SELECT MEDICAL CORP (Form: 10-Q, Received: 11/13/2006 09:13:31)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the Quarter Ended September 30, 2006


o		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 þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO þ

As of October 31, 2006, the Registrant’s Parent had outstanding 205,483,958 shares of common stock.

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 stockholder’s equity and comprehensive income	6

	Consolidated statements of cash flows	7

	Notes to consolidated financial statements	8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44

ITEM 4.	CONTROLS AND PROCEDURES	44

PART II	OTHER INFORMATION	45

ITEM 1.	LEGAL PROCEEDINGS	45

ITEM 1A.	RISK FACTORS	46

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	46

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	46

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	46

ITEM 5.	OTHER INFORMATION	46

ITEM 6.	EXHIBITS	46

SIGNATURES		47
Office Lease Agreement dated August 25, 2006
Certification of Chief Executive Officer
Certification of Senior Vice President and Chief Financial Officer
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
Certification of Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

PART I FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Select Medical Corporation

Consolidated Balance Sheets

(unaudited)

(in thousands, except share and per share amounts)


	December 31,		September 30,
	2005		2006
ASSETS
Current Assets:
Cash and cash equivalents	$	35,861	$	5,040
Restricted cash		6,345		5,247
Accounts receivable, net of allowance for doubtful accounts of $74,891 and $60,531 in 2005 and 2006, respectively		256,798		247,972
Prepaid income taxes		4,110		—
Current deferred tax asset		59,135		57,892
Current assets held for sale		13,876		—
Other current assets		19,725		16,847

Total Current Assets		395,850		332,998

Property and equipment, net		248,541		330,106
Goodwill		1,305,210		1,319,018
Other identifiable intangibles		86,789		81,456
Other assets held for sale		61,388		—
Other assets		65,591		62,518


Total Assets	$	2,163,369	$	2,126,096


LIABILITIES AND STOCKHOLDER’S EQUITY
Current Liabilities:
Bank overdrafts	$	19,355	$	7,531
Current portion of long-term debt and notes payable		6,516		6,309
Accounts payable		60,528		64,973
Accrued payroll		61,531		54,515
Accrued vacation		26,983		27,039
Accrued interest		25,230		12,704
Accrued professional liability		21,527		23,128
Accrued restructuring		390		252
Accrued other		69,046		65,140
Income taxes payable		—		22,346
Due to third party payors		12,175		9,006
Current liabilities held for sale		4,215		—

Total Current Liabilities		307,496		292,943

Long-term debt, net of current portion		1,315,764		1,231,039
Non-current deferred tax liability		25,771		39,198
Non-current liabilities held for sale		3,817		—

Total Liabilities		1,652,848		1,563,180

Commitments and Contingencies

Minority interest in consolidated subsidiary companies		4,356		2,285

Stockholder’s Equity:
Common stock, $0.01par value, 100 shares issued and outstanding		—		—
Capital in excess of par		440,799		443,635
Retained earnings		61,134		114,055
Accumulated other comprehensive income		4,232		2,941

Total Stockholder’s Equity		506,165		560,631


Total Liabilities and Stockholder’s Equity	$	2,163,369	$	2,126,096

The accompanying notes are an integral part of this statement.

Select Medical Corporation

Consolidated Statements of Operations

(unaudited)

(in thousands)


	For the Quarter Ended September 30,
	2005			2006
Net operating revenues	$	460,658		$	443,872


Costs and expenses:
Cost of services		363,480			362,070
General and administrative		27,221			9,762
Bad debt expense		4,378			5,333
Depreciation and amortization		11,828			12,394

Total costs and expenses		406,907			389,559


Income from operations		53,751			54,313

Other income and expense:
Other income (expense)		247			(3,124	)
Interest income		241			319
Interest expense		(25,467	)		(24,348	)


Income from continuing operations before minority interests and income taxes		28,772			27,160

Minority interest in consolidated subsidiary companies		494			369


Income from continuing operations before income taxes		28,278			26,791

Income tax expense		11,523			10,652


Income from continuing operations		16,755			16,139

Income from discontinued operations, net of tax		1,061			—


Net income	$	17,816		$	16,139

The accompanying notes are an integral part of this statement.

Select Medical Corporation
Consolidated Statements of Operations
(unaudited)
(in thousands)


	Predecessor			Successor
	Period from			Period from
	January 1			February 25			For the Nine
	through			through			Months Ended
	February 24,			September 30,			September 30,
	2005			2005			2006
Net operating revenues	$	277,736		$	1,122,748		$	1,405,756


Costs and expenses:
Cost of services		244,321			875,566			1,119,767
General and administrative		122,509			48,960			33,511
Bad debt expense		6,588			14,244			18,766
Depreciation and amortization		5,933			28,110			34,955

Total costs and expenses		379,351			966,880			1,206,999


Income (loss) from operations		(101,615	)		155,868			198,757

Other income and expense:
Loss on early retirement of debt		(42,736	)		—			—
Merger related charges		(12,025	)		—			—
Other income		267			658			918
Interest income		523			511			738
Interest expense		(4,651	)		(60,121	)		(72,615	)


Income (loss) from continuing operations before minority interests and income taxes		(160,237	)		96,916			127,798

Minority interest in consolidated subsidiary companies		330			1,350			1,095


Income (loss) from continuing operations before income taxes		(160,567	)		95,566			126,703

Income tax expense (benefit)		(59,794	)		38,623			51,278


Income (loss) from continuing operations		(100,773	)		56,943			75,425

Income from discontinued operations, net of tax (includes pre-tax gain of $13,950 in 2006)		522			3,367			10,018


Net income (loss)	$	(100,251	)	$	60,310		$	85,443

The accompanying notes are an integral part of this statement.

Select Medical Corporation

Consolidated Statement of Changes in Stockholder’s Equity and Comprehensive Income

(unaudited)

(in thousands)


										Accumulated
	Common		Common		Capital in					Other
	Stock		Stock Par		Excess of		Retained			Comprehensive			Comprehensive
	Issued		Value		Par		Earnings			Income			Income
Balance at December 31, 2005		—	$	—	$	440,799	$	61,134		$	4,232
Net income								85,443					$	85,443
Unrealized gain on interest rate swap, net of tax											527			527
Changes in foreign currency translation											1,013			1,013
Sale of foreign subsidiary											(2,831	)		(2,831	)

Total comprehensive income													$	84,152

Dividends to Holdings								(32,522	)
Contribution related to restricted stock award issuances by Holdings						2,836

Balance at September 30, 2006		—	$	—	$	443,635	$	114,055		$	2,941

The accompanying notes are an integral part of this statement.

Select Medical Corporation

Consolidated Statements of Cash Flows
(unaudited)

(in thousands)


	Predecessor			Successor
				Period from			For the Nine
	Period from			February 25			Months Ended
	January 1 through			through September			September 30,
	February 24, 2005			30, 2005			2006
Operating activities
Net income (loss)	$	(100,251	)	$	60,310		$	85,443
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		6,177			28,898			35,131
Provision for bad debts		6,661			14,425			18,853
Gain from sale of business		—			—			(13,950	)
Non-cash income from hedge		—			—			(918	)
Loss on early retirement of debt (non-cash)		7,977			—			—
Non-cash stock compensation expense		—			7,567			2,837
Minority interests		469			2,335			1,435
Loss on disposal of assets		—			715			1,418
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Accounts receivable		(48,976	)		(23,516	)		(10,811	)
Other current assets		1,816			(1,250	)		2,494
Other assets		(622	)		1,163			3,539
Accounts payable		5,250			2,484			4,300
Due to third-party payors		667			(2,598	)		(3,169	)
Accrued interest		(4,839	)		11,563			(12,526	)
Accrued expenses		204,748			(190,801	)		(9,991	)
Income taxes and deferred taxes		(60,021	)		31,441			33,562

Net cash provided by (used in) operating activities		19,056			(57,264	)		137,647


Investing activities
Purchases of property and equipment		(2,586	)		(70,459	)		(112,132	)
Earnout payments		—			—			(100	)
Proceeds from sale of business		—			—			76,806
Restricted cash		108			217			1,098
Acquisition of businesses, net of cash acquired		(108,279	)		(2,747	)		(3,261	)

Net cash used in investing activities		(110,757	)		(72,989	)		(37,589	)


Financing activities
Equity investment by Holdings		—			724,042			—
Proceeds from credit facility		—			780,000			—
Proceeds from senior subordinated notes		—			660,000			—
Repayment of senior subordinated notes		—			(350,000	)		—
Payment of deferred financing costs		—			(57,198	)		—
Costs associated with equity investment of Holdings		—			(8,686	)		—
Net repayments on credit facility debt		—			(62,900	)		(84,350	)
Principal payments on seller and other debt		(528	)		(4,004	)		(614	)
Dividends to Holdings		—			(9,396	)		(32,522	)
Repurchases of common stock and options		—			(1,687,994	)		—
Proceeds from issuance of common stock		1,023			—			—
Borrowing (repayment) of bank overdrafts		—			689			(11,824	)
Distributions to minority interests		(401	)		(1,240	)		(1,604	)

Net cash provided by (used in) financing activities		94			(16,687	)		(130,914	)


Effect of exchange rate changes on cash and cash equivalents		(149	)		584			35


Net decrease in cash and cash equivalents		(91,756	)		(146,356	)		(30,821	)

Cash and cash equivalents at beginning of period		247,476			155,720			35,861

Cash and cash equivalents at end of period	$	155,720		$	9,364		$	5,040


Supplemental Cash Flow Information
Cash paid for interest	$	10,630		$	41,803		$	81,139
Cash paid for taxes	$	1,502		$	8,931		$	21,840

The accompanying notes are an integral part of this statement.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

On February 24, 2005, Select Medical Corporation (the “Company”) merged with a subsidiary of Select Medical Holdings Corporation (“Holdings”), formerly known as EGL Holding Company, and became a wholly-owned subsidiary of Holdings (“Merger”). Generally accepted accounting principles require that any amounts recorded or incurred (such as goodwill and compensation expense) by the parent as a result of the Merger or for the benefit of the subsidiary be “pushed down” and recorded in the Company’s consolidated financial statements. The Company’s financial position and results of operations prior to the Merger are presented separately in the consolidated financial statements as “Predecessor” financial statements, while the Company’s financial position and results of operations following the Merger are presented as “Successor” financial statements. Due to the revaluation of assets as a result of purchase accounting associated with the Merger, the pre-merger financial statements are not comparable with those after the Merger in certain respects.

The unaudited condensed consolidated financial statements of the Company as of September 30, 2006 (Successor) and for the periods of January 1, 2005 to February 24, 2005 (Predecessor) and February 25, 2005 to September 30, 2005 (Successor), the three months ended September 30, 2005 (Successor) and the three and nine months ended September 30, 2006 (Successor) have been prepared in accordance with generally accepted accounting principles. In the opinion of management, such information contains all adjustments necessary for a fair statement of the results for such periods. All significant intercompany transactions and balances have been eliminated. The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2006.

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 condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2005 contained in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 20, 2006.

2. Accounting Policies

Use of Estimates

The preparation of consolidated 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 may differ from those estimates.

Reclassifications

The Company revised the classification of restricted cash from cash flows from financing activities to cash flows from investing activities for the periods of January 1, 2005 to February 24, 2005 (Predecessor) and February 25, 2005 to September 30, 2005 (Successor). In addition, certain reclassifications have been made to prior periods’ consolidated financial statements and disclosures to conform to current period presentation.

Recent Accounting Pronouncements

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on how to evaluate prior period financial statement misstatements for purposes of assessing their materiality in the current period. Correcting prior year financial statements for immaterial misstatements would not require amending previous filings; rather such corrections may be made in subsequent filings. The cumulative effect of initially applying SAB 108, if any, can be recorded as an adjustment to opening retained earnings. SAB 108 does not change the SEC staff’s previous positions regarding qualitative considerations in assessing the materiality of misstatements. SAB 108 is effective for the Company beginning in the fourth quarter of this fiscal year. The Company does not believe that SAB 108 will have a material impact on its financial statements.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company does not believe that the adoption of the provisions of SFAS No. 157 will materially impact its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires the employer to recognize the overfunded or underfunded status of a single-employer defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end balance sheet. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. The Company believes that the adoption of SFAS No. 158 will have no impact on its consolidated financial statements.

In July 2006, FASB issued Financial Accounting Standards Board Interpretation (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes.” FIN No. 48 is an interpretation of Statement of Financial Accounting Standards (“SFAS No. 109”), “Accounting for Income Taxes.” FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. This interpretation also provides guidance on the derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition of tax positions. The recognition threshold and measurement attribute is part of a two step tax position evaluation process prescribed in FIN No. 48. FIN No. 48 is effective after the beginning of an entity’s first fiscal year that begins after December 15, 2006. The Company is currently evaluating its uncertain tax positions as required under the accounting standard in order to implement the new standard during the first quarter of 2007. The Company has not yet determined the impact, if any, to its consolidated financial statements.

instruments to mitigate the risks inherent in servicing assets and servicing liabilities to account for those derivative instruments at fair value. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006 although early adoption is permitted. The Company has evaluated SFAS No. 156 and has determined that there is no impact to the consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and No. 140” (“SFAS No. 155”). SFAS No. 155 simplifies the accounting for certain hybrid financial instruments, eliminates the FASB’s interim guidance which provides that beneficial interests in securitized financial assets are not subject to the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and eliminates the restriction on the passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not anticipate that the implementation of this standard will have a material impact on its financial position, results of operations or cash flows.

3. Intangible Assets

Intangible assets consist of the following:


	Successor
	As of September 30, 2006
	Gross Carrying		Accumulated
	Amount		Amortization
	(in thousands)
Amortized intangible assets
Contract therapy relationships	$	20,456	$	(6,478	)
Non-compete agreements		20,809		(5,889	)

Total	$	41,265	$	(12,367	)


Indefinite-lived intangible assets
Goodwill	$	1,319,018
Trademarks		47,058
Certificates of need		3,608
Accreditations		1,892

Total	$	1,371,576

Amortization expense for intangible assets with finite lives follows:

Successor

Predecessor

Successor

Period

Three

Period from

from

Nine

Months

January 1

February

Months

Ended

through

25 through

Ended

September

February 24,

September

30, 2005

30, 2006

2005

30, 2005

30, 2006

(in thousands)

Amortization expense

2,580

1,953

576

6,019

5,858

Estimated amortization expense for intangible assets for each of the five years commencing January 1, 2006 will be approximately $7.8 million and primarily relates to the amortization of the value associated with the non-compete agreements entered into in connection with the acquisitions of Kessler Rehabilitation Corporation and SemperCare Inc. and the value assigned to the Company’s contract therapy relationships. The useful lives of the Kessler non-compete, SemperCare non-compete and the Company’s contract therapy relationships are approximately six, seven and five years, respectively.

The changes in the carrying amount of goodwill for the Company’s reportable segments for the nine months ended September 30, 2006 are as follows:


	Specialty		Outpatient
	Hospitals		Rehabilitation		Total
	(in thousands)
Balance as of December 31, 2005	$	1,221,776	$	83,434	$	1,305,210
Tax adjustments related to Merger		112		10,800		10,912
Goodwill acquired during year		299		1,201		1,500
Earnouts		—		100		100
Other		—		1,296		1,296

Balance as of September 30, 2006	$	1,222,187	$	96,831	$	1,319,018

In conjunction with recording the gain on sale of the Canadian Back Institute Limited (“CBIL”) (Note 6), the Company determined that deferred taxes should have been recorded as of the date of the Merger related to differences between the Company’s book and tax investment basis in CBIL. This adjustment was recorded in the first quarter of 2006 and is not considered to be material on a qualitative or quantitative basis.

4. Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income at December 31, 2005 consist of cumulative translation adjustment gains of $1.8 million, associated with the Company’s Canadian subsidiary which was sold on March 1, 2006 (Note 6) and a gain of $2.4 million, net of tax of $1.7 million, on an interest

rate swap transaction. At September 30, 2006, accumulated other comprehensive income consisted of a gain of $2.9 million, net of tax of $2.1 million, on an interest rate swap transaction.

5. Segment Information

The Company’s segments consist of (i) specialty hospitals and (ii) outpatient rehabilitation. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. All other primarily includes the Company’s general and administrative services. The Company evaluates performance of the segments based on Adjusted EBITDA. Adjusted EBITDA is defined as net income (loss) before interest, income taxes, stock compensation expense, long-term incentive compensation, depreciation and amortization, income from discontinued operations, loss on early retirement of debt, merger related charges, other income and minority interest.

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


	Successor
	Three Months Ended September 30, 2005
	Specialty		Outpatient
	Hospitals		Rehabilitation		All Other			Total
	(in thousands)
Net operating revenue	$	341,835	$	118,263	$	560		$	460,658
Adjusted EBITDA		77,571		15,302		(11,417	)		81,456
Total assets		1,589,460		516,697		33,235			2,139,392
Capital expenditures		13,814		324		113			14,251


	Successor
	Three Months Ended September 30, 2006
	Specialty		Outpatient
	Hospitals		Rehabilitation		All Other			Total
	(in thousands)
Net operating revenue	$	329,324	$	114,043	$	505		$	443,872
Adjusted EBITDA		60,812		15,737		(8,896	)		67,653
Total assets		1,773,586		254,865		97,645			2,126,096
Capital expenditures		38,671		876		771			40,318


	Predecessor
	Period from January 1 through February 24, 2005
	Specialty		Outpatient
	Hospitals		Rehabilitation		All Other			Total
	(in thousands)
Net revenue	$	202,781	$	73,344	$	1,611		$	277,736
Adjusted EBITDA		44,384		9,848		(7,701	)		46,531
Total assets		904,754		239,019		87,640			1,231,413
Capital expenditures		1,165		408		1,013			2,586


	Successor
	Period from February 25 through September 30, 2005
	Specialty		Outpatient
	Hospitals		Rehabilitation		All Other			Total
	(in thousands)
Net revenue	$	828,606	$	291,019	$	3,123		$	1,122,748
Adjusted EBITDA		190,927		42,566		(27,495	)		205,998
Total assets		1,589,460		516,697		33,235			2,139,392
Capital expenditures		66,943		937		2,579			70,459

	Successor
	Nine Months Ended September 30, 2006
	Specialty		Outpatient
	Hospitals		Rehabilitation		All Other			Total
	(in thousands)
Net revenue	$	1,049,768	$	353,974	$	2,014		$	1,405,756
Adjusted EBITDA		218,203		48,920		(30,574	)		236,549
Total assets		1,773,586		254,865		97,645			2,126,096
Capital expenditures		107,001		3,827		1,304			112,132

A reconciliation of net income (loss) to Adjusted EBITDA is as follows:


	Successor					Predecessor			Successor
	Three			Three		Period from			Period from			Nine
	Months			Months		January 1			February 25			Months
	Ended			Ended		through			through			Ended
	September			September		February			September			September
	30, 2005			30, 2006		24, 2005			30, 2005			30, 2006
	(in thousands)
Net income (loss)	$	17,816		$	16,139	$	(100,251	)	$	60,310		$	85,443
Income from discontinued operations, net of tax		(1,061	)		—		(522	)		(3,367	)		(10,018	)
Income tax expense (benefit)		11,523			10,652		(59,794	)		38,623			51,278
Minority interest		494			369		330			1,350			1,095
Interest expense, net		25,226			24,029		4,128			59,610			71,877
Other expense (income)		(247	)		3,124		(267	)		(658	)		(918	)
Merger related charges		—			—		12,025			—			—
Loss on early retirement of debt		—			—		42,736			—			—
Depreciation and amortization		11,828			12,394		5,933			28,110			34,955
Stock compensation expense:
Included in general and administrative		1,366			888		115,025			7,438			2,663
Included in cost of services		58			58		27,188			129			174
Long-term incentive compensation (1)		14,453			—		—			14,453			—

Adjusted EBITDA	$	81,456		$	67,653	$	46,531		$	205,998		$	236,549


1)		For the three months ended September 30, 2005 and for the period from February 25 through September 30, 2005, $14.5 million of long-term compensation expense was included in general administrative expense on the Company’s consolidated statement of operations.

6. Discontinued Operations

On December 23, 2005, the Company agreed to sell all of the issued and outstanding shares of its wholly-owned subsidiary, Canadian Back Institute Limited (“CBIL”), for approximately C$89.8 million (US$79.0 million). The sale was completed on March 1, 2006. CBIL operated 109 outpatient rehabilitation clinics in seven Canadian provinces. The Company operated all of its Canadian activity through CBIL. The purchase price is subject to adjustment based on the amount of net working capital and long term liabilities of CBIL and its subsidiaries on the closing date. CBIL’s assets and liabilities have been classified as held for sale at December 31, 2005 and its operating results have been classified as discontinued operations and cash flows have been included with continuing operations for the period from January 1, 2005 through February 24, 2005, the period from February 25, 2005 through September 30, 2005 and the three months ended September 30, 2005 and the nine months ended September 30, 2006. Previously, the operating results of this subsidiary were included in the Company’s outpatient rehabilitation segment.

Successor

Predecessor

Successor

Period from

For the Two

Three Months

January 1

February 25

Months

Ended

through

Ended

September 30,

February 24,

September

February 28,

2005

30, 2005

2006 (1)

(in thousands)

Net revenue

17,040

10,051

41,702

12,902

Income from discontinued operations before income tax expense

1,708

950

5,563

15,547

Income tax expense

647

428

2,196

5,529

Income from discontinued operations, net of tax

1,061

522

3,367

10,018


(1)		The income from discontinued operations before income taxes includes a gain on sale of approximately $14.0 million.

7. Commitments and Contingencies

Litigation

On August 24, 2004, Clifford C. Marsden and Ming Xu filed a purported class action complaint in the United States District Court for the Eastern District of Pennsylvania on behalf of the public stockholders of the Company against Martin F. Jackson, Robert A. Ortenzio, Rocco A. Ortenzio, Patricia A. Rice and the Company. In February 2005, the Court appointed James Shaver, Frank C. Bagatta and Capital Invest, die Kapitalanlagegesellschaft der Bank Austria Creditanstalt Gruppe GmbH as lead plaintiffs (“Lead Plaintiffs”).

individual officers’ preliminary motion to dismiss the amended complaint. The Company and the individual officers have answered the amended complaint and the case has moved to the discovery and class certification phase. The Company does not believe this claim will have a material adverse effect on its financial position or results of operations. However, due to the uncertain nature of such litigation, the Company cannot predict the outcome of this matter.

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

To cover claims arising out of the operations of the Company’s hospitals and outpatient rehabilitation facilities, the Company maintains professional malpractice liability insurance and general liability insurance. The Company also maintains umbrella liability insurance covering claims which, due to their nature or amount, are not covered by or not fully covered by the Company’s other insurance policies. These insurance policies also do not generally cover punitive damages and are subject to various deductibles and policy limits. Significant legal actions as well as the cost and possible lack of available insurance could subject the Company to substantial uninsured liabilities.

Health care providers are often subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal (hence, usually unknown to the defendant) for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. A qui tam lawsuit against the Company has been filed in the United States District Court for the District of Nevada, but because the action is still under seal, the Company does not know the details of the allegations or the relief sought. As is required by law, the federal government is conducting an investigation of matters alleged by this complaint. The Company has received subpoenas for patient records and other documents apparently related to the federal government’s investigation. The Company believes that this investigation involves the billing practices of certain of its subsidiaries that provide outpatient services to beneficiaries of Medicare and other federal health care programs. The three relators in this qui tam lawsuit are two former employees of the Company’s Las Vegas, Nevada subsidiary who were terminated by the Company in 2001 and a former employee of the Company’s Florida subsidiary who the Company asked to resign. The Company sued the former Las Vegas employees in state court in Nevada in 2001 for, among other things, return of misappropriated funds, and the Company’s lawsuit has recently been transferred to the federal court in Las Vegas. While the government has investigated but chosen not to intervene in two previous qui tam lawsuits filed against the Company, the Company cannot provide assurance that the government will not intervene in the Nevada qui tam case or any other existing or future qui tam lawsuit against the Company. While litigation is inherently uncertain, the Company believes, based on its prior experiences with qui tam cases and the limited information currently available to the Company, that the Nevada qui tam action will not have a material adverse effect on the Company.

Other

At September 30, 2006, the Company has outstanding commitments under construction contracts at six long-term acute care properties and one of its inpatient rehabilitation facilities totaling $27.2 million.

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

The 7 ⁵ / ₈ % Senior Subordinated Notes are fully and unconditionally guaranteed on a senior subordinated basis by all of the Company’s wholly-owned subsidiaries (the “Subsidiary Guarantors”). Certain of the Company’s subsidiaries did not guarantee the 7 ⁵ / ₈ % Senior Subordinated Notes (the “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 September 30, 2006 (Successor) and for the period January 1, 2005 through February 24, 2005 (Predecessor), February 25, 2005 through September 30, 2005 (Successor), and the nine months ended September 30, 2006 (Successor).

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 at September 30, 2006:


Caritas Rehab Services, LLC		North Andover Physical Therapy, Inc.
Cupertino Medical Center, P.C.		Ocala Regional Physical Therapy Center, Ltd.
Elizabethtown Physical Therapy		OccuMed East, P.C.
Jeff Ayres, PT Therapy Center, Inc.		Ohio Occupational Health, P.C., Inc.
Jeffersontown Physical Therapy, LLC		Partners in Physical Therapy, PLLC
Kentucky Orthopedic Rehabilitation, LLC		Philadelphia Occupational Health, P.C.
Kessler Core PT, OT and Speech Therapy at New York, LLC		Rehabilitation Physician Services, P.C. Robinson & Associates, P.C.
Langhorne, P.C.		Select Specialty Hospital – Central Pennsylvania, L.P.
Lester OSM, P.C.		Select Specialty Hospital – Houston, L.P.
Louisville Physical Therapy, P.S.C.		Select Specialty Hospital – Gulf Coast, Inc.
Medical Information Management Systems, LLC		Therex, P.C.
Metropolitan West Physical Therapy and Sports Medicine Services Inc.		TJ Corporation I, LLC U.S. Regional Occupational Health II, P.C.
MKJ Physical Therapy, Inc.		U.S. Regional Occupational Health II of New Jersey, P.C.
New York Physician Services, P.C.


	Select Medical Corporation
	Condensed Consolidating Balance Sheet
	September 30, 2006
	(unaudited)
	Successor
	Select Medical
	Corporation (Parent			Subsidiary			Non-Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	( in thousands)
Assets
Current Assets:
Cash and cash equivalents	$	751		$	3,036		$	1,253		$	—		$	5,040
Restricted cash		5,247			—			—			—			5,247
Accounts receivable, net		(264	)		230,745			17,491			—			247,972
Current deferred tax asset		25,315			29,965			2,612			—			57,892
Other current assets		1,150			14,096			1,601			—			16,847

Total Current Assets		32,199			277,842			22,957			—			332,998

Property and equipment, net		10,104			290,891			29,111			—			330,106
Investment in affiliates		1,736,608			63,624			—			(1,800,232	) (a)		—
Goodwill		—			1,319,018			—			—			1,319,018
Other identifiable intangibles		—			81,456			—			—			81,456
Other assets		58,426			3,545			547			—			62,518


Total Assets	$	1,837,337		$	2,036,376		$	52,615		$	(1,800,232	)	$	2,126,096


Liabilities and Stockholder’s Equity
Current Liabilities:
Bank overdrafts	$	7,531		$	—		$	—		$	—		$	7,531
Current portion of long-term debt and notes payable		5,920			389			—			—			6,309
Accounts payable		3,449			57,789			3,735			—			64,973
Intercompany accounts		272,910			(239,777	)		(33,133	)		—			—
Accrued payroll		1,322			53,020			173			—			54,515
Accrued vacation		2,870			22,014			2,155			—			27,039
Accrued interest		12,704			—			—			—			12,704
Accrued professional liability		23,128			—			—			—			23,128
Accrued restructuring		—			252			—			—			252
Accrued other		42,466			20,636			2,038			—			65,140
Due to third party payors		—			8,730			276			—			9,006
Income taxes		(15,616	)		38,859			(897	)		—			22,346

Total Current Liabilities		356,684			(38,088	)		(25,653	)		—			292,943

Long-term debt, net of current portion		913,361			291,426			26,252			—			1,231,039
Noncurrent deferred tax liability		6,661			31,467			1,070			—			39,198

Total Liabilities		1,276,706			284,805			1,669			—			1,563,180

Commitments and Contingencies

Minority interest in consolidated subsidiary companies		—			—			2,285			—			2,285

Stockholder’s Equity:
Common stock		—			—			—			—			—
Capital in excess of par		443,635			—			—			—			443,635
Retained earnings		114,055			177,267			30,088			(207,355	) (b)		114,055
Subsidiary investment		—			1,574,304			18,573			(1,592,877	) (a)(b)		—
Accumulated other comprehensive income		2,941			—			—			—			2,941

Total Stockholder’s Equity		560,631			1,751,571			48,661			(1,800,232	)		560,631


Total Liabilities and Stockholder’s Equity	$	1,837,337		$	2,036,376		$	52,615		$	(1,800,232	)	$	2,126,096


(a)		Elimination of investments in subsidiaries.

(b)		Elimination of investments in subsidiaries’ earnings.


	Select Medical Corporation
	Condensed Consolidating Statement of Operations
	For the Nine Months Ended September 30, 2006
	(unaudited)
	Successor
	Select Medical						Non-
	Corporation (Parent			Subsidiary			Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Net operating revenues	$	474		$	1,288,351		$	116,931		$	—		$	1,405,756


Costs and expenses:
Cost of services		174			1,022,233			97,360			—			1,119,767
General and administrative		33,342			169			—			—			33,511
Bad debt expense		—			17,736			1,030			—			18,766
Depreciation and amortization		1,841			30,688			2,426			—			34,955

Total costs and expenses		35,357			1,070,826			100,816			—			1,206,999


Income (loss) from operations		(34,883	)		217,525			16,115			—			198,757

Other income and expense:
Intercompany interest and royalty fees		(46,508	)		46,212			296			—			—
Intercompany management fees		124,023			(120,852	)		(3,171	)		—			—
Other income		918			—			—			—			918
Interest income		700			38			—			—			738
Interest expense		(55,340	)		(16,180	)		(1,095	)		—			(72,615	)


Income (loss) before minority interests and income taxes		(11,090	)		126,743			12,145			—			127,798

Minority interest in consolidated subsidiary companies		—			—			1,095			—			1,095


Income (loss) from continuing operations before income taxes		(11,090	)		126,743			11,050			—			126,703

Income tax expense (benefit)		(264	)		50,574			968			—			51,278


Income (loss) from continuing operations		(10,826	)		76,169			10,082			—			75,425

Income from discontinued operations, net of tax		9,068			—			950			—			10,018

Equity in earnings of subsidiaries		87,201			10,082			—			(97,283	)		—


Net income	$	85,443		$	86,251		$	11,032		$	(97,283	)	$	85,443

-19-


	Select Medical Corporation
	Condensed Consolidating Statement of Cash Flows
	For the Nine Months Ended September 30, 2006
	Successor
	Select Medical						Non-
	Corporation (Parent			Subsidiary			Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Operating activities
Net income	$	85,443		$	86,251		$	11,032		$	(97,283	) (a)	$	85,443
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		1,841			30,688			2,602			—			35,131
Provision for bad debts		—			17,736			1,117			—			18,853
Gain from sale of business		(13,950	)		—			—			—			(13,950	)
Non cash income from hedge		(918	)		—			—			—			(918	)
Non-cash compensation expense		2,837			—			—			—			2,837
Minority interests		—			—			1,435			—			1,435
Loss on disposal of assets		232			1,132			54			—			1,418
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Equity in earnings of subsidiaries		(87,201	)		(10,082	)		—			97,283	(a)		—
Intercompany		41,724			(6,275	)		(35,449	)		—			—
Accounts receivable		264			(15,596	)		4,521			—			(10,811	)
Other current assets		761			(1,456	)		3,189			—			2,494
Other assets		(1,037	)		3,312			1,264			—			3,539
Accounts payable		1,458			6,810			(3,968	)		—			4,300
Due to third-party payors		(6,099	)		(5,423	)		8,353			—			(3,169	)
Accrued interest		(12,526	)		—			—			—			(12,526	)
Accrued expenses		3,522			(12,206	)		(1,307	)		—			(9,991	)
Income taxes		33,562			—			—			—			33,562

Net cash provided by (used in) operating activities		49,913			94,891			(7,157	)		—			137,647


Investing activities
Purchases of property and equipment		(1,094	)		(98,879	)		(12,159	)		—			(112,132	)
Proceeds from sale of business		76,806			—			—			—			76,806
Earnout payments		—			(100	)		—			—			(100	)
Restricted cash		1,098			—			—			—			1,098
Acquisition of businesses, net of cash acquired		—			(1,239	)		(2,022	)		—			(3,261	)

Net cash provided by (used in) investing activities		76,810			(100,218	)		(14,181	)		—			(37,589	)


Financing activities
Net repayments on credit facility		(84,350	)		—			—			—			(84,350	)
Dividends to Holdings		(32,522	)		—			—			—			(32,522	)
Intercompany debt reallocation		(14,049	)		5,309			8,740			—			—
Principal payments on seller and other debt		—			(577	)		(37	)		—			(614	)
Payment of bank overdrafts		(11,824	)		—			—			—			(11,824	)
Distributions to minority interests		—			—			(1,604	)		—			(1,604	)

Net cash provided by (used in) financing activities		(142,745	)		4,732			7,099			—			(130,914	)


Effect of exchange rate changes on cash and cash equivalents		35			—			—			—			35


Net decrease in cash and cash equivalents		(15,987	)		(595	)		(14,239	)		—			(30,821	)

Cash and cash equivalents at beginning of period		16,738			3,631			15,492			—			35,861

Cash and cash equivalents at end of period	$	751		$	3,036		$	1,253		$	—		$	5,040


(a)		Elimination of equity in earnings of subsidiary.

-20-


	Select Medical Corporation
	Condensed Consolidating Statement of Operations
	For the Period January 1 through February 24, 2005
	(unaudited)
	Predecessor
	Select Medical						Non-
	Corporation (Parent			Subsidiary			Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Net operating revenues	$	28		$	248,857		$	28,851		$	—		$	277,736


Costs and expenses:
Cost of services		27,188			193,323			23,810			—			244,321
General and administrative		121,956			553			—			—			122,509
Bad debt expense		—			6,223			365			—			6,588
Depreciation and amortization		371			5,025			537			—			5,933

Total costs and expenses		149,515			205,124			24,712			—			379,351


Income (loss) from operations		(149,487	)		43,733			4,139			—			(101,615	)

Other income and expense:
Intercompany interest and royalty fees		(6,261	)		6,221			40			—			—
Intercompany management fees		213,822			(213,436	)		(386	)		—			—
Loss on early retirement of debt		(42,736	)		—			—			—			(42,736	)
Merger related charges		(12,025	)		—			—			—			(12,025	)
Other income		267			—			—			—			267
Interest income		294			229			—			—			523
Interest expense		(1,433	)		(2,953	)		(265	)		—			(4,651	)


Income (loss) before minority interests and income taxes		2,441			(166,206	)		3,528			—			(160,237	)

Minority interest in consolidated subsidiary companies		—			7			323			—			330


Income (loss) from continuing operations before income taxes		2,441			(166,213	)		3,205			—			(160,567	)

Income tax expense (benefit)		130			(59,937	)		13			—			(59,794	)


Income (loss) from continuing operations		2,311			(106,276	)		3,192			—			(100,773	)

Income from discontinued operations, net of tax		—			—			522			—			522

Equity in earnings of subsidiaries		(102,562	)		3,192			—			99,370	(a)		—


Net income (loss)	$	(100,251	)	$	(103,084	)	$	3,714		$	99,370		$	(100,251	)


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

-21-


	Select Medical Corporation
	Condensed Consolidating Statement of Operations
	For the Period February 25 through September 30, 2005
	Successor
	Select Medical						Non-
	Corporation (Parent			Subsidiary			Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Net operating revenues	$	10		$	1,017,218		$	105,520		$	—		$	1,122,748


Costs and expenses:
Cost of services		129			789,232			86,205			—			875,566
General and administrative		46,950			2,010			—			—			48,960
Bad debt expense		—			13,264			980			—			14,244
Depreciation and amortization		5,299			20,790			2,021			—			28,110

Total costs and expenses		52,378			825,296			89,206			—			966,880


Income (loss) from operations		(52,368	)		191,922			16,314			—			155,868

Other income and expense:
Intercompany interest and royalty fees		(18,387	)		18,210			177			—			—
Intercompany management fees		112,202			(109,833	)		(2,369	)		—			—
Other income		658			—			—			—			658
Interest income		446			65			—			—			511
Interest expense		(48,007	)		(11,326	)		(788	)		—			(60,121	)


Income (loss) before minority interests and income taxes		(5,456	)		89,038			13,334			—			96,916

Minority interest in consolidated subsidiary companies		—			121			1,229			—			1,350


Income (loss) before income taxes		(5,456	)		88,917			12,105			—			95,566

Income tax expense		25,296			12,734			593			—			38,623


Income (loss) from continuing operations		(30,752	)		76,183			11,512			—			56,943

Income from discontinued operations, net of tax		—			—			3,367			—			3,367

Equity in earnings of subsidiaries		91,062			11,512			—			(102,574	) (a)		—


Net income	$	60,310		$	87,695		$	14,879		$	(102,574	)	$	60,310


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

-22-


	Select Medical Corporation
	Condensed Consolidating Statement of Cash Flows
	For the Period January 1 through February 24, 2005
	(unaudited)
	Predecessor
	Select Medical
	Corporation (Parent			Subsidiary			Non-Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Operating activities
Net income (loss)	$	(100,251	)	$	(103,084	)	$	3,714		$	99,370	(a)	$	(100,251	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		371			5,025			781			—			6,177
Provision for bad debts		—			6,223			438			—			6,661
Loss on early retirement of debt (non-cash)		7,977			—			—			—			7,977
Minority interests		—			7			462			—			469
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Equity in earnings of subsidiaries		102,562			(3,192	)		—			(99,370	) (a)		—
Intercompany		(9,581	)		12,090			(2,509	)		—			—
Accounts receivable		(133	)		(47,567	)		(1,276	)		—			(48,976	)
Other current assets		1,899			(374	)		291			—			1,816
Other assets		8,375			(9,045	)		48			—			(622	)
Accounts payable		(296	)		6,128			(582	)		—			5,250
Due to third-party payors		—			3,953			(3,286	)		—			667
Accrued interest		(4,839	)		—			—			—			(4,839	)
Accrued expenses		52,042			152,793			(87	)		—			204,748
Income and deferred taxes		(59,190	)		—			(831	)		—			(60,021	)

Net cash provided by (used in) operating activities		(1,064	)		22,957			(2,837	)		—			19,056


Investing activities
Purchases of property and equipment		(305	)		(2,045	)		(236	)		—			(2,586	)
Restricted cash		108			—			—			—			108
Acquisition of businesses, net of cash acquired		—			(105,092	)		(3,187	)		—			(108,279	)

Net cash used in investing activities		(197	)		(107,137	)		(3,423	)		—			(110,757	)


Financing activities
Intercompany debt reallocation		(2,964	)		63			2,901			—			—
Principal payments on seller and other debt		—			(528	)		—			—			(528	)
Proceeds from issuance of common stock		1,023			—			—			—			1,023
Distributions to minority interests		—			—			(401	)		—			(401	)

Net cash provided by (used in) financing activities		(1,941	)		(465	)		2,500			—			94


Effect of exchange rate changes on cash and cash equivalents		(149	)		—			—			—			(149	)


Net decrease in cash and cash equivalents		(3,351	)		(84,645	)		(3,760	)		—			(91,756	)

Cash and cash equivalents at beginning of period		161,704			74,641			11,131			—			247,476

Cash and cash equivalents at end of period	$	158,353		$	(10,004	)	$	7,371		$	—		$	155,720


(a)		Elimination of equity in earnings of subsidiary.

-23-


	Select Medical Corporation
	Condensed Consolidating Statement of Cash Flows
	For the Period February 25 through September 30, 2005
	Successor
	Select Medical
	Corporation (Parent			Subsidiary			Non-Guarantor
	Company Only)			Guarantors			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Operating activities
Net income	$	60,310		$	87,695		$	14,879		$	(102,574	) (a)	$	60,310
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		5,299			20,790			2,809			—			28,898
Provision for bad debts		—			13,264			1,161			—			14,425
Non cash compensation expense		7,567			—			—			—			7,567
Other non cash expenses		—			715			—			—			715
Minority interests		—			121			2,214			—			2,335
Changes in operating assets and liabilities, net of effects from acquisition of businesses:
Equity in earnings of subsidiaries		(91,062	)		(11,512	)		—			102,574	(a)		—
Intercompany		(92,807	)		93,076			(269	)					—
Accounts receivable		(171	)		(19,433	)		(3,912	)		—			(23,516	)
Other current assets		(554	)		1,007			(1,703	)		—			(1,250	)
Other assets		2,598			(837	)		(598	)		—			1,163
Accounts payable		(182	)		2,018			648			—			2,484
Due to third-party payors		49			(2,023	)		(624	)		—			(2,598	)
Accrued interest		11,563			—			—			—			11,563
Accrued expenses		(64,056	)		(127,293	)		548			—			(190,801	)
Income taxes		25,684			—			5,757			—			31,441

Net cash provided by (used in) operating activities		(135,762	)		57,588			20,910			—			(57,264	)


Investing activities
Purchases of property and equipment, net		(1,065	)		(60,413	)		(8,981	)					(70,459	)
Restricted cash		217			—			—			—			217
Acquisition of businesses, net of cash acquired		—			(2,747	)		—			—			(2,747	)

Net cash used in investing activities		(848	)		(63,160	)		(8,981	)		—			(72,989	)


Financing activities
Equity investment by Holdings		724,042			—			—			—			724,042
Proceeds from credit facility		780,000			—			—			—			780,000
Proceeds from senior subordinated notes		660,000			—			—			—			660,000
Repayments on credit facility debt		(62,900	)		—			—			—			(62,900	)
Dividends to Holdings		(9,396	)		—			—			—			(9,396	)
Repayment of senior subordinated notes		(350,000	)		—			—			—			(350,000	)
Deferred financing costs		(57,198	)		—			—			—			(57,198	)
Repurchases of common stock and options		(1,687,994	)		—			—			—			(1,687,994	)
Costs associated with equity investment of Holdings		(8,686	)		—			—			—			(8,686	)
Intercompany debt reallocation		(7,936	)		12,415			(4,479	)		—			—
Principal payments on seller and other debt		(340	)		(3,615	)		(49	)		—			(4,004	)
Proceeds from bank overdrafts		689			—			—			—			689
Distributions to minority interests		—			—			(1,240	)					(1,240	)

Net cash provided by (used in) financing activities		(19,719	)		8,800			(5,768	)		—			(16,687	)


Effect of exchange rate changes on cash and cash equivalents		584			—			—						584


Net increase (decrease) in cash and cash equivalents		(155,745	)		3,228			6,161			—			(146,356	)

Cash and cash equivalents at beginning of period		158,353			(10,004	)		7,371			—			155,720

Cash and cash equivalents at end of period	$	2,608		$	(6,776	)	$	13,532		$	—		$	9,364


(a)		Elimination of equity in earnings of subsidiary.

-24-

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

You should read this discussion together with our unaudited consolidated financial statements and the accompanying notes.

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:

	•		compliance with the Medicare “hospital within a hospital” regulation changes will require increased capital expenditures and may have an adverse effect on our future net operating revenues and profitability;

	•		changes in government reimbursement for our services may have an adverse effect on our future net operating revenues and profitability, such as the regulations adopted by the Centers for Medicare & Medicaid Services, also known as CMS, on May 2, 2006;

	•		the failure of our long-term acute care hospitals to maintain their status as such may cause our net operating revenues and profitability to decline;

	•		the failure of our facilities operated as “hospitals within hospitals” to qualify as hospitals separate from their host hospitals may cause our net operating revenues and profitability to decline;

	•		implementation of modifications to the admissions policies for our inpatient rehabilitation facilities, as required to achieve compliance with Medicare guidelines, may result in a loss of patient volume at these hospitals and, as a result, may reduce our future net operating revenues and profitability;

	•		implementation of annual caps that limit the amounts that can be paid for outpatient therapy services rendered to any Medicare beneficiary may reduce our future net operating revenues and profitability;

	•		changes in applicable regulations or a government investigation or assertion that we have violated applicable regulations may result in increased costs or sanctions that reduce our net operating revenues and profitability;

	•		integration of recently acquired operations and future acquisitions may prove difficult or unsuccessful, use significant resources or expose us to unforeseen liabilities;

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

	•		the failure to maintain established relationships with the physicians in our markets could reduce our net operating revenues and profitability;

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

	•		competition may limit our ability to grow and result in a decrease in our net operating revenues and profitability;

	•		the loss of key members of our management team could significantly disrupt our operations; and

	•		the effect of claims asserted against us or lack of adequate available insurance could subject us to substantial uninsured liabilities.

Overview

We are a leading operator of specialty hospitals in the United States. We are also a leading operator of outpatient rehabilitation clinics in the United States. As of September 30, 2006, we operated 93 long-term acute care hospitals in 26 states, four acute medical rehabilitation hospitals which are certified by Medicare as inpatient rehabilitation facilities in New Jersey, and 605 outpatient rehabilitation clinics in 24 states and the District of Columbia. We also provide medical rehabilitation services on a contract basis at nursing homes, hospitals, assisted living and senior care centers, schools and work sites. We began operations in 1997 under the leadership of our current management team.

We manage our company through two business segments, our specialty hospital segment and our outpatient rehabilitation segment. We had net operating revenues of $1,405.8 million for the nine months ended September 30, 2006. Of this total, we earned approximately 75% of our net operating revenues from our specialty hospitals and approximately 25% from our outpatient rehabilitation business.

Our specialty hospital segment consists of hospitals designed to serve the needs of long-term stay acute patients and hospitals designed to serve patients that require intensive medical rehabilitation care. Patients in our long-term acute care hospitals typically suffer from serious and often complex medical conditions that require a high degree of care. Patients in our inpatient rehabilitation facilities typically suffer from debilitating injuries, including traumatic brain and spinal cord injuries, and require rehabilitation care in the form of physical and vocational rehabilitation services. Our outpatient rehabilitation business consists of clinics and contract services that provide physical, occupational and speech rehabilitation services. Our outpatient rehabilitation patients are typically diagnosed with musculoskeletal impairments that restrict their ability to perform normal activities of daily living.

Recent Trends and Events

CBIL Sale

On March 1, 2006, we sold our wholly-owned subsidiary, Canadian Back Institute Limited (“CBIL”), for approximately C$89.8 million in cash (US$79.0 million). As of December 31, 2005, CBIL operated 109 outpatient rehabilitation clinics in seven Canadian provinces. We conducted all of our Canadian operations through CBIL. The purchase price is subject to a post-closing adjustment based on the amount of net working capital and long term liabilities of CBIL and its subsidiaries on the closing date. The financial results of CBIL have been reclassified as discontinued operations for all periods presented in this report, and its assets and liabilities have been reclassified as held for sale on our December 31, 2005 balance sheet. We have recognized a gain on sale (net of tax) of $9.1 million in the first quarter ended March 31, 2006.

Third Quarter Ended September 30, 2006

For the three months ended September 30, 2006, our net operating revenues decreased 3.6% to $443.9 million compared to $460.7 million for the three months ended September 30, 2005. This decrease in net operating revenues was attributable to a decline in both our specialty hospital net operating revenues and our outpatient rehabilitation net operating revenues. The decline in our specialty hospital net operating revenues is primarily a result of a decrease in our Medicare net revenues due to LTACH regulatory changes that have reduced the payment rates and a decline in Medicare volume. The decline in our outpatient net operating revenues is due to a decline in the number of clinics we operate and the volume of visits occurring at the operating clinics. We realized income from operations for the three months ended September 30, 2006 of $54.3 million compared to $53.8 million for the three months ended September 30, 2005. Interest expense for the three

months ended September 30, 2006 was $24.3 million compared to $25.5 million for the three months ended September 30, 2005.

For the nine months ended September 30, 2006, our net operating revenues increased 0.4% to $1,405.8 million compared to $1,400.5 million for the combined nine months ended September 30, 2005. This increase in net operating revenues was attributable to a 1.8% increase in our specialty hospital net operating revenues offset by a 2.9% decline in our outpatient rehabilitation net operating revenues that resulted from a decline in the number of clinics we operate and in the volume of visits occurring at the operating clinics. We had income from operations for the nine months ended September 30, 2006 of $198.8 million compared to $54.3 million for the combined nine months ended September 30, 2005. For the combined nine month period ended September 30, 2005, we incurred $149.8 million of stock compensation costs as a result of the Merger. Interest expense for the nine months ended September 30, 2006 was $72.6 million compared to $64.8 million for the combined nine months ended September 30, 2005. This increase resulted from the significant increase in Merger related debt that occurred on February 25, 2005.

Our cash flow from operations provided $137.6 million of cash for the nine months ended September 30, 2006.

Regulatory Changes

On May 2, 2006, CMS released its final annual payment rate updates for the 2007 LTCH-PPS rate year (affecting discharges and cost reporting periods beginning on or after July 1, 2006 and before July 1, 2007). The May 2006 final rule made several changes to LTCH-PPS payment methodologies and amounts which affect our long-term acute care hospitals.

For discharges occurring on or after July 1, 2006, the rule changes the payment methodology for Medicare patients with a length of stay less than or equal to five-sixths of the geometric average length of stay for each LTC-DRG (referred to as “short-stay outlier” or “SSO” cases). Previously, payment for these patients was based on the lesser of (1) 120 percent of the cost of the case; (2) 120 percent of the LTC-DRG specific per diem amount multiplied by the patient’s length of stay; or (3) the full LTC-DRG payment. The final rule modifies the limitation in clause (1) above to reduce payment for SSO cases to 100 percent (rather than 120 percent) of the cost of the case. The final rule also adds a fourth limitation, capping payment for SSO cases at a per diem rate derived from blending 120 percent of the LTC-DRG specific per diem amount with a per diem rate based on the general acute care hospital inpatient prospective payment system (“IPPS”). Under this methodology, as a patient’s length of stay increases, the percentage of the per diem amount based upon the IPPS component will decrease and the percentage based on the LTC-DRG component will increase.

In addition, for discharges occurring on or after July 1, 2006, the final rule provides for (i) a zero-percent update for the 2007 LTCH-PPS rate year to the LTCH-PPS standard federal rate used as a basis for LTCH-PPS payments; (ii) the elimination of the surgical case exception to the three-day or less interruption of stay policy, under which surgical exception Medicare reimburses a general acute care hospital directly for surgical services furnished to a long-term acute care hospital patient during a brief interruption of stay from the long-term acute care hospital, rather than requiring the long-term acute care hospital to bear responsibility for such surgical services; and (iii) increasing the costs that a long-term acute care hospital must bear before Medicare will make additional payments for a case under its high-cost outlier policy for the 2007 LTCH-PPS rate year.

CMS estimates that the changes in the May 2006 final rule will result in an approximately 3.7 percent decrease in LTCH Medicare payments-per-discharge as compared to the 2006 rate year, largely attributable to the revised SSO payment methodology. Based upon our historical Medicare patient volumes and revenues, we expect that

the May 2006 final rule will reduce Medicare revenues associated with SSO cases and high cost outlier cases to our long-term acute care hospitals by approximately $30.0 million on an annual basis. For the three months ended September 30, 2006, we estimate the reduction in Medicare payments for discharges occurring during this period related to the rule change approximated $7.2 million.

Additionally, had CMS updated the LTCH-PPS standard federal rate by the 2007 estimated market basket index of 3.4 percent rather than applying the zero-percent update, we estimate that we would have received approximately $31.0 million in additional annual Medicare revenues, based on our historical Medicare patient volumes and revenues (such revenues would have been paid to our hospitals for discharges beginning on or after July 1, 2006).

On August 11, 2004, CMS published final regulations applicable to long-term acute care hospitals that are operated as “hospitals within hospitals” or as “satellites” (collectively referred to as “HIHs”). HIHs are separate hospitals located in space leased from, and located in, general acute care hospitals, known as “host” hospitals. As of September 30, 2006, we operated 93 long-term acute care hospitals, 82 of which operated as HIHs. Effective for hospital cost reporting periods beginning on or after October 1, 2004, subject to certain exceptions, the final regulations provide lower rates of reimbursement to HIHs for those Medicare patients admitted from their hosts that are in excess of a specified percentage threshold. For HIHs opened after October 1, 2004, the Medicare admissions threshold has been established at 25%. For HIHs that meet specified criteria and were in existence as of October 1, 2004, including all of our existing HIHs, the Medicare admissions thresholds will be phased-in over a four-year period starting with hospital cost reporting periods beginning on or after October 1, 2004, as follows: (i) for discharges during the cost reporting period beginning on or after October 1, 2004 and before October 1, 2005, the Medicare admissions threshold is the Fiscal 2004 Percentage (as defined below) of Medicare discharges admitted from the host hospital; (ii) for discharges during the cost reporting period beginning on or after October 1, 2005 and before October 1, 2006, the Medicare admissions threshold is the lesser of the Fiscal 2004 Percentage of Medicare discharges admitted from the host hospital or 75%; (iii) for discharges during the cost reporting period beginning on or after October 1, 2006 and before October 1, 2007, the Medicare admissions threshold is the lesser of the Fiscal 2004 Percentage of Medicare discharges admitted from the host hospital or 50%; and (iv) for discharges during cost reporting periods beginning on or after October 1, 2007, the Medicare admissions threshold is 25%. As used above, “Fiscal 2004 Percentage” means, with respect to any HIH, the percentage of all Medicare patients discharged by such HIH during its cost reporting period beginning on or after October 1, 2003 and before October 1, 2004 who were admitted to such HIH from its host hospital, but in no event is the Fiscal 2004 Percentage less than 25%. We have developed a business plan and strategy in each of our markets to adapt to the HIH regulations and maintain our Company’s current business. Our transition plan includes managing admissions at existing HIHs, relocating certain HIHs to leased spaces in smaller host hospitals in the same markets, consolidating HIHs in certain of our markets, relocating certain of our facilities to alternative settings, building or buying free-standing facilities and closing some of our facilities. At this time we cannot predict with any certainty the impact on revenues or operating expenses at the hospitals being moved. If CMS implements certain additional regulatory changes that it has proposed and discussed and that would affect long-term acute care hospitals more generally, our plan would have to be further modified.

During the three months and nine months ended September 30, 2006, we have recorded a liability of approximately $1.5 million and $2.5 million, respectively, related to estimated repayments to Medicare for host admissions exceeding a HIH hospital’s threshold. The liability has been recorded through a reduction in our net revenue. Because these rules are complex and are based on the volume of Medicare admissions from our host hospitals as a percent of our overall Medicare admissions, we cannot predict with any certainty the impact on our future net operating revenues of compliance with these regulations. Although, we expect the financial impact to increase as the thresholds decline during the phase-in of the regulations and the execution of our transition plan.

The new HIH regulations established exceptions to the Medicare admissions thresholds with respect to patients who reach “outlier” status at the host hospital, HIHs located in “MSA-dominant hospitals” or HIHs located in rural areas.

Development of New Specialty Hospitals and Clinics

We expect to continue evaluating opportunities to develop new long-term acute care hospitals. Additionally, we are evaluating opportunities to develop free-standing inpatient rehabilitation facilities similar to the four inpatient rehabilitation facilities acquired through our September 2003 Kessler acquisition. We also intend to open new outpatient rehabilitation clinics in our current markets where we can benefit from existing referral relationships and brand awareness to produce incremental growth.

Operating Statistics

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


	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	2005			2006			2005			2006
Specialty hospital data(1):
Number of hospitals — start of period		102			100			86			101
Number of hospital start-ups		—			1			—			3
Number of hospitals closed		(1	)		(3	)		(2	)		(4	)
Number of hospitals consolidated		—			(1	)		—			(3	)
Number of hospitals acquired		—			—			17			—

Number of hospitals — end of period		101			97			101			97

Available licensed beds		3,814			3,825			3,814			3,825
Admissions		9,725			9,485			30,056			30,122
Patient days		242,850			236,094			739,860			734,070
Average length of stay (days)		25			25			25			24
Net revenue per patient day(2)	$	1,385		$	1,361		$	1,371		$	1,401
Occupancy rate		69	%		66	%		70	%		69	%
Percent patient days — Medicare		75	%		72	%		76	%		73	%
Outpatient rehabilitation data (3):
Number of clinics owned — start of period		574			542			589			553
Number of clinic start-ups		2			2			17			7
Number of clinics closed/sold		(10	)		(7	)		(40	)		(23	)

Number of clinics owned — end of period		566			537			566			537
Number of clinics managed — end of period		55			68			55			68

Total number of clinics (all) — end of period		621			605			621			605

Number of visits		805,018			714,064			2,532,157			2,261,080
Net revenue per visit (4)	$	89		$	95		$	89		$	93


(1)		Specialty hospitals consist of long-term acute care hospitals and inpatient rehabilitation facilities.




(2)		Net revenue per patient day is calculated by dividing specialty hospital patient service revenues by the total number of patient days.

(3)		Clinic data has been restated to remove the clinics operated by CBIL, which is being reported as a discontinued operation. Occupational health clinics have been reclassified as managed clinics.

(4)		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 contract services revenue.

Results of Operations

On February 24, 2005, we consummated a Merger with a wholly-owned subsidiary of Select Medical Holdings Corporation (“Holdings”) pursuant to which we became a wholly-owned subsidiary of Holdings. Although the Predecessor and Successor results are not comparable by definition due to the Merger and the resulting change in basis, for ease of comparison in the following discussion and to assist the reader in understanding our operating performance and trends, the financial data for the period after the Merger, February 25, 2005 through September 30, 2005 (Successor period), has been added to the financial data for the period from January 1, 2005 through February 24, 2005 (Predecessor period), to arrive at the combined nine months ended September 30, 2005. The combined data is referred to herein as the combined nine months ended September 30, 2005. As a result of the Merger, certain of our costs and expenses have been affected by increased interest expense, loss on early retirement of debt, merger related charges, a significant stock compensation charge allocated to cost of services and general and administrative expense and increases in depreciation and amortization due to the revaluation of our tangible and intangible assets. We believe this combined presentation is a reasonable means of presenting our operating results. The following table presents the combined consolidated statement of operations for the nine months ended September 30, 2005.


	Predecessor			Successor			Combined
				Period
	Period from			from			Nine
	January 1			February			Months
	through			25 through			Ended
	February			September			September
	24, 2005			30, 2005			30, 2005
	(in thousands)
Net operating revenues	$	277,736		$	1,122,748		$	1,400,484


Costs and expenses:
Cost of services		244,321			875,566			1,119,887
General and administrative		122,509			48,960			171,469
Bad debt expense		6,588			14,244			20,832
Depreciation and amortization		5,933			28,110			34,043

Total costs and expenses		379,351			966,880			1,346,231

Income (loss) from operations		(101,615	)		155,868			54,253

Other income and expense:
Loss on early retirement of debt		(42,736	)		—			(42,736	)
Merger related charges		(12,025	)		—			(12,025	)
Other income		267			658			925
Interest income		523			511			1,034
Interest expense		(4,651	)		(60,121	)		(64,772	)

Income (loss) from continuing operations before minority interests and income taxes		(160,237	)		96,916			(63,321	)
Minority interest in consolidated subsidiary companies		330			1,350			1,680

Income (loss) from continuing operations before income taxes		(160,567	)		95,566			(65,001	)
Income tax expense (benefit)		(59,794	)		38,623			(21,171	)


Income (loss) from continuing operations		(100,773	)		56,943			(43,830	)
Income from discontinued operations, net of tax		522			3,367			3,889

Net income (loss)	$	(100,251	)	$	60,310		$	(39,941	)

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


	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	2005			2006			2005 (1)			2006
Net operating revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of services(2)		78.9			81.6			80.0			79.7
General and administrative		5.9			2.2			12.2			2.4
Bad debt expense		1.0			1.2			1.5			1.3
Depreciation and amortization		2.6			2.8			2.4			2.5

Income from operations		11.6			12.2			3.9			14.1
Loss on early retirement of debt		—			—			(3.1	)		—
Merger related charges		—			—			(0.9	)		—
Other income		0.1			—			0.1			—
Interest expense, net		(5.4	)		(6.1	)		(4.6	)		(5.0	)

Income (loss) from continuing operations before minority interests and income taxes		6.3			6.1			(4.6	)		9.1
Minority interests		0.1			0.1			0.1			0.1

Income (loss) from continuing operations before income taxes		6.2			6.0			(4.7	)		9.0
Income tax expense (benefit)		2.5			2.4			(1.5	)		3.6

Income (loss) from continuing operations		3.7			3.6			(3.2	)		5.4
Income from discontinued operations, net of tax		0.2			—			0.3			0.7

Net income (loss)		3.9	%		3.6	%		(2.9	)%		6.1	%

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


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2005			2006			% Change			2005 (1 )			2006			% Change
	(in thousands)									(in thousands)
Net operating revenues:
Specialty hospitals	$	341,835		$	329,324			(3.7	)%	$	1,031,387		$	1,049,768			1.8	%
Outpatient rehabilitation		118,263			114,043			(3.6	)		364,363			353,974			(2.9	)
Other		560			505			(9.8	)		4,734			2,014			(57.5	)

Total company	$	460,658		$	443,872			(3.6	)%	$	1,400,484		$	1,405,756			0.4	%


Income (loss) from operations:
Specialty hospitals	$	70,675		$	52,424			(25.8	)%	$	214,957		$	195,291			(9.1	)%
Outpatient rehabilitation		12,778			12,493			(2.2	)		44,980			39,161			(12.9	)
Other		(29,702	)		(10,604	)		64.3			(205,684	)		(35,695	)		82.6

Total company	$	53,751		$	54,313			1.0	%	$	54,253		$	198,757			266.4	%


Adjusted EBITDA:(3)
Specialty hospitals	$	77,571		$	60,812			(21.6	)%	$	235,311		$	218,203			(7.3	%)
Outpatient rehabilitation		15,302			15,737			2.8			52,414			48,920			(6.7	)
Other		(11,417	)		(8,896	)		22.1			(35,196	)		(30,574	)		13.1

Adjusted EBITDA margins:(3)
Specialty hospitals		22.7	%		18.5	%		(18.5	)%		22.8	%		20.8	%		(8.8	)%
Outpatient rehabilitation		12.9			13.8			7.0			14.4			13.8			(4.2	)
Other		N/M			N/M			N/M			N/M			N/M			N/M

Total assets:
Specialty hospitals	$	1,589,460		$	1,773,586					$	1,589,460		$	1,773,586
Outpatient rehabilitation		516,697			254,865						516,697			254,865
Other		33,235			97,645						33,235			97,645

Total company	$	2,139,392		$	2,126,096					$	2,139,392		$	2,126,096


Purchases of property and equipment, net:
Specialty hospitals	$	13,814		$	38,671					$	68,108		$	107,001
Outpatient rehabilitation		324			876						1,345			3,827
Other		113			771						3,592			1,304

Total company	$	14,251		$	40,318					$	73,045		$	112,132

The following table reconciles same hospitals information:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2006			2005 (1)			2006
	(in thousands)						(in thousands)
Net operating revenue
Specialty hospitals net operating revenue	$	341,835		$	329,324		$	1,031,387		$	1,049,768
Less: Specialty hospitals in development or closed after 1/1/05		10,210			5,195			39,064			21,947

Specialty hospitals same store net operating revenue	$	331,625		$	324,129		$	992,323		$	1,027,821


Adjusted EBITDA(3)
Specialty hospitals Adjusted EBITDA(3)	$	77,571		$	60,812		$	235,311		$	218,203
Less: Specialty hospitals in development or closed after 1/1/05		903			(3,193	)		3,908			(5,671	)

Specialty hospitals same store Adjusted EBITDA(3)	$	76,668		$	64,005		$	231,403		$	223,874


All specialty hospitals Adjusted EBITDA margin(3)		22.7	%		18.5	%		22.8	%		20.8	%
Specialty hospitals same store Adjusted EBITDA margin(3)		23.1	%		19.7	%		23.3	%		21.8	%


N/M — Not Meaningful.

(1)		The financial data for the period after the Merger, February 25, 2005 through September 30, 2005 (Successor period), has been added to the financial data for the period from January 1, 2005 through February 24, 2005 (Predecessor period), to arrive at the combined nine months ended September 30, 2005.

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

(3)		We define Adjusted EBITDA as net income before interest, income taxes, depreciation and amortization, other income, income from discontinued operations, loss on early retirement of debt, merger related charges, stock compensation expense, long-term incentive compensation and minority interest. We believe that the presentation of Adjusted EBITDA is important to investors because Adjusted EBITDA is used by management to evaluate financial performance and determine resource allocation for each of our operating units. Adjusted EBITDA is not a measure of financial performance under generally accepted accounting principles. Items excluded from Adjusted EBITDA are significant components in understanding and assessing financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to, or substitute for, 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 Adjusted EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of other companies. See footnote 5 to our interim unaudited consolidated financial statements for the period ended September 30, 2006 for a reconciliation of net income to Adjusted EBITDA as utilized by us in reporting our segment performance in accordance with SFAS No. 131.

Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005

Net Operating Revenues

Our net operating revenues decreased by 3.6% to $443.9 million for the three months ended September 30, 2006 compared to $460.7 million for the three months ended September 30, 2005.

Specialty Hospitals. Our specialty hospital net operating revenues decreased 3.7% to $329.3 million for the three months ended September 30, 2006 compared to $341.8 million for the three months ended September 30, 2005. Net operating revenues for the specialty hospitals opened or acquired as of January 1, 2005 and operated by us throughout both periods decreased 2.3% to $324.1 million for the three months ended September 30, 2006 from $331.6 million for the three months ended September 30, 2005. This decrease resulted primarily from a decrease in our Medicare net revenues due to LTACH regulatory changes that have reduced the payment rates and a decline in Medicare volume. Our patient days for these same store hospitals decreased 1.3%. This decrease in patient days was due to a decline in the average length of stay in our long-term acute care hospitals from 27 days for the three months ended September 30, 2005 to 26 days for the three months ended September 30, 2006. Additionally, our occupancy percentage decreased to 67% for the three months ended September 30, 2006 compared to 69% for the three months ended September 30, 2005.

Outpatient Rehabilitation. Our outpatient rehabilitation net operating revenues declined 3.6% to $114.0 million for the three months ended September 30, 2006 compared to $118.3 million for the three months ended September 30, 2005. The number of patient visits in our outpatient rehabilitation clinics declined 11.3% for the three months ended September 30, 2006 to 714,064 visits compared to 805,018 visits for the three months ended September 30, 2005. The decrease in net operating revenues and patient visits was principally related to a 5.1% decline in the number of clinics we own and a 6.5% decline in the volume of visits per clinic. We are continuing to experience declines in our patient visits in a number of markets as a result of physicians opening competing physical therapy practices. Net revenue per visit in our clinics was $95 for the three months ended September 30, 2006 compared to $89 for the three months ended September 30, 2005.

Other. Our other revenues were $0.5 million for the three months ended September 30, 2006 compared to $0.6 million for the three months ended September 30, 2005. These revenues relate to revenue from other non-healthcare services.

Operating Expenses

Our operating expenses decreased by 4.5% to $377.2 million for the three months ended September 30, 2006 compared to $395.1 million for the three months ended September 30, 2005. Our operating expenses include our cost of services, general and administrative expense and bad debt expense. As a percentage of our net operating revenues, our operating expenses were 85.0% for the three months ended September 30, 2006 compared to 85.8% for the three months ended September 30, 2005. Cost of services as a percentage of operating revenues was 81.6% for the three months ended September 30, 2006 compared to 78.9% for the three months ended September 30, 2005. These costs primarily reflect our labor expenses. Another component of cost of services is facility rent expense, which was $20.0 million for the three months ended September 30, 2006 compared to $20.2 million for the three months ended September 30, 2005. During the same time period, general and administrative expense declined in total, and as a percentage of net operating revenues. General and administrative expenses were 2.2% of net operating revenues for the three months ended September 30,

2006 compared to 5.9% for the three months ended September 30, 2005. Our general and administrative expenses for the three months ended September 30, 2005 included $14.5 million paid under the terms of Holdings’ long-term incentive compensation plan. Our bad debt expense as a percentage of net operating revenues was 1.2% for the three months ended September 30, 2006 compared to 1.0% for the three months ended September 30, 2005.

Adjusted EBITDA

Specialty Hospitals . Adjusted EBITDA decreased by 21.6% to $60.8 million for the three months ended September 30, 2006 compared to $77.6 million for the three months ended September 30, 2005. Our Adjusted EBITDA margins decreased to 18.5% for the three months ended September 30, 2006 from 22.7% for the three months ended September 30, 2005. The hospitals opened or acquired as of January 1, 2005 and operated by us throughout both periods had Adjusted EBITDA of $64.0 million for the three months ended September 30, 2006, a decrease of 16.5% over the Adjusted EBITDA of these hospitals for the three months ended September 30, 2005. Our Adjusted EBITDA margin in these same store hospitals decreased to 19.7% for the three months ended September 30, 2006 from 23.1% for the three months ended September 30, 2005. The decrease in our adjusted EBITDA is principally related to the reduction in our Medicare net operating revenues resulting from LTACH regulatory changes that have reduced our payment rates for Medicare cases.

Outpatient Rehabilitation . Adjusted EBITDA increased by 2.8% to $15.7 million for the three months ended September 30, 2006 compared to $15.3 million for the three months ended September 30, 2005. Our Adjusted EBITDA margins increased to 13.8% for the three months ended September 30, 2006 from 12.9% for the three months ended September 30, 2005. The increase in Adjusted EBITDA was primarily the result of the increase in our net revenue per visit described under—“Net Operating Revenues -Outpatient Rehabilitation.”

Other . The Adjusted EBITDA loss was $8.9 million for the three months ended September 30, 2006 compared to a loss of $11.4 million for the three months ended September 30, 2005. This reduction in the Adjusted EBITDA loss was primarily the result of the decline in our general and administrative expenses.

Income from Operations

For the three months ended September 30, 2006 we had income from operations of $54.3 million compared to $53.8 million for the three months ended September 30, 2005. The increase in income from operations resulted from the Adjusted EBITDA changes described above and a reduction in general and administrative expense, offset by a small increase in depreciation and amortization expense. This increase in depreciation and amortization expense resulted primarily from increased depreciation expense associated with free-standing hospitals we have placed in service.

Other Income (Expense)

On September 19, 2005 we entered into an interest rate swap agreement designated as a cash flow hedge of forecasted LIBOR based variable rate interest payments. The notional amount of the interest rate swap is $175.0 million, and the underlying variable rate debt is associated with the $175.0 million senior floating rate notes due 2015 issued by Holdings. The interest rate swap does not qualify under SFAS No. 133 as an effective hedge as the cash flow stream being hedged relates to dividend payments to Holdings necessary to fund interest payments on Holdings’ $175.0 million senior floating rate notes. This results in the fair market value changes in the swap being reported as other income or expense. For the three months ended September 30, 2006 we recognized a loss of $3.1 million related to the changes in the fair market value.

Interest Expense

Interest expense was $24.3 million for the three months ended September 30, 2006 compared to $25.5 million for the three months ended September 30, 2005. The reduction in interest expense is due to the reduction in our borrowings under our senior credit facility.

Minority Interests

Minority interests in consolidated earnings was $0.4 million for the three months ended September 30, 2006 compared to $0.5 million for the three months ended September 30, 2005.

Income Taxes

We recorded income tax expense of $10.7 million for the three months ended September 30, 2006. The expense represented an effective tax rate of 39.8%. For the three months ended September 30, 2005 we recorded income tax expense of $11.5 million. This expense represented an effective tax rate of 40.7%.

Income from Discontinued Operations, Net of Tax

On March 1, 2006, we sold our wholly-owned subsidiary CBIL. The operating results of CBIL have been reclassified and reported as discontinued operations.

Nine Months Ended September 30, 2006 Compared to Combined Nine Months Ended September 30, 2005

Net Operating Revenues

Our net operating revenues increased by 0.4% to $1,405.8 million for the nine months ended September 30, 2006 compared to $1,400.5 million for the combined nine months ended September 30, 2005.

Specialty Hospitals. Our specialty hospital net operating revenues increased 1.8% to $1,049.8 million for the nine months ended September 30, 2006 compared to $1,031.4 million for the combined nine months ended September 30, 2005. Net operating revenues for the specialty hospitals opened or acquired as of January 1, 2005 and operated by us throughout both periods increased 3.6% to $1,027.8 million for the nine months ended September 30, 2006 from $992.3 million for the combined nine months ended September 30, 2005. This increase resulted primarily from higher net revenue per patient day and an increase in patient days. Our patient days for these hospitals increased 1.0% for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. Additionally, our occupancy percentage increased to 71% for the nine months ended September 30, 2006 compared to 70% for the combined nine months ended September 30, 2005. Although our net operating revenues and patient days increased for the comparable nine month period, our net operating revenues and patient days decreased for the three months ended September 30, 2006. See “Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005 – Net Operating Revenues – Specialty Hospitals” for a discussion of these declines.

Outpatient Rehabilitation. Our outpatient rehabilitation net operating revenues declined 2.9% to $354.0 million for the nine months ended September 30, 2006 compared to $364.4 million for the combined nine

months ended September 30, 2005. The number of patient visits in our outpatient rehabilitation clinics declined 10.7% for the nine months ended September 30, 2006 to 2,261,080 compared to 2,532,157 visits for the combined nine months ended September 30, 2005. The decrease in net operating revenues and patient visits was principally related to a 5.1% decline in the number of clinics we own and a 5.9% decline in the volume of visits per clinic. We are continuing to experience declines in our patient visits in a number of markets as a result of physicians opening competing physical therapy practices. Net revenue per visit in these clinics was $93 for the nine months ended September 30, 2006 compared to $89 for the combined nine months ended September 30, 2005.

Other. Our other revenues were $2.0 million for the nine months ended September 30, 2006 compared to $4.7 million for the combined nine months ended September 30, 2005. The decline resulted from the sale of our home medical equipment and infusion/intravenous service business which we sold in May 2005.

Operating Expenses

Our operating expenses decreased by 10.7% to $1,172.0 million for the nine months ended September 30, 2006 compared to $1,312.2 million for the combined nine months ended September 30, 2005. Our operating expenses include our cost of services, general and administrative expense and bad debt expense. The decrease in operating expenses was principally related to the significant decline in stock compensation expense for the nine months ended September 30, 2006. In connection with the Merger, we granted restricted stock awards to certain key management employees. These awards generally vest over five years. Effective at the time of the Merger, Holdings also granted stock options to certain other key employees that vest over five years. The fair value of restricted stock awards and stock options vesting during the nine months ended September 30, 2006 was $2.7 million and for the period from February 25, 2005 through September 30, 2005 was $7.4 million which were included in general and administrative expenses. Additionally, during the Predecessor period of January 1, 2005 through February 25, 2005, all of our then outstanding stock options were redeemed in accordance with the Merger agreement. This resulted in a charge of $142.2 million of which $115.0 million is included in general and administrative expense and $27.2 million is included in cost of services.

As a percentage of our net operating revenues, our operating expenses were 83.4% for the nine months ended September 30, 2006 compared to 93.7% for the combined nine months ended September 30, 2005. Cost of services as a percentage of operating revenues was 79.7% for the nine months ended September 30, 2006 compared to 80.0% for the combined nine months ended September 30, 2005. These costs primarily reflect our labor expenses. This reduction resulted from a decline in our stock compensation costs offset by an increase in our direct labor costs in both our specialty hospitals and outpatient rehabilitation segments which principally occurred during the first quarter of 2006. This is primarily the result of inefficient nurse staffing ratios in our specialty hospitals and higher salaries for physical and occupational therapists in our outpatient clinics. Another component of cost of services is facility rent expense, which was $61.1 million for both the nine months ended September 30, 2006 and for the combined nine months ended September 30, 2005. During the same time period, general and administrative expense declined in total, and as a percentage of net operating revenues. General and administrative expenses were 2.4% of net operating revenues for the nine months ended September 30, 2006 compared to 12.2% for the combined nine months ended September 30, 2005. Our general and administrative expenses for the combined nine months ended September 30, 2005 included costs associated with the SemperCare Corporate office that were not eliminated until the second quarter of 2005 and stock compensation expense related to the Merger. Our bad debt expense as a percentage of net operating revenues was 1.3% for the nine months ended September 30, 2006 compared to 1.5% for the combined nine months ended September 30, 2005.

Adjusted EBITDA

Specialty Hospitals . Adjusted EBITDA decreased by 7.3% to $218.2 million for the nine months ended September 30, 2006 compared to $235.3 million for the combined nine months ended September 30, 2005. Our Adjusted EBITDA margins declined to 20.8% for the nine months ended September 30, 2006 from 22.8% for the combined nine months ended September 30, 2005. The hospitals opened or acquired as of January 1, 2005 and operated by us throughout both periods had Adjusted EBITDA of $223.9 million, a decrease of 3.3% over the Adjusted EBITDA of these hospitals for the same period in 2005. This decrease in same hospital Adjusted EBITDA for the nine months ended September 30, 2006 resulted from the significant decline we experienced in same hospital Adjusted EBITDA for the three months ended September 30, 2006. See “Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005 – Adjusted EBITDA – Specialty Hospitals” for a discussion of this decline. As a result, our Adjusted EBITDA margin in these same store hospitals declined to 21.8% for the nine months ended September 30, 2006 from 23.3% for the combined nine months ended September 30, 2005.

Outpatient Rehabilitation . Adjusted EBITDA decreased by 6.7% to $48.9 million for the nine months ended September 30, 2006 compared to $52.4 million for the combined nine months ended September 30, 2005. Our Adjusted EBITDA margins declined to 13.8% for the nine months ended September 30, 2006 from 14.4% for the combined nine months ended September 30, 2005. The decline in Adjusted EBITDA was the result of the decline in clinic visit volumes described under—“Net Operating Revenues -Outpatient Rehabilitation” above. Additionally, we experienced increased labor costs for physical and occupational therapists in 2006.

Other . The Adjusted EBITDA loss was $30.6 million for the nine months ended September 30, 2006 compared to a loss of $35.2 million for the combined nine months ended September 30, 2005. This reduction in the Adjusted EBITDA loss was primarily the result of the decline in our general and administrative expenses associated with the SemperCare Corporate office that was closed during the second quarter of 2005.

Income from Operations

For the nine months ended September 30, 2006 we had income from operations of $198.8 million compared to income from operations of $54.3 million for the combined nine months ended September 30, 2005. The lower income from operations experienced for the combined nine months ended September 30, 2005 resulted from the significant stock compensation expense of $142.2 million related to the cancellation of all vested and unvested outstanding stock options in accordance with the terms of the Merger agreement in the Predecessor period of January 1, 2005 through February 24, 2005.

Loss on Early Retirement of Debt

In connection with the Merger, we commenced tender offers to acquire all of our then outstanding 9 ¹ / 2 % senior subordinated notes due 2009 and all of our then outstanding 7 ¹ / 2 % senior subordinated notes due 2013. Upon completion of the tender offers on February 24, 2005, all $175.0 million of the 7 ¹ / 2 % senior subordinated notes were tendered and $169.3 million of the $175.0 million of 9 ¹ / 2 % notes were tendered. The loss on early retirement of debt consists of the tender premium cost of $34.8 million and the remaining unamortized deferred financing costs of $7.9 million.

Merger Related Charges

As a result of the Merger, we incurred costs in the Predecessor period of January 1, 2005 through February 24, 2005 directly related to the Merger. This included the cost of the investment advisor hired by the Special Committee of our Board of Directors to evaluate the Merger, legal and accounting fees, costs associated with the Hart-Scott-Rodino filing related to the Merger, costs associated with purchasing a six year extended reporting period under our directors and officers liability insurance policy and other associated expenses.

Other Income (Expense)

On September 19, 2005 we entered into an interest rate swap agreement designated as a cash flow hedge of forecasted LIBOR based variable rate interest payments. The notional amount of the interest rate swap is $175.0 million, and the underlying variable rate debt is associated with the $175.0 million senior floating rate notes due 2015 issued by Holdings. The interest rate swap does not qualify under SFAS No. 133 as an effective hedge as the cash flow stream being hedged relates to dividend payments to Holdings necessary to fund interest payments on Holdings’ $175.0 million senior floating rate notes. This results in the fair market value changes in the swap being reported as other income or expense. For the nine months ended September 30, 2006 we recognized a gain of $0.9 million related to the changes in the fair market value.

Interest Expense

Interest expense increased by $7.8 million to $72.6 million for the nine months ended September 30, 2006 from $64.8 million for the combined nine months ended September 30, 2005. The increase in interest expense is due to the higher debt levels outstanding in the Successor periods resulting from the Merger.

Minority Interests

Minority interests in consolidated earnings was $1.1 million for the nine months ended September 30, 2006 compared to $1.7 million for the combined nine months ended September 30, 2005.

Income Taxes

We recorded income tax expense of $51.3 million for the nine months ended September 30, 2006. The expense represented an effective tax rate of 40.5%. We recorded income tax benefit of $59.8 million for the Predecessor period of January 1, 2005 through February 24, 2005. The tax benefit represented an effective tax benefit rate of 37.2%. This effective tax benefit rate consisted of the statutory Federal rate of 35.0% and a state rate of 2.2%. Because of the differing state tax rules related to net operating losses, a portion of these state net operating losses were assigned valuation allowances. We recorded income tax expense of $38.6 million for the Successor period of February 25, 2005 through September 30, 2005. The expense represented an effective tax rate of 40.4%.

Income from Discontinued Operations, Net of Tax

On March 1, 2006, we sold our wholly-owned subsidiary CBIL. The operating results of CBIL have been reclassified and reported as discontinued operations.

Liquidity and Capital Resources

Operating activities provided $137.6 million of cash flow for the nine months ended September 30, 2006. Operating activities used $38.2 million of cash flow for the combined nine months ended September 30, 2005, which includes $186.0 million in cash expenses related to the Merger. Our days sales outstanding decreased to 51 days at September 30, 2006, from 52 days at December 31, 2005. The reduction in days sales outstanding is primarily related to the timing of the periodic interim payments we received from Medicare for the services provided at our specialty hospitals.

Investing activities used $37.6 million of cash flow for the nine months ended September 30, 2006. Investing activities used $183.7 million of cash flow for the combined nine months ended September 30, 2005. The primary source of cash from investing activities in the nine months ended September 30, 2006 resulted from the sale of CBIL which generated cash proceeds of $76.8 million, which was offset by cash disbursements of $112.1 million related to building improvements and equipment purchases primarily associated with properties we acquired in 2005 and acquisition payments of $3.3 million which primarily relate to the repurchase of minority interests. The primary use of cash from investing activities for the combined nine months ended September 30, 2005 related to the acquisition of SemperCare, which used $105.1 million in cash. The remaining use of cash was related to purchases of property and equipment of $73.0 million and other acquisition related payments of $5.9 million.

Financing activities utilized $130.9 million of cash flow for the nine months ended September 30, 2006. The cash usage resulted primarily from principal repayments on our credit facility of $84.4 million, dividends paid to Holdings of $32.5 million and repayment of bank overdrafts of $11.8 million. Financing activities used $16.6 million of cash for the combined nine months ended September 30, 2005. The Merger financing was the primary contributor of this cash flow. The excess proceeds from the Merger financing were used to pay Merger related costs, which included the cancellation and cash-out of outstanding stock options.

Capital Resources

Net working capital was $40.1 million at September 30, 2006 compared to $88.4 million at December 31, 2005. This decrease in working capital was principally related to a reduction in cash and cash equivalents.

At September 30, 2006, our senior credit facility provides for senior secured financing consisting of a term loan facility that matures on February 24, 2012 and a revolving loan facility that will terminate on February 24, 2011. At September 30, 2006, we had outstanding $576.3 million of indebtedness under our senior credit facility of which $5.0 million was borrowed under our revolving loan facility and $571.3 million was borrowed under the term loan facility, excluding $23.9 million of letters of credit. At September 30, 2006 we had $271.1 million of additional borrowing capacity under our revolving loan facility. Borrowings under the revolving loan facility bear interest at a fluctuating rate of interest based upon financial covenant ratio tests. On June 13, 2005 we entered into an interest rate swap transaction with an effective date of August 22, 2005. The swap is designated as a cash flow hedge of forecasted LIBOR based variable rate interest payment. The underlying variable rate debt is $200.0 million and the swap is for a period of five years.

At September 30, 2006 we also had outstanding $660.0 million in aggregate principal amount of 7 5/8% senior subordinated notes due 2015. Interest on the notes is payable semi-annually in arrears on February 1 and August 1 of each year. The notes are guaranteed by all of our wholly-owned subsidiaries, subject to certain exceptions.

Holdings, our parent company, has outstanding $175.0 million of senior floating rate notes and $150.0 million of 10% senior subordinated notes. These notes are general unsecured obligations of Holdings and are not guaranteed by us or any of our subsidiaries. Our parent company is a holding company, and as such, will rely on our cash flow to service these obligations. In the nine months ended September 30, 2006, we remitted to Holdings an aggregate of $32.5 million consisting of $15.0 million to fund the interest payment on Holdings’ $150.0 million 10% senior subordinated notes and $17.1 million to fund the interest payment on Holdings’ $175.0 million senior floating rate notes. The remainder of the funds remitted to Holdings of $0.4 million were to pay costs associated with registering the $175.0 million senior floating rate notes. As of September 30, 2006, we had remitted to Holdings all the funds we were permitted to remit under the terms of our senior secured credit facility and senior subordinated notes. We expect in the future that we will continue to remit to Holdings the maximum amount that is permitted under the terms of our senior secured credit facility and senior subordinated notes, which includes amounts necessary to fund the interest payments on Holdings’ 10% senior subordinated notes and its senior floating rate notes and other permitted payments.

We believe internally generated cash flows and borrowings of revolving loans under our senior secured credit facility will be sufficient to finance operations for at least the next twelve months.

As a result of the HIH regulations enacted in 2004, we currently anticipate that we will need to relocate a significant number of our long-term acute care hospitals. Our transition plan includes managing admissions at existing HIHs, relocating certain HIHs to leased spaces in smaller host hospitals in the same markets, consolidating HIHs in certain of our markets, relocating certain of our facilities to alternative settings, building or buying free-standing facilities and closing some of our facilities. At this time we cannot predict with any certainty the impact on revenues or operating expenses at the hospitals being moved. These relocation efforts will require us to make additional capital expenditures above historic levels. We currently expect to spend approximately $280.0 million on capital expenditures through 2009, including both our ongoing maintenance capital expenditures and the capital required for hospital relocations. At September 30, 2006, we have outstanding commitments under construction contracts at six long-term acute care properties and one of our inpatient rehabilitation facilities totaling $27.2 million.

During the nine months ended September 30, 2006, we have relocated eight of our HIH hospitals into five free-standing buildings. Additionally we have opened two new hospitals in free-standing buildings and one new hospital as an HIH. We closed four HIH hospitals during 2006.

We also continue to evaluate opportunities to develop new long-term acute care hospitals. Additionally, we are evaluating opportunities to develop free-standing inpatient rehabilitation facilities similar to the four inpatient rehabilitation facilities acquired through our September 2003 Kessler acquisition. We also intend to open new outpatient rehabilitation clinics in our current markets where we can benefit from existing referral relationships and brand awareness to produce incremental growth.

We periodically investigate strategic acquisitions that could increase our market share in one or both of our business segments. We cannot predict the likelihood that any of these business acquisitions will be consummated nor can we predict the cost of this type of acquisition.

Inflation

The healthcare 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 cannot predict our ability to cover or offset future cost increases.

CMS did not update our LTACH-PPS standard federal rate for the 2007 estimated market basket index change. This annual market basket adjustment is CMS’ approach to adjusting Medicare payments to reflect inflationary effects on costs. This increase historically has occurred on July 1 of each year.

Recent Accounting Pronouncements

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on how to evaluate prior period financial statement misstatements for purposes of assessing their materiality in the current period. Correcting prior year financial statements for immaterial misstatements would not require amending previous filings; rather such corrections may be made in subsequent filings. The cumulative effect of initially applying SAB 108, if any, can be recorded as an adjustment to opening retained earnings. SAB 108 does not change the SEC staff’s previous positions regarding qualitative considerations in assessing the materiality of misstatements. SAB 108 is effective beginning in the fourth quarter of this fiscal year. We do not believe that SAB 108 will have a material impact on our financial statements.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We do not believe that the adoption of the provisions of SFAS No. 157 will materially impact our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires the employer to recognize the overfunded or underfunded status of a single-employer defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end balance sheet. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. We believe that the adoption of SFAS No. 158 will have no impact on our consolidated financial statements.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards Board Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes.” FIN No. 48 is an interpretation of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. This interpretation also provides guidance on the derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition of tax positions. The recognition threshold and measurement attribute is part of a two step tax position evaluation process prescribed in FIN No. 48. FIN No. 48 is effective after the beginning of an entity’s first fiscal year that begins after December 15, 2006. We are currently evaluating our uncertain tax positions as required under the accounting standard in order to implement the standard during the first quarter of 2007. We have not determined the impact, if any, to our consolidated financial statements.

In March 2006, FASB issued SFAS No. 156 “Accounting for Servicing of Financial Assets an amendment of SFAS No. 140” (“SFAS No. 156”). SFAS No. 156 requires that all separately recognized servicing assets and servicing liabilities associated with a transfer of assets (e.g., a sale of receivables) be initially measured at fair value, if practicable. SFAS No. 156 permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value and requires an entity that uses derivative instruments to mitigate the risks inherent in servicing assets and servicing liabilities to account for those derivative instruments at fair value. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006 although early adoption is permitted. We have evaluated SFAS No. 156 and have determined that there is no impact to the consolidated financial statements.

In February 2006, the Financial Accounting Standards Board issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and No. 140” (“SFAS No. 155”). SFAS No. 155 simplifies the accounting for certain hybrid financial instruments, eliminates the FASB’s interim guidance which provides that beneficial interests in securitized financial assets are not subject to the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and eliminates the restriction on the passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We do not anticipate that the implementation of this standard will have a material impact on our financial position, results of operations or cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures About Market Risk

We are subject to interest rate risk in connection with our long-term indebtedness. Our principal interest rate exposure relates to the loans outstanding under our senior secured credit facility. As of September 30, 2006, we had $576.3 million in term loans outstanding under our senior secured credit facility which bear interest at variable rates. On June 13, 2005, we entered into an interest rate swap transaction. The effective date of the swap transaction was August 22, 2005. We entered into the swap transaction to mitigate the risks of future variable rate interest payments. The notional amount of the interest rate swap is $200.0 million, the underlying variable rate debt is associated with the senior secured credit facility, and the swap is for a period of five years. Each eighth point change in interest rates on the variable rate portion of our outstanding senior secured credit facility at September 30, 2006 would have an annualized effect on interest expense of $0.5 million.

ITEM 4. CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered in this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in the relevant SEC rules and forms.

In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On April 19, 2005, Lead Plaintiffs filed an amended complaint, purportedly on behalf of a class of shareholders of the Company, against Martin F. Jackson, Robert A. Ortenzio, Rocco A. Ortenzio, Patricia A. Rice, and the Company as defendants. The amended complaint continues to allege, among other things, failure to disclose adverse information regarding a potential regulatory change affecting reimbursement for the Company’s services applicable to long-term acute care hospitals operated as hospitals within hospitals, and the issuance of false and misleading statements about the financial outlook of the Company. The amended complaint seeks, among other things, damages in an unspecified amount, interest and attorneys’ fees. The Company believes that the allegations in the amended complaint are without merit and intends to vigorously defend against this action. In April 2006, the Court granted in part and denied in part the Company and the individual officers’ preliminary motion to dismiss the amended complaint. The Company and the individual officers have answered the amended complaint and the case had moved to the discovery and class certification phase. The Company does not believe this claim will have a material adverse effect on its financial position or results of operations. However, due to the uncertain nature of such litigation, the Company cannot predict the outcome of this matter.

subsidiary who were terminated by the Company in 2001 and a former employee of the Company’s Florida subsidiary who the Company asked to resign. The Company sued the former Las Vegas employees in state court in Nevada in 2001 for, among other things, return of misappropriated funds, and the Company’s lawsuit has recently been transferred to the federal court in Las Vegas. While the government has investigated but chosen not to intervene in two previous qui tam lawsuits filed against the Company, the Company cannot provide assurance that the government will not intervene in the Nevada qui tam case or any other existing or future qui tam lawsuit against the Company. While litigation is inherently uncertain, the Company believes, based on its prior experiences with qui tam cases and the limited information currently available to the Company, that the Nevada qui tam action will not have a material adverse effect on the Company.

ITEM 1A. RISK FACTORS.

There are no material changes to the risk factors described under Item 1A of our Form 10-K for the year ended December 31, 2005, as modified by the risk factors described under Item 1A of our Form 10-Q for the three months ended March 31, 2006 and Item 1A of our Form 10-Q for the three months ended June 30, 2006.

ITEM 2. UNREGISTERED SALES OF EQUITY 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

Not applicable.

ITEM 5. OTHER INFORMATION

On August 25, 2006, Select Medical Corporation entered into a lease for approximately 47,864 square feet of office space in a new building yet to be constructed in Mechanicsburg, Pennsylvania (the “New Lease”) with Old Gettysburg Associates IV, L.P., a limited partnership owned by Rocco A. Ortenzio, Robert A. Ortenzio, John M. Ortenzio and Select Capital Commercial Properties, Inc., a Pennsylvania corporation whose principal offices are located in Mechanicsburg, Pennsylvania. Rocco A. Ortenzio, Robert A. Ortenzio, and John M. Ortenzio each own one-third of Select Capital Commercial Properties, Inc. Rocco A. Ortenzio is a director and the Executive Chairman of the Company. Robert A. Ortenzio is a director and the Chief Executive Officer of the Company. The New Lease is for a fifteen year initial term from the date of the issuance of the occupancy permit at an annual rental of $23.53 per rentable square foot. The Company obtained an independent appraisal to support the amount of rent it will pay for this space. A copy of the New Lease is attached as Exhibit 10.1 to this report.

On August 10, 2006, the Board of Directors of the Company authorized the Company to enter into the New Lease. Under the provisions of the Company’s Code of Conduct, it is an actual or potential conflict of interest for an employee to own a significant financial interest in any third party that has an actual or potential business or other relationship with the Company. Rocco A. Ortenzio and Robert A. Ortenzio are each officers and directors of the Company, and are also partners in Old Gettysburg Associates IV, L.P. On August 10, 2006, in connection with authorizing the Company to enter into the New Lease, the Board of Directors of the Company approved the waiver of this provision of the Code of Conduct based on all the facts and circumstances surrounding the New Lease, including (a) the fact that the terms of the New Lease were negotiated at arm’s length, (b) that the Company obtained an independent appraisal to support the amount of rent it will pay for this space, and (c) that the Board of Directors of the Company did not otherwise find that the transaction would conflict or prevent either Mr. Rocco Ortenzio or Mr. Robert Ortenzio from faithfully performing his duties for the Company.

On November 10, 2006, the Board of Directors approved a lease for approximately 1,606 square feet of additional office space at 4718 Old Gettysburg Road in Mechanicsburg, Pennsylvania (the “Additional Lease”) with Old Gettysburg Associates II, a limited partnership owned by Rocco A. Ortenzio, Robert A. Ortenzio, John M. Ortenzio and Select Capital Commercial Properties, Inc. The Additional Lease will be for a five year term at an annual rental of $18.64 per rentable square foot. The Company obtained an independent appraisal to support the amount of rent it will pay for this space. On November 10, 2006, in connection with authorizing the Company to enter into the Additional Lease the Board of Directors of the Company also approved a waiver of the relevant provision of the Code of Conduct in connection with the Additional Lease for the same reasons that applied in the case of the New Lease, which are discussed above.

ITEM 6. EXHIBITS

The exhibits to this report are listed in the Exhibit Index appearing on page 48 hereof.

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: November 13, 2006

EXHIBIT INDEX


Exhibit		Description

10.1		Office Lease Agreement dated August 25, 2006 between Old Gettysburg Associates IV, L.P. and Select Medical Corporation.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Senior Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EXHIBIT 10.1

OFFICE LEASE AGREEMENT
BASIC LEASE INFORMATION

1. Date: August 25, 2006

2. Landlord: Old Gettysburg Associates IV, L.P.

3. Tenant: Select Medical Corporation

4. Guarantor: Select Medical Corporation

5. Building: Executive Park West IV

6. Premises: The entire building

7. Commencement Date: Upon issuance of occupancy permit

8. Expiration Date: 15 years after issuance of occupancy permit

9. Rentable Area of the Building: 47,864 Rentable square feet

10. Rentable Area of the Premises: 47,864 Rentable square feet

11. Tenant's Proportionate Share 100%

12. Initial Annual Base Rental: $1,126,240.00

13. Initial Annual Base Rental Rate: $23.53 per Rentable square foot

14. Annual Base Rental Increase (cumulative) 4 %

15. Initial Annual Operating Expense Allowance: $239,320.00

16. Initial Annual Operating Expense Allowance Rate: $5.00 per Rentable square foot

17. Fiscal Year: Twelve months ending December 31

18. Security Deposit: $0 payable at the time the lease is signed (Article #26)

19. First Rent Check of $93,853.33 Payable at the time the lease is signed
(Article #26)

20. Broker: None

21. Landlord's Address for Notices: Old Gettysburg Associates IV, L.P.

% Select Capital 4718 Old Gettysburg
Rd, Suite 405
Mechanicsburg, PA 17055

22. Tenant's Address for Notices: Select Medical Corporation 4716 Old Gettysburg Rd Mechanicsburg, PA 17055

23. Other Terms and Conditions Tenant to have option to extend under similar conditions for additional 10 years.

Exhibits A-F are part of this Lease, identified as follows:

Exhibit A,   Description of Premises
Exhibit B,   Description of Real Property
Exhibit C,   Description of Leasehold Improvements
Exhibit D,   Parking
Exhibit E,   Security Card/Key Access
Exhibit F,   Rules and Regulations

The foregoing Basic Lease Information is hereby incorporated into and made a part of the Office Lease Agreement which is described herein and attached. Each reference in the Lease to any information and definitions contained in the Basic Lease Information shall mean and refer to the information and definitions hereinabove set forth. In the event of any conflict between any Basic Lease Information and the Lease, the Lease shall control.

LANDLORD: Old Gettysburg Associate IV

By: SELECT CAPITAL COMMERCIAL PROPERTIES,
INC.

                                           Its general partner

WITNESS: /s/ Marlene Bullman           By: /s/ John M. Ortenzio
         --------------------              ----------------------------------
                                            John M. Ortenzio, President

                                       Date:  August 28, 2006

                                       TENANT: Select Medical Corporation

ATTEST: /s/ John F. Duggan             By: /s/ Michael E. Tarvin
        -------------------                 ---------------------------------
                                            Michael E. Tarvin,
                                            Senior Vice President

                                       Date:  August 25, 2006

TABLE OF CONTENTS

                                                                                                   Page
ARTICLE 1 - PREMISES..........................................................................       4

ARTICLE 2 - TERM...............................................................................      4

ARTICLE 3 - DELIVERY OF THE PREMISES TO TENANT.................................................      5

ARTICLE 4 - ACCEPTANCE OF THE PREMISES AND BUILDING BY TENANT.................................       5

ARTICLE 5 - RENTAL............................................................................       5

ARTICLE 6 - OPERATING EXPENSES................................................................       6

ARTICLE 7 - SERVICES BY LANDLORD..............................................................       8

ARTICLE 8 - UTILITIES.........................................................................       8

ARTICLE 9 - USE..............................................................................       10

ARTICLE 10 - LAWS, ORDINANCES AND REQUIREMENTS OF PUBLIC AUTHORITIES.........................       10

ARTICLE 11 - OBSERVANCE OF RULES AND REGULATIONS.............................................       10

ARTICLE 12 - ALTERATIONS.....................................................................       11

ARTICLE 13 - LIENS...........................................................................       11

ARTICLE 14 - ORDINARY REPAIRS................................................................       11

ARTICLE 15 - INSURANCE.......................................................................       12

ARTICLE 16 - DAMAGE BY FIRE OR OTHER CAUSE...................................................       13

ARTICLE 17 - CONDEMNATION....................................................................       14

ARTICLE 18 - ASSIGNMENT AND SUBLETTING.......................................................       14

ARTICLE 19 - INDEMNIFICATION.................................................................       15

ARTICLE 20 - SURRENDER OF THE PREMISES.......................................................       15

ARTICLE 21 - ESTOPPEL CERTIFICATES...........................................................       16

ARTICLE 22 - SUBORDINATION...................................................................       16

ARTICLE 23 - PARKING.........................................................................       17

ARTICLE 24 - DEFAULT AND REMEDIES............................................................       17

ARTICLE 25 - WAIVER BY TENANT................................................................       19

ARTICLE 26 - SECURITY DEPOSIT................................................................       20

ARTICLE 27 - ATTORNEY'S FEES AND LEGAL EXPENSES..............................................       20

ARTICLE 28 - NOTICES.........................................................................       20

ARTICLE 29 - MISCELLANEOUS...................................................................       20

EXHIBIT "A"- DESCRIPTION OF PREMISES.........................................................       24

EXHIBIT "B"- DESCRIPTION OF REAL PROPERTY....................................................       25

EXHIBIT "C"- DESCRIPTION OF LEASEHOLD IMPROVEMENTS...........................................       26

EXHIBIT "D" - PARKING........................................................................       27

EXHIBIT "E" - SECURITY CARD ACCESS...........................................................       28

EXHIBIT "F"- RULES AND REGULATIONS...........................................................       29

OFFICE LEASE AGREEMENT

THIS Lease, dated as of the date specified in the Basic Lease Information which is attached hereto and incorporated herein for all purposes, is made between Landlord and Tenant.

ARTICLE 1 - PREMISES

Landlord leases to Tenant, and Tenant leases from Landlord for the Term (as defined below) and subject to the provisions hereof, to each of which Landlord and Tenant mutually agree, the Premises, which Premises is more particularly described in the floor plans in EXHIBIT A hereto, together with its appurtenances, including the right to use, in common with others, the lobbies, entrances, stairs, elevators, off-street parking and loading areas (for loading and unloading of materials and supplies), and other public portions of the Building, which Building is situated on the real property described in Exhibit B hereto. The Premises shall constitute part of the "Rentable Area," which shall be determined and defined by Landlord using standards adopted by Building Owners and Managers Association (BOMA). For purposes of this Lease, the Rentable Area of the Building and the Rentable Area of the Premises are as provided in the foregoing Basic Lease Information. The term "Common Areas" shall mean all of the common facilities now or hereafter under, over, in or adjacent to the Building designed and intended for use by all Tenants in the Building in common facilities now or hereafter under, over, in or adjacent to the Building designed and intended for use by all Tenants in the Building in common with Landlord and each other.

ARTICLE 2 - TERM

Section 2.01. The term of this Lease (the "Term") shall begin on the Commencement Date. The Commencement Date shall be the earlier of the date:

(a) specified in the Basic Lease Information provided Landlord has delivered the Premises with the Building Standard Leasehold Improvements as set forth on Exhibit C substantially completed: or

(b) of Tenant's occupancy of the Premises for the conduct of Tenant's business (i.e. not occupancy for construction purposes) (the "Commencement Date").

Unless sooner terminated, the Term shall end at midnight on the Expiration Date specified in the Basic Lease Information.

Section 2.02 Provided Tenant performs all of Tenant's obligations under this Lease, including Tenant's covenant for the payment of Rental as defined below, Tenant shall, during the Term, peaceably and quietly enjoy the Premises without disturbance from Landlord; subject, however, to the terms of this Lease and any deeds of trust, restrictive covenants, ground leases, easements, and other encumbrances to which this Lease now or may become subject and subordinate.

ARTICLE 3 - DELIVERY OF THE PREMISES TO TENANT

Before the Commencement Date, Landlord shall substantially complete the floor(s) or portions thereof on which the Premises are located and shall construct the Leasehold Improvements, if any, to be constructed or installed by Landlord pursuant to the provisions of Exhibit C hereto. If for any reason Landlord cannot deliver the Premises to Tenant by the Commencement Date, this Lease shall not be void or voidable, nor shall Landlord be liable for any loss or damage resulting therefrom, except that the Rental shall be waived for the period between the Commencement Date and the date when Landlord can deliver possession and Landlord shall extend the Term. Tenant may not enter or occupy the Premises until it is tendered by Landlord, unless Tenant's entry relates to construction work in the Premises. The Premises shall be deemed completed and possession delivered when the Premises is completed to accommodate Tenants use. The terms of Exhibit C hereto shall govern the construction and installation of all Leasehold Improvements. The term "Building Standard Leasehold Improvements" as used herein shall mean those Leasehold Improvements which conform to Building Standard. The term "Non-Building Standard Leasehold Improvements" as used herein shall mean all Leasehold Improvements which exceed or deviate from Building Standard. The terms "Building Standard" and "Non-Building Standard" as used herein shall have the meanings specified and or indicated in Exhibit C hereto.

ARTICLE 4 - ACCEPTANCE OF THE PREMISES AND BUILDING BY TENANT

Taking possession of the Premises by Tenant shall be conclusive evidence that Tenant:

(a) accepts the Premises as suitable for the purposes for which they are Leased

(b) accepts the Building and every part and appurtenance thereof as being in a good and satisfactory condition; and

(c) waives any defects in the Premises and its appurtenances, except for the completion of those items, if any, on any punchlist remaining on Exhibit C attached hereto.

Landlord shall not be liable, except for negligence or willful misconduct, to Tenant or any of its agents, employees, licensees, or invitees for any injury or damage to person or property due to the condition or design of or any defect in the Building or its mechanical systems and equipment which may exist or occur, and Tenant, for itself and its agents, employees, licensees, and invitees, expressly assumes all risks of injury or damage to person or property, either proximate or remote, resulting from the condition of the Premises or the Building.

ARTICLE 5 - RENTAL

Section 5.01 Tenant covenants and agrees to pay to Landlord as Rental for the Premises, in lawful money of the United States, 1/12 of the Annual Base Rental specified in the Basic Lease Information, payable monthly in advance, without notice or demand, on the first day of each calendar month. In the event of any late payments, Tenant agrees to pay a late charge for special handling equal to 5% of the Rental due Rental shall be paid to Landlord, without deduction or offset, at the address of Landlord specified in the Basic Lease Information or such other place as Landlord may designate in writing. The first monthly installment of Rental shall be paid on the Commencement Date, except that if Commencement Date is a date other than the first day of a calendar month, then the monthly Rental for the first and last fractional months of the Term shall be appropriately prorated. The term "Rental" as used herein means the sum of Annual Base

Rental, Proportionate Share of Operating Expense Excess (as defined in Section 6.01), Parking Rental (as defined in EXHIBIT D hereof) and all other sums, whether or not expressly denominated as rent, shall constitute Rental for the purposes of Section 502(b)(7) of the Bankruptcy Code U.S.C. 502(b)(7). A service charge of 10% of the amount of any checks returned stamped "NSF" will be due and payable, in addition to the overdue installments to cover Landlord's extra cost and expense in handling and processing. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly installment due under this Lease shall be deemed to be other than on account of the earliest Rental due hereunder, nor shall any endorsement or statement on any check or payment as Rental be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Rental or pursue any other remedy provided in this Lease or by law.

Section 5.02 Upon the first anniversary of the Commencement Date of this Lease, and upon each and every anniversary date thereafter, the then current Annual Base Rental shall be increased by the Annual Base Rental Rate Increase (cumulative) as specified in the Basic Lease Information.

ARTICLE 6 - OPERATING EXPENSES

Section 6.01. From the Commencement Date until the Fiscal Year End following the Commencement Date, Tenant shall pay on a monthly basis in advance, without demand, on the first day of each calendar month, as part of the Annual Base Rental, Tenant's Proportionate Share of Operating Expenses (as defined in article 6 and 7) in excess of the Initial Operating Expense Allowance ("Operating Expense Excess"). Such payments shall be calculated and made as follows:

(a) Before the beginning of each Fiscal Year during the Term, Landlord shall furnish Tenant with Landlord's reasonable estimate of the Operating Expenses and any anticipated Operating Expense Excess for such Fiscal Year. On the first day of each month during the Fiscal Year, Tenant shall pay Tenant's Proportionate Share of such Fiscal Year's estimated Operating Expense Excess in monthly installments of 1/12th of Tenant's Proportionate Share of the estimated annual Operating Expense Excess for such Fiscal Year.

(b) By the first day of March of each Fiscal Year during Tenant's occupancy (beginning with the Fiscal Year following the Commencement Date), or as soon thereafter as possible, Landlord shall furnish to Tenant a statement of Landlord's actual Operating Expense Excess for the previous Fiscal Year or fraction thereof if the Commencement Date occurred after the first day of the previous Fiscal Year. If the actual Operating Expense Excess is greater than Landlord's estimate, a lump sum payment, considered Rental for all purposes, shall be made by Tenant, within 30 days of the delivery of that statement, equal to Tenant's Proportionate Share of the actual Operating Expense Excess over the Landlord's estimate for the previous Fiscal Year. If the actual Operating Expense Excess is less than Landlord's estimate, a lump sum payment shall be made by Landlord, within 30 days of delivery of that statement, equal to Tenant's Proportionate Share of the actual

Operating Expense Excess under Landlord's estimate. The effect of this reconciliation payment or adjustment is that the Tenant shall pay during each Fiscal Year during the Term, in addition to the Annual Base Rental, Tenant's Proportionate Share of Operating Expenses in excess of an amount equal to that Fixed years allowance. Said amount is based upon 12 months of building operation with all tenants utilizing all services provided by Landlord pursuant to Article 7 and Article 8.

(d) With respect to the last Fiscal Year or partial Fiscal Year, as the case may be, during the Term, an adjustment will be made between Landlord and Tenant pursuant to Section 6.02, at the appropriate time after the Expiration Date. The provisions of the paragraph (d) shall survive termination of this Lease with respect to such adjustment and any payments owing by either party to the other after termination hereof.

Section 6.02. As used herein, "Operating Expense" means all expenses, costs, and disbursements of every kind which Landlord pays or incurs in connection with the ownership, operation including, without limitation, the costs of utilities, and maintenance of the Building, Parking Areas, and exterior areas contained within the boundaries described in Exhibit B upon which the Building is situated. All Operating Expenses shall be determined according to generally accepted accrual accounting principles which shall be consistently applied. Operating Expenses shall include, but are not limited to, the following:

(a) Wages, salaries, and fees of all personnel or entities (exclusive of Landlord's executive personnel) directly engaged in the operation, maintenance, repair, or security of the Building, including taxes, insurance, and benefits relating thereto. As to personnel not involved exclusively with the administration and operation of the Building, only those portions of such expenses reasonably allocable to the Building shall be included.

(b) All supplies and materials used in the operation and maintenance of the Building, except for special lighting, relamping and ballasts within any Tenant space.

(c) Expenses of all management, maintenance, janitorial, security, and service agreements for the Building and the equipment therein, including, without limitation, alarm service, janitorial services, exterior window cleaning, elevator maintenance, landscaping, parking facility maintenance, roadway and utility maintenance and cleaning, etc.

(d) Expenses of all insurance relating to the Building for which Landlord is responsible hereunder, or which Landlord considers reasonably necessary for the operation of the Building, including, without limitation, the cost of property, casualty and liability insurance applicable to the Building and Landlord's personal property used in connection therewith, and the cost of business interruption or rental insurance.

(e) All taxes, assessments, and other governmental charges, now or hereafter applicable to the Building, or any portion thereof, or to Landlord's personal property used in connection therewith, and dues (including those levied by any Association managing all common areas and easements) attributable

to the Building or its operation, exclusive of any inheritance, gift, franchise, income, corporate, or profit taxes which may be assessed against Landlord.

(f) Expenses of repairs and general maintenance (excluding repairs and general maintenance paid by proceeds of insurance or by Tenant or other third parties, and alterations attributable solely to Tenants of the Building).

(g) Landlord's Costs related to fees paid to individuals or companies engaged in rendering legal, accounting or technical services including efforts to reduce Building Ad Valorem Tax expenses.

(h) All utility costs to Landlord of the Building (exclusive, however, of such special utility services as are provided in Section 8.02 hereof), including, without limitation, water, power, fuel, heating, lighting, air conditioning, and ventilation.

Operating Expenses shall not include specific costs especially billed to and paid by specific Tenants such as above Building Standard janitor service, above Building Standard utility service, or other services above Building Standard.

Tenant shall be liable for all taxes levied or assessed against personal property, furniture, fixtures, or Tenant finish placed by Tenant in the Premises. If any such taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property, and Landlord elects to pay the taxes based on such increase, Tenant shall pay to Landlord upon demand that part of such taxes for which Tenant is liable hereunder; provided that Tenant shall have the right to contest such taxes if Tenant shall have furnished Landlord with security sufficient in Landlord's reasonable determination.

ARTICLE 7 - SERVICES BY LANDLORD

While Tenant is occupying the Premises and is not in default under this Lease, Landlord shall, at its expense, but subject to the provisions of Articles 6 and 8 hereof, furnish the Premises with:

(a) passenger elevator service (where applicable) in common with other Tenants for access to and from the Premises, reasonably limited after normal business hours and on Saturdays, Sundays, and holidays;

(b) janitorial cleaning services as are customarily provided to in comparable office buildings in the greater Harrisburg area; and

ARTICLE 8 - UTILITIES

Section 8.01 While Tenant is occupying the Premises and is not in default under this Lease, Landlord shall furnish Tenant with the following services:

(a) potable water

(b) heating, ventilating, and/or air conditioning in season on business days from 7:00 a.m. to 6:00 p.m.

all of which services shall be provided to Tenant by Landlord and paid for by Landlord as part of the Operating Expense Allowance. If Tenant requires air conditioning or heating outside the hours and days specified above, Landlord shall furnish it only at Tenant's request, and Tenant will bear the entire charge therefore which will be an amount equal to the rate charged to Landlord, at that time, plus a reasonable fee to cover Landlord's overhead costs, with a two-hour minimum. With respect to such after hours cost, Landlord acknowledges that the current after hours charge is $35.00 per hour. Whenever machines or equipment that generate abnormal heat are used in the Premises by Tenant which affect the temperature or humidity otherwise maintained by the central air conditioning system, Landlord will have the right to install supplemental air conditioning units in the Premises, and the full total cost thereof, will be paid by Tenant to Landlord on demand. Notwithstanding anything in this Lease to the contrary, Tenant shall be responsible for the cost of special lighting relamping and ballasts within the Premises after initial installation of such items.

Section 8.02 While Tenant is occupying the Premises and is not in default under this Lease, Landlord will furnish sufficient power for lighting, personal computers, and other normal office machines of similar low electrical consumption, all of which power shall be paid for by Landlord as a part of the Operating Expense Allowance. Tenant agrees that Landlord's aforesaid obligation does not include the provision of power for:

(a) special mainframe type computers and/or electronic data processing equipment,

(b) special lighting which has electrical consumption in excess of the Building Standard lighting, or

(c) any item that consumes more than 0.5 kilowatts at rated capacity or requires a voltage other than 120 volt single phase

and such consumption by Tenant shall be deemed excessive usage for which Tenant shall pay Landlord upon receipt of an invoice for the cost to Landlord of such usage. Notwithstanding the aforementioned, Tenant acknowledges that the Building electrical feeders have normal design limitations, such that

(i) in no event shall lighting have a design load greater than an average of 2.00 watts per Usable square foot, and

(ii) collectively, Tenant's equipment and lighting shall not have an electrical design load greater than an average of 3.75 watts per Usable square foot.

Upon the existence of Tenant's excess electrical requirements, Landlord may, at its option, upon not less than 30 days prior written notice to Tenant, discontinue electric services to the Premises until Tenant reduces its power consumption to the permissible limits. Landlord will not be liable in any way to Tenant for failure or defect in the supply or character of electric energy or any other utility service furnished to the Premises because of any requirement, act, or omission of the public utility servicing the Building. All installations of electrical fixtures, appliances, and equipment within the Premises shall be subject to Landlord's prior approval. Landlord's obligation to furnish utility services shall be subject to the rules and regulations of any municipal or other governmental authority regulating the business of providing utility services. When Tenant's use of the Premises consumes power in excess of the Building Standard lighting and for normal office machines of similar low consumption, then the usage of such additional consumption shall be determined, at Landlord's election, either

(i) by a survey performed by a reputable consultant selected by Landlord (and paid for by Tenant when such additional consumption is proven), or

(ii) by separate meter in the Premises to be installed, maintained and read by Landlord at Tenant's sole expense.

Section 8.03 Failure to furnish, or any stoppage of, the services provided for in Article 7 above and in this Article 8 resulting from any cause will not make Landlord liable in any respect for damages to either person, property, or business, nor be construed as an eviction of Tenant, nor entitle Tenant to any abatement of Rental, nor relieve Tenant from its obligations under this Lease. Landlord will, with reasonable diligence, repair any malfunction of the Building Improvements or facilities, but Tenant will have no claim for rebate, abatement of Rental, or damages because of any malfunctions or interruptions in service.

ARTICLE 9 - USE

The Premises shall be used for general office purposes, and for no other purpose and Tenant agrees to use and maintain the Premises in a clean, careful, safe, lawful, and proper manner.

ARTICLE 10 - LAWS, ORDINANCES AND REQUIREMENTS OF PUBLIC AUTHORITIES

Tenant shall, at its sole expense,

(i) comply with all laws, orders, ordinances, and regulations of federal, state, county, and municipal authorities having jurisdiction over the Premises,

(ii) comply with any direction made pursuant to law of any public officer or officers requiring abatement of any nuisance, or imposing any obligation, order, or duty upon Landlord or Tenant arising from Tenant's use of the Premises or from conditions which have been created by or at the insistence of Tenant or required by reason of a breach of any of Tenant's obligations hereunder, and

(iii) indemnify Landlord and hold Landlord harmless from any loss, cost, claim, or expense which Landlord may incur or suffer by reason of Tenant's failure to comply with its obligations under clauses (i) or
(ii) above. If Tenant receives written notice of violation of any such law, order, ordinance, or regulation, it shall promptly notify Landlord thereof.

ARTICLE 11 - OBSERVANCE OF RULES AND REGULATIONS

Tenant and its employees, agents, visitors, and licensees shall observe faithfully and comply strictly with all Rules and Regulations attached to this Lease (EXHIBIT F). Landlord shall at all times have the right to make reasonable exchanges in and additions to such Rules and Regulation. Any failure by Landlord to enforce any of the Rules and Regulations now or hereafter in effect, either against Tenant or any other Tenant in the Building, shall not constitute a waiver of any such Rules and Regulations. Landlord shall not be liable to Tenant for the failure or refusal by any other Tenant, guest, invitee, visitor, or occupant of the Building to comply with any of the Rules and Regulations, but Landlord shall, after receipt of notice, take reasonable action to assure compliance.

ARTICLE 12 - ALTERATIONS

Section 12.01 Tenant may not, at any time during the Term, without Landlord's prior written consent (which consent shall not be unreasonably withheld), make any alterations to the Premises. All alterations shall be made at Tenant's expense, either by Tenant's contractors which have been approved in writing by Landlord, or at Landlord's option, by Landlord's contractors on terms reasonably satisfactory to Tenant, including a fee of 15% of the actual costs to Landlord for performing such work to cover Landlord's overhead.

Section 12.02 All Leasehold Improvements (whether Building Standard or Non-Building Standard), alterations, and other physical additions made or installed by or for Tenant in or to the Premises shall be and remain Landlord's property, except Tenant's furniture, furnishings, personal property, and moveable trade fixtures, and shall not be removed without Landlord's written consent.

ARTICLE 13 - LIENS

Tenant shall keep the Premises, the Building, and the property on which the Building is located, free from any liens arising from any work performed, materials furnished, or obligations incurred by or at the request of Tenant. Nothing contained in this Lease shall be construed as Landlord's consent to any performance of labor or furnishing of any materials for any specific improvements, alteration, or repair of, or to, the Premises, that would result in any liens against the Premises or liability of the Landlord. If, based upon acts of Tenant, any lien is filed against the Premises, the Building, the Property on which the Building is located, or Tenant's Leasehold interests therein, Tenant shall discharge same within 10 days after its filing. If Tenant fails to discharge such lien within such period, then, in addition to any other right or remedy of Landlord, Landlord may, at its election, discharge the lien by either paying the amount claimed to be due, obtaining the discharge by deposit with a court or a title company, or by bonding. Tenant shall pay on demand any amount paid by Landlord for reasonable attorneys' fees and other legal expenses of Landlord incurred in defending any such action or in obtaining the discharge of such lien, together with all necessary disbursements in connection therewith, to double the amount of the lien claim plus a sufficient amount to cover any penalties, interest, attorneys' fees, court costs, and other legal expenses resulting from such contest. This bond shall name Landlord and such other parties as Landlord may direct as beneficiaries thereunder.

ARTICLE 14 - ORDINARY REPAIRS

Tenant shall, at all times during the Term hereof and at Tenant's sole cost and expense, keep the Premises and every part thereof in good condition and repair, ordinary wear and tear, fire and other casualty excepted. Subject to Article 20, section 20.02 herein, Tenant shall, at the end of the term hereof, surrender the Premises, as repaired, to Landlord in the same condition as when received, ordinary wear and tear excepted. If Tenant fails to make such repairs promptly, Landlord may, at its option, make such repairs, and Tenant shall pay Landlord on demand Landlord's actual costs in making repairs plus a fee of (15%) to cover Landlord's overhead.

ARTICLE 15 - INSURANCE

Section 15.01 Tenant shall, during the Term, at its sole expense, keep in force, with Tenant, Landlord, and the mortgagees and ground lessors of Landlord named as additional insured thereunder (except with respect to Worker's Compensation coverage) all as their respective interests may appear, the following insurance:

(a) All Risk Insurance (including fire, extended coverage, vandalism, malicious mischief, extended perils, sprinkler leakage and debris removal) upon property of every description and kind owned by Tenant and located in the Building or for which Tenant is legally liable or installed by or on behalf of Tenant including, without limitation, fittings, installations, fixtures, removable trade fixtures, Non-Building Standard Leasehold Improvements (as defined in EXHIBIT
C), and alterations, in an amount not less than the full replacement cost thereof. If there is a dispute as to the amount which comprises full replacement cost, the decision of Landlord or the mortgagees of Landlord shall be conclusive and binding.

(b) Commercial liability insurance coverage to include death, personal injury, bodily injury (not less that $1,000,000 limits), broad form property damage (not less than $1,000,000 limits), fire sprinkler hazard, operations hazard, owner's protective coverage, contractual liability, and products and completed operations liability, with combined single liability limits not less than $1,000,000. Such coverage shall insure against all liability of Tenant and its authorized representatives and visitors arising out of, and in connection with, Tenant's use or occupancy of the Premises.

(c) Worker's Compensation and Employer's Liability Insurance, with a waiver of subrogation endorsement, in form and amount satisfactory to Landlord.

(d) Any other form or forms of insurance as Tenant or Landlord or the mortgagees of Landlord may reasonably require from time to time in form, in amounts, and for insurance risks against which a prudent Tenant of a comparable size and in a comparable business would protect itself.

All policies shall be issued by insurers with a Best's Insurance Reports rating of A or better and shall be in form satisfactory to Landlord. Tenant agrees that certificates of insurance on the Landlord's standard form, or certified copies of each such insurance policy, naming Landlord and its mortgagees as additional insured, will be delivered to Landlord not later than 5 days prior to the date that Tenant takes possession of any part of the Premises. All policies shall contain an undertaking by the insurers to notify Landlord and the mortgagees of Landlord in writing, by Registered U.S. Mail, not less than 30 days before any material change, reduction in coverage, cancellation, or other termination thereof. All insurance shall be primarily as to Landlord and not participating with any other available insurance. So long as Tenant is not in default, proceeds of Tenant's insurance shall be available to repair or replace the insured fixtures and equipment.

Section 15.02 During the Term, Landlord shall insure the Building (but excluding Non-Building Standard Leasehold Improvements and any other property which Tenant is obligated to insure under Section 15.01 hereof) against damage by fire and standard extended coverage perils in an amount equal to the full replacement cost thereof, and shall provide public liability insurance in such amounts and with such deductions as Landlord considers appropriate. Landlord may, but shall not be obligated to, take out and carry any other form or forms of insurance as it or Landlord's mortgagees may reasonably determine appropriate.
Notwithstanding any contribution by Tenant to the cost of insurance premiums, as provided herein, Tenant acknowledges that it has no right to receive any proceeds from any insurance policies carried by Landlord. Landlord will not be required to carry insurance of any kind on any Non-Building Standard Leasehold Improvements, on Tenant's furniture or furnishings, or on any of Tenant's fixtures, equipment,

improvements, or appurtenances under this Lease; and Landlord shall not be obligated to repair or replace same.

Section 15.03 Tenant shall not keep in the Premises any article which may be prohibited by any reasonable insurance policy periodically in force covering the Building. If Tenant's occupancy results in any increase in premiums for the insurance carried by Landlord, Tenant shall pay any such increase in premiums as additional Rental within 10 days after being billed therefore. Tenant shall promptly comply with all reasonable requirements of the insurance authority or any present or future insurer relating to the Premises and the Building.

Section 15.04 If any of Landlord's insurance policies shall be cancelled or cancellation shall be threatened or the coverage hereunder reduced or threatened to be reduced, or if the premiums on any of Landlord's insurance policies are increased or threatened to be increased, in any way because of Tenant's use of the Premises and, if Tenant fails to remedy the cause thereof within 48 hours after notice, Landlord may, at its option, either terminate this Lease or enter upon the Premises and attempt to remedy such condition, and Tenant shall promptly pay the cost thereof to Landlord as additional Rental. Landlord shall not be liable for any damage or injury caused to any property of Tenant or of others located on the Premises resulting from such entry. If Landlord is unable to remedy such condition, then Landlord shall have all of the remedies provided for in this Lease in the event of a default by Tenant.

Section 15.05 All policies covering real or personal property which either party obtains affecting the Premises shall include a clause or endorsement denying the insurer any rights of subrogation against the other party to the extent rights have been waived by the insured before the occurrence of injury or loss. Landlord and Tenant hereby mutually waive any rights of recovery against the other for injury or loss due to hazards covered by insurance containing such a waiver of subrogation clause or endorsement to the extent of the injury or loss covered thereby.

ARTICLE 16 - DAMAGE BY FIRE OR OTHER CAUSE

Section 16.01 Subject to Sections 16.02 and 16.03 hereof, if the Building is damaged by fire or other casualty so as to affect the Premises, Tenant shall immediately notify Landlord, who shall (but only if the proceeds from Landlord's insurance available to Landlord

(i) are free from collection by Landlord's mortgagee, ground or primary lessor, and

(ii) are sufficient)

have the damage repaired with reasonable speed at the expense of Landlord, subject to delays which may arise by reason of adjustment of loss under insurance policies and to other delays beyond Landlord's reasonable control. Provided such damage was not the result of the negligence or willful misconduct of Tenant, or Tenant's employees or invitees, an abatement in the Rental hereunder shall be allowed as to that portion of the Premises rendered untenantable by such damage until such time as Landlord determines that such damaged portion of the Premises has been made tenantable for Tenant's use.

Section 16.02 If the Premises are damaged or destroyed by any cause whatsoever, and if, in the Landlord's reasonable opinion the Premises cannot be rebuilt or made fit for Tenant's purposes within 120 days of the damage or destruction, or if the proceeds from insurance remaining after payment of any such proceeds to Landlord's mortgagee, ground, or primary lessor, are insufficient to repair or restore the damage by destruction, Landlord may, at its option, terminate this Lease by giving the Tenant, within 60 days after such damage or destruction, notice of termination, and thereupon Rental and any other payments for which

Tenant is liable under this Lease shall be apportioned and paid to the date of such damage, and Tenant shall immediately vacate the Premises, provided, however, that those provisions of this Lease which are designated to cover matters of termination and the period thereafter shall survive the termination hereof.

Section 16.03 If either

(a) the Building is damaged or destroyed to the extent that, in Landlord's reasonable opinion it would not be economically feasible to repair or restore such damage or destruction, or

(b) in Landlord's reasonable judgment, the damage or destruction to the Building cannot be repaired or restored within 60 days after such damage or destruction,

Landlord may, at its option, terminate this Lease by giving Tenant, within 60 days after such damage, notice of such termination requiring Tenant to vacate the Premises 60 days after delivery of the notice of termination, and thereupon Rental and any other payments shall be apportioned and paid to the date on which possession is relinquished and Tenant shall immediately vacate the Premises according to such notice of termination, provided, however, that those provisions of this Lease which are designed to cover matters of termination and the period thereafter shall survive the termination hereof.

Section 16.04 No damages shall be payable by Landlord for inconvenience, loss of business, or annoyance arising from any repair or restoration of any portion of the Premises, or the Building. Landlord shall use its best efforts to have such repairs made promptly so as not to unnecessarily interfere with Tenant's occupancy.

Section 16.05 The provisions of this Article shall be considered an express agreement governing any case of damage or destruction of the Building, the Building Standard Leasehold Improvements, the Non-Building Standard Leasehold Improvements, the alterations, or the Premises by fire or other casualty.

ARTICLE 17 - CONDEMNATION

If the Premises shall be taken or condemned, in whole or in part, for any public purpose to such an extent as to render said Premises untenantable, this Lease shall, at the option of Landlord or Tenant, forthwith terminate. All proceeds from any taking or condemnation shall belong to and be paid to Landlord, except to the extent of any proceeds awarded to Tenant on account of moving and relocation expenses and depreciation to and removal of Tenant's physical property.

ARTICLE 18 - ASSIGNMENT AND SUBLETTING

Section 18.01 If Tenant should desire to assign this Lease or sublet the Premises (or any part thereof), Tenant shall give Landlord written notice at least 60 days in advance thereof. Landlord shall then have a period of 30 days following receipt of such notice within which to notify Tenant in writing that Landlord elects either

(a) to terminate this Lease as to the space so affected by Tenant in its notice, in which event Tenant, subject to the provisions of this Lease which expressly survive the termination hereof, shall be relieved of all further obligations hereunder as to such space;

(b) to permit Tenant to assign or sublet such space, subject, however, to the subsequent written approval of the proposed assignee or subtenant by Landlord, and provided that if the Rental rate agreed upon between Tenant and its proposed subtenant is greater than the Rental rate that Tenant must pay Landlord hereunder, then 100% of such excess Rental shall be considered additional Rental owed by Tenant to Landlord, and shall be paid by Tenant to Landlord in the same manner that Tenant pays Annual Base Rental; or

(c) to refuse to consent to Tenant's assignment or subleasing of such space and to continue this Lease in full force and effect as to the entire Premises, in which case, any judgment against Landlord for unreasonable denial shall be limited to specific performance of approval of said assignment or sublease.

No assignment or subletting by Tenant shall relieve Tenant of Tenant's obligations under this Lease. Any attempted assignment or sublease by Tenant in violation of the terms and provisions of this Section 18.01 shall be void. In no event shall Tenant solicit assignees or sub lessees in other Buildings owned by Landlord, or at less than a fair market rate.

Section 18.02 Landlord may sell, transfer, assign, and convey all or any part of the Building and any and all of its rights under this Lease, provided Landlord's successor in interest assumes Landlord's obligations hereunder, and in the event Landlord assigns its rights under this Lease, Landlord shall be released from any further obligations hereunder, and Tenant agrees to look solely to Landlord's successor in interest for performance of such obligations.

ARTICLE 19 - INDEMNIFICATION

Tenant waives all claims against Landlord for damage to any property or injury to, or death of, any person in, upon, or about the Building, the Premises or Parking Facilities arising at any time and from any and all causes whatsoever other than solely by reason of the negligence or willful misconduct of Landlord, its agents, employees, representatives, or contractors, and Tenant agrees that it will defend, indemnify, save, and hold harmless, Landlord from and against all claims, demands, actions, damages, loss, cost, liabilities, expenses, and judgments suffered by, recovered from, or asserted against Landlord on account of any damage to any property or injury to, or death of, any person arising from the use of the Building, the Premises, or the Parking Facilities by Tenant or its employees or invitees, except such as is caused solely by the negligence or willful misconduct of Landlord, its agents, employees, representatives, or contractors. Tenant's foregoing indemnity obligation shall include reasonable attorneys' fees and all other reasonable costs and expenses incurred by Landlord. The provisions of this Article 19 shall survive the termination of this Lease with respect to any damage, injury, or death occurring before such termination. If Landlord is made a party to any litigation commenced by or against Tenant or relating to this Lease or to the Premises, and provided that in any such litigation, Landlord is not finally adjudicated to be at fault, then Tenant shall pay all costs and expenses, including attorneys' fees and court costs, incurred by or imposed upon Landlord because of any such litigation, and the amount of all such costs and expenses, including attorneys' fees and court costs, shall be a demand obligation owing by Tenant to Landlord, and shall be considered as additional Rental.

ARTICLE 20 - SURRENDER OF THE PREMISES

Section 20.01 Upon the expiration or other termination of this Lease for any cause whatsoever, Tenant shall peacefully vacate the Premises in as good order and condition as the same were at the beginning of the Term or may thereafter have been improved by Landlord or Tenant, subject only to reasonable use and wear thereof, and repairs which are Landlord's obligation hereunder.

Section 20.02 Landlord may require Tenant to remove any Non-Building Standard Leasehold Improvements, alterations, and physical additions installed in the Premises upon termination of this Lease. In the event Landlord so elects, and Tenant fails to remove the aforementioned items, Landlord may remove and store same at Tenant's cost, and Tenant shall pay Landlord on demand, the cost of restoring the Premises to Building Standard, ordinary wear and tear excepted. Tenant agrees to remove, at Tenant's expense, all of its furniture, furnishings, personal property, and moveable trade fixtures by the Expiration Date, and shall promptly reimburse Landlord for the cost of repairing all damage done to the Premises or the Building by such removal.

Section 20.03 Should Tenant continue to hold the Premises after the termination of this Lease, whether the termination occurs by lapse of time or otherwise, such holding over shall, unless otherwise agreed to by Landlord in writing, constitute and be construed as a tenancy at will at a monthly Rental equal to 2.5 times the monthly Rental Rate for the Premises as of the date of termination, and subject to all of the other terms set forth herein except any right to renew or expand this Lease. Tenant shall be liable to Landlord for all damage which Landlord suffers because of any holding over by Tenant, and Tenant shall indemnify Landlord against all claims made by any other Tenant or prospective Tenant against Landlord resulting from delay by Landlord in delivering possession of the Premises to such other Tenant or prospective Tenant.

ARTICLE 21 - ESTOPPEL CERTIFICATES

Tenant agrees to furnish, when requested by Landlord or the holder of any deed of trust covering the Building, the Land, or any interest of Landlord therein, a certificate signed by Tenant certifying to such parties as Landlord may designate to the extent true matters with respect to the terms and status of this Lease and the Premises, stating that Tenant, as of the date of such certificate, has no charge, lien, or claim of offset under this Lease or otherwise against Rentals or other charges due or to become due hereunder; and such other matters as may be requested by Landlord or the holder of any such deed of trust. To the extent any such statements requested are not true, Tenant shall explain such facts in writing. Landlord agrees periodically to furnish, when reasonably requested in writing by Tenant, certificates signed by Landlord containing substantially the same information as described above.

ARTICLE 22 - SUBORDINATION

Section 22.01 This Lease is subject and subordinate to any deeds of trust, mortgages, or other security instruments, and any other supplements or amendments thereto, which presently or may in the future cover the Building and the Land or any interest of Landlord therein, and to any increases, renewals, modifications, consolidations, replacements, and extensions of any of such deeds of trust, mortgages, or security instruments. Landlord agrees to use his best efforts to obtain for Tenant a "non-disturbance" agreement from the holder or beneficiary of any deeds of trust, mortgages or other security instruments that in the future may cover the Building and the Land or any interest of Landlord therein. This provision is declared by Landlord and Tenant to be self-operative and no further instrument shall be required to effect such subordination of this Lease. Tenant shall, however, upon demand, execute, acknowledge, and deliver to Landlord any further instruments and certificates evidencing such subordination as Landlord may require. This Lease is further subject and subordinate to

(a) all ground or primary Leases in existence at the date hereof and to any supplements, modifications, and extensions thereof heretofore or hereafter made, and

(b) utility easements and agreements, covenants, restrictions, and other encumbrances which do not materially adversely effect Tenant's intended use of the Premises, both existing and future.

Section 22.02 Notwithstanding the generality of the foregoing provisions of
Section 22.01 hereof, any such mortgagee or ground or primary lessor shall have the right at any time to subordinate any such ground or primary Leases, deeds of trust, mortgages, or other security instruments to this Lease on such terms and subject to such conditions as such mortgagee or ground or primary lessor may consider appropriate in its discretion. At any time, before or after the institution of any proceedings for the foreclosure of any such deeds of trust, mortgages, or other security instruments or termination of any ground or primary Lease, or sale of the Building under any such deeds of trust, mortgages, or other security instruments or termination of any ground or primary Lease, Tenant shall attorn to such ground or primary lessor or such purchaser upon any such sale or the grantee under any deed in lieu of such foreclosure and shall recognize such ground or primary lessor or such purchaser or grantee as Landlord under this Lease. The agreement of Tenant to attorn contained in the immediately preceding sentence shall survive any such termination of any ground or primary Lease, foreclosure sale, trustee's sale, or conveyance in lieu thereof. Tenant shall upon demanded at any time, before or after any such termination, execute, acknowledge, and deliver to Landlord's mortgagee or ground or primary lessor any written instruments and certificates evidencing such attornment as Landlord's mortgagee or ground or primary lessor may reasonably require.

ARTICLE 23 - PARKING

Landlord will permit Tenant to use the areas designated by Landlord ("Parking Area") for parking of vehicles in common with other Tenants in the office park during the Term as more fully provided for in EXHIBIT D hereto.

ARTICLE 24 - DEFAULT AND REMEDIES

Section 24.01 The occurrence of any one or more of the following events shall, at Landlord's option, constitute an event of default of this Lease:

(a) if Tenant shall fail to pay any Rental or other sums payable by Tenant hereunder within 10 days of written notice thereof from Landlord (provided, however, if such event of default shall occur more than once in every 6 months period, Landlord shall not be required to provide any written notice of default and an event of default shall occur as and when such Rental or other sums becomes due and payable);

(b) if Tenant shall fail to perform or observe any other term hereof or any of the Rules and Regulations and such failure shall continue for more than 30 days after notice thereof from Landlord;

(d) if Tenant deserts or vacates any substantial portion of the Premises;

(e) if any petition is filed by or against Tenant or any guarantor of Tenant's obligations under this Lease under any section or chapter of the present or any future Federal Bankruptcy Code or under any similar law or statute of the United States or any state thereof;

(f) if Tenant or any guarantor of Tenant's obligations under this Lease becomes insolvent or makes a transfer in fraud of creditors;

(g) if Tenant or any guarantor of this Lease makes an assignment for the benefit of creditors; or

(h) if a receiver, custodian, or trustee is appointed for Tenant or for any of the assets of Tenant which appointment is not vacated within 30 days of the date of such appointment.

Section 24.02 If an event of default occurs, at any time thereafter Landlord may do one or more of the following without any additional notice or demand:

(a) Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord. If Tenant fails to do so, Landlord may, without notice and without prejudice to any other remedy Landlord may have, enter upon and take possession of the Premises and expel or remove Tenant and its effects without being liable to prosecution or any claim for damages therefor; and Tenant shall be liable to Landlord for all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the Premises or otherwise, including any loss of Rental for the remainder of the Term. Any such loss of Rental shall be offset by any Rental received by Landlord as a result of reletting the Premises during the remainder of the Term.

(b) Terminate this Lease, in which event Tenant's event of default shall be considered a total breach of Tenant's obligations under this Lease and Tenant immediately shall become liable for such damages for such breach amount, equal to the total of:

(1) the costs of recovering the Premises;

(2) the unpaid Rental earned as of the date of termination, due for the remaining term as of the date of termination, plus interest thereon at a rate per annum from the due date equal to 5% percent over the Prime Rate; provided, however, that such interest shall never exceed the Highest Lawful Rate;

(3) the total Rental and other benefits which Landlord would have received under the Lease for the remainder of the Term, at the rates then in effect, together with all other expenses incurred by Landlord in connection with Tenant's default

(3) the amount of the excess of

(i) the total Rental and other benefits which Landlord would have received under the Lease for the remainder of the Term, at the rates then in effect, together with all other expenses occurred by Landlord in connection with Tenant's default, over

(ii) the Fair Market Rate of the balance of the Term as of the time of such breach,

which excess shall be discounted at the rate of 8% per annum to the then present value: and

(4) all other sums of money and damages owing by Tenant and Landlord.

(c) Enter upon and take possession of the Premises as Tenant's agent without terminating this Lease and without being liable to prosecution or any claim for damages therefor, and Landlord may relet the Premises as Tenant's agent and receive the Rental therefor, in which event Tenant shall pay to Landlord on demand the cost of renovating, repairing, and altering the Premises for a new Tenant or Tenants and any deficiency that may arise by

reason of such reletting; provided, however, that Landlord shall have no duty to relet the Premises and Landlord's failure to relet the Premises shall not release or affect Tenant's liability for Rental or for damages.

(d) Do whatever Tenant is obligated to do under this Lease and may enter the Premises without being liable to prosecution or any claim for damages therefor, to accomplish this purpose. Tenant shall reimburse Landlord immediately upon demand for any expenses which Landlord incurs in thus effecting compliance with this Lease on Tenant's behalf, and Landlord shall not be liable for any damages suffered by Tenant from such action, whether caused by the negligence of Landlord or otherwise.

Section 24.03 No act or thing done by Landlord or its agents during the Term shall constitute an acceptance of an attempted surrender of the Premises, and no agreement to accept a surrender of the Premises or to terminate this Lease shall be valid unless made in writing and signed by Landlord. No re-entry or taking possession of the Premises by Landlord shall constitute an election by Landlord to terminate this Lease, unless a written notice of such intention is given to Tenant Notwithstanding any such reletting or re-entry or taking possession, Landlord may at any time thereafter terminate this Lease for a previous default. Landlord's acceptance of Rental following an event of default hereunder shall not be construed as a waiver of such event of default. No waiver by Landlord of any breach of this Lease shall constitute a waiver of any other violation or breach of any time of the terms hereof. Forbearance by Landlord to enforce one or more of the remedies herein provided upon a breach hereof shall not constitute a waiver of any other breach of the Lease.

Section 24.04 No provision of this Lease shall be deemed to have been waived by Landlord unless such waiver is in writing and signed by Landlord. Nor shall any custom or practice which may evolve between the parties in the administration of the terms of this Lease be construed to waive or lessen Landlord's right to insist upon strict performance of the terms of this Lease. The rights granted to Landlord in this Lease shall be cumulative of every other right or remedy which Landlord may otherwise have at law or in equity or by statue, and the exercise of one or more rights or remedies shall not prejudice or impair the current or subsequent exercise of other rights or remedies.

ARTICLE 25 - WAIVER BY TENANT

To the extent permitted by applicable law, Tenant waives for itself and all claiming by, through, and under it, including creditors of all kinds

(a) any right and privilege which it or any of them may have under any present or future constitution, statute, or rule of law to redeem the Premises or to have a continuance of this Lease for the Term after termination of Tenant's right of occupancy by order or judgment of any court or by any legal process or writ, under the terms of this Lease, or after the termination of the Term as herein provided,

(b) the benefits of any present or future constitution, statute, or rule of law which exempts property form liability for debt or for distress for rent, and

(c) the provisions of law relating to notice and/or delay in levy of execution in case of eviction of a Tenant for non-payment of rent.

ARTICLE 26 - SECURITY DEPOSIT

The Security Deposit if any shall be held by Landlord, without interest, as security for the performance of Tenant's obligations under this Lease. Landlord may, without prejudice to any other remedy, use the Security Deposit to remedy any default in any obligation of Tenant hereunder, and such use shall survive the termination of this Lease, and Tenant shall promptly, on demand, restore the Security Deposit to its original amount. If Tenant is not in default at the termination of this Lease, any remaining portion of the Security Deposit shall be returned to Tenant. If Landlord transfers its interest in the Premises during the Term, Landlord shall assign the Security Deposit to the transferee who shall then become obligated to Tenant for its return, and thereafter Landlord shall have no further liability for its return.

ARTICLE 27 - ATTORNEY'S FEES AND LEGAL EXPENSES

In any action or proceeding brought by either party against the other with respect to this Lease, the prevailing party shall be entitled to recover from the other party's reasonable attorneys' fees, investigation costs, and other legal expenses and court costs incurred by such party in such action or proceeding as the court may find to be reasonable. The prevailing party shall be the one who receives the net judgment in its behalf at the end of any action.

ARTICLE 28 - NOTICES

Any notice or document required to be delivered hereunder shall be considered delivered, whether actually received or not, when hand delivered to the address of the other party, or 48 hours after deposited in the United States Mail, postage prepaid, registered or certified mail, return receipt requested, addressed to the parties hereto at the respective addresses specified in the Basic Lease Information, or at such other address as they have subsequently specified by written notice.

ARTICLE 29 - MISCELLANEOUS

Section 29.01 Where this Lease requires Tenant to reimburse Landlord the cost of any item, if no such cost has been stipulated, such cost will be the reasonable and customary charge therefor periodically established by Landlord. Failure to pay any such cost shall be considered as a failure to pay Rental.

Section 29.02 Tenant represents and warrants that it has had no dealings with any broker or agent in connection with the negotiation or execution of this Lease except such brokers or agents as may be identified in Item 23 of the Basic Lease Information. Tenant shall indemnify and hold Landlord harmless from any costs, expenses, or liability for commission or other compensation or charges claimed by any person, broker or agent (other than those identified in the Basic Lease Information), claiming through association with Tenant with respect to this Lease.

Section 29.03 As used herein, the terms "business days" means Monday through Friday (except for holidays); "normal business hours" means 7:00 a.m. to 6:00
p.m. on business days; and "holidays" means those holidays designated by Landlord, which holidays shall be consistent with those holidays designated by Landlords of comparable office Buildings in the immediate area and town.

Section 29.04 Every agreement contained in this Lease is, and shall be construed as, a separate and independent agreement. If any term of this Lease or the application thereof to any person or circumstances

shall be invalid and unenforceable, the remainder of this Lease, or the application of such term to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected.

Section 29.05 There shall be no merger of this Lease or of the Leasehold estate hereby created with the fee estate in the Premises or any part thereof by reason of the fact that the same person may acquire or hold, directly or indirectly, this Lease or the Leasehold state hereby created or any interest in this Lease or in any interest in such fee estate. In the event of a voluntary or other surrender of this Lease, or a mutual cancellation hereof, Landlord may, at its option, terminate all subleases, or treat such surrender or cancellation as an assignment of such subleases.

Section 29.06 Any liability of Landlord to Tenant under the terms of this Lease shall be limited to Landlord's interest in the Building and the Land, and Landlord shall not be personally liable for any deficiency.

Section 29.07 Whenever a period of time is herein prescribed for action, other than the payment of money, to be taken by either party hereto, such party shall not be liable or responsible for, and there shall be excluded from the computation for any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations, or restrictions, or any other cause of any kind whatsoever which is beyond the control of such party.

Section 29.08 The article headings contained in this Lease are for convenience only and shall not enlarge or limit the scope or meaning of the various and several articles hereof. Words of any gender used in this Lease shall include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires.

Section 29.09 If there be more than one Tenant, the obligations hereunder imposed Tenant shall be joint and several, and all agreements and covenants herein contained shall be binding upon the respective heirs, personal representatives, successors, and to the extent permitted under this Lease, assigns of the parties hereto. If there is a guarantor of Tenant's obligations hereunder, Tenant's obligations shall be joint and several obligations of Tenant and such guarantor, and Landlord need not first proceed against Tenant hereunder before proceeding against such guarantor, nor shall any such guarantor be released from its guarantee for any reason, including, without limitation, any amendment, renewal, expansion or diminution of this Lease, any forbearance by Landlord or waiver of any of Landlord's rights, the failure to give Tenant or such guarantor any notices, or the release of any party liable for the payment of Tenant's obligations hereunder.

Section 29.10 Neither Landlord nor Landlord's agents or brokers have made any representations or promises with respect to the Premises or the Building except as herein expressly set forth and all reliance with respect to any representations or promises is based solely on those contained herein.

Section 29.11 This Lease sets forth the entire agreement between the parties and cancels all prior negotiations, arrangements, brochures, agreements, and understandings, if any, between Landlord and Tenant regarding the subject matter of this Lease. No amendment or modification of this Lease shall be binding or valid unless expressed in writing executed by both parties hereto.

Section 29.12 The submission of this Lease to Tenant shall not be construed as an offer, nor shall Tenant have any rights with respect thereto unless Landlord executes a copy of this Lease and delivers the same to Tenant.

Section 29.13 If Tenant signs as a corporation, each of the persons executing this Lease on behalf of Tenant represents and warrants that Tenant is a duly organized and existing corporation, that Tenant has and is

qualified to do business in the Commonwealth of Pennsylvania, that the corporation has full right and authority to enter into this Lease, and that all persons signing on behalf of the corporation were authorized to do so by appropriate corporation actions. If Tenant signs as a partnership, trust, or other legal entity, each of the persons executing this Lease on behalf of Tenant represents and warrants that Tenant has complied with all applicable laws, rules, and governmental regulations relative to its right to do business in the Commonwealth of Pennsylvania, that such entity has the full right and authority to enter into this Lease, and that all persons signing on behalf of the Tenant were authorized to do so by any and all necessary or appropriate partnership, trust, or other actions.

Section 29.14 If, in connection with obtaining financing for the Building or of any ground or underlying Lease, any lender shall request reasonable modifications in the Lease as a condition for such financing, Tenant will not unreasonably withhold, delay, or defer its consent thereto, provided that such modifications do not increase the obligations of Tenant hereunder or materially adversely affect either the Leasehold interest hereby created or Tenant's use and enjoyment of the Premises.

Section 29.15 This Lease shall be governed by and construed under the laws of the Commonwealth of Pennsylvania. Any action brought to enforce or interpret this Lease shall be brought in the court of appropriate jurisdiction in Cumberland County, Pennsylvania. Should any provision of this Lease require judicial interpretation, it is agreed that the Court interpreting or considering same shall not apply the presumption that the terms hereof shall be more strictly construed against a party by reason of the rule or conclusion that a document should be construed more strictly against the party who itself or through its agent prepared the same, it being agreed that all parties hereto have participated in the preparation of this Lease and that legal counsel was consulted by each party before the execution of this Lease.

Section 29.16 Any elimination or shutting off of light, air, or view by any structure which may be erected on lands adjacent to the Building, modification of the amenities to the Building shall in no way affect this Lease or impose any liability on Landlord.

Section 29.17 Landlord may, upon reasonable notice (except in the case of emergencies) enter upon the Premises at reasonable hours to inspect same or clean or make repairs or alterations (but without any obligation to do so, except as expressly provided for herein) and to show the Premises to prospective lenders or purchasers, and, during the last 6 months of the Term of the Lease, to show them to prospective Tenants at reasonable hours and, if they are vacated, to prepare them for re-occupancy. Landlord shall cause its officers, agents and representatives to exercise care with any such entry not to unreasonably interfere with the operation and normal office routine of Tenant (except in the case of emergency).

Section 29.18 Landlord may elect to relocate Tenant to other space in the Building containing at least the same amount of Rentable Area as contained in the Premises ("Substitution Space"). If such relocation occurs, the description of the Premises set forth in this Lease shall, without further act on the part of Landlord or Tenant, be deemed amended so that the Substitution Space shall be deemed the Premises hereunder, and all of the terms, covenants, conditions and provisions of this Lease shall continue in full force and effect and shall apply to the Substitution Space. The cost of relocating Tenant and altering the Substitution Space to make it comparable to the Premises shall be borne by Landlord. The Annual Base Rental for the Substitution Space shall be the amount specified under item 14 of the Basic Lease Information.

Section 29.19 The Exhibits and numbered riders attached to this Lease are by this reference incorporated fully herein. The term "this Lease" shall be considered to include all such Exhibits and riders.

IN WITNESS WHEREOF, Landlord and Tenant have set their hands and seals to this Lease Agreement the day and year first above written.

LANDLORD: Old Gettysburg Associates, IV, L.P.

By: SELECT CAPITAL COMMERCIAL PROPERTIES,
INC.

                                      Its general partner

WITNESS: /s/ Marlene Bullman      By: /s/ John M. Ortenzio
         --------------------         ----------------------------------
                                       John M. Ortenzio, President

                                  Date:  August 28, 2006

                                  TENANT: Select Medical Corporation

ATTEST: /s/ John F. Duggan        By:  /s/ Michael E. Tarvin
        ------------------             ---------------------------------
                                       Michael E. Tarvin,
                                       Senior Vice President

                                  Date:  August 25, 2006

EXHIBIT "A"- DESCRIPTION OF PREMISES

(Floor plan to be attached)

EXHIBIT "B"- DESCRIPTION OF REAL PROPERTY

ALL that certain piece, parcel or lot of land situate on the westerly side of Old Gettysburg Road in Lower Allen Township, Cumberland County, Pennsylvania, and being more fully bound and described as follows:

BEGINNING at a concrete monument on the westerly right-of-way line of Old Gettysburg Road at the southeastern corner of lands now or formerly Old Gettysburg Association recorded in Deed Book 34-J, Page 383; thence along said lands N 33 degrees 26'45" W a distance of 381.93 feet to a concrete monument; thence continuing along said lands N 27 degrees 30'02" W a distance of 92.35 feet to the southwestern corner of said lands, said point also being the POINT OF BEGINNING.

From said POINT OF BEGINNING thence N 26 degrees 54'03" W a distance of 408.79 feet to a point at the terminus of the southerly right-of-way line of Century Drive; thence N 63 degrees 05'57" E a distance of 23.30 feet; thence N 40 degrees 45'54" E a distance of 68.99 feet; thence S 88 degrees 53'50" E a distance of 81.55 feet; thence N 40 degrees 45'54" E a distance of 18.66 feet; thence N 49 degrees 14'06" W a distance of 62.78 feet; thence N 40 degrees 45'54" E a distance of 220.46 feet; thence N 65 degrees 37'08" E a distance of 74.00 feet; thence along lands now or formerly John R. & Doris J. Kennedy, lands now or formerly Floyd E. Gouse, lands now or formerly Dorsey H. & Annie F. Fry, lands now or formerly Floyd E. Gouse, lands now or formerly Dorsey H. & Annie F. Fry, and along the western terminus of Florence Avenue S 24 degrees 22'52" E a distance of 426.84 feet to a point on the terminus of Florence Avenue; thence S 47 degrees 21'49" W, along the western boundary line of said lands of Old Gettysburg Association, a distance of 427.62 feet to the POINT OF BEGINNING.

CONTAINING 4.04 acres more or less.

EXHIBIT "C"- DESCRIPTION OF LEASEHOLD IMPROVEMENTS

Landlord agrees to finish the Premises "turn key" according tot Building Standard finishes as listed below. All costs of such finishes shall be paid by the Landlord.

Refer to: Plan by JWF dated December 12, 2005.

EXHIBIT "D" - PARKING

1. Throughout the Term, Tenant shall have access to the parking spaces in the Parking Area. All such parking spaces shall be provided to Tenant at no cost on an unassigned basis and shall be used in common with the other Tenants.

2. Landlord shall have the right to reserve parking spaces as it elects and condition use thereof on such terms as it elects.

3. Landlord shall have the right to: add parking decks, change curb cuts, change traffic patterns, re-stripe the parking surfaces as to size and location of spaces, temporarily displace vehicles (for the purpose of improving and expanding Parking Area).

4. If a card system is utilized, lost cards will be replaced on request, but a charge of $15.00 per card will be required to reimburse Landlord for administrative costs of card replacement and reprogramming of card entry processing unit.

5. Tenant shall cooperate fully in Landlord's efforts to maintain the designated use of the various Parking Facilities and parking areas, and shall follow all regulations issued by the Landlord with respect thereto.

EXHIBIT "E" - SECURITY CARD ACCESS

Building: Executive Park West IV

Security in the form of limited access to the Building during other than Normal Business Hours through the use of cards may be provided by Landlord. In such event Landlord agrees to provide to Tenant free of charge, 2 cards which cards will be surrendered at the Expiration Date. The deposit for any card Tenant may desire in addition to this quantity shall be $15.00 per card. Landlord, however, shall have no liability to Tenant, its employees, agents, invitees or licensees for losses due to theft or burglary, or for damages done by unauthorized persons on the Premises and neither shall Landlord be required to insure against any such losses. Tenant agrees to surrender all cards then in its possession upon the expiration or earlier termination of this Lease. Any lost card shall be cancelled and Tenant shall pay the sum of $15.00 Dollars for each replacement card.

EXHIBIT "F"- RULES AND REGULATIONS

1. Sidewalks, doorways, vestibules, halls, stairways, and similar areas shall not be obstructed by Tenants or their officers, agents, servants, and employees, or used for any purpose other than ingress and egress to and from the Premises and for going from one part of the Building to another part of the Building.

2. Plumbing fixtures and appliances shall be used only for the purpose for which constructed, and no sweepings, rubbish, rags, or other unsuitable material shall be thrown or placed therein. The cost of repairing any stoppage or damage resulting to any such fixtures or appliances from such misuse shall be paid by such Tenant.

3. No signs, posters, advertisements, or notices shall be painted or affixed on any of the windows or doors, or other part of the Building, or placed in such a manner as to be visible outside the Premises, except of such color, size, and style, and in such places, as shall be first approved in writing by the Building Manager. No nails, hooks, or screws shall be driven into or inserted in any part of the Building, except by Building maintenance personnel.

4. Directories will be placed by Landlord, at Landlord's own expense, in a conspicuous place in the Building. No other directories shall be permitted.

5. The Premises shall not be used for conducting any barter, trade, or exchange of goods or sale through promotional give-away programs or any business involving the sale of second-hand goods, insurance salvage stock, or file sale stock, and shall not be used for any auction or pawnshop business, any fire sale, bankruptcy sale, going-out-of-business sale, moving sale, bulk sale, or any other business which, because of merchandising methods or otherwise, would tend to lower the character of the Building. Canvassing, soliciting and peddling in the Building are prohibited.

6. Tenants shall not do anything, or permit anything to be done, in or about the Building, or bring or keep anything therein, that will in any way increase the possibility of fire or other casualty or obstruct or interfere with the rights of, or otherwise injure or annoy, other Tenants, or do anything in conflict with the valid pertinent laws, rules, or regulations of any governmental authority. Tenants shall not use or keep in the Building any flammable or explosive fluid or substance, or any illuminating material, unless it is battery powered, UL approved.

7. Tenants shall not place a load upon any floor of the Premises which exceeds the floor load per square foot which such floor was designed to carry or which is allowed by applicable Building code. Landlord may prescribe the weight and position of all safes and heavy installations which Tenant desires to place in the Premises so as properly to distribute the weight thereof. All damage done to the Building by the improper placing of heavy items which over-stress the floor will be repaired at the sole expense of the Tenant.

8. A Tenant shall notify the Building Manager when safes or other heavy equipment are to be taken into or out of the Building. Moving of such items shall be done under the supervision of the Building Manager, after receiving written permission. Tenant shall not move in or out of the Building at the beginning or end of the Lease term, prior to 6:00 p.m. on any weekday.

9. Corridor doors, when not in use, shall be kept closed. All window blinds shall be left in closed position, in order to facilitate energy conservation.

10. All deliveries must be made via the service entrance and service elevators during normal business hours. Prior approval must be obtained from Landlord for any deliveries that must be received after normal business hours. Any hand trucks utilized for deliveries must be equipped with rubber tires and sideguards.

11. Each Tenant shall cooperate with Building employees in keeping the Premises neat and clean. When conditions are such that Tenant must dispose of crates, boxes, etc., it will be the responsibility of Tenant to do so outside of the hours of 7:00 a.m. and 6:00 p.m., at Tenant's expense.

12. Nothing shall be swept or thrown into the corridors, halls, elevator shafts or stairways. No birds, animals, reptiles, or any other creatures, shall be brought into or kept in or about the Building except for any Seeing Eye dogs.

13. Should a Tenant require telegraphic, telephonic, annunciator, or any other communication service, Landlord will direct Tenant as to where and how the electricians and installers shall introduce and place wires, and none shall be introduced or placed except as Landlord shall direct in writing.

14. Tenants shall not make or permit any improper noises in the Building, or otherwise interfere in any way with other Tenants or persons having business with them.

15. No equipment shall be operated on the Premises that could unreasonably interfere with the rights of any other Tenant in the Building without written consent of Landlord. Nothing shall be done or permitted in the Premises, and nothing shall be brought into or kept on the Premises, which would impair or interfere with any of the Building services, or the use or enjoyment by any other Tenant of any other Premises, nor shall there be installed by any Tenant any heating, ventilating, air conditioning, electrical or other equipment of any kind which, in the judgment of the Landlord, might cause any such impairment or interference. No space heaters or fans shall be operated in the Premises.

16. Business machines and mechanical equipment belonging to Tenant which cause noise and/or vibration that may be transmitted to the structure of the Building or to any Leased space so as to be objectionable to Landlord or any Tenants in the Building, shall be placed and maintained by Tenant, at Tenant's expense, in settings of cork, rubber, or spring type noise and/or vibration eliminators sufficient to eliminate vibration and/or noise.

17. Tenants shall not permit any cooking within the Premises and shall not permit any food or other odors emanating within the premises to seep into other portions of the Building. Tenants shall not install vending machines in the Premises.

18. No locks shall be changed without Landlord consent. No additional locks shall be placed upon any doors without the prior written consent of Landlord. All necessary keys shall be furnished by Landlord, and the same shall be surrendered upon termination of this Lease, and Tenant shall then give Landlord or his agent an explanation of the combination of all locks on the doors or vaults. Tenant shall initially be given two (2) keys to the Premises by Landlord. No duplication of such keys shall be made by Tenants. Additional keys shall be obtained only from Landlord, at a reasonable fee to be determined by Landlord.

19. Tenants, employees, or agents, or anyone else who desires to enter the Building after normal business hours, may be required to sign in upon entry and sign out upon leaving, giving the location during such person's stay and such person's time of arrival and departure.

20. Tenants will not locate furnishings or cabinets adjacent to mechanical or electrical access panels or over air conditioning outlets so as to prevent operating personnel form servicing such units as routine or emergency access may require. Cost of moving such furnishings for Landlord's access will be at Tenant's

expense. The lighting and air conditioning equipment of the Building will remain the exclusive charge of the Building designated personnel. Landlord will control all internal lighting that may be visible from the exterior of the Building and shall have the right to change any unapproved lighting, without notice to Tenant, at Tenant's expense.

21. Tenants shall comply with parking rules and regulations as may be posted and distributed from time to time, and shall take reasonable steps to cooperate with Landlord to enforce compliance.

22. Tenants shall provide plexiglass or other pads for all chairs mounted on rollers or casters, unless same are designated for use on carpet by the manufacturer.

23. No Tenant shall make any changes or alterations to any portion of the Building without Landlord's prior written approval (which approval shall not be unreasonably withheld), which may be given on such conditions as Landlord may elect. All such work shall be done by Landlord or by contractors and/or workmen approved by Landlord (which approval shall not be unreasonably withheld), working under Landlord's supervision.

24. Landlord has the right to evacuate the Building in event of emergency or catastrophe.

25. If any governmental license or permit shall be required for the proper and lawful conduct of Tenant's business, Tenant, before occupying the Premises, shall procure and maintain such license or permit and submit it for Landlord's inspection. Tenant shall at all times comply with the terms of any such license or permit.

26. Landlord shall have the right, exercisable without notice and without liability to any Tenant, to change the name and street address of the Building, and to install signs on the interior and exterior of the Building.

27. Smoking is not permitted anywhere inside the Premise or building.

28. Landlord reserves the right to rescind any of these rules and regulations and make such other and further rules and regulations as in the reasonable judgment of Landlord shall from time to time be needed for the safety, protection, care, and cleanliness of the Building, the operation thereof, the preservation of good order therein, and the protection and comfort of its Tenants, their agents, employees, and invitees, which rules and regulations when made and notice thereof given to a Tenant shall be binding upon him in like manner as if originally herein prescribed.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Robert A. Ortenzio, Chief Executive Officer of Select Medical Corporation, certify that:

	1.		I have reviewed this quarterly report on Form 10-Q of Select Medical Corporation;

	2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

	a)		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	c)		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

	d)		disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a)		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2006


/s/ Robert A. Ortenzio
Robert A. Ortenzio
Chief Executive Officer

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Martin F. Jackson, Senior Vice President and Chief Financial Officer of Select Medical Corporation, certify that:

	1.		I have reviewed this quarterly report on Form 10-Q of Select Medical Corporation;

	2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

	4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

	a)		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	c)		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

	d)		disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2006


/s/ Martin F. Jackson
Martin F. Jackson
Senior Vice President and Chief Financial Officer

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Select Medical Corporation (the “Company”) on Form 10-Q for the quarter ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert A. Ortenzio, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial position and results of operations of the Company.

Date: November 13, 2006


		/s/ Robert A. Ortenzio
		Robert A. Ortenzio
		Chief Executive Officer

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Select Medical Corporation (the “Company”) on Form 10-Q for the quarter ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Martin F. Jackson, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial position and results of operations of the Company.

Date: November 13, 2006


		/s/ Martin F. Jackson
		Martin F. Jackson
		Senior Vice President and Chief Financial Officer