SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

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

Commission File Number: 000-32499

SELECT MEDICAL CORPORATION

(Exact name of Registrant as specified in its charter)

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

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

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

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

YES       NO

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

TABLE OF CONTENTS

PART I    FINANCIAL INFORMATION
	ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
		Consolidated Balance Sheets
		Consolidated Statements of Operations
		Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income
		Consolidated Statements of Cash Flows
		Notes to consolidated financial statements
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II    OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX
CONSULTING AGREEMENT BETWEEN ZIMMERMAN & SELECT
AIRPLANE COST SHARING AGREEMENT
SELECT MEDICAL CORP. AMEND.& RESTATED 2002 PLAN

TABLE OF CONTENTS

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

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PART I    FINANCIAL INFORMATION
ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS

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

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

See accompanying notes.

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

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

See accompanying notes.

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

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

See accompanying notes.

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

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

See accompanying notes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

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

         Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted as permitted by the rules and regulations of the Securities and Exchange Commission, although the Company believes the disclosure is adequate to make the information presented not misleading. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2001 contained in the Company’s Form 10-K filed with the Securities Exchange Commission.

2. Accounting Policies

Use of Estimates

         The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncement

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

3. Stock Option Plans

         On April 11, 2002, the Company’s Board of Directors adopted the Select Medical Corporation Second Amended and Restated 1997 Stock Option Plan, subject to stockholder approval. The amended plan provides for the grant of non-qualified stock options to key employees to purchase an additional 3,000,000 shares of common stock. A substantial portion of these options must be Performance Accelerated Vesting Options. The Performance Accelerated Vesting Options will vest and become exercisable on the seventh anniversary of the grant of such options, but the vesting schedule for these options will be accelerated if the Company meets or

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exceeds two performance-based targets. Twenty percent (20%) of a grant of Performance Accelerated Vesting Options shall vest and become exercisable after the completion of each fiscal year in which the Company meets or exceeds both its earnings per share and return on equity targets. No accelerated vesting shall occur in years in which the Company fails to meet either of its targets. In addition, if the Company meets both of these targets in 2002, 2003 and 2004, and the Company’s earnings per share for fiscal year 2004 is greater than or equal to $1.21, then all Performance Accelerated Vesting Options will become fully vested and immediately exercisable.

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

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

4. Segment Information

         The Company’s segments consist of (i) inpatient hospitals and (ii) outpatient rehabilitation. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on EBITDA of the respective business units. EBITDA is defined as earnings before interest, minority interest, income taxes, depreciation and amortization. All segment revenues are from external customers.

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

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

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

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A reconciliation of EBITDA to net income is as follows:

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

5.     Restructuring Charges

The following summarizes the Company’s restructuring activity:

	Lease
	Termination
	Costs			Severance			Total
December 31, 2001	$	1,687,000		$	132,000		$	1,819,000
Amounts paid in 2002		(338,000	)		(15,000	)		(353,000	)
March 31, 2002	$	1,349,000		$	117,000		$	1,466,000

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

6.     Intangible Assets

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

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

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

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Intangible assets consist of the following:

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

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

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

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

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

7.     Net Income per Share

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

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

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8.     Commitments and Contingencies

Litigation

On August 10, 1998 a complaint in the U.S. District Court for the Eastern District of Pennsylvania was filed that named as defendants NovaCare, Inc. (now known as NAHC, Inc.), other named defendants and 100 defendants who were to be named at a later time. This qui tam action sought triple damages and penalties under the False Claims Act against NAHC. The Department of Justice did not intervene in this action. The allegations involve, among other things, the distinction between individual and group billing in physical rehabilitation clinics that the Company acquired from NovaCare. On October 16, 2000 the relator plaintiff made a motion to amend the complaint to, among other things, add Select Medical Corporation and some of its subsidiaries acquired in the NovaCare acquisition as defendants in this case. This motion was granted in September of 2001. The amended complaint alleges that from about January 1, 1995 through the present, the defendants submitted false or fraudulent bills for physical therapy to various federal health programs. The United States Attorneys Office has asserted that because the complaint is being amended to add allegations against new defendants, it is entitled to a new period to determine whether to intervene in the new allegations. On January 3, 2002, NAHC entered into a settlement agreement with the relator plaintiff and the government, pursuant to which, in exchange for a payment by NAHC of $375,000, the parties settled all claims arising out of conduct that took place before the Company’s acquisition of the NovaCare subsidiaries that are defendants in the case. Claims against the Company and the NovaCare subsidiaries regarding conduct occurring after the NovaCare acquisition were not settled. As of April 30, 2002, the government had not advised the Company whether it intends to intervene in any remaining claims, and the Company and the subsidiaries have not been served with the amended complaint. Based on a review of the amended complaint, the Company does not believe that this lawsuit is meritorious and intends to vigorously defend against this action. However, because of the uncertain nature of the litigation, the Company cannot predict the outcome of this matter.

         The Company is subject to legal proceedings and claims that have arisen in the ordinary course of its business and have not been finally adjudicated, which include malpractice claims covered under the Company’s insurance policies, as well as claims that were covered under policies issued by PHICO Insurance Company, which are discussed below. In the opinion of management, the outcome of these actions will not have a material effect on the financial position or results of operations of the Company.

Other

         In February 2002, PHICO Insurance Company (“PHICO”), at the request of the Pennsylvania Insurance Department, was placed in liquidation by an order of the Commonwealth Court of Pennsylvania (“Liquidation Order”). The Company had placed its primary malpractice insurance coverage through PHICO from June 1998 through December 2000. In January 2001, these policies were replaced by policies issued with other issuers. Currently, the Company has approximately 20 unsettled cases in 11 states from the policy years covered by PHICO issued policies. The Liquidation Order refers these claims to the various state guaranty associations. These state guaranty association statutes generally provide for coverage between $100,000-$300,000 per insured claim, depending on the state. Some states also have catastrophic loss funds to cover settlements in excess of the available state guaranty funds. Most state insurance guaranty statutes provide for net worth and residency limitations that, if applicable, may limit or prevent the Company from the recovering from these state guaranty association funds. At this time, the Company believes that it will meet the requirements for coverage under the applicable state guarantee association statutes, and that the resolution of these claims will not have a material adverse effect on the Company’s financial position, cash flow or results of operations. However, because the rules related to state guarantee funds are subject to interpretation and because these claims are still in the process of resolution, the Company’s conclusions may change as this process progresses.

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

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

         The equity method has been used by the Company with respect to investments in subsidiaries. The equity method has been used by Subsidiary Guarantors with respect to investments in Non-Guarantor Subsidiaries. Separate financial statements for Subsidiary Guarantors are not presented.

         The following table sets forth the Non-Guarantor Subsidiaries:

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

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

(a)	Elimination of investments in subsidiaries.
(b)	Elimination of investments in subsidiaries’ earnings.

- 14 -

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

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

- 15 -

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

(a) Elimination of equity in earnings of subsidiary.

- 16 -

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

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

- 17 -

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

(a) Elimination of equity in earnings of subsidiary.

- 18 -

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         You should read this discussion together with our consolidated financial statements and notes thereto contained in our Form 10-K filed with the Securities Exchange Commission on March 5, 2002.

Forward Looking Statements

         This discussion contains forward-looking statements relating to the financial condition, results of operations, plans, objectives, future performance and business of Select Medical Corporation. These statements include, without limitation, statements preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “estimates” or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to factors including the following:

• a change in government reimbursement for our services that would affect our revenue;

• the failure of our long-term acute care hospitals to maintain their status as such, which could negatively impact our profitability;

• private third party payors of our services may undertake cost containment initiatives that would decrease our revenue;

• shortages in qualified nurses could increase our operating costs significantly;

• future acquisitions may use significant resources and expose us to unforeseen risks, and

• the effects of liability and other claims asserted against us.

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

Overview

         We are a leading operator of specialty acute care hospitals for long term stay patients in the United States. We are also the second largest operator of outpatient rehabilitation clinics in the United States. As of March 31, 2002, we operated 64 specialty acute care hospitals in 22 states and 720 outpatient rehabilitation clinics in 31 states, the District of Columbia and seven Canadian provinces. We began operations in 1997 under the leadership of our current management team.

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

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

- 19 -

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

			Three months ended
			March 31,
			2002			2001
Specialty Hospital Data
	# of Hospitals — Start of Period			64			54
		# of Hospital Start-ups		0			2
	# of Hospitals — End of Period			64			56
	# of Licensed Beds			2,307			2,068
	# of Admissions			5,211			4,191
	# of Patient Days			149,869			123,740
	Average Length of Stay			30			31
	Net Revenue Per Patient Day (a)		$	993		$	913
	Occupancy Rate			72	%		68	%
	% Patient Days – Medicare			77	%		76	%
Outpatient Rehabilitation Data
	# of Clinics Owned — Start of Period			664			636
		# of Clinics Acquired		1			0
		# of Clinic Start-ups		14			9
		# of Clinics Closed/Sold/Consolidated		12			21
	# of Clinics Owned — End of Period			667			624
	# of Clinics Managed — End of Period			53			51
	Total # of Clinics (All) – End of Period			720			675
	# of Visits (U.S)			964,416			946,180
	Net Revenue Per Visit (U.S.) (b)		$	86		$	81

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

         Our goal is to open approximately eight to ten new specialty acute care hospitals each year utilizing our “hospital within a hospital” model. We also intend to open new clinics in our current markets where we can benefit from existing referral relationships and brand awareness to produce incremental growth. From time to time, we also intend to evaluate acquisition opportunities that may enhance the scale of our business and expand our geographic reach.

- 20 -

Sources of Revenue

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

         Our specialty hospitals are paid by Medicare under a cost-based reimbursement methodology. These payments are subject to final cost report settlements based on administrative review and audit by third parties. An annual cost report is filed for each provider to report the cost of providing services and to settle the difference between the interim payments we receive and final costs. We record adjustments to the original estimates in the periods that such adjustments become known. Because our routine payments from Medicare are different than the final reimbursement due to us under the cost based reimbursement system, we record a receivable or payable for the difference. At December 31, 2001 and March 31, 2002, we had a net amount due to Medicare of $3.4 million and $5.0 million respectively. We recorded this amount as due to third party payors on our balance sheet.

         On March 22, 2002, the Centers for Medicare and Medicaid Services (“CMS”) published a proposed rule to establish a prospective payment system for Medicare payment of inpatient hospital services furnished by long-term care hospitals such as ours. CMS is accepting comments on the proposed rule until May 21, 2002. Current expectations are that the regulations may be final by the CMS deadline of October 2002, with implementation at a later date. We are currently evaluating this proposed rule and preparing our comments that we will file with CMS.

Results of Operations

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

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

- 21 -

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

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

N/M – Not Meaningful

(a)

Cost of services include salaries, wages and benefits, operating supplies, lease and rent expense and other operating costs.

(b)

We define EBITDA as income (loss) before interest, income taxes, depreciation and amortization and special charges, other income, minority interest and extraordinary items. EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles. Items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA is a key measure used by management to evaluate our operations and provides useful information to investors. EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated by operations, investing or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. Because EBITDA is not a measurement determined in accordance with

- 22 -

generally accepted accounting principles and is susceptible to varying calculations, EBITDA as presented may not be comparable to similarly titled measures of other companies.

         The following table reconciles EBITDA to net income:

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

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

Net Operating Revenues

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

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

         Outpatient Rehabilitation. Our outpatient rehabilitation net operating revenues increased 10.1% to $119.7 million for the three months ended March 31, 2002 compared to $108.7 million for the three months ended March 31, 2001. The increase was related to an increase in the number of visits, an increase in the net revenue per visit experienced at our outpatient rehabilitation locations and the additional revenues associated with two acquisitions that occurred in the third and fourth quarters of 2001.

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

- 23 -

Operating Expenses

         Our operating expenses increased by 22.1% to $241.9 million for the three months ended March 31, 2002 compared to $198.1 million for the three months ended March 31, 2001. Our operating expenses consist of our cost of services, general and administrative expense and bad debt expense. The increase in operating expenses was principally related to the internal development of new specialty hospitals that commenced operations in 2001, costs associated with the increased patient volumes and the operating expenses associated with the acquisitions that occurred in the third and fourth quarter of 2001. As a percentage of our net operating revenues, our operating expenses were 88.9% for the three months ended March 31, 2002 compared to 88.0% for the three months ended March 31, 2001. Cost of services as a percentage of operating revenues increased to 81.5% for the three months ended March 31, 2002 from 80.6% for the three months ended March 31, 2001. These costs primarily reflect our labor expenses. This increase reflects the higher costs of services as a percentage of revenue in our newly developed specialty hospitals. During the same time period, general and administrative expense as a percentage of net operating revenues decreased to 3.6% for the three months ended March 31, 2002 from 3.7% for the three months ended March 31, 2001. Our bad debt expense as a percentage of net operating revenues was 3.8% for the three months ended March 31, 2002 compared to 3.7% for the three months ended March 31, 2001.

EBITDA

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

         Specialty Acute Care Hospitals. EBITDA increased by 17.0% to $15.7 million for the three months ended March 31, 2002 compared to $13.4 million for the three months ended March 31, 2001. Our EBITDA margins declined to 10.5% for the three months ended March 31, 2002 from 11.8% for the three months ended March 31, 2001. The hospitals opened before January 1, 2001 and operated throughout both periods had EBITDA of $18.1 million, an increase of 28.8% over the EBITDA of these hospitals in the same period last year. This increase in same hospital EBITDA resulted from an increase in non-Medicare patient days and its associated increased revenue per patient day. Our EBITDA margin in these same store hospitals increased to 13.2% from 12.5%.

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

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

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Income from Operations

         Income from operations increased 25.1% to $24.0 million for the three months ended March 31, 2002 compared to $19.2 million for the three months ended March 31, 2001. The increase in income from operations resulted from the EBITDA increases described above, and a reduction in amortization expense of $2.3 million resulting from the adoption of FAS 142, and was offset by an increase in depreciation expense. The increase in depreciation expense resulted primarily from increases in depreciation on fixed asset additions that are principally related to new hospital development.

Interest Expense

         Interest expense decreased by $1.2 million to $6.8 million for the three months ended March 31, 2002 from $8.0 million for the three months ended March 31, 2001. The decline in interest expense is due to the lower debt levels outstanding in 2002 compared to 2001 and a lower effective interest rate in 2002. The lower debt levels resulted from the scheduled term amortization payments under our credit facility and the repayment of all borrowings under the revolving portion of the credit facility. All repayments have been made with cash flows generated through operations.

Minority Interests

         Minority interests in consolidated earnings decreased by 57.1% to $0.6 million for the three months ended March 31, 2002 compared to $1.4 million for the three months ended March 31, 2001. This decrease resulted from a smaller percentage of ownership held by minority interests. The terms of our agreements with some of our minority owners allowed them to sell their minority interests back to us upon the completion of our initial public offering which occurred on April 10, 2001. We completed the purchase of these minority interests between May 2001 and October 2001.

Income Taxes

         We recorded income tax expense of $6.5 million for the three months ended March 31, 2002. The expense represented an effective tax rate of 39.1% and approximates the federal and state statutory tax rates. We recorded income tax expense of $3.9 million for the three months ended March 31, 2001. This expense represented an effective tax rate of 39.0%.

Capital Resources and Liquidity

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

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

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

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Capital Resources

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

         We have a credit agreement with a group of banks. Our credit facility consists of a term facility of $87.8 million and a revolving credit facility of $152.4 million. As of March 31, 2002 we had borrowed all of our available loans under the U.S. and Canadian term loans and had availability to borrow an additional $148.0 million under our revolving facility subject to certain limitations. We have $4.4 million outstanding under letters of credit issued through the credit facility. The revolving facility terminates in 2005.

         Borrowings under the credit agreement bear interest at a fluctuating rate of interest based upon financial covenant ratio tests. As of March 31, 2002, our weighted average interest rate under our credit agreement was approximately 7.6%. A portion of the amount borrowed under our U.S. term loan portion of our credit agreement is hedged through an interest rate swap transaction, which fixes the rate paid through March 31, 2003. See Item 3, “Quantitative and Qualitative Disclosures on Market Risk” for a discussion of our floating interest rates on borrowings under our credit facility.

         We are required to pay a quarterly commitment fee at a rate that ranges from      .375% to .500%, based upon financial covenant ratio tests. This fee applies to unused commitments under the revolving credit facility. The terms of the credit agreement include various restrictive covenants. These covenants include:

• restrictions against incurring additional indebtedness,

• disposing of assets,

• incurring capital expenditures,

• making investments,

• restrictions against paying certain dividends,

• engaging in transactions with affiliates,

• incurring contingent obligations, and

• allowing or causing fundamental changes.

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

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

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

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

Inflation

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

Recent Accounting Pronouncement

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

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         In June 2001, the Financial Accounting Standards Board issued No. 142 “Goodwill and Other Intangible Assets” which we adopted on January 1, 2002. This accounting standard eliminates the periodic amortization of goodwill, and instead requires an annual impairment testing of goodwill and introduces the concept of indefinite life intangible assets. There was no asset impairment recognized by Select upon the adoption of this accounting standard. If the new standard had been in effect in 2001, pre-tax amortization expense in the first quarter of 2001 would have been approximately $2.3 million less. This would have increased fully diluted earnings per share by approximately $0.04.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures About Market Risk

         We are exposed to interest rate changes, primarily as a result of floating interest rates on borrowings under our credit facility. A change in interest rates by one percentage point on variable rate debt would have resulted in interest expense fluctuating approximately $0.1 million for the three months ended March 31, 2002. As required by our credit agreement, on March 30, 2001, we entered into an interest rate swap agreement that fixes the interest rate cost to us on a portion of the U.S. term loans outstanding under our credit facility for a period of four years. The swap became effective on April 27, 2001. In January 2002 we amended the swap to mature in March 2003. The fixed rate portion of all of our outstanding U.S. term loans was 91% as of March 31, 2002.

         Approximately 17% of our term-loan borrowings under our credit agreement are denominated in Canadian dollars. Although we are not required by our credit agreement to maintain a hedge on our foreign currency risk, we have entered into a five year agreement that allows us to limit the cost of Canadian dollars to a range of U.S.$0.6631 to U.S.$0.6711 per Canadian dollar to limit our risk on the potential fluctuation in the exchange rate of the Canadian dollar to the U.S. dollar.

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PART II    OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

         On August 10, 1998 a complaint in the U.S. District Court for the Eastern District of Pennsylvania was filed that named as defendants, NovaCare, Inc. (now known as NAHC, Inc.), other named defendants and 100 defendants who were to be named at a later time. This qui tam action sought triple damages and penalties under the False Claims Act against NAHC. The Department of Justice did not intervene in this action. The allegations involve, among other things, the distinction between individual and group billing in physical rehabilitation clinics that we acquired from NovaCare. On October 16, 2000 the relator plaintiff made a motion to amend the complaint to, among other things, add Select Medical Corporation and some of its subsidiaries acquired in the NovaCare acquisition as defendants in this case. This motion was granted in September of 2001. The amended complaint alleges that from about January 1, 1995 through the present, the defendants submitted false or fraudulent bills for physical therapy to various federal health programs. The United States Attorneys Office has asserted that because the complaint is being amended to add allegations against new defendants, it is entitled to a new period to determine whether to intervene in the new allegations. On January 3, 2002, NAHC and its related subsidiaries (including the subsidiaries acquired in the NovaCare acquisition) entered in to a settlement agreement with the relator plaintiff and the government, pursuant to which, in exchange for a payment by NAHC of $375,000, the parties settled all claims arising out of conduct that took place before Select Medical’s acquisition of the NovaCare subsidiaries that are defendants in the case. Claims against the Company and the NovaCare subsidiaries regarding conduct occurring after the NovaCare acquisition were not settled. As of April 30, 2002, the government had not advised the Company whether it intends to intervene in any remaining claims, and Select and the subsidiaries have not been served with the amended complaint. Based on a review of the amended complaint, we do not believe that this lawsuit is meritorious, and we intend to vigorously defend against this action. However, because of the uncertain nature of the litigation, we cannot predict the outcome of this matter.

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

         None.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

         Not applicable.

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

         None.

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ITEM 5.    OTHER INFORMATION

         None.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

         a.     Exhibits

         The exhibits to this report are listed in the Exhibit Index appearing on page 31 hereof.

         b.     Reports on Form 8-K

         None.

SIGNATURES

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

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

Dated: May 15, 2002

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EXHIBIT INDEX

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

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