8-K

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): October 29, 2008

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 October 29, 2008, announcing our third quarter revenues and results of operations.
	99.2	The script for a conference call held by the registrant on October 29, 2008

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: October 29, 2008

REHABCARE GROUP, INC.

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

EXHIBIT INDEX

Exhibit No.	Description
99.1	Press release dated October 29, 2008, announcing our third quarter 2008 revenues and results of operations.
99.2	The script for a conference call held by the registrant on October 29, 2008

EX-99.1

Exhibit 99.1

CONTACT: RehabCare Group, Inc.

Financial: Jay W. Shreiner,

Chief Financial Officer

Press: Donna Lee, Office of the CEO

(314) 863-7422 or

FD, Gordon McCoun/Theresa Kelleher

(212) 850-5600

FOR IMMEDIATE RELEASE

Wednesday, October 29, 2008

REHABCARE REPORTS THIRD QUARTER 2008 RESULTS

·   Contract Therapy hits 6.2% operating margin and Hospital Rehabilitation Services achieves 15% operating margin despite impact of hurricanes and therapy caps; Company raises earnings expectations for both divisions

·   Hospital division reports $5.5 million operating loss, anticipates improvement in the fourth quarter

·   Debt is reduced by $19 million and balance sheet remains strong in a volatile financial market

ST. LOUIS, MO, October 29, 2008--RehabCare Group, Inc. (NYSE:RHB) today reported financial results for the quarter and nine months ended September 30, 2008. Comparative results for the quarter and nine months follow.

	Third			Second			Third			Nine Months Ended
	Quarter			Quarter			Quarter			September 30,
Amounts in millions, except per share data	2008			2008			2007				2008			2007
Consolidated Operating Revenues	$	182.6		$	183.9		$	170.7		$	548.9		$	532.8
Consolidated Operating Earnings  (a)		7.0			7.7			8.2			23.3			19.5
Consolidated Earnings from Continuing Operations, Net of Tax		4.2			4.6			3.9			13.5			8.5
Loss from Discontinued Operations, Net of Tax		(0.2	)		(0.1	)		-			(0.5	)		(0.9	)
Consolidated Net Earnings		4.0			4.5			3.9			13.0			7.6
Consolidated Diluted Earnings per Share		0.22			0.25			0.22			0.73			0.43
Minority Interests in Net Losses of Consolidated Affiliates		0.6			0.6			0.1			1.3			0.2
Contract Therapy Operating Revenues		105.6			106.3			98.3			316.2			301.4
Contract Therapy Operating Earnings		6.6			5.6			3.2			16.0			2.1
HRS Inpatient Operating Revenues		30.8			29.9			29.5			90.4			92.2
HRS Outpatient Operating Revenues		10.8			10.3			10.8			31.6			33.1
HRS Operating Revenues		41.6			40.2			40.3			122.0			125.3
HRS Operating Earnings		6.2			5.3			6.3			16.2			16.9
Hospital Operating Revenues		27.5			27.2			22.2			82.2			72.2
Hospital Operating Loss  (a)		(5.5	)		(3.5	)		(1.6	)		(9.1	)		(1.3	)
Other Operating Revenues		8.4			10.8			10.2			30.2			34.5
Other Operating Earnings (Loss)		(0.3	)		0.3			0.4			0.3			1.9

(a)  Includes a pretax impairment charge on a Louisiana Specialty Hospital intangible asset of $4.9 million,

or $0.17 per diluted share after tax,in the nine months ended September 30, 2007.

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REHABCARE REPORTS THIRD QUARTER 2008 RESULTS                            Page 2

“Our two mature businesses performed very well in the third quarter despite the effects of two major hurricanes and the temporary imposition of Part B Therapy Caps,” said John H. Short, Ph.D., RehabCare President and Chief Executive Officer.  “The hurricanes had an estimated $1 million impact on operating earnings, and the disruption of therapy caps during the first two weeks of July impacted productivity and revenue in our largest division, Contract Therapy (CT).  The impact of these events was offset by reductions in our self-insurance costs, bad debt expense and management incentives.  Both our CT and Hospital Rehabilitation Services (HRS) divisions posted another quarter of margin improvement, once again demonstrating our ability to effectively manage and quickly recover from external challenges to our operations.”

Dr. Short continued, “While not reflected in third quarter results, we are beginning to gain some traction towards our objectives for the Hospital division.  In the third quarter, operating earnings were impeded by the temporary evacuation of two facilities during the recent hurricanes, continued start-up losses, and sluggish operating performance in several mature facilities.  However, we continue to implement an action plan to turn around this business segment.”   

He added, “While many companies struggle with the global credit crisis, our balance sheet remains strong.  In the third quarter, cash flow from operations and the sale of our Midland, TX hospital funded a $19 million reduction in debt.”

Financial Overview of Third Quarter

Operating revenues for the third quarter of 2008 were $182.6 million compared to $183.9 million in the second quarter of 2008, a decrease of $1.3 million, or 0.7%.

Net earnings from continuing operations for the third quarter of 2008 were $4.2 million compared to $4.6 million in the second quarter of 2008.  The Company incurred a loss from discontinued operations in Midland, TX, net of tax, of $0.2 million in the third quarter of 2008, inclusive of lease and other exit costs.

Consolidated net earnings were $4.0 million in the third quarter of 2008 compared to $4.5 million in the second quarter of 2008.  Earnings per share on a fully diluted basis for the third quarter of 2008 were $0.22 compared to $0.25 in the previous quarter.  Earnings from continuing operations were $0.24 and $0.26 respectively.

The Contract Therapy division’s operating revenues for the third quarter of 2008 decreased $0.7 million to $105.6 million, compared to $106.3 million in the second quarter of 2008 primarily due to the impact of the Part B Therapy Caps and hurricanes.  Same store revenues fell by 0.4% while the average number of locations operated in the current quarter increased by 1.0%.  The number of locations increased from 1,053 to 1,075 during the quarter.  The Company signed contracts for 53 new client locations in the third quarter.  The number of signed but unopened contracts stood at 19 at the end of the quarter.

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REHABCARE REPORTS THIRD QUARTER 2008 RESULTS                            Page 3

The division’s operating earnings were $6.6 million, or 6.2% of revenue, compared to $5.6 million, or 5.3% of revenue, in the second quarter of 2008.

The Hospital Rehabilitation Services division’s third quarter operating revenues increased 3.4% to $41.6 million, compared to $40.2 million in the second quarter of 2008.  Sequentially, inpatient operating revenues improved 3.1% as the average number of programs operated in the current quarter increased by 1.8% and same store acute discharges increased 1.7%. Outpatient operating revenues increased 4.3%.

At September 30, 2008, HRS operated 156 programs compared to 154 programs at June 30, 2008.  The division had two inpatient rehabilitation facility (IRF) signings in the third quarter and three IRF openings. At September 30, the number of signed but unopened IRF contracts stood at five, three of which are expected to open in the fourth quarter of 2008.

Division operating earnings increased by $0.9 million to $6.2 million, or 15.0% of revenue, in the third quarter of 2008 compared to $5.3 million, or 13.2% of revenue, in the second quarter of 2008.

Net revenues in the Hospital division for the third quarter of 2008 increased 1.2% to $27.5 million, compared to $27.2 million in the previous quarter.  The division operated a total of ten hospitals at September 30, 2008, five of which were rehabilitation hospitals and five long-term acute care hospitals (LTACHs).

The division managed its rehab hospitals to an average 60% Rule compliance level of 59.4% at the end of the quarter.

The division incurred an operating loss of $5.5 million in the third quarter of 2008 compared to an operating loss of $3.5 million in the previous quarter.  The $2.0 million sequential decline primarily resulted from $2.2 million lower earnings from same store hospitals, driven by an estimated $0.6 million decline due to the hurricanes and lower patient revenue in certain markets.  This same store hospital decline was partially offset by a $0.7 million increase from a full quarter of operations for The Specialty Hospital in Rome, Georgia.  In addition, the division was impacted by a $0.5 million increase in start-up losses, most of which relates to Northland LTAC Hospital, which opened in April.  Northland is expected to end its Medicare mandated length-of-stay demonstration period on December 1.

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REHABCARE REPORTS THIRD QUARTER 2008 RESULTS                            Page 4

Balance Sheet

At September 30, 2008, the Company had approximately $12.4 million in cash and cash equivalents and $52.0 million in outstanding debt.  The Company has fixed the interest rate on $25 million of this debt at 4% plus spread through December 2009.  Days sales outstanding increased sequentially from 69.6 days at June 30, 2008 to 70.1 days at September 30, 2008.  For the nine months ended September 30, 2008, the Company generated cash from operations of $32.0 million and expended approximately $12.7 million for capital expenditures, including $9.6 million in the Company’s Hospital division, primarily on developing joint ventures.  The remaining $3.1 million of capital expenditures was principally related to information systems.

Legislative Update

The Company is actively pressing its trade groups toward finalizing an alternative to the therapy cap exception process set to expire in December of 2009. In addition, it is working collaboratively with industry colleagues on shared concerns, such as Recovery Audit Contractor (RAC) audits, which often adversely affect the post-acute industry. Other issues, such as the physician fee schedule, CMS-required studies on IRF and LTACH admission criteria and healthcare reform proposals also will be part of the Company’s 2009 initiatives.

Outlook

The Company will not be providing revenue and earnings per share guidance for the fourth quarter of 2008, but provides the following:

·   The CT division continues to expect a modest net increase in the number of units for the remainder of the year, and in light of its operating performance over the last two quarters, has raised its operating earnings margin expectations to a range of 5.5 to 6.5% for the fourth quarter.

·   The HRS division expects a modest increase in units as well and has raised its operating earnings margin target to 13 to 16% from 12 to 15% for the fourth quarter.  Year-over-year growth in same store discharges for the fourth quarter 2008 is expected to remain within the 3 to 5% range, similar to the third quarter 2008 performance.

·   The Hospital division expects an operating loss of $3.7 to $4.7 million, which includes start-up and ramp-up losses associated with Northland LTAC and St. Luke’s Rehabilitation Hospitals, in the fourth quarter.

·   The Company expects capital expenditures in the fourth quarter of 2008 of approximately $8.5 million (includes the purchase of the Rehabilitation Hospital of Rhode Island), of which approximately $6 million relates to hospital strategic and maintenance capital.

·   The Company continues to expect its effective tax rate to approximate 39% for 2008.

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REHABCARE REPORTS THIRD QUARTER 2008 RESULTS                            Page 5

Conclusion

Dr. Short concluded, “Given our continued improving performance in the face of recent challenges, we have raised our operating earnings margin targets for the fourth quarter in both our CT and HRS divisions.

“While the turmoil on Wall Street has had far-reaching effects, we are well positioned to persevere in the face of global economic issues and prolonged credit tightness.  In our 26 years, we’ve built a flexible business model and strong financial platform to outlast uncertain times.”

About RehabCare Group

Established in 1982 and headquartered in St. Louis, MO, RehabCare (www.rehabcare.com) is a leading provider of rehabilitation program management services in partnership with over 1,200 hospitals and skilled nursing facilities in 43 states.  The Company also operates freestanding rehabilitation hospitals and long-term acute care hospitals across the country.  RehabCare is 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 A.M. Eastern time today.  An online replay will be available until November 19, 2008. A telephonic replay of the call will be available beginning at approximately 1:00 p.m. Eastern Time today.  The dial-in number for the replay is (630) 652-3041 and the access code is 22855235.

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. Such statements are based on the Company’s current expectations and could be affected by numerous factors, risks and uncertainties discussed in the Company’s filings with the Securities and Exchange Commission, including the Company’s most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. Do not rely on forward looking statements as the Company cannot predict or control many of the factors that ultimately may affect the Company’s ability to achieve the results estimated.  The Company makes no

promise to update any forward looking statements whether as a result of changes in underlying factors, new information, future events or otherwise.

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REHABCARE REPORTS THIRD QUARTER 2008 RESULTS                            Page 6

I. Condensed Consolidated Statements of Earnings
(Unaudited; amounts in thousands, except per share data)
	Three Months Ended									Nine Months Ended
	Sept. 30,			June 30,			Sept. 30,			Sept. 30,			Sept. 30,
		2008			2008			2007			2008			2007
Operating revenues	$	182,626		$	183,919		$	170,684		$	548,919		$	532,799
Costs & expenses
Operating		149,925			149,453			138,327			446,484			431,980
Selling, general & administrative:
Divisions		11,687			12,383			10,761			35,792			34,170
Corporate		10,430			10,744			9,334			32,432			29,894
Impairment of intangible asset		-			-			-			-			4,906
Depreciation & amortization		3,596			3,638			4,029			10,905			12,316
Total costs & expenses		175,638			176,218			162,451			525,613			513,266
Operating earnings, net		6,988			7,701			8,233			23,306			19,533
Interest income		29			38			38			104			780
Interest expense		(847	)		(1,006	)		(2,077	)		(3,152	)		(6,653	)
Other income (expense), net		(4	)		25			18			24			(43	)
Equity in net income of affiliates		143			140			79			441			168
Minority interests		612			647			131			1,339			157
Earnings from continuing operations before income taxes		6,921			7,545			6,422			22,062			13,942
Income tax expense		2,699			2,942			2,484			8,604			5,402
Earnings from continuing operations		4,222			4,603			3,938			13,458			8,540
Loss from discontinued operations		(224	)		(107	)		(28	)		(456	)		(982	)
Net earnings	$	3,998		$	4,496		$	3,910		$	13,002		$	7,558
Diluted earnings per share	$	0.22		$	0.25		$	0.22		$	0.73		$	0.43
Weighted average diluted shares		17,824			17,737			17,443			17,773			17,381

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REHABCARE REPORTS THIRD QUARTER 2008 RESULTS                            Page 7

II. Condensed Consolidated Balance Sheets
(Amounts in thousands)
	Unaudited
	September 30,		December 31,
	2008		2007
Assets
Cash and cash equivalents	$	12,405	$	10,265
Accounts receivable, net		139,320		135,194
Deferred tax assets		13,977		15,863
Other current assets		8,597		7,892
Total current assets		174,299		169,214
Property and equipment, net		34,623		29,705
Goodwill		171,313		168,517
Intangible assets		23,388		28,027
Investment in unconsolidated affiliate		4,742		4,701
Other assets		7,588		8,396
	$	415,953	$	408,560
Liabilities & Stockholders’ Equity
Current portion of long-term debt	$	7,000	$	9,500
Payables & accruals		88,564		79,429
Total current liabilities		95,564		88,929
Long-term debt, less current portion		45,000		65,000
Other non-current liabilities		10,627		9,342
Minority interest		3,391		1,267
Stockholders’ equity		261,371		244,022
	$	415,953	$	408,560

III. Condensed Consolidated Statements of Cash Flows
(Unaudited; amounts in thousands)
	Nine Months Ended
	September 30,
	2008			2007
Net cash provided by operating activities	$	32,000		$	30,854
Net cash used in investing activities		(12,528	)		(7,904	)
Net cash provided used in financing activities		(17,332	)		(18,177	)
Net increase in cash and cash equivalents		2,140			4,773
Cash and cash equivalents at beginning of period		10,265			9,430
Cash and cash equivalents at end of period	$	12,405		$	14,203
Supplemental information:
Additions to property and equipment	$	(12,689	)	$	(6,463	)

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REHABCARE REPORTS THIRD QUARTER 2008 RESULTS                            Page 8

IV. Operating Statistics
(Unaudited; dollars in thousands)
		Third			Second			Third		Nine Months Ended
		Quarter			Quarter			Quarter		September 30,
		2008			2008			2007			2008			2007
Contract Therapy
Operating revenues	$	105,572		$	106,304		$	98,274		$	316,156		$	301,381
Operating expenses		86,535			87,624			81,713			260,752			256,151
Division SG&A		5,304			6,112			5,575			17,275			17,630
Corporate SG&A		5,632			5,359			5,796			17,326			19,271
Depreciation and amortization		1,534			1,604			2,035			4,808			6,276
Operating earnings	$	6,567		$	5,605		$	3,155		$	15,995		$	2,053
Operating earnings margin		6.2	%		5.3	%		3.2	%		5.1	%		0.7	%
Average number of locations		1,071			1,061			1,106			1,062			1,140
End of period number of locations		1,075			1,053			1,085			1,075			1,085
Hospital Rehabilitation Services
Operating revenues
Acute	$	28,405		$	27,482		$	26,899		$	83,207		$	84,484
Subacute		2,395			2,398			2,613			7,232			7,709
Total Inpatient	$	30,800		$	29,880		$	29,512		$	90,439		$	92,193
Outpatient		10,791			10,344			10,774			31,557			33,150
Total HRS	$	41,591		$	40,224		$	40,286		$	121,996		$	125,343
Operating expenses		29,302			28,306			27,980			86,797			88,812
Division SG&A		3,419			3,657			3,028			10,445			10,443
Corporate SG&A		2,029			2,274			2,038			6,568			6,032
Depreciation and amortization		612			676			931			2,008			3,155
Operating earnings	$	6,229		$	5,311		$	6,309		$	16,178		$	16,901
Operating earnings margin		15.0	%		13.2	%		15.7	%		13.3	%		13.5	%
Average number of programs
Acute		109			107			109			107			112
Subacute		14			13			15			14			16
Total Inpatient		123			120			124			121			128
Outpatient		33			33			35			33			35
Total HRS		156			153			159			154			163
End of period number of programs
Acute		110			107			108			110			108
Subacute		13			14			14			13			14
Total Inpatient		123			121			122			123			122
Outpatient		33			33			32			33			32
Total HRS		156			154			154			156			154
Acute patient days		129,783			126,043			126,608			383,812			393,855
Subacute patient days		35,071			32,945			34,672			102,012			101,085
Total patient days		164,854			158,988			161,280			485,824			494,940
Acute discharges		10,569			10,309			10,173			31,154			32,052
Subacute discharges		870			734			754			2,399			2,429
Total discharges		11,439			11,043			10,927			33,553			34,481
Outpatient visits		238,624			241,478			250,933			720,012			777,439
Hospitals
Operating revenues	$	27,513		$	27,197		$	22,163		$	82,183		$	72,209
Operating expenses		28,095			25,701			20,965			77,032			60,828
Division SG&A		1,284			1,195			747			3,467			1,946
Corporate SG&A		2,334			2,601			1,112			7,120			3,336
Impairment of intangible asset		-			-			-			-			4,906
Depreciation and amortization		1,317			1,227			937			3,694			2,512
Operating earnings (loss)	$	(5,517	)	$	(3,527	)	$	(1,598	)	$	(9,130	)	$	(1,319	)
Operating earnings margin		-20.1	%		-13.0	%		-7.2	%		-11.1	%		-1.8	%
End of period number of facilities		10			10			8			10			8
Patient days		24,393			23,766			21,765			71,790			64,560
Discharges		1,492			1,467			1,241			4,451			3,701

-END-

EX-99.2

Exhibit 99.2

REHABCARE CONFERENCE CALL SCRIPT

October 29, 2008

INTRODUCTION BY CONFERENCE OPERATOR

INTRODUCTION OF MANAGEMENT BY FD

    This conference call contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on the Company’s current expectations and could be affected by numerous factors, risks and uncertainties discussed in the Company’s filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. Do not rely on forward looking statements as the Company cannot predict or control many of the factors that ultimately may affect the Company’s ability to achieve the results estimated.  The Company makes no promise to update any forward looking statements whether as a result of changes in underlying factors, new information, future events or otherwise.

JOHN SHORT

INTRODUCTION AND WELCOME

Good morning and thank you for joining us today.  I’m John Short, President and CEO of the Company.  With me are Jay Shreiner, Chief Financial Officer, and the members of my executive management team, all of whom will be available to answer your questions at the conclusion of our remarks.

Our mature businesses performed very well in the third quarter despite the impact of the legislative delay in extending the Part B therapy cap exceptions process and the recent hurricanes.  The hurricanes had an estimated $1 million impact on operating earnings, and the disruption of therapy caps during the first two weeks of July impacted productivity and revenue in our Contract Therapy (CT) division.  The impact of these events was offset by reductions in our self-insurance costs, bad debt expense and management incentives.

Our CT division posted an operating earnings margin of 6.2% in the third quarter, and our Hospital Rehabilitation Services (HRS) division improved revenue and profit performance across the board, achieving a 15% operating margin for the quarter.

As pleased as we were with the performance of CT and HRS, we were obviously disappointed by the Hospital division’s third quarter results.  The division reported a 2.0 million dollar sequential decline in earnings, in part due to the estimated 600,000 dollar impact of the hurricanes.  We continue to implement an action plan to turn around this business segment through a combination of strengthening our field management, centralizing business functions, trimming overhead, ramping up market development efforts and reevaluating our development pipeline.

In the third quarter, we used our cash flow from operations, in addition to the proceeds from the sale of RehabCare Rehabilitation Hospital in Midland, Texas, to pay down 19 million dollars in outstanding debt, reducing it to 52 million dollars.

Now, let me give you some other highlights of the quarter as they pertain to our core operating segments.

Operating revenues in our Contract Therapy division declined by 0.7 percent from the second quarter and same store revenues fell by 0.4 percent, a result of programs operating under the constraints of therapy caps in the first two weeks of July, as well as the evacuation of several client facilities during the hurricanes.  However, the division had a net gain of 22 units and signed 53 new contracts in the third quarter, proving the validity of our business development and client retention strategies for a second straight quarter.

The division achieved operating margins of 6.2 percent, above our targeted range of 4.5 to 5.5 percent.  Believing the improvements in operating earnings over the last two quarters are sustainable, we are raising our margin expectations to a range of 5.5 to 6.5 percent for the fourth quarter.

Inpatient and outpatient operating revenues in our Hospital Rehabilitation Services division sequentially improved 3.1 percent and 4.3 percent respectively, for a division revenue increase of 3.4 percent over the second quarter.  Fueling this was a sequential 1.7 percent increase in same store acute discharges.  For the fourth quarter, we expect to remain within the 3 to 5 percent range for growth in year-over-year same store discharges.

At the end of the third quarter, we operated 156 programs, compared to 154 at the end of the second quarter.  There was a net addition of three inpatient rehabilitation facilities (IRFs), bringing the total number to 110, while outpatient units remained stable at 33.  We closed one subacute unit during the quarter, bringing the current number to 13.  We signed two new IRF clients and opened three new IRFs in the third quarter. At September 30, the number of signed but unopened IRF contracts stood at five, three of which are expected to open in the fourth quarter.

Operating earnings margins improved to 15 percent, at the high end of our 12 to 15 percent targeted range.   We are raising our margin expectations for HRS to between 13 and 16 percent in the fourth quarter.

Operating earnings in our Hospital division were, once again, unfavorably affected by start-up losses in the third quarter, which totaled 1.9 million dollars.  Earnings also were impacted by disrupted operations in our Clear Lake and Louisiana Specialty Hospitals following the hurricanes, among other factors.

Net revenues in the division increased 1.2 percent over the previous quarter, reflecting a full quarter of operations at The Specialty Hospital in Rome, Georgia, which we acquired June 1.  At the end of the third quarter, we were operating a total of ten hospitals, five rehabilitation hospitals and five long-term acute care hospitals (LTACHs).  In August, HealthSouth purchased the operations of our Midland, TX hospital.

Part of our strategy entails reevaluating the risks and opportunities with our joint venture projects.  Consequently, we have canceled two projects in collaboration with our existing partners in Kokomo, Indiana, due to deteriorating market conditions and Reading, Pennsylvania, due to uncertainty surrounding the exemption from the CMS moratorium.

However, work continues on the following new hospitals:

Northland LTAC Hospital, our 35-bed hospital in North Kansas City which we opened in April, is expected to end its Medicare mandated length-of-stay demonstration period on December 1.

Construction is complete on St. Luke’s Rehabilitation Hospital, our joint venture with St. Luke’s Hospital in St. Louis, Missouri.  We look forward to the official opening of this 35-bed inpatient rehabilitation hospital next week.

Our joint venture with Landmark Health Systems, Inc., to purchase a majority interest in and operate the Rehabilitation Hospital of Rhode Island, is still awaiting approval by the state’s Attorney General as well as the state’s Department of Health.  We expect to take over operation of the existing 41-bed facility at the beginning of 2009. We also have a CON to develop a 40-bed LTACH with Landmark, which we will open in late 2009.

In the third quarter of 2009, we are scheduled to open Greater Peoria Specialty Hospital, a 50-bed LTACH we are developing in Peoria, Illinois with Methodist Medical Center.

Since completing our joint venture with Floyd Healthcare Resources on June 1, which gave us 80 percent ownership of The Specialty Hospital, a 24-bed LTACH, we have begun the development of the 45-bed replacement hospital.  This expansion is scheduled for completion in the second quarter of 2010.

We also have begun the process of an expansion and relocation of Central Texas Rehabilitation Hospital in Austin, Texas, as well as development of Central Texas Specialty Hospital, a 40-bed LTACH.  These projects are part of a joint venture with The Seton Family of Hospitals.  We anticipate completion of the relocation in the second quarter of 2010, followed by the opening of the LTACH in the third quarter of that year.

When completed, these projects will grow our Hospital division from its 10 existing hospitals to a total of 14 by the end of 2009.

Legislatively, while we enjoy a temporary reprieve from therapy caps, we are actively pressing our trade groups toward finalizing an alternative to the therapy cap exception process, which is set to expire in December of 2009. We’re also working collaboratively with industry colleagues on shared concerns, such as the Recovery Audit Contractor (RAC) audits, which often adversely affect the post-acute industry. In addition to these issues, the items we’ll be focusing on in 2009 include the physician fee schedule, CMS-required studies on IRF and LTACH patient admission criteria and healthcare reform proposals.

I’ll now turn the call over to Jay Shreiner, who will review our financial results for the quarter.

Thank you, John.

Consolidated Results

Consolidated net revenues for the third quarter of 2008 were 182.6 million dollars, compared to 183.9 million dollars in the second quarter, a 0.7 percent decline.

Net earnings from continuing operations for the third quarter were 4.2 million dollars, compared to 4.6 million dollars in the second quarter.  In the third quarter, we incurred a loss from discontinued operations in Midland, Texas, net of tax, of 224,000 dollars, which is inclusive of lease and other exit costs.

Consolidated net earnings were 4.0 million dollars, or 22 cents per diluted share, in the third quarter, compared to 4.5 million dollars, or 25 cents per diluted share, in the second quarter of 2008.  Earnings from continuing operations were 24 cents and 26 cents respectively.

Contract Therapy (CT)

Net revenues for the Contract Therapy division were 105.6 million dollars in the third quarter, a decrease from the second quarter of 700,000 dollars. Same store revenues decreased 0.4 percent, while the average number of locations increased by 1.0 percent.

The division’s operating earnings were 6.6 million dollars in the third quarter of 2008, compared to 5.6 million in the second quarter.

Hospital Rehabilitation Services

Third quarter revenues in our HRS division increased from 40.2 million dollars to 41.6 million dollars, sequentially.  Inpatient operating revenues improved from 29.9 million dollars to 30.8 million dollars, as the average number of inpatient programs operated in the third quarter increased by 1.8 percent.  Outpatient operating revenues increased from 10.3 million dollars to 10.8 million dollars sequentially.

Operating earnings for the division were 6.2 million dollars, a 17.3 percent increase from the 5.3 million dollars in the second quarter.

Hospitals

The Hospital division reported operating revenues of 27.5 million dollars, a sequential improvement of 1.2 percent. The division incurred an operating loss of 5.5 million dollars in the third quarter, compared to an operating loss of 3.5 million dollars in the previous quarter.  The 2.0 million dollar sequential decline in earnings primarily resulted from a combination of the following:

·   a 2.2 million dollar sequential decline in earnings from same store hospitals, driven by an estimated 600,000 dollar decline due to hurricanes and lower patient revenue in certain markets

·   a 700,000 dollar increase in earnings from a full quarter of operations in our Rome, Georgia hospital and

·   a 500,000 dollar increase in start-up losses, most of which relates to our LTACH in North Kansas City, Missouri

The Hospital division expects an operating loss of $3.7 to $4.7 million, including start-up and ramp-up losses associated with Northland LTAC and St. Luke’s Rehabilitation Hospitals, in the fourth quarter.

The division managed its rehab hospitals to an average 60 percent Rule compliance level of 59.4 percent at the end of the quarter.

Balance Sheet

For the nine-month period ending September 30, 2008, we generated cash from operations of 32 million dollars. We spent 12.7 million dollars for capital expenditures, including 9.6 million dollars in our Hospital division, primarily on developing joint ventures. The remaining 3.1 million dollars of capital expenditures was principally related to information systems.

Days sales outstanding in accounts receivable increased from 69.6 days at the end of the second quarter, to 70.1 days at the end of the third quarter.

At September 30, 2008, we had approximately 12.4 million dollars in cash and cash equivalents compared to 14.3 million dollars at June 30, 2008. Total debt outstanding at September 30th was 52 million dollars compared to 71 million dollars at the end of June.  We have fixed the interest rate on $25 million of this debt at four percent plus spread through December 2009.

During the fourth quarter of 2008, we expect capital expenditures of approximately $8.5 million dollars, of which approximately 6 million dollars relates to hospital strategic and maintenance capital and includes the purchase of Rehabilitation Hospital of Rhode Island.

Now I will turn the call back over to John.

JOHN SHORT

Thank you, Jay.

Closing Remarks

With no apparent external obstacles, our CT and HRS divisions have a clear path in the final stretch of 2008, and the momentum of two consecutive quarters of solid earnings performance on which to build.

The growth opportunities in these two divisions also continue to flourish and the pipeline includes some exciting prospects, such as our newly signed agreement with West Penn Allegheny Health System.  Under a comprehensive management agreement, we will oversee operations of three inpatient and three outpatient rehabilitation programs as well as provide our care management services, CareNexus, for this multi-hospital system, which serves nearly 79,000 patients each year.  This is one of our largest contract agreements to date.

Our cash position remains strong, as we continue to improve operations and pay down debt, and the diversity of our business relationship model gives us greater flexibility with potential clients and joint venture partners who are worried about economic conditions.

While the Hospital division underperformed in the third quarter, we are positioned for a better fourth quarter. Exiting two joint venture partnerships in Kokomo and Reading are examples of the tough, but necessary, decisions we are making to improve this division’s performance.

In closing, let me thank our employees in the hurricane-impacted regions who were heroic in their efforts to tend to our patients and assist our clients during the storms, as well as to quickly recover our operations in the aftermath.  Thanks to everyone for your continued support throughout 2008.

And in the spirit of the season:  I’m John Short and I approve this message.

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 PM Eastern time today.