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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-11151

U.S. PHYSICAL THERAPY, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

NEVADA 76-0364866
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

3040 POST OAK BLVD., SUITE 222, HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 297-7000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NOT
APPLICABLE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, $.01 par value
(TITLE OF CLASS)

Indicate by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]

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

As of March 26, 2001, the aggregate market value of the voting stock held
by non-affiliates of the registrant was: $57,122,000

As of March 26, 2001, the number of shares outstanding of the registrant's
common stock, par value $.01 per share, was: 6,622,016
DOCUMENTS INCORPORATED BY REFERENCE

DOCUMENT PART OF FORM 10-K
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Portions of Definitive Proxy Statement for the 2001 Annual PART III
Meeting of Shareholders

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FORWARD LOOKING STATEMENTS

We make statements in this report that are considered to be forward-looking
statements within the meaning of the Securities and Exchange Act of 1934. Such
statements involve risks and uncertainties that could cause actual results to
differ materially from those we project. When used in this report, the words
"anticipates," "believes," "estimates," "intends," "expects," "plans," "should"
and "goal" and similar expressions are intended to identify such forward-looking
statements. The forward-looking statements are based on the Company's current
views and assumptions and involve risks and uncertainties that include, among
other things:

- general economic, business, and regulatory conditions discussed under the
headings "Sources of Revenue/ Reimbursement" and "Factors Affecting
Future Results" below;

- competition discussed under the heading "Competition" below;

- federal and state regulations discussed under the heading "Regulation and
Healthcare Reform" below;

- availability, terms, and use of capital discussed under the heading
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" below; and

- weather.

Some or all of these factors are beyond the Company's control.

Given these uncertainties, you should not place undue reliance on these
forward-looking statements. Please see the other sections of this report and our
other periodic reports filed with the Securities and Exchange Commission (the
"SEC") for more information on these factors. These forward-looking statements
represent our estimates and assumptions only as of the date of this report. The
Company undertakes no obligation to update any forward-looking statement,
whether as the result of actual results, changes in assumptions, new
information, future events, or otherwise.

PART I

ITEM 1. BUSINESS.

GENERAL

U.S. Physical Therapy, Inc. (the "Company") operates outpatient physical
and occupational therapy clinics which provide post-operative care and treatment
for a variety of orthopedic-related disorders and sports-related injuries. At
December 31, 2000, the Company operated 139 outpatient physical and occupational
therapy clinics in 30 states. The average age of the 139 clinics in operation at
December 31, 2000 was 3.78 years. Since the inception of the Company, 146
clinics have been developed and six clinics have been acquired by the Company.
To date, the Company has closed eight facilities due to adverse clinic
performance, consolidated the operations of three of its clinics with other
existing clinics to more efficiently serve various geographic markets and sold
certain fixed assets at two of the Company's clinics, which facilities it then
closed. The Company opened 28 new clinics in 2000. Management's goal for 2001 is
to open between 30 and 35 clinics.

The clinics provide post-operative care and treatment for a variety of
orthopedic-related disorders and sports-related injuries, treatment for
neurologically-related injuries, rehabilitation of injured workers and
preventative care. Each clinic's staff typically includes one or more licensed
physical and/or occupational therapists and office personnel, and may also
include physical and/or occupational therapy assistants, aides, exercise
physiologists and athletic trainers. The clinics perform a tailored and
comprehensive evaluation of each patient which is followed by a treatment plan
specific to the injury. The treatment plan may include the use of modalities and
procedures such as ultrasound, electrical stimulation, hot packs, iontophoresis,
therapeutic exercise, manual therapy techniques, education on management of
daily life skills and home exercise programs. The clinics' business primarily
originates from physician referrals. The principal sources of payment for the
clinics' services are commercial health insurance, workers' compensation
insurance, managed care programs, Medicare and proceeds from personal injury
cases. The Company's strategy is to develop and acquire outpatient clinics on a
national basis.

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The Company's development strategy is to attract physical and occupational
therapists who have established relationships with physicians by offering them
the opportunity to acquire a partnership interest in a new clinic to be
developed by the Company. In addition, the therapist partner receives a
competitive salary and bonus based on his or her clinic's net revenue and
profitability. The Company is presently engaged in discussions with several
prospective therapist partners.

In addition to the Company's partnership program, it also manages physical
therapy facilities for third parties, including physicians, with seven such
third-party facilities under the Company's management as of December 31, 2000.

In March 2000, the Company decided to discontinue its surgery center
initiative which originally began in 1999. Costs incurred related to the surgery
center initiative, including severance benefits for terminated employees,
totaled $369,000 and $384,000 for the years ended December 31, 2000 and 1999,
respectively.

On January 5, 2001, the Company effected a two-for-one common stock split
in the form of a 100% stock dividend to stockholders of record as of December
27, 2000. All share and per share amounts contained herein have been adjusted to
reflect the effect of the stock split.

The Company was formed in June 1990 and operated as a subchapter S
Corporation until August 1991 when it reorganized into a limited partnership
form of organization. In May 1992, in connection with the Company's initial
public offering, the Company was reorganized into its present form, a Nevada
corporation with operating subsidiaries organized in the form of limited
partnerships. In such reorganization, the prior owners of the limited
partnership interests and the corporate general partner corporations exchanged
their interests for the Company's common stock.

In June 1993, the Company completed the issuance and sale at par in a
private placement of $3,050,000 of 8% Convertible Subordinated Notes due June
30, 2003 (the "Initial Series Notes"). In May 1994, the Company completed the
issuance and sale at par in a private placement of $2,000,000 of 8% Convertible
Subordinated Notes, Series B due June 30, 2004 (the "Series B Notes") and
$3,000,000 of 8% Convertible Subordinated Notes, Series C due June 30, 2004 (the
"Series C Notes," and collectively, the Initial Series Notes, the Series B Notes
and the Series C Notes are hereinafter referred to as the "Convertible
Subordinated Notes").

During 2000, $850,000 of the Convertible Subordinated Notes were converted
by the note holders into 144,998 shares of common stock, resulting in a balance
of $7,200,000 in Convertible Subordinated Notes at December 31, 2000. In January
2001, an additional $650,000 was converted by a note holder into 130,000 shares
of common stock and the Company exercised its right under the Initial Series
Notes and the Series B Notes to require conversion of the remaining $3,550,000
into 668,332 shares of common stock. The Series C Notes do not contain a
mandatory conversion feature and currently remain outstanding.

Unless the context otherwise requires, references in this Form 10-K to the
Company include the Company and all its subsidiaries. The Company's principal
executive offices are located at 3040 Post Oak Blvd., Suite 222, Houston, Texas
77056, and its telephone number is (713) 297-7000.

THE COMPANY'S CLINICS

In general, the managing physical and/or occupational therapist of each
clinic owns a partnership interest in the clinic he or she operates. For the
majority of the clinics, this is accomplished by structuring the clinic as a
separate limited partnership (the "Clinic Partnerships"). As of December 31,
2000, the Company, through wholly-owned subsidiaries, owned a 1% general
partnership interest, with the exception of one clinic in which the Company
owned a 6% general partnership interest, and limited partnership interests
ranging from 49% to 99% in the clinics it operates (with respect to 90% of the
Company's clinics, the Company owned a limited partnership interest of 64% as of
December 31, 2000). For the majority of the clinics, the managing therapist of
each such clinic, along with other therapists at the clinic in several of the
partnerships, own the remaining limited partnership interests in the clinic. In

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some instances, the Company develops satellite clinic facilities which are
extensions of existing clinics, and thus, Clinic Partnerships may consist of one
or more clinic locations.

In the majority of the partnership agreements, the therapist partner begins
with a 20% profit interest in his or her Clinic Partnership which increases by
3% at the end of each year until his or her interest reaches 35%. The therapist
partners have no interest in net losses of Clinic Partnerships, except to the
extent of their capital accounts. The Company presently anticipates that future
clinics developed by the Company will be structured in a comparable manner.

In addition, typically each therapist partner enters into an employment
agreement with the Company providing for a covenant not to compete during his or
her employment with the Company plus one to two years thereafter. The terms of
the employment agreements range from two to five years. Pursuant to each
employment agreement, the therapist partner receives a base salary and a bonus
based on the net revenues or operating profit generated by his or her Clinic
Partnership. Each employment agreement provides that the therapist partner can
be required to sell his or her partnership interest in the Clinic Partnership
for the amount of his or her capital account upon termination of employment with
the Clinic Partnership before the expiration of the initial term of employment.
The employment agreements contain no provisions requiring the purchase by the
Company of the therapist partner's interest in the Clinic Partnership in the
event of death or disability, or after the initial term of employment.

The Company's business plan is to have each clinic maintain an independent
local identity, while at the same time enjoying the benefits of national
purchasing, third-party payor contracts and centralized management controls.
Pursuant to a management agreement, U.S. PT Management, Ltd. ("USPTM"), a Texas
limited partnership owned indirectly by the Company, provides a variety of
services to each clinic, including supervision of site selection, construction,
clinic design and equipment selection, establishment of accounting systems and
procedures and training of office support personnel, management oversight of
operations, ongoing accounting services and marketing support.

The Company's typical clinic occupies approximately 1,500 to 4,000 square
feet of space under a lease in an office building or shopping center. The
Company seeks to obtain leases for its clinics at ground level (although it may
not always be successful in obtaining such leases) in order to make access to
its clinics as easy as possible for patients. The Company also attempts to make
the decor in its clinics less institutional and more aesthetically pleasing than
hospital clinics. The typical staff needed to operate a clinic in its initial
stages is a licensed physical and/or occupational therapist and an office
manager. Staffing may also include physical and/or occupational therapy
assistants, aides, exercise physiologists and athletic trainers. As patient
visits grow, the staffing may be increased to include two or more additional
licensed physical and/or occupational therapists and one or two additional
office personnel. All therapy services provided are performed under the direct
supervision of a licensed physical and/or occupational therapist.

The Company currently provides its services at its clinics only on an
outpatient basis. Patients requiring these types of services are usually treated
for approximately one hour per day, two to five times a week. This form of
treatment typically lasts two to six weeks. The Company's charge for the
treatment is generally on a per procedure basis. In addition to the services
mentioned, the clinics will, when appropriate, develop individual maintenance
exercise programs to be continued after treatment. Advice on postural
improvements and changes in work habits or lifestyle is provided to promote
self-management of the patient's condition. The Company continues to assess the
potential for developing new services and expanding the method of providing its
current services, with an emphasis on health insurance and workers' compensation
insurance cost containment.

INDUSTRY BACKGROUND

Physical and occupational therapy is the process of aiding in the
rehabilitation of individuals disabled by injury or disease or recovering from
surgery. Management believes that the following factors are influencing the
growth of outpatient physical and occupational therapy services:

Economic Benefits of Physical and Occupational Therapy
Services. Purchasers and providers of healthcare services, such as insurance
companies, health maintenance organizations, businesses and industries, are
seeking ways to save on traditional healthcare services. Management believes
physical and occupational therapy services are cost-effective by

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helping to prevent short-term disabilities from becoming chronic conditions, and
by speeding the recovery from surgery and musculoskeletal injuries.

Earlier Hospital Discharge. Changes in health insurance reimbursement,
both public and private, have encouraged the early discharge of patients in
order to contain and reduce costs. Management believes early hospital discharge
practices foster greater numbers of individuals requiring outpatient physical
and occupational therapy services.

Aging Population. The elderly population, which has experienced rapid
growth over the past several decades, has a greater incidence of major
disability. This growth has fueled the demand for rehabilitation services.

MARKETING

On a local basis, the Company focuses its marketing efforts on physicians,
mainly orthopedic surgeons, neurosurgeons, physiatrists, occupational medicine
and general practitioners, which generally account for the majority of physical
and occupational therapy referrals. In marketing to the physician community, the
clinics emphasize their commitment to quality patient care and communication
with physicians regarding patient progress. On a national level, the Company
employs marketing personnel to assist the clinic directors in establishing
referral relationships with health maintenance organizations, preferred provider
organizations, industry and case managers and insurance companies for clinic
therapy services, as well as to develop and implement marketing plans for
marketing to the physician community.

SOURCES OF REVENUE/REIMBURSEMENT

Payor sources for clinic services are primarily commercial health
insurance, managed care programs, workers' compensation insurance, Medicare and
proceeds from personal injury cases. Commercial health insurance and managed
care programs generally provide outpatient services coverage to patients
utilizing the clinics, and the patient is normally required to pay an annual
deductible and a co-insurance payment. Workers' compensation is a statutorily
defined employee benefit which varies on a state-by-state basis. Workers'
compensation laws generally require employers to pay for employees' costs of
medical rehabilitation, lost wages, legal fees and other costs associated with
work-related injuries and disabilities and, in certain jurisdictions, mandatory
vocational rehabilitation. These statutes generally require that these benefits
be offered to employees without any deductibles, co-payments or cost sharing.
Companies may provide such coverage to their employees through either the
purchase of insurance from private insurance companies, participation in
state-run funds or through self-insurance. Treatments for patients who are
parties to personal injury cases are generally paid for from the proceeds of
settlements with insurance companies or from favorable judgements. If an
unfavorable judgement is received, collection efforts are generally not pursued
against the patient and the patient's account is written off against established
reserves. Bad debt reserves relating to personal injury accounts receivable are
regularly reviewed and adjusted as appropriate.

The Company's business depends to a significant extent on its relationships
with physicians, commercial health insurers, workers' compensation insurers, and
other referral sources, such as health maintenance organizations and preferred
provider organizations. If clinics are located in certain geographical areas, it
is important for them to be approved as providers by certain key health
maintenance organizations and preferred provider plans. If these clinics do not
obtain such approval, or if they cannot maintain such approval, the Company
could be adversely affected.

As of December 31, 2000, 112 of the Company's clinics have been certified
as rehabilitation agencies by Medicare and 14 additional clinics have individual
therapists certified by Medicare to provide services as physical therapists in
private practice. Management anticipates that, in the future, newly developed
clinics will generally elect to become certified as Medicare providers. No
assurance can be given that the newly developed clinics will be successful in
becoming certified as Medicare providers.

Prior to 1999, Medicare reimbursement for outpatient physical and
occupational therapy services furnished by a Medicare-certified rehabilitation
agency was based on a cost reimbursement methodology. The Company was reimbursed
at a tentative rate with final settlement determined after submission of an
annual cost report by the Company and audits thereof by the Medicare fiscal
intermediary. Effective in 1999, the Balanced Budget Act of 1997 ("BBA")
provides that reimbursement for outpatient therapy services provided to Medicare
beneficiaries is pursuant

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to a fee schedule published by the Department of Health and Human Services
("HHS"), and the total amount paid by Medicare in any one year for outpatient
physical (including speech-language pathology) or occupational therapy to any
one patient is limited to $1,500, except for services provided in hospitals. On
November 29, 1999, President Clinton signed into law the Medicare, Medicaid and
SCHIP Balanced Budget Refinement Act of 1999 ("BBRA") which, among other
provisions, placed a two-year moratorium on the $1,500 reimbursement limit for
therapy services provided in 2000 and 2001. On December 21, 2000, the President
signed into law the Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000 ("BIPA") which, among other provisions, extended the
moratorium for one year through December 31, 2002.

Medicare regulations require that a physician certify the need for physical
and/or occupational therapy services for each patient and that these services be
provided in accordance with an established plan of treatment which is
periodically revised. State Medicaid programs generally do not provide coverage
for outpatient physical or occupational therapy, and, therefore, Medicaid is
not, nor is it expected to be, a material payor for the Company.

REGULATION AND HEALTHCARE REFORM

The healthcare industry is subject to numerous federal, state and local
regulations. Certain states into which the Company may expand have laws that
require facilities that employ health professionals and provide health-related
services to be licensed and, in some cases, to obtain a certificate of need.
Pursuant to certificate of need laws, the affected entity is required to
demonstrate to a state regulatory authority the need for and financial
feasibility of certain expenditures related to such activities as the
construction of new facilities or the commencement of new healthcare services.
Based on its operating experience to date, the Company believes that its
business, as presently conducted, does not require certificates of need or other
facility approvals or licenses. There can be no assurance, however, that
existing laws or regulations will not be interpreted or modified to require the
Company to obtain such approvals or licenses and, if so, that such approvals or
licenses could be obtained. Failure to obtain any required certificates,
approvals or licenses could have a material adverse effect on the Company's
business, financial condition and results of operations.

As of December 31, 2000, 112 of the Company's clinics have been certified
as rehabilitation agencies by Medicare and 14 additional clinics have individual
therapists certified by Medicare to provide services as physical therapists in
private practice. In order to receive Medicare reimbursement, a rehabilitation
agency or the individual therapist must meet the applicable conditions of
participation set forth by HHS relating to the type of facility, its equipment,
record keeping, personnel and standards of medical care, as well as compliance
with all state and local laws. Clinics are subject to periodic inspections or
surveys to determine compliance.

Various Federal and state laws regulate the relationships between providers
of healthcare services and physicians. These laws include Section 1128B(b) of
the Social Security Act (the "Fraud and Abuse Law"), under which civil and
criminal penalties can be imposed upon persons who pay or receive remuneration
in return for referrals of patients who are eligible for reimbursement under the
Medicare or Medicaid programs. The Company does not believe its business
arrangements are out of compliance with these provisions. The provisions are
broadly written and the full extent of their application is not currently known.
In 1991, the Office of the Inspector General ("OIG") of the United States
Department of Health and Human Services issued regulations describing
compensation arrangements which are not viewed as illegal remuneration under the
Fraud and Abuse Law (the "1991 Safe Harbor Rules"). The 1991 Safe Harbor Rules
created certain standards ("Safe Harbors") which, if fully complied with, assure
participants that a particular business arrangement is not: (a) a criminal
offense under the Fraud and Abuse Law, (b) the basis for an exclusion from the
Medicare and Medicaid programs or (c) the basis for imposition of civil
sanctions. Failure to fall within a Safe Harbor does not constitute a violation
of the Fraud and Abuse Law; however, the OIG has indicated that failure to fall
within a Safe Harbor may subject an arrangement to increased scrutiny.

The Fraud and Abuse Law limits the relationships which the Company may have
with referral sources. The Company's business of managing physician-owned
physical therapy facilities is subject to Fraud and Abuse Law issues. According
to the OIG's advisory opinion No. 98-4, these business arrangements fall outside
the scope of the Safe Harbors. Currently, federal courts provide little guidance
as to the application of the Fraud and Abuse Law to such arrangements.
Management considers these issues in planning its clinics, marketing and other
activities, and believes its operations are in compliance with applicable law,
but no assurance can be given regarding compliance in

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any particular factual situation. In the event that management contracts of the
type to which the Company is a party are held to violate the Fraud and Abuse
Law, such holding could have a material adverse effect on the Company's
business, financial condition and results of operations.

In February 2000, the OIG issued a special fraud alert regarding the rental
of space in physician offices by persons or entities to which the physicians
refer. The OIG is concerned that in such arrangements, the rental payments may
be disguised kickbacks to the physician-landlords to induce referrals. The Fraud
and Abuse Law prohibits knowingly and willfully soliciting, receiving, offering
or paying anything of value to induce referrals of items or services payable by
a federal healthcare program. Currently, eight clinics rent space from referring
physicians. The Company has taken the steps that it believes are necessary to
assure that all leases comply with the space rental Safe Harbor to the Fraud and
Abuse Law. When the lease meets all of the criteria of a Safe Harbor, the
arrangement is immune from prosecution under the Fraud and Abuse Law.

The Company believes its operations are in compliance with the current
requirements of applicable federal and state law, but no assurances can be given
that a federal or state agency charged with enforcement of the Fraud and Abuse
Law and similar laws might not assert an adverse position or new interpretation
of existing laws that could have a material adverse effect on its business.

The federal law known as the "Stark II" provisions of the Omnibus Budget
Reconciliation Act of 1993 (the "Stark Law") amended the federal Medicare
statute to prohibit referrals by a physician for "designated health services,"
including physical therapy and occupational therapy, to an entity in which the
physician (or family member) has an investment interest or other financial
relationship, subject to certain exceptions. This prohibition took effect on
January 1, 1995.

This law also prohibits billing for services rendered pursuant to a
prohibited referral. Penalties for violation include denial of payment for the
services, significant civil monetary penalties, and exclusion from the Medicare
and Medicaid programs. Several states have enacted laws similar to the Stark
Law, but these state laws cover all (not just Medicare and Medicaid) patients;
and many healthcare reform proposals in the last few years would have expanded
the Stark Law to cover all patients as well. The Stark Law covers a management
contract with a physician group and any financial relationship between the
Company and referring physicians, including any financial transaction resulting
from a clinic acquisition. As with the Fraud and Abuse Law, management considers
the Stark Law in planning its clinics, marketing and other activities, and
believes that its operations are in compliance with applicable law. However, as
noted above, no assurance can be given regarding compliance in any particular
factual situation.

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT

In an effort to combat healthcare fraud, Congress included several
anti-fraud measures in the Health Insurance Portability and Accountability Act
of 1996 ("HIPAA"). HIPAA amends existing criminal legislation and criminal
penalties for Medicare fraud and enacts new federal healthcare anti-fraud
legislation. HIPAA creates a source of funding for fraud control divided between
HHS and the Department of Justice and is used to coordinate federal, state and
local healthcare law enforcement programs, conduct investigations, provide
guidance to the healthcare industry on fraudulent healthcare practices, and
establish a national data bank to receive and report final adverse actions. The
Company cannot predict what effect, if any, these expanded enforcement
authorities will have on the healthcare industry generally or on the Company's
business.

Additionally, HIPAA mandates the adoption of certain standards regarding
the exchange of electronic healthcare information in an effort to ensure the
privacy and security of patient information. HIPAA's security and privacy final
regulations were released by HHS on December 28, 2000; however, these
regulations are currently under review and will not be finalized until April 14,
2001. Once the regulations are finalized, the Company will have two years to
comply. Sanctions for failing to comply with HIPAA include criminal penalties
and civil sanctions.

The Company is evaluating the impact of HIPAA. At this time, the Company
anticipates that it will be able to fully comply with the HIPAA requirements
that have been adopted. Since the HIPAA regulations have not yet been finalized,
the Company cannot at this time estimate the cost of such compliance. Based on
its current knowledge, the Company believes that the cost of its compliance will
not have a material adverse effect on its business, financial condition or
results of operations.

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Political, economic and regulatory influences are subjecting the healthcare
industry in the United States to fundamental change. The Company anticipates
that Congress, state legislatures and the private sector will continue to review
and assess alternative healthcare delivery and payment systems. Potential
approaches that have been considered include mandated basic healthcare benefits,
controls on healthcare spending through limitations on the growth of private
health insurance premiums and Medicare and Medicaid spending, the creation of
large insurance purchasing groups, price controls and other fundamental changes
to the healthcare delivery system. Managed care entities, which represent an
ever-growing percentage of healthcare payors, are demanding lower costs from
healthcare providers, and in many cases, requiring or encouraging providers to
accept capitated payments that may not be adequate to allow providers to cover
their full costs or may reduce their profitability. Legislative debate is
expected to continue in the future and market forces are expected to demand
reduced costs. The Company cannot predict what impact the adoption of any
federal or state healthcare reform measures or future private sector reform may
have on its business.

COMPETITION

The healthcare industry, generally, and the physical and occupational
therapy businesses, in particular, are highly competitive and subject to
continual changes in the manner in which services are delivered and in which
providers are selected. The competitive factors in the physical and occupational
therapy businesses include, without limitation, quality of care, cost, treatment
outcomes, convenience of location, and relationships with and ability to meet
the needs of referral and payor sources. The Company's clinics compete directly
or indirectly with the physical and occupational therapy departments of acute
care hospitals, physician-owned therapy clinics, private therapy clinics and
chiropractors.

The Company believes that its main sources of competition are acute care
hospital outpatient therapy clinics and private therapy clinic organizations
that provide therapy services. The Company will face further competition as
consolidation of the therapy industry continues through the acquisition of
physician-owned and other privately-owned therapy practices.

Management believes that providing the key therapists with an opportunity
to participate in clinic ownership is a competitive advantage because it helps
to ensure commitment by local management to the success of the clinic and
minimizes turnover of managing therapists.

The Company also believes its competitive position is enhanced by its
strategy of locating its clinics, when possible, on the ground floor in office
buildings and shopping centers with nearby parking, thereby making the clinics
more easily accessible to patients. The Company attempts to make the decor in
its clinics less institutional and more aesthetically pleasing than hospital
clinics. Management also believes it can generally provide its services at a
lesser cost than comparable services of hospitals due to hospitals' higher
overhead.

EMPLOYEES

At December 31, 2000, the Company employed 1,056 total employees, of which
610 were full-time employees. At that date, none of the Company's employees were
subject to collective bargaining agreements or were members of unions.
Management considers the relations between the Company and its employees to be
good.

In the states in which the Company's current clinics are located, persons
performing physical and occupational therapy services are required to be
licensed by the state. All persons currently employed by the Company and its
clinics who are required to be licensed are licensed, and the Company intends
that all future employees who are required to be licensed will be licensed.
Management is not aware of any federal licensing requirements applicable to its
employees.

INSURANCE

The Company maintains professional liability coverage on professionals
employed in each of its clinics, in addition to general liability insurance and
coverage for the customary risks inherent in the operation of healthcare
facilities and businesses in general. Management believes its insurance policies
in force to be adequate in amount and coverage for its current operations.

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ITEM 2. PROPERTIES.

The Company presently leases, under noncancellable operating leases with
terms ranging from one to five years, all of the properties used for its clinics
with the exception of two clinics located in Brownwood, Texas and Mineral Wells,
Texas, for which the Company owns the buildings. The Company also owns a
building in Clovis, New Mexico, which it intends to sell or lease, related to a
clinic closed in 2000. The Company intends, where feasible, to lease the
premises in which new clinics will be located. The Company's typical clinic
occupies approximately 1,500 to 4,000 square feet of space.

The Company also leases, under a noncancellable operating lease expiring in
July 2003, its executive offices located in Houston, Texas. The executive
offices currently occupy approximately 18,726 square feet of space (including
allocations for common areas).

ITEM 3. LEGAL PROCEEDINGS.

The Company is subject to litigation and other proceedings arising in the
ordinary course of business. While the ultimate outcome of lawsuits or other
proceedings cannot be predicted with certainty, management does not believe the
impact of such lawsuits or other proceedings, if any, would be material to the
Company's business, financial condition or results of operations.

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

No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the fourth quarter of 2000.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

PRICE QUOTATIONS

The Company's common stock trades on the Nasdaq Stock Market, Inc.
("Nasdaq") National Market under the symbol "USPH." The range of Nasdaq reported
trading prices for each quarterly period, as set forth below, reflect the
two-for-one stock split effected in the form of a 100% stock dividend, payable
on January 5, 2001, to holders of record as of December 27, 2000. The reported
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.

2000 1999
---------------- ----------------
QUARTER HIGH LOW HIGH LOW
- ------- ------ ------ ------ ------

First................................... $4.984 $4.125 $4.750 $3.750
Second.................................. 5.375 4.375 4.688 3.750
Third................................... 7.875 5.188 4.719 3.875
Fourth.................................. 12.688 6.875 4.813 3.625

RECORD HOLDERS

As of March 12, 2001, there were 43 holders of record of the Company's
outstanding common stock.

DIVIDENDS

Since inception, the Company has not declared or paid cash dividends or
made distributions on its equity securities (other than as described in the next
paragraph), and the Company does not anticipate that it will pay cash dividends
or make distributions in the foreseeable future.

On January 5, 2001, the Company effected a two-for-one stock split in the
form of a 100% stock dividend to stockholders of record as of December 27, 2000.

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RECENT SALES OF UNREGISTERED SECURITIES

There were no sales of unregistered securities during the quarter ended
December 31, 2000.

ITEM 6. SELECTED FINANCIAL DATA.

YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net revenues(1).......................... $63,222 $51,368 $44,837 $38,807 $32,207
Income before income taxes............... $ 6,138 $ 3,962 $ 2,704 $ 2,481 $ 1,758
Net income(2)............................ $ 3,735 $ 2,394 $ 1,596 $ 2,426 $ 1,641
Earnings per common share:
Basic(3)............................... $ 0.61 $ 0.35 $ 0.22 $ 0.34 $ 0.23
Diluted(3)............................. $ 0.52 $ 0.34 $ 0.21 $ 0.33 $ 0.22
Total assets(1).......................... $22,970 $23,346 $24,362 $22,548 $19,483
Long-term debt, less current portion..... $ 7,226 $ 8,087 $ 8,126 $ 8,239 $ 8,276
Working capital(1)....................... $10,420 $12,493 $12,832 $11,204 $ 9,214
Current ratio(1)......................... 4.14 6.79 5.45 5.07 4.56
Long-term debt to total capitalization... 0.46 0.43 0.41 0.45 0.52

- ---------------
(1) Certain amounts for 1999 and 1998 have been reclassified to conform to the
presentation used for 2000. The reclassifications had no effect on net
income.

(2) Prior to 1998, net operating loss carryforwards were utilized to offset any
federal income tax liability.

(3) All per share information has been adjusted to reflect the two-for-one stock
split effected in the form of a 100% stock dividend, payable on January 5,
2001 to holders of record as of December 27, 2000.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

OVERVIEW

The Company operates outpatient physical and/or occupational therapy
clinics which provide post-operative care and treatment for a variety of
orthopedic-related disorders and sports-related injuries. At December 31, 2000,
the Company operated 139 outpatient physical and/or occupational therapy clinics
in 30 states. The average age of the 139 clinics in operation at December 31,
2000 was 3.78 years. Since the inception of the Company, 146 clinics have been
developed and six clinics have been acquired by the Company. To date, the
Company has closed eight facilities due to adverse clinic performance,
consolidated the operations of three of its clinics with other existing clinics
to more efficiently serve various geographic markets and closed two of the
Company's clinics after selling certain fixed assets at such facilities. The
closure of one of the Company's clinics, due to adverse clinic performance,
occurred during 1998. See "Loss on Closure of Facility" for additional
information. During 1999, three clinics were closed with no loss being
recognized related to these closures. These three clinics combined accounted for
net patient revenues and clinic operating costs for the year ended December 31,
1999 of $263,000 and $333,000, respectively, and for the year ended December 31,
1998 of $815,000 and $728,000, respectively. Two clinics were closed in 2000
with no loss being recognized. These two clinics combined accounted for net
patient revenues and clinic operating costs for the year ended December 31, 2000
of $97,000 and 221,000, respectively, for the year ended December 31, 1999 of
$222,000 and $328,000, respectively, and for the year ended December 31, 1998 of
$211,000 and $228,000, respectively.

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FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999

Net Patient Revenues

Net patient revenues increased to $60,667,000 for 2000 from $49,056,000 for
1999, an increase of $11,611,000, or 24%, on a 23% increase in patient visits to
697,000. Net patient revenues from the 28 clinics opened during 2000 (the "2000
New Clinics") accounted for 27% of the increase, or $3,144,000. The remaining
increase of $8,467,000 in net patient revenues is attributable to those 111
clinics opened before 2000 (the "Mature Clinics"). Of the $8,467,000 increase in
net patient revenues from the Mature Clinics, $8,215,000 was due to a 17%
increase in the number of patient visits to 661,000, while $252,000 was due to
an increase in the average net revenue per visit to $87.03.

Net patient revenues are based on established billing rates less allowances
and discounts for patients covered by worker's compensation programs and other
contractual programs. Payments received under these programs are based on
predetermined rates and are generally less than the established billing rates of
the clinics. Net patient revenues reflect reserves, which are evaluated
quarterly by management, for contractual and other adjustments relating to
patient discounts from certain payors. Prior to January 1, 1999, Medicare
reimbursement for outpatient physical and occupational therapy services
furnished by clinics was based on a cost reimbursement methodology. The Company
was reimbursed at a tentative rate with final settlement determined after
submission of an annual cost report by the Company and audits thereof by the
Medicare fiscal intermediary. Effective in 1999, the Balanced Budget Act of 1997
provides that reimbursement for outpatient therapy services provided to Medicare
beneficiaries is pursuant to a fee schedule published by the Department of
Health and Human Services, and the total amount that may be paid by Medicare in
any one year for outpatient physical (including speech-language pathology) or
occupational therapy to any one patient is limited to $1,500, except for
services provided in hospitals. On November 29, 1999, President Clinton signed
into law the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999
which, among other provisions, placed a two-year moratorium on the $1,500
reimbursement limit for therapy services provided in 2000 and 2001. On December
21, 2000, the President signed into law the Medicare, Medicaid, and SCHIP
Benefits Improvement and Protection Act of 2000 which, among other provisions,
extended the moratorium for one year through December 31, 2002.

Management Contract Revenues

Management contract revenues increased to $2,369,000 for 2000 from
$2,112,000 for 1999, an increase of $257,000, or 12%. Approximately $117,000 of
the increase, or 46%, was due to a new management contract entered into in March
2000. The remaining 54% increase, or $140,000, was primarily due to a 9%
increase in patient visits for management contracts entered into prior to 2000.

Other Revenues

Other revenues consisting of interest, sublease and real estate commission
income decreased to $186,000 for 2000 from $200,000 for 1999, a decrease of
$14,000, or 7%. The decrease was primarily due to a sublease agreement that was
terminated in 1999, offset, in part, by an increase in real estate commission
income.

Clinic Operating Costs

Clinic operating costs as a percent of net patient revenues and management
contract revenues combined decreased to 72% for 2000 from 74% for 1999.

Clinic Operating Costs -- Salaries and Related Costs

Salaries and related costs increased to $28,683,000 for 2000 from
$23,995,000 for 1999, an increase of $4,688,000, or 20%. Approximately 37% of
the increase, or $1,748,000, was due to the 2000 New Clinics. The

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remaining 63% increase, or $2,940,000, was due principally to increased staffing
to meet the increase in patient visits for the Mature Clinics, coupled with an
increase in bonuses earned by the clinic directors at the Mature Clinics. Such
bonuses are based on the net revenues or operating profit generated by the
individual clinics. Salaries and related costs as a percent of net patient
revenues and management contract revenues combined decreased to 46% for 2000
from 47% for 1999.

Clinic Operating Costs -- Rent, Clinic Supplies and Other

Rent, clinic supplies and other increased to $14,952,000 for 2000 from
$12,455,000 for 1999, an increase of $2,497,000, or 20%. Approximately 57% of
the increase, or $1,415,000, was due to the 2000 New Clinics, while 43%, or
$1,082,000, of the increase was due to the Mature Clinics. The increase in rent,
clinic supplies and other for the Mature Clinics related to the fact that of the
17 clinics opened during 1999, 59% opened during the second half of the year.
Accordingly, 2000 was the first year in which they incurred a full year of
expenses. Rent, clinic supplies and other as a percent of net patient revenues
and management contract revenues combined remained unchanged at 24% for 2000 and
1999.

Clinic Operating Costs -- Provision for Doubtful Accounts

The provision for doubtful accounts increased to $1,596,000 for 2000 from
$1,165,000 for 1999, an increase of 37%, or $431,000. Approximately 16% of the
increase, or $70,000, was due to the 2000 New Clinics. The remaining 84%
increase, or $361,000, was due to the Mature Clinics. The provision for doubtful
accounts as a percent of net patient revenues was 2.6% for 2000 compared to 2.4%
for 1999.

Corporate Office Costs -- General and Administrative

General and administrative costs, consisting primarily of salaries and
benefits of corporate office personnel, rent, insurance costs, depreciation and
amortization, travel and legal and professional fees increased to $5,790,000 for
2000 from $4,803,000 for 1999, an increase of $987,000, or 21%. General and
administrative costs increased primarily as a result of increased travel and
salaries and benefits related to additional personnel hired to support an
increasing number of clinics. General and administrative costs as a percent of
net patient revenues and management contract revenues combined remained
unchanged at 9% for 2000 and 1999.

Corporate Office Costs -- Recruitment and Development

Recruitment and development costs primarily represent salaries and benefits
of recruitment and development personnel, rent, travel, marketing and recruiting
fees attributed directly to the Company's activities in the development and
acquisition of new clinics. Recruitment and development personnel have no
involvement with a facility following opening. All recruitment and development
personnel are located at the Company's corporate office in Houston, Texas.
Recruitment and development costs increased $133,000, or 8%, to $1,817,000 in
2000 from $1,684,000 in 1999. Recruitment and development costs for 2000 and
1999 included $369,000 and $384,000, respectively, related to the surgery center
initiative discontinued in March 2000. The increase was primarily due to
increased salaries and benefits of development personnel and increased
recruitment fees and marketing expenses associated with opening 28 new clinics
in 2000 over 17 in 1999. Excluding expenses related to the surgery centers,
recruitment and development costs as a percent of net patient revenues and
management contract revenues combined decreased to 2% for 2000 from 3% for 1999.

Interest Expense

Interest expense increased $53,000, or 7%, to $780,000 for 2000 from
$727,000 for 1999. This increase in interest was due to $2,115,000 borrowed by
the Company to help finance the repurchase of 1,130,000 shares of its common
stock. In November 2000, the Company repaid $1,215,000 of this loan, leaving a
balance of $900,000 at December 31, 2000. The loan bears interest at a rate per
annum of prime plus one-half percentage point and is repayable in quarterly
installments of $250,000 beginning March 2001. See "Liquidity and Capital
Resources."

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Minority Interests in Earnings of Subsidiary Limited Partnerships

Minority interests in earnings of subsidiary limited partnerships increased
$889,000, or 34%, to $3,466,000 for 2000 from $2,577,000 for 1999 due to the
increase in aggregate profitability of those clinics in which partners have
achieved positive retained earnings and are accruing partnership income.

Provision for Income Taxes

The provision for income taxes increased to $2,403,000 for 2000 from
$1,568,000 for 1999, an increase of $835,000, or 53%. During 2000 and 1999, the
Company accrued income taxes at effective tax rates of 39% and 40%,
respectively. The 2000 and 1999 rates exceeded the U.S. statutory tax rate of
34% due primarily to state income taxes.

FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998

Net Patient Revenues

Net patient revenues increased to $49,056,000 for 1999 from $43,179,000 for
1998, an increase of $5,877,000, or 14%, on a 13% increase in patient visits to
566,000. Net patient revenues from the 17 clinics opened in 1999 (the "1999 New
Clinics") accounted for 25% of the increase, or $1,488,000. The remaining
increase of $4,389,000 in net patient revenues comes from those 96 clinics
opened before 1999. The $4,389,000 increase in net patient revenues from these
96 clinics was primarily due to a 9% increase in the number of patient visits to
547,000, coupled with an increase in the average net revenue per visit to
$86.94.

Management Contract Revenues

Management contract revenues increased to $2,112,000 for 1999 from
$1,320,000 for 1998, an increase of $792,000, or 60%. This increase was due to
the fact that three of the six management contracts were entered into in the
second half of 1998. Accordingly, 1999 was the first full year revenues were
recognized for all six third-party facilities under management at December 31,
1999.

Other Revenues

Other revenues, consisting of interest and sublease income, decreased
$138,000, or 41%, to $200,000 for 1999 from $338,000 for 1998. This decrease was
due primarily to a decrease in interest income as a result of a lower average
amount of cash and cash equivalents available for investment during 1999
compared to 1998.

Clinic Operating Costs

Clinic operating costs as a percent of net patient revenues and management
contract revenues combined decreased to 74% for 1999 from 76% for 1998.

Clinic Operating Costs -- Salaries and Related Costs

Salaries and related costs increased to $23,995,000 for 1999 from
$21,029,000 for 1998, an increase of $2,966,000, or 14%. Approximately 26% of
the increase, or $781,000, was due to the 1999 New Clinics. The remaining 74%
increase, or $2,185,000, was due principally to increased staffing to meet the
increase in patient visits for the clinics opened prior to 1999, coupled with an
increase in bonuses earned by the clinic directors at the clinics opened prior
to 1999. Such bonuses are based on the net revenues or operating profit
generated by the individual clinics. Salaries and related costs as a percent of
net patient revenues and management contract revenues combined remained
unchanged at 47% for 1999 and 1998.

Clinic Operating Costs -- Rent, Clinic Supplies and Other

Rent, clinic supplies and other increased to $12,455,000 for 1999 from
$11,502,000 for 1998, an increase of $953,000, or 8%. Approximately 71% of the
increase, or $677,000, was due to the 1999 New Clinics, while 29%, or $276,000,
of the increase was due to the clinics opened prior to 1999. The $276,000
increase from the clinics opened

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prior to 1999 was due to the fact that of the 20 clinics opened during 1998, 65%
opened during the second half of the year. Accordingly, 1999 was the first year
in which they incurred a full year of expenses. Rent, clinic supplies and other
as a percent of net patient revenues and management contract revenues combined
decreased to 24% for 1999 from 26% for 1998.

Clinic Operating Costs -- Provision for Doubtful Accounts

The provision for doubtful accounts increased to $1,165,000 for 1999 from
$1,143,000 for 1998, an increase of $22,000, or 2%. This increase was due to a
$32,000 increase associated with the 1999 New Clinics, offset, in part, by a
decrease of $10,000 for the clinics opened prior to 1999. The provision for
doubtful accounts as a percent of net patient revenues decreased to 2.4% in 1999
from 2.6% in 1998.

Corporate Office Costs -- General and Administrative

General and administrative costs, consisting primarily of salaries and
benefits of corporate office personnel, rent, insurance costs, depreciation and
amortization, travel and legal and professional fees increased to $4,803,000 for
1999 from $4,240,000 for 1998, an increase of $563,000, or 13%. General and
administrative costs increased primarily as a result of salaries and benefits
related to additional personnel hired to support an increasing number of
clinics. In addition, in July 1998, the Company increased the square footage
occupied at its corporate office in Houston, Texas and extended the lease for a
five-year period ending July 2003. In connection with these changes to the
lease, rent expense increased substantially. General and administrative costs as
a percent of net patient revenues and management contract revenues combined
decreased to 9% for 1999 from 10% for 1998.

Corporate Office Costs -- Recruitment and Development

Recruitment and development costs primarily represent salaries and benefits
of recruitment and development personnel, rent, travel, marketing and recruiting
fees attributed directly to the Company's activities in the development and
acquisition of new clinics and, until its discontinuance in March 2000, the
development of its surgery center initiative. Recruitment and development
personnel have no involvement with a facility following opening. All recruitment
and development personnel are located at the Company's corporate office in
Houston, Texas. Recruitment and development costs increased $288,000, or 21%, to
$1,684,000 in 1999 from $1,396,000 in 1998. Recruitment and development expenses
related to the surgery center initiative accounted for 133%, or $384,000, of the
increase between 1999 and 1998. The majority of the $384,000 surgery center
costs related to consulting fees, salaries of development personnel, legal fees
and travel associated with potential acquisitions of surgery centers and
identifying and investigating potential sites for the development of new surgery
centers. Excluding the effects of the surgery center initiative, recruitment and
development costs decreased $96,000 from 1998 to 1999. Recruitment and
development costs as a percent of net patient revenues and management contract
revenues combined remained unchanged at 3% for 1999 and 1998.

Loss on Closure of Facility

In August 1998, the Company closed a clinic located in Corpus Christi,
Texas due to adverse clinic performance. During 1998, the Company recognized a
$230,000 loss related to this closure. Of the $230,000 loss, $18,000 represented
lease commitments, $99,000 was due to the write-off of goodwill, fixed assets,
leasehold improvements and a non-compete agreement and the remainder was costs
incurred in connection with closing the facility.

The Corpus Christi, Texas clinic accounted for net patient revenues and
clinic operating costs for 1998 of $218,000 and $603,000, respectively.

Minority Interests in Earnings of Subsidiary Limited Partnerships

Minority interests in earnings of subsidiary limited partnerships increased
$714,000, or 38%, to $2,577,000 in 1999 from $1,863,000 in 1998 due to the
increase in aggregate profitability of those clinics in which partners have
achieved positive retained earnings and are accruing partnership income.

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Provision for Income Taxes

The provision for income taxes increased to $1,568,000 for 1999 from
$1,108,000 for 1998, an increase of $460,000, or 42%. During 1999 and 1998, the
Company accrued income taxes at effective tax rates of 40% and 41%,
respectively. The 1999 and 1998 rates exceeded the U.S. statutory tax rate of
34% due primarily to state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2000, the Company had $2,071,000 in cash and cash
equivalents available to fund the working capital needs of its operating
subsidiaries, future clinic developments, acquisitions and investments. Included
in cash and cash equivalents at December 31, 2000 was $710,000 in a money market
fund invested in short-term debt instruments issued by an agency of the U.S.
Government. The Company also had a revolving line of credit with a bank which
provides for borrowings up to $500,000, as needed, at a rate of prime plus
one-half percentage point.

The decrease in cash of $1,959,000 from December 31, 1999 to December 31,
2000 is due primarily to the Company's use of cash to repurchase 1,130,000
shares of its common stock in August 2000 for $6,275,000 (including expenses),
fund capital expenditures primarily for physical therapy equipment and leasehold
improvements of $2,827,000, distribute $3,072,000 to minority investors in
subsidiary limited partnerships and pay on notes payable of $1,254,000, offset,
in part, by cash provided by operating activities of $8,861,000, proceeds from a
bank loan of $2,115,000 and proceeds of $394,000 from the exercise of stock
options.

The Company's current ratio decreased to 4.14 to 1.00 at December 31, 2000
from 6.79 to 1.00 at December 31, 1999. The decrease in the current ratio was
due primarily to a decrease in cash and cash equivalents due to the repurchase
of common stock.

At December 31, 2000, the Company had a debt-to-equity ratio of 0.85 to
1.00 compared to 0.76 to 1.00 at December 31, 1999. The increase in the
debt-to-equity ratio from December 31, 1999 to December 31, 2000 resulted from
the decrease in equity due to the common stock repurchase in August 2000 of
$6,275,000 (including expenses), offset, in part, by net income of $3,735,000,
the conversion of $850,000 convertible subordinated debt into 144,998 shares of
common stock and the proceeds and tax benefit from the exercise of stock options
of $394,000 and $255,000, respectively.

In April 1999, the Company's Board of Directors authorized the use of
available cash to purchase up to 692,000 shares of its common stock at a price
not greater than $5.00 nor less than $4.25 per share. The Company conducted the
repurchases through a procedure commonly referred to as a "Dutch Auction," and
completed the repurchase of 692,000 shares (9.6% of the then outstanding shares)
in May 1999. The shares were repurchased at a price of $4.875 per share for a
total aggregate cost of $3,414,000 (including expenses).

In July 2000, the Company's Board of Directors authorized the repurchase
for cash of up to 1,000,000 shares of its issued and outstanding common stock
for a price of $5.50 per share (the "Offer"). Pursuant to the terms of the
Offer, the Company could buy up to an additional 2% of its outstanding shares
without amending or extending the Offer. The Company completed the repurchase of
1,130,000 shares in August 2000 for a total aggregate cost of $6,275,000
(including expenses). The Company utilized cash on hand and a convertible line
of credit in the amount of $2,115,000 to fund the repurchase of the stock.

In conjunction with the Offer, the Company entered into a Letter Loan
Agreement with a bank wherein the bank agreed to lend the Company up to
$2,500,000 on a convertible line of credit, convertible to a term loan on
December 31, 2000, to purchase stock tendered pursuant to the Offer. The loan
bears interest at a rate per annum of prime plus one-half percentage point and
is repayable in quarterly installments of $250,000 beginning March 2001.
Additionally, the bank agreed to loan up to $500,000 for working capital
purposes pursuant to a revolving line of credit. The revolving line of credit
has a per annum three-eighths of one percent commitment fee on the unused
portion and bears interest on outstanding loans at a rate per annum of prime
plus one-half percentage point. Any amounts borrowed and outstanding under the
revolving line of credit must be repaid on July 1, 2001. Through December 31,
2000, the Company had borrowed $2,115,000 and $-0-under the $2,500,000
convertible line of credit and the $500,000 revolving line of credit,
respectively.

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In November 2000, the Company repaid $1,215,000 of the $2,115,000 borrowed
under the convertible line of credit. Subsequent to December 31, 2000, the
Company repaid the remaining balance of $900,000 on the convertible line of
credit.

Management believes that existing funds, supplemented by cash flows from
existing operations and the revolving line of credit will be sufficient to meet
its current operating needs and its development plans through at least 2002.

RECENTLY PROMULGATED ACCOUNTING STANDARDS

Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138. SFAS 133
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. Under the standard, entities
are required to carry all derivative instruments in the statement of financial
position at fair value. Adoption of SFAS 133 did not have a material effect on
the Company's financial condition or results of operations because the Company
historically has not entered into derivative or other financial instruments for
trading or speculative purposes nor does it use or intend to use derivative
financial instruments or derivative commodity instruments.

FACTORS AFFECTING FUTURE RESULTS

Clinic Development

As of December 31, 2000, the Company had 139 clinics in operation, 28 of
which opened in 2000. Management's goal for 2001 is to open between 30 and 35
additional clinics. The opening of these clinics is subject to, among other
things, the Company's ability to identify suitable geographic locations and
physical therapy clinic partners. The Company's operating results will be
adversely impacted by initial operating losses from the new clinics. During the
initial period of operation, operating margins for newly opened clinics tend to
be lower than more seasoned clinics due to the start-up costs of newly opened
clinics (including, without limitation, salaries and related costs of the
physical therapist and other clinic personnel, rent and equipment and other
supplies required to open the clinic) and the fact that patient revenues tend to
be lower in the first year of a new clinic's operation and increase
significantly over the subsequent two to three years. Based on historical
performance of the Company's new clinics, the clinics opened in 2000 should
favorably impact the Company's results of operations for 2001 and beyond.

Convertible Subordinated Debt

In June 1993, the Company completed the issuance and sale at par in a
private placement of $3,050,000 of 8% Convertible Subordinated Notes due June
30, 2003 (the "Initial Series Notes"). In May 1994, the Company completed the
issuance and sale at par in a private placement of $2,000,000 of 8% Convertible
Subordinated Notes, Series B due June 30, 2004 (the "Series B Notes") and
$3,000,000 of 8% Convertible Subordinated Notes, Series C due June 30, 2004 (the
"Series C Notes" and collectively, the Initial Series Notes, the Series B Notes
and the Series C Notes are hereinafter referred to as the "Convertible
Subordinated Notes").

The Convertible Subordinated Notes are convertible at the option of the
holders thereof into the number of whole shares of Company common stock
determined by dividing the principal amount of the Notes so converted by $5.00
in the case of the Initial Series Notes and the Series C Notes or $6.00 in the
case of the Series B Notes. Holders of Series B Notes were entitled to receive
an interest enhancement payable in shares of Company common stock based upon the
market value of the Company's common stock at June 30, 1996. In July 1996, the
Company issued 141,930 shares of its common stock in connection with the
interest enhancement provision.

During 2000, $100,000 of the Initial Series Notes and $750,000 of the
Series B Notes were converted by the note holders into 20,000 and 124,998 shares
of common stock, respectively. This resulted in a balance of $2,950,000,
$1,250,000 and $3,000,000 for the Initial Series Notes, the Series B Notes and
the Series C Notes, respectively, at December 31, 2000.

In January 2001, an additional $650,000 of the Initial Series Notes was
converted by a note holder into 130,000 shares of common stock. In addition, the
Company exercised its right to require conversion of the remaining balance

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17

of $2,300,000 of the Initial Series Notes and $1,250,000 of the Series B Notes
into 460,000 and 208,332 shares of common stock, respectively.

The debt conversions increase the Company's shareholders' equity by the
carrying amount of the debt converted, thus improving the Company's debt to
equity ratio and will favorably impact results of operations and cash flow due
to the interest savings of approximately $400,000 per year, before income tax,
on the debt.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2000, the Company had outstanding $2,950,000 aggregate
principal amount of the Initial Series Notes, $1,250,000 aggregate principal
amount of the Series B Notes and $3,000,000 aggregate principal amount of the
Series C Notes (collectively, the "Notes").

On November 3, 2000, $750,000 of the Series B Notes was converted into
124,998 shares of common stock. The fair value of the $750,000 converted debt
was approximately $1,184,000 based on the closing sales price of the Company's
common stock on November 2, 2000 of $9.469, as reported by the National Market
of Nasdaq. On November 30, 2000, $100,000 of the Initial Series Notes was
converted into 20,000 shares of common stock. The fair value of the $100,000
converted debt was approximately $196,000 based on the closing sales price of
the Company's common stock on November 29, 2000 of $9.813, as reported by the
National Market of Nasdaq.

On January 8, 2001, an additional $650,000 of the Initial Series Notes was
converted into 130,000 shares of the Company's common stock. The fair value of
the $650,000 converted debt was approximately $1,857,000 based on the closing
sales price of the Company's common stock on January 5, 2001 of $14.281, as
reported by the National Market of Nasdaq. On January 12, 2001, the Company
required conversion of the remaining $2,300,000 of the Initial Series Notes and
$1,250,000 of the Series B Notes into 460,000 and 208,332 shares of common
stock, respectively. The fair value of the $2,300,000 Initial Series Notes and
the $1,250,000 Series B Notes was approximately $6,404,000 and $2,900,000,
respectively, based on the closing sales price of the Company's common stock on
January 11, 2001 of $13.922, as reported by the National Market of Nasdaq.

As of January 12, 2001, the Company had outstanding $3,000,000 aggregate
principal amount of the Series C Notes. Based upon the closing price of the
Company's common stock on March 20, 2001 of $15.00, as reported by the National
Market of Nasdaq, the fair value of the Series C Notes was $9,000,000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Convertible Subordinated Debt."

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quantitative and Qualitative Disclosures About Market
Risk."

16
18

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditors' Reports............................... 18
Audited Financial Statements:
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... 20
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... 22
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2000, 1999 and 1998.............. 23
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... 24
Notes to Consolidated Financial Statements.................. 26

17
19

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders
U.S. Physical Therapy, Inc.

We have audited the accompanying consolidated balance sheets of U.S.
Physical Therapy, Inc. and subsidiaries (the "Company") as of December 31, 2000
and 1999, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years then ended. In connection with our audits
of the consolidated financial statements, we have also audited the related
financial statement schedule for the years ended December 31, 2000 and 1999.
These consolidated financial statements and the financial statement schedule 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of U.S.
Physical Therapy, Inc. and subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

KPMG LLP

Houston, Texas
March 8, 2001

18
20

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
U.S. Physical Therapy, Inc.

We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of U.S. Physical Therapy, Inc., and
subsidiaries (the "Company") for the year ended December 31, 1998. Our audit
also included the financial statement schedule listed in the index at Item
14(a)(2). 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 consolidated results of operations
and cash flows of U.S. Physical Therapy, Inc. and subsidiaries for the year
ended December 31, 1998, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

ERNST & YOUNG LLP

Houston, Texas
March 16, 1999

19
21

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

DECEMBER 31,
------------------
2000 1999
------- -------

ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,071 $ 4,030
Patient accounts receivable, less allowance for doubtful
accounts of $2,780 and $2,014, respectively............ 10,701 9,605
Accounts receivable -- other.............................. 452 384
Other current assets...................................... 519 630
------- -------
Total current assets.............................. 13,743 14,649
Fixed assets:
Furniture and equipment................................... 12,141 10,625
Leasehold improvements.................................... 6,313 5,306
------- -------
18,454 15,931
Less accumulated depreciation and amortization............ 11,463 9,446
------- -------
6,991 6,485
Goodwill, net of amortization of $291 and $230,
respectively.............................................. 897 948
Other assets, net of amortization of $483 and $464,
respectively.............................................. 1,339 1,264
------- -------
$22,970 $23,346
======= =======

See notes to consolidated financial statements.

20
22

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

DECEMBER 31,
------------------
2000 1999
------- -------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade................................. $ 434 $ 349
Accrued expenses.......................................... 1,622 1,329
Estimated third-party payor (Medicare) settlements........ 355 439
Notes payable............................................. 912 39
------- -------
Total current liabilities......................... 3,323 2,156
Notes payable -- long-term portion.......................... 26 37
Convertible subordinated notes payable...................... 7,200 8,050
Minority interests in subsidiary limited partnerships....... 2,858 2,383
Commitments and contingencies............................... -- --
Shareholders' equity:
Preferred stock, $.01 par value, 500,000 shares
authorized, -0- shares outstanding..................... -- --
Common stock, $.01 par value, 10,000,000 shares
authorized, 5,698,916 and 6,581,018 shares issued at
December 31, 2000 and 1999, respectively............... 57 66
Additional paid-in capital................................ 3,504 8,387
Accumulated earnings........................................ 6,049 2,314
Treasury stock at cost, 9,800 shares held at December 31,
2000 and 1999............................................. (47) (47)
------- -------
Total shareholders' equity........................ 9,563 10,720
------- -------
$22,970 $23,346
======= =======

See notes to consolidated financial statements.

21
23

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------

Net patient revenues........................................ $60,667 $49,056 $43,179
Management contract revenues................................ 2,369 2,112 1,320
Other revenues.............................................. 186 200 338
------- ------- -------
Net revenues................................................ 63,222 51,368 44,837
Clinic operating costs:
Salaries and related costs................................ 28,683 23,995 21,029
Rent, clinic supplies and other........................... 14,952 12,455 11,502
Provision for doubtful accounts........................... 1,596 1,165 1,143
------- ------- -------
45,231 37,615 33,674
Corporate office costs:
General and administrative................................ 5,790 4,803 4,240
Recruitment and development............................... 1,817 1,684 1,396
------- ------- -------
7,607 6,487 5,636
Loss on closure of facility................................. -- -- 230
------- ------- -------
Operating income before non-operating expenses.............. 10,384 7,266 5,297
Interest expense............................................ 780 727 730
Minority interests in subsidiary limited partnerships....... 3,466 2,577 1,863
------- ------- -------
Income before income taxes.................................. 6,138 3,962 2,704
Provision for income taxes.................................. 2,403 1,568 1,108
------- ------- -------
Net income.................................................. $ 3,735 $ 2,394 $ 1,596
======= ======= =======
Basic earnings per common share............................. $ .61 $ .35 $ .22
======= ======= =======
Diluted earnings per common share........................... $ .52 $ .34 $ .21
======= ======= =======

See notes to consolidated financial statements.

22
24

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

ACCUMU- TOTAL
COMMON STOCK ADD'L LATED TREASURY STOCK SHARE-
--------------- PAID-IN EARNINGS/ --------------- HOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT EQUITY
------ ------ ------- --------- ------ ------ --------

Balance at January 1, 1998.................... 7,231 $ 72 $11,653 $(1,676) (10) $(47) $10,002
Proceeds from exercise of stock options....... 2 -- 7 -- -- -- 7
Net income.................................... -- -- -- 1,596 -- -- 1,596
------ ---- ------- ------- --- ---- -------
Balance at December 31, 1998.................. 7,233 72 11,660 (80) (10) (47) 11,605
Proceeds from exercise of stock options....... 40 1 134 -- -- -- 135
Repurchase of common stock.................... (692) (7) (3,407) -- -- -- (3,414)
Net income.................................... -- -- -- 2,394 -- -- 2,394
------ ---- ------- ------- --- ---- -------
Balance at December 31, 1999.................. 6,581 66 8,387 2,314 (10) (47) 10,720
Proceeds from exercise of stock options....... 103 1 393 -- -- -- 394
Tax benefit from exercise of stock options.... -- -- 255 -- -- -- 255
Repurchase of common stock.................... (1,130) (11) (6,264) -- -- -- (6,275)
8% convertible subordinated notes converted to
common stock................................ 145 1 733 -- -- -- 734
Net income.................................... -- -- -- 3,735 -- -- 3,735
------ ---- ------- ------- --- ---- -------
Balance at December 31, 2000.................. 5,699 $ 57 $ 3,504 $ 6,049 (10) $(47) $ 9,563
====== ==== ======= ======= === ==== =======

See notes to consolidated financial statements.

23
25

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------

OPERATING ACTIVITIES
Net income.................................................. $ 3,735 $ 2,394 $ 1,596
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 2,331 2,090 2,071
Minority interests in earnings of subsidiary limited
partnerships........................................... 3,466 2,577 1,863
Provision for bad debts................................... 1,596 1,165 1,143
Loss on sale of fixed assets.............................. 35 9 --
Loss on disposal of certain assets in closure of
facility............................................... -- -- 144
Tax benefit from exercise of stock options................ 255 -- --
Changes in operating assets and liabilities:
Increase in patient accounts receivable................... (2,692) (2,265) (1,941)
Increase in accounts receivable-other..................... (68) (114) (83)
Decrease (increase) in other assets....................... (91) (94) 61
Increase (decrease) in accounts payable and accrued
expenses............................................... 378 (207) 326
Decrease in estimated third-party payor (Medicare)
settlements............................................ (84) (505) (151)
------- ------- -------
Net cash provided by operating activities................... 8,861 5,050 5,029

See notes to consolidated financial statements.

24
26

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------

INVESTING ACTIVITIES
Purchase of fixed assets.................................... $(2,827) $(2,097) $(2,357)
Purchase of intangibles..................................... (10) (24) (192)
Proceeds on sale of fixed assets............................ 35 25 26
------- ------- -------
Net cash used in investing activities....................... (2,802) (2,096) (2,523)
FINANCING ACTIVITIES
Proceeds from notes payable................................. 2,115 -- --
Payment of notes payable.................................... (1,253) (32) (55)
Repurchase of common stock.................................. (6,275) (3,414) --
Proceeds from investment of minority investors in subsidiary
limited partnerships...................................... 81 29 6
Proceeds from exercise of stock options..................... 394 135 7
Conversion of notes payable into common stock............... (8) -- --
Distributions to minority investors in subsidiary limited
partnerships.............................................. (3,072) (1,970) (1,692)
------- ------- -------
Net cash used in financing activities....................... (8,018) (5,252) (1,734)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (1,959) (2,298) 772
Cash and cash equivalents -- beginning of year.............. 4,030 6,328 5,556
------- ------- -------
Cash and cash equivalents -- end of year.................... $ 2,071 $ 4,030 $ 6,328
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes.............................................. $ 2,639 $ 1,763 $ 816
======= ======= =======
Interest.................................................. $ 709 $ 651 $ 657
======= ======= =======

See notes to consolidated financial statements.

25
27

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000

1. ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION

U.S. Physical Therapy, Inc. and its subsidiaries (the "Company") develops,
owns and operates outpatient physical and occupational therapy clinics. As of
December 31, 2000, the Company owned and operated 139 clinics in 30 states. The
clinics provide post-operative care and treatment for a variety of
orthopedic-related disorders and sports-related injuries, treatment for
neurologically-related injuries, rehabilitation of injured workers and
preventative care. The clinics' business primarily originates from physician
referrals. The principal sources of payment for the clinics' services are
commercial health insurance, workers' compensation insurance, managed care
programs, Medicare and proceeds from personal injury cases.

The consolidated financial statements include the accounts of U.S. Physical
Therapy, Inc. and its subsidiaries. All significant intercompany transactions
and balances have been eliminated. The Company, through its wholly-owned
subsidiaries, currently owns a 1% general partnership interest, with the
exception of one clinic in which the Company owns a 6% general partnership
interest, and limited partnership interests ranging from 49% to 99% in the
clinics it owns and operates (with respect to 90% of the Company's clinics, the
Company owned a limited partnership interest of 64%). For the majority of the
clinics, the managing therapist of each such clinic, along with other therapists
at the clinic in several of the partnerships, own the remaining limited
partnership interests in the clinic. In some instances, the Company develops
satellite clinic facilities which are extensions of existing clinics, and thus,
clinic partnerships may consist of one or more clinic locations. In the majority
of the partnership agreements the therapist partner begins with a 20% profit
interest in his or her clinic limited partnership which increases by 3% at the
end of each year until his or her interest reaches 35%. The minority interest in
the equity and earnings of the clinic limited partnerships is presented
separately in the consolidated financial statements.

2. SIGNIFICANT ACCOUNTING POLICIES

Common Stock

On January 5, 2001, the Company effected a two-for-one common stock split
in the form of a 100% stock dividend to stockholders of record as of December
27, 2000. All share and per share information included in the accompanying
consolidated financial statements and related notes has been adjusted to reflect
the stock split.

Cash Equivalents

The Company considers all highly liquid investments with a maturity of
three months or less, when purchased, to be cash equivalents. The Company,
pursuant to its investment policy, invests its cash in deposits with major
financial institutions, in highly rated commercial paper and short-term treasury
and United States government agency securities. Included in cash and cash
equivalents at December 31, 2000 and 1999 was $710,000 and $1,245,000,
respectively, in a money market fund invested in short-term debt instruments
issued by an agency of the U.S. Government and $-0- and $993,000, respectively,
of short-term commercial paper.

Long-Lived Assets

Fixed assets are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets.
Estimated useful lives for furniture and equipment range from three to eight
years. Leasehold improvements are amortized over the estimated useful lives of
the assets or the related lease terms, whichever is shorter.

Non-compete agreements are being amortized on a straight-line basis over
their respective terms, ranging from two to seven years. Goodwill is being
amortized on a straight-line basis over twenty years.

26
28
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In August 1998, the Company closed a clinic located in Corpus Christi,
Texas due to adverse clinic performance. During 1998, the Company recognized a
$230,000 loss relating to this closure. Of the $230,000 loss, $18,000
represented lease commitments, $99,000 was due to the write-off of goodwill,
fixed assets, leasehold improvements and a non-compete agreement and the
remainder was costs incurred in connection with closing the facility.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The Company accounts for long-lived assets in accordance with the
provisions of 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." This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.

Net Patient Revenues

Net patient revenues are reported at the estimated net realizable amounts
from patients, third-party payors, and others for services rendered. The Company
has agreements with third-party payors that provide for payments to the Company
at amounts different from its established rates.

Prior to January 1, 1999, Medicare reimbursement for outpatient physical
and occupational therapy services furnished by clinics was based on a cost
reimbursement methodology. The Company was reimbursed at a tentative rate with
final settlement determined after submission of an annual cost report by the
Company and audits thereof by the Medicare fiscal intermediary. Effective in
1999, the Balanced Budget Act of 1997 ("BBA") provides that reimbursement for
outpatient therapy services provided to Medicare beneficiaries is pursuant to a
fee schedule published by the Department of Health and Human Services ("HHS"),
and the total amount that may be paid by Medicare in any one year for outpatient
physical (including speech-language pathology) or occupational therapy to any
one patient is limited to $1,500, except for services provided in hospitals. On
November 29, 1999, President Clinton signed into law the Medicare, Medicaid and
SCHIP Balanced Budget Refinement Act of 1999 ("BBRA") which, among other
provisions, placed a two-year moratorium on the $1,500 reimbursement limit for
Medicare therapy services provided in 2000 and 2001. On December 21, 2000, the
President signed into law the Medicare, Medicaid, and SCHIP Benefits Improvement
and Protection Act of 2000 ("BIPA") which, among other provisions, extended the
moratorium for one year through December 31, 2002.

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 and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing that would have a
material effect on the Company's financial statements as of December 31, 2000.
Compliance with such laws and regulations can be subject to future government
review and interpretation, as well as significant regulatory action including
fines, penalties, and exclusion from the Medicare program.

Income Taxes

Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.

27
29
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Comprehensive Earnings

On January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income," which requires reporting of comprehensive
income (earnings) and its components, in the statement of operations and
statement of stockholders' equity, including net earnings as a component.
Comprehensive earnings is the change in equity of a business from transactions
and other events and circumstances from non-owner sources. The Company does not
have any components of other comprehensive income other than net earnings and
activity from owner sources.

Fair Values

The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate their fair values. The fair values of the long-term
convertible subordinated notes are based on the Company's stock price and the
number of shares that would be acquired upon conversion. The long-term
convertible subordinated notes are described fully in Note 4.

Use of Estimates

Management is required to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.

Reclassifications

Certain amounts presented in the accompanying consolidated financial
statements for 1998 and 1999 have been reclassified to conform with the
presentation used for 2000.

Revenue Recognition

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the staff's views in applying
accounting principles generally accepted in the United States of America to
revenue recognition in financial statements. The Company believes that its
accounting practices are currently in compliance with SAB 101.

Stock Options

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Pro forma
information regarding net income and earnings per share is required by FASB
Statement No. 123, "Accounting and Disclosure of Stock-Based Compensation," and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model. All of the Company's stock option plans are administered by a committee
comprised of selected members of the Board of Directors (the "Stock Option
Committee").

3. NON-CASH TRANSACTION

In May 1994, the Company issued $2,000,000 aggregate principal amount of 8%
Convertible Subordinated Notes, Series B (the "Series B Notes"). The Series B
Notes contained a Contingent Interest Enhancement provision which allowed the
Series B Note Holders to receive an interest enhancement payable in shares of
Company common stock based upon the market value of the Company's shares for the
month of June 1996. In 1996, a total of 141,930 shares of the Company's common
stock were issued in connection with the Contingent Interest Enhancement
provision. Deferred financing costs, included in "Other Assets" on the balance
sheet and being amortized over the life of the Series B Notes, totaling $765,000
were recorded in connection with the issuance of the 141,930 shares.

28
30
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On November 3, 2000, $750,000 of the Series B Notes were converted by the
note holders into 124,998 shares of Company common stock. In conjunction with
this conversion, the unamortized portion of the deferred financing costs related
to the converted notes was taken to additional paid-in capital. Interest expense
for 2000, 1999 and 1998 included $71,000, $75,000 and $75,000, respectively, of
amortization relating to the deferred financing costs.

On November 30, 2000, $100,000 of the 8% Convertible Subordinated Notes due
June 30, 2003 was converted by the note holder into 20,000 shares of common
stock.

4. NOTES PAYABLE

On June 2, 1993, the Company completed the issuance and sale of $3,050,000
aggregate principal amount of 8% Convertible Subordinated Notes due June 30,
2003 (the "Notes"). The Notes, which are subordinated to any indebtedness for
borrowed money, were issued at par in a private placement transaction to a total
of six investors, including two directors who purchased a total of $175,000 of
the Notes and a company controlled by one of the Company's directors, Mr.
Richard C.W. Mauran, who purchased $2,000,000 of the Notes. The Notes bear
interest at 8% per annum, payable quarterly, and are convertible at the option
of the note holders into common stock of the Company at any time during the life
of the Notes. The conversion price is $5.00 per share (subject to adjustment as
provided in the Notes). The Company can require the note holders to convert the
Notes into shares of common stock at any time that the average trading price of
the Company's common stock equals or exceeds $10.00 per share (subject to
adjustment as provided in the Notes) during the immediately preceding 90-day
period. During 2000, $100,000 of the Notes were converted into 20,000 shares of
common stock of the Company.

On May 5, 1994, the Company completed the issuance and sale of the Series B
Notes. The Series B Notes were issued at par in a private placement. The Series
B Notes are convertible, at the option of the holder, into the number of whole
shares of the Company's common stock determined by dividing the principal amount
so converted by $6.00, (the "Conversion Price"), subject to adjustment upon the
occurrence of certain events. The Company can require the note holders to
convert the Notes into shares of common stock at any time that the average
trading price of the Company's common stock equals or exceeds $10.00 per share
(subject to adjustment as provided in the Notes) during the immediately
preceding 90-day period. The Series B Notes bear interest from the date of
issuance at a rate of 8% per annum, payable quarterly. Holders of Series B Notes
were entitled to receive an interest enhancement payable in shares of Company
common stock based upon the market value of the Company's common stock at June
30, 1996, which was two years from the date of issuance of the Series B Notes.
In July 1996, the Company issued 141,930 shares of its common stock in
connection with the interest enhancement provision. During 2000, $750,000 of the
Series B Notes were converted into 124,998 shares of common stock of the
Company.

The Company also completed on May 5, 1994, the issuance and sale of
$3,000,000 aggregate principal amount of 8% Convertible Subordinated Notes,
Series C due June 30, 2004 (the "Series C Notes"). The Series C Notes were
issued at par in a private placement to a company controlled by one of the
Company's directors, Mr. Richard C.W. Mauran. The Series C Notes are
convertible, at the option of the holder, into the number of whole shares of
common stock determined by dividing the principal amount so converted by $5.00,
subject to adjustment upon the occurrence of certain events. The Series C Notes
bear interest from the date of issuance at a rate of 8% per annum, payable
quarterly.

Both Series B Notes and Series C Notes are unsecured subordinated
obligations of the Company and rank pari passu with the Company's 8% Convertible
Subordinated Notes due June 30, 2003. Each of the Notes are subordinated in
right of payment to all other indebtedness for borrowed money incurred by the
Company.

Holders of the Notes have piggy-back registration rights as set forth in
the Registration Agreement relating to the Notes. Holders of the Series B Notes
and Series C Notes each have demand and piggy-back registration rights as set
forth in the Registration Agreements related to the Notes.

29
31
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Offer, the Company could buy up to an additional 2% of its outstanding shares
without amending or extending the Offer. The Company completed the repurchase of
1,130,000 shares in August 2000 for a total aggregate cost of $6,275,000
(including expenses). The Company utilized cash on hand and a convertible line
of credit in the amount of $2,115,000 to fund the repurchase of the stock.

In conjunction with the Offer, the Company entered into an agreement with a
bank wherein the bank agreed to lend the Company up to $2,500,000 on a
convertible line of credit, convertible to a term loan on December 31, 2000, to
purchase stock tendered pursuant to the Offer. The loan bears interest at a rate
per annum of prime plus one-half percentage point and is repayable in quarterly
installments of $250,000 beginning March 2001. As of December 31, 2000, the
Company had borrowed $2,115,000 under the $2,500,000 convertible line of credit.
In November 2000, the Company repaid $1,215,000 of the $2,115,000 borrowed under
the convertible line of credit.

The Company also had a revolving line of credit with a bank which provides
for borrowings up to $500,000, as needed, at a rate of prime plus one-half
percentage point.

Notes payable as of December 31, 2000 and 1999 consist of the following:

2000 1999
---------- ----------

Promissory note at a floating interest rate of 1% above
prime, payable in monthly installments through November 1,
2001. This note is secured by the facility, with a net
book value of approximately $65,000, of one of the
Company's clinics......................................... $ 9,000 $ 17,000
Promissory note with an 8% interest rate payable in equal
monthly installments through March 19, 2007. This note is
secured by the facility, with a net book value of
approximately $44,000, of one of the Company's clinics.... 29,000 32,000
Unsecured promissory notes with a 7% interest rate payable
in equal monthly installments through December 31, 2000... -- 27,000
8% Convertible Subordinated Notes due June 30, 2003 with
interest payable quarterly................................ 2,950,000 3,050,000
8% Convertible Subordinated Notes, Series B, due June 30,
2004 with interest payable quarterly...................... 1,250,000 2,000,000
8% Convertible Subordinated Notes, Series C, due June 30,
2004 with interest payable quarterly...................... 3,000,000 3,000,000
Letter Loan Agreement with interest at a rate per annum of
prime plus one-half percentage point and is repayable in
quarterly installments of $250,000 beginning March
2001 ..................................................... 900,000 --
---------- ----------
8,138,000 8,126,000
Less current portion........................................ (912,000) (39,000)
---------- ----------
$7,226,000 $8,087,000
========== ==========

Scheduled maturities for the next five years and thereafter as of December
31, 2000 are as follows:

2001............................................. $ 912,000
2002............................................. 4,000
2003............................................. 2,954,000
2004............................................. 4,255,000
2005............................................. 5,000
Thereafter....................................... 8,000
----------
$8,138,000
==========

30
32
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. RELATED PARTY TRANSACTIONS

During 2000, 1999 and 1998, the Company recognized interest expense of
$415,000, $414,000 and $414,000, respectively, relating to Convertible
Subordinated Notes held by directors of the Company.

See Note 4 for additional information on related party transactions.

6. INCOME TAXES

Significant components of deferred tax assets, included in other assets on
the balance sheet at December 31, 2000 and 1999, were as follows:

2000 1999
---------- --------

Deferred tax assets:
Vacation accrual................................... $ 81,000 $ 99,000
Allowance for bad debt............................. 624,000 452,000
Depreciation....................................... 386,000 244,000
Other.............................................. -- 2,000
---------- --------
Net deferred tax assets.............................. $1,091,000 $797,000
========== ========

The differences between the federal tax rate and the Company's effective
tax rate for the years ended December 31, 2000, 1999 and 1998 were as follows:

2000 1999 1998
------------------ ------------------ ------------------

U.S. tax at statutory
rate.................... $2,087,000 34.00% $1,347,000 34.00% $ 919,000 34.00%
State income taxes........ 280,000 4.56 197,000 4.98 156,000 5.77
Nondeductible expenses.... 36,000 0.59 22,000 0.55 32,000 1.18
Other -- net.............. -- -- 2,000 0.05 1,000 0.03
---------- ----- ---------- ----- ---------- -----
$2,403,000 39.15% $1,568,000 39.58% $1,108,000 40.98%
========== ===== ========== ===== ========== =====

Significant components of the provision for income taxes for the years
ended December 31, 2000, 1999 and 1998 were as follows:

2000 1999 1998
---------- ---------- ----------

Current:
Federal...................................... $2,273,000 $1,378,000 $ 727,000
State........................................ 424,000 299,000 236,000
---------- ---------- ----------
Total current................................ 2,697,000 1,677,000 963,000
---------- ---------- ----------
Deferred:
Federal...................................... (294,000) (109,000) 145,000
State........................................ -- -- --
---------- ---------- ----------
Total deferred............................... (294,000) (109,000) 145,000
---------- ---------- ----------
Total income tax provision..................... $2,403,000 $1,568,000 $1,108,000
========== ========== ==========

The Company is required to establish a valuation allowance 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 assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based

31
33
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

upon the level of historical taxable income and projections for future taxable
income in the periods which the deferred tax assets are deductible, management
believes that a valuation allowance is not required, as it is more likely than
not that the results of future operations will generate sufficient taxable
income to realize the deferred tax assets.

7. STOCK OPTION PLANS

1992 Stock Option Plan, as Amended

The Company has a 1992 Stock Option Plan, as amended (the "Option Plan")
which permits the Company to grant to key employees and outside directors of the
Company options to purchase up to 1,990,000 shares of common stock (subject to
proportionate adjustments in the event of stock dividends, splits, and similar
corporate transactions).

Incentive stock options (those intended to satisfy the requirements of the
Internal Revenue Code) granted under the Option Plan are granted at an exercise
price of not less than the fair market value of the shares of common stock on
the date of grant. The exercise prices of non-qualified options granted under
the Option Plan are determined by the Stock Option Committee. The period within
which each option will be exercisable is determined by the Stock Option
Committee (in no event may the exercise period of an incentive stock option
extend beyond 10 years from the date of grant). As of December 31, 2000, 1999
and 1998, 190,000, 190,000 and 190,000 incentive stock options and 1,983,108,
1,750,100 and 1,664,100 non-qualified stock options have been granted,
respectively. As of December 31, 2000, 1999 and 1998, 32,500, 32,500 and 32,500
incentive stock options and 232,850, 227,250 and 193,750 non-qualified stock
options have been forfeited, respectively. Incentive stock options of 47,500,
7,500 and 7,500 and non-qualified stock options of 128,900, 66,000 and 26,000
have been exercised as of December 31, 2000, 1999 and 1998, respectively.

Outstanding incentive stock options vest one-fourth on each of the second,
third, fourth and fifth anniversaries of the date of grant. Of the 1,621,358
non-qualified stock options granted, but not yet exercised as of December 31,
2000, 524,008 options vested 100% on the date of grant, and 1,097,350 options
vest one-fourth on each of the second, third, fourth and fifth anniversaries of
the date of grant.

A summary of the Company's Option Plan activity and related information for
the years ended December 31, 2000, 1999 and 1998 follows:

2000 1999 1998
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- --------- ---------- --------- ---------- ---------

Outstanding -- beginning of
year......................... 1,606,850 $4.71 1,594,350 $4.72 1,166,500 $4.46
Granted........................ 233,008 4.96 86,000 4.21 525,600 5.30
Exercised...................... (102,900) 4.06 (40,000) 3.39 (1,750) 4.45
Forfeited...................... (5,600) 5.56 (33,500) 5.62 (96,000) 4.72
---------- ----- ---------- ----- ---------- -----
Outstanding -- end of year..... 1,731,358 $4.86 1,606,850 $4.71 1,594,350 $4.72
========== ========== ==========
Exercisable at end of year..... 1,085,207 $4.68 897,875 $4.46 772,563 $4.42
Weighted-average fair value of
options granted during the
year......................... $ 2.11 $ 1.96 $ 2.21

Exercise prices for options outstanding as of December 31, 2000 ranged from
$3.13 to $6.22. The weighted-average remaining contractual life of those options
was 6.36 years.

Executive Option Plan

The Executive Option Plan (the "Executive Plan") was adopted by the Board
of Directors of the Company on March 2, 1993 and was approved by the Company's
stockholders on May 24, 1993. The Executive Plan permits the Company to grant to
any officer of the Company or its affiliates, options to purchase up to 400,000
shares of common stock (subject to adjustments in the event of stock dividends,
splits and similar corporate transactions). No

32
34
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

further grants of options will be made under the Executive Plan as a result of
an amendment to the Option Plan during 1998. The exercise prices of the options
granted under the Executive Plan are determined by the Stock Option Committee,
and in the case of incentive and non-qualified options, may not be less than the
greater of 175% of the fair market value of a share of common stock on the date
of grant of the option or the par value per share of the stock. The period
within which each option will be exercisable is determined by the Stock Option
Committee (in no event may the exercise period extend beyond 10 years from the
date of grant). The outstanding options vest one-third on each of the third,
fourth and fifth anniversaries of the date of grant.

As of December 31, 2000, 1999 and 1998, 250,000, 250,000 and 250,000
incentive stock options and 180,000, 180,000 and 180,000 non-qualified stock
options have been granted, respectively. As of December 31, 2000, 1999 and 1998,
178,000, 178,000 and 140,000 incentive stock options and 82,000, 82,000 and
80,000 non-qualified stock options have been forfeited, respectively. No options
have been exercised under the Executive Plan.

A summary of the Company's Executive Plan activity and related information
for the years ended December 31, 2000, 1999 and 1998 follows:

2000 1999 1998
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- ------- ---------

Outstanding -- beginning of year... 170,000 $6.73 210,000 $6.66 210,000 $6.66
Granted............................ -- -- -- -- -- --
Exercised.......................... -- -- -- -- -- --
Forfeited.......................... -- -- (40,000) 6.35 -- --
------- ----- ------- ----- ------- -----
Outstanding -- end of year......... 170,000 $6.73 170,000 $6.73 210,000 $6.66
======= ======= =======
Exercisable at end of year......... 170,000 $6.73 170,000 $6.73 190,000 $6.58

Exercise prices for options outstanding as of December 31, 2000 ranged from
$6.34 to $7.44. The weighted-average remaining contractual life of those options
was 2.82 years.

1999 Employee Stock Option Plan

During 1999, the Company adopted the 1999 Employee Stock Option Plan (the
"1999 Option Plan") which permits the Company to grant to certain non-officer
employees of the Company up to 200,000 non-statutory options to purchase shares
of common stock (subject to proportionate adjustments in the event of stock
dividends, splits, and similar corporate transactions).

The exercise prices of options granted under the 1999 Option Plan are
determined by the Stock Option Committee. The period within which each option
will be exercisable is determined by the Stock Option Committee (in no event may
the exercise period of an incentive stock option extend beyond 10 years from the
date of grant). As of December 31, 2000 and 1999, 90,250 and 48,500 options,
respectively, had been granted, 23,750 and 4,000 options, respectively, had been
forfeited and no shares had been exercised under the 1999 Option Plan. The
options vest one-fourth on each of the second, third, fourth and fifth
anniversaries of the date of grant.

33
35
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the Company's 1999 Option Plan activity and related
information for the years ended December 31, 2000 and 1999 follows:

2000 1999
-------------------- --------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- --------- ------- ---------

Outstanding -- beginning of year..................... 44,500 $4.22 -- $ --
Granted.............................................. 41,750 5.51 48,500 4.22
Forfeited............................................ (19,750) 4.27 (4,000) 4.22
------- ----- ------ -----
Outstanding -- end of year........................... 66,500 $5.02 44,500 $4.22
======= ======
Exercisable at end of year........................... -- $ -- -- $ --
Weighted-average fair value of options granted during
the year........................................... $ 2.84 $ 1.97

Exercise prices for options outstanding at December 31, 2000 ranged from
$4.22 to $6.22. The weighted-average remaining contractual life of those options
was 9.06 years.

Non-Plan, Non-Qualifying Option Agreements

During 2000 and 1999, the Board of Directors of the Company granted
non-plan, non-qualifying options covering 20,000 and 150,000 shares,
respectively, of Company common stock (subject to proportionate adjustments in
the event of stock dividends, splits and similar corporate transactions) to
three individuals in connection with their offers of employment. During 2000 and
1999, 100,000 and 50,000 shares, respectively, were forfeited. The period within
which each option will be exercisable is 10 years from the date of grant. The
options vest one-fourth on each of the second, third, fourth and fifth
anniversaries of the date of grant.

A summary of the Company's non-plan, non-qualifying option activity and
related information for the years ended December 31, 2000 and 1999 follows:

2000 1999
--------------------- --------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
-------- --------- ------- ---------

Outstanding -- beginning of year................... 100,000 $4.22 -- $ --
Granted............................................ 20,000 4.25 150,000 4.27
Forfeited.......................................... (100,000) 4.22 (50,000) 4.38
-------- ----- ------- -----
Outstanding -- end of year......................... 20,000 $4.25 100,000 $4.22
======== =======
Exercisable at end of year......................... -- $ -- -- $ --
Weighted-average fair value of the 50,000 options
granted during 1999.............................. $ 2.04
Weighted-average fair value of the 100,000 options
granted during 1999.............................. $ 1.97
Weighted-average fair value of the options granted
during 2000...................................... $ 1.94

The weighted-average remaining contractual life for options outstanding at
December 31, 2000 was 9.13 years.

The following weighted-average assumptions for 2000, 1999 and 1998 were
used in estimating the fair value of the options granted under the stock option
plans and the non-plan, non-qualifying option agreements: risk-free interest
rates ranging from 4.65% to 6.45%; dividend yield rate of 0%; volatility factors
of the expected market price

34
36
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of the Company's common stock ranging from .245 to .287; and a weighted-average
expected life of the option of eight years for those options which vest
one-fourth on each of the second, third, fourth and fifth anniversaries of the
date of grant and weighted-average expected lives of five to eight years for the
remaining options.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The pro forma
effect on net income for 2000, 1999 and 1998 is not representative of the pro
forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995. The Company's pro forma information follows (in thousands except for
earnings per share information):

2000 1999 1998
------ ------ ------

Pro forma net income............................. $3,393 $2,117 $1,347
Pro forma earnings per share -- basic............ $ 0.55 $ 0.31 $ 0.19
Pro forma earnings per share -- diluted.......... $ 0.47 $ 0.31 $ 0.18

In total, the Company has 3,641,936 shares which are reserved for issuance
under the 1992 Stock Option Plan, the Executive Option Plan, the 1999 Employee
Stock Option Plan, a non-plan, non-qualifying option agreement, the 8%
Convertible Subordinated Notes, the Series B Notes and the Series C Notes.

8. PREFERRED STOCK

The Board of Directors of the Company is empowered, without approval of the
stockholders, to cause shares of preferred stock to be issued in one or more
series and to establish the number of shares to be included in each such series
and the rights, powers, preferences and limitations of each series. There are no
provisions in the Company's Articles of Incorporation specifying the vote
required by the holders of preferred stock to take action.

All such provisions would be set out in the designation of any series of
preferred stock established by the Board of Directors. The bylaws of the Company
specify that, when a quorum is present at any meeting, the vote of the holders
of at least a majority of the outstanding shares entitled to vote who are
present, in person or by proxy, shall decide any question brought before the
meeting, unless a different vote is required by law or the Company's Articles of
Incorporation. Because the Board of Directors has the power to establish the
preferences and rights of each series, it may afford the holders of any series
of preferred stock, preferences, powers, and rights, voting or otherwise, senior
to the right of holders of common stock. The issuance of the preferred stock
could have the effect of delaying or preventing a change in control of the
Company. The Board of Directors has no present plans to issue any of the
preferred stock.

9. DEFINED CONTRIBUTION PLAN

The Company has a 401(k) profit sharing plan covering all employees with
three months of service. The Company may make discretionary contributions of up
to 50% of employee contributions. The Company recognized no contribution expense
for the years ended December 31, 2000, 1999 and 1998.

35
37
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company has entered into operating leases for its executive offices and
clinic facilities. In connection with these agreements, the Company incurred
rent expense of $4,546,000, $3,815,000 and $3,125,000 for the years ended
December 31, 2000, 1999 and 1998, respectively. Several of the leases provide
for an annual increase in the rental payment based upon the Consumer Price Index
for each particular year. The majority of the leases provide for renewal periods
ranging from one to five years. The agreements to extend the leases specify that
rental rates would be adjusted to market rates as of each renewal date.

The future minimum lease commitments for the next five years and in the
aggregate as of December 31, 2000 are as follows:

2001............................................ $ 4,173,000
2002............................................ 3,335,000
2003............................................ 2,449,000
2004............................................ 1,611,000
2005............................................ 742,000
Thereafter...................................... 57,000
-----------
$12,367,000
===========

Employment Agreements

At December 31, 2000, the Company had an outstanding employment agreement
with one of its executive officers for $250,000 annually, subject to adjustment
to reflect positive performance, for a term extending through February 2002.

In addition, the Company has outstanding employment agreements with the
managing physical therapist partners of the Company's physical therapy clinics
and with certain other clinic employees which obligate subsidiaries of the
Company to pay compensation of $5,699,000 in 2001 and $4,513,000 in the
aggregate through 2004. In addition, each employment agreement with the managing
physical therapists provides for monthly bonus payments calculated as a
percentage of each clinic's net revenues (not in excess of operating profits) or
operating profits. The Company recognized salaries and bonus expense for the
managing physical therapists of $9,576,000, $8,073,000 and $7,044,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.

Each employment agreement provides that the therapist partner can be
required to sell his or her partnership interest in the clinic partnership for
the amount of his or her capital account upon termination of employment with the
clinic partnership before the expiration of the initial term of employment. The
employment agreements contain no provisions requiring the purchase by the
Company of the therapist partner's interest in the clinic partnership in the
event of death or disability, or after the initial term of employment. In
addition, the employment agreements generally include non-competition and
non-solicitation provisions which extend through the term of the agreement and
for one to two years thereafter.

36
38
U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. EARNINGS PER SHARE

The computation of basic and diluted earnings per share for the years ended
December 31, 2000, 1999 and 1998 are as follows:

2000 1999 1998
---------- ---------- ----------

Numerator:
Net income........................................... $3,735,000 $2,394,000 $1,596,000
---------- ---------- ----------
Numerator for basic earnings per share............... $3,735,000 $2,394,000 $1,596,000
Effect of dilutive securities:
Interest on convertible subordinated notes
payable......................................... 466,000 475,000 --
---------- ---------- ----------
Numerator for diluted earnings per share-income
available to common stockholders after assumed
conversions....................................... $4,201,000 $2,869,000 $1,596,000
========== ========== ==========
Denominator:
Denominator for basic earnings per
share -- weighted-average shares.................. 6,153,000 6,800,000 7,222,000
Effect of dilutive securities:
Stock options..................................... 478,000 70,000 264,000
Convertible subordinated notes payable............ 1,521,000 1,544,000 --
---------- ---------- ----------
Dilutive potential common shares..................... 1,999,000 1,614,000 264,000
---------- ---------- ----------
Denominator for diluted earnings per share --adjusted
weighted-average shares and assumed conversions... 8,152,000 8,414,000 7,486,000
========== ========== ==========
Basic earnings per share............................... $ 0.61 $ 0.35 $ 0.22
========== ========== ==========
Diluted earnings per share............................. $ 0.52 $ 0.34 $ 0.21
========== ========== ==========

During 2000, 1999 and 1998, the Company had outstanding The Notes, the
Series B Notes and the Series C Notes (collectively the "Notes"). In November
2000, $850,000 of the Notes were converted into common shares. The Notes were
not included in the computation of diluted earnings per share for 1998 because
the effect on the computation was anti-dilutive.

12. SUBSEQUENT EVENTS

In January 2001, the remaining $2,950,000 of the 8% Convertible
Subordinated Notes due June 30, 2003 and the remaining $1,250,000 of the 8%
Convertible Subordinated Notes, Series B, due June 30, 2004 was converted into
590,000 and 208,332 shares of the Company's common stock, respectively.

In March 2001, the Company repaid the remaining principal balance of
$900,000 on the convertible line of credit used to repurchase 1,130,000 of
Company common stock in August 2000.

37
39

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

The Board of Directors of the Company appointed KPMG LLP as the Company's
independent auditors effective September 27, 1999. KPMG LLP replaced Ernst &
Young LLP, which had served as the Company's independent auditors since 1992.
Ernst & Young LLP was dismissed effective September 27, 1999.

The reports issued by Ernst & Young LLP on the Company's financial
statements for fiscal 1998 did not contain any adverse opinion or a disclaimer
of opinion, or any qualification or modification as to uncertainty, audit scope,
or accounting principles.

The decision to change the Company's independent auditors to KPMG LLP was
recommended by the Audit Committee of the Board of Directors of the Company and
then ratified by the full Board of Directors.

During the fiscal year ended December 31, 1998 and the subsequent interim
period preceding the dismissal of Ernst & Young LLP, there were no disagreements
with Ernst & Young LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to the satisfaction of Ernst & Young LLP, would have caused it to make
reference to the subject matter of the disagreement in connection with its
reports.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

The information required by Items 401 and 405 of Regulation S-K is omitted
from this Report as the Company intends to file its definitive annual meeting
proxy materials within 120 days after its fiscal year-end and the information to
be included therein in response to such Items is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by Item 402 of Regulation S-K is omitted from this
Report as the Company intends to file its definitive annual meeting proxy
materials within 120 days after its fiscal year-end and the information to be
included therein in response to such Item is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by Item 403 of Regulation S-K is omitted from this
Report as the Company intends to file its definitive annual meeting proxy
materials within 120 days after its fiscal year-end and the information to be
included therein in response to such Item is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by Item 404 of Regulation S-K is omitted from this
Report as the Company intends to file its definitive annual meeting proxy
materials within 120 days after its fiscal year-end and the information to be
included therein in response to such Item is incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)(1) The following consolidated financial statements of U.S. Physical Therapy,
Inc. and subsidiaries are included in Item 8:

Consolidated Balance Sheets -- December 31, 2000 and 1999

Consolidated Statements of Operations -- years ended December 31, 2000,
1999 and 1998

Consolidated Statements of Shareholders' Equity -- years ended December 31,
2000, 1999 and 1998

38
40

Consolidated Statements of Cash Flows -- years ended December 31, 2000,
1999 and 1998

Notes to Consolidated Financial Statements -- December 31, 2000

(2) The following consolidated financial statement schedule of U.S. Physical
Therapy, Inc. is included in Item 14(d):

Schedule II -- Valuation and Qualifying Accounts

All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.

(3) List of Exhibits

3.1 Articles of Incorporation of the Company (filed as an
exhibit to the Company's Registration Statement on Form S-1
(33-47019) and incorporated herein by reference).
3.2 Bylaws of the Company, as amended (filed as an exhibit to
the Company's Form 10-KSB for the year ended December 31,
1993 and incorporated herein by reference).
10.1 Convertible Subordinated Note Purchase Agreement dated June
2, 1993 (filed as an exhibit to the Company's Form 8-K dated
June 10, 1993 and incorporated herein by reference).
10.2 Form of U.S. Physical Therapy, Inc. 8% Convertible
Subordinated Notes (filed as an exhibit to the Company's
Form 8-K dated June 2, 1993 and incorporated herein by
reference).
10.3 Amendment to Convertible Subordinated Note Purchase
Agreement dated March 10, 1994 (filed as an exhibit to the
Company's Form 8-K dated March 25, 1994 and incorporated
herein by reference).
10.4 Form of 8% Convertible Subordinated Notes, Series B (filed
as an exhibit to the Company's Form 8-K dated May 5, 1995
and incorporated herein by reference).
10.5 Registration Agreement for Series B Notes (filed as an
exhibit to the Company's Form 8-K dated May 5, 1995 and
incorporated herein by reference).
10.6 Form of 8% Convertible Subordinated Notes, Series C (filed
as an exhibit to the Company's Form 8-K dated May 5, 1995
and incorporated herein by reference).
10.7 Registration Agreement for Series C Notes (filed as an
exhibit to the Company's Form 8-K dated May 5, 1995 and
incorporated herein by reference).
10.8+ 1992 Stock Option Plan, as amended (filed as an exhibit to
the Company's Registration Statement on Form S-8 (333-64159)
and incorporated herein by reference).
10.9+ Executive Option Plan (filed as an exhibit to the Company's
Registration Statement on Form S-8 (33-63444) and
incorporated herein by reference).
10.10+ 1999 Employee Stock Option Plan (filed as an exhibit to the
Company's Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference).
10.11+ Non-Statutory Stock Option Agreement (filed as an exhibit to
the Company's Form 10-K for the year ended December 31, 1999
and incorporated herein by reference).
10.12+ Amended and Restated Employment Agreement between the
Company and Roy W. Spradlin (filed as an exhibit to the
Company's Form 10-KSB for the year ended December 31, 1997
and incorporated herein by reference).
10.13* The Southwest Bank of Texas N.A. Three Year $2.5 million
Letter Loan Agreement, dated July 1, 2000.
10.14* The Southwest Bank of Texas N.A. Convertible Line of Credit
Note, Exhibit A(i) to the Three Year $2.5 million Letter
Loan Agreement dated July 1, 2000.
10.15* The Southwest Bank of Texas N.A. Revolving Line of Credit
Note, Exhibit A(ii) to the Three Year $2.5 million Letter
Loan Agreement dated July 1, 2000.
16 Change in registrant's independent public accountants, which
occurred on September 27, 1999 (filed on Form 8-K on
September 30, 1999 and incorporated herein by reference).

39
41

21* Subsidiaries of the Registrant.
23.1* Consent of KPMG LLP (Registration Nos. 33-63446, 33-63444,
33-91004, 33-93040, 333-30071 and 333-64159).
23.2* Consent of Ernst & Young LLP (Registration Nos. 33-63446,
33-63444, 33-91004, 33-93040, 333-30071 and 333-64159).

(a) Reports on Form 8-K

No Form 8-K was filed during the quarter ended December 31, 2000.
- ---------------
+ Management contract or compensatory plan or arrangement.

* Filed herewith.

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42

ITEM 14. (d)

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

COL. A COL. B COL. C COL. D COL. E
- ------------------------------------ ---------- ---------------------- ----------- ----------
ADDITIONS
----------------------
CHARGED
BALANCE AT CHARGED TO TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS- DEDUCTIONS- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------- ---------- ---------- --------- ----------- ----------

YEAR ENDED DECEMBER 31, 2000:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts..................... $2,014,000 $1,596,000 $ 830,000(1) $2,780,000
YEAR ENDED DECEMBER 31, 1999:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts..................... $1,692,000 $1,165,000 $ 843,000(1) $2,014,000
YEAR ENDED DECEMBER 31, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts..................... $1,595,000 $1,143,000 $1,046,000(1) $1,692,000

- ---------------
(1) Uncollectible accounts written off, net of recoveries.

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43

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

U.S. PHYSICAL THERAPY, INC
(Registrant)

By: /s/ J. MICHAEL MULLIN
-----------------------------------
J. Michael Mullin,
Chief Financial Officer
(principal financial and
accounting officer)

Date: April 12, 2001

In accordance with the Exchange Act, this report has been signed below by
the followingpersons on behalf of the registrant and in the capacities as of the
date indicated above.

By: By:
-------------------------------------------------- --------------------------------------------------
J. Livingston Kosberg, Marlin W. Johnston,
Chairman of the Board Director

By: By:
-------------------------------------------------- --------------------------------------------------
Mark J. Brookner, James B. Hoover,
Vice Chairman of the Board Director

By: By:
-------------------------------------------------- --------------------------------------------------
Roy W. Spradlin, Daniel C. Arnold,
President, Chief Executive Officer and Director Director
(principal executive officer)

By: By:
-------------------------------------------------- --------------------------------------------------
Bruce D. Broussard, Albert L. Rosen,
Director Director

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44
EXHIBIT INDEX

- ---------------
+ Management contract or compensatory plan or arrangement.

* Filed herewith.