UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): August 3, 2006

REHABCARE GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware	0-19294	51-0265872
(State or other jurisdiction	(Commission File Number)	(I.R.S. Employer
of incorporation)		Identification No.)

	7733 Forsyth Boulevard
	Suite 2300
	St. Louis, Missouri	63105
	(Address of principal executive offices)	(Zip Code)

(314) 863-7422

(Company’s telephone number, including area code)

Not applicable

(Former name or former address if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions.

o	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o	Pre-commencement communications pursuant to Rule 14d-2(b) under the

Exchange Act (17 CFR 240.14d-2(b))

o	Pre-commencement communications pursuant to Rule 13e-4(c) under the

Exchange Act (17 CFR 240.13e-4(c


Item 2.02		Results of Operations and Financial Condition

		The information in Exhibit 99.1 is incorporated herein by reference.

Item 7.01		Regulation FD Disclosure

		The information in Exhibit 99.2 is incorporated herein by reference.

Item 9.01		Financial Statements and Exhibits

(d)		Exhibits

		The following exhibits are furnished pursuant to Item 2.02 and 7.01 hereof and should not be deemed to be “filed” under the Securities Exchange Act of 1934:

	99.1	Press release dated August 3, 2006, announcing our second quarter revenues and results of operations.

	99.2	The script for a conference call held by the registrant on August 3, 2006

SIGNATURES

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

Dated: August 3, 2006

REHABCARE GROUP, INC.

	By: /s/	Jay W. Shreiner
		Jay W. Shreiner
		Senior Vice President and
		Chief Financial Officer

EXHIBIT INDEX

Exhibit No.		Description
99.1		Press release dated August 3, 2006, announcing our second quarter revenues and results of operations.

99.2		The script for a conference call held by the registrant on August 3, 2006

Exhibit 99.1

	CONTACT: RehabCare Group, Inc.
		Jay W. Shreiner
		Chief Financial Officer
		Betty Cammarata, Dir-Investor Relations
		Press: David Totaro, Senior Vice
		President, Corporate Marketing &
		Communications
		(314) 863-7422 or
		Financial Dynamics
		Gordon McCoun/Theresa Kelleher
		Press: Sean Leous (212) 850-5600

FOR IMMEDIATE RELEASE

Thursday, August 3, 2006

REHABCARE REPORTS SECOND QUARTER 2006 RESULTS

•

Strong revenue growth of 18 percent year-over-year

•

Freestanding Hospital division results turn accretive ahead of expectations

•

Symphony acquisition now expected to create $10-14 million of savings within 18 months

•

Integration disruption will impact earnings in 2006

ST. LOUIS, MO, August 3, 2006--RehabCare Group, Inc. (NYSE:RHB) today reported financial results for the quarter and six months ended June 30, 2006. Comparative results for the quarter and six months follow.

	Quarter Ended						Six Months Ended
Amounts in millions,	June 30,						June 30,
except per share data		2006		2005				2006		2005
Consolidated Operating Revenues	$	127.7		$	108.4		$	249.4		$	210.8
Consolidated Net Earnings (a)(b)		3.5			5.5			2.9			10.4
Consolidated Diluted Earnings per Share		0.20			0.32			0.17			0.60

Contract Therapy Operating Revenues		63.1			57.6			120.5			110.1
Contract Therapy Operating Earnings (Loss)		0.7			3.2			(0.6	)		5.6

HRS Inpatient Operating Revenues		32.6			35.6			66.2			71.3
HRS Outpatient Operating Revenues		12.6			12.4			25.4			24.6
HRS Operating Revenues		45.2			48.0			91.6			95.9
HRS Operating Earnings		4.7			6.7			10.2			13.4

Freestanding Hospitals Operating Revenues		16.9			—			32.0			—
Freestanding Hospitals Operating Earnings		0.5			—			0.2			—

Healthcare Management Consulting Operating Revenues		2.6			2.8			5.3			5.1
Healthcare Management Consulting Operating Earnings (Loss)		—			(0.1	)		—			(0.1	)

Equity in After Tax Loss of Affiliates		(0.1	)		(0.3	)		(2.9	)(b)		(0.7	)

(a)

Includes after tax stock-based compensation expense of $0.4 million and $0.7 million for the three months and six months ended June 30, 2006, respectively.

(b)

Includes the impact of an other than temporary decline in the value of RehabCare’s equity investment in InteliStaf of $2.8 million for the six months ended June 30, 2006.

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John H. Short, Ph.D., president and chief executive officer, commented “In a challenging environment, our operating results in the second quarter were mixed. Our Contract Therapy division returned to profitability, continuing to recover from the Part B Cap impact and our Freestanding Hospital division outperformed our expectations. Our HRS division was slightly down in revenue and margins due to continued 75% Rule pressure. In May we announced an agreement to purchase Symphony Health Services, the largest acquisition in the Company’s history, which we closed on July 1. The combination of RehabCare and Symphony significantly strengthens the reach of our Contract Therapy division and accelerates our continuum of post-acute care strategy in over 50 markets, providing us the opportunity to gain greater efficiencies and economies of scale.”

Dr. Short continued, “We made substantial progress with our Freestanding Hospital division, which we created less than a year ago. We acquired Louisiana Specialty Hospital in New Orleans, a 56-bed long-term acute care hospital (inclusive of a 12-bed satellite location). This facility is located in West Jefferson Medical Center, where we manage one inpatient unit, three outpatient sites and four contract therapy sites. This acquisition extends our presence in New Orleans, a continuum market for us. On July 1, we also closed the acquisition of RehabCare Rehabilitation Hospital-Permian Basin in Midland, Texas, a 38-bed inpatient rehabilitation hospital where we have provided management and therapy services since 1988. We also operate two outpatient and two contract therapy sites in this continuum market. More significantly, through improved management of our freestanding hospitals, we increased overall patient census, which enabled the division’s operating results to become accretive for the first six months, ahead of our expectations.”

Dr. Short added, “With one month of Symphony operating history under our belts, we have achieved many cost savings in our back office functions. Additionally, given the efficiencies to be realized by converting Symphony’s management systems to RehabCare’s Palm technology, we have decided to accelerate our transition plan. As a result, we are revising our ongoing annual cost savings estimate from $8-12 million in 24 months to $10-14 million within an 18 month period. Unfortunately, we underestimated the short term transition cost and business interruption caused by shifting Symphony to our processes and systems. The acceleration of the point-of-service technology rollout, combined with the business interruptions of combining two businesses and converting to common business processes and management tools, will result in some dilution for

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the balance of 2006, primarily in the third quarter.

Financial Overview of Second Quarter

Net revenues for the second quarter 2006 were $127.7 million compared to $108.4 million from the year ago quarter, an increase of 17.8 percent. The increase reflects our acquisition of the assets of MeadowBrook Healthcare in August 2005, combined with the start-up of our Arlington Rehabilitation Hospital in Arlington, Texas in December 2005 and the subsequent acquisition of Louisiana Specialty Hospital in June 2006, and growth in the number of locations in the Contract Therapy division. This was partially offset by the impact of the Part B therapy caps and lower revenues in the Hospital Rehabilitation Services division.

Consolidated net earnings were $3.5 million in the second quarter 2006 compared to $5.5 million in the prior year period. Earnings per share on a fully diluted basis for the second quarter 2006 were $0.20, inclusive of $0.02 net expense for stock based compensation, compared to $0.32 for the same period last year.

The Contract Therapy (CT) division’s net revenues for the second quarter of 2006 increased 9.4 percent to $63.1 million, compared to $57.6 million in the year ago quarter. Operating earnings for the quarter were $0.7 million compared to the prior year quarter of $3.2 million. As of June 30, 2006, the division operated in 793 locations versus 764 locations at June 30, 2005.

The year-over-year second quarter increase in revenue was driven both by the division’s sales efforts, which increased the average number of locations by 45, or 6.1 percent, and improved rates resulting from the division’s third and fourth quarter 2005 pricing initiatives. Same store revenues grew 2.1 percent, down from the historical high single digit same store growth rates.

Despite the substantial revenue growth, operating earnings for the division declined significantly year-over-year as the recovery of Part B revenue continued throughout the quarter. In addition, lower therapist productivity combined with higher wage rates resulted in a 9.0 percent year-over-year second quarter increase in labor and benefit costs per minute of therapy service. The ongoing tight therapist labor market and the Part B cap recovery were both contributing factors to the cost increase.

The Hospital Rehabilitation Services (HRS) division’s second quarter net revenues decreased 5.9 percent to $45.2 million, compared to $48.0 million in the year ago quarter. Operating earnings for the quarter were $4.7 million compared to the prior year quarter of $6.7 million. As of

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June 30, 2006, HRS operated 175 programs compared to 188 at June 30, 2005. During the same time period, acute rehab units (ARU’s) decreased from 120 to 119.

HRS operating revenues were lower due to a 3.8 percent year-over-year decline in average units operated, a decline in discharges and competitive pricing pressure experienced on certain contract renewals.

Inpatient revenues were negatively impacted by a 5.6 percent decline in the average number of units operated, resulting from the net reduction of five VitalCare contracts, five hospital-based skilled nursing units and one ARU. The number of VitalCare units has stabilized. Acute rehabilitation revenue growth continues to be impacted by the 75% Rule. Same store ARU discharges for the second quarter of 2006 were down 4.0 percent from the second quarter of 2005, a slightly larger decline than forecast. On a year-to-date basis, however, same store discharges were down 2.6 percent compared to the first half of 2005, in line with the Company’s expectations.

Operating earnings for the division were negatively impacted by increases in both internal and contract labor costs resulting from the continued tight labor market for therapists. Inpatient labor and benefit costs per discharge increased 5.3 percent compared to the year ago quarter and Outpatient labor and benefit costs per unit of service increased 8.7 percent.

The Freestanding Hospital division’s net revenues during the second quarter of 2006 were $16.9 million. Operating earnings for the quarter were $0.5 million. Compared to the first quarter of 2006, net revenues and operating earnings improved $1.7 million and $0.8 million, respectively. The division’s operating earnings were impacted by improved census, as patient days on a same facility basis increased 5.0 percent sequentially. Louisiana Specialty Hospital was immediately accretive to the division’s operating profit and the performance of the Arlington Rehabilitation Hospital, which opened in late 2005, improved significantly on a sequential basis.

Stock-Based Compensation

Effective January 1, 2006, the company adopted Statement of Financial Accounting Standards No. 123 – revised 2004, “Share-Based Payment” which requires the recognition of compensation expense for all share-based compensation awarded to employees, net of estimated forfeitures, using a fair-value-based method. During the second quarter of 2006 and year-to-date June 2006, the Company recognized pretax share based compensation expense of approximately $0.6 million and $1.1 million,

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or approximately $0.02 and $0.04 per diluted share after tax, respectively. This expense has been recorded as a component of corporate selling, general and administrative expenses.

Balance Sheet

At June 30, 2006 the Company had approximately $8.2 million in cash and cash equivalents, and $101.5 million of restricted cash placed in escrow to fund the July 1 closing of the Symphony Health Services acquisition. At June 30, 2006, the Company had $100.0 million outstanding under its newly amended $175 million revolving credit facility and $9.1 million in subordinated long-term debt related to various acquisitions. Days sales outstanding increased slightly sequentially from 66.2 days to 67.0 days at June 30, 2006.

2006 Financial Overview

The Company will not be providing annual revenue and earnings per share guidance for 2006. The following is a brief update of the most significant issues facing its business for the remainder of 2006:

Contract Therapy

•

The Company is accelerating its integration activities for Symphony, and increasing its estimate of ongoing cost savings from $8-12 million in 24 months to $10-14 million within an 18 month period. Integration disruption will result in some dilution during the remainder of the year, primarily in the third quarter.

•

While anticipated price increases, including CMS market basket adjustments in the fourth quarter, will mitigate increased wage and benefit costs, the Company expects its traditional contract therapy operating margins to continue to improve during the second half of 2006 returning to 2005 levels by the first quarter of 2007.

Hospital Rehabilitation Services

•

The Company anticipates that the one-year delay in 75% Rule implementation will help mitigate the impact on same store patient discharges. Its overall average compliance at June 30 is 65 percent with growth in same store 75% compliant admissions of 0.8 percent sequentially and 4.7 percent compared to the year ago quarter.

•	The Company continues to anticipate a 1-3 percent decline in year-over-year same store discharges for the full year 2006.

•	The Company now anticipates the number of HRS programs and ARU’s will

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remain flat during 2006.

Freestanding Hospitals

•	The Company anticipates earnings from the Hospital division, including accounting for new facility start-up costs, will be accretive for the full year 2006.

•	The Company now anticipates opening the Northwest Texas Rehabilitation Hospital in Amarillo, Texas in October, 2006.

Dr. Short concluded, “During the quarter we have taken steps to further implement our strategic initiatives, building RehabCare into a stronger company. Having closed on Symphony, our key focus will be to more quickly integrate the cultures and best practices of RehabCare and Symphony into our combined service offerings, and to work to realize the expected $10 to $14 million in ongoing annual cost savings over the next 18 months. In Contract Therapy, now that we have recouped the lost revenue from the Part B caps our efforts will be on addressing the issues of wage rate increases and productivity to improve profitability. Additional initiatives have been added to increase capture of compliant cases in our host hospitals which should result in an absolute increase in our ARU discharges. Finally, we continue to look for joint venture and acquisition opportunities for our Freestanding Hospitals division to build out additional markets and extend our continuum of care.”

About RehabCare Group

RehabCare Group, Inc., headquartered in St. Louis, MO, is a leading provider of physical therapy management services for hospital inpatient rehabilitation and skilled nursing units, outpatient programs and contract therapy services in conjunction with more than 1,400 hospitals and skilled nursing facilities in 42 states, the District of Columbia and Puerto Rico. RehabCare also owns and operates freestanding rehabilitation hospitals and long-term acute care hospitals. RehabCare is pleased to be included in the Russell 2000 and Standard and Poor’s Small Cap 600 Indices.

A listen-only simulcast of RehabCare’s second quarter conference call will be available on the Company’s web site at www.rehabcare.com, under For Our Investors, Webcasts, and online at www.earnings.com, beginning at 10:00 Eastern time. An online replay will be available for at least 21 days after the call. A telephonic replay of the call will be available beginning at 1:00 P.M. Eastern time today and ending at midnight on August 24, 2006. The dial-in number for the replay is (630) 652-3041 and the access code is 15194835.

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This press release contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from forecasted results. These risks and uncertainties may include but are not limited to, our ability to consummate acquisitions and other partnering relationships at reasonable valuations; our ability to integrate acquisitions and partnering relationships within the expected timeframes and to achieve the revenue, cost savings and earnings levels from such acquisitions and relationships at or above the levels projected; changes in governmental reimbursement rates and other regulations or policies affecting the services provided by us to clients and/or patients; the operational, administrative and financial effect of our compliance with other governmental regulations and applicable licensing and certification requirements; our ability to attract new client relationships or to retain and grow existing client relationships through expansion of our hospital rehabilitation and contract therapy service offerings and the development of alternative product offerings; the future financial results of any unconsolidated affiliates; the adequacy and effectiveness of our operating and administrative systems; our ability to attract and the additional costs of attracting and retaining administrative, operational and professional employees; shortages of qualified therapists and other healthcare personnel; significant increases in health, workers compensation and professional and general liability costs; litigation risks of our past and future business, including our ability to predict the ultimate costs and liabilities or the disruption of our operations; competitive and regulatory effects on pricing and margins; our ability to effectively respond to fluctuations in our census levels and number of patient visits; the proper functioning of our information systems; natural disasters and other unexpected events which could severely damage or interrupt our systems and operations; and general and economic conditions, including efforts by governmental reimbursement programs, insurers, healthcare providers and others to contain healthcare costs.

NOTE: More information on RehabCare can be found on the World Wide Web at http://www.rehabcare.com.

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I. Condensed Consolidated Statements of Earnings
(Amounts in thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
		2006			2005			2006			2005
Operating revenues	$	127,666		$	108,353		$	249,384		$	210,784
Costs & expenses
Operating		101,074			81,206			198,314			157,704
Selling, general & administrative:
Divisions		9,690			8,828			18,846			17,463
Corporate		8,080			6,104			16,629			12,103
Depreciation & amortization		2,957			2,408			5,861			4,701
Restructuring		(191	)		—			(191	)		—
Total costs & expenses		121,610			98,546			239,459			191,971

Operating earnings, net		6,056			9,807			9,925			18,813

Other income (expense), net		13			24			(26	)		38

Interest expense, net		(153	)		(104	)		(221	)		(146	)
Earnings before income taxes and equity in net loss of affiliates		5,916			9,727			9,678			18,705

Income taxes		2,337			3,940			3,823			7,575
Equity in net loss of affiliates		(102	)		(298	)		(2,943	)		(739	)
Minority interest		3			—			3			—

Net earnings	$	3,480		$	5,489		$	2,915		$	10,391

Diluted earnings per share	$	0.20		$	0.32		$	0.17		$	0.60
Weighted average diluted shares outstanding		17,232			17,245			17,202			17,195

II. Condensed Consolidated Balance Sheets
(Amounts in thousands)
	Unaudited
	June 30,		December 31,
	2006		2005
Assets
Cash and cash equivalents	$	8,172	$	28,103
Accounts receivable, net		95,210		85,541
Deferred tax assets		7,090		6,359
Other current assets		8,268		7,295
Total current assets		118,740		127,298

Restricted cash		101,500		-
Property and equipment, net		29,350		27,495
Excess of cost over net assets acquired, net		105,764		94,960
Intangible assets		13,801		7,560
Investments in unconsolidated affiliates		3,381		6,324
Other assets		10,833		9,288
	$	383,369	$	272,925
Liabilities & Stockholders’ Equity
Current portion of long-term debt	$	2,612	$	3,408
Payables & accruals		60,473		63,226
Total current liabilities		63,085		66,634

Long-term debt, less current portion		6,500		4,059
Revolving credit facility		100,000		—
Other non-current liabilities		8,431		3,984
Minority interest		46		—
Stockholders’ equity		205,307		198,248
	$	383,369	$	272,925

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III. Operating Statistics
(Dollars in 000’s)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
		2006			2005			2006			2005
Contract Therapy
Operating revenues	$	63,053		$	57,629		$	120,491		$	110,088
Operating expenses		52,572			46,085			101,921			87,957
Division SG&A		4,590			4,019			8,792			7,974
Corporate SG&A (a)		4,015			3,338			8,109			6,618
Depreciation and amortization		1,173			1,022			2,300			1,981
Operating earnings (loss) (b)	$	703		$	3,165		$	(631	)	$	5,558

Average number of locations		790			745			770			730
End of period number of locations		793			764			793			764

Hospital Rehabilitation Services (HRS)
Operating revenues
Inpatient	$	32,626		$	35,632		$	66,233		$	71,264
Outpatient		12,567			12,414			25,411			24,595
Total	$	45,193		$	48,046		$	91,644		$	95,859
Operating expenses		32,270			32,960			64,986			65,928
Division SG&A		4,160			4,336			7,875			8,521
Corporate SG&A (a)		2,909			2,677			6,209			5,334
Depreciation and amortization		1,156			1,377			2,351			2,704
Operating earnings (b)	$	4,698		$	6,696		$	10,223		$	13,372

Average number of programs
Inpatient		136			144			137			144
Outpatient		43			42			42			41
Total		179			186			179			185

End of period number of programs
Inpatient		135			146			135			146
Outpatient		40			42			40			42
Total		175			188			175			188

Freestanding Hospitals
Operating revenues	$	16,880		$	—		$	32,033		$	—
Operating expenses		14,263			—			27,454			—
Division SG&A		450			—			1,112			—
Corporate SG&A (a)		1,054			—			2,104			—
Depreciation and amortization		611			—			1,183			—
Operating earnings (b)	$	502		$	—		$	180		$	—

End of period number of facilities		6			—			6			—

Healthcare Management Consulting
Operating revenues (c)	$	2,609		$	2,811		$	5,305		$	5,121
Operating loss (b)		(38	)		(54	)		(38	)		(117	)

(a)

During Q2 2006 and YTD 2006, the Company incurred $0.6 million and $1.1 million of stock compensation expense in accordance with the provisions of SFAS #123R. These costs have been allocated to the divisions as part of corporate SG&A.

(b)

A second quarter 2006 reversal of previously recognized restructuring expenses of $191 was not allocated to the operating earnings of the divisions.

(c)

Includes intercompany sales, at market rates, of $69 and $89 for the three months and six months ended June 30, 2006, respectively, and $133 and $284 for the three months and six months ended June 30, 2005, respectively.

WE INVITE YOU TO VISIT OUR WEB SITE AFTER NOON TODAY TO VIEW KEY STATISTICS IN GREATER DETAIL @ www.rehabcare.com

-END-

Exhibit 99.2

REHABCARE CONFERENCE CALL SCRIPT

August 3, 2006

INTRODUCTION BY CONFERENCE OPERATOR

INTRODUCTION OF MANAGEMENT BY FINANCIAL DYNAMICS

This conference call contains forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from forecasted results. These risks and uncertainties may include but are not limited to, our ability to consummate acquisitions and other partnering relationships at reasonable valuations; our ability to integrate acquisitions and partnering relationships within the expected timeframes and to achieve the revenue, cost savings and earnings levels from such acquisitions and relationships at or above the levels projected; our ability to comply with the terms of our borrowing agreements; changes in governmental reimbursement rates and other regulations or policies affecting the services provided by us to clients and/or patients; the operational, administrative and financial effect of our compliance with other governmental regulations and applicable licensing and certification requirements; our ability to attract new client relationships or to retain and grow existing client relationships through expansion of our hospital rehabilitation and contract therapy service offerings and the development of alternative product offerings; the future financial results of any unconsolidated affiliates; the adequacy and effectiveness of our operating and administrative systems; our ability to attract and the additional costs of attracting and retaining administrative, operational and professional employees; shortages of qualified therapists and other healthcare personnel;

significant increases in health, workers compensation and professional and general liability costs; litigation risks of our past and future business, including our ability to predict the ultimate costs and liabilities or the disruption of our operations; competitive and regulatory effects on pricing and margins; our ability to effectively respond to fluctuations in our census levels and number of patient visits; the proper functioning of our information systems; natural disasters and other unexpected events which could severely damage or interrupt our systems and operations; and general and economic conditions, including efforts by governmental reimbursement programs, insurers, healthcare providers and others to contain healthcare costs.

INTRODUCTION AND WELCOME

Good morning and thank you for joining us today. I’m John Short, President and CEO of the Company. Joining me from management are: Tom Davis, Executive Vice President and Chief Development Officer; Pat Henry, Executive Vice President, Traditional Business; Scott Jones, Symphony’s President and CEO; Jay Shreiner, Chief Financial Officer; Don Adam, Senior Vice President, Acquisitions; David Groce, Senior Vice President and General Counsel; Jeff Zadoks, Corporate Controller; and Betty Cammarata, Director of Investor Relations. We will be available during the question and answer period following our formal remarks.

I would like to welcome our new colleagues joining us for the first time from Symphony Health Services, Louisiana Specialty Hospital in New Orleans and RehabCare Rehabilitation Hospital–Permian Basin in Midland, Texas, representing the three strategic acquisitions we completed over the past quarter. We look forward to the significant contributions each of these operations will bring RehabCare as we continue

to deliver on our strategy of creating continuums of post acute care in key geographic markets throughout the United States.

With these three acquisitions, we have completed the most productive strategic period in the Company’s history accelerating our continuum strategy in over 50 markets and providing us the opportunity to gain efficiencies and economies of scale throughout our service network. While we will continue to be active in pursuing joint venture and other partnership opportunities, we will now turn our focus to integrating these new businesses to maximize their profitability.

In the month since we closed on the Symphony purchase, we have had many early successes in our efforts to generate cost synergies in our back office functions, while investing heavily in communications and planning to ensure that the cultural and organizational integration have proceeded smoothly. These include the integration of all payroll processing, the transfer of all accounts payable activities, and, most importantly, finalizing our organizational and people plans. We have also identified opportunities to accelerate and increase synergies from the integration process. Primarily as a result of an acceleration of the point of service technology roll-out plan, we now expect to achieve synergies in the range of $10-$14 million, up from our earlier estimates of $8-$12 million, within an 18-month period, compared to our earlier projection of 24 months. Symphony’s Polaris and VTA divisions continue to perform as expected.

At the same time, we have encountered some obstacles that will result in short term declines in Symphony’s RehabWorks division operating performance. Specifically we anticipated

we could convert their time keeping and management reporting systems to our PROMOS operating system on July 1. After extensive testing and analysis we determined we will need most of the third quarter to shift these functions onto our systems and that it is critical that we begin moving their therapists onto our hand-held point of service technology much more rapidly than anticipated. Secondly, we have instituted training programs in support of new field processes. These activities, when combined with the transition issues associated with a transaction of this size and scope, will negatively impact therapist productivity and also result in short term interruption of field level management tools for the RehabWorks locations. Our management team has been re-budgeting the entire 500 plus RehabWorks sites to ensure we minimize the disruption, facilitate the introduction of our new systems and processes, and identify operational synergies in the markets where we overlap. This re-budgeting process will continue over the next several weeks.

With all of these factors considered, we now expect some dilution to our earnings over the balance of the year. The third quarter performance will be most affected by these issues with anticipated improvement in the fourth quarter.

Now I would like to turn to our second quarter operating performance beginning with our freestanding hospital division.

Freestanding Hospitals

Less than one year ago, we formed this division with the acquisition of four MeadowBrook hospitals. Since then, we have acquired the Louisiana Specialty Hospital, located in West Jefferson Medical Center, where we also manage one ARU, three outpatient sites and four contract therapy sites

further enhancing our continuum of care in New Orleans. We have also acquired the RehabCare Rehabilitation Hospital-Permian Basin in Midland, Texas, where we have provided management and therapy services since 1988. We also operate two outpatient and two contract therapy sites in this continuum market. This expands the division to seven wholly owned freestanding hospitals. Our eighth hospital, Northwest Texas Rehabilitation Hospital, in Amarillo, is under construction and expected to open in October. With the addition of Midland and Amarillo, the division will have annualized net operating revenues approaching $100 million in 2007. In addition, we operate a 40% owned joint venture rehab hospital in Kokomo, Indiana.

I am excited to report that this division generated positive operating profit, inclusive of corporate overhead allocations. These positive results are ahead of our prior expectations and we now expect the division, including start-up costs for Midland in the third quarter and Amarillo in the fourth quarter, to be accretive for the full year of 2006. The improved sequential performance is attributable to stabilization and growth of average patient census throughout our portfolio of hospitals.

We will continue to actively pursue joint ventures and acquisitions of freestanding facilities, which will solidify our geographic post-acute continuums of care. Our pipeline of potential joint ventures remains robust with 13 letters of intent that remain active and several additional pre-LOI opportunities under review.

Turning to Hospital Rehabilitation Services,

As we told you last quarter, despite the one year extension of the phase-in of the 75% Rule, in the near term we expect

the rule to continue to create downward pressure on same store discharges. Sequentially, we experienced a 0.7 percent decline in ARU same store patient discharges. On a year to date basis, ARU same store discharges have declined 2.6 percent compared to the prior year, in line with our expectations. At June 30, the average compliance of all of our units was 65%. We saw growth in same store 75% compliant admissions of 0.8% sequentially and 4.7% compared to the year ago quarter. All our units are operating in their 60% compliance period through June 30, 2007.

Operation enhancement reviews performed in the second quarter on a subset of our facilities identified opportunities to increase the number of compliant cases admitted from our host hospitals. These initiatives have proven effective through a combination of education and process improvements in our admissions teams where implemented. As a result, over the next 12 months, we are expanding these initiatives with the expectation of growing our base of compliant acute rehab admissions. We believe we continue to perform significantly better than others in the industry in mitigating the impact of the rule.

Contract Therapy

In our contract therapy division, as expected, we achieved a gradual recovery sequentially from the significant negative impact of the Part B therapy caps. Since the automatic exception process was issued in mid-February, we saw a steady recovery in our Part B revenues and by the quarter end Part B revenues had recovered to approximately 95% of the pre-cap levels when measured on a same store basis. Part A to Part B revenue mix had also recovered to pre-cap levels. Sequentially, operating profit improved, but not to historical pre-cap levels, as the recovery was not complete until the end of the quarter. Symphony’s RehabWorks division

has recovered similarly. During the cap recovery process, additional non-patient care therapist time was required to restore Part B services to appropriate levels. With the lion's share of this behind us, we have placed a renewed focus on productivity management through close scrutiny of daily patient care time.

We have implemented a revised wage adjustment approval process and have modified salary guidelines for all new hires. In addition, as we did last year, we will continue our pricing initiatives to include the 3.1% market basket increase recently released by CMS. The combination of these efforts will continue to drive lower cost per minute of therapy service delivered.

Jay Shreiner, will review our financial results for the quarter.

Thank you, John,

Net revenues for the first quarter of 2006 increased 17.8% to $127.7 million compared to $108.4 million in the same quarter last year and increased 4.9% from the first quarter of 2006. The year-over-year increase resulted primarily from our August 2005 acquisition of the assets of MeadowBrook Healthcare combined with the start-up of our Arlington, Texas facility in December 2005, and the subsequent acquisition of Louisiana Specialty Hospital in New Orleans in June 2006. In addition, Contract Therapy revenues increased as the division operated on average approximately 6 percent more locations. The revenue increase was partially offset by the negative influence of the Part B therapy caps.

Net income declined to $3.5 million in the second quarter of 2006 compared to $5.5 million a year ago but improved from a

net loss of $0.6 million in the first quarter of 2006. This loss included a $2.8 million loss on the write-off of our investment in InteliStaf. The key drivers of the second quarter 2006 results were strong performance of the freestanding hospital division, gradual recovery from the Part B therapy caps in contract therapy, continued pressure on therapist labor costs in both contract therapy and HRS as a result of a tight labor market, sequentially lower legal costs although they remained at elevated levels compared to the year ago period, and $0.6 million of pre-tax stock based compensation.

Earnings per share on a diluted basis for the quarter were $0.20, inclusive of $0.02 of net expense for stock-based compensation, compared to diluted earnings per share of $0.32 last year and a loss of $0.03 in the previous quarter.

Net revenues for Contract Therapy division were $63.1 million, an increase of 9.4% from $57.6 million in the second quarter of 2005. This year-over-year increase in revenue was driven by increases in the average number of locations and the improved rates resulting from the division’s third and fourth quarter 2005 pricing initiatives. Same store revenue growth was 2.1 percent down from the high single digit historical same store growth rates due to the effects of the Part B caps.

Sequentially, revenues grew 9.8%. This increase was driven by both Part B recovery initiatives and a 5.5% increase in the average number of locations. Same store revenue grew 4.2%.

Operating earnings for the division were $0.7 million in the second quarter of 2006 compared to operating earnings in the prior year second quarter of $3.2 million. Despite the

recovery from the impact of the Part B therapy cap which occurred progressively throughout the quarter, lower therapist productivity combined with higher wage rates resulted in a year-over-year increase of 9% in labor and benefit costs per minute of therapy service.

Sequentially, operating earnings increased to $0.7 million from a loss of $1.3 million as Part A and Part B revenue mix improved throughout the quarter and labor and benefit costs per minute of therapy stabilized. Average hourly wage rates increased at an annualized rate of 1.5% during the quarter down substantially from first quarter’s annualized hourly rate increase of 7.7%.

The division finished the second quarter with 793 locations compared to 764 at both June 30, 2005 and March 31, 2006. We added 47 new locations during the quarter and closed 18. Of the closures, nine were for payment reasons or because they were unprofitable; one facility took their therapy program in-house; one client was lost due to a change in ownership; and seven clients chose to work with other vendors. The division’s backlog stood at 25 at the end of the quarter, down from 38 at the end of the prior quarter.

Second quarter HRS revenues were $45.2 million, a decline of 5.9% compared with last year’s second quarter at $48.0 million, and a decline of 2.7% on a sequential basis. Operating earnings for the division, declined to $4.7 million compared to $6.7 million in the prior year quarter, and $5.5 million last quarter.

Year-over-year HRS operating revenues decreased as a result of a 3.8 percent decline in the average number of locations operated and pricing pressure experienced on certain contract renewals. Year-over-year inpatient contracts declined as a

result of a net reduction of five VitalCare contracts, five hospital-based skilled nursing units and one ARU.

Same store ARU discharges were down 4.0% year-over-year but only 0.7% sequentially. The negative impact of the 75% rule has been mitigated by the one-year delay in the phase-in of the rule and our continued efforts to identify additional qualifying patients by expanding our network of referral sources. We continue to expect a full year-over-year negative impact of 1-3% on same store discharges.

Second quarter HRS operating earnings were negatively impacted by increases in both internal and contract labor costs for therapists. Inpatient labor and benefit costs per discharge increased 5.3 percent compared to second quarter 2005 and outpatient labor and benefit costs per unit of service increased 8.7 percent. In addition, while second quarter 2006 legal fees associated with certain previously reported legal proceedings declined sequentially as expected, they remained approximately $0.3 million higher than the second quarter of 2005.

The division finished the quarter with 175 programs, a net decline of two sequentially, which is comprised of five openings, five closures and two conversions in connection with our Midland transaction. Of the five new openings, three were ARUs, and two were outpatient units. Of the five closures, one was an ARU, one was a subacute unit, and three were outpatient units. Two chose to close their units and three chose to self operate. The division’s backlog was nine at the end of the quarter, which included four ARU’s, two outpatient units, and three subacute units. This is an increase of two from the first quarter backlog.

Our HRS business development activities generated the signing

of five acute rehab units, and two outpatient units in the second quarter. The Company now anticipates the number of HRS programs and ARU’s will remain flat during 2006.

Freestanding Hospitals reported net revenues of $16.9 million, and operating earnings of $0.5 million for the quarter, sequential improvements from first quarter 2006 net revenues of $15.2 million and operating losses of $0.3 million, respectively. This sequential revenue and operating profit improvement is attributable to improved patient census across the division. These improvements were enhanced by the contribution margin generated by Louisiana Specialty Hospital which was acquired on June 1.

Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123R which requires the recognition of compensation expense for all share-based compensation awarded to employees, net of estimated forfeitures, using a fair value based method. During the second quarter of 2006, we recognized after tax share based compensation expense of approximately $0.4 million bringing the year-to-date amount to approximately $0.7 million, or $0.02 and $0.04 per diluted share respectively.

At June 30, we had $8.2 million in cash and cash equivalents. In addition, we had $101.5 million of restricted cash which was held in escrow at June 30 in order to effect the acquisition of Symphony on July 1. We had $100 million of borrowings against our newly amended revolving credit facility in order to fund the Symphony purchase escrow account. On June 16, our credit facility was increased to a capacity of $175 million and can be further expanded to $225 million upon our request and the approval of our bank group. We also had $9.1 million in subordinated long-term debt

related to other acquisitions. Days sales outstanding increased sequentially by 0.8 days to 67.0 days from 66.2 days primarily due to a shift to more contract therapy receivables which have longer collection cycles. Cash flow from operations was $4.6 million for the second quarter 2006 while capital expenditures were $3.3 million.

Now I will turn the call back over to John.

Thank you, Jay.

Closing Remarks

This week, we are saying good-bye to Ed Trusheim, who is retiring from our Board having served as a director since 1992 and as the Company’s Chairman of the Board since 1998. During that time, Ed has provided exemplary leadership as the Company has grown from a single service-line business with $45 million in annual revenues to a provider of services throughout the full post acute continuum of care with annualized revenues of more than $500 million. I want to personally thank Ed for his unwavering commitment to the Company and the friendship and counsel he has provided over the years and for his willingness to extend his tenure as Chairman to ensure the smoothest possible transition to the next generation of Board leadership.

With Ed’s departure, the board has chosen Harry Rich as Chairman. Harry brings a wealth of fiscal and operational experience in a wide variety of industries and the ideal balance of business knowledge and responsible leadership for a company focused on progressive growth in a complex operating environment.

In closing, our management team is committed to delivering the following results:

Further develop the post acute continuums in the 50 existing markets where we have significant market presence and opportunity in post acute care.

Complete the Symphony integration plan and deliver the $12-14 million in cost savings as rapidly as possible.

Raise our total Contract Therapy operating margins back to our historical 5-6%.

Increase the number of 75% compliant acute rehab discharges in our ARU’s.

Continue to expand our Freestanding Hospital division through the development of 5-7 joint ventures and/or wholly owned hospitals each year.

I’m confident we will accomplish these objectives because we have 15,000 dedicated healthcare professionals, among the best and brightest in the country, working everyday to achieve our vision of helping patients regain their lives.

With that, I would like to have our operator open the call for questions.

To be read following Questions and Answers –

As a reminder, this conference call is being webcast live on our web site, www.rehabcare.com and will be available for replay beginning at 1:00 Eastern time today. For your reference, we continue to provide the statistics section on our web site offering quarterly historical statistics for each of our operating divisions for the past few years. We invite you to view this information and hope it will be useful to you.