EXECUTIVE SUMMARY

Our Business. We operate outpatient physical and/or occupational therapy clinics that provide preventative and post-operative care for a variety of orthopedic-related disorders and sports-related injuries, treatment for neurologically-related injuries and rehabilitation of injured workers. During 2008, we formed a new venture, OA Centers, which specializes in the outpatient, non-surgical treatment of osteo arthritis, degenerative joint disease and other musculoskeletal conditions. The first OA Center opened in June 2008. In October 2008, we acquired a 65% interest in RMG which provides physicians and their patients with clinical services including electro-diagnostic analysis ("EDX") as well as intra articular joint ("IAJP Direct") and lumbar osteoarthritis ("LOP Direct") programs. EDX produces real time physiologic data about nerve and muscle function. IAJP Direct involves viscosupplementation injections used in conjunction with specialized outpatient rehabilitation programs. LOP Direct is a unique procedure for the treatment of osteoarthritis of the spine.

Effective November 18, 2008, we acquired a 65% interest in an outpatient rehabilitation practice with four clinics in San Antonio, TX, and effective June 11, 2008, we acquired a 65% interest in a multi-partner outpatient rehabilitation practice with nine clinics located in the Mid-Atlantic region. In both cases, the existing partners retained a 35% interest. Effective January 1, 2008, we acquired a physical therapy practice located in Michigan. The results of operations of the acquired clinics have been included in our consolidated financial statements since the effective date of their acquisition.

At December 31, 2008, we operated 360 clinics in 42 states. The average age of our clinics at December 31, 2008, was 6.2 years. Of the 360 clinics, we developed 277 of the clinics and acquired 83. In 2008, we added 30 clinics, including 16 developed and 14 acquired (as detailed above), closed 18 and sold one.

In addition to our owned clinics, we also manage physical therapy facilities for third parties, primarily physicians, with ten third-party facilities under management as of December 31, 2008.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those that have a significant impact on our results of operations and financial position involving significant estimates requiring our judgment. Our critical accounting policies are:

Revenue Recognition. Revenues are recognized in the period in which services are rendered. Net patient revenues (patient revenues less estimated contractual adjustments) are reported at the estimated net realizable amounts from insurance companies, third-party payors, patients and others for services rendered. The Company has agreements with third-party payors that provide for payments to the Company at contracted amounts different from its established rates. The allowance for estimated contractual adjustments is based on terms of payor contracts and historical collection and write-off experience.

Contractual Allowances. Contractual allowances result from the differences between the rates charged for services performed and expected reimbursements by both insurance companies and government sponsored healthcare programs for such services. Medicare regulations and the various third party payors and managed care contracts are often complex and may include multiple reimbursement mechanisms payable for the services provided in our clinics. We estimate contractual allowances based on our interpretation of the applicable regulations, payor contracts and historical calculations. Each month the Company estimates its contractual allowance for each clinic based on payor contracts and the historical collection experience of the clinic and applies an appropriate contractual allowance reserve percentage to the gross accounts receivable balances for each payor of the clinic. Based on our historical experience, calculating the contractual allowance reserve percentage at the payor level is sufficient to allow us to provide the necessary detail and accuracy with our collectibility estimates. However, the services authorized and provided and related reimbursement are subject to interpretation that could result in payments that differ from our estimates. Payor terms are periodically revised necessitating continual review and assessment of the estimates made by management. Our billing system may not capture the exact change in our contractual allowance reserve estimate from period to period. Therefore, in order to assess the accuracy of our revenues and hence our contractual allowance reserves, our management regularly compares its cash collections to corresponding net revenues measured both in the aggregate and on a clinic by clinic basis. In the aggregate, the historical difference between net revenues and corresponding cash collections has generally reflected a difference within approximately 1% of net revenues. Additionally, analysis of subsequent period's contractual write-offs on a payor basis reflects a difference within approximately 1% between the actual aggregate contractual reserve percentage as compared to the estimated contractual allowance reserve percentage associated with the same period end balance. As a result, we believe that a reasonable likely change in the contractual allowance reserve estimate would not likely be more than 1% at December 31, 2008. For purposes of demonstrating the sensitivity of this estimate on the Company's financial condition, a one percent increase or decrease in our aggregate contractual allowance reserve percentage would decrease or increase, respectively, net patient revenue by approximately $573,000 for the year ended December 31, 2008. Management believes the changes in the estimate of the contractual allowance reserve for the periods ended December 31, 2008, 2007 and 2006 have not been material to the statement of operations.

The following table sets forth information regarding our accounts receivable as of the dates indicated (in thousands):

                                                        December 31,
                                                      2008         2007

             Gross accounts receivable              $ 57,281     $ 54,282
             Less contractual allowances              29,153       26,524

             Subtotal - accounts receivable           28,128       27,758
             Less allowance for doubtful accounts      2,275        2,184

             Net patient accounts receivable        $ 25,853     $ 25,574

The following table presents our accounts receivable aging by payor class as of the dates indicated (in thousands):

                                                    December 31, 2008                             December 31, 2007
                                         Current to                                    Current to
Payor                                     120 Days        120+ Days       Total         120 Days        120+ Days       Total

Managed Care/Commercial Plans           $      9,815     $     2,519     $ 12,334     $      9,163     $     3,011     $ 12,174
Medicare/Medicaid                              4,498           1,853        6,351            4,406           2,283        6,689
Workers Compensation*                          4,129             923        5,052            4,180             877        5,057
Self-pay                                         504             784        1,288              591           1,024        1,615
Other**                                        1,812           1,291        3,103            1,032           1,191        2,223

Totals                                  $     20,758     $     7,370     $ 28,128     $     19,372     $     8,386     $ 27,758

* Workers compensation is paid by state administrators or their designated agents.

** Other includes primarily litigation claims and RMG receivables and, to a lesser extent, vehicular insurance claims.

Reimbursement for Medicare beneficiaries is based upon a fee schedule published by HHS. For a more complete description of our third party revenue sources, see "Business - Sources of Revenue" in Item 1.

Allowance for Doubtful Accounts. We determine allowances for doubtful accounts based on the specific agings and payor classifications at each clinic. We review the accounts receivable aging and rely on prior experience with particular payors to determine an appropriate reserve for doubtful accounts. Historically, clinics that have a large number of aged accounts generally have less favorable collection experience, and thus, require a higher allowance. Accounts that are ultimately determined to be uncollectible are written off against our bad debt allowance. The amount of our aggregate allowance for doubtful accounts is regularly reviewed for adequacy in light of current and historical experience.

Accounting for Income Taxes. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount to be recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

The Company does not believe that it has any significant uncertain tax positions at December 31, 2008, nor is this expected to change within the next twelve months due to the settlement and expiration of statutes of limitation.

The Company did not have any accrued interest or penalties associated with any unrecognized tax benefits nor was any interest expense recognized during the twelve months ended December 31, 2008 and 2007.

Carrying Value of Long-Lived Assets. Our property and equipment, intangible assets and goodwill (collectively, our "long-lived assets") comprise a significant portion of our total assets. We account for our long-lived assets pursuant to Statement of Financial Accounting Standards ("SFAS") No. 144 and No. 142. This accounting standard requires that we periodically, and upon the occurrence of certain events, assess the recoverability of our long-lived assets. If the carrying value of our property and equipment exceeds their undiscounted cash flows, we are required to write the carrying value down to estimated fair value.

Goodwill. The fair value of goodwill and other intangible assets with indefinite lives are tested for impairment at least annually and upon the occurrence of certain events, and are written down to fair value if considered impaired. The Company evaluates goodwill and other intangible assets with indefinite lives for impairment on at least an annual basis (in its third quarter) by comparing the fair value of each reporting unit to the carrying value of the reporting unit including related goodwill and other intangible assets with indefinite lives. A reporting unit refers to the acquired interest of a single clinic or group of clinics. Local management typically continues to manage the acquired clinic or group of clinics. For each clinic or group of clinics, the Company maintains discrete financial information and both corporate and local management regularly review the operating results. For each purchase of the equity interest, goodwill and other intangible assets with indefinite lives are assigned to the respective clinic or group of clinics, if deemed appropriate. If the carrying value of our goodwill and other intangible assets with indefinite lives exceeds the estimated fair value, we are required to allocate the estimated fair value to our assets and liabilities, as if we had just acquired it in a business combination. We then write-down the carrying value of our goodwill and other intangible assets with indefinite lives to the implied fair value. Any such write-down is included as an impairment loss in our consolidated statement of net income. Judgment is required to estimate the fair value of our long-lived assets. We may use quoted market prices, prices for similar assets, present value techniques and other valuation techniques to prepare these estimates. In addition, we may obtain independent appraisals in certain circumstances. We may need to make estimates of future cash flows and discount rates as well as other assumptions in order to apply these valuation techniques. Irrespective of our valuation analysis, future market conditions may deteriorate. Accordingly, any value ultimately derived from our long-lived assets may differ from our estimate of fair value. In 2008, the evaluation of goodwill yielded an impairment charge of $49,000 on a clinic purchased in 1994. The evaluation of goodwill in 2007 did not result in any goodwill amounts that were deemed permanently impaired. During 2006, the Company wrote off $192,000 in goodwill related to closed clinics. See Note 2 - Significant Accounting Policies - Goodwill - of the Notes to Consolidated Financial Statements in Item 8.

SELECTED OPERATING AND FINANCIAL DATA

During 2006, we closed 31 unprofitable clinics. In accordance with current accounting literature, the results of operations and closure costs for these 31 clinics and the results of operations for the clinic sold in 2006 are presented as discontinued operations for all periods presented, net of the tax benefit. The operating results of the 18 clinics closed in 2008 and the 12 clinics closed in 2007 were not material to the operations of the Company and therefore the operating results of those clinics were not reclassified and reported as discontinued operations. See Note 4 of the Notes to Consolidated Financial Statements in Item 8.

The following table and discussion relates to continuing operations unless otherwise noted. The defined terms with their respective description used in the following discussion are listed below:

2008                   Year ended December 31, 2008
2007                   Year ended December 31, 2007
2006                   Year ended December 31, 2006
New Clinics            Clinics opened or acquired during the year ended December
                       31, 2008
Mature Clinics         Clinics opened or acquired prior to January 1, 2008
2007 New Clinics       Clinics opened or acquired during the year ended December
                       31, 2007
2007 Mature Clinics    Clinics opened or acquired prior to January 1, 2007
2006 New Clinics       Clinics opened or acquired during the year ended December
                       31, 2006
2006 Mature Clinics    Clinics opened or acquired prior to January 1, 2006 but not
                       closed or sold in 2006
Discontinued Clinics   Clinics closed or sold in 2006

                                                          For the Years Ended December 31,
                                                       2008             2007             2006

Number of clinics, at the end of period                     360              349              292
Working Days                                                256              255              254
Average visits per day per clinic                          20.4             19.6             20.0
Total patient visits                                  1,865,787        1,553,564        1,379,050
Net patient revenue per visit                       $     98.05      $     96.19      $     96.72
Statement of operations per visit:
Net revenues                                        $    100.59      $     97.64      $     98.04
Salaries and related costs                                53.74            50.98            50.28
Rent, clinic supplies, contract labor and other           21.33            20.97            20.23
Provision for doubtful accounts                            1.65             1.64             1.53
Closure costs                                              0.23                -                -

Contribution from clinics                                 23.64            24.05            26.00
Corporate office costs                                    10.84            11.15            12.51

Operating income from continuing operations         $     12.80      $     12.90      $     13.49

RESULTS OF OPERATIONS

FISCAL YEAR 2008 COMPARED TO FISCAL 2007

• Net revenues rose 24% to $187.7 million for 2008 from $151.7 million for 2007 primarily due to a 20% increase in patient visits to 1.9 million and an increase of $1.86 in net patient revenues per visit to $98.05. The 2008 figures include a full year for the STAR clinics acquired in 2007 and the physical therapy practice acquired in January 2008, 61/2 months for the clinics acquired in the Mid Atlantic acquisition and 11/2 months for the clinics acquired in San Antonio Acquisition. The 2007 figures include four months of the results of the STAR clinics which were acquired in September 2007. In addition, the 2008 figures include 256 days of operations as compared to 255 days for 2007.

• Net income from continuing operations increased 14% to $10.0 million for 2008 from $8.8 million. Earnings from continuing operations per diluted share increased to $0.83 from $0.75. Total diluted shares for the years ended December 31, 2008 were 12.1 million and for 2007 were 11.7 million.

• Net income (inclusive of effects of discontinued operations) increased 14% to $10.0 million for 2008 from $8.7 million. Net income per diluted share increased to $0.83 from $0.75. These net income figures are net of closure costs of $262,000, tax effected, incurred in 2008 and closure costs, impairment charges and operating losses from discontinued operations of $77,000, tax effected, in 2007.

Net Patient Revenues

• Net patient revenues increased to $182.9 million for 2008 from $149.4 million for 2007, an increase of $33.5 million, or 22%, primarily due to a 20% increase in patient visits to 1.9 million and an increase of $1.86 in patient revenues per visit to $98.05.

• Total patient visits increased 312,000, or 20%, to 1.9 million for 2008 from 1.6 million for 2007. The growth in visits for the period was attributable to approximately 86,000 visits in New Clinics together with a 226,000 or 15% increase in visits for Mature Clinics. For 2007 New Clinics, the number of visits increased by 243,000 for 2008 compared to 2007. For 2007 Mature Clinics, the number of visits decreased by 17,000 in 2008 compared to 2007.

• Net patient revenues from New Clinics accounted for approximately 25% of the total increase, or approximately $8.4 million, of which $6.4 million was related to 14 clinics acquired in 2008. The

remaining increase of $25.1 million in net patient revenues was from Mature Clinics primarily related to the STAR clinics acquired.

Net patient revenues are based on established billing rates less allowances and discounts for patients covered by contractual programs and workers' compensation. Net patient revenues reflect contractual and other adjustments, which we evaluate monthly, relating to patient discounts from certain payors. Payments received under these programs are based on predetermined rates and are generally less than the established billing rates of the clinics.

Management Contract Revenues and Other Revenues

Revenues from management contracts and other revenues increased by approximately $2.5 million from 2007 to 2008 due to the inclusion of revenues for the complete year in 2008 from the STAR clinics derived primarily from managing seven clinics. For 2007, the results included only four months.

Clinic Operating Costs

Clinic operating costs were 77% of net revenues for 2008 and 75% of net revenues for 2007. Each component of clinic operating costs is discussed below:

Clinic Operating Costs - Salaries and Related Costs

Salaries and related costs increased to $100.3 million for 2008 from $79.2 million for 2007, an increase of $21.1 million, or 27%. Approximately 22% of the increase, or $4.6 million, was attributable to the New Clinics. The remaining increase of $16.5 million was due to $15.4 million in higher costs at various 2007 New Clinics and $1.1 million higher at various 2007 Mature Clinics. Salaries and related costs as a percent of net revenues was 53% for 2008 and 52% for 2007.

Clinic Operating Costs - Rent, Clinic Supplies and Other

Rent, clinic supplies and other costs increased to $39.8 million for 2008 from $32.6 million for 2007, an increase of $7.2 million, or 22%. Approximately 30% of the increase, or $2.2 million, was attributable to the New Clinics and $5.3 million was attributable to 2007 New Clinics offset by $0.3 million related to 2007 Mature Clinics. Rent, clinic supplies and other costs as a percent of net revenues was 21% for 2008 and 2007.

Clinic Operating Costs - Provision for Doubtful Accounts

The provision for doubtful accounts increased to $3.1 million for 2008 from $2.6 million for 2007, an increase of $0.5 million, or 20%. The provision for doubtful accounts as a percent of net patient revenues was 2% for 2008 and 2007. Our allowance for bad debts as a percent of total patient accounts receivable was 8% at December 31, 2008 and 2007. The allowance for doubtful accounts at the end of each period is based on a detailed, clinic-by-clinic review of overdue accounts and is regularly reviewed in the aggregate in light of current and historical experience.

The accounts receivable days outstanding were 51 days at December 31, 2008 and 55 days December 31, 2007. Receivables in the amount of $3.0 million and $2.0 million were written-off in 2008 and 2007, respectively.

Closure costs

Closure costs primarily related to the closure of 18 clinics in 2008 amounted to $432,000. Closure costs include $342,000 related to lease obligations and facilities costs, $77,000 related to write-off of unamortized leasehold improvements and $13,000 in severance and salary costs.

Corporate Office Costs

Corporate office costs, consisting primarily of salaries, benefits and equity based compensation of corporate office personnel, rent, insurance costs, depreciation and amortization, travel, legal, compliance, professional, marketing and recruiting fees, were $20.2 million for 2008 and $17.3 million for 2007. Although corporate office costs increased by $2.9 million, primarily due to increased salary and benefits costs and professional services such as legal and accounting, corporate office costs as a percent of net revenues remained at 11% for 2008 and 2007.

Interest expense

Interest expense increased to $542,000 for 2008 from $301,000 for 2007 primarily due to higher borrowings under our revolving credit facility to fund acquisitions. See Liquidity and Capital Resources below for a discussion of the terms of the related Credit Agreement.

Minority interests in subsidiary limited partnerships

Minority interests in subsidiary limited partnerships were $7.1 million in 2008 compared to $5.7 million in 2007. As a percentage of operating income from continuing operations before corporate office costs, minority interests in subsidiary limited partnerships were 16.1% in 2008 compared to 15.3% in the previous year. The increase was primarily related to acquired profitable clinics which have minority limited partners with 30% to 35% interests.

Provision for Income Taxes

The provision for income taxes increased to $6.5 million for 2008 from $5.5 million for 2007, an increase of approximately $1.0 million, or 19%, as a result of higher pre-tax income. During 2008 and 2007, we recognized state and federal income taxes at an effective tax rate of 39% and 38%, respectively.

FISCAL YEAR 2007 COMPARED TO FISCAL 2006

• Net revenues rose 12% to $151.7 million for 2007 from $135.2 million for 2006 primarily due to a 13% increase in patient visits to 1.6 million partially offset by a decrease of $0.53 in net patient revenues per visit to $96.19. As previously noted, the 2007 figures include four months of the results of the STAR clinics acquired in September 2007. In addition, the 2007 figures include 255 days of operations as compared to 254 days for 2006.

• Net income from continuing operations increased 8% to $8.8 million for 2007 from $8.2 million. Earnings from continuing operations per diluted share increased to $0.75 from $0.70. Total diluted shares for the years ended December 31, 2007 and 2006 were 11.7 million.

• Net income (inclusive of effects of discontinued operations) increased 39% to $8.7 million for 2007 from $6.3 million. Net income per diluted share increased to $0.75 from $0.54. These net income figures are net of closure costs, impairment charges and operating losses from discontinued operations of $77,000, tax effected, in 2007 and $1.9 million, tax effected, in 2006.

Net Patient Revenues

• Net patient revenues increased to $149.4 million for 2007 from $133.4 million for 2006, an increase of $16.1 million, or 12%, primarily due to a 13% increase in patient visits to 1.6 million partially offset by a decrease of $0.53 in patient revenues per visit to $96.19.

• Total patient visits increased 175,000, or 13%, to 1.6 million for 2007 from 1.4 million for 2006. The growth in visits for the period was attributable to approximately 119,000 visits in 2007 New Clinics together with a 56,000 or 4% increase in visits for 2007 Mature Clinics. For 2006 New Clinics, the number of visits increased by 104,000 for 2007 compared to 2006. For 2006 Mature Clinics, the number of visits decreased by 48,000 in 2007 compared to 2006.

• Net patient revenues from 2007 New Clinics accounted for approximately 69% of the total increase, or approximately $11.1 million, primarily related to the STAR clinics. The remaining increase of $5.0 million in net patient revenues was from 2007 Mature Clinics.

Net patient revenues are based on established billing rates less allowances and discounts for patients covered by contractual programs and workers' compensation. Net patient revenues reflect contractual and other adjustments, which we evaluate monthly, relating to patient discounts from certain payors. Payments received under these programs are based on predetermined rates and are generally less than the established billing rates of the clinics.

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