U S PHYSICAL THERAPY INC /NV - 10-K Annual Report

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

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-11151

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

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

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

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

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

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

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

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

As of March 22, 2002, the aggregate market value of the voting stock held
by non-affiliates of the registrant was: $105,009,790

As of March 22, 2002, the number of shares outstanding of the registrant's
common stock, par value $.01 per share, was: 10,946,594
DOCUMENTS INCORPORATED BY REFERENCE

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FORWARD LOOKING STATEMENTS

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

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

- competition discussed under the heading "Competition" below;

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

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

- weather.

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

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

PART I

ITEM 1. BUSINESS.

GENERAL

U.S. Physical Therapy, Inc. (the "Company") operates outpatient physical
and occupational therapy clinics which provide post-operative care and treatment
for a variety of orthopedic-related disorders and sports-related injuries. At
December 31, 2001, the Company operated 162 outpatient physical and occupational
therapy clinics in 31 states. The average age of the 162 clinics in operation at
December 31, 2001 was 4.08 years. Since the inception of the Company, 176
clinics have been developed and six clinics have been acquired by the Company.
To date, the Company has sold one clinic, closed 14 facilities due to clinic
performance, consolidated the operations of three of its clinics with other
existing clinics to more efficiently serve various geographic markets and sold
certain fixed assets at two of the Company's clinics, which facilities it then
closed. The Company added 30 new clinics in 2001. Management's goal for 2002 is
to open between 35 and 40 clinics.

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

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

In addition to the Company's partnership program, it also manages physical
therapy facilities for third parties, including physicians. Six of such
third-party facilities were under the Company's management as of December 31,
2001.

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

On January 5, 2001, the Company effected a two-for-one common stock split
in the form of a 100% stock dividend to stockholders of record as of December
27, 2000. On June 28, 2001, the Company effected a three-for-two common stock
split in the form of a 50% stock dividend to stockholders of record as of June
7, 2001. Fractional shares resulting from the three-for-two stock split were
paid to shareholders in cash. All share and per share amounts contained herein
have been adjusted to reflect the effect of the stock splits.

The Company was formed in June 1990 and operated as a Subchapter S
corporation until August 1991 when it reorganized into a limited partnership. In
May 1992, in connection with the Company's initial public offering, the Company
was reorganized into its present form as a Nevada corporation with operating
subsidiaries organized in the form of limited partnerships.

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

The Convertible Subordinated Notes are convertible at the option of the
holders thereof into the number of whole shares of Company common stock
determined by dividing the principal amount of the notes so converted by $3.33
(in the case of the Initial Series Notes and the Series C Notes) or $4.00 (in
the case of the Series B Notes), subject to adjustment under certain
circumstances.

During 2000, $850,000 of the Convertible Subordinated Notes were converted
by the note holders into 217,497 shares of common stock, resulting in a balance
of $7,200,000 in Convertible Subordinated Notes at December 31, 2000. In January
2001, an additional $650,000 was converted by a note holder into 195,000 shares
of common stock and the Company exercised its right under the Initial Series
Notes and the Series B Notes to require conversion of the remaining $3,550,000
into 1,002,498 shares of common stock.

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

THE COMPANY'S CLINICS

In general, the managing physical and/or occupational therapist of each
clinic owns a partnership interest in the clinic he or she operates. For the
majority of the clinics, this is accomplished by structuring the clinic as a
separate limited partnership (the "Clinic Partnerships"). As of December 31,
2001, the Company, through wholly-owned subsidiaries, owned a 1% general
partnership interest, with the exception of one clinic in which the Company
owned a 6% general partnership interest, and limited partnership interests
ranging from 49% to 99% in the clinics it operates (with respect to 80% of the
Company's clinics, the Company owned a limited partnership interest of 64% as of
December 31, 2001). For the majority of the clinics, the managing therapist of
each such clinic, along with other therapists at the clinic in several of the
partnerships, own the remaining limited partnership interests in the clinic. In

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

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

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

Each clinic maintains an independent local identity, while at the same time
enjoying the benefits of national purchasing, third-party payor contracts and
centralized management controls. Pursuant to a management agreement, U.S. PT
Management, Ltd. ("USPTM"), a Texas limited partnership whose general and
limited partnership interests are held by the Company, provides a variety of
services to each clinic, including supervision of site selection, construction,
clinic design and equipment selection, establishment of accounting systems and
procedures and training of office support personnel, operational direction,
ongoing accounting services and marketing support.

The Company's typical clinic occupies approximately 1,500 to 3,000 square
feet of space under a lease in an office building or shopping center. The
Company seeks to obtain leases for its clinics at ground level (although it may
not always be successful in obtaining such leases) in order to make access to
its clinics as easy as possible for patients. The Company also attempts to make
the decor in its clinics less institutional and more aesthetically pleasing than
hospital clinics. The typical staff needed to operate a clinic in its initial
stages is a licensed physical and/or occupational therapist and an office
manager. Staffing may also include physical and/or occupational therapy
assistants, aides, exercise physiologists and athletic trainers. As patient
visits grow, the staffing may be increased to include two or more additional
licensed physical and/or occupational therapists and one or two additional
office personnel. All therapy services provided are performed under the direct
supervision of a licensed physical and/or occupational therapist.

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

INDUSTRY BACKGROUND

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

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

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

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

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

MARKETING

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

SOURCES OF REVENUE/REIMBURSEMENT

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

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

Approximately 20% of the Company's patient visits are from patients with
Medicare insurance coverage. In order to receive Medicare reimbursement, a
rehabilitation agency or the individual therapist must meet the applicable
conditions of participation set forth by HHS relating to the type of facility,
its equipment, record keeping, personnel and standards of medical care, as well
as compliance with all state and local laws. Clinics are subject to periodic
inspections or surveys to determine compliance. As of December 31, 2001, 130 of
the Company's clinics have been certified as rehabilitation agencies by Medicare
and 20 additional clinics not certified as rehabilitation agencies have
individual therapists certified by Medicare to provide services as physical
therapists in private practice. Management anticipates that, in the future,
newly developed clinics will generally elect to become certified as Medicare
providers. No assurance can be given that the newly developed clinics will be
successful in becoming certified as Medicare providers.

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Prior to 1999, Medicare reimbursement for outpatient physical and
occupational therapy services furnished by a Medicare-certified rehabilitation
agency was based on a cost reimbursement methodology. The Company was reimbursed
at a tentative rate with final settlement determined after submission of an
annual cost report by the Company and audits thereof by the Medicare fiscal
intermediary. Effective in 1999, the Balanced Budget Act of 1997 ("BBA")
provides that reimbursement for outpatient therapy services provided to Medicare
beneficiaries is pursuant to a fee schedule published by the Department of
Health and Human Services ("HHS"), and the total amount paid by Medicare in any
one year for outpatient physical (including speech-language pathology) or
occupational therapy to any one patient is limited to $1,500, except for
services provided in hospitals. On November 29, 1999, President Clinton signed
into law the Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999
("BBRA") which, among other provisions, placed a two-year moratorium on the
$1,500 reimbursement limit for therapy services provided in 2000 and 2001. On
December 21, 2000, the President signed into law the Medicare, Medicaid, and
SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA") which, among
other provisions, extended the moratorium for one year through December 31,
2002. Should the $1,500 reimbursement limit become effective in 2003, the
Company does not anticipate that the change will have a material impact on
revenues in 2003.

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

REGULATION AND HEALTHCARE REFORM

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

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

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

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are held to violate the Fraud and Abuse Law, such holding could have a material
adverse effect on the Company's business, financial condition and results of
operations.

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

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

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

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

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

Additionally, HIPAA mandates the adoption of certain standards regarding
the exchange of electronic healthcare information in an effort to ensure the
privacy and security of patient information. HIPAA's security and privacy final
regulations were released on December 28, 2000 and became effective April 14,
2001. The Company must fully comply with the final regulations by April 14,
2003. Sanctions for failing to comply with HIPAA include criminal penalties and
civil sanctions.

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

Political, economic and regulatory influences are subjecting the healthcare
industry in the United States to fundamental change. The Company anticipates
that Congress, state legislatures and the private sector will continue to review
and assess alternative healthcare delivery and payment systems. Potential
approaches that have been considered include mandated basic healthcare benefits,
controls on healthcare spending through limitations on the growth of

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private health insurance premiums and Medicare and Medicaid spending, the
creation of large insurance purchasing groups, price controls and other
fundamental changes to the healthcare delivery system. Managed care entities,
which represent an ever-growing percentage of healthcare payors, are demanding
lower costs from healthcare providers, and in many cases, requiring or
encouraging providers to accept capitated payments that may not be adequate to
allow providers to cover their full costs or may reduce their profitability.
Legislative debate is expected to continue in the future and market forces are
expected to demand reduced costs. The Company cannot predict what impact the
adoption of any federal or state healthcare reform measures or future private
sector reform may have on its business.

COMPETITION

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

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

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

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

EMPLOYEES

At December 31, 2001, the Company employed 1,122 total employees, of which
675 were full-time employees. At that date, none of the Company's employees were
subject to collective bargaining agreements or were members of unions.
Management considers the relations between the Company and its employees to be
good.

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

INSURANCE

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

ITEM 2. PROPERTIES.

The Company presently leases, under noncancellable operating leases with
terms ranging from one to five years, all of the properties used for its clinics
with the exception of two clinics located in Brownwood, Texas and Mineral Wells,
Texas, for which the Company owns. The Company also owns a building in Clovis,
New Mexico, which it

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intends to sell or lease, related to a clinic that has been closed. The Company
intends, where feasible, to lease the premises in which new clinics will be
located. The Company's typical clinic occupies 1,500 to 3,000 square feet of
space.

The Company also leases, under a noncancellable operating lease expiring in
July 2003, its executive offices located in Houston, Texas. The executive
offices currently occupy approximately 23,000 square feet of space (including
allocations for common areas).

ITEM 3. LEGAL PROCEEDINGS.

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

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

No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the fourth quarter of 2001.

PART II

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

PRICE QUOTATIONS

The Company's common stock trades on the Nasdaq Stock Market, Inc.
("Nasdaq") National Market under the symbol "USPH." The range of Nasdaq reported
trading prices for each quarterly period, as set forth below, reflect the
two-for-one stock split effected in the form of a 100% stock dividend, payable
on January 5, 2001, to holders of record as of December 27, 2000 and the
three-for-two stock split effected in the form of a 50% stock dividend, payable
on June 28, 2001, to holders of record as of June 7, 2001. The reported
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.

RECORD HOLDERS

As of March 26, 2002, there were 40 holders of record of the Company's
outstanding common stock.

DIVIDENDS

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

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

On June 28, 2001, the Company effected a three-for-two stock split in the
form of a 50% stock dividend to stockholders of record as of June 7, 2001.
Fractional shares resulting from the three-for-two stock split were paid to
shareholders in cash.

8

RECENT SALES OF UNREGISTERED SECURITIES

On September 30, 2001, the Company purchased the 35% minority interest in a
limited partnership which owns nine clinics in Michigan for consideration
aggregating $2,111,000. The Company issued 95,000 shares of common stock and a
note payable of $630,000. The securities were issued in reliance on the
exemption from registration set forth in Rule 506 of Regulation D and Section
4(2) of the Securities Act of 1933, as amended.

On December 31, 2001, the Company purchased the 35% minority interest in a
limited partnership which owns four clinics in Michigan for consideration
aggregating $1,511,000. The Company issued 67,100 shares of common stock and a
note payable of $435,000. The securities were issued in reliance on the
exemption from registration set forth in Rule 506 of Regulation D and Section
4(2) of the Securities Act of 1933, as amended.

ITEM 6. SELECTED FINANCIAL DATA.

- ---------------
(1) Certain amounts for 1999 and 1998 have been reclassified to conform to the
presentation used for 2001 and 2000. The reclassifications had no effect on
net income.

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

(3) All per share information has been adjusted to reflect the two-for-one stock
split effected in the form of a 100% stock dividend, payable on January 5,
2001 to holders of record as of December 27, 2000 and the three-for-two
stock split effected in the form of a 50% stock dividend payable on June 28,
2001 to holders of record as of June 7, 2001.

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

OVERVIEW

The Company operates outpatient physical and/or occupational therapy
clinics which provide post-operative care and treatment for a variety of
orthopedic-related disorders and sports-related injuries. At December 31, 2001,
the Company operated 162 outpatient physical and/or occupational therapy clinics
in 31 states. The average age of the 162 clinics in operation at December 31,
2001 was 4.08 years. Since the inception of the Company, 176 clinics have been
developed and six clinics have been acquired by the Company. To date, the
Company has sold one clinic, closed 14 facilities due to negative clinic
performance, consolidated the operations of three of its clinics with other
existing clinics to more efficiently serve various geographic markets and closed
two of the Company's clinics after selling certain fixed assets at such
facilities. During 1999, three clinics were closed with no loss being recognized
related to these closures. These three clinics combined accounted for net
patient revenues and clinic operating costs for the year ended December 31, 1999
of $263,000 and $333,000, respectively. Two clinics were closed in 2000 with no
loss being recognized. These two clinics combined accounted for net patient
revenues and clinic operating costs for the year ended December 31, 2000 of
$97,000 and 221,000, respectively, for the year ended December 31, 1999 of
$222,000 and $328,000, respectively. During 2001, six clinics were closed with
no loss being recognized. These six

9

clinics combined accounted for net patient revenues and clinic operating costs
for the year ended December 31, 2001 of $393,000 and $513,000, respectively, for
the year ended December 31, 2000 of $738,000 and $606,000, respectively, and for
the year ended December 31, 1999 of $353,000 and $219,000, respectively.

The Company also sold one clinic during 2001. This clinic accounted for net
patient revenues and clinic operating costs for the year ended December 31, 2001
of $122,000 and $148,000, respectively, for the year ended December 31, 2000 of
$162,000 and $172,000, respectively, and for the year ended December 31, 1999 of
$167,000 and $177,000, respectively.

In addition to the Company's owned clinics, it also manages physical
therapy facilities for third parties, including physicians, with six such
third-party facilities under management as of December 31, 2001.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those that have a significant impact on
the results of operations and financial position of the Company involving
significant estimates requiring judgment by Management. The Company's critical
accounting policies are:

Revenue Recognition. The Company bills primarily third-party payors
for services at standard rates. Actual payments received from the payors
vary based upon the payor's fee schedules, contracts the Company may have
signed with the payor or limits on usual and customary charges. Based upon
historical payment data, the Company records a contractual allowance to
reduce gross revenues to the estimated net realizable amount expected to be
ultimately collected from payors. The accuracy of revenue recognition
improves with the timeliness of collections.

Allowance for Doubtful Accounts. The Company reviews account agings
and experience with particular payors at each clinic in determining an
appropriate accrual for doubtful accounts. Historically, clinics that have
large numbers of older 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 the bad
debt allowance.

Accounting for Income Taxes. As part of the process of preparing the
consolidated financial statements, the Company is required to estimate its
federal income tax liability and income taxes in the states in which it
operates, as well as assessing temporary differences resulting from
differing treatment of items, such as bad debt expense and amortization of
leasehold improvements, for tax and accounting purposes. The differences
result in deferred tax assets and liabilities, which are included in the
consolidated balance sheets. Management then must assess the likelihood
that deferred tax assets will be recovered from future taxable income, and
if not, establish a valuation allowance.

FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000

Net Patient Revenues

Net patient revenues increased to $78,450,000 for 2001 from $60,667,000 for
2000, an increase of $17,783,000, or 29%, on a 25% increase in patient visits to
871,000. Net patient revenues from the 30 clinics opened during 2001 (the "2001
New Clinics") accounted for 21% of the increase, or $3,703,000. The remaining
increase of $14,080,000 in net patient revenues is attributable to the 132
clinics opened before 2001 (the "Mature Clinics"). Of the $14,080,000 increase
in net patient revenues from the Mature Clinics, $11,444,000 was due to a 19%
increase in the number of patient visits to 829,000, while $2,636,000 was due to
a 4% increase in the average net revenue per visit to $90.19.

Net patient revenues are based on established billing rates less allowances
and discounts for patients covered by worker's compensation programs and other
contractual programs. Payments received under these programs are based on
predetermined rates and are generally less than the established billing rates of
the clinics. Net patient revenues reflect reserves, which are evaluated
quarterly by management, for contractual and other adjustments relating to
patient discounts from certain payors. Reimbursement for outpatient therapy
services provided to Medicare beneficiaries is pursuant to a fee schedule
published by the Department of Health and Human Services, and the total

10

amount that may be paid by Medicare in any one year for outpatient physical
(including speech-language pathology) or occupational therapy to any one patient
is limited to $1,500, except for services provided in hospitals. On November 29,
1999, President Clinton signed into law the Medicare, Medicaid and SCHIP
Balanced Budget Refinement Act of 1999 which, among other provisions, placed a
two-year moratorium on the $1,500 reimbursement limit for therapy services
provided in 2000 and 2001. On December 21, 2000, the President signed into law
the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of
2000 which, among other provisions, extended the moratorium for one year through
December 31, 2002. The Company does not generally treat long-term complicated
rehabilitation cases; therefore, should the $1,500 reimbursement limit become
effective in 2003, the Company does not anticipate a material impact on revenues
in 2003.

Management Contract Revenues

Management contract revenues decreased to $2,311,000 for 2001 from
$2,369,000 for 2000, a decrease of $58,000, or 2%. This decrease was primarily
due to the termination at the end of the contract of a third-party management
contract with a hospital in February 2001. Currently, the Company is not
expecting significant expansion of the management contracting business.

Clinic Operating Costs

Clinic operating costs as a percent of combined net patient revenues and
management contract revenues decreased to 68% in 2001 from 72% in 2000.

Clinic Operating Costs -- Salaries and Related Costs

Salaries and related costs increased to $35,351,000 for 2001 from
$28,683,000 for 2000, an increase of $6,668,000, or 23%. Approximately 26% of
the increase, or $1,715,000, was due to the 2001 New Clinics. The remaining 74%
increase, or $4,953,000, was due principally to increased staffing to meet the
increase in patient visits for the Mature Clinics, coupled with an increase in
bonuses earned by the clinic directors at the Mature Clinics. Such bonuses are
based on the net revenues or operating profit generated by the individual
clinics. Salaries and related costs as a percent of combined net patient
revenues and management contract revenues decreased to 44% in 2001 from 46% in
2000.

Clinic Operating Costs -- Rent, Clinic Supplies and Other

Rent, clinic supplies and other increased to $17,599,000 for 2001 from
$14,952,000 for 2000, an increase of $2,647,000, or 18%. Approximately 49% of
the increase, or $1,310,000, was due to the 2001 New Clinics, while 51%, or
$1,337,000, of the increase was due to the Mature Clinics. The increase in rent,
clinic supplies and other for the Mature Clinics was primarily due to the fact
that for the 28 clinics opened during 2000, 32% opened in the fourth quarter.
Accordingly, 2001 was the first year in which they incurred a full year of
expenses. Rent, clinic supplies and other as a percent of net patient revenues
and management contract revenues combined decreased to 22% for 2001 from 24% for
2000.

Clinic Operating Costs -- Provision for Doubtful Accounts

The provision for doubtful accounts increased to $1,930,000 for 2001 from
$1,596,000 for 2000, an increase of 21%, or $334,000. Approximately 24% of the
increase, or $81,000, was due to the 2001 New Clinics. The remaining 76%
increase, or $253,000, was due to the Mature Clinics. The provision for doubtful
accounts as a percent of net patient revenues was 2.5% for 2001 compared to 2.6%
for 2000.

Corporate Office Costs

Corporate office costs, consisting primarily of salaries and benefits of
corporate office personnel, rent, insurance costs, depreciation and
amortization, travel, legal, professional, marketing and recruiting fees
increased to $9,120,000 for 2001 from $7,607,000 for 2000, an increase of
$1,513,000, or 20%. Corporate office costs increased primarily as a result of
increased legal fees, travel, recruiting fees and salaries and benefits related
to additional personnel hired to support an increasing number of clinics.
Corporate office costs as a percent of combined net patient revenues and

11

management contract revenues decreased to 11% in 2001 from 12% in 2000.
Corporate office expense in 2000 included $369,000 related to the Company's
discontinued surgery center initiative.

Interest Expense

Interest expense decreased $514,000, or 66%, to $266,000 for 2001 from
$780,000 for 2000. This decrease was primarily due to the conversion of $850,000
and $4,200,000 of convertible subordinated debt into shares of Company common
stock in the last quarter of 2000 and the first quarter of 2001, respectively.
See "Factors Affecting Future Results -- Convertible Subordinated Debt."

Minority Interests in Earnings of Subsidiary Limited Partnerships

Minority interests in earnings of subsidiary limited partnerships increased
$1,713,000, or 49%, to $5,179,000 for 2001 from $3,466,000 for 2000 due to the
increase in aggregate profitability of those clinics in which partners have
achieved positive retained earnings and are accruing partnership income.

Provision for Income Taxes

The provision for income taxes increased to $4,432,000 for 2001 from
$2,403,000 for 2000, an increase of $2,029,000, or 84%. During 2001 and 2000,
the Company accrued income taxes at an effective tax rate of 39%. The 2001 and
2000 rate exceeded the U.S. statutory tax rate of 35% due primarily to state
income taxes.

FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999

Net Patient Revenues

Net patient revenues increased to $60,667,000 for 2000 from $49,056,000 for
1999, an increase of $11,611,000, or 24%, on a 23% increase in patient visits to
697,000. Net patient revenues from the 28 clinics opened during 2000 (the "2000
New Clinics") accounted for 27% of the increase, or $3,144,000. The remaining
increase of $8,467,000 in net patient revenues is attributable to the 111
clinics opened before 2000 (the "Mature Clinics"). Of the $8,467,000 increase in
net patient revenues from the Mature Clinics, $8,215,000 was due to a 17%
increase in the number of patient visits to 661,000, while $252,000 was due to a
$0.36 increase in the average net revenue per visit to $87.03.

See the discussion on accounting for and regulatory initiatives related to
patient billing under the heading "Fiscal Year 2001 Compared to Fiscal Year
2000 -- Net Patient Revenues."

Management Contract Revenues

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

Other Revenues

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

Clinic Operating Costs

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

12

Clinic Operating Costs -- Salaries and Related Costs

Salaries and related costs increased to $28,683,000 for 2000 from
$23,995,000 for 1999, an increase of $4,688,000, or 20%. Approximately 37% of
the increase, or $1,748,000, was due to the 2000 New Clinics. The remaining 63%
increase, or $2,940,000, was due principally to increased staffing to meet the
increase in patient visits for the Mature Clinics, coupled with an increase in
bonuses earned by the clinic directors at the Mature Clinics. Such bonuses are
based on the net revenues or operating profit generated by the individual
clinics. Salaries and related costs as a percent of net patient revenues and
management contract revenues combined decreased to 46% for 2000 from 47% for
1999.

Clinic Operating Costs -- Rent, Clinic Supplies and Other

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

Clinic Operating Costs -- Provision for Doubtful Accounts

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

Corporate Office Costs

Corporate office costs, consisting primarily of salaries and benefits of
corporate office personnel, rent, insurance costs, depreciation and
amortization, travel, legal, professional, marketing and recruiting fees
increased to $7,607,000 for 2000 from $6,487,000 for 1999, an increase of
$1,120,000, or 17%. Corporate office costs increased primarily as a result of
increased travel, recruiting fees, marketing expenses and salaries and benefits
related to additional personnel hired to support an increasing number of
clinics. Corporate office costs for 2000 and 1999 included $369,000 and
$384,000, respectively, related to the discontinued surgery center initiative.
Excluding expenses related to the surgery centers, corporate office costs as a
percent of net patient revenues and management contract revenues combined
decreased to 11% for 2000 from 12% for 1999.

Interest Expense

Interest expense increased $53,000, or 7%, to $780,000 for 2000 from
$727,000 for 1999. This increase in interest was due to $2,115,000 borrowed by
the Company to help finance the repurchase of 1,695,000 shares of its common
stock. In November 2000, the Company repaid $1,215,000 of this loan, leaving a
balance of $900,000 at December 31, 2000. The loan bore interest at a rate per
annum of prime plus one-half percentage point and the balance was repaid in
March 2001. See "Liquidity and Capital Resources."

Minority Interests in Earnings of Subsidiary Limited Partnerships

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

Provision for Income Taxes

The provision for income taxes increased to $2,403,000 for 2000 from
$1,568,000 for 1999, an increase of $835,000, or 53%. During 2000 and 1999, the
Company accrued income taxes at effective tax rates of 39% and

13

40%, respectively. The 2000 and 1999 rates exceeded the U.S. statutory tax rate
of 34% due primarily to state income taxes.

Liquidity and Capital Resources

At December 31, 2001, the Company had $8,121,000 in cash and cash
equivalents available to fund the working capital needs of its operating
subsidiaries, future clinic developments, acquisitions and investments. Included
in cash and cash equivalents at December 31, 2001 was $4,525,000 in a money
market fund invested in short-term debt instruments issued by an agency of the
U.S. Government.

The increase in cash of $6,050,000 from December 31, 2000 to December 31,
2001 is due primarily to cash provided by operating activities of $15,172,000
and proceeds from the exercise of stock options of $2,279,000, offset in part by
the Company's use of cash to repurchase 135,000 shares of common stock for
$1,943,000, pay notes payable of $1,542,000, fund capital expenditures for
physical therapy equipment and leasehold improvements in the amount of
$3,344,000, distribute $4,530,000 to minority investors in subsidiary limited
partnerships and to purchase intangibles of $53,000.

The Company's current ratio increased to 6.83 to 1.00 at December 31, 2001
from 4.14 to 1.00 at December 31, 2000. The increase in the current ratio was
due primarily to an increase in cash and cash equivalents and an increase in net
patient revenues, which in turn caused an increase in patient accounts
receivable.

At December 31, 2001, the Company had a debt-to-equity ratio of 0.14 to
1.00 compared to 0.85 to 1.00 at December 31, 2000. The decrease in the
debt-to-equity ratio from December 31, 2000 to December 31, 2001 resulted from
net income of $7,071,000, the conversion of $4,200,000 subordinated notes
payable into common stock, the issuance of 162,100 shares of common stock valued
at $2,557,000 associated with the purchase of the 35% minority interest in
thirteen Michigan clinics and the proceeds of and tax benefit from the exercise
of stock options of $2,279,000 and $3,134,000, respectively.

In August 2000, the Company completed the repurchase of 1,695,000 shares
for a total aggregate cost of $6,275,000 (including expenses). The Company
utilized cash on hand and a bank loan in the amount of $2,115,000 to fund the
purchase of the stock.

In conjunction with the stock purchase, the Company entered into a loan
agreement with a bank to borrow up to $2,500,000 on a line of credit,
convertible to a term loan on December 31, 2000. The loan bore interest at a
rate per annum of prime plus one-half percentage point and was repayable in
quarterly installments of $250,000 beginning March 2001. In November 2000, the
Company repaid $1,215,000 of the $2,115,000 borrowed under the convertible line
of credit. In March 2001, the Company repaid the remaining balance of $900,000
on the bank loan.

In September 2001, the Board of Directors authorized the purchase, in the
open market or in privately negotiated transactions, up to 1,000,000 shares of
the Company's common stock. Any shares purchased will be held as treasury shares
and may be used for such valid corporate purposes or retired as the Board of
Directors, in its discretion, may deem advisable. As of December 31, 2001, the
Company had purchased 135,000 shares of its common stock on the open market for
a total of $1,943,000.

The Company does not have credit lines or other arrangements for funding
with banks or other institutions. Historically, the Company has generated cash
from operations sufficient to fund its development activities and cover
operational needs. The Company does not generally acquire new clinics through
acquisitions of existing clinics, but develops clinics in a de novo fashion,
which management believes generally requires substantially less capital. The
Company currently plans to continue adding new clinics on a de novo basis,
although this strategy may change from time to time as appropriate opportunities
become available. The Company has from time to time purchased minority interests
of limited partners in clinic partnerships, including the minority interests
purchased in the thirteen Michigan clinics referred to above. In selective
cases, the Company may purchase additional minority interests in the future.
Generally, any material purchases of minority interests are expected to be
accomplished using a combination of common stock and cash.

Management believes that existing funds, supplemented by cash flows from
existing operations, will be sufficient to meet its current operating needs,
development plans and any purchases of minority interests through at least 2002.

14

RECENTLY PROMULGATED ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 eliminates the pooling of interests method of accounting
and requires that all business combinations initiated after June 30, 2001 be
accounted for under the purchase method. The adoption of SFAS 141 did not have a
material impact on the Company's business because it had no planned or pending
acquisitions that would have met the requirements for use of the pooling of
interests method.

Also in July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets," ("SFAS 142") which is
effective for the Company beginning in 2002 except for certain provisions that
were effective July 1, 2001. SFAS 142 requires goodwill and other intangible
assets with indefinite lives no longer be amortized. SFAS 142 further requires
the fair value of goodwill and other intangible assets with indefinite lives be
tested for impairment upon adoption of this statement, annually and upon the
occurrence of certain events and be written down to fair value if considered
impaired. At December 31, 2001, the Company had approximately $4,519,000 of
unamortized goodwill. Amortization expense related to goodwill was $44,000,
$61,000 and $61,000 for the years ended December 31, 2001, 2000 and 1999,
respectively. The Company does not believe the adoption of SFAS 142 will have a
material impact on its financial condition or results of operations.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," ("SFAS 143") which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This statement applies to all
entities that have legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development or
normal use of the asset. SFAS 143 is effective for fiscal years beginning after
June 15, 2002. We do not expect the adoption of SFAS 143 to have a significant
impact on the Company's financial condition or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS 144") which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. While SFAS 144 supersedes SFAS Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," it
retains many of the fundamental provisions of that statement. SFAS 144 also
supersedes the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. SFAS 144
is effective for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The Company does not expect SFAS 144 to have
a significant impact on the Company's financial condition or results of
operations.

FACTORS AFFECTING FUTURE RESULTS

Clinic Development

As of December 31, 2001, the Company had 162 clinics in operation, 30 of
which opened in 2001. Management's goal for 2002 is to open between 35 and 40
additional clinics. The opening of these clinics is subject to the Company's
ability to identify suitable geographic locations and physical and occupational
therapists to manage the clinics. The Company's operating results will be
impacted by initial operating losses from the new clinics. During the initial
period of operation, operating margins for newly opened clinics tend to be lower
than more seasoned clinics due to the start-up costs of newly opened clinics
(including, without limitation, salaries and related costs of the physical
and/or occupational therapist and other clinic personnel, rent and equipment and
other supplies required to open the clinic) and the fact that patient visits and
revenues tend to be lower in the first year of a new clinic's operation and
increase significantly over the subsequent two to three years. Based on
historical performance of the Company's new clinics, the clinics opened in 2001
should favorably impact the Company's results of operations for 2002 and beyond.

Convertible Subordinated Debt

In a June 1993 private placement, the Company issued $3,050,000 of 8%
Convertible Subordinated Notes due June 30, 2003 (the "Initial Series Notes").
In a May 1994 private placement, the Company issued $2,000,000 of 8%

15

Convertible Subordinated Notes, Series B due June 30, 2004 (the "Series B
Notes") and $3,000,000 of 8% Convertible Subordinated Notes, Series C due June
30, 2004 (the "Series C Notes" and collectively, the Initial Series Notes, the
Series B Notes and the Series C Notes are hereinafter referred to as the
"Convertible Subordinated Notes").

The Convertible Subordinated Notes were convertible at the option of the
holders thereof into the number of whole shares of Company common stock
determined by dividing the principal amount of the Notes so converted by $3.33
in the case of the Initial Series Notes and the Series C Notes or $4.00 in the
case of the Series B Notes. Only the $3,000,000 Series C Notes remain
outstanding.

During 2000, $100,000 of the Initial Series Notes and $750,000 of the
Series B Notes were converted by the note holders into 30,000 and 187,497 shares
of common stock, respectively. This resulted in a balance of $2,950,000,
$1,250,000 and $3,000,000 for the Initial Series Notes, the Series B Notes and
the Series C Notes, respectively, at December 31, 2000. In January 2001, an
additional $650,000 of the Initial Series Notes was converted by a note holder
into 195,000 shares of common stock. In addition, the Company exercised its
right to require conversion of the remaining balance of $2,300,000 of the
Initial Series Notes and $1,250,000 of the Series B Notes into 690,000 and
312,498 shares of common stock, respectively. The fair value of the debt
converted in 2001 and 2000 was approximately $11,161,000 and $1,380,000,
respectively, based upon the closing price of the Company's common stock on the
day before conversion, as reported by the National Market of NASDAQ.

The debt conversions increased the Company's shareholders' equity by the
carrying amount of the debt converted less unamortized deferred financing costs,
thus improving the Company's debt to equity ratio and favorably impacted results
of operations and cash flow due to the interest savings in 2001 before income
taxes of approximately $400,000.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2000, the Company had outstanding $2,950,000 aggregate
principal of the Initial Series Notes, $1,250,000 aggregate principal of the
Series B Notes and $3,000,000 aggregate principal amount of the Series C Notes.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Results -- Convertible Subordinated
Debt."

As of December 31, 2001, the Company had outstanding $3,000,000 aggregate
principal amount of the Series C Notes.

Based upon the closing price of the Company's common stock on March 25,
2002 of $17.85, as reported by the National Market of Nasdaq, the fair value of
the Series C Notes was $16,065,000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Convertible Subordinated Debt."

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

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

16

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditors' Report................................ 18
Audited Financial Statements:
Consolidated Balance Sheets as of December 31, 2001 and
2000...................................................... 19
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999.......................... 21
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2001, 2000 and 1999.............. 22
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.......................... 23
Notes to Consolidated Financial Statements.................. 25

17

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of U.S.
Physical Therapy, Inc. and subsidiaries (the "Company") as of December 31, 2001
and 2000, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 2001. In connection with our audits of the consolidated financial
statements, we have also audited the related consolidated financial statement
schedule for each of the years in the three-year period ended December 31, 2001.
These consolidated financial statements and the consolidated financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of U.S.
Physical Therapy, Inc. and subsidiaries as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

As discussed in note 2 to the consolidated financial statements, effective
July 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations," and certain
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," as required
for goodwill and intangible assets resulting from business combinations
consummated after June 30, 2001.

KPMG LLP

Houston, Texas
February 27, 2002

18

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

See notes to consolidated financial statements.

19

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

See notes to consolidated financial statements.

20

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

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

See notes to consolidated financial statements.

21

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

See notes to consolidated financial statements.

22

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

See notes to consolidated financial statements.

23

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

See notes to consolidated financial statements.

24

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001

1. ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION

U.S. Physical Therapy, Inc. and its subsidiaries (the "Company") develops,
owns and operates outpatient physical and occupational therapy clinics. As of
December 31, 2001, the Company owned and operated 162 clinics in 31 states. The
clinics provide post-operative care and treatment for a variety of
orthopedic-related disorders and sports-related injuries, treatment for
neurologically-related injuries, rehabilitation of injured workers and
preventative care. The clinics' business primarily originates from physician
referrals. The principal sources of payment for the clinics' services are
commercial health insurance, workers' compensation insurance, managed care
programs, Medicare and proceeds from personal injury cases.

In addition to the Company's ownership of clinics, it also manages physical
therapy facilities for third parties, including physicians, with six such
third-party facilities under management as of December 31, 2001.

The consolidated financial statements include the accounts of U.S. Physical
Therapy, Inc. and its subsidiaries. All significant intercompany transactions
and balances have been eliminated. The Company, through its wholly-owned
subsidiaries, currently owns a 1% general partnership interest, with the
exception of one clinic in which the Company owns a 6% general partnership
interest, and limited partnership interests ranging from 49% to 99% in the
clinics it owns and operates (with respect to 80% of the Company's clinics, the
Company owned a limited partnership interest of 64%). For the majority of the
clinics, the managing therapist of each such clinic, along with other therapists
at the clinic in several of the partnerships, own the remaining limited
partnership interests in the clinic. In some instances, the Company develops
satellite clinic facilities which are extensions of existing clinics, and thus,
clinic partnerships may consist of one or more clinic locations. In the majority
of the partnership agreements the therapist partner begins with a 20% profit
interest in his or her clinic limited partnership which increases by 3% at the
end of each year until his or her interest reaches 35%. The minority interest in
the equity and earnings of the clinic limited partnerships is presented
separately in the consolidated financial statements.

2. SIGNIFICANT ACCOUNTING POLICIES

Common Stock

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

On June 28, 2001, the Company effected a three-for-two common stock split
in the form of a 50% stock dividend to stockholders of record as of June 7,
2001.

All share and per share information included in the accompanying
consolidated financial statements and related notes have been adjusted to
reflect these stock splits.

Accounting Change

Effective July 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
certain provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," as
required for goodwill and intangible assets resulting from business combinations
consummated after June 30, 2001.

On September 30, 2001, the Company purchased the 35% minority interest in a
limited partnership which owns nine clinics in Michigan and on December 31,
2001, the Company purchased the 35% minority interest in a limited partnership
which owns four clinics in Michigan (see Note 3).

SFAS No. 141 requires the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 141 also specifies
criteria which intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill. The
SFAS No. 142 provisions adopted

25

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

require that goodwill and intangible assets with indefinite useful lives
acquired in a business combination completed after June 30, 2001 no longer be
amortized, but instead be tested for impairment in accordance with pre-SFAS No.
142 accounting literature.

Goodwill associated with the purchase of minority interests in September
and December 2001 totaled $3,622,000. This goodwill has not been amortized and
will be tested for impairment upon adoption of certain provisions of SFAS No.
142 that are effective for the Company effective January 1, 2002. If the
goodwill associated with the September and December 2001 acquisitions of
minority interests had been amortized in accordance with the Company's pre-SFAS
No. 142 policy, additional amortization expense for the year ended December 31,
2001 would have been $26,000.

Cash Equivalents

The Company considers all highly liquid investments with a maturity of
three months or less, when purchased, to be cash equivalents. The Company,
pursuant to its investment policy, invests its cash in deposits with major
financial institutions, in highly rated commercial paper and short-term treasury
and United States government agency securities. Included in cash and cash
equivalents at December 31, 2001 and 2000 was $4,525,000 and $710,000,
respectively, in a money market fund invested in short-term debt instruments
issued by an agency of the U.S. Government.

Long-Lived Assets

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

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

Goodwill

"Old goodwill" is amortized using the straight-line method over twenty
years.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," ("SFAS 142"). Provisions of SFAS 142 that are effective for the Company
January 1, 2002, require that goodwill and other intangible assets with
indefinite lives no longer be amortized. SFAS 142 further requires the fair
value of goodwill and other intangible assets with indefinite lives be tested
for impairment upon adoption of this statement, annually and upon the occurrence
of certain events and be written down to fair value if considered impaired. At
December 31, 2001, the Company had approximately $4,519,000 of unamortized
goodwill. Amortization expense related to goodwill was $44,000, $61,000 and
$61,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The
Company does not believe the adoption of SFAS 142 will have a material impact on
its financial condition or results of operations.

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

The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets

26

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," ("SFAS 144") which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. While SFAS 144 supersedes SFAS No. 121, it retains many of the
fundamental provisions of that statement. SFAS 144 also supersedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. SFAS 144 is
effective for the Company January 1, 2002. The Company does not expect adoption
of SFAS 144 will have a significant impact on its financial condition or results
of operations.

Net Patient Revenues

Net patient revenues are reported at the estimated net realizable amounts
from patients, insurance companies, third-party payors, and others for services
rendered. The Company has agreements with third-party payors that provide for
payments to the Company at amounts different from its established rates. The
Company determines allowances for doubtful accounts based on the specific agings
and payor classifications at each clinic, and contractual adjustments based on
historical experience and the terms of payor contracts. Net accounts receivable
includes only those amounts the Company estimates to be collectible.

Reimbursement for outpatient therapy services provided to Medicare
beneficiaries is pursuant to a fee schedule published by the Department of
Health and Human Services ("HHS"), and the total amount that may be paid by
Medicare in any one year for outpatient physical (including speech-language
pathology) or occupational therapy to any one patient is limited to $1,500,
except for services provided in hospitals. On November 29, 1999, President
Clinton signed into law the Medicare, Medicaid and SCHIP Balanced Budget
Refinement Act of 1999 ("BBRA") which, among other provisions, placed a two-year
moratorium on the $1,500 reimbursement limit for Medicare therapy services
provided in 2000 and 2001. On December 21, 2000, the President signed into law
the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of
2000 ("BIPA") which, among other provisions, extended the moratorium for one
year through December 31, 2002. The Company does not generally treat long-term
complicated rehabilitation cases, therefore, should the $1,500 reimbursement
limit become effective in 2003, the Company does not anticipate a material
impact on revenues in 2003.

Laws and regulations governing the Medicare program are complex and subject
to interpretation. The Company believes that it is in compliance with all
applicable laws and regulations and is not aware of any pending or threatened
investigations involving allegations of potential wrongdoing that would have a
material effect on the Company's financial statements as of December 31, 2001.
Compliance with such laws and regulations can be subject to future government
review and interpretation, as well as significant regulatory action including
fines, penalties, and exclusion from the Medicare program.

Income Taxes

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

Derivative Instruments and Hedging Activities

Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138. SFAS 133
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. Under the standard, entities
are required to carry all derivative instruments in the statement of financial

27

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

position at fair value. Adoption of SFAS 133 did not have a material effect on
the Company's financial condition or results of operations because the Company
historically has not entered into derivative or other financial instruments for
trading or speculative purposes nor does it use or intend to use derivative
financial instruments or derivative commodity instruments.

Fair Values

The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, accounts payable, and notes payable -- current
portion approximate their fair values due to the short-term maturity of these
financial instruments. The fair values of the long-term convertible subordinated
notes are based on the Company's stock price and the number of shares that would
be acquired upon conversion. Based upon the closing price of the Company's
common stock on December 31, 2001 of $16.16, the fair value of the convertible
subordinated notes was $14,544,000.

Use of Estimates

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

Reclassifications

Certain amounts presented in the accompanying consolidated financial
statements for 1999 have been reclassified to conform with the presentation used
for 2001 and 2000.

Revenue Recognition

Revenues are recognized in the period in which services are rendered and
are reported at estimated net realizable amounts.

Stock Options

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

3. NON-CASH TRANSACTIONS

Conversion of Subordinated Notes to Common Stock

In June 1993, the Company issued $3,050,000 aggregate principal amount of
8% Convertible Subordinated Notes (the "Initial Series Notes").

In May 1994, the Company issued $2,000,000 aggregate principal amount of 8%
Convertible Subordinated Notes, Series B (the "Series B Notes"). The Series B
Notes contained a Contingent Interest Enhancement provision which allowed the
Series B Note Holders to receive an interest enhancement payable in shares of
Company common stock based upon the market value of the Company's shares for the
month of June 1996. In 1996, a total of 212,895 shares of the Company's common
stock were issued in connection with the Contingent Interest Enhancement
provision. Deferred financing costs, included in "Other Assets" on the balance
sheet and being amortized over the life of the Series B Notes, totaling $765,000
were recorded in connection with the issuance of the 212,895 shares.

28

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During 2000, $100,000 of the Initial Series Notes and $750,000 of the
Series B Notes were converted by the note holders into 30,000 and 187,497 shares
of Company common stock, respectively.

During 2001, an additional $650,000 of the Initial Series Notes was
converted by a note holder into 195,000 shares of common stock. In addition, the
Company exercised its right to convert the remaining balances of $2,300,000 of
the Initial Series Notes and $1,250,000 of the Series B Notes into 690,000 and
312,500 shares of common stock, respectively.

In conjunction with the conversion of the Series B Notes, the unamortized
portion of the deferred financing costs related to the converted notes was taken
to additional paid-in capital. Interest expense for 2001, 2000 and 1999 included
$-0-, $71,000 and $75,000, respectively, of amortization relating to the
deferred financing costs.

Acquisition of Minority Interests

On September 30, 2001, the Company purchased the 35% minority interest in a
limited partnership which owns nine clinics in Michigan for consideration
aggregating $2,111,000. At closing, the Company delivered 95,000 shares of
restricted stock and a note payable for $630,000 which was paid in October 2001.
This non-cash investing and financing transaction has been excluded from the
consolidated statements of cash flows.

On December 31, 2001, the Company purchased the 35% minority interest in a
limited partnership which owns four clinics in Michigan for consideration
aggregating $1,511,000. At closing, the Company delivered 67,100 shares of
restricted stock and a note payable for $435,000 which was paid in January 2002.
This non-cash investing and financing transaction has been excluded from the
consolidated statements of cash flows. Additionally, as part of the purchase,
the Company agreed to pay the minority partner $261,000 of undistributed
earnings which was paid in January 2002.

4. NOTES PAYABLE

On June 2, 1993, the Company completed the issuance and sale of $3,050,000
aggregate principal amount of 8% Convertible Subordinated Notes due June 30,
2003 (the "Notes"). The Notes, which were subordinated to any indebtedness for
borrowed money, were issued at par in a private placement transaction to a total
of six investors, including two directors who purchased a total of $175,000 of
the Notes and a company controlled by one of the Company's directors which
purchased $2,000,000 of the Notes. The Notes bore interest at 8% per annum,
payable quarterly, and were convertible at the option of the note holders into
common stock of the Company at any time during the life of the Notes. The
conversion price was $3.33 per share (subject to adjustment as provided in the
Notes). The Company could require the note holders to convert the Notes into
shares of common stock at any time that the average trading price of the
Company's common stock equaled or exceeded $6.67 per share (subject to
adjustment as provided in the Notes) during the immediately preceding 90-day
period. During 2000, $100,000 of the Notes were converted into 30,000 shares of
common stock and during 2001, $650,000 of the Notes were converted into 195,000
shares of common stock of the Company voluntarily, and the Company exercised its
right to convert the remaining balance of $2,300,000 of the Notes into 690,000
shares of common stock.

On May 5, 1994, the Company completed the issuance and sale of the Series B
Notes. The Series B Notes were issued at par in a private placement. The Series
B Notes were convertible, at the option of the holder, into the number of whole
shares of the Company's common stock determined by dividing the principal amount
so converted by $4.00, (the "Conversion Price"), subject to adjustment upon the
occurrence of certain events. The Company could require the note holders to
convert the Notes into shares of common stock at any time that the average
trading price of the Company's common stock equaled or exceeded $6.67 per share
(subject to adjustment as provided in the Notes) during the immediately
preceding 90-day period. The Series B Notes bore interest from the date of
issuance at a rate of 8% per annum, payable quarterly. Holders of Series B Notes
were entitled to receive an interest enhancement payable in shares of Company
common stock based upon the market value of the Company's common stock at June
30, 1996, which was two years from the date of issuance of the Series B Notes.
In July 1996, the Company issued 212,895 shares of its common stock in
connection with the interest enhancement provision. During 2000,

29

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$750,000 of the Series B Notes were converted into 187,497 shares of common
stock of the Company voluntarily, and during 2001, the Company exercised its
right to convert the remaining balance of $1,250,000 of the Series B Notes into
312,500 shares of common stock of the Company.

The Company also completed on May 5, 1994, the issuance and sale of
$3,000,000 aggregate principal amount of 8% Convertible Subordinated Notes,
Series C due June 30, 2004 (the "Series C Notes"). The Series C Notes were
issued at par in a private placement to a company controlled by one of the
Company's then directors who no longer serves. The Series C Notes are
convertible, at the option of the holder, into the number of whole shares of
common stock determined by dividing the principal amount so converted by $3.33,
subject to adjustment upon the occurrence of certain events. The Series C Notes
bear interest from the date of issuance at a rate of 8% per annum, payable
quarterly. Based upon current market prices of the Company's common stock,
Management expects the $3,000,000 of Series C Notes due June 30, 2004 to be
converted to common stock on or prior to the maturity date.

The Series C Notes are unsecured and subordinated in right of payment to
all other indebtedness for borrowed money incurred by the Company.

The holder of the Series C Notes has piggy-back registration rights as set
forth in the Registration Agreement relating to the Notes and demand and
piggy-back registration rights as set forth in the Registration Agreement
related to the Notes.

In July 2000, the Company's Board of Directors authorized the repurchase
for cash of up to 1,500,000 shares of its issued and outstanding common stock
for a price of $3.67 per share (the "Offer"). Pursuant to the terms of the
Offer, the Company could buy up to an additional 2% of its outstanding shares
without amending or extending the Offer. The Company completed the repurchase of
1,695,000 shares in August 2000 for a total aggregate cost of $6,275,000
(including expenses). The Company utilized cash on hand and a convertible line
of credit in the amount of $2,115,000 to fund the repurchase of the stock.

In conjunction with the Offer, the Company entered into an agreement with a
bank wherein the bank agreed to lend the Company up to $2,500,000 on a
convertible line of credit, convertible to a term loan on December 31, 2000, to
purchase stock tendered pursuant to the Offer. The loan bore interest at a rate
per annum of prime plus one-half percentage point and was repayable in quarterly
installments of $250,000 beginning March 2001. During 2000, the Company had
borrowed $2,115,000 under the $2,500,000 convertible line of credit. In November
2000, the Company repaid $1,215,000 of the $2,115,000 borrowed under the
convertible line of credit. In March 2001, the Company repaid the remaining
balance of $900,000 on the bank loan.

The Company also had a revolving line of credit with a bank which provided
for borrowings up to $500,000, as needed, at a rate of prime plus one-half
percentage point. The revolving line of credit expired in July 2001 and was not
renewed.

30

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Notes payable as of December 31, 2001 and 2000 consist of the following:

Scheduled maturities for the next five years and thereafter as of December
31, 2001 are as follows:

2002............................................. $ 701,000
2003............................................. 4,000
2004............................................. 3,005,000
2005............................................. 5,000
2006............................................. 5,000
Thereafter....................................... 2,000
----------
$3,722,000
==========

5. RELATED PARTY TRANSACTIONS

During 2001, 2000 and 1999, the Company recognized interest expense of
$6,000, $415,000 and $414,000, respectively, relating to Convertible
Subordinated Notes held by directors of the Company.

See Note 3 and 4 for additional information on related party transactions.

31

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. INCOME TAXES

Significant components of deferred tax assets, included in other assets on
the balance sheet at December 31, 2001 and 2000, were as follows:

The differences between the federal tax rate and the Company's effective
tax rate for the years ended December 31, 2001, 2000 and 1999 were as follows:

Significant components of the provision for income taxes for the years
ended December 31, 2001, 2000 and 1999 were as follows:

The Company is required to establish a valuation allowance for deferred tax
assets if, based on the weight of available evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income in the periods which the deferred tax
assets are deductible, management believes that a valuation allowance is not
required, as it is more likely than not that the results of future operations
will generate sufficient taxable income to realize the deferred tax assets.

32

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. STOCK OPTION PLANS

The Company has in effect the following stock option plans:

The 1992 Stock Option Plan, as amended (the "1992 Plan") which permits the
Company to grant to key employees and outside directors of the Company incentive
and non-qualified options to purchase up to 3,495,000 shares of common stock
(subject to proportionate adjustments in the event of stock dividends, splits,
and similar corporate transactions).

Incentive stock options (those intended to satisfy the requirements of the
Internal Revenue Code) granted under the 1992 Plan are granted at an exercise
price not less than the fair market value of the shares of common stock on the
date of grant. The exercise prices of options granted under the 1992 Plan are
determined by the Stock Option Committee. The period within which each option
will be exercisable is determined by the Stock Option Committee (in no event may
the exercise period of an incentive stock option extend beyond 10 years from the
date of grant).

The Executive Option Plan (the "Executive Plan") which permitted the
Company to grant to any officer of the Company or its affiliates, options to
purchase up to 255,000 shares of common stock (subject to adjustments in the
event of stock dividends, splits and similar corporate transactions). No further
grants of options will be made under the Executive Plan. The exercise prices of
the options granted under the Executive Plan were determined by the Stock Option
Committee, and in the case of both incentive and non-qualified options, could
not be less than the greater of 175% of the fair market value of a share of
common stock on the date of grant or the par value per share of the stock. The
period within which each option is exercisable was determined by the Stock
Option Committee to be ten years from the date of grant.

The 1999 Employee Stock Option Plan (the "1999 Plan") permits the Company
to grant to certain non-officer employees of the Company up to 300,000
non-qualified options to purchase shares of common stock (subject to
proportionate adjustments in the event of stock dividends, splits, and similar
corporate transactions). The exercise prices of options granted under the 1999
Option Plan are determined by the Stock Option Committee. The period within
which each option will be exercisable is determined by the Stock Option
Committee.

During 2001, 2000 and 1999, the Board of Directors of the Company granted
non-plan, non-qualifying option agreements (the "Inducements") covering 30,000,
30,000 and 225,000 options, respectively (subject to proportionate adjustments
in the event of stock dividends, splits and similar corporate transactions) to
four individuals in connection with their offers of employment. During 2000 and
1999, 150,000 and 75,000 were forfeited, respectively. The period within which
each option will be exercisable is 10 years from the date of grant.

A cumulative summary of stock options as of December 31, 2001 follows:

33

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the status of the Company's stock option plans as of December
31, 2001, 2000 and 1999 and the changes during the years then ended is presented
below:

The following tables summarize information about the Company's stock
options outstanding as of December 31, 2001, 2000 and 1999, respectively:

34

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The weighted-average fair value per share of options granted during the
years ended December 31, 2001, 2000 and 1999 follows:

The weighted-average assumptions for 2001, 2000 and 1999 were used in
estimating the fair value per share of the options granted under the stock
option plans and the non-plan, non-qualifying option agreements: risk-free
interest rates ranging from 4.65% to 6.45%; dividend yield rate of 0%;
volatility factors of the expected market price of the Company's common stock
ranging from .245 to .459; and a weighted-average expected life of eight years
for those options that do not vest upon issuance and weighted-average expected
lives of five to eight years for the remaining options.

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

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The pro forma
effect on net income for 2001, 2000 and 1999 is not representative of the pro
forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995. The Company's pro forma information follows (in thousands except for
earnings per share information):

In total, the Company has 3,965,258 shares which are reserved for issuance
under the 1992 Stock Option Plan, the Executive Option Plan, the 1999 Employee
Stock Option Plan, two non-plan, non- qualifying option agreements and the
Series C Notes.

35

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. PREFERRED STOCK

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

All such provisions would be set out in the designation of any series of
preferred stock established by the Board of Directors. The bylaws of the Company
specify that, when a quorum is present at any meeting, the vote of the holders
of at least a majority of the outstanding shares entitled to vote who are
present, in person or by proxy, shall decide any question brought before the
meeting, unless a different vote is required by law or the Company's Articles of
Incorporation. Because the Board of Directors has the power to establish the
preferences and rights of each series, it may afford the holders of any series
of preferred stock, preferences, powers, and rights, voting or otherwise, senior
to the right of holders of common stock. The issuance of the preferred stock
could have the effect of delaying or preventing a change in control of the
Company.

9. DEFINED CONTRIBUTION PLAN

The Company has a 401(k) profit sharing plan covering all employees with
three months of service. The Company may make discretionary contributions of up
to 50% of employee contributions. The Company recognized no contribution expense
for the years ended December 31, 2001, 2000 and 1999.

10. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company has entered into operating leases for its executive offices and
clinic facilities. In connection with these agreements, the Company incurred
rent expense of $5,422,000, $4,546,000 and $3,815,000 for the years ended
December 31, 2001, 2000 and 1999, respectively. Several of the leases provide
for an annual increase in the rental payment based upon the Consumer Price Index
for each particular year. The majority of the leases provide for renewal periods
ranging from one to five years. The agreements to extend the leases specify that
rental rates would be adjusted to market rates as of each renewal date.

The future minimum lease commitments for the next five years and in the
aggregate as of December 31, 2001 are as follows:

2002........................................... $ 4,765,000
2003........................................... 3,906,000
2004........................................... 2,963,000
2005........................................... 1,885,000
2006........................................... 907,000
Thereafter..................................... 80,000
-----------
$14,506,000
===========

Employment Agreements

At December 31, 2001, the Company had an outstanding employment agreement
with one of its executive officers for $250,000 annually, subject to adjustment
to reflect positive performance, for a term extending through February 2004. The
Company also had an outstanding consulting agreement with one of its directors
for $95,000 annually for a term extending through May 2006.

36

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In addition, the Company has outstanding employment agreements with the
managing physical therapist partners of the Company's physical therapy clinics
and with certain other clinic employees which obligate subsidiaries of the
Company to pay compensation of $3,889,000 in 2002 and $2,236,000 in the
aggregate through 2006. In addition, each employment agreement with the managing
physical therapists provides for monthly bonus payments calculated as a
percentage of each clinic's net revenues (not in excess of operating profits) or
operating profits. The Company recognized salaries and bonus expense for the
managing physical therapists of $12,322,000, $9,576,000 and $8,073,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.

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

11. EARNINGS PER SHARE

The computation of basic and diluted earnings per share for the years ended
December 31, 2001, 2000 and 1999 are as follows:

37

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

38

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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

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

ITEM 11. EXECUTIVE COMPENSATION.

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

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

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

PART IV

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

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

Consolidated Balance Sheets -- December 31, 2001 and 2000

Consolidated Statements of Operations -- years ended December 31, 2001,
2000 and 1999

Consolidated Statements of Shareholders' Equity -- years ended December 31,
2001, 2000 and 1999

Consolidated Statements of Cash Flows -- years ended December 31, 2001,
2000 and 1999

Notes to Consolidated Financial Statements -- December 31, 2001

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

Schedule II -- Valuation and Qualifying Accounts

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

39

(3) List of Exhibits

3.1 Articles of Incorporation of the Company (filed as an
exhibit to the Company's Form 10-Q for the quarterly period
ended June 30, 2001 and incorporated herein by reference).
3.2 Amendment to the Articles of Incorporation of the Company
(filed as an exhibit to the Company's Form 10-Q for the
quarterly period ended June 30, 2001 and incorporated herein
by reference).
3.3 Bylaws of the Company, as amended (filed as an exhibit to
the Company's Form 10-KSB for the year ended December 31,
1993 and incorporated herein by reference).
10.1 Convertible Subordinated Note Purchase Agreement dated June
2, 1993 (filed as an exhibit to the Company's Form 8-K dated
June 10, 1993 and incorporated herein by reference).
10.2 Form of U.S. Physical Therapy, Inc. 8% Convertible
Subordinated Notes (filed as an exhibit to the Company's
Form 8-K dated June 2, 1993 and incorporated herein by
reference).
10.3 Amendment to Convertible Subordinated Note Purchase
Agreement dated March 10, 1994 (filed as an exhibit to the
Company's Form 8-K dated March 25, 1994 and incorporated
herein by reference).
10.4 Form of 8% Convertible Subordinated Notes, Series B (filed
as an exhibit to the Company's Form 8-K dated May 5, 1995
and incorporated herein by reference).
10.5 Registration Agreement for Series B Notes (filed as an
exhibit to the Company's Form 8-K dated May 5, 1995 and
incorporated herein by reference).
10.6 Form of 8% Convertible Subordinated Notes, Series C (filed
as an exhibit to the Company's Form 8-K dated May 5, 1995
and incorporated herein by reference).
10.7 Registration Agreement for Series C Notes (filed as an
exhibit to the Company's Form 8-K dated May 5, 1995 and
incorporated herein by reference).
10.8+ 1992 Stock Option Plan, as amended (filed as an exhibit to
the Company's Form 10-Q for the quarterly period ended June
30, 2001 and incorporated herein by reference).
10.9+ Executive Option Plan (filed as an exhibit to the Company's
Registration Statement on Form S-8 (33-63444) and
incorporated herein by reference).
10.10+ 1999 Employee Stock Option Plan (filed as an exhibit to the
Company's Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference).
10.11+ Non-Statutory Stock Option Agreement (filed as an exhibit to
the Company's Form 10-K for the year ended December 31, 1999
and incorporated herein by reference).
10.12+ Second Amended and Restated Employment Agreement between the
Company and Roy W. Spradlin (filed as an exhibit to the
Company's Form 10-Q for the quarterly period ended June 30,
2001 and incorporated herein by reference).
10.13 The Southwest Bank of Texas N.A. Three Year $2.5 million
Letter Loan Agreement, dated July 1, 2000 (filed as an
exhibit to the Company's Form 10-K/A for the year ended
December 31, 2000 and incorporated herein by reference).
10.14 The Southwest Bank of Texas N.A. Convertible Line of Credit
Note, Exhibit A(i) to the Three Year $2.5 million Letter
Loan Agreement dated July 1, 2000 (filed as an exhibit to
the Company's Form 10-K/A for the year ended December 31,
2000 and incorporated herein by reference).
10.15 The Southwest Bank of Texas N.A. Revolving Line of Credit
Note, Exhibit A(ii) to the Three Year $2.5 million Letter
Loan Agreement dated July 1, 2000 (filed as an exhibit to
the Company's Form 10-K/A for the year ended December 31,
2000 and incorporated herein by reference).
10.16+ Non-Statutory Stock Option Agreement dated February 17, 2000
(filed as an exhibit to the Company's Form 10-Q for the
quarterly period ended June 30, 2001 and incorporated herein
by reference).
10.17+ Non-Statutory Stock Option Agreement dated February 7, 2001
(filed as an exhibit to the Company's Form 10-Q for the
quarterly period ended June 30, 2001 and incorporated herein
by reference.)
10.18+ Consulting agreement between the Company and J. Livingston
Kosberg (filed as an exhibit to the Company's Form 10-Q for
the quarterly period ended June 30, 2001 and incorporated
herein by reference).

40

10.19 Partnership Interest Purchase Agreement between the Company
and John Cascardo (filed as an exhibit to the Company's Form
10-Q for the quarterly period ended September 30, 2001 and
incorporated herein by reference).
10.20* Partnership Interest Purchase Agreement between the Company
and Peter Gennrich.
21* Subsidiaries of the Registrant.
23.1* Consent of KPMG LLP (Registration Nos. 33-63446, 33-63444,
33-91004, 33-93040, 333-30071, 333-64159, 333-67680,
333-67678 and 333-82932).

(a) Reports on Form 8-K

No Form 8-K was filed during the quarter ended December 31, 2001.
- ---------------
+ Management contract or compensatory plan or arrangement.

* Filed herewith.

41

ITEM 14. (d)

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

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

42

SIGNATURES

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

U.S. PHYSICAL THERAPY, INC.
(Registrant)

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

Date: April 1, 2002

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

By: /s/ ROY W. SPRADLIN By: /s/ MARK J. BROOKNER
-------------------------------------------------- --------------------------------------------------
Roy W. Spradlin, Mark J. Brookner,
Chairman, President and Chief Executive Officer Vice Chairman of the Board
(principal executive officer)

By: /s/ EDDY J. ROGERS, JR. By: /s/ JAMES B. HOOVER
-------------------------------------------------- --------------------------------------------------
Eddy J. Rogers, Jr., James B. Hoover,
Director Director

By: /s/ MARLIN W. JOHNSTON By: /s/ DANIEL C. ARNOLD
-------------------------------------------------- --------------------------------------------------
Marlin W. Johnston, Daniel C. Arnold,
Director Director

By: /s/ BRUCE D. BROUSSARD By: /s/ ALBERT L. ROSEN,
-------------------------------------------------- --------------------------------------------------
Bruce D. Broussard, Albert L. Rosen,
Director Director

43

INDEX OF EXHIBITS

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

* Filed herewith.

45