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 attract and the additional costs of attracting and retaining administrative, operational and professional employees;

· shortages of qualified therapists and other healthcare personnel;

· unionization activities among our employees;

· our ability to effectively respond to fluctuations in our census levels and number of patient visits;

· changes in governmental reimbursement rates and other regulations or policies affecting reimbursement for the services provided by us to clients and/or patients;

· competitive and regulatory effects on pricing and margins;

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

· violations of healthcare regulations, including the 60% Rule in inpatient rehabilitation facilities and the 25% Rule in long-term acute care hospitals ("LTACHs");

· 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;

· 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 consummate acquisitions and other partnering relationships at reasonable valuations;

· litigation risks of our past and future business, including our ability to predict the ultimate costs and liabilities or the disruption of our operations;

· significant increases in health, workers compensation and professional and general liability costs and our ability to predict the ultimate liability for such costs;

· uncertainty in the financial markets that limits the availability and terms of financing;

· our ability to comply with the terms of our borrowing agreements;

· the adequacy and effectiveness of our information systems;

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

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

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 healthcare management consulting. Program management services include hospital rehabilitation services (including inpatient acute and subacute rehabilitation and outpatient therapy programs) and skilled nursing rehabilitation services (including contract therapy in skilled nursing facilities, resident-centered management consulting services and staffing services for therapists and nurses). Our hospitals segment owns and operates six inpatient rehabilitation hospitals and five LTACHs. Our healthcare management consulting segment consists of our Phase 2 Consulting business.

REHABCARE GROUP, INC.

Effective August 30, 2008, the Company completed the sale of equipment, goodwill, other intangible assets and certain related assets associated with an 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. The Midland hospital has been classified as a discontinued operation pursuant to the requirements of FASB Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Prior year comparative amounts throughout Management's Discussion and Analysis of Financial Condition and Results of Operations have been adjusted to reflect the treatment of the Midland hospital as a discontinued operation.

Selected Operating Statistics:

                                                    Three Months Ended
                                                        March 31,
                                                     2009         2008
    Program Management:
    Skilled Nursing Rehabilitation Services:
    Total operating revenues (in thousands)        $ 123,148   $ 112,450
    Contract therapy revenues (in thousands)       $ 116,132   $ 104,280
    Average number of contract therapy locations       1,074       1,055
    Average revenue per contract therapy location  $ 108,108   $  98,854

    Hospital Rehabilitation Services:
    Operating revenues (in thousands)
    Inpatient                                      $  31,743   $  29,759
    Outpatient                                        11,323      10,422
    Total                                          $  43,066   $  40,181

    Average number of programs
    Inpatient                                            122         121
    Outpatient                                            36          33
    Total                                                158         154

    Average revenue per program
    Inpatient                                      $ 260,192   $ 246,055
    Outpatient                                     $ 316,286   $ 315,819

    Hospitals:
    Operating revenues (in thousands)              $  35,317   $  27,473
    Number of facilities at end of period                 11           8

    Healthcare Management Consulting:
    Operating revenues (in thousands)              $   1,919   $   2,804

REHABCARE GROUP, INC.

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Operating Revenues

Consolidated operating revenues during the first quarter of 2009 increased by approximately $21.0 million, or 11.6%, to $203.4 million compared to $182.4 million in the first quarter of 2008. The revenue increase was due to growth in our skilled nursing rehabilitation services, hospital rehabilitation services and hospital businesses, partially offset by a decrease in revenues in our healthcare management consulting business.

Skilled nursing rehabilitation services ("SRS") operating revenues increased $10.7 million or 9.5% in the first quarter of 2009 compared to the first quarter of 2008. Same store contract therapy revenues grew 11.5% reflecting a 7.6% increase in same store minutes of service. Higher average daily census, improved therapist productivity and a market basket adjustment for skilled nursing facilities which became effective October 1, 2008 contributed to the growth in same store revenues and same store minutes of service. The average number of contract therapy locations operated during the first quarter of 2009 grew 1.8%.

Hospital rehabilitation services ("HRS") operating revenues increased 7.2% in the first quarter of 2009 compared to the first quarter of 2008 as inpatient revenue increased 6.7% and outpatient revenue increased 8.6%. The increase in inpatient revenue reflects a 5.3% increase in the average number of inpatient rehabilitation facility programs operated in the first quarter of 2009. HRS operated 113 inpatient rehabilitation facility programs as of March 31, 2009 and 107 inpatient rehabilitation facility programs as of March 31, 2008. Same store inpatient rehabilitation facility discharges increased 1.1% compared to the first quarter of 2008. The increase in outpatient revenue reflects an 8.5% increase in the average number of units operated. Outpatient same store revenues increased by 5.0% in the first quarter of 2009.

Hospital segment revenues were $35.3 million in the first quarter of 2009 compared to $27.5 million in the first quarter of 2008. The increase in revenues in 2009 reflects the June 2008 acquisition of The Specialty Hospital in Rome, Georgia, the November 2008 opening of a rehabilitation hospital in St. Louis, Missouri and the December 2008 certification of an LTACH in Kansas City, Missouri. Same store revenues increased by $0.7 million or 2.5% in the first quarter of 2009 as compared to the first quarter of 2008. Our inpatient rehabilitation hospital in Austin, Texas, which was in its ramp-up phase in the first quarter of 2008, contributed $0.3 million to the same store revenue growth. We define the ramp-up phase as the period during which a recently opened hospital attempts to build up its patient census following the receipt of its Medicare provider number.

Healthcare management consulting segment revenues were $1.9 million in the first quarter of 2009 compared to $2.8 million in the first quarter of 2008. Our Phase 2 Consulting business experienced more difficulty selling services to new clients in 2009 in part due to the slowdown in our nation's economy.

Costs and Expenses
                                            Three Months Ended March 31,
                                            2009                    2008
                                                 % of                    % of
                                      Amount    Revenue       Amount    Revenue
                                               (dollars in thousands)
Consolidated costs and expenses:
Operating expenses                  $ 162,014      79.6 %   $ 147,106      80.7 %
Selling, general and administrative    23,168      11.4        22,980      12.6
Depreciation and amortization           3,882       1.9         3,671       2.0
Total costs and expenses            $ 189,064      92.9 %   $ 173,757      95.3 %

REHABCARE GROUP, INC.

Operating expenses as a percentage of revenues decreased primarily due to improved operating performances by our skilled nursing rehabilitation services and hospital rehabilitation services businesses. The decrease in selling, general and administrative expenses as a percentage of revenues reflects the increase in revenues combined with the cost savings achieved by eliminating approximately 60 corporate and division support positions in the second half of 2008. These cost savings were more than offset by an increase in selling, general and administrative expenses incurred by our Hospital segment.

The Company's provision for doubtful accounts is included in operating expenses. On a consolidated basis, the provision for doubtful accounts increased by approximately $0.1 million from $2.3 million in the first quarter of 2008 to $2.4 million in the first quarter of 2009.

                                                      Three Months Ended March 31,
                                                    2009                        2008
                                                      % of Unit                   % of Unit
                                           Amount      Revenue         Amount      Revenue
                                                         (dollars in thousands)
Skilled Nursing Rehabilitation Services:
Operating expenses                       $  98,998         80.4 %    $  93,071         82.8 %
Selling, general and administrative         12,017          9.8         13,483         12.0
Depreciation and amortization                1,678          1.3          1,787          1.5
Total costs and expenses                 $ 112,693         91.5 %    $ 108,341         96.3 %
Hospital Rehabilitation Services:
Operating expenses                       $  30,634         71.1 %    $  29,189         72.7 %
Selling, general and administrative          5,490         12.8          5,634         14.0
Depreciation and amortization                  646          1.5            720          1.8
Total costs and expenses                 $  36,770         85.4 %    $  35,543         88.5 %
Hospitals:
Operating expenses                       $  30,890         87.5 %    $  23,236         84.6 %
Selling, general and administrative          5,224         14.8          3,173         11.5
Depreciation and amortization                1,545          4.3          1,150          4.2
Total costs and expenses                 $  37,659        106.6 %    $  27,559        100.3 %
Healthcare Management Consulting:
Operating expenses                       $   1,494         77.9 %    $   2,144         76.5 %
Selling, general and administrative            437         22.8            690         24.6
Depreciation and amortization                   13          0.6             14          0.5
Total costs and expenses                 $   1,944        101.3 %    $   2,848        101.6 %

Total skilled nursing rehabilitation services ("SRS") costs and expenses as a percentage of unit revenue decreased in the first quarter of 2009 compared to the first quarter of 2008 primarily due to an increase in therapist productivity and a decrease in selling, general and administrative expenses. Direct operating expenses declined as a percentage of unit revenue primarily due to a reduction in labor and benefit costs as a percentage of revenue. With regard to labor and benefit costs, therapist productivity improvements and lower contract labor usage during the current quarter largely offset the impact of wage rate and benefit cost increases. We believe a soft job market may have contributed to the decreased use of contract labor. Selling, general and administrative expenses decreased primarily due to the cost savings achieved from the division and corporate realignment activities that were completed in the second half of 2008. Depreciation and amortization expense decreased primarily due to lower amortization associated with capitalized software which became fully amortized in 2008. As a result of these factors, SRS's operating earnings increased from $4.1 million in the first quarter of 2008 to $10.5 million in the first quarter of 2009.

REHABCARE GROUP, INC.

Total hospital rehabilitation services ("HRS") costs and expenses as a percentage of unit revenue decreased in the first quarter of 2009 compared to the first quarter of 2008 primarily due to improved operating performance and a decrease in selling, general and administrative expenses. Direct operating expenses decreased as a percentage of unit revenue in the current quarter reflecting a $0.4 million refund for professional liability insurance combined with a favorable change in the division's contract mix, which includes six additional inpatient rehabilitation programs compared to the prior year quarter. Selling, general and administrative expenses decreased primarily as a result of the corporate realignment activities that were completed in the second half of 2008. Depreciation and amortization expense decreased primarily due to lower amortization associated with capitalized software which became fully amortized in 2008. HRS's operating earnings increased by $1.7 million from $4.6 million in the first quarter of 2008 to $6.3 million in the first quarter of 2009.

Total hospital segment costs and expenses as a percentage of unit revenue increased from the first quarter of 2008 to the first quarter of 2009. Operating expenses increased as a percentage of unit revenue in the first quarter of 2009 as our new hospitals incurred start-up and ramp-up losses and earnings from our mature hospitals remained relatively flat compared to the prior year quarter. Combined start-up and ramp-up losses increased from $0.6 million in the first quarter of 2008 to $1.1 million in the first quarter of 2009. The 2009 losses relate primarily to the ramp-up of our recently opened hospitals in St. Louis and Kansas City. Selling, general and administrative expenses increased from the prior year quarter largely due to costs incurred for merger, acquisition and joint venture development activities and an investment in back office resources to support the recent and future growth of the business. Depreciation and amortization expense increased from the first quarter of 2008 to the first quarter of 2009 primarily due to depreciation and amortization associated with our newest facilities. As a result of these factors, the hospitals segment incurred operating losses of $2.3 million in the first quarter of 2009 and $0.1 million in the first quarter of 2008.

Operating expenses for the healthcare management consulting segment decreased by approximately $0.7 million from the prior year quarter primarily due to lower salaries and incentive costs. The reduction in operating expenses helped to offset the segment's decline in revenue resulting in break-even profitability for the first quarter of 2009.

Non-Operating Items

Interest expense decreased from $1.3 million in the first quarter of 2008 to $0.6 million in the first quarter of 2009 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 $57.0 million and $70.2 million at March 31, 2009 and 2008, respectively. Interest expense also includes commitment fees paid on the unused portion of our line of credit and fees paid on outstanding letters of credit.

Earnings from continuing operations before income taxes increased to $14.0 million in the first quarter of 2009 from $7.5 million in the first quarter of 2008. The provision for income taxes was $5.5 million in the first quarter of 2009 compared to $3.0 million in the first quarter of 2008, reflecting effective income tax rates of 39.6% and 39.4%, respectively.

The Company incurred a loss from discontinued operations, net of tax, of $0.1 million during the three months ended March 31, 2008. Such loss relates to the operations of the Midland hospital, which was sold in the third quarter of 2008.

REHABCARE GROUP, INC.

Net losses attributable to noncontrolling interests in consolidated subsidiaries increased to $0.2 million in the first quarter of 2009 from $0.1 million in the first quarter of 2008. This increase is primarily due to the recognition of the noncontrolling interests' share of the losses incurred by our hospitals in Kansas City and St. Louis.

Net earnings attributable to RehabCare were $8.7 million in the first quarter of 2009 compared to $4.5 million in the first quarter of 2008. Diluted earnings per share attributable to RehabCare were $0.48 in the first quarter of 2009 and $0.25 in the first quarter of 2008.

Liquidity and Capital Resources

As of March 31, 2009, we had $38.2 million in cash and cash equivalents, and a current ratio (the amount of current assets divided by current liabilities) of approximately 2.2 to 1. Working capital increased by $15.7 million to $113.0 million at March 31, 2009 as compared to $97.3 million at December 31, 2008. Net accounts receivable were $143.8 million at March 31, 2009 as compared to $139.2 million at December 31, 2008. The number of days sales outstanding (DSO) in net receivables was 63.9 and 66.0 at March 31, 2009 and December 31, 2008, respectively. A year ago, DSO in net receivables was 69.4 days. The increase in accounts receivable is primarily due to the increase in revenues in the first quarter of 2009. The improvement in DSO occurred primarily in our SRS division.

We generated cash from operations of $9.4 million and $4.1 million in the three months ended March 31, 2009 and 2008, respectively. Capital expenditures were $1.6 million and $3.2 million in the three months ended March 31, 2009 and 2008, 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 for the remainder of 2009 to approximate $11.0 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 $57.0 million outstanding as of March 31, 2009 at a weighted-average interest rate of approximately 3.0%. 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 March 31, 2009, 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 March 31, 2009, after consideration of the effects of restrictive covenants, the available borrowing capacity under the line of credit was approximately $107.2 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. New legislation would be necessary to further extend this exception process. The therapy caps are $1,840 for occupational therapy, and an annual combined cap of $1,840 for physical and speech therapy. Most of our Medicare Part B patients currently qualify for an automatic exception to these caps due to their clinical complexities.

REHABCARE GROUP, INC.

To participate in Medicare, inpatient rehabilitation facilities (such as those operated by our hospital division and managed in our HRS division) must satisfy what is now known as the 60% Rule. 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 2007 Medicare, Medicaid and SCHIP Extension Act ("the SCHIP Extension Act") established a three-year moratorium, which is scheduled to end on December 31, 2010, on the establishment or classification of any new LTACH facilities, any satellite facilities and increases in bed capacity at existing LTACHs. The most recent extension of SCHIP, which was enacted in February 2009, did not alter any Medicare reimbursement policies that would significantly impact our business.

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 ("RACs") to collect improper Medicare overpayments. The RAC program, which began with a demonstration pilot in three states, has been controversial because the RACs are paid a percentage of claims that are ultimately disallowed. On October 6, 2008, CMS awarded contracts to four permanent RACs which began a nationwide roll-out of the program in March 2009. 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 2008 and an additional 1.1% increase beginning January 1, 2009. Unless new legislation is enacted, this provision will expire on December 31, 2009 and result in a significant decrease in the fee schedule.

On April 29 and May 1, 2009, CMS issued proposed payment rules for inpatient rehabilitation facilities, long-term acute care hospitals and skilled nursing facilities for reporting year 2010. We are currently evaluating the impact of these proposed rules.

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 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 2008 Annual Report on Form 10-K, filed on March 10, 2009.

REHABCARE GROUP, INC.

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 2008 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 three months of 2009.