UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number 0-19294

RehabCare Group, Inc.

(Exact name of Registrant as specified in its charter)

Delaware	51-0265872
(State of Incorporation)	(I.R.S.  Employer Identification No.)

7733 Forsyth Boulevard, 23rd Floor, St.  Louis, Missouri 63105

(Address of principal executive offices and zip code)

 (314) 863-7422

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.   Yes xNo ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company.

Large accelerated filer   ¨	Accelerated filer   x
Non-accelerated filer   ¨	Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   

Yes   ¨No   x

Indicate the number of shares outstanding of the Registrant’s common stock, as of the latest practicable date.

Class	Outstanding at October 27, 2008
Common Stock, par value $.01 per share	18,067,734 (a)

(a) Includes 420,112 shares of unvested restricted stock.

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REHABCARE GROUP, INC.

Index

Part I.  – Financial Information
	Item 1. – Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007	3
		Condensed Consolidated Statements of Earnings for the three months and nine months ended September 30, 2008 and 2007 (unaudited)	4
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)	5
		Notes to the condensed consolidated financial statements (unaudited)	6
	Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
	Item 3. – Quantitative and Qualitative Disclosures about Market Risk		29
	Item 4. – Controls and Procedures		29
Part II.  – Other Information
	Item 1. – Legal Proceedings		29
	Item 1A. – Risk Factors		30
	Item 6. – Exhibits		30
	Signatures		31

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PART 1. – FINANCIAL INFORMATION

Item 1. – Condensed Consolidated Financial Statements

REHABCARE GROUP, INC.

Condensed Consolidated Balance Sheets

(dollars in thousands, except per share data)

	September 30,			December 31,
		2008				2007
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	12,405			$	10,265
Accounts receivable, net of allowance for doubtful accounts of $17,678 and $16,266, respectively		139,320				135,194
Income taxes receivable		1,072				—
Deferred tax assets		13,977				15,863
Other current assets		7,525				7,892
Total current assets		174,299				169,214
Marketable securities, trading		2,975				3,547
Property and equipment, net		34,623				29,705
Goodwill		171,313				168,517
Intangible assets, net		23,388				28,027
Investment in unconsolidated affiliate		4,742				4,701
Other		4,613				4,849
Total assets	$	415,953			$	408,560
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	7,000			$	9,500
Accounts payable		5,858				5,825
Accrued salaries and wages		52,916				49,886
Income taxes payable		—				192
Accrued expenses		29,790				23,526
Total current liabilities		95,564				88,929
Long-term debt, less current portion		45,000				65,000
Deferred compensation		2,981				3,552
Deferred tax liabilities		7,113				5,375
Other		533				415
Total liabilities		151,191				163,271
Minority interests		3,391				1,267
Stockholders’ equity:
Preferred stock, $.10 par value; authorized 10,000,000 shares, none issued and outstanding		—				—
Common stock, $.01 par value; authorized 60,000,000 shares, issued 21,641,770 shares and 21,466,994 shares as of September 30, 2008 and December 31, 2007, respectively		216				215
Additional paid-in capital		144,664				140,246
Retained earnings		171,333				158,331
Accumulated other comprehensive loss		(138	)			(66	)
Less common stock held in treasury at cost; 4,002,898 shares as of September 30, 2008 and December 31, 2007		(54,704	)			(54,704	)
Total stockholders’ equity		261,371				244,022
Total liabilities and stockholders’ equity	$	415,953			$	408,560

See accompanying notes to condensed consolidated financial statements.

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REHABCARE GROUP, INC.

Condensed Consolidated Statements of Earnings

(in thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
		2008			2007			2008			2007
Operating revenues	$	182,626		$	170,684		$	548,919		$	532,799
Costs and expenses:
Operating		149,925			138,327			446,484			431,980
Selling, general and administrative:
Divisions		11,687			10,761			35,792			34,170
Corporate		10,430			9,334			32,432			29,894
Impairment of intangible asset		—			—			—			4,906
Depreciation and amortization		3,596			4,029			10,905			12,316
Total costs and expenses		175,638			162,451			525,613			513,266
Operating earnings		6,988			8,233			23,306			19,533
Interest income		29			38			104			780
Interest expense		(847	)		(2,077	)		(3,152	)		(6,653	)
Other income (expense)		(4	)		18			24			(43	)
Equity in net income of affiliate		143			79			441			168
Minority interests		612			131			1,339			157
Earnings from continuing operations before income taxes		6,921			6,422			22,062			13,942
Income taxes		2,699			2,484			8,604			5,402
Earnings from continuing operations		4,222			3,938			13,458			8,540
Loss from discontinued operations		(224	)		(28	)		(456	)		(982	)
Net earnings	$	3,998		$	3,910		$	13,002		$	7,558
Weighted-average common shares outstanding:
Basic		17,589			17,212			17,560			17,174
Diluted		17,824			17,443			17,773			17,381
Basic earnings per common share:
Earnings from continuing operations	$	0.24		$	0.23		$	0.77		$	0.50
Loss from discontinued operations		(0.01	)		—			(0.03	)		(0.06	)
Net earnings	$	0.23		$	0.23		$	0.74		$	0.44
Diluted earnings per common share:
Earnings from continuing operations	$	0.24		$	0.23		$	0.76		$	0.49
Loss from discontinued operations		(0.02	)		(0.01	)		(0.03	)		(0.06	)
Net earnings	$	0.22		$	0.22		$	0.73		$	0.43

See accompanying notes to condensed consolidated financial statements.

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REHABCARE GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited; amounts in thousands)

		Nine Months Ended,
		September 30,
		2008			2007
Cash flows from operating activities:
Net earnings	$	13,002			7,558
Reconciliation to net cash provided by operating activities:
Depreciation and amortization		11,158			12,659
Provision for doubtful accounts		6,103			6,914
Equity in net income of affiliate		(441	)		(168	)
Minority interests		(1,339	)		(157	)
Impairment of intangible asset		—			4,906
Stock-based compensation expense		2,196			1,217
Income tax benefits from share-based payments		762			281
Excess tax benefits from share-based payments		(547	)		(182	)
Gain on disposal of discontinued operation		(321	)		—
(Gain) loss on disposal of property and equipment		(24	)		43
Changes in assets and liabilities:
Accounts receivable, net		(7,901	)		(1,839	)
Other current assets		486			2,240
Other assets		255			261
Accounts payable		(144	)		(2,483	)
Accrued salaries and wages		2,680			(4,015	)
Income taxes payable and deferred taxes		2,125			4,190
Accrued expenses		4,126			(151	)
Deferred compensation		(176	)		(420	)
Net cash provided by operating activities		32,000			30,854
Cash flows from investing activities:
Additions to property and equipment		(12,689	)		(6,463	)
Purchase of marketable securities		(369	)		(316	)
Proceeds from sale/maturities of marketable securities		546			708
Investment in unconsolidated affiliate		—			(1,119	)
Proceeds from disposition of business		7,193			—
Purchase of businesses, net of cash acquired		(7,096	)		(1	)
Other, net		(113	)		(713	)
Net cash used in investing activities		(12,528	)		(7,904	)
Cash flows from financing activities:
Net change in revolving credit facility		(16,500	)		(18,900	)
Principal payments on long-term debt		(6,000	)		(1,059	)
Contributions by minority interest shareholders		2,879			654
Exercise of stock options		1,742			946
Excess tax benefits from share-based payments		547			182
Net cash 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

See accompanying notes to condensed consolidated financial statements.

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REHABCARE GROUP, INC.

Notes to Condensed Consolidated Financial Statements

Nine Month Periods Ended September 30, 2008 and 2007

(Unaudited)

(1)           Basis of Presentation

The condensed consolidated balance sheets and related condensed consolidated statements of earnings and cash flows contained in this Form 10-Q, which are unaudited, include the accounts of the Company and its wholly and majority owned affiliates.  The Company accounts for its investments in less than 50% owned affiliates using the equity method.  All significant intercompany accounts and activity have been eliminated in consolidation.  In the opinion of management, all entries necessary for a fair presentation of such financial statements have been included.  The results of operations for the three months and nine months ended September 30, 2008 are not necessarily indicative of the results to be expected for the fiscal year.  Certain prior year amounts have been reclassified to conform to current year presentation.  Such reclassifications primarily relate to the sale of RehabCare Rehabilitation Hospital – Permian Basin, a 38-bed inpatient rehabilitation hospital located in Midland, Texas (the “Midland hospital”).  The Company reclassified its condensed consolidated statements of earnings for the three months and nine months ended September 30, 2007 to show the results of operations for the Midland hospital as discontinued operations.

The condensed consolidated financial statements do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with U.S. generally accepted accounting principles.  Reference is made to the Company’s audited consolidated financial statements and the related notes as of December 31, 2007 and 2006 and for each of the years in the three-year period ended December 31, 2007, included in the Annual Report on Form 10-K on file with the Securities and Exchange Commission, which provide additional disclosures and a further description of the Company’s accounting policies.

(2)           Critical Accounting Policies and Estimates

The Company’s condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles.  Preparation of these statements requires management to make judgments and estimates.  Some accounting policies have a significant impact on amounts reported in these financial statements.  A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in the Company’s 2007 Annual Report on Form 10-K, filed on March 11, 2008.

(3)           Stock-Based Compensation

The Company adopted Statement of Financial Accounting Standards No.  123 – revised 2004, “Share-Based Payment” (“Statement 123R”), on January 1, 2006.  Statement 123R requires the recognition of compensation expense for all share-based compensation awarded to employees, net of estimated forfeitures, using a fair-value-based method.  Under Statement 123R, the grant-date fair value of each award is amortized to expense over the award’s vesting period.  Compensation expense associated with share-based awards is included in corporate selling, general and administrative expense in the accompanying consolidated statements of earnings.  Total pre-tax compensation expense and its related income tax benefit were as follows (in thousands of dollars):

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REHABCARE GROUP, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

		Three Months Ended,				Nine Months Ended,
		September 30,				September 30,
		2008		2007		2008		2007
Share-based compensation expense	$	560	$	320	$	2,196	$	1,217
Income tax benefit		217		123		849		470

The Company has various incentive plans that provide long-term incentive and retention awards.  These awards include stock options and restricted stock awards.  At September 30, 2008, a total of 575,198 shares were available for future issuance under the plans.

Stock Options

No stock options were granted during the nine months ended September 30, 2008 and 2007.   As of September 30, 2008, there was approximately $0.1 million of unrecognized compensation cost related to nonvested options.  Such cost is expected to be recognized over a weighted-average period of 1.5 years.

Restricted Stock Awards

In 2006, the Company began issuing restricted stock awards to attract and retain key Company executives.  At the end of a three-year restriction period, the awards will vest and be transferred to the participant provided that the participant has been an employee of the Company continuously throughout the restriction period.  In the first quarter of 2007, the Company also began issuing restricted stock awards to its nonemployee directors.  One-fourth of such awards generally vest each quarter over the first four quarters following the date of grant.

The Company’s restricted stock awards have been classified as equity awards under Statement 123R.  In general, the Company will receive a tax deduction for each restricted stock award on the vesting date equal to the fair market value of the restricted stock on the vesting date.

A summary of the status of the Company’s nonvested restricted stock awards as of September 30, 2008 and changes during the nine-month period ended September 30, 2008 is presented below:

			Weighted-
			Average
			Grant-Date
Nonvested Restricted Stock Awards	Shares		Fair Value
Nonvested at December 31, 2007	254,760		$16.14
Granted	257,262		21.71
Vested	(26,250	)	21.18
Forfeited	(56,910	)	17.66
Nonvested at September 30, 2008	428,862		$18.97

As of September 30, 2008, there was approximately $5.3 million of unrecognized compensation cost related to nonvested restricted stock awards.  Such cost is expected to be recognized over a weighted-average period of 1.9 years.

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REHABCARE GROUP, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(4)           Earnings per Share

Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding for the period.  Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity (as calculated utilizing the treasury stock method).  These potential shares include dilutive stock options and unvested restricted stock awards.

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Numerator:
Earnings from continuing operations	$	4,222		$	3,938		$	13,458		$	8,540
Loss from discontinued operations		(224	)		(28	)		(456	)		(982	)
Net earnings	$	3,998		$	3,910		$	13,002		$	7,558
Denominator:
Basic weighted average common shares outstanding		17,589			17,212			17,560			17,174
Effect of dilutive securities:
stock options and restricted stock awards		235			231			213			207
Diluted weighted average common shares outstanding		17,824			17,443			17,773			17,381
Basic earnings per common share:
Earnings from continuing operations	$	0.24		$	0.23		$	0.77		$	0.50
Loss from discontinued operations		(0.01	)		—			(0.03	)		(0.06	)
Net earnings	$	0.23		$	0.23		$	0.74		$	0.44
Diluted earnings per common share:
Earnings from continuing operations	$	0.24		$	0.23		$	0.76		$	0.49
Loss from discontinued operations		(0.02	)		(0.01	)		(0.03	)		(0.06	)
Net earnings	$	0.22		$	0.22		$	0.73		$	0.43

For the three months and nine months ended September 30, 2008, outstanding stock options totaling approximately 1.0 million potential shares in each period were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive.  For the three months and nine months ended September 30, 2007, outstanding stock options totaling approximately 1.3 million potential shares in each period were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive.

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REHABCARE GROUP, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(5)           Comprehensive Income

The following table sets forth the computation of comprehensive income (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008			2007
Net earnings	$	3,998	$	3,910	$	13,002		$	7,558
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on interest rate swap		24		—		(72	)		—
Comprehensive income	$	4,022	$	3,910	$	12,930		$	7,558

(6)           Investment in Unconsolidated Affiliate

In January 2005, the Company paid $3.6 million for a 40% equity interest in Howard Regional Specialty Care, LLC (“HRSC”), which operates a freestanding rehabilitation hospital in Kokomo, Indiana.  The Company uses the equity method to account for its investment in HRSC.  The value of the Company’s investment in HRSC at the transaction date exceeded its share of the book value of HRSC’s stockholders’ equity by approximately $3.5 million.  This excess is being accounted for as equity method goodwill.  In February 2007, the Company invested an additional $1.1 million of cash in HRSC, and the majority owner invested an additional $1.7 million.  HRSC used these funds to meet its working capital needs and to acquire an outpatient rehabilitation business in Kokomo.  The carrying value of the Company’s investment in HRSC was $4.7 million at September 30, 2008 and December 31, 2007.

(7)           Business Combinations

Effective June 1, 2008, the Company acquired an 80% equity interest in The Specialty Hospital, LLC for approximately $8.2 million plus costs of executing the acquisition.  The Specialty Hospital is a 24-bed long-term acute care hospital located on the grounds of Floyd Medical Center in Rome, Georgia.  Floyd Healthcare Resources, Inc. has retained a 20% interest in the hospital.  In connection with this transaction, the Company recorded approximately $6.8 million in intangible assets, consisting primarily of goodwill.  This allocation is based on preliminary valuation and estimated working capital information and will be adjusted upon completion of a final valuation and final determination of working capital in accordance with the terms of the purchase agreement.  The Specialty Hospital’s results of operations have been included in the Company’s financial statements prospectively beginning on the date of acquisition.  The Company has not presented the pro forma operations of The Specialty Hospital because the results are not considered material to the Company’s results of operations.

Effective July 1, 2006, the Company acquired all of the outstanding limited liability company membership interests of Symphony Health Services, LLC (“Symphony”) at a cost of approximately $109.9 million.  The Company recognized lease exit costs associated with exiting certain Symphony leased properties as liabilities assumed in the acquisition and included in the allocation of the purchase price for Symphony.  The following table provides a roll-forward of the liability for accrued lease exit costs for the nine month period ended September 30, 2008 (in thousands):

Balance, December 31, 2007	$	469
Payments		(177	)
Balance, September 30, 2008	$	292

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REHABCARE GROUP, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(8)           Intangible Assets

Under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” intangible assets with indefinite lives are not amortized but must be reviewed for impairment annually and whenever events or changes in circumstances indicate that the asset might be impaired.  If the impairment test indicates that the carrying value of an intangible asset exceeds its fair value, then an impairment loss should be recognized in the consolidated statement of earnings in an amount equal to the excess carrying value.

On May 1, 2007, the Centers for Medicare and Medicaid Services (“CMS”) released a rule extending the so-called 25% Rule to all LTACHs, including those LTACHs that had previously operated under a statutory grandfathering exemption.  The 25% Rule limits LTACH prospective payment system (“PPS”) paid admissions from a single referral source to 25%.  Admissions beyond the 25% threshold would be paid using lower inpatient PPS rates.  Louisiana Specialty Hospital, the Company’s LTACH in New Orleans, Louisiana, had been grandfathered and statutorily exempt from the 25% Rule.  Such exemption provided greater operational flexibility and fewer restrictions on the types of patients that could be admitted to that facility.  Under the May 1, 2007 rule, implementation of the 25% threshold by previously grandfathered facilities was to occur over a three year transition period.

As part of the purchase price allocation for Louisiana Specialty Hospital, the Company initially recorded the value of the statutory exemption as an indefinite-lived intangible asset at its estimated acquisition date fair value of $5.4 million.  The Company determined that the issuance of the May 1, 2007 rule by CMS resulted in a triggering event during the second quarter of 2007 that required the useful life of the statutory exemption intangible asset to be reassessed as finite-lived and a corresponding impairment analysis to be performed.  Based on that analysis, the Company recognized an impairment loss of $4.9 million in the first nine months of 2007 in the hospitals segment to reduce the carrying value of this intangible asset to its revised estimate of fair value based on the impact of the change in regulations.  The Company computed the fair value of the statutory exemption intangible asset using a present value technique and the Company’s projections of cash flow expected to be generated over the intangible asset’s remaining estimated useful life.

On December 29, 2007, the 2007 Medicare, Medicaid and SCHIP Extension Act was signed into law.  The Act provides that the 25% Rule will not be applied to grandfathered LTACHs, such as the Company’s LTACH in New Orleans, through at least December 31, 2010.  Statement 142 prohibits the reversal of the Company’s previously recognized $4.9 million impairment loss.

At September 30, 2008 and December 31, 2007, the Company had the following intangible asset balances (in thousands):

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REHABCARE GROUP, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

	September 30, 2008					December 31, 2007
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Amortizing Intangible Assets:
Noncompete agreements	$	1,800	$	(1,205	)	$	4,460	$	(1,449	)
Customer contracts and relationships		23,096		(9,409	)		23,096		(7,508	)
Trade names		8,953		(1,760	)		8,773		(1,276	)
Medicare exemption		454		(198	)		454		(113	)
Other		1,047		(200	)		905		(125	)
Total	$	35,350	$	(12,772	)	$	37,688	$	(10,471	)
Non-amortizing Intangible Assets:
Trade names	$	810				$	810

Amortization expense on intangible assets was approximately $917,000 and $918,000 for the three months ended September 30, 2008 and 2007, respectively, and $2,715,000 and $2,802,000 for the nine months ended September 30, 2008 and 2007, respectively.

The changes in the carrying amount of goodwill for the nine months ended September 30, 2008 are as follows (in thousands):

	Contract							Other Healthcare
	Therapy		HRS (a)		Hospitals			Services		Total
Balance at December 31, 2007	$	68,459	$	39,715	$	45,239		$	15,104	$	168,517
Acquisitions		—		—		6,362			—		6,362
Dispositions		—		—		(3,566	)		—		(3,566	)
Balance at September30, 2008	$	68,459	$	39,715	$	48,035		$	15,104	$	171,313

(a) Hospital rehabilitation services (HRS).

(9)           Disposition and Discontinued Operations

Effective August 30, 2008, the Company completed the sale of equipment, goodwill, other intangible assets and certain related assets associated with its 38-bed inpatient rehabilitation hospital located in Midland, Texas (the “Midland hospital”) to HealthSouth Corporation for $7.2 million less direct selling costs.  This transaction was the result of a strategic review of the Midland-Odessa market.  Simultaneous with the sale, the Midland hospital transferred its operations and remaining patients to HealthSouth’s rehabilitation hospital also located in the Midland-Odessa area.  In connection with this transaction, the Company recognized a pre-tax gain related to the disposal of the Midland hospital assets of approximately $0.3 million in the third quarter of 2008.

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REHABCARE GROUP, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

The Midland hospital has been a component of the Hospital reporting unit since mid-2006, and its operations were integrated into the Hospital reporting unit.  Accordingly, the Company determined an appropriate allocation of goodwill for the Midland hospital based on its fair value relative to the overall fair value of the Hospital reporting unit.  The Company used a discounted cash flow technique to determine fair value, which resulted in $3.6 million of goodwill being allocated to the Midland hospital.  The goodwill remaining in the Hospital reporting unit was tested at September 30, 2008, and no goodwill impairment was necessary.

Summarized below are the carrying amounts of the assets and liabilities of the Midland hospital that were sold effective August 30, 2008 (in thousands):

	August 30,
		2008
Assets:
Property and equipment, net	$	18
Goodwill		3,566
Intangible assets, net		2,154
Total assets	$	5,738
Liabilities:
Accrued salaries and wages	$	7
Total liabilities	$	7

The Midland hospital has been classified as a discontinued operation pursuant to the requirements of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  The operating results for this discontinued operation are shown in the table below (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Operating revenues	$	580		$	2,259		$	3,927		$	5,240
Costs and expenses		1,268			2,304			4,995			6,802
Operating loss from discontinued operations		(688	)		(45	)		(1,068	)		(1,562	)
Gain on disposal of assets of discontinued operations		321			—			321			—
Income tax benefit		143			17			291			580
Loss from discontinued operations	$	(224	)	$	(28	)	$	(456	)	$	(982	)

At September 30, 2008, the Company remained a party to an operating lease agreement for the Midland hospital building with a term ending in 2013.  As a result of finding a new tenant, the landlord agreed to terminate the Company’s lease agreement in October 2008.  In connection with exiting the Midland hospital building, the Company incurred a total pre-tax charge of $1.1 million in the third quarter of 2008 to recognize a $0.7 million liability for broker fees and other fees associated with terminating the lease agreement and a $0.4 million loss to write-down the remaining fixed assets to their estimated fair value.  Payments to settle the liability were completed in October 2008.  The $1.1 million charge is included in the $0.3 million net gain on the disposal of the Midland hospital assets.

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REHABCARE GROUP, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

(10)           Long-Term Debt

On June 16, 2006, the Company entered into an Amended and Restated Credit Agreement with Bank of America, N.A., Harris, N.A., General Electric Capital Corporation, National City Bank, U.S. Bank National Association, SunTrust Bank and Comerica Bank, as participating banks in the lending group.  The Amended and Restated Credit Agreement is a $175 million, five-year revolving credit facility.

The Amended and Restated Credit Agreement contains administrative covenants that are ordinary and customary for similar credit facilities.  The credit facility also includes financial covenants, including requirements for us to comply on a consolidated basis with a maximum ratio of senior funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA), a maximum ratio of total funded debt to EBITDA and a minimum ratio of adjusted EBITDA to fixed charges.  As of September 30, 2008, the Company was in compliance with all debt covenants.

Borrowings under the credit facility bear interest at either the lender’s prime rate or the London Interbank Offered Rate (“LIBOR”), at the Company’s option.  The annual fees and applicable interest rate margins to be charged in connection with the credit facility and the outstanding principal balance are variable based upon the Company’s consolidated leverage ratios.  As of September 30, 2008, the balance outstanding against the revolving credit facility was $52.0 million.  On December 28, 2007, the Company entered into an interest rate swap related to a portion of these borrowings.  The swap effectively fixes the interest rate on $25 million of the borrowings at 4.0% plus applicable margins.  After consideration of the swap, the weighted average interest rate on all borrowings under the credit facility was 4.9% at September 30, 2008.

The interest rate swap agreement expires in December 2009.  The Company has formally designated this swap agreement as a cash flow hedge and expects the hedge to be highly effective in offsetting fluctuations in the designated interest payments resulting from changes in the benchmark interest rate (LIBOR).  The fair value of this swap agreement was recorded in the consolidated balance sheets as a liability of $0.2 million and $0.1 million at September 30, 2008 and December 31, 2007, respectively.  The unrealized losses resulting from the change in the fair value of the interest rate swap have been reflected in other comprehensive income.  Over the next 12 months, the Company expects to reclassify approximately $0.2 million of these losses from accumulated other comprehensive income to interest expense as the related interest payments being hedged are made.

As of September 30, 2008, the Company had $7.2 million in letters of credit outstanding to its insurance carriers as collateral for reimbursement of claims.  The letters of credit reduce the amount the Company may borrow under its line of credit.  As of September 30, 2008, after the consideration of the effects of restrictive covenants, the available borrowing capacity under the line of credit was approximately $87 million.

(11)           Industry Segment Information

The Company operates in the following three business segments, which are managed separately based on fundamental differences in operations: program management services, hospitals and other healthcare services.  Program management services include hospital rehabilitation services (including inpatient acute and subacute rehabilitation and outpatient therapy programs) and contract therapy programs (which focus primarily on rehabilitation in skilled nursing facilities).  The Company’s hospitals segment owns and operates five inpatient rehabilitation hospitals and five long-term acute care hospitals.  The Company’s other healthcare services segment provides healthcare management consulting services and staffing services for therapists and nurses.  Virtually all of the Company’s services are provided in the United States.  

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REHABCARE GROUP, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

Summarized information about the Company’s operations in each industry segment is as follows (in thousands):

		Three Months Ended,						Nine Months Ended,
Operating Revenues		September 30,						September 30,
		2008			2007			2008			2007
Program management:
Contract therapy	$	105,572		$	98,274		$	316,156		$	301,381
Hospital rehabilitation services		41,591			40,286			121,996			125,343
Program management total		147,163			138,560			438,152			426,724
Hospitals		27,513			22,163			82,183			72,209
Other healthcare services		8,374			10,153			30,187			34,526
Less intercompany revenues (1)		(424	)		(192	)		(1,603	)		(660	)
Total	$	182,626		$	170,684		$	548,919		$	532,799

		Three Months Ended,						Nine Months Ended,
Operating Earnings (Loss)		September 30,						September 30,
		2008			2007			2008			2007
Program management:
Contract therapy	$	6,567		$	3,155		$	15,995		$	2,053
Hospital rehabilitation services		6,229			6,309			16,178			16,901
Program management total		12,796			9,464			32,173			18,954
Hospitals		(5,517	)		(1,598	)		(9,130	)		(1,319	)
Other healthcare services		(291	)		367			263			1,898
Total	$	6,988		$	8,233		$	23,306		$	19,533

		Three Months Ended,				Nine Months Ended,
Depreciation and Amortization		September 30,				September 30,
		2008		2007		2008		2007
Program management:
Contract therapy	$	1,534	$	2,035	$	4,808	$	6,276
Hospital rehabilitation services		612		931		2,008		3,155
Program management total		2,146		2,966		6,816		9,431
Hospitals		1,317		937		3,694		2,512
Other healthcare services		133		126		395		373
Total	$	3,596	$	4,029	$	10,905	$	12,316

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REHABCARE GROUP, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

		Three Months Ended,				Nine Months Ended,
Capital Expenditures		September 30,				September 30,
		2008		2007		2008		2007
Program management:
Contract therapy	$	983	$	665	$	2,353	$	1,837
Hospital rehabilitation services		296		184		654		296
Program management total		1,279		849		3,007		2,133
Hospitals		3,913		1,244		9,627		4,192
Other healthcare services		12		82		55		138
Total	$	5,204	$	2,175	$	12,689	$	6,463

	Total Assets				Unamortized Goodwill
	September 30,		December 31,		September 30,		December 31,
		2008		2007		2008		2007
Program management:
Contract therapy	$	175,050	$	175,589	$	68,459	$	68,459
Hospital rehabilitation services		103,907		105,292		39,715		39,715
Program management total		278,957		280,881		108,174		108,174
Hospitals (2)		105,112		93,659		48,035		45,239
Other healthcare services		31,884		34,020		15,104		15,104
Total	$	415,953	$	408,560	$	171,313	$	168,517

(1) Intercompany revenues represent sales of services, at market rates, between the Company’s operating segments.

(2) Hospital total assets include the carrying value of the Company’s equity investment in HRSC.

(12)           Related Party Transactions

The Company’s hospital rehabilitation services division recognized operating revenues for services provided to HRSC, the Company’s 40% owned equity method investment, of approximately $0.4 million for the nine months ended September 30, 2007.  In March 2007, the Company canceled its existing management services contract with HRSC.

The Company purchased air transportation services from 55JS Limited, Co. at an approximate cost of $132,000 and $142,000 for the three months ended September 30, 2008 and 2007, respectively, and $453,000 and $368,000 for the nine months ended September 30, 2008 and 2007, respectively.  55JS Limited, Co. is owned by the Company’s President and Chief Executive Officer, John Short.  The air transportation services are billed to the Company for hourly usage of 55JS’s plane for Company business.

(13)           Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“Statement 157”).  This statement clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements.  Statement 157 does not require any new fair value measurements.  In February 2008, the FASB issued FASB Staff Position 157-2, “Effective Date of FASB Statement 157,” which deferred the effective date of Statement 157 to fiscal years beginning

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REHABCARE GROUP, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

after November 15, 2008 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.  In accordance with this interpretation, the Company adopted the provisions of Statement 157 on January 1, 2008 with respect to the Company’s financial assets and financial liabilities.  The provisions of Statement 157 have not been applied to nonfinancial assets and nonfinancial liabilities.  The major categories of assets and liabilities that are measured at fair value, for which the Company will wait until 2009 to apply the provisions of Statement 157, are as follows:  reporting units measured at fair value in the first step of a goodwill impairment test under Statement 142 and long-lived assets measured at fair value for an impairment assessment under Statement 144.

The following table sets forth the information required by Statement 157 for the Company’s financial assets and financial liabilities which are measured at fair value on a recurring basis.  The Company uses an income approach to value its liability for the outstanding interest rate swap agreement discussed in Note 10.  The fair value of the swap is estimated using a discounted cash flow model that takes into account observable inputs including the contractual terms of the swap and current market information as of the reporting date such as prevailing interest rates.

				Fair Value Measurements at September 30, 2008 Using:
	Carrying value at September 30, 2008			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Trading securities	$	2,975		$	2,975	$	—		$	—
Interest rate swap		(225	)		—		(225	)		—
Total	$	2,750		$	2,975	$	(225	)	$	—

(14)           Recently Issued Pronouncements

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115” (“Statement 159”).  This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value, with unrealized gains and losses related to these items reported in earnings at each subsequent reporting date.  The Company adopted this statement on January 1, 2008 and has elected not to apply the fair value option to any items not already carried at fair value in accordance with other accounting standards, so the adoption of Statement 159 did not impact the Company’s consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (“Statement 141(R)”) and Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“Statement 160”). Statements 141(R) and 160 require most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity.  Both statements are effective for fiscal years beginning after December 15, 2008.  Statement 141(R) will be applied to business combinations occurring after the effective date.  Statement 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date.  The Company has not determined the effect the adoption of Statements 141(R) and 160 will have on the Company’s financial position or results of operations.

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REHABCARE GROUP, INC.

Notes to Condensed Consolidated Financial Statements (Continued)

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities" (“Statement 161”), which amends and expands the disclosure requirements of FAS 133 to require qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. Statement 161 will be effective for the Company beginning in 2009.  The adoption of this statement will expand the Company’s disclosures about derivatives held by the Company.

(15)           Employee Severance Costs

In the third quarter of 2008, the Company eliminated 35 corporate and division support positions in an effort to better align the Company’s support functions and reduce corporate and division overhead.   In connection with these efforts, the Company recognized a pre-tax charge of $1.3 million for employee severance costs including costs incurred under pre-existing severance plans.  This charge is reflected on the corporate and division selling, general and administrative expense lines of the Company’s consolidated statement of earnings for the third quarter of 2008.  The following table provides a roll-forward of the liability for accrued severance costs from July 1, 2008 through September 30, 2008 (amounts in millions):

	Employee
	Severance
	Costs
Balance, July 1, 2008		$	—
Accrual for severance costs			1.3
Payments			(0.3	)
Balance, September 30, 2008		$	1.0

(16)           Impact of Hurricanes

During the month of September 2008, the business activities of certain Company-owned facilities and certain client-owned facilities in Louisiana, Texas and Florida were disrupted as a result of Hurricanes Gustav, Hanna and Ike.  The Company estimates the hurricanes had a negative impact on third quarter consolidated operating earnings of approximately $1.0 million, net of accrued business interruption insurance recoveries recorded during the period of $0.1 million.  These recoveries have been recorded on the operating expense line of the Company’s consolidated statement of earnings.  The Company may recognize additional recoveries after contingencies relating to the insurance claim have been resolved.

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REHABCARE GROUP, INC.

Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q 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 reimbursement for 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 service offerings and the development of alternative product offerings;

·   the future financial results of any unconsolidated affiliates;

·   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 and our ability to predict the ultimate liability for such 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 adequacy and effectiveness of our information systems;

·   natural disasters and other unexpected events which could severely damage or interrupt our systems and operations;

·   changes in federal and state income tax laws and regulations, the effectiveness of our tax planning strategies and the sustainability of our tax positions; and

·   general and economic conditions, including efforts by governmental reimbursement programs, insurers, healthcare providers and others to contain healthcare costs.

Results of Operations

We operate in the following three business segments, which are managed separately based on fundamental differences in operations: program management services, hospitals and other healthcare services.  Program management services include hospital rehabilitation services (including inpatient acute and subacute rehabilitation and outpatient therapy programs) and contract therapy programs (which focus primarily on rehabilitation in skilled nursing facilities).  Our hospitals segment owns and operates five inpatient rehabilitation hospitals and five long-term acute care hospitals (LTACHs).  Our other healthcare services segment provides healthcare management consulting services and staffing services for therapists and nurses.

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REHABCARE GROUP, INC.

Selected Operating Statistics:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
Program Management:
Contract Therapy:
Operating revenues (in thousands)	$	105,572	$	98,274	$	316,156	$	301,381
Average number of locations		1,071		1,106		1,062		1,140
Average revenue per location	$	98,548	$	88,832	$	297,600	$	264,365
Hospital Rehabilitation Services:
Operating revenues (in thousands)
Inpatient	$	30,800	$	29,512	$	90,439	$	92,193
Outpatient		10,791		10,774		31,557		33,150
Total	$	41,591	$	40,286	$	121,996	$	125,343
Average number of programs
Inpatient		123		124		121		128
Outpatient		33		35		33		35
Total		156		159		154		163
Average revenue per program
Inpatient	$	251,437	$	238,227	$	745,881	$	719,966
Outpatient		329,810		307,848		959,022		936,378
Total	$	267,958	$	253,564	$	791,382	$	766,837
Hospitals:
Operating revenues (in thousands)	$	27,513	$	22,163	$	82,183	$	72,209
Number of facilities at end of period		10		8		10		8
Other Healthcare Services:
Operating revenues (in thousands)	$	8,374	$	10,153	$	30,187	$	34,526

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

Operating Revenues

Consolidated operating revenues during the third quarter of 2008 increased by $11.9 million, or 7.0%, to $182.6 million compared to $170.7 million in the third quarter of 2007.  The revenue increase was due to growth in our contract therapy, hospital rehabilitation services and hospital businesses, partially offset by a decrease in revenues in our other healthcare services business.

Contract therapy revenues increased $7.3 million or 7.4% in the third quarter of 2008 compared to the third quarter of 2007.  Effective July 1, 2008, the exception process to the Part B therapy caps lapsed.  However, on July 15, 2008, Congress extended the therapy cap exception process retroactive to July 1, 2008.  Despite the disruption caused by this two week delay, same store revenues grew 11.8% in the third quarter of 2008 primarily due to a 10.0% increase in same store minutes of service.  The same store revenue growth more than offset the impact of a 3.2% decline in the

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REHABCARE GROUP, INC.

average number of locations operated in the current quarter.   Higher average daily census and improved productivity contributed to the growth in same store revenues and same store minutes of service.

Hospital rehabilitation services operating revenues increased 3.2% in the third quarter of 2008 compared to the third quarter of 2007 as inpatient revenue increased 4.4% and outpatient revenue increased 0.2%.  The increase in inpatient revenue reflects a 5.5% increase in average revenue per program, partially offset by a 1.1% decline in the average number of units operated.  Same store acute rehabilitation revenues and discharges increased 2.2% and 3.7%, respectively, compared to the third quarter of 2007.  The increase in outpatient revenue reflects a 7.1% increase in average revenue per program, partially offset by a 6.5% decline in the average number of units operated.    Outpatient same store revenues increased by 7.7% in the third quarter of 2008.

Hospital segment revenues were $27.5 million in the third quarter of 2008 compared to $22.2 million in the third quarter of 2007.  The increase in revenues in 2008 reflects the acquisition of The Specialty Hospital in Rome, Georgia effective June 1, 2008 and the operations for our inpatient rehabilitation hospital in Austin, Texas, which received its Medicare provider number in November 2007.  The hospital segment also opened an LTACH in Kansas City, Missouri in April 2008.  This hospital is currently in its length-of-stay demonstration period which means it will be reimbursed at Medicare’s lower inpatient prospective payment system rates for six months, starting on May 6, 2008, the date the hospital received its Medicare provider certification.  After it maintains a Medicare average length-of-stay of 25 days for six months, the hospital will apply to the Centers for Medicare and Medicaid Services (“CMS”) for an LTACH provider number.  Same store revenues increased by $0.3 million or 1.4% in the third quarter of 2008 as compared to the third quarter of 2007.  Same store revenues in the third quarter of 2008 were negatively impacted by a decrease in patient census at a number of hospitals including our Clear Lake, Texas hospital, which was closed for two weeks as a result of Hurricane Ike, and our New Orleans and Lafayette, Louisiana hospitals, whose operations were disrupted by Hurricane Gustav.  Same store revenues in the third quarter of 2007 were negatively impacted by adjustments to contractual discounts of $1.4 million as a result of refinements to our estimates of expected reimbursements on outstanding receivables.

Other healthcare services segment revenues were $8.4 million in the third quarter of 2008 compared to $10.2 million in the third quarter of 2007.  This decline in revenues occurred primarily in our Phase 2 Consulting business, which experienced more difficulty selling new consulting projects in 2008 in part due to the slowdown in our nation’s economy.

Costs and Expenses
	Three Months Ended September 30,
		2008				2007
			% of				% of
		Amount	Revenue			Amount	Revenue
	(dollars in thousands)
Consolidated costs and expenses:
Operating expenses	$	149,925	82.1	%	$	138,327	81.0	%
Division selling, general and administrative		11,687	6.4			10,761	6.3
Corporate selling, general and administrative		10,430	5.7			9,334	5.5
Depreciation and amortization		3,596	2.0			4,029	2.4
Total costs and expenses	$	175,638	96.2	%	$	162,451	95.2	%

Operating expenses as a percentage of revenues increased primarily due to losses realized by our hospital segment.  Hurricanes Gustav, Hanna and Ike had a negative impact on third quarter revenues and operating expenses with an estimated aggregate impact on third quarter operating earnings of approximately $1.0 million.  The increase in

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REHABCARE GROUP, INC.

selling, general and administrative expenses reflects the costs of severance benefits incurred in the third quarter of 2008, an increase in share-based compensation and other management incentive costs and an investment in back office resources to support the growth of our hospital segment.  Depreciation and amortization expense decreased primarily due to lower depreciation and amortization associated with software costs and intangible assets which became fully amortized.

The Company’s provision for doubtful accounts is included in operating expenses.  On a consolidated basis, the provision for doubtful accounts decreased from $2.1 million in the third quarter of 2007 to $1.4 million in the third quarter of 2008.  This decrease is primarily attributable to our contract therapy business and reflects the results of a concerted focus on collection activities and our efforts over the past two years to improve the quality of the division’s portfolio of accounts receivable.

		Three Months Ended September 30,
		2008					2007
			% of Unit					% of Unit
		Amount	Revenue				Amount	Revenue
		(dollars in thousands)
Contract Therapy:
Operating expenses	$	86,535		82.0	%	$	81,713		83.1	%
Division selling, general and administrative		5,304		5.0			5,575		5.7
Corporate selling, general and administrative		5,632		5.3			5,796		5.9
Depreciation and amortization		1,534		1.5			2,035		2.1
Total costs and expenses	$	99,005		93.8	%	$	95,119		96.8	%
Hospital Rehabilitation Services (HRS):
Operating expenses	$	29,302		70.5	%	$	27,980		69.5	%
Division selling, general and administrative		3,419		8.2			3,028		7.5
Corporate selling, general and administrative		2,029		4.9			2,038		5.0
Depreciation and amortization		612		1.4			931		2.3
Total costs and expenses	$	35,362		85.0	%	$	33,977		84.3	%
Hospitals:
Operating expenses	$	28,095		102.1	%	$	20,965		94.6	%
Division selling, general and administrative		1,284		4.7			747		3.4
Corporate selling, general and administrative		2,334		8.5			1,112		5.0
Depreciation and amortization		1,317		4.8			937		4.2
Total costs and expenses	$	33,030		120.1	%	$	23,761		107.2	%
Other Healthcare Services:
Operating expenses	$	6,417		76.6	%	$	7,861		77.4	%
Division selling, general and administrative		1,680		20.1			1,411		13.9
Corporate selling, general and administrative		435		5.2			388		3.8
Depreciation and amortization		133		1.6			126		1.3
Total costs and expenses	$	8,665		103.5	%	$	9,786		96.4	%

Total contract therapy costs and expenses as a percentage of unit revenue decreased in the third quarter of 2008 compared to the third quarter of 2007 primarily due to an increase in productivity and other operational improvements.  Despite the negative impacts of the lapse in the exceptions process to the Part B therapy caps during the first half of July 2008 and Hurricanes Gustav and Ike, direct operating expenses declined as a percentage of unit revenue reflecting the combined impact of improved therapist productivity throughout the division and reduced bad debt expense.  Division and corporate selling, general and administrative expenses decreased as a percentage of unit

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REHABCARE GROUP, INC.

revenue primarily due to continued synergies achieved following the integration of the Symphony business acquired in 2006.  Depreciation and amortization expense decreased primarily because capitalized software assets associated with the Symphony acquisition became fully amortized in the fourth quarter of 2007.  Contract therapy’s operating earnings increased from $3.2 million in the third quarter of 2007 to $6.6 million in the third quarter of 2008.

Total hospital rehabilitation services (“HRS”) costs and expenses increased from the third quarter of 2007 to the third quarter of 2008 primarily due to an increase in direct operating expenses.  Direct operating expenses increased as a percentage of unit revenue reflecting an increase in salaries, wages and overhead costs as a percentage of revenue due in part to general wage inflation and in part to the impact of Hurricanes Gustav and Ike which impacted productivity and had an estimated negative impact on HRS’s third quarter operating earnings of approximately $0.2 million.  Division selling, general and administrative expenses increased primarily as a result of severance costs incurred in the third quarter of 2008.  Depreciation and amortization expense decreased primarily due to lower amortization associated with capitalized software which became fully amortized.  Total hospital rehabilitation services operating earnings decreased by $0.1 million from $6.3 million in the third quarter of 2007 to $6.2 million in the third quarter of 2008.

Total hospital segment costs and expenses increased from the prior year quarter.  Operating expenses increased as a percentage of unit revenue in the third quarter of 2008 primarily due to increased start-up losses and a decline in earnings from our mature hospitals, including a significant decrease in earnings realized by our Clear Lake, Texas hospital mainly as a result of Hurricane Ike.  We estimate Hurricanes Ike and Gustav had a combined negative impact on the operating earnings of the hospital segment of $0.6 million.  Our hospital segment incurred start-up losses of $1.9 million and $0.7 million during the quarters ended September 30, 2008 and 2007, respectively.  The 2008 start-up losses relate primarily to the development of an LTACH in Kansas City.  Selling, general and administrative expenses increased from the prior year quarter reflecting the reallocation of certain resources from our other divisions and an investment in back office resources to support start-up activities in 2008 and the additional growth in the business expected in 2009.  Depreciation and amortization expense increased from the third quarter of 2007 to the third quarter of 2008 primarily due to depreciation and amortization associated with our newest facilities.  As a result of these factors, the hospitals segment incurred operating losses of $5.5 million in the third quarter of 2008 and $1.6 million in the third quarter of 2007.

The other healthcare services segment generated an operating loss of $0.3 million in the third quarter of 2008 compared to operating earnings of $0.4 million in the third quarter of 2007.  The decrease in operating earnings is mainly attributable to our Phase 2 Consulting business, which experienced more difficulty selling new consulting projects in 2008 in part due to the slowdown in our nation’s economy.

Non-Operating Items

Interest expense decreased from $2.1 million in the third quarter of 2007 to $0.8 million in the third quarter of 2008 primarily due to both a reduction in interest rates and a reduction in borrowings against our revolving credit facility.  The balance outstanding on the revolving credit facility was $52.0 million and $94.6 million at September 30, 2008 and 2007, respectively.  Interest expense also includes interest on subordinated promissory notes issued as partial consideration for various acquisitions completed over the last three years, commitment fees paid on the unused portion of our line of credit, and fees paid on outstanding letters of credit.

Minority interests in net losses of consolidated affiliates increased to $0.6 million in the third quarter of 2008 from $0.1 million in the third quarter of 2007.  This increase is primarily due to the recognition of the noncontrolling interests’ share of the losses incurred by our LTACH in Kansas City.

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REHABCARE GROUP, INC.

Earnings from continuing operations before income taxes increased to $6.9 million in the third quarter of 2008 from $6.4 million in the third quarter of 2007.  The provision for income taxes was $2.7 million in the third quarter of 2008 compared to $2.5 million in the third quarter of 2007, reflecting effective income tax rates of 39.0% and 38.7%, respectively.

The Company incurred losses from discontinued operations, net of tax, of $0.2 million in the quarter ended September 30, 2008.  Such losses relate to the operations of RehabCare Rehabilitation Hospital – Permian Basin, a 38-bed inpatient rehabilitation hospital located in Midland, Texas (the “Midland hospital”) partially offset by a net gain of $0.3 million recognized on the sale of that hospital effective August 30, 2008.

Net earnings were $4.0 million in the third quarter of 2008 compared to $3.9 million in the third quarter of 2007.  Diluted earnings per share were $0.22 in both the third quarter of 2008 and the third quarter of 2007.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Operating Revenues

Consolidated operating revenues during the first nine months of 2008 increased by $16.1 million, or 3.0%, to $548.9 million compared to $532.8 million in the first nine months of 2007.  The revenue increase was primarily due to growth in our contract therapy and hospital businesses, partially offset by a decrease in revenues in our hospital rehabilitation and other healthcare services businesses.

Contract therapy revenues increased $14.8 million or 4.9% in the first nine months of 2008 compared to the first nine months of 2007.  Same store revenues grew 11.8% reflecting a 10.2% increase in same store minutes of service.  The same store revenue growth more than offset the impact of a 6.8% decline in the average number of locations operated in the first nine months of 2008.   Higher average daily census and improved productivity contributed to the growth in same store revenues and same store minutes of service.

Hospital rehabilitation services operating revenues declined 2.7% in the first nine months of 2008 compared to the first nine months of 2007 as inpatient revenue declined 1.9% and outpatient revenue declined 4.8%.  The decline in inpatient revenue reflects a 5.3% decline in the average number of units operated, partially offset by a 3.6% increase in average revenue per program.  Same store acute rehabilitation discharges increased 1.4% in the first nine months of 2008 as the division’s units were able to increase patient volumes in 2008 following the December 2007 freeze in the 75% Rule’s compliance threshold at 60%.  The decline in outpatient revenue reflects a 7.0% decline in the average number of units operated, partially offset by a 4.6% increase in outpatient same store revenues.

Hospital segment revenues were $82.2 million in the first nine months of 2008 compared to $72.2 million in the first nine months of 2007.  The increase in revenues in 2008 reflects the acquisition of The Specialty Hospital in Rome, Georgia effective June 1, 2008 and the operations of our inpatient rehabilitation hospital in Austin, Texas, which received its Medicare provider number in November 2007.  The increase in revenues also reflects same store revenue growth of $0.8 million or 1.1% in the first nine months of 2008.  Our inpatient rehabilitation hospital in Amarillo, Texas, which was in its ramp-up phase in the first quarter of 2007, contributed $1.3 million to the same store revenue growth.  We define the ramp-up phase as the period during which a recently opened hospital builds its patient census following the receipt of its Medicare provider number.

Other healthcare services segment revenues were $30.2 million in the first nine months of 2008 compared to $34.5 million in the first nine months of 2007.  This decline in revenues occurred primarily in our Phase 2 Consulting business, which experienced more difficulty selling new contracts in 2008 in part due to the slowdown in our nation’s economy.

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REHABCARE GROUP, INC.

Costs and Expenses
	Nine Months Ended September 30,
		2008				2007
			% of				% of
		Amount	Revenue			Amount	Revenue
	(dollars in thousands)
Consolidated costs and expenses:
Operating expenses	$	446,484	81.3	%	$	431,980	81.1	%
Division selling, general and administrative		35,792	6.6			34,170	6.4
Corporate selling, general and administrative		32,432	5.9			29,894	5.6
Impairment of intangible asset		—	—			4,906	0.9
Depreciation and amortization		10,905	2.0			12,316	2.3
Total costs and expenses	$	525,613	95.8	%	$	513,266	96.3	%

Operating expenses increased slightly as a percentage of revenues as a decline in earnings realized by our hospital segment was mostly offset by improved operating performance from our contract therapy division.  Both events are discussed further below.  The increase in selling, general and administrative expenses reflects the costs of severance benefits incurred in the third quarter of 2008, an increase in share-based compensation and other management incentive costs and an investment in back office resources to support the current year and expected future growth of our hospital segment.  These cost increases were partially offset by the cost savings achieved from closing Symphony’s corporate office in Hunt Valley, Maryland at the end of June 2007.  The hospital segment incurred a $4.9 million impairment charge in the first nine months of 2007 as discussed in more detail below.  Depreciation and amortization expense decreased primarily due to lower amortization associated with capitalized software and intangible assets which became fully amortized.

The Company’s provision for doubtful accounts is included in operating expenses.  On a consolidated basis, the provision for doubtful accounts decreased from $6.8 million in the first nine months of 2007 to $6.0 million in the first nine months of 2008.  This decrease is primarily attributable to our contract therapy business reflecting the results of a concerted focus on collection activities and our efforts over the past two years to improve the quality of the division’s portfolio of accounts receivable.

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REHABCARE GROUP, INC.

		Nine Months Ended September 30,
		2008					2007
			% of Unit					% of Unit
		Amount	Revenue				Amount	Revenue
		(dollars in thousands)
Contract Therapy:
Operating expenses	$	260,752		82.5	%	$	256,151		85.0	%
Division selling, general and administrative		17,275		5.4			17,630		5.8
Corporate selling, general and administrative		17,326		5.5			19,271		6.4
Depreciation and amortization		4,808		1.5			6,276		2.1
Total costs and expenses	$	300,161		94.9	%	$	299,328		99.3	%
Hospital Rehabilitation Services (HRS):
Operating expenses	$	86,797		71.1	%	$	88,812		70.9	%
Division selling, general and administrative		10,445		8.6			10,443		8.3
Corporate selling, general and administrative		6,568		5.4			6,032		4.8
Depreciation and amortization		2,008		1.6			3,155		2.5
Total costs and expenses	$	105,818		86.7	%	$	108,442		86.5	%
Hospitals:
Operating expenses	$	77,032		93.7	%	$	60,828		84.2	%
Division selling, general and administrative		3,467		4.2			1,946		2.7
Corporate selling, general and administrative		7,120		8.7			3,336		4.6
Impairment of intangible asset		—		—			4,906		6.8
Depreciation and amortization		3,694		4.5			2,512		3.5
Total costs and expenses	$	91,313		111.1	%	$	73,528		101.8	%
Other Healthcare Services:
Operating expenses	$	23,506		77.9	%	$	26,849		77.8	%
Division selling, general and administrative		4,605		15.2			4,151		12.0
Corporate selling, general and administrative		1,418		4.7			1,255		3.6
Depreciation and amortization		395		1.3			373		1.1
Total costs and expenses	$	29,924		99.1	%	$	32,628		94.5	%

Total contract therapy costs and expenses as a percentage of unit revenue decreased in the first nine months of 2008 compared to the first nine months of 2007 primarily due to operational efficiencies and cost savings achieved from completing the integration of Symphony and closing Symphony’s corporate office in Hunt Valley, Maryland at the end of June 2007.  Direct operating expenses declined as a percentage of unit revenue reflecting the combined impact of continued efficiencies realized from the integration of the former RehabWorks’ units and improved therapist productivity throughout the division.  Labor and benefit costs per minute of service declined by 1.0% from the first nine months of 2007 to the first nine months of 2008 as therapist productivity improvements during 2008 more than offset the impact of wage rate increases.  Division and corporate selling, general and administrative expenses decreased as a percentage of unit revenue primarily due to synergies achieved from the integration of the Symphony business.  Depreciation and amortization expense decreased primarily because capitalized software assets associated with the Symphony acquisition became fully amortized in the fourth quarter of 2007.  Contract therapy’s operating earnings were $16.0 million in the first nine months of 2008 compared to $2.1 million in the first nine months of 2007.

Total hospital rehabilitation services costs and expenses declined from the first nine months of 2007 to the first nine months of 2008 primarily due to a decline in direct operating expenses.  Direct operating expenses declined

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REHABCARE GROUP, INC.

as average units in operation fell from 163 to 154.  Corporate selling, general and administrative expenses increased reflecting the costs of severance benefits incurred in 2008 and increases in share-based compensation expense and other management incentive costs.  Depreciation and amortization expense decreased primarily due to lower depreciation and amortization associated with capitalized software and other fixed assets which became fully depreciated.  Total hospital rehabilitation services operating earnings decreased from $16.9 million in the first nine months of 2007 to $16.2 million in the first nine months of 2008.

Total hospital segment costs and expenses increased as a percentage of unit revenue in the first nine months of 2008 despite the recognition of a $4.9 million impairment loss in the first nine months of 2007.  This impairment loss reduced the carrying value of an intangible asset to its revised estimate of fair value based on the impact of a change in LTACH regulations issued by CMS on May 1, 2007.  Operating expenses increased as a percentage of unit revenue in the first nine months of 2008 primarily due to increased start-up losses and a decline in earnings from our mature hospitals, including one hospital that was significantly impacted by Hurricane Ike.  The division incurred start-up losses of $3.5 million during the nine months ended September 30, 2008 primarily related to the development of an LTACH in Kansas City.  Start-up losses were $0.8 million during the nine months ended September 30, 2007.  Selling, general and administrative expenses increased from the prior year period reflecting the reallocation of certain resources from our other divisions and an investment in back office resources to support the growth in the business expected in 2009.  Depreciation and amortization expense increased from the first nine months of 2007 to the first nine months of 2008 primarily due to depreciation and amortization associated with our newest facilities.  As a result of these factors, the hospitals segment incurred operating losses of $9.1 million in the first nine months of 2008 and $1.3 million in the first nine months of 2007.

The other healthcare services segment generated operating earnings of $0.3 million and $1.9 million in the nine months ended September 30, 2008 and 2007, respectively.  The decrease in operating earnings is mainly attributable to our Phase 2 Consulting business.

Non-Operating Items

Interest income decreased by $0.7 million from the first nine months of 2007 to the first nine months of 2008 primarily due to the recognition of $0.7 million of interest income in the second quarter of 2007 related to a federal income tax refund claim.

Interest expense decreased from $6.7 million in the first nine months of 2007 to $3.2 million in the first nine months of 2008 primarily due to both a reduction in interest rates and a reduction in borrowings against our revolving credit facility.  The balance outstanding on the revolving credit facility was $52.0 million and $94.6 million at September 30, 2008 and 2007, respectively.  Interest expense also includes interest on subordinated promissory notes issued as partial consideration for various acquisitions completed over the last three years, commitment fees paid on the unused portion of our line of credit, and fees paid on outstanding letters of credit.

Minority interests in net losses of consolidated affiliates increased to $1.3 million in the first nine months of 2008 from $0.2 in the first nine months of 2007.  This increase is primarily due to the recognition of the noncontrolling interests’ share of the losses incurred by our LTACH in Kansas City.

Earnings from continuing operations before income taxes increased to $22.1 million in the first nine months of 2008 from $13.9 million in the first nine months of 2007.  The provision for income taxes was $8.6 million in the first nine months of 2008 compared to $5.4 million in the first nine months of 2007, reflecting effective income tax rates of 39.0% and 38.7%, respectively.

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REHABCARE GROUP, INC.

The Company incurred losses from discontinued operations, net of tax, of $0.5 million and $1.0 million during the nine months ended September 30, 2008 and 2007, respectively.  Such losses relate entirely to the operations and sale of the Midland hospital.

Net earnings were $13.0 million in the first nine months of 2008 compared to $7.6 million in the first nine months of 2007.  Diluted earnings per share were $0.73 in the first nine months of 2008 compared to $0.43 in the first nine months of 2007.

Liquidity and Capital Resources

As of September 30, 2008, we had $12.4 million in cash and cash equivalents, and a current ratio (the amount of current assets divided by current liabilities) of approximately 1.8 to 1.  Working capital decreased by $1.6 million to $78.7 million at September 30, 2008 as compared to $80.3 million at December 31, 2007.  Net accounts receivable were $139.3 million at September 30, 2008 as compared to $135.2 million at December 31, 2007.  The number of days sales outstanding (DSO) in net receivables was 70.1 and 71.8 at September 30, 2008 and December 31, 2007, respectively.   A year ago, DSO in net receivables was 78.4 days.  The increase in accounts receivable is primarily due to the increase in revenues in 2008.   The improvement in DSO occurred primarily in our contract therapy division.

We generated cash from operations of $32.0 million and $30.9 million in the nine months ended September 30, 2008 and 2007, respectively.  Capital expenditures were $12.7 million and $6.5 million in the nine months ended September 30, 2008 and 2007, respectively.  Our capital expenditures primarily relate to the construction of new hospitals, investments in information technology systems, equipment additions and replacements and various other capital improvements.  The Company expects total capital expenditures in 2008 to approximate $18 million to $20 million.  Actual amounts spent will be dependent upon the timing of individual projects.  Over the next few years, we plan to continue to invest significantly in information technology systems and the development and renovation of hospitals.

The Company has historically financed its operations with funds generated from operating activities and borrowings under credit facilities and long-term debt instruments.  We believe our cash on hand, cash generated from operations and availability under our credit facility will be sufficient to meet our future working capital, capital expenditures, internal and external business expansion, and debt service requirements.  We have a $175 million, five-year revolving credit facility, dated June 16, 2006, with $52.0 million outstanding as of September 30, 2008 at a weighted-average interest rate of approximately 4.9%.  The revolving credit facility is expandable to $225 million, subject to the approval of the lending group and subject to our continued compliance with the terms of the credit agreement.  As of September 30, 2008, we had $7.2 million in letters of credit issued to insurance carriers as collateral for reimbursement of claims.  The letters of credit reduce the amount we may borrow under the revolving credit facility.  As of September 30, 2008, after consideration of the effects of restrictive covenants, the available borrowing capacity under the line of credit was approximately $87 million.

Regulatory and Legislative Update

On July 15, 2008, the Medicare Improvements for Patients and Providers Act of 2008 became law.  Among other things, the bill extended the therapy cap exception process from July 1, 2008 through December 31, 2009. The therapy caps are $1,810 for occupational therapy, and an annual combined cap of $1,810 for physical and speech therapy.  Most of our Medicare Part B patients qualify for an automatic exception to these caps due to their clinical complexities.  Uncertainties surrounding the therapy cap exception process during the first two weeks of July caused some disruption to the contract therapy division’s operating performance in the third quarter of 2008; however, this disruption was brief and not significant overall.

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REHABCARE GROUP, INC.

To participate in Medicare, inpatient rehabilitation facilities (such as those operated in our hospital division) and acute rehabilitation units (such as those managed within our HRS division) must satisfy what was previously known as the 75% Rule and is now known as the 60% Rule.  The 2007 Medicare, Medicaid and SCHIP Extension Act (“the SCHIP Extension Act”) permanently set the compliance threshold at 60%.  The rule requires that 60% of patients fall within thirteen specific diagnostic categories. We continue to monitor the regulatory environment for any new rules that could affect this statute.

The SCHIP Extension Act also established a three-year moratorium on the establishment or classification of any new LTACH facilities, any satellite facilities and increases in bed capacity at existing LTACHs.  On May 21, 2008, CMS issued an interim final rule outlining criteria for an exemption from the three-year moratorium as well as for exceptions to this rule.  Due to uncertainty surrounding this exemption, our joint venture with The Reading Hospital has canceled its plans to build an LTACH in Reading.  We continue to serve this hospital through our HRS division.

On August 1, 2008, CMS issued final payment rules for skilled nursing facilities (“SNFs”) and inpatient rehabilitation facilities (“IRFs”) for reporting year 2009.  The rules include a 3.4% market basket increase for SNFs and no market basket change for IRFs.  While we believe the SNF rule will have a favorable impact on our contract therapy division, we believe the IRF rule will have an insignificant impact on our HRS and hospital businesses.

The Medicare program is administered by contractors and fiscal intermediaries. Under the authority granted by CMS, certain fiscal intermediaries have issued local coverage determinations that are intended to clarify the clinical criteria under which Medicare reimbursement is available. Certain local coverage determinations attempt to require evidence of a greater level of medical necessity for inpatient rehabilitation facility patients.  Those local coverage determinations have been used by fiscal intermediaries to deny admission or reimbursement for some patients in our hospital rehabilitation services and hospital divisions.  Where appropriate, we and our clients will appeal such denials and many times are successful in overturning the original decision of the fiscal intermediary.

The Medicare Modernization Act of 2003 directed CMS to create a program using independent recovery audit contractors to collect improper Medicare overpayments.  The recovery audit contractor (“RAC”) program began with a demonstration pilot in three states and is scheduled to be expanded to all 50 states by 2010.  On October 6, 2008, CMS awarded contracts to four permanent RACs to begin later this year. We will continue to challenge and appeal any claims that we believe have been inappropriately denied.

Medicare reimbursement for outpatient rehabilitation services is based on the lesser of the provider’s actual charge for such services or the applicable Medicare physician fee schedule amount established by CMS. This reimbursement system applies regardless of whether the therapy services are furnished in a hospital outpatient department, a skilled nursing facility, an assisted living facility, a physician’s office, or the office of a therapist in private practice.  The physician fee schedule is subject to change from year to year.  The Medicare Improvements for Patients and Providers Act of 2008 provided a 0.5% increase in the fee schedule for the balance of 2008 and a 1.1% increase for 2009.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with U.S.generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date

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REHABCARE GROUP, INC.

of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Our significant accounting policies, including the use of estimates, were presented in the notes to consolidated financial statements included in our 2007 Annual Report on Form 10-K, filed on March 11, 2008.

Critical accounting policies are those that are considered most important to the presentation of our financial condition and results of operations, require management’s most difficult, subjective and complex judgments, and involve uncertainties.  Our most critical accounting policies pertain to allowance for doubtful accounts, contractual allowances, goodwill and other intangible assets, impairment of long-lived assets, health, workers compensation and professional liability insurance accruals and accounting for investments in unconsolidated affiliates.  Each of these critical accounting policies was discussed in our 2007 Annual Report on Form 10-K in the Critical Accounting Policies and Estimates section of “Item 7.  – Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  There were no significant changes in the application of critical accounting policies during the first nine months of 2008.

Item 3. – Quantitative and Qualitative Disclosures About Market Risks

The Company’s primary market risk exposure consists of changes in interest rates on certain borrowings that bear interest at floating rates.  Borrowings under our credit facility bear interest at the lender’s prime rate and the London Interbank Offered Rate (“LIBOR”), at our option, with applicable margins varying based upon our consolidated total leverage ratio.  Our LIBOR contracts can vary in length from 30 to 180 days.  As of September 30, 2008, the balance outstanding against the revolving credit facility was $52.0 million.  On December 28, 2007, the Company entered into an interest rate swap agreement that effectively fixed the interest rate at 4.0% plus applicable margins on $25 million of the borrowings under our credit facility for a two-year period.

After consideration of the swap contract mentioned above, as of September 30, 2008, we had $27.0 million of variable rate debt outstanding under the credit facility at a weighted-average variable interest rate of approximately 4.8%.  Adverse changes in short-term interest rates could affect our overall borrowing rate when contracts are renewed.  Based on the variable rate debt outstanding under the credit facility at September 30, 2008, a 100 basis point increase in the LIBOR rate would result in additional interest expense of approximately $0.3 million on an annualized basis.

Item 4. – Controls and Procedures

As of September 30, 2008, the Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) and  15d-14(c) under the Securities Exchange Act of 1934, as amended).  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective in making known in a timely fashion material information required to be filed in this report.  There have been no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. – OTHER INFORMATION

Item 1. – Legal Proceedings

At the current time, we are not a party to any pending legal proceedings which we believe are material.

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REHABCARE GROUP, INC.

In the ordinary course of our business, we are a party to a number of other claims and lawsuits, as both plaintiff and defendant, which we regard as immaterial.  From time to time, and depending upon the particular facts and circumstances, we may be subject to indemnification obligations under our contracts with our hospital and healthcare facility clients.  We do not believe that any liability resulting from such matters, after taking into consideration our insurance coverage and amounts already provided for, will have a material effect on our consolidated financial position or overall liquidity; however, such matters, or the expense of prosecuting or defending them, could have a material effect on cash flows and results of operations in a particular quarter or fiscal year as they develop or as new issues are identified.

Item 1A. – Risk Factors

For information regarding risk factors, please refer to the Company’s 2007 Annual Report on Form 10-K.  There were no material changes in the Company’s risk factors in the first nine months of 2008.

Item 6. - Exhibits

See exhibit index

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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 thereunto duly authorized.

REHABCARE GROUP, INC.

November 4, 2008

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

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EXHIBIT INDEX

3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1, dated May 9, 1991 [Registration No.  33-40467], and incorporated herein by reference)

3.2 Certificate of Amendment of Certificate of Incorporation (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended May 31, 1995 and incorporated herein by reference)

3.3 Amended and Restated Bylaws, dated October 30, 2007 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K dated October 31, 2007 and incorporated herein by reference)

4.1 Rights Agreement, dated August 28, 2002, by and between the Registrant and Computershare Trust Company, Inc. (filed as Exhibit 1 to the Registrant’s Registration Statement on Form 8-A filed September 5, 2002 and incorporated herein by reference)

31.1 Certification by Chief Executive Officer in accordance with Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification by Chief Financial Officer in accordance with Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certification by Chief Executive Officer in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certification by Chief Financial Officer in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

_________________________

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