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

Back to GetFilings.com

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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

FORM 10-K

COMMISSION FILE NUMBER 1-11151
U.S. PHYSICAL THERAPY, INC.
(EXACT 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.)

1300 WEST SAM HOUSTON PARKWAY SOUTH,
SUITE 300,
HOUSTON, TEXAS 77042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(713) 297-7000
(TELEPHONE NUMBER)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, $.01 PAR VALUE

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. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

The aggregate market value of the shares of the registrant's common stock
held by non-affiliates of the registrant at June 30, 2004 was $117,885,188 based
on the closing sale price reported on the Nasdaq National Market for the
registrant's common stock on June 30, 2004, the last business day of the
registrant's most recently completed second fiscal quarter. For purposes of this
computation, all executive officers, directors and 5% beneficial owners of the
registrant are deemed to be affiliates. Such determination should not be deemed
an admission that such executive officers, directors and beneficial owners are,
in fact, affiliates of the registrant.

As of March 15, 2005, the number of shares outstanding of the registrant's
common stock, par value $.01 per share, was: 11,957,707.

DOCUMENTS INCORPORATED BY REFERENCE

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

FORM 10-K TABLE OF CONTENTS

1

FORWARD LOOKING STATEMENTS

We make statements in this report that are considered to be forward-looking
statements within the meaning under Section 21E of the Securities Exchange Act
of 1934. These statements contain forward-looking information relating to the
financial condition, results of operations, plans, objectives, future
performance and business of our Company. These statements (often using words
such as "believes", "expects", "intends", "plans", "appear", "should" and
similar words) involve risks and uncertainties that could cause actual results
to differ materially from those we project. Included among such statements are
those relating to opening new clinics, availability of personnel and the
reimbursement environment. The forward-looking statements are based on our
current views and assumptions and actual results could differ materially from
those anticipated in such forward-looking statements as a result of certain
risks, uncertainties, and factors, which include, but are not limited to:

- revenue and earnings expectations;

- general economic, business, and regulatory conditions including federal
and state regulations discussed under the heading "Regulation and
Heathcare Reform" below;

- availability of qualified physical and occupational therapists;

- the failure of our clinics to maintain their Medicare certification
status or changes in Medicare admission guidelines;

- competitive and/or economic conditions in our markets which may require
us to close certain clinics and thereby incur closure costs and losses
including the possible write-off or write-down of goodwill;

- changes in reimbursement rates or methods from third party payors
including government agencies and deductibles and co-pays owed by
patients;

- maintaining adequate internal controls;

- availability, terms, and use of capital;

- future acquisitions; and

- weather.

Many factors are beyond our control.

Given these uncertainties, you should not place undue reliance on our
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. Our forward-looking statements
represent our estimates and assumptions only as of the date of this report.
Except as required by law, we are under no obligation to update any forward-
looking statement, regardless of the reason the statement is no longer accurate.

2

PART I

ITEM 1. BUSINESS.

GENERAL

Our company, U.S. Physical Therapy, Inc. (the "Company"), through our
subsidiaries, operates outpatient physical and occupational therapy clinics that
provide pre- and post-operative care and treatment for orthopedic-related
disorders, sports-related injuries, preventative care, rehabilitation of injured
workers and neurological-related injuries. The Company primarily operates
through subsidiary clinic partnerships, in which the Company generally owns a 1%
general partnership interest and a 64% limited partnership interest and the
managing therapist(s) of each clinic owns the remaining limited partnership
interest in the majority of the clinics (hereinafter referred to as "Traditional
Partnership Model" or "Clinic Partnership"). To a lesser extent, the Company
operates some clinics, through wholly-owned subsidiaries, under profit sharing
arrangements with therapists (hereinafter referred to as "Wholly-Owned
Facilities"). Unless the context otherwise requires, references in this Annual
Report on Form 10-K to "we", "our" or "us" includes the Company and all our
subsidiaries.

At December 31, 2004, we operated 264 outpatient physical and occupational
therapy clinics in 35 states. Our strategy is to develop outpatient clinics on a
national basis. The average age of the 264 clinics in operation at December 31,
2004 was 4.5 years. We developed 258 of the clinics and acquired six. In
addition to our owned clinics at December 31 2004, we also managed four physical
therapy facilities for third parties, including physicians. Our highest
concentration of clinics at present are in the following states -- Texas,
Michigan, Wisconsin, Virginia, Oklahoma, Florida and Maine.

Since mid 2004, we have shifted our focus back to developing new clinics
through our Traditional Partnership Model and reduced our emphasis on
Wholly-Owned Facilities. Primarily due to new therapists partners having
existing relationships in place, clinics formed under the Traditional
Partnership Model typically require less management time, have a faster ramp up
and higher average patient visits per clinic and are more profitable than
Wholly-Owned Facilities. We continue to seek to attract physical and
occupational therapists who have established relationships with physicians by
offering therapists a competitive salary; a bonus based on his or her clinic's
net revenue; and a share of the profits of the clinic operated by that
therapist. In addition, we have developed satellite clinic facilities of
existing clinics, with the result that some clinic groups operate more than one
clinic location. In 2005, we intend to continue to focus on developing new
clinics through our Traditional Partnership Model and on opening satellite
clinics where deemed appropriate. In addition, we will evaluate acquisition
opportunities in select markets.

Therapists at our clinics initially perform a tailored and comprehensive
evaluation of each patient, which is then followed by a treatment plan specific
to the injury as prescribed by the patient's physician. The treatment plan may
include a number of procedures, including therapeutic exercise, manual therapy
techniques, ultrasound, electrical stimulation, hot packs, iontophoresis,
education on management of daily life skills and home exercise programs. A
clinic's business primarily comes from referrals by local physicians. The
principal sources of payment for the clinics' services are managed care
programs, commercial health insurance, Medicare/Medicaid and workers'
compensation insurance.

U.S. Physical Therapy, Inc. was re-incorporated in April 1992 under the
laws of the State of Nevada and has operating subsidiaries organized in various
states in the form of limited partnerships and wholly-owned corporations. This
description of our business should be read in conjunction with our financial
statements and the related notes contained elsewhere in this Annual Report on
Form 10-K. Our principal executive offices are located at 1300 West Sam Houston
Parkway South, Suite 300, Houston, Texas 77042. Our telephone number is (713)
297-7000. Our web address on the internet is www.usph.com.

3

OUR CLINICS

Most of our clinics are Clinic Partnerships in which we own the general
partnership interest and a majority of the limited partnership interests. The
managing therapists of the clinics own a portion of the limited partnership
interests. The therapist partners have no interest in the net losses of Clinic
Partnerships, except to the extent of their capital accounts. Increasingly we
have developed satellite clinic facilities of existing clinics; accordingly
Clinic Partnerships may consist of more than one clinic location. As of December
31, 2004, through wholly-owned subsidiaries, we owned a 1% general partnership
interest in all the Clinic Partnerships, except for one clinic in which we own a
6% general partnership interest. Our limited partnership interests range from
49% to 99% in the Clinic Partnerships, but with respect to the majority of our
clinics, we own a limited partnership interest of 64%. For the great majority of
the Clinic Partnerships the managing therapist of each clinic (along with other
therapists at the clinic in several of the partnerships) own the remaining
limited partnership interests in the Clinic Partnerships.

In the majority of the Clinic Partnership agreements, the therapist partner
begins with a 20% profit interest in their Clinic Partnership which increases by
3% at the end of each year thereafter up to a maximum interest of 35%. In 2002,
we revised our accounting for these Clinic Partnership interests owned by the
therapist partners in conjunction with a change in accounting guidance. For
Clinic Partnerships formed after January 18, 2001, the profit allocated to
therapist partners is treated as compensation expense. See "Significant
Accounting Policies" -- Note 2 of the Notes to the Consolidated Financial
Statements in Item 8.

Typically each therapist partner or director enters into an employment
agreement for a term ranging from one to three years with their Clinic
Partnership. Each agreement provides for a covenant not to compete during the
period of his or her employment and for one or two years thereafter. Under each
employment agreement the therapist partner receives a base salary and may
receive a bonus based on the net revenues generated by his or her Clinic
Partnership. In the case of Wholly-Owned Facilities, the therapist director may
also receive a bonus based on the operating profit generated by his or her
clinic. Each employment agreement provides that we can require the therapist to
sell his or her partnership interest in the Clinic Partnership to us or the
Clinic Partnership upon termination of employment for the amount of his or her
capital account if the termination is for "cause" or for breach of the
employment agreement. If the termination of employment is due to the therapist's
death or disability, or the expiration of the initial or any extended term of
the employment agreement, the buy-out price is for an amount set in a
predetermined formula based on a multiple of prior profitability. The Company
typically has the right, but is not obligated, to purchase the therapists'
partnership interests.

Each clinic maintains an independent local identity, while at the same time
enjoying the benefits of national purchasing, negotiated third-party payor
contracts, centralized support services and management practices. Under a
management agreement, one of our subsidiaries provides a variety of support
services to each clinic, including supervision of site selection, construction,
clinic design and equipment selection, establishment of accounting systems and
billing procedures and training of office support personnel, processing of
accounts payable, operational direction, payroll, benefits administration,
accounting services, quality assurance and marketing support.

Our typical clinic occupies approximately 1,500 to 3,000 square feet of
leased space in an office building or shopping center. We attempt to lease
ground level space for patient ease of access to our clinics. We also attempt to
make the decor in our clinics less institutional and more aesthetically pleasing
than hospital clinics. Typical minimum staff at a clinic consists of a licensed
physical or occupational therapist and an office manager as well as appropriate
contracted services such as social work and medical advisor. As patient visits
grow, staffing may also include additional physical or occupational therapists,
therapy assistants, aides, exercise physiologists, athletic trainers and office
personnel. Therapy services are performed under the supervision of a licensed
therapist.

We provide services at our clinics on an outpatient basis. Patients are
usually treated for approximately one hour per day, two to three times a week,
typically for two to six weeks. We generally

4

charge for treatment on a "per procedure" basis. Medicare patients are charged
based on prescribed time increments. In addition, our clinics will develop, when
appropriate, individual maintenance and self-management exercise programs to be
continued after treatment. We continually assess the potential for developing
new services and expanding the methods of providing our existing services in the
most efficient manner.

RISK FACTORS

Our business, operations and financial condition are subject to various
risks. Some of these risks are described below, and readers of this Annual
Report on Form 10-K should take such risks into account in evaluating our
company or making any decision to invest in us. This section does not describe
all risks applicable to our company, our industry or our business, and it is
intended only as a summary of material factors affecting our business.

WE DEPEND UPON REIMBURSEMENT BY THIRD-PARTY PAYORS.

Substantially all of our revenues are derived from private and governmental
third-party payors. In 2004, approximately 79% of our revenues were derived from
managed care plans, commercial health insurers, workers' compensation payors,
and other private pay revenue sources and approximately 21% from Medicare and
Medicaid. Initiatives undertaken by industry and government to contain
healthcare costs affect the profitability of our clinics. These payors attempt
to control healthcare costs by contracting with healthcare providers to obtain
services on a discounted basis. We believe that this trend will continue and may
limit reimbursements for healthcare services. If insurers or managed care
companies from whom we receive substantial payments were to reduce the amounts
they pay for services, our profit margins may decline, or we may lose patients
if we choose not to renew our contracts with these insurers at lower rates. We
also receive payments from the Medicare program under a fee schedule. Under the
Balanced Budget Act of 1997 the total amount paid by Medicare in any one year
for outpatient physical (including speech-language pathology) or occupational
therapy to any one patient was limited. After a three-year moratorium, a $1,590
annual limitation on therapy services was implemented for a brief period
effective September 1, 2003. Effective December 8, 2003, a moratorium was again
placed on the limit for the remainder of 2003 and for years 2004 and 2005. We
expect that efforts to contain federal spending for Medicare will continue to
seek limitations on Medicare reimbursement for various services, and we cannot
predict whether any of these efforts will be successful or what effect, if any,
such limitations would have on our business. For a further description of this
and other laws and regulations involving governmental reimbursements, see
"Business -- Sources of Revenue" and "-- Regulation and Healthcare Reform" in
Item 1.

WE DEPEND UPON THE CULTIVATION AND MAINTENANCE OF RELATIONSHIPS WITH THE
PHYSICIANS IN OUR MARKETS.

Our success is dependent upon referrals from physicians in the communities
our clinics serve and our ability to maintain good relations with these
physicians. Physicians referring patients to our clinics are free to refer their
patients to other providers. If we are unable to successfully cultivate and
maintain strong relationships with these physicians, our business may decrease
and our net operating revenues may decline.

WE ALSO DEPEND UPON OUR ABILITY TO RECRUIT AND RETAIN EXPERIENCED PHYSICAL AND
OCCUPATIONAL THERAPISTS.

As mentioned above, our revenue generation is dependent upon referrals from
physicians in the communities our clinics serve, and our ability to maintain
good relations with these physicians. Our therapists are the front line for
generating these referrals and we are dependent on their talents and skills to
successfully cultivate and maintain strong relationships with these physicians.
If we cannot recruit and retain our base of experienced and clinically skilled
therapists, our business may decrease and our net operating revenues may
decline. Periodically, we have clinics in isolated communities that are
temporarily unable to operate due to the unavailability of a therapist who
satisfies our standards.

5

OUR REVENUES MAY FLUCTUATE DUE TO WEATHER.

We have a significant number of clinics in states that normally experience
snow and ice during the winter months. A significant number of our clinics are
located in states along the Gulf Coast and Atlantic Coast which are subject to
periodic hurricanes and other severe storm systems. Periods of severe weather
may cause the inability of our staff or patients to travel to our clinics, which
may cause a decrease in our net operating revenues.

OUR REVENUES MAY DECLINE DURING PROLONGED ECONOMIC SLOWDOWN OR RECESSION.

Our revenues are a reflection of the number of visits made by patients to
our clinics. Some therapy and some surgical treatments that lead to patient need
for therapy are elective or can be deferred. During periods of high unemployment
or relative economic weakness, patient visits may decline.

OUR OPERATIONS ARE SUBJECT TO EXTENSIVE REGULATION.

The healthcare industry is subject to extensive federal, state and local
laws and regulations relating to:

- facility and professional licensure, including certificates of need;

- conduct of operations, including financial relationships among healthcare
providers, Medicare fraud and abuse, and physician self-referral;

- addition of facilities and services; and

- payment for services.

Recently, there have been heightened coordinated civil and criminal
enforcement efforts by both federal and state government agencies relating to
the healthcare industry, including our line of business. We believe we are in
substantial compliance with all laws, but differing interpretations or
enforcement of these laws and regulations could subject our current practices to
allegations of impropriety or illegality or could require us to make changes in
our methods of operations, facilities, equipment, personnel, services and
capital expenditure programs and increase our operating expenses. If we fail to
comply with these extensive laws and government regulations, we could become
ineligible to receive government program reimbursement, suffer civil or criminal
penalties or be required to make significant changes to our operations. In
addition, we could be forced to expend considerable resources responding to an
investigation or other enforcement action under these laws or regulations. For a
more complete description of certain of these laws and regulations, see
"Business -- Regulation and Healthcare Reform" in Item 1.

HEALTHCARE REFORM LEGISLATION MAY AFFECT OUR BUSINESS.

In recent years, many legislative proposals have been introduced or
proposed in Congress and in some state legislatures that would effect major
changes in the healthcare system, either nationally or at the state level. At
the federal level, Congress has continued to propose or consider healthcare
budgets that substantially reduce payments under the Medicare programs. Both the
ultimate content, timing or effect of any healthcare reform legislation and the
impact of potential legislation on us is uncertain and difficult, if not
impossible to predict. That impact may be material to our business, financial
condition or results of operations.

WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY.

We encounter competition from local, regional or national entities, some of
which have superior resources or other competitive advantages. Intense
competition may adversely affect our business, financial condition or results of
operations. For a more complete description of this competitive environment, see
"Business -- Competition" in Item 1. An adverse effect on our business,
financial condition or results of operations may require us to write-off or
write-down goodwill.

6

WE MAY INCUR CLOSURE COSTS AND LOSSES.

The competitive and/or economic conditions in the local markets in which we
operate may require us to close certain clinics. In the event a clinic is
closed, we may incur closure costs and losses. The closure costs and losses
include, but are not limited to, lease obligations, severance, and write-off of
goodwill.

FUTURE ACQUISITIONS MAY USE SIGNIFICANT RESOURCES, MAY BE UNSUCCESSFUL AND
COULD EXPOSE US TO UNFORESEEN LIABILITIES.

As part of our growth strategy, we intend to pursue acquisitions of
outpatient physical and occupational therapy clinics. Acquisitions may involve
significant cash expenditures, potential debt incurrence and operational losses,
dilutive issuances of equity securities and expenses that could have an adverse
effect on our financial condition and results of operations. Acquisitions
involve numerous risks, including:

- the difficulty and expense of integrating acquired personnel into our
business;

- diversion of management's time from existing operations;

- potential loss of key employees of acquired companies; and

- assumption of the liabilities and exposure to unforeseen liabilities of
acquired companies, including liabilities for failure to comply with
healthcare regulations.

We may not be successful in obtaining financing for acquisitions at a
reasonable cost, or such financing may contain restrictive covenants that limit
our operating flexibility. We also may be unable to acquire outpatient physical
and occupational therapy clinics or succeed in achieving improvements in their
financial performance.

CERTAIN OF OUR INTERNAL CONTROLS, PARTICULARLY AS THEY RELATE TO BILLINGS AND
CASH COLLECTIONS, ARE LARGELY DECENTRALIZED AT OUR CLINIC LOCATIONS.

Our clinic operations are largely decentralized and certain of our internal
controls, particularly the processing of billings and cash collections, occur at
the clinic level. Taken as a whole, we believe our internal controls for these
functions at our clinics are adequate. Our controls for billing and cash
collections largely depend on compliance with our written policies and
procedures and separation of functions among clinic personnel. We also maintain
corporate level controls, including an audit compliance program, that are
intended to mitigate and detect any potential deficiencies in internal controls
at the clinic level. The effectiveness of these controls to future periods are
subject to the risk that controls may become inadequate because of changes in
conditions or the level of compliance with our policies and procedures
deteriorates.

FACTORS INFLUENCING DEMAND FOR THERAPY SERVICES

We believe that the following factors, among others, influence the growth
of outpatient physical and occupational therapy services:

Economic Benefits of Therapy Services. Purchasers and providers of
healthcare services, such as insurance companies, health maintenance
organizations, businesses and industries, continuously seek cost savings for
traditional healthcare services. We believe that our therapy services provide a
cost-effective way to prevent short-term disabilities from becoming chronic
conditions and to speed 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 to
reduce costs. We believe that early hospital discharge practices foster greater
demand for outpatient physical and occupational therapy services.

7

Aging Population. In general, the elderly population has a greater
incidence of disability compared to the population as a whole. As this segment
of the population grows, we believe that demand for rehabilitation services will
expand.

MARKETING

We focus our marketing efforts primarily on physicians, mainly orthopedic
surgeons, neurosurgeons, physiatrists, occupational medicine physicians and
general practitioners. In marketing to the physician community, we emphasize our
commitment to quality patient care and communication with physicians regarding
patient progress. We employ personnel to assist clinic directors in developing
and implementing marketing plans for the physician community and to assist in
establishing referral relationships with health maintenance organizations,
preferred provider organizations, industry and case managers and insurance
companies.

SOURCES OF REVENUE

Payor sources for clinic services are primarily managed care programs,
commercial health insurance, Medicare/Medicaid, workers' compensation insurance
and proceeds from personal injury cases. Commercial health insurance, Medicare
and managed care programs generally provide coverage to patients utilizing our
clinics after payment by the patients of normal deductibles and co-insurance
payments. Workers' compensation laws generally require employers to provide,
directly or indirectly through insurance, costs of medical rehabilitation for
their employees from work-related injuries and disabilities and, in some
jurisdictions, mandatory vocational rehabilitation, usually without any
deductibles, co-payments or cost sharing. Treatments for patients who are
parties to personal injury cases are generally paid from the proceeds of
settlements with insurance companies or from favorable judgments. If an
unfavorable judgment 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 all receivable types are regularly
reviewed and adjusted as appropriate.

The following table shows our payor mix for the years ended:

Our business also depends to a significant extent on our relationships with
commercial health insurers, health maintenance organizations and preferred
provider organizations and workers' compensation insurers. In some geographical
areas, our clinics must be approved as providers by key health maintenance
organizations and preferred provider plans to obtain payments. Failure to obtain
or maintain these approvals would adversely affect financial results.

Approximately 21.6% of our visits during the year ended December 31, 2004
were from patients with Medicare program coverage. To receive Medicare
reimbursement, a Medicare Certified Rehabilitation Agency or the individual
therapist must meet applicable participation conditions set by HHS (the Health
and Human Services Department of the federal government) relating to the type of
facility, equipment, record keeping, personnel and standards of medical care,
and also must comply with all state and local laws. HHS through Centers for
Medicare and Medicaid Service ("CMS") and designated agencies periodically
inspects or surveys clinics/providers for approval and/or compliance. We
anticipate that newly

8

developed clinics will generally become certified as Medicare providers. There
is no assurance that newly developed clinics will be successful in becoming
certified as Medicare providers.

Since 1999, reimbursement for outpatient therapy services has been made
according to a fee schedule published by the HHS. Under the Balanced Budget Act
of 1997, the total amount paid by Medicare in any one year for outpatient
physical (including speech-language pathology) and/or occupational therapy to
any one patient is limited to $1,500 (the "Medicare Limit"), except for services
provided in hospitals. After a three-year moratorium, this Medicare Limit on
therapy services was implemented for services rendered on or after September 1,
2003 subject to an adjusted total of $1,590 (the "Adjusted Medicare Limit").
Effective December 8, 2003, a moratorium was again placed on the Adjusted
Medicare Limit for the remainder of 2003 and for years 2004 and 2005. The
Medicare Limit is scheduled to be reinstated in 2006 with the amount yet
undetermined. The potential negative impact on revenue resulting from a Medicare
limit could be reduced by receiving payments from secondary insurance carriers
and patients electing to self-pay. If the moratorium is not extended after 2005
and such negative impact is not mitigated by such efforts, the Adjusted Medicare
Limit could have an adverse impact on 2006 and later revenue and income.

Medicare regulations require that a physician certify the need for therapy
services for each patient and that these services be provided under an
established plan of treatment, which is periodically revised.

Medicaid is not, nor is it expected to be, a material payor for us.

REGULATION AND HEALTHCARE REFORM

Numerous federal, state and local regulations regulate healthcare services.
Some states into which we may expand have laws requiring facilities employing
health professionals and providing health-related services to be licensed and,
in some cases, to obtain a certificate of need (that is, demonstrating to a
state regulatory authority the need for, and financial feasibility of, new
facilities or the commencement of new healthcare services). Based on our
operating experience to date, we believe that our business in the states in
which we currently operate and as presently conducted does not require
certificates of need. Our therapists, however, are required to be licensed, as
determined by the state of service delivery. Failure to obtain or maintain any
required certificates, approvals or licenses could have a material adverse
effect on our business, financial condition and results of operations.

Regulations Controlling Fraud and Abuse. 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. We
believe that our billing procedures and business arrangements are in compliance
with these provisions. However, the provisions are broadly written and the full
extent of their specific application on a fact specific basis is uncertain and
difficult to predict. Several states have enacted state laws similar to the
Fraud and Abuse law, which may include payors other than Medicare/Medicaid.

In 1991, the Office of the Inspector General ("OIG") of the United States
Department of Health and Human Services issued regulations describing
compensation arrangements that fall within a "Safe Harbor" and, therefore, are
not viewed as illegal remuneration under the Fraud and Abuse Law. Failure to
fall within a Safe Harbor does not mean that the Fraud and Abuse Law has been
violated; however, the OIG has indicated that failure to fall within a Safe
Harbor may subject an arrangement to increased scrutiny.

Our business of managing physician-owned physical therapy facilities is
regulated by the Fraud and Abuse Law and falls outside the complete scope of the
Safe Harbors. We believe our arrangements comply with the Fraud and Abuse Law,
even though federal courts provide little guidance as to the application of the
Fraud and Abuse Law to these arrangements. If our management contracts are held
to violate the Fraud and Abuse Law, it could have an adverse effect on our
business, financial condition and results of operations.
9

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 patients. The OIG's stated concern in these arrangements is that 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. We rent clinic space for a
number of our clinics from referring physicians and have taken the appropriate
steps that we believe are necessary to ensure that all leases comply with the
space rental Safe Harbor to the Fraud and Abuse Law. Further, on December 17,
2004, an advisory opinion was issued regarding management services arrangements.
We have taken appropriate steps regarding the structure of such arrangements as
we believe are necessary to comply.

Stark Law. Provisions of the Omnibus Budget Reconciliation Act of 1993
(the "Stark Law") prohibit referrals by a physician for "designated health
services" to an entity in which the physician or family member has an investment
interest or other financial relationship, subject to several exceptions. The
Stark Law covers a management contract with a physician group and any financial
relationship between us and referring physicians, including any financial
transaction resulting from a clinic acquisition. This law also prohibits billing
for services rendered from a prohibited referral. Several states have enacted
laws similar to the Stark Law, but these state laws may cover all (not just
Medicare and Medicaid) patients. Many federal healthcare reform proposals in the
past few years have expanded the Stark Law to cover all patients as well. As
with the Fraud and Abuse Law, we consider the Stark Law in planning our clinics,
marketing and other activities, and believe that our operations are in
compliance with applicable law. If we fail to comply with the Stark Law our
financial results and operations would be adversely affected. Penalties for
violations include denial of payment for the services, significant civil
monetary penalties, and exclusion from the Medicare and Medicaid programs.

HIPAA. In an effort to further combat healthcare fraud and protect patient
confidentially, Congress included several anti-fraud measures in the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA"). HIPAA created a
source of funding for fraud control to coordinate federal, state and local
healthcare law enforcement programs, conduct investigations, provide guidance to
the healthcare industry concerning fraudulent healthcare practices, and
establish a national data bank to receive and report final adverse actions.
Additionally, HIPAA mandates the adoption of standards regarding the exchange of
healthcare information in an effort to ensure the privacy and electronic
security of patient information and standards relating to the privacy of health
information. We believe that our operations fully comply with standards for
privacy of protected healthcare information. We also must comply with HIPAA
standards for the security of electronic health information by April of 2005.
Sanctions for failing to comply with HIPAA include criminal penalties and civil
sanctions. We cannot predict what negative effect, if any, HIPAA will have on
our business.

Other Regulatory Factors. Political, economic and regulatory influences
are fundamentally changing the healthcare industry in the United States.
Congress, state legislatures and the private sector continue to review and
assess alternative healthcare delivery and payment systems. Potential
alternative approaches could include mandated basic healthcare benefits,
controls on healthcare spending through limitations on the growth of private
health insurance premiums and Medicare and Medicaid spending, the creation of
large insurance purchasing groups, and price controls. Legislative debate is
expected to continue in the future and market forces are expected to demand only
modest increases or reduced costs. For instance, managed care entities are
demanding lower reimbursement rates from healthcare providers and, in some
cases, are requiring or encouraging providers to accept captivated payments that
may not allow providers to cover their full costs or realize traditional levels
of profitability. We cannot predict what impact the adoption of any federal or
state healthcare reform measures or future private sector reform may have on our
business.

COMPETITION

The healthcare industry generally, and the physical and occupational
therapy businesses in particular, are highly competitive and undergo continual
changes in the manner in which services are delivered and
10

providers are selected. Competitive factors affecting our business include
quality of care, cost, treatment outcomes, convenience of location, and
relationships with, and ability to meet the needs of, referral and payor
sources. Our clinics compete directly or indirectly with the physical and
occupational therapy departments of acute care hospitals, physician-owned
therapy clinics, other private therapy clinics and chiropractors.

Of these sources, we believe acute care hospital outpatient therapy clinics
and private therapy clinic organizations are our primary competitors. We may
face more intense competition as consolidation of the therapy industry continues
through the acquisition of physician-owned and other privately owned therapy
practices.

We believe that our strategy of providing key therapists in a community
with an opportunity to participate in clinic profitability provides us with a
competitive advantage by helping to ensure the commitment of local management to
the success of the clinic.

We also believe that our competitive position is enhanced by our strategy
of locating our clinics, when possible, on the ground floor of office buildings
and shopping centers with nearby parking, thereby making the clinics more easily
accessible to patients. We offer convenient hours. We also attempt to make the
decor in our clinics less institutional and more aesthetically pleasing than
traditional hospital clinics. Finally, we believe that we can generally provide
services at a lower cost than hospitals due to hospitals' higher overhead.

COMPLIANCE PROGRAM

Our Compliance Program. The ongoing success of our Company depends upon
our reputation for quality service and ethical business practices. Our Company
operates in a highly regulated environment with many federal, state and local
laws and regulations. We take a proactive interest in complying with and
understanding the laws and regulations that apply to our business.

Our Board of Directors ("Board") adopted a Code of Business Conduct and
Ethics to clarify the ethical standards under which the directors and management
carry out their duties. In addition, the Board has created a Corporate
Compliance Sub-Committee of the Board Audit Committee ("Compliance Committee")
whose purpose is to assist the Board and its Audit Committee ("Audit Committee")
in discharging their oversight responsibilities with respect to compliance with
federal and state laws and regulations relating to healthcare.

We have issued an Ethics and Compliance Manual and created a compliance
video. These tools were prepared to ensure that each clinic as well as every
employee of our Company and our subsidiaries has a clear understanding of our
mutual commitment to high standards of professionalism, honesty, fairness and
compliance with the law in conducting business. These standards are administered
by our Compliance Officer ("CO"), who reports to the Chairman of the Compliance
Committee and has the responsibility for the day-to-day oversight,
administration and development of our compliance program. The CO, internal and
external counsel, management and the Compliance Committee review our policies
and procedures for our compliance program from to time to time in order to
improve operations and to ensure compliance with requirements of standards, laws
and regulations and to reflect the on-going compliance focus areas which have
been identified by the Compliance Committee. We also have established systems
for reporting potential violations, educating our employees, monitoring and
auditing compliance and handling enforcement and discipline.

Committees. Our Compliance Committee, appointed by the Board, consists of
three independent directors. The Compliance Committee has general oversight of
our Company's compliance with the legal and regulatory requirements regarding
healthcare operations. The Compliance Committee relies on the expertise and
knowledge of management, especially the CO and other compliance and legal
personnel. The CO is in ongoing contact with the Chairman of the Compliance
Committee. The Compliance Committee meets at least four times a year or more
frequently as necessary to carry out its responsibilities and reports
periodically to the Board regarding its actions and recommendations.

11

In addition, management has appointed a team to address our Company's
compliance with HIPAA. The HIPAA team consists of employees from our legal,
information systems, finance, operations, compliance, business services and
human resources departments. The team prepares assessments and makes
recommendations regarding operational changes and/or new systems, if needed, to
comply with HIPAA. The team meets frequently.

Each clinic has a formally appointed Governing Body composed of a member of
management of the Company and the director/administrator of the clinic. The
Governing Body retains legal responsibility for the overall conduct of the
clinic. The members confer regularly and discuss, among other issues, clinic
compliance with applicable laws and regulations.

Reporting Violations. In order to facilitate our employees' ability to
report in confidence, anonymously and without retaliation any perceived improper
work-related activities and other violations of our compliance program, we have
set up an independent national compliance hotline. The compliance hotline is
available to receive confidential reports of wrongdoing Monday through Friday
(excluding holidays), 24 hours a day. The compliance hotline is staffed by
experienced third party professionals trained to utilize utmost care and
discretion in handling sensitive issues and classified information. The
information received is documented and forwarded timely to the CO, who, together
with the Compliance Committee, has the power and resources to investigate and
resolve matters of improper conduct.

Educating Our Employees. We utilize numerous methods to train our
employees in compliance related issues. The directors/administrators of each
clinic are responsible to conduct the initial training sessions on corporate
compliance with existing employees. Training is based on our Ethics and
Compliance Manual and compliance video. The directors/administrators also
provide periodic "refresher" training for existing employees and one-on-one
comprehensive training with new hires. The Corporate Compliance group responds
to questions from clinic personnel and will conduct frequent teleconference
meetings on topics as deemed necessary.

When a clinic opens, the CO sends a package of compliance materials
containing manuals and detailed instructions for meeting Medicare Rehabilitation
Agency (if applicable) and other compliance requirements. During follow up
telephone training with the director/administrator of the clinic, the CO
explains various details regarding requirements and compliance standards. The CO
and the compliance staff will remain in contact with the director/administrator
while the clinic is being brought up to compliance standards and to provide any
assistance required. All new office managers receive training (including
Medicare, regulatory and corporate compliance, insurance billing, charge entry
and transaction posting and coding, daily, weekly and monthly accounting
reports) from the training staff at the corporate office prior to beginning
their duties at the clinic. The corporate compliance group will assist in
continued compliance including guidance to the clinic in Medicare
certifications, state survey requirements and responses to any items noted by
regulatory agencies.

Monitoring and Auditing Compliance. The Company has in place audit
programs and other procedures to monitor and audit compliance with application
policies and procedures. We employ internal auditors who as part of their job
responsibilities conduct periodic audits of each clinic. Each clinic is
typically audited regularly and additional focused audits are performed as
deemed necessary. During these audits, particular attention is paid to
compliance with Medicare and internal policies, Federal and state laws and
regulations, third party payor requirements, and patient chart documentation,
billing, marketing, reporting, record keeping, collections and contract
procedures. The audits are conducted on site and include interviews with the
employees involved in management, operations, billing and accounts receivable.
Formal audit reports are prepared and reviewed with corporate management and the
Compliance Committee. Each clinic director/administrator will receive a letter
instructing them of any corrective measures required. Each clinic
director/administrator then works with the compliance team and operations to
ensure such corrective measures are achieved. Recently, we added a Medicare
Remediation Specialist to our compliance staff. The Medicare Remediation
Specialist assists clinics in implementing corrective measures for items
identified during the audit process.

12

Handling Enforcement and Discipline. It is our policy that any employee
who fails to comply with compliance program requirements or who negligently or
deliberately fails to comply with known law or regulation specifically addressed
in our compliance program should be subject to disciplinary action up to and
including immediate discharge. The Compliance Committee, Compliance staff, human
resources staff and clinic management investigate violations of our compliance
program and impose disciplinary action as considered appropriate.

EMPLOYEES

At December 31, 2004, we employed 1,349 people, of which 1,138 were
full-time employees. At that date, none of our employees were governed by
collective bargaining agreements or were members of unions. We consider our
relations with our employees to be good.

In the states in which our current clinics are located, persons performing
designated physical and occupational therapy services are required to be
licensed by the state. All persons currently employed by us who are required to
be licensed are licensed. We are not aware of any federal licensing requirements
applicable to our employees.

AVAILABLE INFORMATION

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act are made available free of charge
on our internet website at http://www.usph.com as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission.

ITEM 2. PROPERTIES.

We lease all of the properties used for our clinics under non-cancelable
operating leases with terms ranging from one to five years, with the exception
of one clinic in Mineral Wells, Texas, which we own. We intend to lease the
premises for any new clinics locations except in rare instances where leasing is
not a cost-effective alternative. Our typical clinic occupies 1,500 to 3,000
square feet.

We also lease our executive offices located in Houston, Texas, under a
non-cancelable operating lease expiring in June 2010. We currently occupy
approximately 37,537 square feet of space (including allocations for common
areas) at our executive offices.

ITEM 3. LEGAL PROCEEDINGS.

We are involved in 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, we do not believe the impact of existing
lawsuits or other proceedings will have a material impact on our 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 our security holders during the
fourth quarter of 2004.

13

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.

PRICE QUOTATIONS

Our common stock is traded on the Nasdaq National Market ("Nasdaq") under
the symbol "USPH." As of March 4, 2005 there were 37 holders of record of our
outstanding common stock. The table below indicates the high and low sales
prices of our common stock reported for the periods presented.

Since inception we have not declared or paid cash dividends or made
distributions on our equity securities, and we do not presently anticipate that
we will pay cash dividends or make distributions.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information about our common stock that may be
issued upon the exercise of options and rights under all of our existing equity
compensation plans as of December 31, 2004, including the 1992 Stock Option
Plan, 1999 Employee Stock Option Plan, Executive Option Plan and Inducement
option agreements.

- ---------------

(1) The 1992 Stock Option Plan, as amended, (the "1992 Plan") expired in 2002,
and no new option grants can be awarded subsequent to this date. The
Executive Option Plan (the "Executive Plan") permits us to grant to officers
or our affiliates, options to purchase shares of our common stock. No
further grants of options will be made under the Executive Plan. The 2003
Stock Incentive Plan (the "2003 Plan") permits us to grant stock-based
compensation to employees, consultants and outside directors of the Company.

(2) The 1999 Employee Stock Option Plan (the "1999 Plan") permits us to grant to
certain non-officer employees non-qualified options to purchase shares of
our common stock. We granted Inducement options to certain individuals in
connection with their offers of employment or initial affiliation with us.
Each inducement option was made pursuant to an option grant agreement.

For further descriptions of the 1992 Plan, 1999 Plan, 2003 Plan and the
Inducements, see Stock Option Plans" in Note 8 of the Notes to the Consolidated
Financial Statements in Item 8.

14

REPURCHASE OF COMMON STOCK

The following table provides information regarding shares of the Company's
common stock repurchased by the Company during the quarter ended December 31,
2004.

- ---------------

(1) In the Company's Form 10-K for the year ended December 31, 2001, filed with
the SEC on April 1, 2002, the Company announced that in September 2001 the
Board had authorized the repurchase of up to 1,000,000 shares of the
Company's outstanding common stock. In the Company's Form 10-Q for the
quarter ended March 31, 2003, filed with the SEC on May 5, 2003, the Company
announced that on February 26, 2003 the Board had authorized a new share
repurchase program of up to 250,000 shares of the Company's outstanding
common stock. In the Company's Form 8-K filed on December 9, 2004, the
Company announced that on December 8, 2004, the Board had authorized a new
share repurchase program of up to 500,000 shares of the Company's
outstanding common stock. All shares of common stock repurchased by the
Company during the quarter ended December 31, 2004 were purchased under
these programs.

In the third quarter of 2004, the Company purchased 50,000 shares of its
common stock for an aggregate cost of $656,000. The total shares purchased in
2004 totaled 373,403.

ITEM 6. SELECTED FINANCIAL DATA.

The following selected financial data should be read in conjunction with
the description of our critical accounting policies set forth in Item 7.

See Notes on following page.

15

- ---------------

(1) Certain reclassifications have been made to prior year amounts to conform to
current year presentation. In response to the February 7, 2005 letter from
the Chief Accountant of the Securities and Exchange Commission to the
American Institute of Certified Public Accountants, the Company undertook a
comprehensive review of its accounting practices for leases. The Company had
historically accounted for tenant improvements allowances as reductions to
the related leasehold improvement asset on the consolidated balance sheets
and capital expenditures in investing activities on the consolidated
statements of cash flows. Management determined the FASB Technical Bulletin
No. 88-1, "Issues Relating to Accounting for Leases," requires these
allowances to be recorded as deferred rent liabilities on the consolidated
balance sheets and as a component of operating activities on the
consolidated statements of cash flows. The Company made a cumulative
adjustment in the prior year balance sheet which had the effect of
increasing fixed assets, net and deferred rent by approximately $1.5
million. This cumulative adjustment did not have any effect on the prior
year income statements and was immaterial with respect to the statements of
cash flows. In addition, the components of deferred taxes have been
appropriately classified in the prior year balance sheets.

In addition, the Consolidated Balance Sheet as of December 31, 2003
reflects a revision in classification to accrued liabilities of credit
balances previously included as an offset to accounts receivable. The
credit balances are primarily related to patients and payors. The
Consolidated Statements of Net Income reflect a reclassification of
interest income from net revenues to interest income/expense, net.

(2) All per share information has been adjusted to reflect a two-for-one stock
split on January 5, 2001, and a three-for-two stock split on June 28, 2001.

(3) In 2003, the majority of the Company's outstanding debt was classified as
short-term resulting in the ratio of total long-term debt to total
capitalization being less than 0.01 to 1.

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

EXECUTIVE SUMMARY

Our Business. We operate outpatient physical and/or occupational therapy
clinics that provide preventative and post-operative care for a variety of
orthopedic-related disorders and sports-related injuries, treatment for
neurologically-related injuries and rehabilitation of injured workers. At
December 31, 2004 we operated 264 outpatient physical and occupational therapy
clinics in 35 states. The average age of our clinics at December 31, 2004, was
4.5 years. We have developed 258 of the clinics and acquired six. To date, we
have sold four clinics, closed 34 facilities due to substandard performance, and
consolidated four clinics with other existing clinics. In 2004, we added 35 new
clinics, closed 12 and sold 1.

In addition to our owned clinics, we also manage physical therapy
facilities for third parties, primarily physicians, with four third-party
facilities under management as of December 31, 2004.

CRITICAL ACCOUNTING POLICIES

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

Revenue Recognition. We bill third-party payors for services at standard
rates. Net patient revenues are based on established billing rates, less
allowances and discounts for patients covered by 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, evaluated monthly by management, for contractual and other
adjustments agreed to or established with payors. Reimbursement for Medicare
beneficiaries is based upon a fee schedule published by HHS. For a more complete
description of our third party revenue sources, see "Business -- Sources of
Revenue" in Item 1.

16

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

Accounting for Income Taxes. As part of the process of preparing the
consolidated financial statements, we must estimate our federal and state income
tax liability, as well as assess temporary differences resulting from differing
treatment of items (such as bad debt expense and amortization of leasehold
improvements) for tax and for accounting purposes. The differences result in
deferred tax assets and liabilities, which are included in our consolidated
balance sheets. We periodically assess the likelihood that deferred tax assets
will be recovered from future taxable income, and if not, establish a valuation
allowance.

Carrying Value of Long-Lived Assets. Our property and equipment,
intangible assets and goodwill (collectively, our "long-lived assets") comprise
a significant portion of our total assets. We account for our long-lived assets
pursuant to Statement of Financial Accounting Standards No. 144. This accounting
standard requires that we periodically, and upon the occurrence of certain
events, assess the recoverability of our long-lived assets. If the carrying
value of our property and equipment or intangible assets exceeds their
undiscounted cash flows, we are required to write the carrying value down to
estimated fair value. Also, if the carrying value of our goodwill exceeds the
estimated fair value, we are required to allocate the estimated fair value to
our assets and liabilities, as if we had just acquired it in a business
combination. We then write-down the carrying value of our goodwill to the
implied fair value. Any such write-down is included as an impairment loss in our
consolidated statement of net income. Judgment is required to estimate the fair
value of our long-lived assets. We may use quoted market prices, prices for
similar assets, present value techniques and other valuation techniques to
prepare these estimates. In addition, we may obtain independent appraisals in
certain circumstances. We may need to make estimates of future cash flows and
discount rates as well as other assumptions in order to apply these valuation
techniques. Irrespective of our valuation analysis, future market conditions may
deteriorate. Accordingly, any value ultimately derived from our long-lived
assets may differ from our estimate of fair value.

Accounting for Minority Interests. In the majority of our partnership
agreements, the therapist partner begins with a 20% profit interest in his or
her clinic partnership, which increases by 3% at the beginning of each
subsequent year up to a maximum of 35%. Within the balance sheet and statement
of net income, we record partner therapists' profit interest in the clinic
partnerships as minority interest in earnings of subsidiary limited partnerships
for those formed prior to January 18, 2001. The Emerging Issues Task Force
("EITF") issued EITF 00-23, "Issues Related to the Accounting for Stock
Compensation under APB No. 25 and FASB Interpretation No, 44", which provides
specific accounting guidance relating to various incentive compensation issues.
We reviewed EITF 00-23 with respect to the partnership structure and the
accounting for minority interests and concluded that for partnerships formed
after January 18, 2001, EITF 00-23 requires us to expense as compensation rather
than as a minority interest in earnings, the clinic partners' interest in
profits. Moreover, EITF 00-23 also requires, as to clinic partnerships formed
after January 18, 2001, that we expense as compensation rather than capitalizing
as goodwill, the purchase of minority interest in the partnerships. At December
31, 2004, we operated 178 clinics which had a minority interest.

In accordance with the above, for the years ended December 31, 2004, 2003
and 2002, we have expensed $823,000, $428,000 and $306,000, respectively, of the
minority interests in earnings of subsidiary limited partnerships relating to
certain partnerships formed after January 18, 2001, as salaries and related
costs. As of December 31, 2004, 2003 and 2002, $490,000, $346,000, and $276,000,
respectively, in undistributed minority interests related to those partnerships
is classified as other long-term liabilities. This change in classification had
no effect on net income at December 31, 2004, 2003 and 2002 but rather resulted
in a reclassification from minority interests in earnings to salaries and
related costs. See "Minority

17

Interest" (a subsection of "Significant Accounting Policies") -- Note 2 of the
Notes to Consolidated Financial Statements in Item 8.

SELECTED OPERATING AND FINANCIAL DATA

The following table presents selected operating and financial data. We view
the non-financial data points as key indicators of our operating performance. In
particular, we view average visits per day per clinic as a material component of
our operating performance. As indicated below, the number of daily visits to our
clinics has declined from an average of 22.1 per clinic during 2002 to an
average of 18.9 per clinic during 2004.

RESULTS OF OPERATIONS

FISCAL YEAR 2004 COMPARED TO FISCAL 2003

- Net revenues rose 12% to $118.3 million from $105.5 million primarily due
to an 8% increase in patient visits to 1.2 million and a $3.56 or 4%
increase in net patient revenues per visit to $96.40.

- Net income declined 9% to $6.7 million from $7.3 million.

- Earnings per share decreased 11% to $0.54 per diluted share from $0.61
per diluted share. Total diluted shares outstanding at December 31, 2004
and 2003 were 12.4 million and 12.2 million, respectively.

Net Patient Revenues

- Net patient revenues increased to $116.3 million for the year ended
December 31, 2004 ("2004") from $103.2 million for the year ended
December 31, 2003 ("2003"), an increase of $13.0 million, or 13%,
primarily due to an 8% increase in patient visits to 1.2 million and a
$3.56 increase in patient revenues per visit to $96.40. The increase in
patient revenues per visit was primarily due to contractual fee
increases.

- Total patient visits increased 94,500, or 8%, to 1.2 million for 2004
from 1.1 million for 2003. The growth in visits for the period was
attributable to approximately 25,500 visits in clinics opened during 2004
("New Clinics") together with a 69,000 or 6% increase in visits for
clinics opened

18

prior to 2004 ("Mature Clinics"). For clinics opened in 2003, the number
of visits increased by 113,000 for 2004 compared to 2003. For clinics
opened prior to 2003, the number of visits decreased by 44,000 in 2004
compared to 2003.

- Net patient revenues from New Clinics accounted for approximately 19% of
the total increase, or approximately $2.5 million. The remaining increase
of $10.5 million in net patient revenues was from Mature Clinics.

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

Clinic Operating Costs

Clinic operating costs were 72% of net revenues for 2004 and 71% of net
revenues for 2003. Each component of clinic operating costs is discussed below:

CLINIC OPERATING COSTS -- SALARIES AND RELATED COSTS

Salaries and related costs increased to $59.1 million for 2004 from
$52.4 million for 2003, an increase of $6.6 million, or 13%. Approximately
29% of the increase, or $1.9 million, was attributable to the New Clinics.
The remaining 71% of the increase, or $4.7 million, was due to higher costs
at various Mature Clinics due to ramping up activities. Salaries and
related costs as a percent of net revenues was 50% for both 2004 and 2003.

CLINIC OPERATING COSTS -- RENT, CLINIC SUPPLIES AND OTHER

Rent, clinic supplies and other costs increased to $24.9 million for
2004 from $21.2 million for 2003, an increase of $3.7 million, or 17%.
Approximately 41% of the increase or $1.5 million was attributable to the
New Clinics, $1.9 million was attributable to various Mature Clinics due to
escalating rent costs and $0.3 million was attributable to lease expense as
described in the next sentence. In response to the February 7, 2005 letter
from the Chief Accountant of the Securities and Exchange Commission to the
American Institute of Certified Public Accountants, we undertook a
comprehensive review of our accounting practices for leases. As a result of
this review, we made an accounting adjustment that resulted in an
acceleration of rent expense under certain leases that contained rent
abatements and/or fixed escalations in rental payments. We recorded a
cumulative rent expense adjustment relating to this matter principally for
the years 2001 to 2004 of approximately $254,000 pre-tax in the fourth
quarter of 2004. See Note 2 of the Notes to the Consolidated Financial
Statements for further discussion. Rent, clinic supplies and other costs as
a percent of net revenues was 21% and 20% for 2004 and 2003, respectively.

CLINIC OPERATING COSTS -- PROVISION FOR DOUBTFUL ACCOUNTS

The provision for doubtful accounts increased to $1.3 million for 2004
from $932,000 for 2003, an increase of $360,000 or 39%. The provision for
doubtful accounts as a percent of net patient revenues was 1% for both 2004
and 2003. Our allowance for bad debts as a percent of total patient
accounts receivable was 12% at December 31, 2004, as compared to 19% at
December 31, 2003 (adjusted for the reclassification of accounts receivable
credits to accrued liabilities -- See Note 2 of the Notes to the
Consolidated Financial Statements).

CLOSURE COSTS

In the 2004 third quarter, we recognized a loss of $815,000 related to
the closure of eight clinics. In the fourth quarter, we recognized a loss
of $42,500 related to a closed clinic, which was offset by a

19

$121,000 benefit resulting from our ability to reduce liabilities related
to lease obligations on the eight clinic closures in the third quarter
through renegotiation and early termination of certain leases. See Note 4
of the Notes to Consolidated Financial Statements for further discussion.

GAIN ON SALE OF CLINIC ASSETS

On June 30, 2004, we recognized a gain of $452,000 primarily related
to the sale of a clinic. See Note 4 of the Notes to the Consolidated
Financial Statements for further discussion.

Corporate Office Costs

Corporate office costs, consisting primarily of salaries and benefits of
corporate office personnel, rent, insurance costs, depreciation and
amortization, travel, legal, compliance, professional, marketing and recruiting
fees, increased to $16.8 million for 2004 from $14.0 million for 2003, an
increase of $2.8 million, or 20%. Salary expense increased due to a one time
charge of $650,000 related to the resignation of our former CEO along with
$220,000 in recruiting fees primarily related to the CEO search. Additionally,
there was an increase of $325,000 related to the new Chief Operating Officer and
Chief Financial Officer and corporate bonus accruals of $300,000. Legal expense
increased by $624,000 due to various legal issues. Accounting fees increased by
$470,000 primarily due to implementing requirements of the Sarbanes-Oxley Act of
2002 and increased tax compliance and auditing fees. Corporate office costs as a
percent of net revenues increased to 14% for 2004 from 13% for 2003.

Minority Interests in Earnings of Subsidiary Limited Partnerships

Minority interests in earnings of subsidiary limited partnerships increased
7% to $5.4 million for 2004 from $5.0 million for 2003. As a percentage of
operating income, minority interest increased to 34% for 2004 from 30% for 2003.
In the majority of our partnership agreements, the therapist partner begins with
a 20% profit interest in his or her clinic partnership, which increases by 3% at
the beginning of each subsequent year up to a maximum of 35%.

Provision for Income Taxes

The provision for income taxes decreased to $4.1 million for 2004 from $4.5
million for 2003, a decrease of approximately $353,000, or 8% as a result of
lower pre-tax income. During 2004 and 2003, we accrued state and federal income
taxes at an effective tax rate of 38%.

FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002

- Net revenues rose 11% to $105.5 million from $94.7 million primarily due
to an 11% increase in patient visits to 1.1 million and a $0.91 increase
in net patient revenues per visit to $92.84.

- Net income declined 14% to $7.3 million from $8.5 million.

- Earnings per diluted share were $0.61 for 2003 and $0.67 for the year
ended December 31, 2002 ("2002"). Total diluted shares at December 31,
2003 were 12.2 million, a reduction of approximately 700,000 shares from
12.9 million at December 31, 2002 primarily due to a decrease in the
dilutive effect on stock options of approximately 750,000 shares, offset
with an increase in the number of weighted-average shares outstanding of
approximately 75,000 shares. The 750,000 decrease in the dilutive effect
on stock options was directly related to a decline in average year to
date stock price to $13.10 for 2003 compared to $14.97 for 2002 and a
decline in the total number of options outstanding to 1,167,441 for 2003
compared to 1,698,941 for 2002.

Net Patient Revenues

- Net patient revenues increased to $103.2 million for 2003 from $92.3
million for 2002, an increase of $10.9 million, or 12%, primarily due to
an 11% increase in patient visits to 1.1 million and a $0.91 increase in
patient revenues per visit to $92.84.

20

- Total patient visits increased 107,000, or 11%, to 1.1 million for 2003
from 1.0 million for 2002. The growth in visits for the year was
attributable to an increase of 103,000 visits in clinics opened between
January 1, 2002 and December 31, 2002 and 40,000 visits from clinics
developed during 2003 (the "2003 New Clinics"), offset by a 36,000
decrease in visits for clinics opened before January 1, 2002. We believe
the decrease in visits for clinics opened before January 1, 2002 was
primarily a result of increases in patient co-payments and deductibles
which contributed to some softness in the therapy sector. We also believe
that in certain markets this decline was attributable to higher
unemployment rates or increased competition levels.

- Net patient revenues from 2003 New Clinics accounted for approximately
36% of the increase, or approximately $3.9 million. The remaining
increase of $7 million in net patient revenues was from clinics opened
prior to January 1, 2003 (the "2003 Mature Clinics"). Of the $7 million
increase, $10 million related to 40 clinics opened during 2002, offset by
a $3 million decrease in clinics opened prior to January 1, 2002. In
addition, of the $7 million increase in net patient revenues from the
2003 Mature Clinics, $6.2 million of this increase related to a 7%
increase in patient visits, while $880,000 was due to a less than 1%
increase in the average net revenue per visit.

Clinic Operating Costs

Clinic operating costs as a percent of net revenues were 71% for 2003 and
68% for 2002.

CLINIC OPERATING COSTS -- SALARIES AND RELATED COSTS

Salaries and related costs increased to $52.4 million for 2003 from
$44.9 million for 2002, an increase of $7.5 million, or 17%. Approximately
34% of the increase, or $2.6 million, was incurred at the 2003 New Clinics.
The remaining 66% increase, or $5 million, was due principally to an
increase in salaries and related costs of $4.5 million in 2003 Mature
Clinics opened in 2002 that experienced an increase in clinic staff to meet
the increase in patient visits. Additionally, salaries and related costs
increased $218,000 and $122,000 relating to increased group health
insurance cost and compensation costs associated with minority interests in
earnings of subsidiary limited partnerships relating to the 30 partnerships
formed after January 18, 2001, respectively. Bonuses are based on the net
revenues and operating profit generated by the individual clinics. Salaries
and related costs as a percent of net revenues were 50% for 2003 and 47%
for 2002.

CLINIC OPERATING COSTS -- RENT, CLINIC SUPPLIES AND OTHER

Rent, clinic supplies and other increased to $21.2 million for 2003
from $18 million for 2002, an increase of $3.2 million, or 18%. The $3.2
million consisted of a $2 million increase in rent, clinic supplies and
other at 2003 New Clinics with the remaining $1.2 million in our 2003
Mature Clinics. Rent, clinic supplies and other as a percent of net
revenues increased to 20% for 2003 from 19% for 2002.

CLINIC OPERATING COSTS -- PROVISION FOR DOUBTFUL ACCOUNTS

The provision for doubtful accounts decreased to $932,000 for 2003
from $1.7 million for 2002, a decrease of $737,000 or 44%. This decrease
was primarily due to enhanced collection efforts and a resulting
improvement in experience. The provision for doubtful accounts as a percent
of net patient revenues decreased to 0.9% for 2003 from 1.8% for 2002. Our
allowance for bad debts as a percent of total patient accounts receivable
was 19% at December 31, 2003, as compared to 24% at December 31, 2002.
Accounts receivable days outstanding decreased to 68 days at December 31,
2003 as compared to 71 days at December 31, 2002. The provision for
doubtful accounts for each period is based on a detailed, clinic-by-clinic
review of overdue accounts.

Corporate Office Costs

Corporate office costs, consisting primarily of salaries and benefits of
corporate office personnel, rent, insurance costs, depreciation and
amortization, travel, legal, compliance, professional, marketing and

21

recruiting fees, increased to $14.0 million for 2003 from $11.3 million for
2002, an increase of $2.7 million, or 24%. Corporate office costs increased
primarily as a result of an increase in salaries and benefits, recruitment fees,
severance costs, depreciation expense, higher legal and accounting fees and an
increase in insurance premiums. Corporate office costs as a percent of net
revenues increased to 13% for 2003 from 12% for 2002.

Minority Interests in Earnings of Subsidiary Limited Partnerships

Minority interests in earnings of subsidiary limited partnerships increased
to $5 million for 2003 from $4.9 million for 2002, an increase of $89,000, or
2%. The increase in minority interests in earnings resulted from an increase in
the limited partnerships' profit interest in Mature Clinics opened prior to
January 18, 2001, offset by the 2003 amount of minority interest classified as
salaries and related costs. As a percentage of operating income, minority
interest increased to 30% for 2003 from 26% for 2002. See Note 2 of the Notes to
the Consolidated Financial Statements for further discussion.

Provision for Income Taxes

The provision for income taxes decreased to $4.5 million for 2003 from $5.2
million for 2002, a decrease of approximately $0.8 million, or 15% as a result
of lower pre-tax income. During 2003 and 2002, we accrued state and federal
income taxes at an effective tax rate of 38%.

LIQUIDITY AND CAPITAL RESOURCES

We believe that our business is generating enough cash flow from operating
activities to allow us to meet our short-term and long-term cash requirements
excluding possible acquisitions. At December 31, 2004, we had $20.6 million in
cash and cash equivalents compared to $16.8 million at December 31, 2003, an
increase of 23%. Although the start-up costs associated with opening new
clinics, and our planned capital expenditures are significant, we believe that
our cash and cash equivalents are sufficient to fund the working capital needs
of our operating subsidiaries, future clinic development and investments.
Included in cash and cash equivalents at December 31, 2004 were $1.9 million in
a money market fund and $13.7 million in a short-term debt instrument issued by
an agency of the U.S. Government.

The increase in cash of $3.7 million from December 31, 2003 to December 31,
2004 is due primarily to $17.9 million in cash provided by operating activities,
offset by cash used in financing and investing activities of $9.2 million and
$5.0 million, respectively. In 2004, we used $5.3 million for distributions to
minority investors in subsidiary limited partnerships, $5.6 million to
repurchase 373,403 shares of common stock of the Company, $5.0 million to
purchase fixed assets and $0.5 million for intangibles. During 2004, the
exercise of stock options generated $1.8 million in cash to the Company and
resulted in a related tax benefit of $1.6 million.

Our current ratio increased to 7.2 to 1.0 at December 31, 2004 from 5.6 to
1.0 at December 31, 2003. The increase in the current ratio is due primarily to
the conversion of Convertible Subordinated Notes into common stock of the
Company upon maturity and the increase in cash and cash equivalents.

We have future obligations for debt repayments and future minimum rentals
under operating leases. The obligations as of December 31, 2004 are summarized
as follows (in thousands):

In 2002, $667,000 of a convertible subordinated note was converted into
200,100 shares of common stock, leaving a $2.3 million balance at December 31,
2003 and 2002. On January 12, 2004, $666,660 of the convertible subordinated
note was converted into 200,000 shares of common stock and, on June 30,

22

2004, the final remaining $1.7 million balance was converted by the note holder
into 499,900 shares of common stock.

We do not currently have a credit line or other credit arrangements.
Historically, we have generated sufficient cash from operations to fund our
development activities and cover operational needs. We generally develop new
clinics rather than acquire them which requires less capital. We plan to
continue developing new clinics and may also make acquisitions in select
markets. We have from time to time purchased the minority interests of limited
partners in our clinic partnerships. We may purchase additional minority
interests in the future. Generally, any acquisition or purchase of minority
interests are expected to be accomplished using a combination of cash, notes or
common stock. We believe that existing funds, supplemented by cash flows from
existing operations, will be sufficient to meet our current operating needs,
development plans and any purchases of minority interests through at least 2005.

In September 2001, the Board of Directors ("Board") authorized management
to purchase, in the open market or in privately negotiated transactions, up to
1,000,000 shares of our common stock. On February 26, 2003 and on December 8,
2004, the Board authorized share repurchase programs of up to 250,000 and
500,000 additional shares, respectively, of our outstanding common stock. As of
December 31, 2004, there were 444,000 shares that can be purchased under these
programs. As there is no expiration for the Board authorizations, additional
shares may be purchased from time to time in the open market or private
transactions. Shares purchased are held as treasury shares and may be used for
valid corporate purposes or retired as the Board deems advisable. During the
years ended December 31, 2004, 2003 and 2002, we purchased 373,403; 1,800 and
795,600 shares, respectively, of our common stock on the open market for $5.6
million, $20,410 and $10.5 million, respectively.

RECENTLY PROMULGATED ACCOUNTING PRONOUNCEMENTS

In May 2003, FASB Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS 150"),
was issued. SFAS 150 establishes standards for the classification and
measurement of certain financial instruments of both liabilities and equity.
SFAS 150 also includes disclosures for financial instruments within its scope.
For the Company, SFAS 150 was effective for instruments entered into or modified
after May 31, 2003 and otherwise was effective as of January 1, 2004, except for
mandatorily redeemable financial instruments. For certain redeemable financial
instruments, SFAS 150 will be effective for us on January 1, 2005. The effective
date has been deferred indefinitely for certain other types of mandatory
instruments. The adoption of SFAS 150 did not have an impact on our financial
condition or results of operations.

In December 2003, the FASB issued Revised Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46R"), which requires the
consolidation of variable interest entities. FIN 46R, as revised, was applicable
to financial statements of companies that had interests in "special purpose
entities" during 2003. Effective as of the first quarter of 2004, FIN 46R is
applicable to financial statements of companies that have interests in all other
types of entities. Adoption of FIN 46R had no effect on our financial position,
results of operations or cash flows.

In May 2004, the FASB issued FASB Staff Position 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" ("FSP 106-2"), which requires measures of the
accumulated postretirement benefit obligation and net periodic postretirement
benefit costs to reflect the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003. FSP 106-2 supersedes FSP 106-1 and is
effective for interim or annual reporting periods beginning after June 15, 2004.
The adoption of FSP 106-2 did not have an impact on our financial condition or
results of operations.

In December 2004, the FASB issued Revised SFAS 123, "Share Based Payment"
("SFAS 123R"), which is a revision of SFAS 123 and supersedes APB 25. Among
other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value
method of accounting, and requires us to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized
over the period during which an

23

employee is required to provide service in exchange for the award -- the
requisite service period (usually the vesting period). SFAS 123R requires that
the grant-date fair value of employee share options and similar instruments be
estimated using option-pricing models adjusted for the unique characteristics of
those instruments (unless observable market prices for the same or similar
instruments are available). SFAS 123R is effective as of the beginning of the
first interim or annual period that begins after June 15, 2005. For the Company,
SFAS 123R is effective for our third quarter which begins July 1, 2005. SFAS
123R permits companies to adopt its requirements using either a "modified
prospective" method, or a "modified retrospective" method. Under the "modified
prospective" method, compensation cost is recognized in the financial statements
beginning with the effective date, based on the requirements of SFAS 123R for
all share-based payments granted after that date, and for all unvested awards
granted prior to the effective dated. Under the "modified retrospective" method,
the requirements are the same as under the "modified prospective" method, but
this method also permits entities to restate financial statements of previous
periods based on proforma disclosures made in accordance with SFAS 123.

We currently utilize Black-Scholes, a standard option pricing model, to
measure the fair value of stock options granted to employees. While SFAS 123R
permits entities to continue to use such a model, the standard also permits the
use of a "lattice" model. We have not yet determined the model we will use to
measure the fair value of employee stock options upon the adoption of SFAS 123R.
Also, SFAS 123R requires that the benefits associated with the tax deductions in
excess of recognized compensation cost be reported as a financing cash flow,
rather than as an operating cash flow as required under current literature. The
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after the effective date. These future amounts cannot be
estimated, because they depend on, among other things, when and if employees
exercise stock options. However, the amount of operating cash flows recognized
in the prior periods for the tax benefit from exercise of stock options, as
shown in the Consolidated Statements of Cash Flows, were $1.6 million for 2004,
$2.0 million for 2003 and $4.2 million for 2002.

We currently expect to adopt SFAS 123R effective July 1, 2005; however, we
are evaluating our method of estimating the grant-date fair value and which of
the aforementioned adoption methods we will use. Based on stock options granted
to its employees through December 31, 2004, we expect that the adoption of SFAS
123R, would reduce both third quarter 2005 and fourth quarter 2005 net earnings
by approximately $65,000 each.

Previously, in December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB
Statement No. 123," ("SFAS 148") which provides alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. SFAS 148 also amends
certain disclosures under SFAS 123 and Accounting Principles Board Opinion No.
28, "Interim Financial Reporting," to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. SFAS 148 was effective for fiscal
years ending after December 15, 2002. For 2004, 2003 and 2002, we continued to
use the provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees" to account for employee stock options and apply the disclosures
required under SFAS 123 and SFAS 148.

FACTORS AFFECTING FUTURE RESULTS

CLINIC DEVELOPMENT

As of December 31, 2004, we had 264 clinics in operation, 35 of which
opened in 2004. We expect to incur initial operating losses from new clinics
opened in 2005, which will impact our operating results. Generally we experience
losses during the initial period of a new clinic's operation. Operating margins
for newly opened clinics tend to be lower than more seasoned clinics because of
start-up costs and lower patient visits and revenues. Patient visits and
revenues gradually increase in the first year of operation, as patients and
referral sources become aware of the new clinic. Revenues tend to increase
significantly during the two to three years following the first anniversary of a
clinic opening. Based on historical

24

performance of our new clinics, generally the clinics opened in 2004 and late
2003 would favorably impact our results of operations beginning in 2005.

CONVERTIBLE SUBORDINATED DEBT

In May 1994, we issued a $3 million 8% Convertible Subordinated Note,
Series C, due June 30, 2004 (the "Series C Note"). The Series C Note was
convertible at the option of the holder into shares of Company common stock
determined by dividing the principal amount of the Note being converted by
$3.33. The Series C Note bore interest from the date of issuance at a rate of 8%
per annum, payable quarterly. In June 2002, $667,000 of the Series C Note was
converted by the note holder into 200,100 shares of common stock. The principal
amount under the Series C Note was $2.3 million at December 31, 2003. On January
12, 2004, $666,660 of the Series C Note was converted by the note holder into
200,000 shares of common stock. On June 30, 2004, the final remaining balance of
$1.7 million of the Series C Note was converted by the note holder into 499,900
shares of common stock. The Series C Note was unsecured and subordinated in
right of payment to all other indebtedness for borrowed money incurred by the
Company. See Note 6 of the Notes to the Consolidated Financial Statements in
Item 8.

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

We do not maintain any derivative instruments, interest rate swap
arrangements, hedging contracts, futures contracts or the like. Our only
indebtedness as of December 31, 2004 was other notes of $70,000. See Note 6 of
the Notes to the Consolidated Financial Statements in Item 8.

25

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND RELATED INFORMATION

Management's Report on Internal Control Over Financial
Reporting................................................. 27
Report of Independent Registered Public Accounting
Firm -- Grant Thornton LLP................................ 28
Independent Auditors' Attestation of Management's Evaluation
of Internal Controls...................................... 29
Report of Independent Registered Public Accounting
Firm -- KPMG LLP.......................................... 30
Audited Financial Statements:
Consolidated Balance Sheets as of December 31, 2004 and
2003...................................................... 31
Consolidated Statements of Net Income for the years ended
December 31, 2004, 2003 and 2002.......................... 32
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2004, 2003 and 2002.............. 33
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002.......................... 34
Notes to Consolidated Financial Statements.................. 35

26

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. U.S. Physical Therapy, Inc. and
subsidiaries' (the "Company's") internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of the
preparation and reporting of financial statements for external purposes in
accordance with generally accepted accounting principles.

Our internal control over financial reporting includes those policies and
procedures that:

- Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;

- Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts and
expenditures are being made in accordance with authorizations of the
Company's management and directors; and

- Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could
have a material effect on the financial statements.

Management assessed the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on our assessment and those criteria, management believes that
the Company maintained effective internal control over financial reporting as of
December 31, 2004.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

The Company's independent registered public accounting firm has audited and
issued their report on management's assessment of the Company's internal control
over financial reporting, which appears on page 29.

March 14, 2005

27

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheet of U.S.
Physical Therapy, Inc. (a Nevada corporation) and subsidiaries as of December
31, 2004, and the related consolidated statements of net income, shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of U.S.
Physical Therapy, Inc. and subsidiaries as of December 31, 2004, and the results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of U.S.
Physical Therapy, Inc. and subsidiaries' internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated March 14,
2005, expressed an unqualified opinion that U.S. Physical Therapy, Inc. and
subsidiaries maintained effective internal control over financial reporting and
on management's assessment thereof.

/s/ GRANT THORNTON LLP

Houston, Texas
March 14, 2005

28

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited management's assessment, included in the accompanying
management's report on internal control over financial reporting, that U.S.
Physical Therapy, Inc. and subsidiaries maintained effective internal control
over financial reporting as of December 31, 2004, based on criteria established
in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). U.S. Physical
Therapy, Inc. and subsidiaries' management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.

We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.

A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that U.S. Physical Therapy, Inc.
and subsidiaries maintained effective internal control over financial reporting
as of December 31, 2004, is fairly stated, in all material respects, based on
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in
our opinion, U.S. Physical Therapy, Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the balance sheet of U.S.
Physical Therapy, Inc. and subsidiaries as of December 31, 2004, and the related
statements of net income, shareholders' equity, and cash flows the year then
ended, and our report dated March 14, 2005 expressed an unqualified opinion on
those consolidated financial statements.

/s/ GRANT THORNTON LLP

Houston, Texas
March 14, 2005

29

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheet of U.S.
Physical Therapy, Inc. and subsidiaries (the Company) as of December 31, 2003,
and the related consolidated statements of net income, shareholders' equity, and
cash flows for each of the years in the two-year period ended December 31, 2003.
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 two-year period ended December 31, 2003. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
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, 2003, and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 2003, in conformity with U.S. generally accepted
accounting principles. 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.

KPMG LLP

Houston, Texas
March 4, 2004

30

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

31

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF NET INCOME

See notes to consolidated financial statements.

32

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

See notes to consolidated financial statements.

33

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements.

34

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004

1. ORGANIZATION, NATURE OF OPERATIONS AND BASIS OF PRESENTATION

U.S. Physical Therapy, Inc. and its subsidiaries (the "Company") operate
outpatient physical and occupational therapy clinics that provide pre- and
post-operative care and treatment for orthopedic-related disorders,
sports-related injuries, preventative care, rehabilitation of injured workers
and neurological-related injuries. As of December 31, 2004, the Company owned
and operated 264 clinics in 35 states. The clinics' business primarily
originates from physician referrals. The principal sources of payment for the
clinics' services are managed care programs, commercial health insurance,
Medicare/Medicaid, workers' compensation insurance 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 four such
third-party facilities under management as of December 31, 2004.

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 primarily operates through
subsidiary clinic partnerships, in which the Company generally owns a 1% general
partnership interest and a 64% limited partnership interest in the clinics. The
managing therapist of each clinic owns the remaining limited partnership
interest in the majority of the clinics. In some instances, the Company
developed satellite clinic facilities as extensions of existing clinics, with
the result that a number of existing clinic partnerships operate more than one
clinic location. See Note 2 -- Significant Accounting Policies -- Minority
Interests.

2. SIGNIFICANT ACCOUNTING POLICIES

CASH EQUIVALENTS

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The Company, pursuant
to its investment policy, invests its cash primarily in deposits with major
financial institutions, in highly rated commercial paper and short-term treasury
and other United States and municipal government agency securities. The Company
held approximately $16 million and $11 million in highly liquid investments at
December 31, 2004 and 2003, respectively.

The Corporation maintains its cash and cash equivalents at financial
institutions. The combined account balances at several institutions typically
exceed Federal Deposit Insurance Corporation ("FDIC") insurance coverage and, as
a result, there is a concentration of credit risk related to amounts on deposit
in excess of FDIC insurance coverage. Management believes that this risk is not
significant.

LONG-LIVED ASSETS

Fixed assets are stated at cost. Depreciation is computed on 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 shorter of the related
lease term or estimated useful lives of the assets, which is generally five
years.

IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

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, "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

35

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

The Company reviews property and equipment and intangible assets for
impairment when certain events or circumstances indicate that the related
amounts might be impaired. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.

GOODWILL

Goodwill represents the excess of costs over the fair value of the acquired
business assets. Effective January 1, 2002, goodwill and other intangible assets
with indefinite lives are no longer amortized. The fair value of goodwill and
other intangible assets with indefinite lives are tested for impairment annually
and upon the occurrence of certain events and are written down to fair value if
considered impaired. The Company evaluates goodwill for impairment on an annual
basis by comparing the fair value of its reporting segment units to their
carrying values. For the year ended December 31, 2004, the fair value of the
Company's reporting segment units exceeds the recorded carrying value. At
December 31, 2004 and December 31, 2003, the Company had approximately $6.1
million and $5.7 million, respectively, of unamortized goodwill. Prior to 2002,
goodwill was amortized using the straight-line method over 20 years.

MINORITY INTERESTS

In the majority of the Company's 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 thereafter up to a maximum of 35%.
Within the balance sheet and statement of net income, the Company records
partner therapists' profit interest in the clinic partnerships as minority
interests in subsidiary limited partnerships. The Emerging Issues Task Force
("EITF") issued EITF 00-23, "Issues Related to the Accounting for Stock
Compensation under APB No. 25 and FASB Interpretation No. 44" (EITF 00-23),
which provides specific accounting guidance relating to various incentive
compensation issues. The Company reviewed EITF 00-23 with respect to the
partnership's structure and the accounting for minority interest and concluded
that for partnerships formed after January 18, 2001, EITF 00-23 requires the
Company to expense as compensation rather than as a minority interest in
earnings, the clinic partners' interest in profits. Moreover, EITF 00-23
requires that the Company expense as compensation rather than capitalizing as
goodwill, the purchase of minority interest in the partnerships for clinic
partnerships formed after January 18, 2001. As of December 31, 2004, the Company
operated 178 clinics with a minority interest.

Pursuant to EITF 00-23, for the years ended December 31, 2004, 2003 and
2002, the Company expensed $823,000, $428,000 and $306,000, respectively, of the
minority interest in earnings of subsidiary limited partnerships relating to
certain partnerships formed after January 18, 2001, as salaries and related
costs. As of December 31, 2004 and 2003, $490,000 and $346,000, respectively, in
undistributed minority interests related to those partnerships are classified as
other long-term liabilities.

REVENUE RECOGNITION

Revenues are recognized in the period in which services are rendered. Net
patient revenues are reported at the estimated net realizable amounts from
insurance companies, third-party payors, patients and others for services
rendered. The Company has agreements with third-party payors that provide for
payments to the Company at 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
the terms of payor contracts and historical experience. Patient revenues are
shown net of contractual adjustments in the statement of net income and the
provision for doubtful

36

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

accounts is included in clinic operating cost. Net accounts receivable includes
only those amounts the Company estimates to be collectible.

Reimbursement rates for outpatient therapy services provided to Medicare
beneficiaries are established pursuant to a fee schedule published by the
Department of Health and Human Services ("HHS"). Under the Balanced Budget Act
of 1997 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 (the "Medicare Limit"), except for services
provided in hospitals. After a three-year moratorium, this Medicare Limit on
therapy services was implemented for services rendered on or after September 1,
2003. The Medicare Limit in any one-year was adjusted up to $1,590 (the
"Adjusted Medicare Limit") and the full amount available for the remaining four
months of 2003. Effective December 8, 2003, a moratorium was placed on the
Adjusted Medicare Limit for the remainder of 2003 and for years 2004 and 2005.
The Medicare Limit is scheduled to be reinstated in 2006 with the amount yet
undetermined.

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, 2004.
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

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

FAIR VALUES OF FINANCIAL INSTRUMENTS

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.

SEGMENT REPORTING

Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by chief
operating decision makers in deciding how to allocate resources and in assessing
performance. The Company identifies operating segments based on management
responsibility and believes it meets the criteria for aggregating its operating
segments into a single reporting segment.

USE OF ESTIMATES

In preparing the Company's consolidated financial statements, management
makes certain estimates and assumptions that affect the amounts reported in the
consolidated financial statements and related disclosures. Actual results may
differ from these estimates.

37

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SELF-INSURANCE PROGRAM

The Company utilizes a self-insurance plan for its employee group health
insurance coverage administered by a third party. Predetermined loss limits have
been arranged with the insurance company to limit the Company's maximum
liability and cash outlay. Accrued expenses include the estimated incurred but
unreported costs to settle unpaid claims and estimated future claims.

RECLASSIFICATIONS

Certain reclassifications have been made to prior year amounts to conform
to current year presentation. In response to the February 7, 2005 letter from
the Chief Accountant of the Securities and Exchange Commission to the American
Institute of Certified Public Accountants, the Company undertook a comprehensive
review of its accounting practices for leases. The Company had historically
accounted for tenant improvements allowances as reductions to the related
leasehold improvement asset on the consolidated balance sheets and capital
expenditures in investing activities on the consolidated statements of cash
flows. Management determined the FASB Technical Bulletin No. 88-1, "Issues
Relating to Accounting for Leases," requires these allowances to be recorded as
deferred rent liabilities on the consolidated balance sheets and as a component
of operating activities on the consolidated statements of cash flows. The
Company made a cumulative adjustment in the prior year balance sheet that had
the effect of increasing fixed assets, net and deferred rent by approximately
$1.5 million. This cumulative adjustment did not have any effect on the prior
year income statements and was immaterial with respect to the statements of cash
flows. In addition, the components of deferred taxes have been appropriately
classified in the prior year balance sheets.

In addition, the Consolidated Balance Sheet as of December 31, 2003
reflects a revision in classification to accrued liabilities of credit balances
previously included as an offset to accounts receivable. The credit balances are
primarily related to patients and payors. The Consolidated Statements of Net
Income reflect a reclassification of interest income from net revenues to
interest income/expense, net.

STOCK OPTIONS

The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25, to account for its
fixed-plan stock options. Under this method, the compensation expense is
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. FASB Statement No. 123, Accounting for
Stock-Based Compensation and FASB Statement No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123, established accounting and disclosure requirements using fair-value-based
method of accounting for stock-based employee compensation plans. As permitted
by existing accounting standards, the Company has elected to apply the
intrinsic-bases method of accounting described above, and has adopted only the
disclosure requirements of Statement 123, as amended. Under APB Opinion No. 25
the Company recognized $82,000 of compensation cost in corporate office costs
for the year ended December 31, 2003 and recaptured into income the same amount
during the year ended December 31, 2004. No compensation cost related to stock
plans was recognized for the year ended December 31, 2002.

The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options that 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

38

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 Company's
pro forma information follows (in thousands except for earnings per share
information):

The weighted-average fair value per share of options granted during the
years ended December 31, 2004, 2003 and 2002 follows:

The following weighted-average assumptions for 2004, 2003 and 2002 were
used in estimating the fair value per share of the options granted under the
stock option plans and assuming no dividends:

RECENTLY PROMULGATED ACCOUNTING PRONOUNCEMENTS

In May 2003, FASB Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS 150"),
was issued. SFAS 150 establishes standards for the classification and
measurement of certain financial instruments of both liabilities and equity. The
Statement also includes disclosures for financial instruments within its scope.
For the Company, SFAS 150 was effective for instruments entered into or modified
after May 31, 2003 and otherwise was effective as of January 1, 2004, except for
mandatorily redeemable financial instruments. For certain redeemable financial

39

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

instruments, the Statement will be effective for the Company on January 1, 2005.
The effective date has been deferred indefinitely for certain other types of
mandatory instruments. The adoption of SFAS 150 did not have an impact on the
Company's financial condition or results of operations.

In December 2003, the FASB issued Revised Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46R"), which requires the
consolidation of variable interest entities. FIN 46R, as revised, was applicable
to financial statements of companies that had interests in "special purpose
entities" during 2003. Effective as of the first quarter of 2004, FIN 46R is
applicable to financial statements of companies that have interests in all other
types of entities. Adoption of FIN 46R had no effect on the Company's financial
position, results of operations or cash flows.

In May 2004, the FASB issued FASB Staff Position 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" ("FSP 106-2"), which requires measures of the
accumulated postretirement benefit obligation and net periodic postretirement
benefit costs to reflect the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003. FSP 106-2 supersedes FSP 106-1 and is
effective for interim or annual reporting periods beginning after June 15, 2004.
The adoption of FSP 106-2 did not have an impact on the Company's financial
condition or results of operations.

In December 2004, the FASB issued Revised SFAS 123, "Share Based Payment"
("SFAS 123R"), which is a revision of SFAS 123 and supersedes APB 25. Among
other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value
method of accounting, and requires the Company to measure the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award (with limited exceptions). That cost will be
recognized over the period during which an employee is required to provide
service in exchange for the award -- the requisite service period (usually the
vesting period). SFAS 123R requires that the grant-date fair value of employee
share options and similar instruments be estimated using option-pricing models
adjusted for the unique characteristics of those instruments (unless observable
market prices for the same or similar instruments are available). SFAS 123R is
effective as of the beginning of the first interim or annual period that begins
after June 15, 2005. For the Company, SFAS 123R is effective for its third
quarter which begins July 1, 2005. SFAS 123R permits companies to adopt its
requirements using either a "modified prospective" method, or a "modified
retrospective" method. Under the "modified prospective" method, compensation
cost is recognized in the financial statements beginning with the effective
date, based on the requirements of SFAS 123R for all share-based payments
granted after that date, and for all unvested awards granted prior to the
effective dated. Under the "modified retrospective" method, the requirements are
the same as under the "modified prospective" method, but also permits entities
to restate financial statements of previous periods based on proforma
disclosures made in accordance with SFAS 123 and SFAS 148.

The Company currently utilizes Black-Scholes, a standard option pricing
model, to measure the fair value of stock options granted to employees. While
SFAS 123R permits entities to continue to use such a model, the standard also
permits the use of a "lattice" model. The Company has not yet determined the
model it will use to measure the fair value of employee stock options upon the
adoption of SFAS 123R. Also, SFAS 123R requires that the benefits associated
with the tax deductions in excess of recognized compensation cost be reported as
a financing cash flow, rather than as an operating cash flow as required under
current literature. The requirement will reduce net operating cash flows and
increase net financing cash flows in periods after the effective date. These
future amounts cannot be estimated, because they depend on, among other things,
when employees exercise stock options. However, the amount of operating cash
flows recognized in the prior periods for the tax benefit from exercise of stock
options, as shown in the Company's Consolidated Statements of Cash Flows, were
$1.6 million, $2.0 million and $4.2 million, respectively, for 2004, 2003 and
2002.

40

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company currently expects to adopt SFAS 123R effective July 1, 2005;
however, the Company is evaluating its method of estimating the grant-date fair
value and which of the aforementioned adoption methods it will use. Based on
stock options granted to its employees through December 31, 2004, the Company
expects that the adoption of SFAS 123R, would reduce both third quarter 2005 and
fourth quarter 2005 net earnings by approximately $65,000 each.

Previously, in December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB
Statement No. 123," ("SFAS 148") which provides alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. SFAS 148 also amends
certain disclosures under SFAS 123 and Accounting Principles Board Opinion No.
28, "Interim Financial Reporting," to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. SFAS 148 was effective for fiscal
years ending after December 15, 2002. For 2004, 2003 and 2002 we continued to
use the provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") to account for employee stock options and apply the
disclosures required under SFAS 123.

3. NON-CASH TRANSACTIONS

In June 2002, $667,000 of the Series C Notes was converted by a note holder
into 200,100 shares of common stock. See "Notes Payable" in Note 6. On January
12, 2004, $666,660 of the Series C Note was converted by the note holder into
200,000 shares of common stock. On June 30, 2004, the remaining $1.7 million
balance of the Series C Note was converted by the note holder into 499,900
shares of common stock.

4. ACQUISITIONS AND DISPOSALS

ACQUISITIONS OF MINORITY INTERESTS

On June 1, 2002, the Company purchased a 35% minority interest in a limited
partnership for $220,000. Additional consideration may be paid in the future
based upon clinic performance. The Company paid the minority partner $73,000 in
undistributed earnings. Based on the clinic's having met specified criteria, the
Company paid additional consideration of $31,000 and $41,000 in August 2003 and
2004, respectively. In July 2002, the Company sold half of the purchased
interest to another therapist for $220,000, payable from future profits of the
partnership. The Company discounted the note receivable by 50% and is
recognizing the gain as payments are made.

On August 1, 2003, the Company purchased a 35% minority interest in a
limited partnership for $64,000 and agreed to pay the minority partner $75,000
in undistributed earnings. The purchase was made under a note, which is payable
in three installments. On September 10, 2003, the Company paid the first
installment of $35,000. The remaining principal amount due under the note
payable was $104,000 at December 31, 2003 of which $34,000 was paid on August 1,
2004 and $70,000 is payable on August 1, 2005.

On April 28, 2004, the Company purchased a 17.5% minority interest in a
limited partnership for $138,000 and agreed to pay the minority partner $36,000
in undistributed earnings.

On June 2, 2004, the Company purchased a 17.5% minority interest in a
limited partnership for $7,820 and agreed to pay the minority partner $11,000 in
undistributed earnings.

On September 30, 2001, the Company purchased a 35% minority interest in a
limited partnership which owns nine clinics in Michigan for consideration
aggregating $2,111,000. Additional purchase

41

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

consideration was contingent upon future clinic performance. In September 2004,
the Company paid additional consideration of $105,000 based on the clinics
having met specified criteria.

In November 2004, the Company purchased a 5% minority interest in a limited
partnership for $208,825 and agreed to pay the minority partner $48,692 in
undistributed earnings.

The Company's minority interest purchases were accounted for as purchases
and accordingly, the results of operations of the acquired minority interest
percentage are included in the accompanying financial statements from the dates
of purchase. In addition, the Company is permitted to make, and has occasionally
made, changes to preliminary purchase price allocations during the first year
after completing the purchase.

The changes in the carrying amount of goodwill consisted of the following
(in thousands):

SALE OF ASSETS

On June 30, 2004, the Company sold all of its assets in a clinic. Net
proceeds from the sale were $473,000 on assets with a carrying value of $17,000.
After recording certain costs associated with the sale, the Company recorded a
gain of $452,000.

CLOSURE COSTS

In third quarter of 2004, management decided to close eight unprofitable
clinics after a thorough review of the Company's clinics. The Company initially
recognized $815,000 in closure costs relating to these clinics as of September
30, 2004. The breakdown of these charges by major type of cost, additions and
activity subsequent to September 30, 2004 and balance at December 31, 2004
follows (in thousands):

Subsequent to the initial charge, the Company was able to reduce its
liabilities related to lease obligations by $121,000 and made lease payments
related to these closed clinics of $60,000, thereby reducing the lease
obligation included in accrued expenses to $250,000 as of December 31, 2004.
Closure costs for the 2004 year totaled $690,000.

In the fourth quarter of 2004, the Company decided to close an additional
clinic which resulted in a write-off of goodwill of $42,500.

42

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Lease obligations represent the future payments remaining under lease
agreements adjusted for estimated early settlements. Severance costs primarily
represent the costs associated with the settlement of employment contracts.

5. ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

Undistributed earnings relate to those partnerships formed after January
18, 2001. See Note 2. -- Significant Accounting Policies -- Minority Interests.

6. NOTES PAYABLE

In May 1994, the Company issued a $3 million 8% Convertible Subordinated
Note, Series C, due June 30, 2004 (the "Series C Note"). The Series C Note was
convertible at the option of the holder into shares of Company common stock
determined by dividing the principal amount of the Series C Note being converted
by $3.33. The Series C Note bore interest from the date of issuance at a rate of
8% per annum, payable quarterly. In June 2002, $667,000 of the Series C Note was
converted by the note holder into 200,100 shares of common stock. The principal
amount under the Series C Note was $2.3 million at December 31, 2003 and on
January 12, 2004, $666,660 of the Series C Note was converted by the note holder
into 200,000 shares of common stock. On June 30, 2004, the remaining balance of
$1.7 million of the Series C Note was converted by the note holder into 499,900
shares of common stock. The Series C Note was unsecured and subordinated in
right of payment to all other indebtedness for borrowed money incurred by the
Company. Notes payable as of December 31, 2004 and 2003 consist of the following
(in thousands):

43

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES

Significant components of deferred tax assets included in the consolidated
balance sheets at December 31, 2004 and 2003 were as follows (in thousands):

The differences between the federal tax rate and the Company's effective
tax rate for the years ended December 31, 2004, 2003 and 2002 were as follows
(in thousands):

Significant components of the provision for income taxes for the years
ended December 31, 2004, 2003 and 2002 were as follows (in thousands):

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 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

44

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

8. STOCK OPTION PLANS

The Company has the following stock option plans:

The 1992 Stock Option Plan, as amended (the "1992 Plan") 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). The 1992 Plan expired in 2002 and no new
option grants can be awarded subsequent to this date.

Incentive stock options (those intended to satisfy the requirements of the
Internal Revenue Code) granted under the 1992 Plan were 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 were
determined by the Stock Option Committee. The period within which each option
will be exercisable was 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") permits 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 2003 and 2002, the Board of Directors of the Company granted
Inducement options covering 145,000 and 10,000 options, respectively, to six
individuals in connection with their offers of employment or service. During
2003 and 2002, 22,500 and 22,500 options were forfeited, respectively.
Inducement options may be exercised for a 10 year term from the date of the
grant.

The 2003 Stock Option Plan (the "2003 Plan") permits the Company to grant
to key employees and outside directors of the Company incentive and
non-qualified options to purchase up to 900,000 shares of common stock (subject
to proportionate adjustments in the event of stock dividends, splits, and
similar corporate transactions). The 2003 Plan was approved by the Shareholders
of the Company at the 2004 Shareholders Meeting on May 25, 2004 During 2003 and
2002, the Company erroneously granted rights to purchase 278,000 shares of
common stock under the 1992 Plan after the plan expired. The Company honored the
grants by issuing grants under the 2003 Plan in June 2004.

45

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A cumulative summary of stock options as of December 31, 2004 follows:

A summary of the status of the Company's stock options granted under the
plans as of December 31, 2004, 2003 and 2002 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, 2004, 2003 and 2002, respectively:

46

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes information about the Company's stock
options outstanding and exercisable and range of exercise prices as of December
31, 2004:

8. PREFERRED STOCK

The Board of Directors of the Company is empowered, without approval of the
shareholders, 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.

47

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. PURCHASE OF COMMON STOCK

In September 2001, the Board of Directors ("Board") authorized the Company
to purchase, in the open market or in privately negotiated transactions, up to
1,000,000 shares of its common stock. On February 26, 2003 and on December 8,
2004, the Board authorized share repurchase programs of up to 250,000 and
500,000 additional shares, respectively, of the Company's outstanding common
stock. As of December 31, 2004, there are 444,197 shares remaining that can be
purchased under these programs. As there is no expiration for the Board
authorizations, additional shares may be purchased from time to time in the open
market or private transactions depending on price, availability and the
Company's cash position. Shares purchased are held as treasury shares and may be
used for such valid corporate purposes or retired as the Board considers
advisable. During the years ended December 31, 2004, 2003 and 2002, the Company
purchased 373,403; 1,800 and 795,600 shares, respectively, of its common stock
on the open market for $5.6 million, $20,410 and $10.5 million, respectively.

10. 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 did not make any discretionary
contributions and recognized no contribution expense for the years ended
December 31, 2004, 2003 and 2002.

11. 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 $9.1 million, $7.6 million and $6.4 million for the years ended
December 31, 2004, 2003 and 2002, respectively. Several of the leases provide
for an annual increase in the rental payment based upon the Consumer Price
Index. 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 each of the next five years and
thereafter and in the aggregate as of December 31, 2004 are as follows (in
thousands):

2005........................................................ $ 9,413
2006........................................................ 8,258
2007........................................................ 6,653
2008........................................................ 4,125
2009........................................................ 2,162
Thereafter.................................................. 449
-------
$31,060
=======

EMPLOYMENT AGREEMENTS

At December 31, 2004, the Company had outstanding employment agreements
with two of its executive officers. The agreements were effective November 1,
2004 and provide for annual salaries of $325,000 each, subject to annual
adjustments, and expire on November 1, 2007, provided however, that effective on
the first and second anniversary of the effective date, the term shall
automatically be extended for an additional year (up to a maximum term, with
such extensions, of five years) unless either party notifies the other on or
before such anniversary dates that such party has elected not to extend such
term.

48

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company also had outstanding consulting agreements with two of its directors
whom are former employees: one for $87,800 annually for a term extending through
May 2006, and the other for $50,000 annually for a term extending through
November 14, 2007.

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 $12.6 million in 2005 and $4.5 in the aggregate
from 2006 through 2009. In addition, each employment agreement with the managing
physical therapist 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 $19.3 million, $17.2 million and $14.8 million
for the years ended December 31, 2004, 2003 and 2002, respectively.

Each employment agreement typically provides that the Company has the right
to purchase the limited partnership interest in the clinic partnership for the
amount of the partner's capital account upon termination of employment with the
clinic partnership before the expiration of the initial term of employment. The
employment agreements typically 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.

12. EARNINGS PER SHARE

The computation of basic and diluted earnings per share for the years ended
December 31, 2004, 2003 and 2002 are as follows (in thousands, except per share
data)

49

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Options to purchase 355,005; 267,750 and 344,686 shares for the years ended
December 31, 2004, 2003 and 2002, respectively, were excluded from the diluted
earnings per share calculations for the respective periods because the options'
exercise prices exceeded the average market price of the common shares during
the periods.

13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

50

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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our management, including our Chief Executive Officer and Chief Financial
Officer, have conducted an evaluation of the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) promulgated under the
Exchange Act) as of the end of the fiscal period covered by this report. Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures are effective in
ensuring that the information required to be disclosed in the reports we file or
submit under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the rules and forms of the Securities and
Exchange Commission and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding disclosure.

CHANGES IN INTERNAL CONTROLS

There have been no changes made in our internal controls over financial
reporting during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

ITEM 9B. OTHER INFORMATION

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required in response to this Item 10 is incorporated herein
by reference to our definitive proxy statement relating to our 2005 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A, not later than 120 days after the end of our fiscal
year covered by this report.

ITEM 11. EXECUTIVE COMPENSATION.

The information required in response to this Item 11 is incorporated herein
by reference to our definitive proxy statement relating to our 2005 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A, not later than 120 days after the end of our fiscal
year covered by this report.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

The information required in response to this Item 12 is incorporated herein
by reference to our definitive proxy statement relating to our 2005 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A, not later than 120 days after the end of our fiscal
year covered by this report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required in response to this Item 13 is incorporated herein
by reference to our definitive proxy statement relating to our 2005 Annual
Meeting of Stockholders to be filed with the

51

Securities and Exchange Commission pursuant to Regulation 14A, not later than
120 days after the end of our fiscal year covered by this report.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required in response to this Item 14 is incorporated herein
by reference to our definitive proxy statement relating to our 2005 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A, not later than 120 days after the end of our fiscal
year covered by this report.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Documents filed as a part of this report:

1. Financial Statements. Reference is made to the Index to Financial
Statements and Related Information under Item 8 in Part II hereof, where
these documents are listed.

2. Financial Statement Schedules. See page 56 for Schedule
II -- Valuation and Qualifying Accounts. All other schedules are omitted
because of the absence of conditions under which they are required or
because the required information is shown in the financial statements or
notes thereto.

3. Exhibits. The exhibits listed in List of Exhibits on the next page
are filed or incorporated by reference as part of this report.

52

LIST OF EXHIBITS

- ---------------

* Filed herewith

+ Management contract or compensatory plan or arrangement.

54

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States) the consolidated financial statements
of U.S. Physical Therapy, Inc. and subsidiaries referred to in our report dated
March 14, 2005, which is included in the Annual Report of U.S. Physical Therapy,
Inc. on Form 10-K. Our audit was conducted for the purpose of forming an opinion
on the basic consolidated financial statements taken as a whole. The Schedule
II -- Valuation and Qualifying Accounts is presented for purposes of additional
analysis and is not a required part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated financial statements and, in our opinion,
is fairly stated in all material respects in relation to the basic consolidated
financial statements taken as a whole.

/s/ GRANT THORNTON LLP

Houston, Texas
March 14, 2005

55

FINANCIAL STATEMENT SCHEDULE*

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

U.S. PHYSICAL THERAPY, INC. AND SUBSIDIARIES

- ---------------

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

* All other schedules are omitted because of the absence of conditions under
which they are required or because the required information is shown in the
financial statements or notes thereto.

56

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

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

By: /s/ Lawrance W. McAfee
------------------------------------
Lawrance W. McAfee
Chief Financial Officer

By: /s/ David Richardson
------------------------------------
David Richardson
Controller

Date: March 15, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of the date indicated above.

By: /s/ Christopher J. Reading President, Chief Executive Officer and Director
------------------------------------------ (principal executive officer)
Christopher J. Reading

By: /s/ Lawrance W. McAfee Executive Vice President, Chief Financial Officer
------------------------------------------ and Director (principal financial and accounting
Lawrance W. McAfee officer)

By: /s/ Daniel C. Arnold Chairman of the Board
------------------------------------------
Daniel C. Arnold

By: /s/ Mark J. Brookner Vice Chairman of the Board
------------------------------------------
Mark J. Brookner

By: /s/ Bruce D. Broussard Director
------------------------------------------
Bruce D. Broussard

By: /s/ James B. Hoover Director
------------------------------------------
James B. Hoover

By: /s/ Marlin W. Johnston Director
------------------------------------------
Marlin W. Johnston

By: /s/ Livingston Kosberg Director
------------------------------------------
Livingston Kosberg

By: /s/ Jerald Pullins Director
------------------------------------------
Jerald Pullins

By: /s/ Albert L. Rosen Director
------------------------------------------
Albert L. Rosen

By: /s/ Clayton Trier Director
------------------------------------------
Clayton Trier

57

EXHIBIT INDEX

- ---------------

* Filed herewith

+ Management contract or compensatory plan or arrangement.