 6.46
Exercised.................................... -- -- --
Forfeited.................................... 1.74 to 6.08 (88,000) 6.08
-------------- --------- -----
Balance, December 31, 1999................... 1.74 to 6.51 2,761,000 6.21
Granted...................................... 6.51 to 10.42 1,876,000 7.60
Exercised.................................... 6.08 (4,000) 6.08
Forfeited.................................... 1.74 to 6.51 (132,000) 6.65
-------------- --------- -----
Balance, December 31, 2000................... $1.74 to 10.42 4,501,000 $6.79
============== ========= =====

Additional information with respect to the outstanding options as of
December 31, 1998, 1999 and 2000 is as follows:

Exercise Prices
----------------------------------
1.74 6.08 6.51 10.42
------ --------- --------- -------

Number outstanding at December 31, 1998.... 18,000 1,561,000 -- --
Options outstanding weighted average
remaining contractual life................ 8.86 9.91 -- --
Number of exercisable...................... 3,000 1,267,000 -- --
Number outstanding at December 31, 1999.... 18,000 1,636,000 1,107,000 --
Options outstanding weighted average
remaining contractual life................ 7.86 8.97 9.89 --
Number of exercisable...................... 6,000 1,327,000 1,092,000 --
Number outstanding at December 31, 2000.... 18,000 1,593,000 2,380,000 510,000
Options outstanding weighted average
remaining contractual life................ 6.86 7.97 8.99 9.79
Number of exercisable...................... 10,000 1,404,000 1,095,000 --

The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" (SFAS 123). As permitted by SFAS 123,
the Company has chosen to apply APB Opinion No 25, "Accounting for Stock Issued
to Employees" (APB 25) and related interpretations in accounting for its Plan.
Accordingly, no compensation cost has been recognized for options granted to
employees under the Plan. Had compensation costs for the Plan been determined
based on the fair value at the grant dates for awards under the Plan consistent
with the method of SFAS 123, approximately $1,300,000, $1,020,000 and $241,000
of additional compensation expense, net of tax, would have been recognized
during the years ended December 31, 1998, 1999 and 2000, respectively.

The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model assuming no dividend yield or
volatility, an expected life of four years from the date of vesting and a risk
free interest rate of 4.6%.

F-33

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

8. Stock Option Plan (continued)

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net earnings and earnings per share were as follows:

For the year ended
--------------------------
1998 1999 2000
-------- -------- ------

Net income (loss)--as reported..................... $(18,044) $(13,106) $5,712
Net income (loss)--pro forma....................... (19,344) (14,126) 5,471
Weighted average grant-date fair value............. 1.34 1.60 0.93
Basic earnings (loss) per share--as reported....... (1.64) (0.74) (0.12)
Basic earnings (loss) per share--pro forma......... (1.75) (0.79) (0.13)
Diluted earnings (loss) per share--as reported..... (1.64) (0.74) (0.12)
Diluted earnings (loss) per share--pro forma....... (1.75) (0.79) (0.13)

9. Income Taxes

Significant components of the Company's tax expense (benefit) for the
years ended December 31, 1998, 1999 and 2000 are as follows:

1998 1999 2000
--------- ---------- ----------

Current:
Federal..................................... $ -- $ -- $ --
State and local............................. 755,000 1,497,000 1,275,000
Foreign..................................... -- -- 301,000
--------- ---------- ----------
Total current................................. 755,000 1,497,000 1,576,000
Deferred:
Federal..................................... (937,000) 1,314,000 8,403,000
State and local............................. -- -- --
--------- ---------- ----------
Total deferred................................ (937,000) 1,314,000 8,403,000
--------- ---------- ----------
Total income tax expense (benefit)............ $(182,000) $2,811,000 $9,979,000
========= ========== ==========

The difference between the expected income tax expense at the federal
statutory rate of 34% and the income tax expense (benefit) recognized in the
financial statements is as follows:

1998 1999 2000
----- ----- ----

Expected federal tax rate................................. (34.0%) (34.0%) 35.0%
State taxes, net of federal benefit....................... 2.7 22.1 3.8
Non-deductible goodwill................................... 2.0 36.4 6.7
Other permanent differences............................... 0.4 5.2 0.7
Valuation allowance....................................... 26.6 32.6 (0.2)
Other..................................................... 1.3 0.4 (0.5)
----- ----- ----
Total..................................................... (1.0%) 62.7% 45.5%
===== ===== ====

Undistributed earnings of the Company's foreign subsidiary are
permanently reinvested. Accordingly, no deferred taxes have been provided on
these earnings.

F-34

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

9. Income Taxes (continued)

A summary of deferred tax assets and liabilities is as follows:

1999 2000
------------ ------------

Deferred tax assets--
current
Allowance for doubtful
accounts............... $ 13,735,000 $ 14,713,000
Compensation and benefit
related accruals....... 2,972,000 1,853,000
Expenses not currently
deductible for tax..... -- 339,000
------------ ------------
Net deferred tax asset--
current................ 16,707,000 16,905,000
------------ ------------
Deferred tax assets--non
current
Expenses not currently
deductible for tax..... 2,786,000 2,983,000
Net operating loss carry
forwards............... 18,698,000 14,887,000
Depreciation and
amortization........... 1,687,000 1,238,000
Other................... -- 120,000
------------ ------------
Net deferred tax asset--
non current............ 23,171,000 19,228,000
------------ ------------
Net deferred tax asset
before valuation
allowance.............. 39,878,000 36,133,000
Valuation allowance..... (38,941,000) (35,196,000)
------------ ------------
$ 937,000 $ 937,000
============ ============

The Company provided in 1999 and 2000 a valuation allowance for
substantially all net deferred tax assets. This was based on management's
judgement, after weighing the negative historical information and the positive
future information, that it is more likely than not that such deferred tax
assets will not be realized.

Negative information considered by management included the Company's
limited operating history, and that the Company has incurred cumulative losses
of approximately $19,000,000 since inception through December 31, 2000.
Additionally, each of the Company's significant acquisitions had losses prior
to the acquisitions and had accumulated net operating loss carryforwards of
approximately $31 million. Although the Company earned profits, net of an
extraordinary item, of $15,691,000 for the year ended December 31, 2000, the
company was still in a cumulative loss position.

The increase in the valuation allowance in 1999 is related to the
increase in deferred tax assets primarily related to acquisitions. The decrease
in the valuation allowance in 2000 is related to the utilization of net
operating loss carryforwards, the benefit from which was allocated to reduce
goodwill. The Company has approximately $24,800,000 in federal net operating
loss carry forwards. Such carry forwards expire as follows:

2001........................................................ $ 441,000
2002........................................................ 461,000
2003........................................................ --
2004........................................................ --
Thereafter through 2019..................................... 23,898,000

As a result of the acquisition of Intensiva, ATH and NovaCare, the
Company is subject to the provisions of Section 382 of the Internal Revenue
Code which provide for annual limitations on the deductibility of acquired net
operating losses and certain tax deductions. These limitations apply until the
earlier of utilization or expiration of the net operating losses. Additionally,
if certain substantial changes in the Company's ownership should occur, there
would be an annual limitation on the amount of the carryforwards that can be
utilized.

F-35

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

10. Special Charge

The special charge consists of the following components:

1998 1999
----------- ----------

Asset impairments................................. $ 6,331,000 $5,223,000
Litigation settlement............................. 3,826,000 --
----------- ----------
Total special charge.............................. $10,157,000 $5,223,000
=========== ==========

The 1998 impaired asset charge of $6,331,000 resulted from assets that
were identified in accordance with the Company's policy on impairments based
upon a review of the facts and circumstances related to the assets. The amount
of the charge was determined based upon the comparison of the future discounted
cash flows resulting from the assets and the carrying value of these assets.
The impairment related to assets acquired in May 1998. These assets were
adversely affected by changes in the composition of the businesses at and
immediately subsequent to the acquisitions.

During May 1999, the Company and two of its subsidiaries participated in
the settlement of litigation related to the alleged breach of non-compete
agreements initiated during 1997 by Horizon/CMS Healthcare Corporation and
certain of its affiliates against the Company, Messrs. Rocco Ortenzio, Chairman
and CEO, and Robert Ortenzio, President and COO, and certain other officers and
employees of the Company. The Company's portion of the settlement was
$3,000,000 and its share of the related legal costs was $826,000 both of which
were recognized as a special charge in December 1998 and were paid in 1999.

The 1999 special charge consists of asset impairments of $5,223,000. The
charge relates to the impairment of goodwill, leasehold improvements and
equipment that resulted from closures and relocations of certain hospitals and
clinics in December 1999. The Company also recorded an impairment write down
under FAS 121, on a held for use basis, related to certain outpatient
rehabilitation facilities.

11. Extraordinary item

On November 19, 1999, the Company entered into a new $225 million credit
facility as part of the NovaCare acquisition (Note 6). This credit facility
replaced the Company's $155 million credit facility from February 9, 1999. The
extraordinary item recorded during 1999 consists of the unamortized deferred
financing costs of $5,814,000 related to the February 9, 1999 credit facility.

On September 22, 2000, the Company entered into a new $230 million credit
facility. This credit facility replaced the Company's $225 million credit
facility from November 19, 1999. The extraordinary item recorded during 2000
consists of the unamortized deferred financing costs of $6,247,000 related to
the November 19, 1999 credit facility.

12. Retirement Savings Plan

Beginning March 1, 1998, the Company sponsored a defined contribution
retirement savings plan for substantially all of its employees. Employees may
elect to defer up to 15% of their salary. The Company matches 50% of the first
6% of compensation employees contribute to the plan. The employees vest in the
employer contributions over a three-year period beginning on employee hire
date. The expense incurred by the Company related to this plan was $620,000,
$1,728,000, and $4,083,000 during the years ended December 31, 1998, 1999 and
2000, respectively.

F-36

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

12. Retirement Savings Plan (continued)

A subsidiary sponsored a noncontributory defined contribution retirement
plan for its employees during 1998 and 1999. The plan was frozen during 2000
and the Company does not anticipate making future contributions to the plan.
The subsidiary contributed 9.25% and 7.60% of employee salaries up to a
maximum contribution of $15,000 and $13,000 per employee in 1998 and 1999,
respectively. Approximately $700,000 and $560,000 of contributions related to
this plan were expensed during the years ended December 31, 1998 and 1999.

13. Segment Information

SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating
segments and related disclosures about products and services, geographic areas
and major customers. The adoption of SFAS No. 131 did not affect the Company's
results of operations or financial position.

The Company's segments consist of (i) specialty hospitals and (ii)
outpatient rehabilitation. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies. The
Company evaluates performance based on EBITDA of the respective business
units. EBITDA is defined as earnings before interest, minority interest,
income taxes, extraordinary items, special charges, depreciation and
amortization. All segment revenues are from external customers.

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

Year Ended December 31, 1998
------------------------------------------------------
Specialty Outpatient
Hospitals Rehabilitation All Other Total
------------ -------------- ------------ ------------

Net operating
revenues.............. $ 62,715,000 $ 83,059,000 $ 3,269,000 $149,043,000
EBITDA................. 3,147,000 12,598,000 (12,152,000) 3,593,000
Total assets........... 240,266,000 90,267,000 6,416,000 336,949,000
Capital expenditures... 3,632,000 2,042,000 749,000 6,423,000

Year Ended December 31, 1999
------------------------------------------------------
Specialty Outpatient
Hospitals Rehabilitation All Other Total
------------ -------------- ------------ ------------

Net operating
revenues.............. $307,464,000 $141,740,000 $ 6,771,000 $455,975,000
EBITDA................. 35,929,000 22,697,000 (16,382,000) 42,244,000
Total assets........... 250,034,000 350,419,000 20,265,000 620,718,000
Capital expenditures... 7,243,000 3,085,000 568,000 10,896,000

Year Ended December 31, 2000
------------------------------------------------------
Specialty Outpatient
Hospitals Rehabilitation All Other Total
------------ -------------- ------------ ------------

Net operating
revenues.............. $378,910,000 $416,775,000 $ 10,212,000 $805,897,000
EBITDA................. 44,550,000 65,420,000 (18,300,000) 91,670,000
Total assets........... 246,495,000 329,874,000 10,431,000 586,800,000
Capital expenditures... 13,677,000 6,399,000 2,354,000 22,430,000

F-37

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

13. Segment Information (continued)

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

1998 1999 2000
------------ ------------ ------------

EBITDA................................ $ 3,593,000 $ 42,244,000 $ 91,670,000
Depreciation and amortization......... (4,942,000) (16,741,000) (30,401,000)
Special charge........................ (10,157,000) (5,223,000) --
Interest income....................... 406,000 362,000 939,000
Interest expense...................... (5,382,000) (21,461,000) (36,126,000)
Minority interest..................... (1,744,000) (3,662,000) (4,144,000)
Income tax (expense) benefit.......... 182,000 (2,811,000) (9,979,000)
Extraordinary item.................... -- (5,814,000) (6,247,000)
------------ ------------ ------------
Net income (loss)..................... $(18,044,000) $(13,106,000) $ 5,712,000
============ ============ ============

14. Net Income (Loss) per Share

Under SFAS No. 128, "Earnings per Share" (EPS), the Company's granting of
certain stock options, warrants and convertible preferred stock resulted in
potential dilution of basic EPS. The following table sets forth for the periods
indicated the calculation of net income (loss) per share in the Company's
consolidated Statement of Operations and the differences between basic weighted
average shares outstanding and diluted weighted average shares outstanding used
to compute diluted EPS:

The following table sets forth for the periods indicated the calculation
of net income (loss) per share in the Company's consolidated Statement of
Operations.

For the year ended December 31,
---------------------------------------
1998 1999 2000
------------ ------------ -----------

Numerator:
Income (loss) before extraordinary
item................................. $(18,044,000) $ (7,292,000) $11,959,000
Extraordinary item.................... -- (5,814,000) (6,247,000)
------------ ------------ -----------
Net income (loss).................... (18,044,000) (13,106,000) 5,712,000
Less: Preferred stock dividends...... 2,540,000 5,175,000 8,780,000
------------ ------------ -----------
Numerator for basic earnings per
share-income (loss) available to
common stockholders................. $(20,584,000) $(18,281,000) $(3,068,000)
============ ============ ===========
Denominator:
Denominator for basic earnings per
share-weighted average shares....... 12,517,000 24,557,000 25,457,000
Effect of dilutive securities:
a) Stock options..................... -- -- 316,000
b) Warrants.......................... -- -- 134,000
------------ ------------ -----------
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions....... 12,517,000 24,557,000 25,907,000
============ ============ ===========
Basic earnings (loss) per share:
Income (loss) before extraordinary
item................................. $ (1.64) $ (0.50) $ 0.13
Extraordinary item................... -- (0.24) (0.25)
------------ ------------ -----------
Income (loss) per common share....... $ (1.64) $ (0.74) $ (0.12)
============ ============ ===========
Diluted earnings (loss) per share..... $ (1.64) $ (0.74) $ (0.12)
============ ============ ===========

F-38

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

14. Net Income (Loss) per Share (continued)

The following amounts are shown here for informational and comparative
purposes only since their inclusion would be anti-dilutive.

For the year ended
December 31,
--------------------------
1998 1999 2000
------ --------- ---------

a) Stock options................................ 13,000 123,000 510,000
b) Warrants..................................... -- 10,000 --
c) Convertible preferred stock.................. -- 1,136,000 9,216,000

15. Fair Value of Financial Instruments

Financial instruments include cash and cash equivalents, notes payable,
long-term debt and preferred stock. The carrying amount of cash and cash
equivalents approximates fair value because of the short-term maturity of these
instruments.

The fair market value of the Company's notes payable and long-term debt
approximates its carrying value and was based on borrowing rates currently
available to the Company for bank loans and similar items and maturities.

The fair value of the Company's preferred stock is not practicable to
estimate as it is untraded; accordingly it is recorded at its redemption value

16. Related Party Transactions

The Company has been party to various rental and other agreements with
companies affiliated through common ownership. The Company made office rental,
equipment rental and other payments aggregating $483,000, $1,228,000, and
$1,295,000 during the years ended December 31, 1998, 1999 and 2000,
respectively, to the affiliated companies.

As of December 31, 2000, future rental commitments under outstanding
agreements with the affiliated companies are approximately as follows:

2001......................................................... $ 1,080,000
2002......................................................... 1,076,000
2003......................................................... 1,101,000
2004......................................................... 1,001,000
2005......................................................... 935,000
Thereafter................................................... 10,293,000
-----------
$15,486,000
===========

As further discussed in Note 6, the Company has issued warrants to two of
the Company's principal stockholders in connection with its guarantees of
previous credit agreements.

In December 1999, the Company acquired Select Air Corporation from a
related party in exchange for consideration of $2,700,000, net of cash
acquired.

In March 2000, the Company entered into three-year employment agreements
with two of its principal shareholders. Under these agreements the two
shareholders will receive a combined total annual salary of

F-39

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

16. Related Party Transactions

$1,500,000. Additionally, one such shareholder has a life insurance policy in
which the Company will pay premiums for fiscal year 2000 of $2,000,000 and
$1,250,000 each following fiscal year until 2010.

In April 2000, the Company sold all of the assets of Georgia Health
Group, Inc., a clinic owned by the Occupational Health division for $5,000,000
to a company in which a principal stockholder has a majority owned interest.

17. Commitments and Contingencies

Leases

The Company leases facilities and equipment from unrelated parties under
operating leases. Minimum future lease obligations on long-term non-cancelable
operating leases in effect at December 31, 2000 are approximately as follows:

2001........................................................ $ 44,325,000
2002........................................................ 35,286,000
2003........................................................ 22,702,000
2004........................................................ 14,029,000
2005........................................................ 8,704,000
Thereafter.................................................. 10,846,000
------------
$135,892,000
============

Total rent expense for operating leases for the years ended December 31,
1998, 1999 and 2000 was approximately $11,878,000, $36,982,000 and $68,731,000,
respectively.

Other

A subsidiary of the Company has entered into a naming, promotional and
sponsorship agreement in which the subsidiary pays $900,000 per year until the
complex officially opens. The naming, promotional and sponsorship agreement is
in effect for 25 years after the opening of the complex. The subsidiary is
required to make payments in accordance with the contract terms over 25 years
ranging from $1,400,000 to $1,963,000 per year and provide physical therapy and
training services after the official opening. The official opening of the
clinic within the complex is currently scheduled for June 2001.

Litigation

The Company is subject to legal proceedings and claims that have arisen
in the ordinary course of its business and have not been finally adjudicated,
which include malpractice claims covered under the Company's insurance policy.
In the opinion of management, the outcome of these actions will not have a
material effect on the financial position or results of operations of the
Company.

Laws and regulations governing the Medicare program are complex and
subject to interpretation. The Company believes that it is in compliance with
all applicable laws and regulations through the year ended December 31, 2000.
Compliance with such laws and regulations can be subject to government review
and interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare program.

F-40

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

18. Supplemental Disclosures of Cash Flow Information

Non-cash investing and financing activities are comprised of the
following for the years ended December 31, 1998, 1999 and 2000:

Description of Transaction 1998 1999 2000
-------------------------- ------------ ----------- ------------

Acquisitions paid for in stock (Note
2)..................................... $ 785,000 $ -- $ --
Notes issued with acquisitions (Note
2)..................................... $ 18,343,000 $ 7,783,000 $ 3,207,000
Liabilities assumed with acquisitions
(Note 2)............................... $105,286,000 $65,744,000 $ 255,000
Long-term debt discount (Note 6)........ $ 9,286,000 $ 5,209,000 $ --
Issuance of warrants (Note 6)........... $ 1,086,000 $ 2,389,000 $ 1,104,000
Related party acquisition (Note 16)..... $ -- $ 2,700,000 $ --
Credit facility refinancing (Note 6).... $ -- $ -- $187,000,000
Preferred stock dividends (Note 7)...... $ 2,540,000 $ 5,175,000 $ 8,780,000

19. Subsequent Event

On April 10, 2001, the Company completed an initial public offering of
9,000,000 shares of its common stock at an offering price of $9.50 per share.
On April 20, 2001, the underwriters of the offering exercised an overallotment
option and purchased an additional 1,350,000 shares at a price of $9.50 per
share. The overallotment offering closed on April 25, 2001. The net proceeds of
the initial offering and the overallotment offering of $89.4 million were used
to repay senior debt under the term and revolving loan portions of the
Company's credit facility and to redeem Class A Preferred Stock. All 52,838
shares of the Class A Preferred Stock were redeemed on April 10, 2001 for
$52,838,000. In addition, the Company's Class B Preferred Stock automatically
converted into 9,216,000 shares of common stock upon completion of the
offering.

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

The Company conducts a significant portion of its business through
subsidiaries. The Company has issued $175 million of senior subordinated notes.
These notes will be fully and unconditionally guaranteed, jointly and
severally, by certain wholly-owned subsidiaries (the Subsidiary Guarantors).
Certain of the Company's subsidiaries will not guarantee the notes (the Non-
Guarantor Subsidiaries). The claims of creditors of Non-Guarantor Subsidiaries
have priority over the rights of the Company to receive dividends or
distributions from such subsidiaries.

Presented below is condensed consolidating financial information for the
Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries at
December 31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and
1998.

F-41

Select Medical Corporation

Notes to Consolidated Financial Statements--(Continued)

The table below sets forth the following Non-Guarantor Subsidiaries:

There are professional corporations as described in Note 1 that meet the
definition of Non-Guarantor Subsidiaries in the indenture governing the senior
subordinated notes that are not included on the following table because the
Company does not own any of their equity interests.

F-42

Select Medical Corporation

Condensed Consolidating Balance Sheets

December 31, 2000
-------------------------------------------------------------------------
Select Medical
Corporation (Parent Subsidiary Non-Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------------- ---------- ------------- ------------ ------------

Assets
Current Assets:
Cash and cash
equivalents........... $ -- $ 1,015 $ 2,136 $ -- $ 3,151
Accounts receivable,
net................... (300) 169,273 27,532 -- 196,505
Prepaid income taxes... (6,599) 7,417 275 -- 1,093
Other current assets... 1,528 14,116 1,763 -- 17,407
-------- -------- ------- --------- --------
Total Current Assets.... (5,371) 191,821 31,706 -- 218,156
Property and equipment,
net.................... 4,839 60,861 19,276 -- 84,976
Investment in
affiliates............. 213,618 26,704 -- (240,322)(a) --
Intangible assets....... 5,953 204,735 40,711 -- 251,399
Other assets............ 10,861 20,183 1,225 -- 32,269
-------- -------- ------- --------- --------
Total Assets............ $229,900 $504,304 $92,918 $(240,322) $586,800
======== ======== ======= ========= ========
Liabilities and
Stockholders' Equity
Current Liabilities:
Bank overdrafts........ $ 1,511 $ 9,939 $ 2,768 $ -- $ 14,218
Current portion of
long-term debt and
notes payable......... 4,923 13,641 182 -- 18,746
Accounts payable....... 2,347 22,543 3,905 -- 28,795
Intercompany accounts.. (30,656) 30,981 (325) -- --
Accrued payroll........ 582 20,839 45 -- 21,466
Accrued vacation....... 1,466 5,287 948 -- 7,701
Accrued restructuring.. -- 4,701 -- -- 4,701
Accrued other.......... 6,328 6,922 2,201 -- 15,451
Income taxes........... 1,591 (1,352) (239) -- --
Due to (from) third
party payors.......... (15,770) 21,690 (4,409) -- 1,511
-------- -------- ------- --------- --------
Total Current
Liabilities............ (27,678) 135,191 5,076 -- 112,589
Long-term debt, net of
current portion........ 79,475 155,241 49,326 -- 284,042
-------- -------- ------- --------- --------
Total liabilities....... 51,797 290,432 54,402 -- 396,631
Commitments and
Contingencies
Minority interest in
consolidated subsidiary
companies.............. -- 4,516 7,582 -- 12,098
Preferred stock--Class
A...................... 65,481 -- -- -- 65,481
Convertible Preferred
stock--Class B......... 64,092 -- -- -- 64,092
Stockholders' Equity:
Common stock........... 257 -- -- -- 257
Capital in excess of
par................... 73,069 -- -- -- 73,069
Accumulated deficit.... (23,757) (5,330) 5,053 277 (b) (23,757)
Subsidiary investment.. -- 214,686 25,913 (240,599)(a) --
Treasury stock, at
cost.................. (1,039) -- -- -- (1,039)
Accumulated other
comprehensive loss.... -- -- (32) -- (32)
-------- -------- ------- --------- --------
Total Stockholders'
Equity................. 48,530 209,356 30,934 (240,322) 48,498
-------- -------- ------- --------- --------
Total Liabilities and
Stockholders' Equity... $229,900 $504,304 $92,918 $(240,322) $586,800
======== ======== ======= ========= ========

(a) Elimination of investments in subsidiaries.
(b) Elimination of investments in subsidiaries' earnings.

F-43

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Year Ended December 31, 2000
------------------------------------------------------------------------
Select Medical
Corporation (Parent Subsidiary Non-Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------------- ---------- ------------- ------------ ------------

Net operating revenues.. $ 10,157 $698,416 $97,324 -- $805,897
-------- -------- ------- --------
Costs and expenses:
Cost of services...... -- 577,406 79,055 -- 656,461
General and
administrative....... 28,431 -- -- -- 28,431
Bad debt expense...... -- 26,934 2,401 -- 29,335
Depreciation and
amortization......... 1,644 25,390 3,367 -- 30,401
-------- -------- ------- ------- --------
Total costs and
expenses............... 30,075 629,730 84,823 -- 744,628
-------- -------- ------- ------- --------
Income (loss) from
operations............. (19,918) 68,686 12,501 -- 61,269
Other income and
expense:
Intercompany charges.... (42,151) 40,606 1,545 -- --
Interest income......... (644) (295) -- -- (939)
Interest expense........ 9,856 21,803 4,467 -- 36,126
-------- -------- ------- ------- --------
Income (loss) before
minority interests,
income taxes, equity in
earnings of
subsidiaries and
extraordinary item..... 13,021 6,572 6,489 -- 26,082
Minority interest in
consolidated
subsidiaries........... -- 1,408 2,736 -- 4,144
-------- -------- ------- ------- --------
Income (loss) before
income taxes, equity in
earnings of
subsidiaries and
extraordinary item..... 13,021 5,164 3,753 -- 21,938
Income tax expense...... 4,415 5,263 301 -- 9,979
Equity in earnings of
subsidiaries........... 3,353 3,198 -- (6,551)(a) --
-------- -------- ------- ------- --------
Net income (loss) before
extraordinary item..... $ 11,959 $ 3,099 $ 3,452 $(6,551) $ 11,959
Extraordinary item...... 6,247 -- -- -- 6,247
-------- -------- ------- ------- --------
Net income (loss) ...... $ 5,712 $ 3,099 $ 3,452 $(6,551) $ 5,712
======== ======== ======= ======= ========

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

F-44

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

Operating activities
Net income (loss).......... $ 5,712 $ 3,099 $ 3,452 $(6,551)(a) $ 5,712
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization............. 1,644 25,390 3,367 -- 30,401
Provision for bad debts... -- 26,934 2,401 -- 29,335
Minority interests........ -- 1,408 2,736 -- 4,144
Extraordinary charge...... 6,247 -- -- -- 6,247
Loss on sale of assets.... 111 -- -- -- 111
Changes in operating
assets and liabilities,
net of effects from
acquisition of
businesses:
Equity (loss) in
earnings of
subsidiaries............ (3,353) (3,198) -- 6,551 (a) --
Intercompany............. 12,928 (32,020) 19,092 -- --
Accounts receivable...... (1,050) (22,117) (13,797) -- (36,964)
Other current assets..... (739) (912) (1,041) -- (2,692)
Other assets............. 13,269 (5,045) (13,243) -- (5,019)
Accounts payable......... 1,478 (2,056) 1,958 -- 1,380
Due to (from) third-
party payors............ (6,081) (7,166) (4,426) -- (17,673)
Accrued expenses......... 961 (3,442) 2,464 -- (17)
Income taxes............. 3,426 4,581 (459) -- 7,548
------- -------- -------- ------- --------
Net cash provided by (used
in) operating activities.. 34,553 (14,544) 2,504 -- 22,513
------- -------- -------- ------- --------
Investing activities
Purchases of property and
equipment, net............ (2,354) (16,118) (3,958) -- (22,430)
Escrow receivable.......... -- 29,948 -- -- 29,948
Disposal of assets held for
sale...................... -- 13,000 -- -- 13,000
Proceeds from disposal of
assets.................... 2,452 495 -- -- 2,947
Earnout payments........... -- (3,430) -- -- (3,430)
Acquisition of businesses,
net of cash acquired...... (5,838) -- -- -- (5,838)
------- -------- -------- ------- --------
Net cash provided by (used
in) investing activities.. (5,740) 23,895 (3,958) -- 14,197
------- -------- -------- ------- --------
Financing activities
Net repayments on credit
facility debt............. (12,000) -- -- -- (12,000)
Principal payments on
seller and other debt..... (13,344) (14,233) -- -- (27,577)
Proceeds from issuance of
common stock.............. 1,118 -- -- -- 1,118
Purchase of treasury
stock..................... (210) -- -- -- (210)
Redemption of preferred
stock..................... (11) -- -- -- (11)
Proceeds from bank
overdrafts................ 197 4,751 2,305 -- 7,253
Payment of deferred
financing costs........... (4,563) -- -- -- (4,563)
Distributions to minority
interests................. -- (329) (1,297) -- (1,626)
------- -------- -------- ------- --------
Net cash provided by (used
in) financing activities.. (28,813) (9,811) 1,008 -- (37,616)
------- -------- -------- ------- --------
Effect of exchange rate
changes on
cash and cash equivalents.. -- -- (10) -- (10)
------- -------- -------- ------- --------
Net decrease in cash and
cash equivalents.......... -- (460) (456) -- (916)
Cash and cash equivalents
at beginning of period.... -- 1,475 2,592 -- 4,067
------- -------- -------- ------- --------
Cash and cash equivalents
at end of period.......... $ -- $ 1,015 $ 2,136 $ -- $ 3,151
======= ======== ======== ======= ========

(a) Elimination of equity in earnings of subsidiary.

F-45

Select Medical Corporation

Condensed Consolidating Balance Sheet

December 31, 1999
-------------------------------------------------------------------------
Select Medical
Corporation (Parent Subsidiary Non-Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------------- ---------- ------------- ------------ ------------

Assets
Current Assets:
Cash and cash
equivalents........... $ -- $ 1,475 $ 2,592 $ -- $ 4,067
Escrow Receivable...... -- 29,948 -- -- 29,948
Accounts receivable,
net................... (1,350) 169,362 16,136 -- 184,148
Prepaid income taxes... -- 283 -- -- 283
Assets held for sale... -- 13,000 -- -- 13,000
Other current assets... 789 19,753 722 -- 21,264
-------- -------- ------- --------- --------
Total Current Assets.... (561) 233,821 19,450 -- 252,710
Property and equipment,
net.................... 6,896 70,957 7,219 -- 85,072
Investment in
affiliates............. 309,558 32,766 -- (342,324)(a) --
Intangible assets....... 7,458 219,911 30,710 -- 258,079
Other assets............ 11,140 12,745 972 -- 24,857
-------- -------- ------- --------- --------
Total Assets............ $334,491 $570,200 $58,351 $(342,324) $620,718
======== ======== ======= ========= ========
Liabilities and
Stockholders' Equity
Current Liabilities:
Bank overdrafts........ $ 1,314 $ 5,189 $ 463 -- $ 6,966
Current portion of
long-term debt and
notes payable......... 8,841 12,297 (11) -- 21,127
Accounts payable....... 869 24,673 1,947 -- 27,489
Intercompany accounts.. (14,848) 15,811 (963) -- --
Accrued payroll........ 394 17,541 (70) -- 17,865
Accrued vacation....... 685 3,120 260 -- 4065
Accrued restructuring.. -- 9,357 -- -- 9,357
Accrued other.......... 6,336 8,745 540 -- 15,621
Income taxes........... 4,764 (4,709) (55) -- --
Due to (from) third
party payors.......... (9,689) 27,294 17 -- 17,622
-------- -------- ------- --------- --------
Total Current
Liabilities............ (1,334) 119,318 2,128 -- 120,112
Long-term debt, net of
current portion........ 165,562 127,826 26,306 -- 319,694
-------- -------- ------- --------- --------
Total liabilities....... 164,228 247,144 28,434 -- 439,806
Commitments and
Contingencies
Minority interest in
consolidated subsidiary
companies.............. -- 4,058 6,613 -- 10,671
Preferred stock--Class
A...................... 60,398 -- -- -- 60,398
Convertible Preferred
stock--Class B......... 60,406 -- -- -- 60,406
Stockholders' Equity:
Common stock........... 255 -- -- -- 255
Capital in excess of
par................... 79,502 -- -- -- 79,502
Accumulated deficit.... (29,469) (8,429) 1,601 6,828 (b) (29,469)
Subsidiary investment.. 327,427 21,725 (349,152)(a) --
Treasury stock, at
cost.................. (829) -- -- -- (829)
Accumulated other
comprehensive loss.... -- -- (22) -- (22)
-------- -------- ------- --------- --------
Total Stockholders'
Equity................. 49,459 318,998 23,304 (342,324) 49,437
-------- -------- ------- --------- --------
Total Liabilities and
Stockholders' Equity... $334,491 $570,200 $58,351 $(342,324) $620,718
======== ======== ======= ========= ========

(a) Elimination of investments in subsidiaries.
(b) Elimination of investments in subsidiaries' earnings.

F-46

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Year Ended December 31, 1999
------------------------------------------------------------------------
Select Medical
Corporation (Parent Subsidiary Non-Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------------- ---------- ------------- ------------ ------------

Net operating revenues.. $ 6,771 $386,222 $62,982 -- $455,975
-------- -------- ------- ------- --------
Costs and expenses:
Cost of services...... -- 333,023 50,430 -- 383,453
General and
administrative....... 21,420 -- -- -- 21,420
Bad debt expense...... -- 7,800 1,058 -- 8,858
Depreciation and
amortization......... 1,111 13,257 2,373 -- 16,741
Special Charge........ -- 5,223 -- -- 5,223
-------- -------- ------- ------- --------
Total costs and
expenses............... 22,531 359,303 53,861 -- 435,695
-------- -------- ------- ------- --------
Income (loss) from
operations............. (15,760) 26,919 9,121 -- 20,280
Other income and
expense:
Intercompany charges.... (16,079) 15,058 1,021 -- --
Interest income......... (238) (124) -- -- (362)
Interest expense........ 7,509 11,169 2,783 -- 21,461
-------- -------- ------- ------- --------
Income (loss) before
minority interests,
income taxes, equity in
earnings of
subsidiaries and
extraordinary item..... (6,952) 816 5,317 -- (819)
Minority interest in
consolidated
subsidiaries........... -- 1,349 2,313 -- 3,662
-------- -------- ------- ------- --------
Income (loss) before
income taxes, equity in
earnings of
subsidiaries and
extraordinary item..... (6,952) (533) 3,004 -- (4,481)
Income tax expense
(benefit).............. -- 5,278 -- (2,467)(b) 2,811
Equity in earnings of
subsidiaries........... (340) 2,853 -- (2,513)(a) --
-------- -------- ------- ------- --------
Net income (loss) before
extraordinary item .... $ (7,292) $ (2,958) $ 3,004 $ (46) $ (7,292)
Extraordinary item...... 5,814 -- -- -- 5,814
-------- -------- ------- ------- --------
Net income (loss)....... $(13,106) $ (2,958) $ 3,004 $ (46) $(13,106)
======== ======== ======= ======= ========

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

(b) Represents the reduction in the consolidated tax expense that occurs
through the filing of a consolidated tax return.

F-47

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

For the Year Ended December 31, 1999
----------------------------------------------------------------------
Select Medical Non-
Corporation (Parent Subsidiary Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------------- ---------- ------------ ------------ ------------

Operating activities
Net income (loss)....... $ (13,106) $ (2,958) $ 3,004 $ (46)(a) $ (13,106)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 1,111 13,257 2,373 -- 16,741
Provision for bad
debts................. -- 7,800 1,058 -- 8,858
Special charge......... -- 5,223 -- -- 5,223
Extraordinary item..... 5,814 -- -- -- 5,814
Gain on sale of
assets................ -- (215) -- -- (215)
Minority interests..... -- 1,349 2,313 -- 3,662
Changes in operating
assets and
liabilities, net of
effects from
acquisition of
businesses:
Equity (loss) in
earnings of
subsidiaries.......... 340 (2,853) -- 2,513 (a) --
Intercompany........... (35,890) 20,866 15,024 -- --
Accounts receivable.... 4,335 (43,257) (8,368) -- (47,290)
Other current assets... (660) (1,095) 27 -- (1,728)
Other assets........... (1,506) 909 (10,271) -- (10,868)
Accounts payable....... 717 (1,434) 746 -- 29
Due to (from) third-
party payors.......... (9,689) 18,423 (19) -- 8,715
Accrued expenses....... 1,753 (4,183) (258) -- (2,688)
Income taxes........... 8,641 (4,617) 139 (2,467)(b) 1,696
--------- -------- ------- ------ ---------
Net cash provided by
(used in) operating
activities............. (38,140) 7,215 5,768 -- (25,157)
--------- -------- ------- ------ ---------
Investing activities
Purchases of property
and equipment, net..... (568) (6,761) (3,567) -- (10,896)
Proceeds of disposal of
assets................. -- 988 -- -- 988
Earnout payments........ -- -- -- -- --
Acquisition of
businesses, net of cash
acquired............... (171,354) -- -- -- (171,354)
--------- -------- ------- ------ ---------
Net cash used in
investing activities... (171,922) (5,773) (3,567) -- (181,262)
--------- -------- ------- ------ ---------
Financing activities
Proceeds from issuance
of debt................ 68,194 -- -- -- 68,194
Net repayments on credit
facility debt.......... 86,655 -- -- -- 86,655
Principal payments on
seller and other debt.. (5,393) (4,671) -- -- (10,064)
Proceeds from issuance
of common stock........ 1,041 -- -- -- 1,041
Proceeds from issuance
of preferred stock..... 59,361 -- -- -- 59,361
Purchase of treasury.... (781) -- -- -- (781)
Redemption of preferred
stock.................. (214) -- -- -- (214)
Proceeds from bank
overdrafts............. 1,314 3,128 451 -- 4,893
Payment of deferred
financing costs........ (10,883) -- -- -- (10,883)
Distributions to
minority interests..... -- (295) (427) -- (722)
--------- -------- ------- ------ ---------
Net cash provided by
(used in) financing
activities............. 199,294 (1,838) 24 -- 197,480
--------- -------- ------- ------ ---------
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- 5 -- 5
--------- -------- ------- ------ ---------
Net increase (decrease)
in cash and cash
equivalents............ (10,768) (396) 2,230 -- (8,934)
Cash and cash
equivalents at
beginning of period.... 10,768 1,871 362 -- 13,001
--------- -------- ------- ------ ---------
Cash and cash
equivalents at end of
period................. $ -- $ 1,475 $ 2,592 $ -- $ 4,067
========= ======== ======= ====== =========

(a) Elimination of equity in earnings of subsidiary.
(b) Represents the reduction in the consolidated tax expense that occurs
through the filing of a consolidated tax return.

F-48

Select Medical Corporation

Condensed Consolidating Statement of Operations

For the Year Ended December 31, 1998
-----------------------------------------------------------------------
Select Medical
Corporation (Parent Subsidiary Non-Guarantor
Company Only) Guarantors Subsidiaries Eliminations Consolidated
------------------- ---------- ------------- ------------ ------------

Net operating revenues.. $ 3,269 $116,641 $29,133 $ -- $149,043
-------- -------- ------- ------ --------
Costs and expenses:
Cost of services...... -- 102,805 26,105 -- 128,910
General and
administrative....... 12,526 -- -- -- 12,526
Bad debt expense...... -- 3,808 206 -- 4,014
Depreciation and
amortization......... 216 3,277 1,449 -- 4,942
Special Charge........ 4,326 5,831 -- -- 10,157
-------- -------- ------- ------ --------
Total costs and
expenses............... 17,068 115,721 27,760 -- 160,549
-------- -------- ------- ------ --------
Income (loss) from
operations............. (13,799) 920 1,373 -- (11,506)
Other income and
expense:
Intercompany charges.. (1,168) 771 397 -- --
Interest income....... (267) (500) 361 -- (406)
Interest expense...... 1,609 2,663 1,110 -- 5,382
-------- -------- ------- ------ --------
Income (loss) before
minority interests,
income taxes and equity
in earnings of
subsidiaries........... (13,973) (2,014) (495) -- (16,482)
Minority interest in
consolidated
subsidiaries........... -- 1,043 701 -- 1,744
-------- -------- ------- ------ --------
Income (loss) before
income taxes and equity
in earnings of
subsidiaries........... (13,973) (3,057) (1,196) -- (18,226)
Income tax expense
(benefit).............. (937) 755 -- -- (182)
Equity in earnings of
subsidiaries........... (5,008) (572) -- 5,580 (a) --
-------- -------- ------- ------ --------
Net income (loss)....... $(18,044) $ (4,384) $(1,196) $5,580 $(18,044)
======== ======== ======= ====== ========

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

F-49

Select Medical Corporation

Condensed Consolidating Statement of Cash Flows

Operating activities
Net income (loss)....... $ (18,044) $ (4,384) $(1,196) $5,580 (a) $ (18,044)
Adjustments to reconcile
net income (loss) to
net cash provided by
operating activities:
Depreciation and
amortization.......... 216 3,277 1,449 -- 4,942
Provision for bad
debts................. -- 3,808 206 -- 4,014
Special charge......... 4,326 5,831 -- -- 10,157
Minority interests..... -- 1,043 701 -- 1,744
Changes in operating
assets and
liabilities, net of
effects from
acquisition of
businesses:
Equity (loss) in
earnings of
subsidiaries......... 5,008 572 -- (5,580)(a) --
Intercompany.......... (28,595) 12,658 15,937 -- --
Accounts receivable... (2,985) (5,561) (8,967) -- (17,513)
Other current assets.. (78) 4,055 (748) -- 3,229
Other assets.......... 5,576 (1,327) (5,788) -- (1,539)
Accounts payable...... 96 (3,862) 1,175 -- (2,591)
Due to (from) third-
party payors......... -- (1,315) 36 -- (1,279)
Accrued expenses...... 5,049 (11,519) 935 -- (5,535)
Income taxes.......... (490) (1,603) (194) -- (2,287)
--------- -------- ------- ------ ---------
Net cash provided by
(used in) operating
activities............. (29,921) 1,673 3,546 -- (24,702)
--------- -------- ------- ------ ---------
Investing activities
Purchases of property
and equipment, net..... (749) (2,499) (3,175) -- (6,423)
Earnout payments........ -- -- -- -- --
Acquisition of
businesses, net of cash
acquired............... (203,058) -- -- -- (203,058)
--------- -------- ------- ------ ---------
Net cash used in
investing activities... (203,807) (2,499) (3,175) -- (209,481)
--------- -------- ------- ------ ---------
Financing activities
Proceeds from issuance
of debt................ 103,898 -- -- -- 103,898
Net repayments on credit
facility debt.......... 31,173 -- -- -- 31,173
Principal payments on
seller and other debt.. (6,482) -- -- -- (6,482)
Proceeds from the
issuance of common
stock.................. 65,719 -- -- -- 65,719
Proceeds from issuance
of preferred stock..... 47,616 -- -- -- 47,616
Purchase of treasury
stock.................. (48) -- -- -- (48)
Redemption of preferred
stock.................. (19) -- -- -- (19)
Proceeds from (repayment
of) bank overdrafts.... -- 2,109 (36) -- 2,073
Payment of deferred
financing costs........ (1,314) -- -- -- (1,314)
Distributions to
minority interests..... -- (318) -- -- (318)
--------- -------- ------- ------ ---------
Net cash provided by
(used in) financing
activities............. 240,543 1,791 (36) -- 242,298
--------- -------- ------- ------ ---------
Effect of exchange rate
changes on cash and
cash equivalents....... -- -- 27 -- 27
--------- -------- ------- ------ ---------
Net increase in cash and
cash equivalents....... 6,815 965 362 -- 8,142
Cash and cash
equivalents at
beginning of period.... 3,953 906 -- -- 4,859
--------- -------- ------- ------ ---------
Cash and cash
equivalents at end of
period................. $ 10,768 $ 1,871 $ 362 $ -- $ 13,001
========= ======== ======= ====== =========

(a) Elimination of equity in earnings of subsidiary.

F-50

Report of Independent Accountants

To the Board of Directors of
NovaCare, Inc.

In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of NovaCare, Inc. net investment and of cash
flows present fairly, in all material respects, the financial position of
NovaCare Physical Rehabilitation and Occupational Health Group ("the Group") at
November 19, 1999 and the results of their operations and their cash flows for
the period July 1, 1999 to November 19, 1999, in conformity with accounting
principles which are generally accepted in the United States. These financial
statements are the responsibility of the Group's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards in the United States, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.

As discussed in Note 13, NovaCare, Inc. completed the sale of the Group
to Select Medical Corporation on November 19, 1999.

/s/ PricewaterhouseCoopers LLP
Philadelphia Pennsylvania
July 6, 2000

F-51

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Combined Balance Sheet
(In thousands)

As of
November 19,
1999
------------

Assets
Current assets:
Cash and cash equivalents....................................... $ 1,705
Accounts receivable, net of allowance of $53,493................ 69,357
Deferred income taxes........................................... 9,996
Other current assets............................................ 11,294
--------
Total current assets.......................................... 92,352
Property and equipment, net....................................... 37,848
Excess cost of net assets acquired, net........................... 386,389
Investment in joint ventures...................................... 14,419
Other assets...................................................... 2,338
--------
$533,346
========
Liabilities and NovaCare, Inc. Net Investment
Current liabilities:
Current portion of financing arrangements--third parties........ $ 13,307
Current portion of financing arrangements--related parties...... 166,743
Accounts payable and accrued expenses--related parties.......... 279,797
Accounts payable and accrued expenses--third parties............ 30,785
--------
Total current liabilities..................................... 490,632
Financing arrangements, net of current portion-third parties...... 23,578
Deferred income taxes............................................. 14,767
Other............................................................. 1,190
--------
Total liabilities............................................. 530,167
Commitments and contingencies..................................... --
NovaCare, Inc. net investment..................................... 3,179
--------
$533,346
========

The accompanying Notes to Combined Financial Statements are an integral part of
these statements.

F-52

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Combined Statement of Operations
(In thousands)

For the Period
July 1, 1999 to
November 19, 1999
-----------------

Net revenues................................................ $127,481
Cost of services............................................ 84,792
--------
Gross profit.............................................. 42,689
Selling, general and administrative expenses................ 28,105
Selling, general and administrative allocated from related
party...................................................... 3,554
Provision for uncollectible accounts........................ 41,964
Amortization of excess cost of net asset acquired........... 4,583
--------
Loss from operations...................................... (35,517)
Interest expense-related party.............................. 5,366
Interest expense-third parties.............................. 1,233
Royalty expense-related party............................... 5,596
--------
Loss before income taxes.................................. (47,712)
Income taxes................................................ --
--------
Net loss.................................................. $(47,712)
========

The accompanying Notes to Combined Financial Statements are
an integral part of these statements.

F-53

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Combined Statement of NovaCare, Inc. Net Investment
(In thousands)

NovaCare, Inc.
net investment
--------------

Balance at June 30, 1999......................................... $ 43,751
Net contributions from NovaCare, Inc. ......................... 7,140
Net loss....................................................... (47,712)
--------
Balance at November 19, 1999..................................... $ 3,179
========

The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.

F-54

Novacare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Combined Statement of Cash Flows
(In thousands)

For the Period
July 1, 1999 to
November 19,
1999
---------------

Cash flows from operating activities:
Net loss...................................................... $(47,712)
Adjustments to reconcile net loss to net cash flows used in
operating activities:
Loss from joint ventures.................................... 100
Depreciation and amortization............................... 9,350
Provision for uncollectible accounts........................ 41,964
Minority interest........................................... 37
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable....................................... (12,259)
Other current assets...................................... (2,275)
Accounts payable and accrued expenses--third parties...... 2,702
Other, net................................................ (69)
--------
Net cash flows used in operating activities............... (8,162)
--------
Cash flows from investing activities:
Payments for businesses acquired, net of cash acquired........ (7,159)
Additions to property and equipment........................... (2,302)
Other, net.................................................... 238
--------
Net cash flows used in investing activities................. (9,223)
--------
Cash flows from financing activities:
Payment of long-term debt and credit arrangements--third
parties...................................................... (7,359)
Net advances from related party............................... 20,657
--------
Net cash flows provided by financing activities............. 13,298
--------
Net decrease in cash and cash equivalents................... (4,087)
Cash and cash equivalents, beginning of period.............. 5,792
--------
Cash and cash equivalents, end of period.................... $ 1,705
========

The accompanying Notes to Combined Financial Statements are an integral part of
these statements.

F-55

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements

November 19, 1999
(In thousands)

1. Summary of Significant Accounting Policies

Nature of Operations: NovaCare Physical Rehabilitation and Occupational
Health Group includes RehabClinics, Inc., NovaCare Outpatient Rehabilitation
East, Inc., NovaCare Outpatient Rehabilitation West, Inc., NovaCare
Occupational Health Services, Inc., CMC Center Corporation and Industrial
Health Care Company (collectively "the Group") all of which are wholly-owned
subsidiaries of NC Resources, Inc., a Delaware holding company and a wholly-
owned subsidiary of NovaCare, Inc., a Delaware corporation ("Parent").

Business Profile: The Group is a provider of freestanding outpatient
physical therapy and rehabilitation services and occupational health services.
Outpatient physical therapy and rehabilitation services include: (i) general
physical rehabilitation, which is designed to return injured and post-operative
patients to their optimal functional capacity, (ii) sports medicine, which is
designed to minimize the "downtime" of injured sports participants and safely
return them to sports activities, (iii) enhanced performance training, which is
designed to improve the muscular and cardiovascular performance of both
professional caliber athletes and "weekend warriors" as well as the "senior
citizen" population, (iv) industrial rehabilitation, which is designed to
reduce work-related injuries and rehabilitate and strengthen injured patients
to allow a rapid, safe and productive return to normal job activities and (v)
hospital-based services, which involve providing inpatient and outpatient
rehabilitation services on a contract basis to acute care hospitals.
Occupational health services comprise treatment for work-related injuries and
illnesses, physical and occupational rehabilitation therapy, pre-placement
physical examinations and evaluations, case management, diagnostic testing and
other employer-requested or government-mandated work related health care
services.

Basis of Presentation: The financial statements of the Group include the
combined financial position, results of operations and cash flows of the Group.
The Parent's historical cost basis of assets and liabilities has been reflected
in the Group's financial statements. The financial information in these
financial statements is not necessarily indicative of results of operations,
financial position and cash flows that would have occurred if the Group had
been a separate stand-alone entity during the periods presented or of future
results.

Principles of Combination: The combined financial statements include the
accounts of the Group companies. Investments of 20% to 50% of the voting
interest of affiliates are accounted for using the equity method. All
significant intercompany accounts and transactions between the companies
comprising the Group have been eliminated. The Group recognizes a minority
interest in its balance sheet and statement of operations for the portion of
majority-owned subsidiaries attributable to its minority owners.

Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
During the period July 1, 1999 to November 19, 999, the Company recorded a
$29,358 charge as a change in estimate to increase the allowance for doubtful
accounts to record the accounts receivable at its net realizable value.

F-56

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

November 19, 1999
(In thousands)

Concentration of Credit Risks: Financial instruments which subject the
Group to concentrations of credit risk consist primarily of trade receivables
from workers' compensation programs, health and managed care companies, self-
pay individuals, Medicare, Medicaid and litigation settlements from various
payors located throughout the United States. The Group generally does not
require collateral from its customers. Such credit risk is considered by
management to be limited due to the Group's broad customer base.

Net Revenues: Net revenues are reported at the net realizable amounts
from customers and third-party payors and includes estimated retroactive
revenue adjustments due to future audits, reviews, and investigations.
Retroactive adjustments are considered in the recognition of revenue on an
estimated basis in the period the related services are rendered, and such
amounts are adjusted in future periods as adjustments become known or as years
are no longer subject to such audits, reviews, and investigations. Net revenues
generated directly from Medicare and Medicaid reimbursement programs
represented 8% of the Group's combined net revenues for the period July 1, 1999
to November 19, 1999

Property and Equipment: Property and equipment are stated at cost.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets, which range principally from three to seven years for
property and equipment and 30 to 40 years for buildings. Leasehold improvements
are amortized over the lesser of the lease term or the asset's estimated useful
life. Property and equipment also include external and incremental internal
costs incurred to develop major computer systems. Costs for computer software
developed or purchased for internal use are capitalized and amortized over an
estimated useful life ranging from five to ten years. Costs of software
maintenance and training, as well as the cost of software that does not add
functionality to existing systems are expensed as incurred.

Excess Cost of Net Assets Acquired and Other Intangible Assets: Assets
and liabilities acquired in connection with business combinations accounted for
under the purchase method are recorded at their respective fair values.
Deferred taxes have been recorded to the extent of the difference between the
fair value and the tax basis of the assets acquired and liabilities assumed.
The excess of the purchase price over the fair value of net assets acquired
consists of non-compete agreements and goodwill and is amortized on a straight-
line basis over the estimated useful lives of the assets which range from five
to 40 years, with an average life of approximately 37 years. The value assigned
to non-compete agreements has been included in other assets.

The useful life for each class of intangible asset is as follows:

Goodwill........................................................ 40 years
Covenants not-to-compete........................................ 5 years

F-57

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

November 19, 1999
(In thousands)

Impairment of Long Lived Assets: Effective July 1, 1997, the Group
adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" which establishes accounting standards for the impairment of long-
lived assets, certain identified intangible assets and goodwill related to
those assets to be held and used and for long-lived assets and certain
intangible assets to be disposed of. In accordance with SFAS No. 121, the Group
reviews the realizability of long-lived assets, certain intangible assets and
goodwill whenever events or circumstances occur which indicate recorded cost
may not be recoverable. The Group also reviews the overall recoverability of
goodwill on an annual basis. The analyses are based primarily on estimated
future undiscounted cash flows.

If the expected future cash flows (undiscounted) are less than the
carrying amount of such assets, the Group recognizes an impairment loss for the
difference between the carrying amount of the assets and their estimated fair
value. In estimating future cash flows for determining whether an asset is
impaired, and in measuring assets that are impaired, assets are grouped by
geographic region, which is the lowest level of operational reporting used by
management.

Other Assets: Other assets consist principally of non-compete agreements
and security deposits. Non-compete agreements are principally agreements with
former owners not to compete with the Group within a specified geographical
area for a specified period of time. The asset is amortized over the life of
the agreement.

2. Related Party Transactions

The Group entered into several arrangements with the Parent where fees
are charged to the Group for services provided. These services included
selling, general and administrative and financing services. Upon a change of
control of the Group, certain of these arrangements may be voided and the Group
will no longer be subject to the related fees. The Group will, however, be
responsible for obtaining independent financing and will incur selling, general
and administrative expenses.

Trademarks: The Group is charged a fee of approximately 5.0% of revenues
for the use of the "NovaCare" name and trademark. Fees are settled with the
Parent on a quarterly basis in accordance with the trademark agreement.

Advances and Financing Arrangements: The Group participates in the
Parent's centralized cash management system to finance operations and
acquisitions. The Group's cash deposits are transferred to the Parent on a
daily basis. The Parent funds the Group's disbursement bank accounts as
required. When disbursements exceed deposits, the Parent advances the
difference to the Group through an interest-free intercompany account. Assuming
a LIBOR plus 1.5% borrowing rate, which approximates the Parent's borrowing
rate, interest expense on net advances from the Parent would have been $8,826
for the period July 1, 1999 to November 19, 1999.

F-58

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

November 19, 1999
(In thousands)

In addition, certain advances from the Parent to the Group are funded
through a line of credit arrangement. The annual interest rate on the line of
credit is the prime rate of the Parent's lending bank plus 1.5%. As of November
19, 1999, the interest rate for the Group was 9.25%. Interest due to the Parent
is settled quarterly in accordance with the loan agreement. Interest expense
related to this financing arrangement was $5,366 for the period July 1, 1999 to
November 19, 1999.

Selling, General and Administrative Expenses Allocated from Related
Party: During fiscal 1999 and 1998, the Parent provided certain selling,
general and administrative services to the Group, that included shared
management, legal, information systems, finance and human resource services and
leased office space. These costs were allocated to the Group from the Parent,
based on number of personnel or fiscal 1999's net revenues. While Novacare has
divested of certain of its businesses since June 30, 1999, the level of effort
required by the Parent for each of the businesses was essentially the same for
period July 1, 1999 to November 19, 1999 as it was in fiscal 1999. During the
period July 1, 1999 to November 19, 1999, these allocated costs were $3,554.

The expenses allocated to the Group are not necessarily indicative of
amounts that would have been incurred if the Group had been a separate,
independent entity that either managed these functions or contracted the
services from an unrelated third party. Allocations were based on methodologies
considered reasonable by management. It is not practicable to estimate these
costs on a stand-alone basis, if the Group were a separate company.

Benefits and Payroll Service Fees: Beginning in February 1997, the Group
contracted with NovaCare Employee Services (NCES), a majority owned subsidiary
of the Parent, to provide payroll and benefit services. Under the agreement,
the Group reimburses NCES for all payroll and related benefit costs, in
addition to an administrative fee. Administrative fees incurred, related to
this agreement, were $1,963 for the period July 1, 1999 to November 19, 1999.
The amount for the period July 1, 1999 to November 19, 1999, is included in
selling, general and administrative expenses. Additionally, payroll and related
benefits expense disbursed by NCES for PROH approximated $65,932 for the period
July 1, 1999 to November 19, 1999. As of November 19, 1999 the Group owed NCES
$1,337 for payroll and related benefit costs. These amounts are included in
accounts payable and accrued expenses--related parties.

Insurance Reserves: The Parent maintains insurance coverage for the
Group, including workers' compensation and general business insurance.
Insurance reserves have been specifically allocated to the Group and the
amounts owed to the Parent for such reserves are included in accounts payable
and accrued expenses--related parties. As of November 19, 1999, the Group owed
the Parent $225 for general business insurance.

F-59

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

November 19, 1999
(In thousands)

3. Provision for Restructure

During fiscal 1999, the Group recorded a provision for restructure
totaling $30,225 consisting of:

Writedown of excess cost of net assets acquired, net.............. $28,300
Employee severance and related costs.............................. 1,925
-------
Total........................................................... $30,225
=======

During fiscal 1999, the Group decided to exit certain non-strategic
markets. The markets consisted of 40 clinics. This decision resulted in a
write-down of the value of the related assets to estimated net realizable
value as these were held for disposal. The estimated net realizable value of
the Group's assets held for disposal (principally excess cost of net assets
acquired, net) was determined by reference to the Group's experience with
purchases and sales of comparable assets over the past several years and in
consultation with financial advisors. The clinics to be disposed of had
annualized net revenues of approximately $16,600 and annualized operating
profit of approximately $200. At November 19, 1999, five of the clinics have
been sold for proceeds totaling $923. The net book value of the remaining
assets to be sold is approximately $4,991. The decision to dispose of these
clinics is being evaluated in light of the sale of the Group.

In addition, the Group implemented a revised physical therapist staffing
model to provide therapist services at lower costs while maintaining quality
care. The new staffing model calls for an estimated reduction of 364 physical
therapists. At November 19, 1999, a reduction of 267 physical therapists has
taken place, 193 through attrition and 74 through severance arrangements.

The activity in the Group's reserves for restructure is as follows:

Period
July 1, 1999 to
November 19,
1999
---------------

Beginning balance.......................................... $ 625
Payments................................................... (532)
-----
Ending balance............................................. $ 93
=====

F-60

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

November 19, 1999
(In thousands)

4. Acquisition Transactions

Information with respect to businesses acquired in purchase transactions
was as follows:

As of
November 19,
1999
------------

Excess cost of net assets acquired............................ $431,446
Less: accumulated amortization................................ (45,057)
--------
$386,389
========

Certain purchase agreements require additional payments to the former
owners if specific financial targets are met. At November 19, 1999 aggregate
contingent payments in connection with all acquisitions of approximately
$24,529, in cash, have not been included in the initial determination of cost
of the businesses acquired since the amount of such contingent consideration
that may be paid in the future, if any, is not presently determinable. In
connection with businesses acquired in prior years, the Group paid $7,110 cash
in the period July 1, 1999 to November 19, 1999.

5. Property and Equipment

The components of property and equipment were as follows:

As of
November 19,
1999
------------

Buildings..................................................... $ 1,232
Property, equipment and furniture............................. 43,558
Capitalized software.......................................... 22,637
Leasehold improvements........................................ 18,008
--------
85,435
Less: accumulated depreciation and amortization............... (47,587)
--------
$ 37,848
========

Depreciation expense, including depreciation expense allocated by the
Parent, for the period July 1, 1999 to November 19, 1999, was $4,767.

F-61

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

November 19, 1999
(In thousands)

6. Investment in Joint Ventures

The Group has 50% ownership interests in GP Therapy, Inc., LLC (a joint
venture with Columbia/HCA Healthcare Corp), Mercy Joyner Associates (a joint
venture with Mercy Regional Health Systems), Gill Balsano Consulting, LLC (a
joint venture with a Health Care consulting firm), Langhorne PC (a joint
venture with Delaware Valley Medical Corporation), and South Philadelphia PC (a
joint venture with Mt. Sinai Hospital).

At November 19, 1999 the Group's investment in joint venture for GP
Therapy, Inc., LLC was $10,644. The Group's investment in Mercy Joyner
Associates, was acquired as part of a larger acquisition in fiscal year 1998.
At November 19, 1999 the Group's investment in joint venture for Mercy Joyner
Associates was $455. The Group's investment in Gill Balsano Consulting, LLC was
transferred from the Parent in fiscal year 1999. At November 19, 1999 the
Group's investment in Gill Balsano was $1,596. The Group's investment in the
Langhorne PC and South Philadelphia PC were acquired as part of a larger
acquisition in fiscal year 1998. At November 19, 1999 the Group's investment in
joint venture for both the Langhorne PC and South Philadelphia PC was $1,724.
The Group's share of the loss from joint ventures of $100 is included in
selling, general and administrative expenses.

7. Accounts Payable and Accrued Expenses--Third Parties

Accounts payable and accrued expenses are summarized as follows:

As of
November 19,
1999
------------

Accrued contingent earn-outs.................................. $ 3,077
Accrued compensation and benefits............................. 6,480
Accounts payable.............................................. 7,072
Bank overdraft................................................ 4,864
Accrued acquisition costs..................................... 3,748
Accrued interest.............................................. 1,198
Accrued restructure costs..................................... 93
Other......................................................... 4,253
-------
$30,785
=======

F-62

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

November 19, 1999
(In thousands)

8. Financing Arrangements

Financing arrangements consisted of the following:

As of
November 19,
1999
------------

Line of credit--related party, due November 30, 1999........ $ 166,743
Subordinated promissory notes payable through 2007.......... 35,277
Other....................................................... 1,608
---------
203,628
Less: current portion of financing arrangements--related
parties.................................................... (166,743)
Less: current portion of financing arrangements--third
parties.................................................... (13,307)
---------
$ 23,578
=========

Subordinated promissory notes consist primarily of notes to former owners
of businesses acquired and bear interest generally at 6%. The carrying values
of the notes approximate fair value.

Financing arrangements with related party is comprised of a $180,000 line
of credit with a subsidiary of the Parent. The Group periodically draws from
the line and is charged interest at a rate of the Parent's lending bank's prime
rate plus 1.5% on the daily outstanding balance (See Note 2). As of November
19, 1999, the interest rate for the Group was 9.25%. As of November 19, 1999
the Group had $13,257 available under this line of credit.

At November 19, 1999, aggregate annual maturities of financing
arrangements were as follows for the next five fiscal years and thereafter:

Fiscal Year
-----------

2000............................................................. $180,050
2001............................................................. 12,731
2002............................................................. 5,163
2003............................................................. 2,976
2004............................................................. 1,404
Thereafter....................................................... 1,304
--------
$203,628
========

Interest paid on debt during the period July 1, 1999 to November 19, 1999
was $11,460.

F-63

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

November 19, 1999
(In thousands)

9. Leases

The Group rents office and clinical space and transportation and therapy
equipment under non-cancelable operating leases.

Future minimum lease commitments for all non-cancelable leases as of
November 19, 1999 are as follows:

Operating
Fiscal Year Leases
----------- ---------

2000............................................................ $26,553
2001............................................................ 21,036
2002............................................................ 15,281
2003............................................................ 8,571
2004............................................................ 3,693
Thereafter...................................................... 4,608
-------
Total minimum lease payments.................................... $79,742
=======

Total rent expense for all operating leases during the period July 1,
1999 to November 19, 1999 was $12,308.

F-64

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

November 19, 1999
(In thousands)

10. Income Taxes

The components of income tax benefit were as follows:

Period
July 1, 1999 to
November 19, 1999
-----------------

Current:
Federal................................................ $ --
State.................................................. --
----
--
----
Deferred:
Federal................................................ --
State.................................................. --
----
--
----
$ --
====

The components of net deferred tax assets (liabilities) as of November
19, 1999 were as follows:

As of
November 19,
1999
------------

Accruals and reserves not currently deductible for tax
purposes.................................................. $ 12,054
Restructure reserves....................................... 6,557
Federal and state net operating loss....................... 13,784
--------
32,395
Less: valuation allowance.................................. (22,399)
Total deferred tax assets, net of valuation allowance.... 9,996
Gross deferred tax liabilities, depreciation and capital
leases.................................................... (14,767)
--------
Net deferred tax liability............................... $ (4,771)
========

F-65

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

November 19, 1999
(In thousands)

The reconciliation of the expected tax benefit (computed by applying the
Federal statutory tax rate to income before income taxes) to the actual tax
benefit was as follows:

Period
July 1, 1999 to
November 19, 1999
-----------------

Expected Federal income tax benefit.................... $(16,699)
State income tax benefit, less Federal benefit......... (2,691)
Non-deductible nonrecurring items...................... 25
Non-deductible amortization of excess cost of net
assets acquired....................................... 574
Increase in valuation allowance........................ 18,923
Other, net............................................. (132)
--------
$ --
========

The deferred tax consequences of temporary differences in reporting items
for financial statement and income tax purposes are recognized, if appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including the Group's ability to generate taxable
income within the net operating loss carryforward period. Management has
considered these factors in reaching its conclusion as to the valuation
allowance for financial reporting purpose and the Group has recorded a full
valuation allowance to reflect the estimated amount of deferred tax assets
which may not be realized.

11. Benefit Plans

Retirement Plans: Through the Parent, the Group participates in defined
contribution 401(k) plans covering substantially all of its employees. The
Group's portion of contributions made to the plans by the Parent for the period
July 1, 1999 to November 19, 1999 were $442.

Stock Option Plans: Certain employees of the Group participate in the
Parent's employee stock option plans. Under the plans, substantially all of the
options granted under the plan vest ratably over five years and are granted for
a term of up to ten years. The exercise price of the options equals the fair
value of the Parent's common stock at the date of grant. The Parent has adopted
the disclosure-only provision of SFAS 123. Accordingly, no compensation expense
has been recognized for option grants under the plans by the Parent or the
Group. Had compensation cost for options granted been determined based on the
fair value at the date of grant awards consistent with the provisions of SFAS
123, the Group's net loss would not have been materially different from the
amounts reported in these financial statements.

F-66

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

November 19, 1999
(In thousands)

12. Commitments and Contingencies

The Group is subject to legal proceedings and claims that arise in the
ordinary course of business. Management believes that the amount of any
liability related to these matters will not have a material adverse effect on
the Group's financial position or results of operations.

The Group has entered into a naming, promotional and sponsorship
agreement in which the Group pays $900 per year until the complex officially
opens. The naming, promotional and sponsorship agreement is in effect for 25
years after the opening of the complex. The Group is required to make payments
in accordance with the contract terms over 25 years ranging from $1,400 to
$1,963 per year after the official opening. At this time the Group cannot
estimate the date of the official opening of the complex.

13. Sale of the Group

On November 19, 1999, the Parent completed the sale of the Group to
Select Medical Corporation ("Select"). The sales price for the Group was
$200,000, the cash proceeds of which were reduced by the amount of Group debt
assumed by Select. Of the remainder, $36,800 of the purchase price was placed
in escrow for two years in support of representations relating to minimum
working capital, collectibility of accounts receivable, and certain contingent
earnout payments and litigation matters. Following the closing of the Group
sale and continuing through June 2000, Select presented to the Parent claims
for disbursement of portions of the escrowed funds to Select. The Parent and
Select disagreed on certain of these claims. On July 6, 2000, the Parent
entered into a settlement agreement with regard to the accounts receivable
representation, contingent earnout obligations and certain other differences
and disagreements between the Parent and Select related to the Group purchase
and sale agreement and the escrows established as part of that agreement. As a
result of the settlement, the remaining funds in escrow accounts, including
interest, were disbursed to the parties with $4.5 million being returned to the
Parent. In addition, as part of the settlement, the Parent agreed to reimburse
Select approximately $1.3 million in respect of certain of its obligations set
forth in the purchase and sale agreement and up to $1.8 million for Medicare
liabilities, if any, that relate to periods prior to the Group sale. The Parent
collateralized certain future payments to Select with the Parent's accounts
receivable that pertain primarily to the Parent's former long-term care
services business. Also as part of the settlement agreement, certain of the
representations, warranties and indemnifications in the Group purchase and sale
agreement were released by the parties and certain provisions, principally
relating to tax obligations, remain binding on the parties. In conjunction with
the Group sale, the "NovaCare" name was also sold and the Parent changed its
name to NAHC, Inc. effective March 28, 2000.

F-67

Report of Independent Accountants

To the Board of Directors of
NovaCare, Inc.

In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of NovaCare, Inc. net investment and of cash
flows present fairly, in all material respects, the financial position of
NovaCare Physical Rehabilitation and Occupational Health Group ("the Group") at
June 30, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1999, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Group's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards, which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.

The accompanying combined financial statements have been prepared
assuming that the Group will continue as a going concern. The Group has
historically been dependent on NovaCare, Inc. (the "Parent") for financial
support. Additionally, the Group is indebted to the Parent for significant
currently payable amounts. As discussed in Note 13 to the combined financial
statements, the Parent has $175 million of convertible subordinated debentures
due on January 15, 2000. To enable the Parent to generate sufficient funds to
make the required payment on the convertible debentures, the Parent's Board of
Directors on August 5, 1999 voted to seek approval from its shareholders for
the sale of the Parent's two remaining business units, including the Group, and
the adoption of a restructuring proposal. In a proxy statement dated August 13,
1999 (as amended through September 10, 1999) the Parent's shareholders have
been asked to consider and vote upon these proposals at a special meeting of
shareholders to be held on September 21, 1999. All of the proposals were
adopted by the shareholders at the special meeting. The adoption of these
proposals could result in the ultimate liquidation of the Parent. Should these
matters not be approved, or should the transactions not be consummated as set
forth in the proxy statement, the Parent's management would need to seek other
means to obtain sufficient funds to repay the convertible debentures when due.
These matters, coupled with the Group's continuing operating losses, raise
substantial doubt about the Group's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 13. The
combined financial statements do not include any adjustments that might result
from the outcome of these uncertainties.

/s/ PricewaterhouseCoopers LLP
Philadelphia, PA
September 21, 1999

F-68

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Combined Balance Sheets
(In thousands)

As of June 30,
-----------------
1999 1998
-------- --------

Assets
Current assets:
Cash and cash equivalents.................................. $ 5,792 $ 2,037
Accounts receivable, net of allowance at June 30, 1999 and
1998 of $32,891 and $23,864, respectively................. 99,060 93,156
Deferred income taxes...................................... 8,561 439
Other current assets....................................... 8,498 9,498
-------- --------
Total current assets..................................... 121,911 105,130
Property and equipment, net.................................. 40,065 40,422
Excess cost of net assets acquired, net...................... 387,180 356,044
Investment in joint ventures................................. 15,120 13,062
Other assets................................................. 2,948 3,376
-------- --------
$567,224 $518,054
======== ========
Liabilities and NovaCare, Inc. Net Investment
Current liabilities:
Current portion of financing arrangements--third parties... $ 14,706 $ 13,620
Current portion of financing arrangements--related
parties................................................... 165,202 --
Accounts payable and accrued expenses--related parties..... 268,128 186,330
Accounts payable and accrued expenses--third parties....... 31,399 25,532
-------- --------
Total current liabilities................................ 479,435 225,482
Financing arrangements--related party........................ -- 165,507
Financing arrangements, net of current portion--third
parties..................................................... 29,226 35,319
Deferred income taxes........................................ 13,332 9,865
Other ....................................................... 1,480 2,052
-------- --------
Total liabilities........................................ 523,473 438,225
Commitments and contingencies................................ -- --
NovaCare, Inc. net investment................................ 43,751 79,829
-------- --------
$567,224 $518,054
======== ========

The accompanying Notes to Combined Financial Statements are an integral part of
these statements.

F-69

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Combined Statements of Operations
(In thousands)

For the Years Ended June
30,
----------------------------
1999 1998 1997
-------- -------- --------

Net revenues.................................... $339,708 $281,550 $214,936
Cost of Services................................ 234,350 193,860 152,860
-------- -------- --------
Gross profit.................................. 105,358 87,690 62,076
Selling, general and administrative expenses.... 56,743 40,360 29,947
Selling, general and administrative allocated
from related party............................. 27,444 20,823 8,882
Provision for uncollectible accounts............ 24,130 14,806 10,091
Amortization of excess cost of net assets
acquired....................................... 11,865 9,138 6,464
Provision for restructure....................... 30,225 -- --
-------- -------- --------
(Loss) income from operations................. (45,049) 2,563 6,692
Interest expense-related party.................. 15,518 15,990 27,568
Interest expense-third parties.................. 3,157 2,435 1,081
Royalty expense-related party................... 17,059 14,293 10,660
-------- -------- --------
Loss before income taxes...................... (80,783) (30,155) (32,617)
Income tax benefit.............................. (21,564) (7,618) (10,726)
-------- -------- --------
Net loss...................................... $(59,219) $(22,537) $(21,891)
======== ======== ========

The accompanying Notes to Combined Financial Statements are an integral part of
these statements.

F-70

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Combined Statements of NovaCare, Inc. Net Investment
(In thousands)

NovaCare, Inc.
net investment
--------------

Balance at June 30, 1996......................................... $(34,135)
Net contributions from NovaCare, Inc. ......................... 143,134
Net loss....................................................... (21,891)
--------
Balance at June 30, 1997......................................... 87,158
Net contributions from NovaCare, Inc. ......................... 15,208
Net loss....................................................... (22,537)
--------
Balance at June 30, 1998......................................... 79,829
Net contributions from NovaCare, Inc. ......................... 23,141
Net loss....................................................... (59,219)
--------
Balance at June 30, 1999......................................... $ 43,751
========

The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.

F-71

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Combined Statements of Cash Flows
(In thousands)

For the Years Ended June
30,
-----------------------------
1999 1998 1997
-------- --------- --------

Cash flows from operating activities:
Net loss....................................... $(59,219) $ (22,537) $(21,891)
Adjustments to reconcile net loss to net cash
flows used in operating activities:
(Income) loss from joint ventures............ 514 (16) 78
Depreciation and amortization................ 25,974 20,697 15,487
Provision for restructure.................... 30,225
Provision for uncollectible accounts......... 24,130 14,806 10,091
Minority interest............................ 117 69 105
Deferred income taxes........................ (4,432) 6,251 3,849
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts receivable........................ (26,050) (29,417) (24,946)
Other current assets....................... 417 (1,722) (66)
Accounts payable and accrued expenses--
third parties............................. (13,982) (5,289) (8,427)
Other, net................................. (3,309) (196) (1,048)
-------- --------- --------
Net cash used in operating activities...... (25,615) (17,354) (26,768)
-------- --------- --------
Cash flows from investing activities:
Payments for businesses acquired, net of cash
acquired...................................... (48,038) (94,357) (58,685)
Additions to property and equipment............ (19,906) (8,170) (17,269)
Proceeds from sale of property and equipment... 913 -- 52
Other, net..................................... 452 85 569
-------- --------- --------
Net cash flows used in investing activities.. (66,579) (102,442) (75,333)
-------- --------- --------
Cash flows from financing activities:
Payment of long-term debt and credit
arrangements--third parties................... (14,878) (6,591) (5,015)
Net advances from related party................ 110,827 122,363 110,143
-------- --------- --------
Net cash flows provided by financing
activities.................................. 95,949 115,772 105,128
-------- --------- --------
Net increase (decrease) in cash and cash
equivalents................................... 3,755 (4,024) 3,027
Cash and cash equivalents, beginning of year... 2,037 6,061 3,034
-------- --------- --------
Cash and cash equivalents, end of year......... $ 5,792 $ 2,037 $ 6,061
======== ========= ========

The accompanying Notes to Combined Financial Statements are an integral part of
these statements.

F-72

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements

June 30, 1999
(In thousands)

1. Summary of Significant Accounting Policies

Business Profile: The Group is a provider of freestanding outpatient
physical therapy and rehabilitation services and occupational health services.
Outpatient physical therapy and rehabilitation services include: (i) general
physical rehabilitation, which is designed to return injured and post-operative
patients to their optimal functional capacity, (ii) sports medicine, which is
designed to minimize the "downtime" of injured sports participants and safely
return them to sports activities, (iii) enhanced performance training, which is
designed to improve the muscular and cardiovascular performance of both
professional caliber athletes and "weekend warriors" as well as the "senior
citizen" population, (iv) industrial rehabilitation, which is designed to
reduce work-related injuries and rehabilitate and strengthen injured patients
to allow a rapid, safe and productive return to normal job activities and (v)
hospital-based services, which involve providing inpatient and outpatient
rehabilitation services on a contract basis to acute care hospitals.
Occupational health services comprise treatment for work-related injuries and
illnesses, physical and occupational health services comprise treatment for
work-related injuries and illnesses, physical and occupational rehabilitation
therapy, pre-placement physical examinations and evaluations, case management,
diagnostic testing and other employer-requested or government-mandated work
related health care services.

Principles of Combination: The combined financial statements include the
accounts of the Group companies. Investments of 20% to 50% of the voting
interest of affiliates are accounted for using the equity method. All
significant intercompany accounts and transactions between the companies
comprising the Group have been eliminated. The Group recognizes a minority
interest in its balance sheets and statements of operations for the portion of
majority-owned subsidiaries attributable to its minority owners.

F-73

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

June 30, 1999
(In thousands)

1. Summary of Significant Accounting Policies (continued)

throughout the United States. The Group generally does not require collateral
from its customers. Such credit risk is considered by management to be limited
due to the Group's broad customer base.

Statement of Cash Flows: The Group considers its holdings of highly
liquid debt and money-market instruments to be cash equivalents if the
securities mature within 90 days from the date of acquisition. These
investments are carried at cost, which approximates fair value. Non-cash
investing and financing activities in fiscal years 1999 and 1998 of $10,355 and
$24,875, respectively, consist principally of acquired debt and subordinated
promissory notes issued to former owners at closing. There were no non-cash
investing and financing activities in fiscal 1997. Non-cash contributions from
the Parent in fiscal year 1997 were $102,595 for forgiveness of debt. There
were no non-cash contributions in fiscal years 1999 and 1998.

Net Revenues: Net revenues are reported at the net realizable amounts
from customers and third-party payors and includes estimated retroactive
revenue adjustments due to future audits, reviews and investigations.
Retroactive adjustments are considered in the recognition of revenue on an
estimated basis in the period the related services are rendered, and such
amounts are adjusted in future periods as adjustments become known or as years
are no longer subject to such audits, reviews and investigations. Net revenues
generated directly from Medicare and Medicaid reimbursement programs
represented 8%, 9% and 10% of the Group's combined net revenues for fiscal
years 1999, 1998 and 1997 respectively.

The useful life for each class of intangible assets is as follows:

Goodwill........................................................ 40 years
Covenants not-to-compete........................................ 5 years

F-74

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

June 30, 1999
(In thousands)

1. Summary of Significant Accounting Policies (continued)

assets, certain identified intangible assets and goodwill related to those
assets to be held and used and for long-lived assets and certain intangible
assets to be disposed of. In accordance with SFAS No. 121, the Group reviews
the realizability of long-lived assets, certain intangible assets and goodwill
whenever events or circumstances occur which indicate recorded cost may not be
recoverable. The Group also reviews the overall recoverability of goodwill on
an annual basis. These analyses are based primarily on estimated future
undiscounted cash flows.

Income Taxes: The Group is included in the consolidated Federal income
tax return of the Parent. All tax payments are made by the Parent on behalf of
the Group. The Group includes its portion of tax obligations in accounts
payable and accrued expenses--related parties. Current and deferred tax
benefit, included in these statements, was calculated as if the Group had filed
consolidated income tax returns for the Group on a stand alone basis. Under a
tax sharing agreement with the Parent, the Group is entitled to the income tax
benefits, attributable to the Group's losses, which are used in the Parent's
consolidated return. Were the Group to apply the separate company tax return
method the income taxes would have been an expense of $641, $2,192 and $1,182
and net loss as adjusted would have been $81,424, $32,347 and $33,799 for the
years ended June 30, 1999, 1998 & 1997, respectively.

2. Related Party Transactions

F-75

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

June 30, 1999
(In thousands)

2. Related Party Transactions (continued)

intercompany account. Assuming a LIBOR plus 1.5% borrowing rate, which
approximates the Parent's borrowing rate, interest expense on net advances from
the Parent would have been $17,284, $10,137 and $4,242 for the years ended June
30, 1999, 1998 and 1997, respectively.

In addition, certain advances from the Parent to the Group are funded
through a line of credit arrangement. The annual interest rate on the line of
credit is the prime rate of the Parent's lending bank plus 1.5%. As of June 30,
1999, the interest rate for the Group was 9.25%. Interest due to the Parent is
settled quarterly in accordance with the loan agreement. Interest expense
related to this financing arrangement was $15,518, $15,990 and $27,568 for
fiscal 1999, 1998, and 1997, respectively.

Selling, General and Administrative Expenses Allocated from Related
Party: During fiscal 1999, 1998 and 1997, the Parent provided certain selling,
general and administrative services to the Group, that included shared
management, legal, information systems, finance and human resource services and
leased office space. These costs were allocated to the Group from the Parent,
based on specific identification, net revenue or utilization. During 1999, 1998
and 1997, these allocated costs were $15,671, $16,294 and $7,306, respectively.

Benefits and Payroll Service Fees: Beginning in February 1997, the Group
contracted with NovaCare Employee Services (NCES), a 67% owned subsidiary of
the Parent, to provide payroll and benefit services. Under the agreement, the
Group reimburses NCES for all payroll and related benefit costs, in addition to
an administrative fee. Administrative fees incurred, related to this agreement,
were $10,957, $3,986 and $952 for fiscal 1999, 1998 and 1997, respectively.
These amounts are included in Selling, General and Administrative Expenses
Allocated from Related Party. Additionally, payroll and related benefits
expense disbursed by NCES for PROH approximated $175,000, $141,000 and $108,000
for fiscal 1999, 1998 and 1997, respectively. As of June 30, 1999 and 1998 the
Group owed NCES $5,222 and $3,839 for payroll and related benefit costs. These
amounts are included in accounts payable and accrued expenses--related parties.

Insurance Reserves: The Parent maintains insurance coverage for the
Group, including workers' compensation and general business insurance.
Insurance reserves have been specifically allocated to the Group and the
amounts owed to the Parent for such reserves are included in accounts payable
and accrued expenses--related parties. As of June 30, 1999 and 1998, the Group
owed the Parent the following amounts:

As of
June 30,
---------
1999 1998
---- ----

Workers compensation.................................................. $421 $273
General business...................................................... 274 226
---- ----
$695 $499
==== ====

F-76

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

June 30, 1999
(In thousands)

3. Provision for Restructure

During fiscal 1999, the Group's operations recorded a provision for
restructure totaling $30,225 consisting of:

Writedown of excess cost of net assets acquired, net............ $28,300
Employee severance and related costs............................ 1,925
-------
Total........................................................... $30,225
=======

During fiscal 1999, the Group decided to exit certain non-strategic
markets. The markets consisted of 40 clinics. This decision resulted in a
write-down of the value of the related assets to estimated net realizable value
as these were considered held for disposal. The estimated net realizable value
of the Group's assets held for disposal (principally excess cost of net assets
acquired, net) was determined by reference to the Company's experience with
purchases and sales of comparable assets over the past several years and in
consultation with financial advisors. The clinics to be disposed of had
annualized net revenues of approximately $16,600 and annualized operating
profit of approximately $200. At June 30, 1999, five of the clinics have been
sold for proceeds totaling $923. The net book value of the remaining assets to
be sold is approximately $4,991. The decision to dispose of these clinics is
being evaluated in light of the possible sale of the Group.

In addition, the Group has implemented a revised physical therapist
staffing model to provide therapist services at lower costs while maintaining
quality care. The new staffing model calls for an estimated reduction of 364
physical therapists. At June 30, 1999, a reduction of 231 physical therapists
has taken place, 173 through attrition and 58 through severance arrangements.
The Group's plan will be fully implemented by December 31, 1999, utilizing the
remaining restructure reserve.

The activity in the Group's reserves for restructure is as follows:

Years Ended June
30,
-----------------
1999 1998
-------- -------

Beginning balance............................................ $ 1,137 $ 3,217
Provision for restructure.................................... 30,225 --
Payments..................................................... (2,437) (2,080)
Non-cash reductions, principally asset write-offs............ (28,300) --
-------- -------
Ending balance............................................... $ 625 $ 1,137
======== =======

F-77

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

June 30, 1999
(In thousands)

4. Acquisition Transactions

During the years ended June 30, 1999 and 1998 the Group acquired five and
48 businesses, respectively. The following unaudited pro forma combined results
of the operations of the Group give effect to each of the acquisitions as if
they occurred on July 1, 1997:

Years Ended June 30,
----------------------
1999 1998
---------- ----------

Net Revenues........................................... $ 339,889 $ 344,277
========== ==========
Loss before income taxes............................... $ (80,734) $ (29,945)
========== ==========
Net loss............................................... $ (59,170) $ (22,327)
========== ==========

The above pro forma information is not necessarily indicative of the
results of operations that would have occurred had the acquisition been made as
of July 1, 1997, or the results that may occur in the future.

Information with respect to businesses acquired in purchase transactions
was as follows:

As of June 30,
---------------------
1999 1998
---------- ----------

Excess cost of net assets acquired....................... $ 427,654 $ 384,653
Less: accumulated amortization........................... (40,474) (28,609)
---------- ---------
$ 387,180 $ 356,044
========== =========

Years Ended June 30,
---------------------
1999 1998
---------- ----------

Cash paid (net of cash acquired)......................... $ 40,089 $ 78,164
Notes issued............................................. 4,825 24,875
Other consideration...................................... 2,238 6,920
---------- ---------
47,152 109,959
Liabilities assumed...................................... 17,342 36,751
---------- ---------
64,497 146,710
Fair value of assets acquired, principally accounts
receivable and property and equipment................... (5,091) (29,488)
---------- ---------
Cost in excess of fair value of net assets acquired...... $ 59,403 $ 117,222
========== =========

Certain purchase agreements require additional payments to the former
owners if specific financial targets are met. Aggregate contingent payments in
connection with all acquisitions at June 30, 1999 of approximately $34,884, in
cash, have not been included in the initial determination of cost of the
businesses acquired since the amount of such contingent consideration that may
be paid in the future, if any, is not presently determinable. In connection
with businesses acquired in prior years, the Group paid $5,711 and $10,423 cash
in fiscal years ended June 30, 1999 and 1998 respectively. Additionally, the
Parent issued 43 and 130 shares of its common stock on behalf of the Group
during the fiscal years ended June 30, 1999 and 1998, respectively, in
settlement of earn-out payments to former owners.

F-78

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

June 30, 1999
(In thousands)

5. Property and Equipment

The components of property and equipment were as follows:

As of June 30,
------------------
1999 1998
-------- --------

Buildings................................................... $ 1,232 $ 1,232
Property, equipment and furniture........................... 46,752 41,808
Capitalized software........................................ 16,066 12,916
Leasehold improvements...................................... 17,314 14,927
-------- --------
81,364 70,883
Less: accumulated depreciation and amortization............. (41,299) (30,441)
-------- --------
$ 40,065 $ 40,442
======== ========

Depreciation expense, including depreciation expense allocated by the
Parent, for the fiscal years 1999, 1998 and 1997 was $14,109, $11,559 and
$9,023, respectively.

6. Investment in Joint Ventures

At June 30, 1999 and 1998, the Group's investment in joint venture for GP
Therapy, Inc., LLC was $10,728 and $10,889, respectively. The Group's
investment in Mercy Joyner Associates, was acquired as part of a larger
acquisition in fiscal year 1998. At June 30, 1999 and 1998, the Group's
investment in joint venture for Mercy Joyner Associates was $378 and $231,
respectively. The Group's investment in Gill Balsano Consulting, LLC was
transferred from the Parent in fiscal year 1999. At June 30, 1999 the Group's
investment in Gill Balsano was $2,078. The Group's investment in the Langhorne
PC and South Philadelphia PC were acquired as part of a larger acquisition in
fiscal year 1998. At June 30, 1999 and 1998, the Group's investment in joint
venture for both the Langhorne PC and South Philadelphia PC was $1,936 and
$1,942, respectively. The Group's share in the income (loss) from joint
ventures of $514, $(16) and $78 is included in selling, general and
administrative expenses.

F-79

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

June 30, 1999
(In thousands)

7. Accounts Payable and Accrued Expenses--Third Parties

Accounts payable and accrued expenses are summarized as follows:

As of June 30,
---------------
1999 1998
------- -------

Accrued contingent earn-outs................................... $ 7,256 $ 3,294
Accrued compensation and benefits.............................. 5,809 5,034
Accounts payable............................................... 4,397 4,407
Bank overdraft................................................. 4,206 2,216
Accrued acquisition costs...................................... 3,842 394
Accrued interest............................................... 2,026 1,843
Accrued restructure costs...................................... 625 1,137
Other.......................................................... 3,238 7,207
------- -------
$31,399 $25,532
======= =======

8. Financing Arrangements

Financing arrangements consisted of the following:

As of June 30,
-------------------
1999 1998
--------- --------

Line of credit--related party, due November 30, 1999..... $ 165,202 $165,507
Subordinated promissory notes (6% to 9%),
Payable through 2007.................................... 41,615 47,291
Other.................................................... 2,317 1,648
--------- --------
209,134 214,446
Less: current portion of financing arrangements-related
parties................................................. (165,202) --
Less: current portion of financing arrangements-third
parties................................................. (14,706) (13,620)
--------- --------
$ 29,226 $200,826
========= ========

Subordinated promissory notes consist primarily of notes to former owners
of businesses acquired. The carrying values of the notes approximate fair
value.

Financing arrangements with related party is comprised of a $180,000 line
of credit with a subsidiary of the Parent. The Group periodically draws from
the line and is charged interest at a rate of the Parent's lending bank's prime
rate plus 1.5% on the daily outstanding balance (See Note 2). As of June 30,
1999, the interest rate for the Group was 9.25%. As of June 30, 1999 the Group
had $14,798 available under this line of credit.

F-80

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

June 30, 1999
(In thousands)

8. Financing Arrangements (continued)

At June 30, 1999, aggregate annual maturities of financing arrangements
were as follows for the next five fiscal years and thereafter:

Fiscal Year
-----------

2000............................................................ $179,908
2001............................................................ 13,157
2002............................................................ 10,040
2003............................................................ 3,333
2004............................................................ 1,494
Thereafter...................................................... 1,202
--------
$209,134
========

Interest paid on debt during the fiscal years 1999, 1998 and 1997 was
$18,132, $17,518 and $10,537, respectively.

9. Leases

The Group rents office and clinical space and transportation and therapy
equipment under non-cancelable operating leases.

Future minimum lease commitments for all non-cancelable leases as of June
30, 1999 are as follows:

Operating
Fiscal Year Leases
----------- ---------

2000........................................................... $27,807
2001........................................................... 21,378
2002........................................................... 16,557
2003........................................................... 10,191
2004........................................................... 4,208
Thereafter..................................................... 5,341
-------
Total minimum lease payments................................... $85,482
=======

Total rent expense for all operating leases during fiscal years 1999,
1998 and 1997 was $29,610, $22,071 and $16,514 respectively.

F-81

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

June 30, 1999
(In thousands)

10. Income Taxes

The components of income tax benefit were as follows:

Years Ended June 30,
----------------------------
1999 1998 1997
-------- -------- --------

Current:
Federal......................................... $(17,500) $(14,676) $(15,143)
State........................................... 950 776 260
-------- -------- --------
(16,500) (13,900) (14,883)
-------- -------- --------
Deferred:
Federal......................................... (4,705) 4,890 3,235
State........................................... (309) 1,392 922
-------- -------- --------
(5,014) 6,282 4,157
-------- -------- --------
$(21,564) $ (7,618) $(10,726)
======== ======== ========

The components of net deferred tax assets (liabilities) as of June 30,
1999 and 1998 were as follows:

As of June 30,
-----------------
1999 1998
-------- -------

Accruals and reserves not currently deductible for tax
purposes.................................................. $ (1,113) $ 439
Restructure reserves....................................... 6,775 --
Federal and state net operating loss....................... 2,899 --
-------- -------
Gross deferred tax assets................................ 8,561 439
Depreciation and capital leases............................ (13,332) (9,865)
-------- -------
Gross deferred tax liabilities........................... (13,332) (9,865)
-------- -------
Net deferred tax liability............................... $ (4,771) $(9,426)
======== =======

The reconciliation of the expected tax benefit (computed by applying the
Federal statutory tax rate to income before income taxes) to actual tax
expense was as follows:

Years Ended June 30,
----------------------------
1999 1998 1997
-------- -------- --------

Expected Federal income tax benefit ............ $(28,274) $(10,554) $(11,416)
State income taxes benefit, less Federal
benefit........................................ 416 1,679 870
Non-deductible nonrecurring items............... 95 428 61
Non-deductible amortization of excess
cost of net assets acquired.................... 6,025 1,358 988
Other, net...................................... 174 (529) (1,229)
-------- -------- --------
$(21,564) $ (7,618) $(10,726)
======== ======== ========

F-82

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

June 30, 1999
(In thousands)

11. Benefit Plans

Retirement Plans: Through the Parent, the Group participates in defined
contribution 401(k) plans covering substantially all of its employees. The
Group's portion of contributions made to the plans by the Parent for fiscal
1999, 1998 and 1997 were $1,189, $1,056 and $841, respectively.

Stock Option Plans: Certain employees of the Group participate in the
Parent's employee stock option plans. Under the plans, substantially all of the
options granted under the plan vest ratably over five years and are granted for
a term of up to ten years. The exercise price of the options equal the fair
value of the Parent's common stock at the date of grant. The Parent has adopted
the disclosure-only provision of SFAS 123. Accordingly, no compensation expense
has been recognized for option grants under the plans by the Parent or the
Group. Had compensation cost for options granted been determined based on the
fair value at the date of grant awards consistent with the provisions of SFAS
123, the Group's net loss would not have been materially different from the
amounts reported in these financial statements.

12. Commitments and Contingencies

13. Parent's Restructure Proposal

The accompanying combined financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
combined financial statements for the three years ended June 30, 1999, the
Group has reported substantial net operating losses; has significant excess of
current liabilities over current assets at June 30, 1999; and, is dependent on
the Parent to provide financial support.

The Parent has $175,000 of convertible subordinated debentures due on
January 15, 2000. The Parent's ability to make its scheduled debt payments when
due is dependent on a number of future actions, the outcome of which are
uncertain. The Parent's management has proposed a financial restructuring plan
to its shareholders in a proxy statement dated August 13, 1999, as amended
through September 10, 1999. A special meeting of the Parent's shareholders was
held on September 21, 1999 (the "Special Meeting") and the shareholders voted
to approve (i) the sale of the Group, (ii) the sale of the Parent's interest in
an affiliated company and (iii) the adoption of a restructuring proposal.

The Parent is in the process of seeking buyers for the Group. While to
date no definitive agreement has been entered into with respect to the sale of
the Group, the Parent received shareholder approval at the Special Meeting to
proceed with the sale when a suitable buyer is identified and a definitive
agreement (which meets all of the conditions of the proposal included in the
proxy) is negotiated with such buyer. The sale of the Group could result in
material adjustments to the assets and liabilities reflected in the
accompanying combined financial statements.

F-83

NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)

Notes to Combined Financial Statements--(Continued)

June 30, 1999
(In thousands)

13. Parent's Restructure Proposal (continued)

The Parent's ability to repay the $175,000 convertible subordinated
debentures is dependent on the sale of the Group or the Parent's ability to
secure refinancing in the event the Group is not sold. The Parent is unable to
predict the sale of the Group as set forth in the proxy or likelihood of
successfully concluding any other available alternative. As a result, the
Company is unable to predict the Parent's ability to continue to provide
financial support to the Group.

F-84

Independent Auditors' Report

The Board of Directors and Stockholders
Intensiva HealthCare Corporation:

We have audited the accompanying consolidated balance sheets of Intensiva
HealthCare Corporation and subsidiaries as of December 15, 1998 and December
31, 1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the period from January 1, 1998 through December 15,
1998 and the year ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits 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 Intensiva
HealthCare Corporation and subsidiaries as of December 15, 1998 and December
31, 1997, and the results of their operations and their cash flows for the
period from January 1, 1998 through December 15, 1998 and the year ended
December 31, 1997, in conformity with auditing standards generally accepted in
the United States of America.

/s/ KPMG LLP

St. Louis, Missouri
April 9, 1999

F-85

INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 15, 1998 and December 31, 1997

December 15, December 31,
1998 1997
------------ ------------

Assets
Current assets:
Cash and cash equivalents ......................... $ -- 1,433,812
Accounts receivable, less allowance for doubtful
accounts of $2,767,735 and $1,736,367, respective-
ly................................................ 52,138,563 31,876,315
Inventories ....................................... 1,023,466 781,317
Prepaid expenses .................................. 848,937 855,429
----------- ----------
Total current assets ............................ 54,010,966 34,946,873
Property and equipment, net ......................... 10,531,377 6,882,957
Organizational and preopening costs, net ............ 751,864 382,777
Other assets ........................................ 673,620 1,047,842
----------- ----------
$65,967,827 43,260,449
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Bank overdraft .................................... $ 1,769,407 --
Current portion of long-term obligations .......... 748,283 781,315
Current portion of revolving credit facility ...... 10,884,847 1,649,394
Accounts payable and accrued expenses ............. 9,413,078 7,589,180
Accrued salaries, wages, and benefits ............. 5,155,739 2,245,741
Estimated third-party payor settlements ........... 21,534,681 2,652,585
----------- ----------
Total current liabilities ....................... 49,506,035 14,918,215
----------- ----------
Long-term obligations, less current portion ......... 1,533,641 1,312,234
Revolving credit facility, less current portion ..... -- 1,935,575
Deferred rent expense ............................... 1,516,001 1,301,984
----------- ----------
Total liabilities ............................... 52,555,677 19,468,008
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $0.001 par value:
Series A, 3,465,000 shares authorized, none
outstanding in 1998 and 1997...................... -- --
Series B, 2,232,962 shares authorized, none
outstanding in 1998 and 1997...................... -- --
Common stock, $0.001 par value, 70,000,000 shares
authorized, 10,086,079 and 9,969,045 shares issued
and outstanding, respectively..................... 10,086 9,969
Additional paid-in capital ........................ 30,251,901 30,193,647
Accumulated deficit ............................... (16,849,837) (6,411,175)
----------- ----------
Total stockholders' equity ...................... 13,412,150 23,792,441
----------- ----------
$65,967,827 43,260,449
=========== ==========

See accompanying notes to consolidated financial statements.

F-86

INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Period from January 1, 1998 through December 15, 1998 and year ended December
31, 1997

Period from
January 1, 1998
through Year ended
December 15, December 31,
1998 1997
--------------- ------------

Net patient service revenues ...................... $ 98,848,514 69,589,496
Costs and expenses:
Operating expenses .............................. 95,099,777 59,913,263
General and administrative ...................... 7,485,093 4,605,961
Provision for doubtful accounts ................. 1,818,152 1,951,890
Depreciation and amortization ................... 2,835,004 1,565,004
------------- ----------
Total costs and expenses ...................... 107,238,026 68,036,118
------------- ----------
Operating income (loss) ....................... (8,389,512) 1,553,378
Interest income ................................... -- 412,706
Interest expense .................................. (1,203,126) (235,171)
------------- ----------
Income (loss) before income taxes ............. (9,592,638) 1,730,913
Provision for income taxes ........................ 846,024 93,557
------------- ----------
Net income (loss) ............................. $ (10,438,662) 1,637,356
============= ==========

See accompanying notes to consolidated financial statements.

F-87

INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Period from January 1, 1998 through December 15, 1998 and year ended December
31, 1997

Common stock
------------------
Preferred stock Additional Total
----------------- Number of paid-in Accumulated stockholders'
Series A Series B shares Amount capital deficit equity
-------- -------- ---------- ------- ---------- ----------- --------------

Balance at December 31,
1996 .................. $ -- -- 9,905,062 $ 9,905 30,184,544 (8,048,531) 22,145,918
Issuance of shares of
common stock in
connection with
exercise of stock
options ............... -- -- 63,983 64 9,103 -- 9,167
Net income ............. -- -- -- -- -- 1,637,356 1,637,356
----- ---- ---------- ------- ---------- ----------- -----------
Balance at December 31,
1997 .................. -- -- 9,969,045 9,969 30,193,647 (6,411,175) 23,792,441
Issuance of shares of
common stock in
connection with
exercise of stock
options ............... -- -- 117,034 117 58,254 -- 58,371
Net loss ............... -- -- -- -- -- (10,438,662) (10,438,662)
----- ---- ---------- ------- ---------- ----------- -----------
Balance at December 15,
1998 .................. $ -- -- 10,086,079 $10,086 30,251,901 (16,849,837) 13,412,150
===== ==== ========== ======= ========== =========== ===========

See accompanying notes to consolidated financial statements.

F-88

INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Period from January 1, 1998 through December 15, 1998 and year ended December
31, 1997

Period from
January 1,
1998
through Year ended
December 15, December 31,
1998 1997
------------ ------------

Cash flows from operating activities:
Net income (loss) ................................ $(10,438,662) 1,637,356
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization .................. 2,835,004 1,565,004
Provision for doubtful accounts ................ 1,818,152 1,951,890
Increase in accounts receivable ................ (22,580,074) (25,344,570)
Increase in inventories, prepaid expenses, and
other assets .................................. (363,816) (784,274)
Increase in accounts payable and accrued
expenses ...................................... 1,823,898 4,511,854
Increase in accrued salaries, wages, and
benefits ...................................... 2,909,998 1,209,670
Increase in estimated third-party payor
settlements ................................... 19,381,770 1,748,872
Increase in accrued rent differential .......... 214,017 216,684
------------ -----------
Net cash used in operating activities ........ (4,399,713) (13,287,514)
------------ -----------
Cash flows from investing activities:
Additions to property and equipment .............. (4,318,103) (3,323,707)
Organizational and preopening costs .............. (965,436) (542,742)
Maturities of short-term investments ............. -- 12,987,220
------------ -----------
Net cash provided by (used in) investing
activities .................................. (5,283,539) 9,120,771
------------ -----------
Cash flows from financing activities:
Bank overdraft ................................... 1,769,407 --
Proceeds from exercise of stock options .......... 58,371 9,167
Net borrowings under revolving credit facility ... 7,299,878 3,584,969
Debt issuance costs incurred ..................... -- (140,322)
Payments on long-term obligations ................ (878,216) (738,236)
------------ -----------
Net cash provided by financing activities .... 8,249,440 2,715,578
------------ -----------
Decrease in cash and cash equivalents ........ (1,433,812) (1,451,165)
Cash and cash equivalents, beginning of period ..... 1,433,812 2,884,977
------------ -----------
Cash and cash equivalents, end of period ........... $ -- 1,433,812
============ ===========
Supplemental cash flow information:
Cash paid for interest ........................... $ 1,203,126 235,171
Cash paid for income taxes ....................... 644,246 43,000
============ ===========
Supplemental information--noncash investing and
financing activities:
Acquisition of software license through long-
term obligation ............................... $ -- 555,034
Acquisition of equipment through capital leases
............................................... 1,066,591 1,156,824
============ ===========

See accompanying notes to consolidated financial statements.

F-89

INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 15, 1998 and December 31, 1997

(1) Business and Summary of Significant Accounting Policies and Practices

(a) Description of Business

Intensiva HealthCare Corporation and subsidiaries (the Company) was
incorporated in Delaware on July 18, 1994. The Company operates a
network of long-term care hospitals in certain health care markets
across the United States.

On November 10, 1998, Select Medical Corporation of Mechanicsburg (a
wholly owned subsidiary of Select Medical Corporation) (Select)
initiated a cash tender offer of $9.625 per outstanding share of the
Company's common stock. On December 15, 1998, Select acquired
approximately 95% of the Company's outstanding common stock. The
remaining 5% of the outstanding stock was acquired on December 18, 1998.
Total cash tendered by Select for the Company's common stock was
$97,078,511. Additionally, Select paid $4,688,712 to retire options
vested under the Intensiva HealthCare Corporation Stock Option Plan and
Intensiva HealthCare Corporation Directors Stock Option Plan and to
retire warrants held by a third party. Approximately $1.8 million of
costs incurred by the Company related to the sale of the Company's
common stock to Select are included in general and administrative
expense in the accompanying consolidated statement of operations for the
period from January 1, 1998 through December 15, 1998. Effective
December 16, 1998, the Company became part of the Select consolidated
group of subsidiaries.

(b) Principles of Consolidation

The consolidated financial statements of the Company include all of its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

Cash and cash equivalents consist of interest-bearing money market
accounts and debt instruments with original maturities of three months
or less.

(d) Depository Receipts Account

The Company maintains a depository receipts account at a local financial
institution to which substantially all cash receipts are received. In
accordance with the terms of the revolving credit facility, the balance
of the depository receipts account is swept daily by the lender to
reduce the balance outstanding on the Company's revolving credit
facility.

(e) Financial Instruments

Financial instruments, consisting of cash and cash equivalents, accounts
receivable, current liabilities, long-term obligations, and revolving
credit facility are reported at amounts in the accompanying consolidated
balance sheets that approximate fair value at the balance sheet dates.

(f) Inventories

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

F-90

INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 15, 1998 and December 31, 1997

(g) Property and Equipment

Property and equipment are stated at cost. Equipment under capital
leases is stated at the present value of minimum lease payments.
Property and equipment of the Company are reviewed for impairment
whenever events or circumstances indicate that the asset's undiscounted
expected cash flows are not sufficient to recover its carrying amount.
The Company measures an impairment loss by comparing the fair value of
the asset to its carrying amount. Fair value of an asset is estimated
using the present value of expected future cash flows.

Depreciation and amortization is calculated using the straight-line
method over the estimated useful lives of the assets. Useful lives for
equipment range from 3-15 years. Leasehold improvements are amortized
over the shorter of the lease term or estimated useful life of the
asset, approximately five years.

(h) Organizational and Preopening Costs

Organizational and preopening costs consist of legal, consulting, and
other costs incurred by the Company during the development phase of a
new hospital. These costs are capitalized and amortized to expense over
a period of twelve months beginning when the new hospital is opened and
begins to admit patients. Costs related to marketing and development of
new hospitals at the corporate level are expensed as incurred.

(i) Other Assets

Other assets primarily consist of software license agreements with a
book value of approximately $487,000 and $879,000 at December 15, 1998
and December 31, 1997, respectively. The software licenses are being
amortized into expense over the three-year estimated useful lives of the
licenses.

(j) Bank Overdraft

The balance of the bank overdraft at December 15, 1998 represents
outstanding checks written on the Company's operating and payroll bank
accounts in excess of the cash balance of those accounts. Subsequent to
the balance sheet date, sufficient funds were transferred to the
Company's operating and payroll bank accounts from the revolving credit
facility to satisfy outstanding obligations.

(k) Deferred Rent Expense

Certain of the leases on the Company's health care facilities include
scheduled base rent increases over the terms of the leases. The total
base rent payments are being charged to expense on the straight-line
method over the term of the leases. Deferred rent expense represents the
excess of rent expense over cash payments since inception of the leases.

(l) Income Taxes

Deferred 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 bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates in effect
for the year in which those differences are expected to be recovered or
settled.

F-91

INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 15, 1998 and December 31, 1997

(m) Revenue Recognition

The Company recognizes revenue as services are provided to patients.

The Company has agreements with third-party payors that provide for
patient care reimbursement at rates that may differ from the customary
charges for such care. During the qualification period to become
certified as a long-term care hospital (which historically has been
approximately six to seven months from the opening of the facility for
the Company), the Medicare program reimburses the Company under either
the Prospective Payment System, which provides for payment at
predetermined amounts based on the discharge diagnosis, or under a cost-
based methodology. Upon obtaining certification as a long-term care
hospital, the Company's hospitals receive cost-based reimbursement,
subject to certain limitations specific to long-term care hospitals,
from the Medicare program. Payment for patient services covered by
certain commercial insurance carriers, health maintenance organizations,
and preferred provider organizations are based upon reimbursement
agreements which include negotiated rates for specific services,
discounts from established charges, and prospectively determined per
diem rates.

Net patient service revenues and related accounts receivable are
reported at the estimated net realizable amounts from patients, third-
party payors, and others for services rendered. Retroactive adjustments
are accrued on an estimated basis in the period the related services are
rendered and adjusted in future periods as final settlements are
determined. Final settlements are determined after submission of annual
cost reports by the Company and audits thereof by the Medicare fiscal
intermediary.

(n) Medicare Credit Risk and Payor Concentration

Approximately 69% and 77% of the Company's net patient service revenues
for the period from January 1, 1998 through December 15, 1998 and the
year ended December 31, 1997, respectively, were derived from funds
under the Medicare program, and approximately 68% and 75% of the
Company's net accounts receivable at December 15, 1998 and December 31,
1997, respectively, are from this payor source.

Sixteen of the Company's facilities, which have been certified by
Medicare as long-term care hospitals at December 15, 1998, accounted for
approximately $96 million of net patient services revenues in the period
from January 1, 1998 through December 15, 1998. Significant reductions
in the level of revenues attributable to these facilities may occur if
the Company is unable to maintain the certification of these facilities
as long-term care hospitals in accordance with Medicare rules and
regulations, including the maintenance of an average length of stay of
at least 25 days at each individual facility. Also, the Company's
facilities operate in space leased from general acute care hospitals
(host hospitals), consequently, all of its 22 facilities in operation at
December 15, 1998 are subject to Medicare "hospital within hospitals"
(HIH) rules and regulations. These rules and regulations are designed to
ensure that the Company's facilities are organizationally and
functionally independent of their host hospitals. For purposes of
measuring independence, the Medicare rules and regulations include
requirements that the Company's facilities either purchase no more than
15% of their total operating expenses from the host hospitals or receive
no more than 25% of patient referrals from the host hospitals.
Significant reductions in the Company's level of revenues attributable
to its facilities may occur if the Company is unable to maintain its
facilities' status as HIH's in accordance with Medicare rules and
regulations.

F-92

INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 15, 1998 and December 31, 1997

Management believes that all its facilities are in compliance with the
Medicare rules and regulations covering long-term care hospitals and HIH
facilities. However, in light of the lack of regulatory guidance and
scarcity of case law interpreting these regulations, there can be no
assurance that the Company's facilities will have been found to be in
compliance with these regulations and, if so, whether any sanctions
imposed would have a material adverse effect on the consolidated
financial position or results of operations of the Company.

(o) Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements. Estimates also affect the reported amounts of
revenues and expenses during the period. Actual results may differ from
those estimates.

(p) Net Income (Loss) Per Share

In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, (SFAS
128). SFAS 128 replaces the previously reported primary and fully
diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for all
periods have been presented to conform to SFAS 128 requirements.

Basic and diluted income (loss) per share was computed using net income
(loss) and the weighted average number of shares of common stock and
common stock equivalents, if dilutive. The weighted average numbers of
shares of common stock used in the computation of basic and diluted loss
per share for the period from January 1, 1998 through December 15, 1998
was 10,019,679. Common stock equivalents totaling 685,117 at December
15, 1998 are not included in the computation of diluted loss per share
because they have an anti-dilutive effect. The weighted average numbers
of shares of common stock and common stock equivalents used in the
computation of basic and diluted income per share for the year ended
December 31, 1997 were 9,929,598 and 10,463,800, respectively. The
difference between the two amounts relates to the effect of dilutive
stock options and warrants.

(q) Stock-Based Compensation

The Company uses the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), and related interpretations in accounting for its
stock options. The Company has adopted the pro forma disclosures-only
provisions of SFAS No. 123, Accounting for Stock-Based Compensation.

(r) Recent Accounting Pronouncements

The Company adopted the provisions of SFAS No. 130, Reporting
Comprehensive Income, on January 1, 1998, which requires reporting of
comprehensive income (earnings) and its components in the statements of
operations and statements of equity, including net income as a
component. Comprehensive income is the change in equity of a business
from transactions and other events and circumstances from nonowner
sources.

F-93

INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 15, 1998 and December 31, 1997

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, Reporting on the Costs of
Start-up Activities. SOP 98-5 requires costs of start-up activities and
organizational costs to be expensed as incurred. The Company is required
to adopt SOP 98-5 on January 1, 1999 as a cumulative effect of a change
in accounting principle. The total amount of unamortized organizational
and preopening costs at December 15, 1998 was $751,864.

(2) Allowance for Doubtful Accounts

Activity in the allowance for doubtful accounts is as follows:

Period from
January 1, 1998
through Year ended
December 15, December 31,
1998 1997
--------------- ------------

Balance at beginning of period................... $1,736,367 1,270,478
Provision for doubtful accounts.................. 1,818,152 1,951,890
Accounts written-off............................. (786,784) (1,486,001)
---------- ----------
Balance at end of period......................... $2,767,735 1,736,367
========== ==========

(3) Property and Equipment
Property and equipment are as follows:

December 15, December 31,
1998 1997
------------ ------------

Leasehold improvements.............................. $ 6,207,343 4,329,372
Equipment........................................... 3,740,547 1,954,120
Equipment under capital leases...................... 3,825,685 2,109,393
----------- ---------
13,773,575 8,392,885
Less accumulated depreciation and amortization...... 3,242,198 1,509,928
----------- ---------
Property and equipment, net $10,531,377 6,882,957
=========== =========

(4) Sale Leaseback Agreement

In 1996, the Company entered into a sale leaseback agreement with a
third party to take advantage of favorable borrowing rates and maintain
liquidity. This third party received warrants to purchase 15,950 shares of the
Company's common stock. As part of this agreement, the Company obtained a $1
million commitment from the third party to finance additional capital
expenditures. In November 1998, this agreement was amended to extend an
additional commitment of $500,000 through February 15, 1999. The long-term
obligations under this arrangement are secured by certain equipment, bear
interest at 8%, and are repayable monthly through July 2002. Borrowings
outstanding of approximately $645,500 and $820,000 are included in capital
lease obligations at December 15, 1998 and December 31, 1997, respectively.
The unutilized borrowing capacity under the additional commitment was
approximately $219,000 and $413,000 at December 15, 1998 and December 31,
1997, respectively. The warrants were retired by the Company in connection
with the acquisition of the Company's common stock by Select (see note 1).

F-94

INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 15, 1998 and December 31, 1997

(5) Long-term Obligations

Long-term obligations consist of the following:

December 15, December 31,
1998 1997
------------ ------------

Capital lease obligations, interest rates ranging
from 8% to 15%,
payable monthly through 2002.................... $2,129,603 1,645,218
Notes payable, interest at 6.5%,
payable monthly through June 1999............... 152,321 448,331
---------- ---------
2,281,924 2,093,549
Less current portion............................. 748,283 781,315
---------- ---------
$1,533,641 1,312,234
========== =========

Capital lease obligations are secured by various medical equipment at
each facility, such as ventilators, x-ray machines, IV pumps, and cardiac
monitors. The net book value of equipment under capital leases was
approximately $2,400,000 and $1,700,000 at December 15, 1998 and December 31,
1997, respectively. The notes payable relate to software license agreements.

The aggregate maturities of long-term obligations at December 15, 1998
are as follows:

1999 $1,000,244
2000 769,946
2001 524,037
2002 327,746
2003 and thereafter 160,247
----------
2,782,220
Less interest on capital lease obligations 500,296
----------
$2,281,924
==========

(6) Revolving Credit Facility

In November 1997, the Company entered into a Loan and Security Agreement
(Initial Loan Agreement) to obtain a $20 million revolving credit facility that
was secured by a first security interest in the Company's accounts receivable
and other assets. The Initial Loan Agreement provided for maximum borrowings up
to the lesser of the activated loan amount or the borrowing base as defined in
the Initial Loan Agreement, and bore interest at either the higher of (i) the
prime rate or federal funds rate (whichever was greater) plus .25%, or (ii) the
30-day LIBOR rate plus 2.5%. The Initial Loan Agreement included restrictive
covenants involving limitations on capital expenditures and other borrowings,
adherence to certain financial measurements, and restrictions on the payment of
dividends. The unused availability on the Initial Loan Agreement at December
31, 1997 was approximately $8,212,000. The Initial Loan Agreement was
terminated in April 1998, upon the execution of a second revolving credit
facility with another lender.

The Second Loan and Security Agreement (Second Loan Agreement) was for a
$20 million revolving credit facility with a term of three years. Under the
Second Loan Agreement, the Company pays a monthly loan management fee of $2,000
as well as a monthly usage fee of 0.24% per annum on the average amount by
which the available loan amount, as defined by the agreement, exceeds the
outstanding principal balance. The

F-95

INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 15, 1998 and December 31, 1997

unused availability on the Second Loan Agreement at December 15, 1998 was
approximately $9,115,000. The Second Loan Agreement includes restrictive
covenants on other borrowings and transfer of ownership provisions. Advances
under the New Loan agreement bear interest at 1% above the prime rate (8.75% at
December 15, 1998), and are secured by a first security interest in the
Company's accounts receivable and other assets.

As a result of the acquisition of the Company's common stock by Select,
an event of default occurred under the Second Loan Agreement, with the lender
electing to terminate the agreement. Accordingly, the balance outstanding on
the Second Loan Agreement at December 15, 1998 of $10,884,847 was classified as
a current liability in the accompanying consolidated balance sheets. In January
1999, Select rendered payment in full to the lender including a termination fee
of $600,000.

The Company paid interest at a weighted average interest rate of 11% and
8.75% for the period from January 1, 1998 through December 15, 1998 and the
year ended December 31, 1997, respectively.

(7) Stockholders' Equity

The Company has two stock option plans which provide for the issuance of
options to key employees and directors. Under the Intensiva HealthCare
Corporation Stock Option Plan (1995 Plan), established in 1995, up to 785,400
options to purchase common shares may be issued to employees and directors.
Under the Intensiva HealthCare Corporation Directors Stock Option Plan (1997
Plan), established in 1997, up to 60,000 options to purchase common shares may
be issued to directors. Both plans require that the exercise price of options
issued must be at least equal to the fair market value of the shares of stock
at the date of grant and the term of the options may not exceed 10 years.

Aggregate information relating to stock option activity under the 1995
Plan and the 1997 Plan is as follows:

Period from
January 1, 1998
through Year ended
December 15, December 31,
1998 1997
--------------- ------------

Number of shares under stock options:
Outstanding at beginning of period............... 687,367 575,850
Granted.......................................... 140,500 181,000
Exercised........................................ (117,034) (63,983)
Forfeited........................................ (25,716) (5,500)
-------- -------
Outstanding at end of period..................... 685,117 687,367
Exercisable at end of period..................... 353,766 267,973
======== =======
Weighted average exercise price:
Granted.......................................... $ 5.97 7.21
Exercised........................................ 0.50 0.14
Forfeited........................................ 7.08 6.00
Outstanding at end of period..................... 3.09 2.21
Exercisable at end of period..................... 2.01 0.70

F-96

INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 15, 1998 and December 31, 1997

In accordance with the stock option plans, all employees were to become
fully vested in their options upon a change in ownership. The vested options
under the 1995 Plan and the 1997 Plan were settled by Select for $4,688,712 in
connection with their acquisition of the Company (see note 1).

No compensation expense relating to stock option grants was recorded in
1998 and 1997 as the option exercise prices were equal to fair value of the
Company's common stock at the respective dates of grant.

Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if the Company had accounted for its stock options under
the fair value method of SFAS No. 123. The fair value was estimated at the date
of grant using a Black-Scholes option pricing model with the following weighted
average assumptions:

December 15, December 31,
1998 1997
------------ ------------

Risk-free interest rate............................. 4.7% 5.8%
Dividend yield...................................... -- --
Volatility factor................................... 0.64 0.77
Weighted average expected life...................... 5 years 5 years
======= =======

The Company's pro forma income (loss) compared to reported amounts are as
follows:

Period from
January 1, 1998
through Year ended
December 15, December 31,
1998 1997
--------------- ------------

Net income (loss):
As reported................................... $ (10,438,662) 1,637,356
Pro forma..................................... (11,598,489) 1,509,944
Basic and diluted income (loss) per share:
As reported................................... (1.04) 0.16
Pro forma:
Basic....................................... (1.16) 0.15
Diluted..................................... (1.16) 0.14
Weighted average fair value of options granted
during the period.............................. 3.47 4.77
============= =========

(8) Employee Benefits

The Company sponsors a voluntary defined contribution 401(k) plan (the
Plan) that is available to substantially all employees. Each participant may
make an annual contribution to their account of an amount not to exceed 15% of
their compensation, subject to certain limitations. The Company makes a
matching contribution of 25% of participant contributions, and may make
additional annual discretionary contributions to the Plan not to exceed 15% of
the total compensation of all plan participants. Participants vest in the
Company's matching portion at a rate of 20% per year. Expense for this Plan
totaled approximately $250,000 and $106,500 for the period from January 1, 1998
through December 15, 1998 and the year ended December 31, 1997, respectively.

F-97

INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 15, 1998 and December 31, 1997

(9) Income Taxes

The provision for income taxes for the period from January 1, 1998
through December 15, 1998 and for the year ended December 31, 1997 consisted
primarily of current state income taxes.

The difference between the effective income tax rate for financial
statement purposes and the U.S. federal income tax rate of 34% is as follows:

Period from
January 1, 1998
through Year ended
December 15, December 31,
1998 1997
--------------- ------------

Expected provision (benefit) at statutory tax
rate........................................... $ (3,261,496) 588,510
State taxes, net of federal tax benefit......... 514,955 93,557
Transaction costs incurred by the Company re-
lated to the acquisition by Select............ 617,055 --
Change in valuation allowance................... 2,875,722 (623,050)
Other........................................... 99,788 34,540
------------ ---------
$ 846,024 93,557
============ =========

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are as follows:

December 15, December 31,
1998 1997
--------------- ------------

Net operating loss carryforwards................ $ 2,331,659 936,032
Allowance for doubtful accounts and contractual
allowances..................................... 3,543,120 590,365
Accrued expenses................................ 242,098 198,581
Difference between book and tax basis deprecia-
tion and amortization.......................... 354,314 276,330
------------ ---------
6,471,191 2,001,308
Less valuation allowance........................ 6,471,191 2,001,308
------------ ---------
$ -- --
============ =========

A valuation allowance is necessary for deferred tax assets if, based on
the weight of available evidence, it is more likely than not that some portion
or all of the deferred tax asset will not be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future taxable
income during the period 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. The Company has approximately $6,900,000 of net
operating loss carryforwards for income tax purposes, which, if unused, will
begin to expire in the year 2009.

Compensation expense related to stock options in excess of amounts
recognized for financial reporting purposes resulted in a $1,594,162 increase
in net operating loss carryforwards with a corresponding increase in additional
paid-in capital. A corresponding increase in the valuation allowance was
recorded by the Company and charged to additional paid-in capital.

F-98

INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 15, 1998 and December 31, 1997

(10) Commitments and Contingencies

The Company's health care facilities are located in space leased from
acute care health care providers (host hospitals) under operating lease
agreements with Host Hospitals of initial terms of five or more years, with
varying renewal terms. The Company leases corporate office space under a
noncancellable operating lease which expires in the year 2002.

Minimum annual lease payments on noncancellable operating leases with
maturities in excess of one year are as follows: $8,889,280 in 1999, $9,043,049
in 2000, $8,779,123 in 2001, $6,939,253 in 2002, and $3,518,510 thereafter.
Total rent expense was approximately $10,989,000 and $7,381,000 for the period
from January 1, 1998 through December 15, 1998 and the year ended December 31,
1997, respectively.

(11) Year 2000

The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
"00" date" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in normal business activities. The Company has developed a Year 2000
remediation plan and has begun testing and converting its computer systems and
applications in order to identify and solve significant Year 2000 issues. In
addition, the Company is discussing with its vendors the possibility of any
communication difficulties or other disruptions that may affect the Company.

F-99

Report of Independent Auditors

Board of Directors
American Transitional Hospitals, Inc.

We have audited the accompanying consolidated balance sheet of American
Transitional Hospitals, Inc. (the "Company"), a wholly-owned subsidiary of
Beverly Enterprises, Inc., as of June 29, 1998, and the related consolidated
statements of operations, changes in equity of Parent, and cash flows for the
period from January 1, 1998 to June 29, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the 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 audit provides 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 American
Transitional Hospitals, Inc. at June 29, 1998, and the consolidated results of
their operations and their cash flows for the period from January 1, 1998 to
June 29, 1998 in conformity with accounting principles generally accepted in
the United States.

November 18, 1998
Nashville, Tennessee

/s/ Ernst & Young LLP

F-100

American Transitional Hospitals, Inc.

Consolidated Balance Sheet

June 29, 1998
(In Thousands)

Assets
Current assets:
Cash and cash equivalents............................................ $ 677
Accounts receivable--less allowance for doubtful accounts of
$11,937............................................................. 19,670
Due from Parent's affiliate.......................................... 4,002
Inventories.......................................................... 1,447
Prepaid expenses and other........................................... 141
-------
25,937
Property and equipment, net............................................ 20,162
Pre-opening costs...................................................... 3,366
Other assets, net...................................................... 540
-------
$50,005
=======
Liabilities and equity of Parent
Current liabilities:
Accounts payable..................................................... $ 9,547
Accrued wages and related liabilities................................ 5,101
Other accrued liabilities............................................ 227
Current portion of long-term obligations............................. 247
-------
15,122
Long-term obligations.................................................. 2,110
Equity of Parent....................................................... 32,773
-------
$50,005
=======

See accompanying notes.

F-101

American Transitional Hospitals, Inc.

Consolidated Statement of Operations

Period from January 1, 1998 to June 29, 1998
(In Thousands)

Net operating revenues................................................ $53,341
Operating and administrative expenses:
Wages and related................................................... 30,026
Other............................................................... 25,190
Depreciation and amortization......................................... 1,577
Management fees....................................................... 835
Interest.............................................................. 91
-------
57,719
Loss before provision for income taxes................................ (4,378)
-------
Provision for income taxes............................................ --
-------
Net loss.............................................................. $(4,378)
=======

See accompanying notes.

F-102

American Transitional Hospitals, Inc.

Consolidated Statement of Changes in Equity of Parent

Period from January 1, 1998 to June 29, 1998
(In Thousands)

Balance at January 1, 1998............................................. $31,427
Cash management activity--net........................................ 2,666
Allocation of Parent costs........................................... 3,058
Net loss............................................................. (4,378)
-------
Balance at June 29, 1998............................................... $32,773
=======

See accompanying notes.

F-103

American Transitional Hospitals, Inc.

Consolidated Statement of Cash Flows

Period from January 1, 1998 to June 29, 1998
(In Thousands)

Cash flows from operating activities
Net loss............................................................. $(4,378)
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization...................................... 1,577
Changes in operating assets and liabilities:
Accounts receivable, net.......................................... (7,423)
Inventories....................................................... (214)
Prepaid expenses and other current assets......................... (5)
Accounts payable and other accrued expenses....................... 7,875
-------
Net cash used in operating activities................................ (2,568)
Cash flows from investing activities
Capital expenditures................................................. (3,462)
Other, net........................................................... (1,239)
-------
Net cash used in investing activities................................ (4,701)
Cash flows from financing activities
Payments on long-term obligations.................................... (130)
Net transfers from Parent............................................ 5,724
-------
Net cash provided by financing activities............................ 5,594
-------
Decrease in cash and cash equivalents................................ (1,675)
Cash and cash equivalents at beginning of period..................... 2,352
-------
Cash and cash equivalents at end of period........................... $ 677
=======
Supplemental information
Interest payments.................................................. $ 96
=======

See accompanying notes.

F-104

American Transitional Hospitals, Inc.

Notes to Consolidated Financial Statements

Period from January 1, 1998 to June 29, 1998

1. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of those
entities comprising American Transitional Hospitals, Inc. (the Company) at June
29, 1998. All significant intercompany transactions have been eliminated. The
Company is a wholly-owned subsidiary of Beverly Enterprises, Inc. (Beverly or
Parent). Beverly provides long-term healthcare in 31 states and the District of
Columbia.

As more fully described in Note 9, the Company was acquired on June 30,
1998 by Select Medical Corporation.

The Company provides long-term acute care to chronically ill patients.
The Company receives payment for patient services from the federal government
primarily under the Medicare program, health maintenance organizations,
preferred provider organizations and other private insurers and directly from
patients.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash Equivalents

Highly liquid investments with original maturities of three months or
less when purchased are considered to be cash equivalents.

Inventories

Inventory consists principally of pharmaceuticals and other supplies and
are stated at the lower of cost (first-in, first-out) or market.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line method over the estimated useful
lives of the assets.

Pre-opening Costs

Pre-opening costs (stated at cost less accumulated amortization of
$2,133,000) is being amortized over 5 years using the straight-line method. On
an ongoing basis, the Company reviews the carrying value of its intangible
assets in light of any events or circumstances that indicate they may be
impaired or that the amortization period may need to be adjusted. If such
circumstances suggest the intangible value cannot be recovered, calculated
based on undiscounted cash flows over the remaining amortization period, the
carrying value of the intangible will be reduced by such shortfall.

F-105

American Transitional Hospitals, Inc.

Notes to Consolidated Financial Statements--(Continued)

1. Summary of Significant Accounting Policies (continued)

In April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities," (SOP 98-5) which is
required to be adopted in financial statements for periods beginning after
December 15, 1998. SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Initial application of SOP 98-5
will require the Company to report all previously capitalized pre-opening costs
as a cumulative effect of a change in accounting principle. Upon adoption the
Company will be required to write-off all unamortized pre-opening costs.

Insurance

Beverly insures auto liability, general liability and workers'
compensation risks, in most states, through insurance policies with third
parties, some of which may be subject to reinsurance agreements between the
insurer and Beverly Indemnity, Ltd., a wholly-owned subsidiary of Beverly.
Beverly maintains reserves for estimated incurred losses not covered by third
parties and charges premiums to the Company. Accordingly, no reserve for
liability risks is recorded on the accompanying consolidated balance sheet.

Income Taxes

The Company files as part of the consolidated federal tax return of
Beverly. The Company accounts for income taxes under the liability method.
Under this method, deferred tax assets and liabilities are determined based
upon differences between financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax laws that will be in effect
when the differences are expected to reverse.

Revenues

The Company's revenues are derived primarily from providing long-term
healthcare services. Approximately 67% of the Company's net operating revenues
for the period from January 1, 1998 to June 29, 1998 were derived from funds
under federal medical assistance programs, and approximately 43% of the
Company's net accounts receivable at June 29, 1998 are due from such programs.
These revenues and receivables are reported at their estimated net realizable
amounts and are subject to audit and retroactive adjustment. Provisions for
estimated third-party payor settlements are provided in the period the related
services are rendered and are adjusted in the period of settlement. In the
opinion of management, adequate provision has been made for any adjustments
that may result from such audits.

Equity of Parent and Transactions with Parent

Equity of parent represents the net investment in and advances to the
Company by Beverly. It includes common stock, additional paid-in-capital, net
earnings(loss) and net intercompany accounts with Beverly. There are no
settlement terms or interest charges associated with intercompany account
balances. Generally, this balance is increased by cash transfers from Beverly,
management fees (allocated based on a percentage of revenues), certain direct
expenses paid by Beverly such as payroll and net earnings. The balance is
decreased by daily cash deposits to Beverly's bank accounts.

During the period from January 1, 1998 to June 29, 1998, the Company
provided services to certain nursing homes affiliated with Beverly. The net
revenue recognized for these services was $4,618,000.

F-106

American Transitional Hospitals, Inc.

Notes to Consolidated Financial Statements--(Continued)

1. Summary of Significant Accounting Policies (continued)

Concentration of Credit Risk

The Company has significant accounts receivable whose collectibility or
realizability is dependent upon the performance of certain governmental
programs, primarily Medicare. These receivables represent the only
concentration of credit risk for the Company. The Company does not believe
there are significant credit risks associated with these governmental programs.
The Company believes that an adequate provision has been made for the
possibility of these receivables proving uncollectible and continually monitors
and adjusts these allowances as necessary.

2. Property and Equipment

Following is a summary of property and equipment and related accumulated
depreciation, by major classification, at June 29, 1998 (in thousands):

Land............................................................ $ 1,204
Buildings and improvements...................................... 12,052
Furniture and equipment......................................... 11,670
Construction in progress........................................ 1,463
-------
26,389
Less accumulated depreciation................................... (6,227)
-------
$20,162
=======

The Company provides depreciation using the straight-line method over the
following estimated useful lives:

Estimated
Lives
-----------

Land improvements............................................ 10 years
Buildings.................................................... 35 years
Building improvements........................................ 3--15 years
Furniture and equipment...................................... 3--15 years

Depreciation expense related to property and equipment for the period
from January 1, 1998 to June 29, 1998 was $1,104,000.

3. Long-Term Obligations

Long-term obligations consist of the following at June 29, 1998 (in
thousands):

7.75% Secured Promissory Note, $106 payable quarterly............ $2,346
Other............................................................ 11
------
2,357
Less amounts due within one year................................. (247)
------
$2,110
======

F-107

American Transitional Hospitals, Inc.

Notes to Consolidated Financial Statements--(Continued)

3. Long-Term Obligations (continued)

In connection with the purchase of one of the Company's facilities in
September 1994, the Company entered into a $2,941,000 promissory note. The
note bears interest at a fixed rate of 7.75% over 11 years and is secured by
the property and equipment purchased. These assets had a carrying value of
$7,463,000 at June 29, 1998.

The Company, along with certain other Beverly affiliates, guarantees
various long-term obligations of Beverly. In the event Beverly is unable to
make repayments, the guarantors are obligated for the borrowings. At June 29,
1998 there is $195 million outstanding under these obligations. The Company's
guarantee of these obligations was released effective June 30, 1998 in
connection with the acquisition of the Company by Select Medical Corporation
(Select).

Maturities of long-term obligations are as follows (in thousands): $247
in 1999, $280 in 2000, $303 in 2001, $327 in 2002, $353 in 2003 and $600
thereafter.

4. Operating Leases

Future minimum rental commitments required by all noncancelable operating
leases with initial or remaining terms in excess of one year as of June 29,
1998, are as follows (in thousands):

1999............................................................ $ 5,965
2000............................................................ 3,748
2001............................................................ 2,517
2002............................................................ 2,093
2003............................................................ 233
Thereafter...................................................... --
-------
Total minimum rental commitments................................ $14,556
=======

Rental expense for the period from January 1, 1998 to June 29, 1998 was
approximately $3,070,000.

F-108

American Transitional Hospitals, Inc.

Notes to Consolidated Financial Statements--(Continued)

5. Income Taxes

Deferred income taxes reflect the impact of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The tax effects of temporary
differences giving rise to the Company's deferred tax assets and liabilities at
June 29, 1998 are as follows (in thousands):

Deferred Compensation........................................... $ 5
Capital leases.................................................. (151)
Developmental costs............................................. (792)
Bad debt expenses............................................... 5,364
Depreciation and amortization................................... (743)
Operating supplies.............................................. (322)
Prepaid expenses................................................ (4)
Net operating loss carryforwards................................ 5,935
-------
Net deferred tax asset.......................................... 9,292
Valuation allowance............................................. (9,292)
-------
Net deferred tax asset.......................................... $ --
=======

As of June 29, 1998, the Company had federal and state net operating loss
carryforwards of $14,148,000 which expire between 2001 and 2018. The use of any
federal net operating loss carryforwards will be limited by Internal Revenue
Code Section 382.

The Company had an annual effective tax rate of 0% for the period from
January 1, 1998 to June 29, 1998. A reconciliation of the provision for income
taxes, computed at the statutory rate, to the Company's annual effective tax
rate is summarized as follows (in thousands):

Federal tax.................................................... $(1,532)
State income taxes (net of federal)............................ (217)
Net operating loss utilized by parent.......................... --
Other.......................................................... 13
Change in valuation allowance.................................. 1,736
-------
$ --
=======

6. Retirement Plans

The Company participates in Beverly's defined contribution retirement
plans, which cover substantially all employees. Benefits are determined
primarily as a percentage of a participant's earned income. In addition,
Beverly may make profit sharing contributions on behalf of certain employees.
Retirement expense for the period from January 1, 1998 to June 29, 1998 was
approximately $48,000.

7. Commitments and Contingencies

In May 1998, the Parent was served with a subpoena which was issued by
the Office of the Inspector General (OIG) in Texas in a qui tam case, which is
under seal. The purpose of the subpoena was to allow the government to perform
an investigation prior to making a decision as to whether it will intervene as
a plaintiff

F-109

American Transitional Hospitals, Inc.

Notes to Consolidated Financial Statements--(Continued)

7. Commitments and Contingencies (continued)

in the case. The Parent has shared information voluntarily and cooperated with
the OIG in its investigation. In addition, the Parent has been notified that a
federal grand jury in San Francisco is currently investigating practices which
are the subject of the above civil investigation. To date, five current
employees of the Parent have appeared as witnesses before the grand jury. While
it is not possible to predict the outcome of this investigation, a
determination that the Parent has violated these regulations could have a
material adverse effect on the Parent's and Company's business or operating
results. If the outcome were unfavorable, the Parent and Company could be
subject to fines, penalties and damages and also could be excluded from
Medicare and other government reimbursement programs which could have a
material adverse effect on the Parent's and Company's financial condition or
results of operations.

The Company currently has capital projects underway at various
facilities. Total estimated expenditures for these capital projects are
$2,489,000. Funds expended to date for the projects total approximately
$1,358,000.

8. Impact of Year 2000 (Unaudited)

As with most other industries, hospitals use information systems that may
misidentify dates beginning January 1, 2000 and result in system or equipment
failures or miscalculations. Information systems include computer programs,
building infrastructure components and computer-aided biomedical equipment. The
Company has a Year 2000 strategy that includes phases for education, inventory
and assessment of applications and equipment at risk, analysis and planning,
testing, conversion/remediation/replacement and post-implementation. The
Company can provide no assurance that applications and equipment the Company
believes to be Year 2000 compliant will not experience difficulties or that the
Company will not experience difficulties obtaining resources needed to make
modifications to or replace the Company affected systems and equipment. Failure
by the Company or third parties on which it relies to resolve Year 2000 issues
could have a material adverse effect on the Company's results of operations and
its ability to provide health care services. Consequently, the Company can give
no assurances that issues related to Year 2000 will not have a material adverse
effect on the Company's financial condition or results of operations.

9. Subsequent Event

Effective June 30, 1998, Select purchased the Company for cash of
approximately $65,300,000 and assumed debt of approximately $2,400,000. In
connection with this transaction, Beverly has indemnified Select for previously
filed cost reports and any pending litigation or legal proceedings including
any adverse consequences related to the OIG matter discussed footnote 7 above.

F-110

[LOGO OF SELECT MEDICAL CORPORATION]