U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

            ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
                            AND EXCHANGE ACT OF 1934

                     For the Fiscal Year Ended June 30, 1997

                          Commission File Number 0-9407

                                REHABILICARE INC.

      Minnesota                                           41-0985318
State of Incorporation                          IRS Employer Identification No.
                            
                             1811 Old Highway Eight
                       New Brighton, Minnesota 55112-3493
                                 (612) 631-0590


Securities registered under Section 12(g) of the Exchange Act:

                     Common Stock, $.10 par value per share

Check whether issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such period that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                  Yes_X_ No___

Check if disclosure of delinquent  filers in response to Item 405 of Regulations
S-B is not contained in this form, and no disclosure  will be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [ ]

The  Company's  revenue  for  the  Fiscal  Year  Ended  June  30,  1997  totaled
$10,991,105.

The aggregate market value of voting stock held by  non-affiliates of registrant
as of September 16, 1997 was approximately $16,667,000 (based upon the last sale
price of such  stock on such date as  reported  by the  NASDAQ  National  Market
System).  The  number of shares of the  Company's  $.10 par value  common  stock
outstanding as of September 16, 1997 was 4,870,002.

Transitional Small Business Disclosure Format (Check One):

Yes___  No_X_



<PAGE>


                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.
                           
GENERAL

     Rehabilicare  Inc. (the Company) was incorporated as Medical Devices,  Inc.
pursuant to the laws of the State of Minnesota in 1972.  Its name was changed to
Rehabilicare Inc. in November 1994. The Company is a designer,  manufacturer and
provider of  electromedical  pain  management  and  rehabilitation  products and
services  used  for  clinical,   home  health  care  and  occupational  medicine
applications.

BACKGROUND

         Electrotherapy devices such as those marketed by the Company have broad
application in both the  rehabilitation of injured and atrophied muscles and the
relief of chronic and acute pain.  Transcutaneous  electrical nerve  stimulation
(TENS)  devices  have  been  prescribed  by  physicians  and  used  by  physical
therapists,  athletic trainers and other treating  clinicians in pain management
for over 25 years.  These devices have traditionally been designed to be worn at
home by patients with chronic pain problems.  The  distribution of TENS products
was, for many years,  dominated by small,  regional home health care dealers who
purchase  products  from  manufacturers  and rent or resell  those  products  to
treating clinicians or, upon receipt of a physician's prescription,  directly to
patients.  When portable neuromuscular  stimulators (NMS) were introduced in the
early 1980s, the same distribution techniques were employed.

         During the late 1980s, amounts reimbursed for TENS rentals or purchases
were  reduced by a number of insurance  carriers  and margins for  manufacturers
began to erode. As a result,  most TENS manufacturers  began to distribute their
products  directly to patients through various health care providers and to bill
the patients' insurance carriers directly. In such direct rentals and sales, the
manufacturer typically makes consignment inventory available at the clinic. When
a treating  clinician  determines  that a  specific  device is  beneficial  to a
patient, he or she obtains a physician's prescription. The product is then taken
home by the patient for in-home  therapy.  The  Company  believes  that  patient
acceptance  and  profit  margins  are  improved   significantly  through  direct
distribution.

         In addition to the change in  distribution  techniques  utilized by the
electrotherapy  device industry,  the type of devices available for home use has
expanded.  Physical  therapists  have long  employed a number of  electromedical
treatment  modalities  using  large  clinical  units,  including  interferential
stimulation,  pulsed  galvanic and  microcurrent.  Traditionally,  patients were
required to visit the clinic to use these  machines  because they were expensive
and not  portable.  With the  introduction  of the  Company's  compact  portable
products,  these clinical  therapies became available for home application.  The
Company believes that the acceptance and use of  electrotherapy  devices in home
therapy,  particularly  in  rehabilitation,  will  continue to increase as these
devices are enhanced to provide additional modalities and application systems to
address a broader range of conditions and injuries.

BUSINESS STRATEGY

         The Company has implemented  several  strategies  designed to encourage
the growth of its business and enhance profitability:

            o  A division of the Company was established in 1991 to rent or sell
               its  rehabilitation  and  pain  management  devices  directly  to
               patients through physicians, physical therapists and other health
               care  providers.  These  direct  rentals and sales  substantially
               increased the  Company's  margins and now represent a majority of
               the Company's revenue.

            o  The  Company  has  expanded  its  product  offerings  beyond  the
               traditional TENS and muscle stimulation products offered by other
               electrotherapy  companies  to include  the  additional  treatment
               modalities of  interferential  stimulation,  pulsed  galvanic and
               microcurrent.  The Company  plans to  continue  to  evaluate  and
               develop  compact,   portable  versions  of  other  electrotherapy
               modalities  that can extend the ability of health care  providers
               to offer home health care.

<PAGE>

            o  The Company is developing  diagnosis  based products  designed to
               enhance  the  application  of  its  electrotherapy  products  for
               specific  injuries and conditions.  The Company currently sells a
               TENS unit for use in  controlling  pain in child birth  through a
               distributor in the United Kingdom under the BabiTENS name.

            o  The Company began manufacturing many of its own electrodes during
               fiscal  1994 in order to improve  operating  margins  and provide
               additional quality control.

            o  During the last half of fiscal 1996, the Company began  marketing
               an  electrotherapy  product  designed for early  intervention and
               rehabilitation  of cumulative  trauma injuries to the wrist.  The
               Company  received  a patent  on its  CTDx(TM)  Electrostimulation
               System which includes a SmartBrace(TM)  wrist splint,  SmartBrace
               electrodes  and the  CTDx  electrical  stimulation  device.  This
               system  can be used at the work site or  clinics  which  focus on
               occupational and industrial medicine.

            o  During  the  latter  part  of  fiscal  1997,  the  Company  began
               marketing another proprietary  electromedical stimulator designed
               for use on knees  immediately  after  surgery.  The Ortho  Dx(TM)
               Electrotherapy  System  combines a  high-volt  pulsed  current to
               increase local blood circulation and help deal with post-surgical
               swelling  with  a  neuromuscular  stimulator  to  re-educate  and
               strengthen key muscle groups in the leg.


PRODUCTS

         The   Company   offers  a  number   of   electrotherapy   devices   for
rehabilitation   as  well  as  several  products  for  chronic  and  acute  pain
management.   These  products  consist  of  small,   portable,   battery-powered
electrical pulse generators which are connected by wires to electrodes placed on
the skin.  Rehabilitation  products  accounted for  approximately 41% percent of
total revenue in fiscal 1997 and 47% in fiscal 1996.  Pain  management  products
accounted for  approximately 25% percent of total revenue in fiscal 1997 and 24%
in fiscal 1996. The balance of the Company's  revenue  resulted from the sale of
accessories used with treatment modalities.

REHABILITATION PRODUCTS

         The  Company  offers  a  variety  of  electrotherapy  products  for the
rehabilitation  market,  including  neuromuscular  stimulators,  pulsed galvanic
devices and interferential stimulators. These products are offered separately as
portable, wearable devices or as modalities insertable in the Company's clinical
Plexus  System.  The Plexus  System is  designed  to provide  clinicians  with a
convenient  and  portable  unit with which they can offer a variety of treatment
options in the office,  on the  athletic  playing  field or at other  locations.
Plexus  Systems  consist  of a base  station  and a  number  of  interchangeable
treatment  modalities.  It allows  the  clinician  to test the  efficacy  of the
Company's home treatment  modalities in  rehabilitating  patient injuries before
recommending  the rental or purchase of the modality.  The Plexus I (holding one
modality)  and the Plexus III (holding  three  modalities)  base stations can be
plugged into a wall outlet or run on a self-contained  battery pack. The Company
believes that Plexus is the only system that offers clinicians such an extensive
selection of portable  electrotherapy  modalities  previously  available only as
large tabletop systems.

         NEUROMUSCULAR  STIMULATION DEVICES. NMS devices,  such as the Company's
NM  III(TM),  are  designed to activate  muscles  for  rehabilitation  purposes.
Neuromuscular   stimulation  has  proven   effective  in  producing   controlled
involuntary  muscle  contractions  which assist in maintaining  the strength and
mobility of a limb and preventing deterioration of muscle tissue in patients who
are  unable to  perform  voluntary  muscle  contractions.  Physicians  have also
prescribed  neuromuscular  stimulation in a variety of  circumstances to improve
muscle tone,  increase joint  mobility,  and accelerate  recovery from traumatic
injury.  Common uses of NMS therapy include muscle re-education  associated with
common knee  injuries;  relaxation  of muscle  spasms in the neck,  shoulder and
pelvic  girdle;  reduction of swelling  (edema);  reduction of  spasticity;  and
increase in range of motion  when  limitation  in joint  rotation is due to soft
tissue shortening.

         PULSED GALVANIC DEVICES.  The Company's pulsed galvanic device,  the GV
II(TM),  provides  paired  electrical  pulses  instead of the single  electrical
pulses provided by conventional NMS devices. Each pulse is much stronger and can
achieve  higher  voltages  than NMS  devices.  Pulsed  galvanic  is a  treatment
modality  used by many physical  therapists to reduce edema and pain  associated
with  sciatica,   post-operative   arthroscopic   surgery,   spinal  fusion  and
degenerative neck discs.
<PAGE>

         INTERFERENTIAL  STIMULATION DEVICES.  Interferential is another form of
electrical  stimulation  commonly  used in physical  therapy.  The  Company's IF
II(TM) interferential  stimulator consists of two channels of fixed and variable
frequencies,  and delivers a  continuous,  high energy output that provides deep
tissue  penetration and creates a soothing,  mild heating action in the affected
area.  The IF II is used for the treatment of pain and edema;  to increase blood
flow and reduce muscle spasm associated with lower back problems,  knee repairs,
shoulder pain and tennis elbow; and for podiatric applications.

PAIN MANAGEMENT PRODUCTS

         Electrotherapy  products for pain  management,  primarily TENS devices,
are also  offered as  portable  wearable  devices or as Plexus  modalities.  The
Company is continually  enhancing such devices to incorporate new technology and
to enhance their usability.

         TRANSCUTANEOUS  ELECTRICAL NERVE STIMULATION DEVICES. TENS devices have
been used as a  non-narcotic  alternative  or supplement to drug therapy for the
relief  of  chronic  and  acute  pain for over 25  years.  Although  TENS is not
effective  for every  patient or every  condition,  medical  professionals  have
generally  accepted  TENS as an  effective  treatment  for chronic or acute pain
resulting  from  a  variety  of  medical  conditions.  These  devices  are  most
frequently  used to treat  persistent  conditions  such as low back pain,  joint
stiffness  and  muscle  spasm.  Physicians  have also  prescribed  TENS for pain
resulting  from a  variety  of other  conditions  including  abdominal  surgery,
post-operative pain, tendonitis, phantom limb pain and child birth. TENS devices
generally  reduce pain during treatment and for a period of time following usage
but do not cure the cause of the pain.

         Two  theories  have been  advanced  to explain the manner in which TENS
alleviates  pain.  The "gate  control  theory"  postulates  that the  electrical
impulses from TENS devices block or interfere with the neurological transmission
of pain  signals  from the site of the  injury  to the  brain.  A second  theory
suggests  that the  electrical  impulses  prompt the release of  enkephalins  or
endorphins,  the body's  natural pain  suppressing  agents.  Neither  theory has
conclusive support in scientific literature.  Under either theory, TENS relieves
pain without the costs and risks associated with surgery or the undesirable side
effects and physiological  problems of prolonged drug use, including  addiction,
stupor, depression, disorientation, nausea and ulcers.

         The Company's  current TENS line consists of five  different  products.
The Company believes its Matrix(TM) is one of the most technologically  advanced
TENS devices currently  available.  Incorporating five core treatments and eight
programmed  modes,  the Matrix I provides a comprehensive  range of TENS options
for chronic,  acute and post-surgical pain management.  The UltraPac SX(TM) is a
full-featured   TENS  stimulator  that  offers  a  high  degree  of  programming
flexibility. In addition to continuous stimulation and cycle burst, the UltraPac
SX incorporates  three options through which pulse rate, pulse width or both are
fully modulated.  The SMP(TM) offers a unique mode that alternates  between high
rates of stimulation for pain control and low frequency stimulation to match the
slow  firing  rates of  sympathetic  nerve  fibers,  a  conventional  continuous
stimulation mode and a burst mode. All of these devices use integrated  circuits
and incorporate surface mount technology to minimize size and weight.

         In addition to its reusable TENS devices, the Company has developed and
markets FasTENS(TM),  a disposable acute pain management device for treatment of
post-operative  pain. There are more than 500,000 orthopedic surgical procedures
done  each  year,  virtually  all of  which  require  the use of  narcotic  pain
medication.  FasTENS is a safe and effective adjunct therapy for  post-operative
orthopedic  pain  control.  The  Company  believes  that the use of FasTENS  can
decrease the amount of narcotic pain medication  needed,  providing  significant
benefits to the patient and cost savings to all parties concerned.  Powered by a
lithium battery  activated by a pull tab, FasTENS provides five to seven days of
treatment in  continuous  use. Upon  completion  of the therapy,  FasTENS can be
discarded or returned to the Company for recycling.

         The  Company  has an OEM  contract  with a  distributor  in the  United
Kingdom  for the use of a  modified  TENS unit  (BabiTENS)  manufactured  by the
Company for pain control during labor and child birth.  That device is now being
distributed  through a large pharmacy chain as a widely accepted  alternative to
narcotic pain management.


<PAGE>

MICROCURRENT DEVICES

         Microcurrent is a low level form of electrical stimulation that is very
well respected by certain clinicians.  Because microcurrent provides stimulation
below  sensory nerve levels,  there is no noticeable  sensation  during its use.
Many patients  have claimed  significant  relief from pain and edema  associated
with soft tissue injury using microcurrent where other treatment modalities have
failed.  The Company began producing its own home microcurrent  device (HMC(TM))
in late 1994.

ACCESSORIES

         Users of medical  rehabilitation  and pain  management  devices require
various  accessories.  The Company sells  self-adhesive  and reusable  electrode
pads,  disposable   electrodes,   electrode  leadwires,   disposable  batteries,
rechargeable batteries, and a power pack which eliminates the need for batteries
in a number of the Company's devices. The Company started  manufacturing its own
line of  electrodes  late in fiscal  1994 and  purchases  other  electrodes  and
accessories  from outside  suppliers.  Accessories,  including those provided at
clinics with initial product rentals, accounted for approximately 34% of revenue
in fiscal 1997 and 29% in fiscal 1996.

SALES AND MARKETING

         The Company  sells its  products in a variety of markets and to a broad
range of customers.  Key decision  makers in  recommending  use of the Company's
products  to  patients   include   physical   therapists,   athletic   trainers,
occupational therapists, podiatrists, chiropractors,  neurologists, dentists and
orthopedic  surgeons.  The Company has  historically  approached  these decision
makers  through a network of home health care and specialty  equipment  dealers.
During  the past five  years,  it has  emphasized  direct  rentals  and sales to
patients through health care providers.

DIRECT DISTRIBUTION

         The Company offers  referring  clinicians a wide range of equipment for
their clinical and home  electrotherapy  needs.  The  cornerstone of this direct
marketing  approach is the Plexus base station.  The  clinician  uses the Plexus
base station and a variety of treatment  modalities to determine  which modality
provides the most effective therapy to the patient.  The clinician then arranges
for the patient's physician to provide a prescription for use of the modality at
home.  The home modality is identical to the clinical  version,  thus allowing a
continuity  of care from clinic to home.  The Company  believes this approach to
clinical  training  before  home use has  many  benefits  for both the  treating
clinician and patient:

            o  Valuable  clinician time is not devoted to repeat  therapies over
               an extended time period,  providing the clinician with additional
               time for new patients.

            o  Patient  compliance,  or proper use of the modality,  is enhanced
               because  the  patient is trained in the use of the product at the
               clinic and is allowed to experience the sensation  resulting from
               proper use.

            o  The patient's  satisfaction is enhanced  through contact with the
               Company's  patient care and clinical  staff,  ensuring  continued
               proper  use of the  product,  adequacy  of patient  supplies  and
               product maintenance.

         The Company  uses a network of  independent  sales  representatives  to
contact and support clinics that provide its product to patients.

         When a treating  clinician chooses a modality for home use by a patient
and a  prescription  is written,  the  clinician  notifies  the Company that the
patient has  received  the  equipment  and provides  information  necessary  for
Rehabilicare  to bill the  patient's  insurance  carrier  directly.  The billing
process begins with the new patient sales  department  making phone contact with
the patient to ensure that the product is working  properly  and that all of the
patient's questions are answered. The new patient sales department also verifies
coverage with the patient's insurance carrier and requests any other information
needed prior to generating an invoice to the carrier.

<PAGE>

         To  supplement  the  assistance   offered  by  the  new  patient  sales
department,  the Company  employs  clinicians who  communicate  with patients by
phone from a purely  clinical  perspective and respond to calls from patients to
ensure  products are working and used properly.  This department then reports to
the  prescribing  clinician,  allowing  the  clinician to contact the patient to
alter therapy, as appropriate.

WHOLESALE AND INTERNATIONAL

         The  Company  has  worked  to  redirect   its   traditional   wholesale
operations,  including a change in its domestic distributor  arrangements,  to a
nonexclusive  form. The Company sells its product to approximately  200 domestic
distributors  in the home health care or durable  medical  equipment  market who
sell or rent products on a nonexclusive  basis to users referred by a physician,
clinician or other health care provider.

         The Company continues its efforts to expand international sales through
the use of  foreign  distributors.  Beginning  in  fiscal  1995,  the  Company's
distributor  in the  United  Kingdom  established  a  relationship  with a large
pharmacy chain which utilizes the services of midwives and specifically  trained
advisors to acquaint  women with the advantages of  electrotherapy  during labor
and  delivery.  During  fiscal  1997 the  Company  increased  its  sales to that
distributor  by 32% as the  program  continued  to expand.  The  Company is also
attempting to expand international sales in Western Europe.

NEW PRODUCT DEVELOPMENT

         The  Company's  research and  development  efforts  have been  directed
primarily at developing new lines of electrotherapy  products for rehabilitation
applications.  Efforts are being focused on developing  enhancements of existing
products for use with specific  diagnosed medical problems.  The Company's first
development  effort in diagnosis  based products was a product line designed for
cumulative trauma disorders, such as carpal tunnel syndrome. During fiscal 1996,
it received a patent on its CTDx Electrostimulation System. That system includes
a  SmartBrace  wrist  splint,   SmartBrace  electrodes  and  a  CTDx  electrical
stimulation  device.  It provides a non-narcotic,  non-invasive and conservative
treatment for wrist pain. The system can be effectively used at the work site or
in a clinic  specializing  in  occupational  and  industrial  medicine.  Similar
applications  for other areas affected by repetitive  stress are currently being
studied. Its second product in that area is the Ortho Dx Electrotheraphy  System
designed to speed the recovery from  knee-surgery  and, at the same time, reduce
the costs of such procedures.

         Efforts by  governmental  agencies,  insurance  companies and others to
reduce  health care  spending have  affected,  and will continue to affect,  the
Company's  operating results.  The cost of a significant portion of medical care
in the United States is funded by government, such as Medicare and Medicaid, and
by health maintenance organizations and private insurers. Governmentally imposed
limits on  reimbursement  of  hospitals  and other  health care  providers  have
significantly   impacted  their  spending  budgets.   Under  certain  government
insurance  programs,  a health  care  provider  is  reimbursed  a fixed  sum for
services  rendered in treating a patient,  regardless  of the actual  charge for
such  treatment.  Private  third-party  reimbursement  plans are also developing
increasingly  sophisticated  methods of  controlling  health care costs  through
redesign  of  benefits  and  exploration  of  more  cost  effective  methods  of
delivering   health  care.  In  general,   these  government  and  private  cost
containment  measures have caused health care  providers to be more selective in
the purchase of medical products.

         Under most third-party  reimbursement plans, the coverage of an item or
service  and the amount of  payment  that will be made are  separate  decisions.
Efforts to reduce or control  health care  spending are likely to limit both the
coverage of certain medical devices,  especially newly approved products and the
amount of payment that will be allowed.  Restrictions on coverage and payment of
the Company's products by third-party payors could have an adverse impact on the
Company. Management is attempting to establish relationships with such payors to
assure coverage of its products and make the timing and extent of  reimbursement
more predictable.

REGULATION

         The  medical  devices  manufactured  and  marketed  by the  Company are
subject to regulation by the Food and Drug Administration (the FDA) and, in some
instances,  by  foreign  governments.   Under  the  1976  Amendments  (the  1976
Amendments)  to  the  Federal  Food,  Drug  and  Cosmetic  Act  (the  Act),  and
regulations promulgated thereunder, manufacturers of medical devices must comply
with certain  controls that regulate the testing,  manufacturing,  packaging and
marketing of medical devices.  The Act and regulations  thereunder  create three
classifications  for  medical  devices,  each of which is subject  to  different
levels of regulatory  control,  with Class I being the least stringent and Class
III being subject to the most control.  Class III devices are generally  subject

<PAGE>

to a clinical  evaluation  program conducted before a device receives  premarket
approval by the FDA for commercial distribution. Class II devices are subject in
some cases to  performance  standards that are typically  developed  through the
joint  efforts of the FDA and  manufacturers,  but they do not require  clinical
evaluation  and premarket  approval by the FDA.  Performance  standards for most
Class II devices,  including the Company's  products,  have not been adopted, so
only Class I general  controls  apply to Class II devices  that are  lawfully in
commercial distribution. The Company believes that all of its currently marketed
products are Class II products  under this  classification  system and that they
will not require clinical  evaluation and premarket approval prior to commercial
distribution.

         If a new device is  substantially  equivalent  to a device  that was in
commercial  distribution  prior to the effective date of the 1976 Amendments and
has been continuously  marketed since that date, premarket approval requirements
are satisfied through a 510(k) premarket  notification  submission,  under which
the applicant provides product  information  supporting its claim of substantial
equivalence.  This  process  may  take a year or  longer.  Because  TENS and NMS
devices  were  marketed  prior to  1976,  all  design  enhancements  since  1976
requiring regulatory approval have been marketed under this less burdensome form
of FDA procedure.

         As a manufacturer  of medical  devices,  the Company is also subject to
certain other FDA regulations,  and its  manufacturing  processes and facilities
are  subject  to  continuing  review by the FDA to ensure  compliance  with Good
Manufacturing Practices regulations. The Company believes that its manufacturing
and quality control procedures  substantially conform to the requirements of the
FDA  regulations.  New regulations have been adopted and now are very similar to
the  international  quality  standards  set forth in ISO 9000.  The  Company has
received  certification of its compliance with ISO 9001, EN46001 and the Medical
Device Directives.

MANUFACTURING AND SOURCES OF SUPPLY

         Manufacturing  operations  consist  primarily of installing  electronic
components  and materials onto printed  circuit boards and assembling  them into
the final product  package.  To decrease  size and weight and maximize  quality,
many of the Company's  products  incorporate  surface mount  technology  and the
Company has  purchased  and  utilizes  machinery  automating  surface  mount and
through-hole circuit board manufacturing.  Many components are available off the
shelf from a number of different suppliers. Some, however, such as certain cases
and circuit boards used in its products, are custom manufactured for the Company
and are thus  available  from  only one  supplier.  The  Company  believes  that
alternative  suppliers  could  be  arranged,  if  needed,   without  a  material
disruption of its operations. The Company manufactures its products on the basis
of firm purchase  orders and to replenish  inventory  levels.  The Company ships
most  products  within one or two days of order  receipt.  For this reason,  the
Company typically has no significant order backlog.

PROPRIETARY RIGHTS

         In July 1996, the Company received U.S. Patent approval of its new CTDx
Electrostimulation System which includes the SmartBrace wrist splint, SmartBrace
electrodes and CTDx electrical  stimulation  device. This is the Company's first
patent  on an  electrotherapy  product.  During  fiscal  year  1997 the  Company
submitted several more patent applications for approval.  These applications are
pending.  The  Company  believes  that the United  States  Patent and  Trademark
offices  could  conclude  that  many of its  other  products  utilize  presently
existing technology and that the cost of processing a patent application for all
products could not be justified by the limited protection it would provide.  The
Company  hopes to  continue to keep its  products  competitive  by revising  the
technology that they utilize.

COMPETITION

         Numerous  other   companies   currently   manufacture   and  distribute
electrotherapy  rehabilitation  and  pain  management  devices.  Some  of  these
competitors have greater resources and name recognition than the Company and may
be better  able to  respond  to  changing  market and  industry  conditions.  In
addition,  these  companies  may have greater  experience  in employing a direct
method of distribution  and may benefit from  established  relationships in this
distribution channel. The Company believes that its principal competitors in the
electrotherapy   pain   management   market  and  in  the  NMS  portion  of  the
electrotherapy  rehabilitation  market are Empi,  Inc.  and  Staodyn,  Inc.  The
Company  competes  in these  markets  primarily  on the basis of service and the
variety and quality of its product offerings. The electrotherapy  rehabilitation
market for modalities  other than NMS, such as  interferential,  pulsed galvanic
and microcurrent,  is more fragmented and more difficult to define.  The Company
believes that its ability to offer all of these modalities is in contrast to the
focus of its principal competitors.  The Company further believes that there are

<PAGE>

no  dominant  competitors  for these  other  modalities  and that the  number of
modalities it offers,  together with the  distinctive  features of its products,
allow it to compete favorably in this market.

EMPLOYEES

         As of  September  16,  1997,  the Company  had 92 full time  employees,
including  26 in sales and  marketing,  8 in  research  and  development,  32 in
manufacturing, and 26 in finance and administration. The Company's employees are
not represented by any collective  bargaining  organization  and the Company has
never experienced a work stoppage.  The Company believes that its relations with
its employees are satisfactory.

ITEM 2.  DESCRIPTION OF PROPERTY.

         The  Company's  corporate  headquarters  is  located  in New  Brighton,
Minnesota,  a suburb of St. Paul. The Company owns a 30,000 square foot facility
constructed during fiscal 1995. The facility includes approximately 5,000 square
feet of expansion  space.  All operations  other than field sales activities are
conducted  in  this  building.  In the  opinion  of  management,  the  Company's
properties are adequately covered by insurance.

ITEM 3.  LEGAL PROCEEDINGS.

         The Company  has,  from time to time,  been a party to certain  claims,
legal  actions  and  complaints  arising  in the  ordinary  course of  business.
Management  does not believe that the resolution of such matters has had or will
have a material  impact on the  Company's  results of  operations  or  financial
position.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         There were no matters submitted to a vote of the Company's shareholders
during the quarter ended June 30, 1997.


<PAGE>



                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         The common stock of the Company trades on The Nasdaq Stock Market under
the symbol REHB.  The  following  table sets forth the high and low closing sale
prices of the  Company's  common stock for the periods  indicated,  as quoted by
Nasdaq:

                                        Closing Sale Price
                                        ------------------
                                        High           Low
                                        ----           ---
Fiscal year ending June 30, 1997
         First Quarter                  4 5/16         3
         Second Quarter                 4 1/4          2 3/8
         Third Quarter                  4 1/4          2 7/8
         Fourth Quarter                 3 3/4          2 3/4


                                        Closing Sale Price
                                        ------------------
                                        High           Low
                                        ----           ---
Fiscal year ending June 30, 1996
         First Quarter                  4              2 1/2
         Second Quarter                 4              2 1/4
         Third Quarter                  5 1/4          3 1/2
         Fourth Quarter                 4 3/4          3 3/8

         The last  sale  price  reported  by Nasdaq on  September  16,  1997 was
$3.6875.  As of September 16, 1997, there were approximately 380 shareholders of
record (not including  beneficial  holders) and the Company estimates there were
approximately 1,000 beneficial holders.

         The  Company has never  declared or paid a cash  dividend on its Common
Stock. The Company currently intends to retain earnings for use in the operation
and expansion of its business and therefore does not anticipate  paying any cash
dividends in the foreseeable future.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
RESULTS OF OPERATIONS.

OVERVIEW

         The Company has designed,  manufactured and distributed  electrotherapy
products for  clinical and home health care uses for over 25 years.  Its product
line  focused  primarily  on pain  management  until the late  1980s when it was
expanded to include a variety of rehabilitation  products.  Management  believes
that the rehabilitation market, including occupational medicine applications, is
growing more rapidly than the pain  management  market,  thus providing  greater
potential for revenue growth.

         Historically,  the Company  distributed its products  primarily through
sales to  regional  home health care  dealers  which  resold them to health care
providers or patients  upon  prescription  by  physicians.  In fiscal 1992,  the
Company  began  distributing  directly  to  patients.  Clinical  versions of the
Company's  electrotherapy  modalities  are  placed  with  physicians,   physical
therapists  and other  health care  providers  who refer home  versions of those
modalities to patients after  determining  the most  appropriate  treatment.  An
inventory of home units is left on consignment with such providers.

         The  Company  bills the  patient  or the  patient's  insurance  carrier
directly upon  notification  that a unit has been prescribed and provided to the
patient. It also takes responsibility for patient follow-up,  including the sale
of additional  supplies and any service  required for its products.  The Company
believes that its shift to a direct sales approach has improved  margins and its
ability to  penetrate  existing  markets.  It has also  resulted in  significant
increases in consignment inventory and receivables.


<PAGE>



RESULTS OF OPERATIONS

         The  following  table  sets forth  information  from the  statement  of
operations as a percentage of revenue for the periods indicated:
                               
                                                  Year Ended June 30
                                                  ------------------
                                                  1997          1996
                                                  ----          ----

         Net sales and rental revenue             100.0%        100.0%
         Cost of sales and rentals                 25.1          26.8

         Gross profit                              74.9          73.2

         Operating expenses -
             Selling, general and administrative   60.8          59.9
             Research and development               4.8           5.7
                  Total operating expenses         65.6          65.6

         Operating income                           9.3           7.6

         Other expense                              1.8           2.5

         Provision for income taxes                 2.4           1.9

         Net income                                 5.1           3.2


COMPARISON OF YEAR ENDED JUNE 30, 1997 TO YEAR ENDED JUNE 30, 1996

         Revenue was  $10,991,000 in fiscal 1997, a 26% increase from $8,703,000
in fiscal  1996.  Net sales and  rental  revenue  from  direct  distribution  to
patients   increased  31%  to  $8,835,000  from  $6,733,000  and  accounted  for
approximately  80% of total  revenue in fiscal 1997 and 77% in fiscal 1996.  The
increase  was due  primarily  to a 23%  increase  in the number of new  patients
receiving  the  Company's  products in fiscal 1997.  Revenue from the  Company's
traditional  dealer business  increased 9% to $2,156,000 from $1,970,000  during
fiscal 1997. That increase was equally spread between domestic and international
sales.

         Gross profit was  $8,231,000  or 75% of revenue in fiscal 1997 compared
with  $6,370,000  or 73% of revenue in fiscal 1996.  Margins on dealer  business
were 48% in fiscal 1997 and 50% in fiscal 1996. The variance is due primarily to
product  mix.  Margins on direct  sales and rentals were 80% in both fiscal 1997
and fiscal 1996.

         Selling,   general  and   administrative   expenses  increased  28%  to
$6,683,000  in fiscal  1997 from  $5,210,000  in fiscal  1996.  As a percent  of
revenue,  those  expenses  increased  from 60% to 61% of sales due  primarily to
additional provision for uncollectible receivables recorded during the year. The
Company  also  incurred  additional  marketing  expense in  connection  with the
introduction of its new CTDx product line.

         Research  and  development  expense  was  $528,000  or 5% of revenue in
fiscal  1997  compared  with  $495,000  or 6% of  revenue  in fiscal  1996.  The
additional expense related to expansion of the CTDx product line and development
of the new Ortho Dx product.

         Operating  income was  $1,021,000 in fiscal 1997 compared with $665,000
in fiscal 1996 as a result of the increase in revenues and careful management of
costs and  expenses.  Net income  was  $564,000  in fiscal  1997  compared  with
$282,000 in fiscal 1996.  The  effective  income tax rate of 32% for fiscal 1997
was lower than the 37%  effective  rate for fiscal 1996 due to creation of a tax
advantaged  Foreign Sales  Corporation (FSC) and a reduction of excess liability
recorded in previous years.

<PAGE>

COMPARISON OF YEAR ENDED JUNE 30, 1996 TO YEAR ENDED JUNE 30, 1995

         Revenue was $8,703,000 in fiscal 1996, a 6% decrease from $9,249,000 in
fiscal 1995. Net sales and rental revenue from direct  distribution  to patients
decreased 6% to $6,733,000 from $7,158,000 and accounted for  approximately  77%
of total  revenue in both fiscal 1996 and fiscal  1995.  The decrease in revenue
was due  primarily  to a change in mix of  business  with  fewer  sales and more
rentals.  Revenue from the Company's traditional dealer business decreased 6% to
$1,970,000  from  $2,091,000  during fiscal 1995.  The decrease  resulted from a
decline in the number of domestic distributors for the Company's products as the
health care market continued to change and consolidate.

         Gross profit was  $6,370,000  or 73% of revenue in fiscal 1996 compared
with  $6,466,000  or 70% of revenue in fiscal 1995.  Margins on dealer  business
were 50% in fiscal 1996 and 47% in fiscal 1995. The variance is due primarily to
product  mix as selling  prices were not  increased  and  production  costs were
essentially the same in both years. Margins on direct sales and rentals were 80%
in fiscal 1996 and 77% in fiscal 1995. That  improvement  resulted  largely from
reduced  depreciation  expense as much of the clinical equipment  approached the
end of the estimated useful life originally adopted.

         Selling, general and administrative expenses increased 2% to $5,210,000
in fiscal 1996 from  $5,089,000 in fiscal 1995.  As a percent of revenue,  those
expenses  increased  from  55% to 60%  of  sales  due  primarily  to  additional
provision for uncollectible  receivables recorded during the fourth quarter. The
Company also incurred  additional expense to recruit and train an expanded sales
force.

         Research  and  development  expense  was  $495,000  or 6% of revenue in
fiscal  1996  compared  with  $423,000  or 5% of  revenue  in fiscal  1995.  The
additional expense related to development of the new CTDx product line.

         Operating  income was $665,000 in fiscal 1996 compared with $954,000 in
fiscal 1995 as a result of the decrease in revenue and the increase in operating
expenses.  Net income was  $282,000 in fiscal  1996  compared  with  $640,000 in
fiscal 1995. The effective income tax rate of 26% for fiscal 1995 was reduced by
the increase in valuation reserve for deferred tax assets and the utilization of
certain tax credits.  There were no significant  adjustments included in the 37%
effective rate for 1996.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

         The Company  generated cash of $545,000 from  operations in fiscal 1997
after  using  cash  of  $525,000  in  fiscal  1996.  The  change  was  primarily
attributable  to a decrease  of  $127,000  in  inventories  during  fiscal  1997
compared with an increase of $760,000 in  inventories  during  fiscal 1996.  The
cash  required to increase  inventories  in fiscal 1996 related to both clinical
units and consignment units required to expand the direct distribution business.
A more stable number of sales representatives and efforts to utilize inventories
more efficiently  provided cash in fiscal 1997. The change in cash during fiscal
1997 was also  attributable to the increase in net income,  less the impact of a
decrease  in  depreciation  from  $252,000 to  $149,000,  plus a decrease in the
provisions for deferred income taxes from $233,000 to $79,000

         Operations have previously required significant amounts of cash to fund
increases in receivables.  Net receivables increased $345,000 in fiscal 1997 and
$301,000 in fiscal 1996.  During fiscal 1997, the Company provided an additional
$1,362,000 for uncollectible receivables and wrote off $1,419,000 of accounts it
considered  uncollectible,  for a net  decrease  of $57,000 in the  reserve  for
uncollectible  accounts.  As a percent of  receivables,  the  reserve  therefore
decreased from 21% to 19%. During fiscal 1996, the Company had increased its net
reserve for uncollectible accounts by $811,000, from 12% to 21% of receivables.

          The reserve for uncollectible accounts is determined after considering
various factors including  historical  trends,  relationship and experience with
insurance  or other third party payors and patient  responsibility  for charges.
The Company  believes  that its current  reserve for  uncollectible  accounts is
adequate.  However,  it will be necessary to continue  maintaining a significant
reserve to cover  instances  where the extent of  insurance  coverage  cannot be
verified prior to distributing home units to patients.

         Cash of  $162,000  was used in  investing  activities  in  fiscal  1997
compared with $110,000 in fiscal 1996. Most of the usage related to purchases of
property and equipment and expenses related to new patents.
<PAGE>

         Financing activities used cash of $369,000 in fiscal 1997 compared with
providing  $612,000 of cash in fiscal 1996. The Company  entered into a $600,000
term loan  agreement  in fiscal  1996,  primarily  to finance  its  increase  in
inventories.  In fiscal 1997,  the Company  repaid  $292,000 of long-term  debt,
including  that term loan,  and also paid $215,000 on its revolving bank line of
credit  compared  with  payments of $95,000 in fiscal  1996.  The line of credit
provides  for  borrowings  up  to  $2,000,000,   limited  by  eligible  accounts
receivable.  At June 30,  1997,  the  borrowing  base  limit  was  approximately
$1,519,000 Borrowings under the line were $340,000 at June 30, 1997 and $555,000
at June 30, 1996. The Company  anticipates that cash requirements  during fiscal
1998 will be less than its available credit facility.

SAFE HARBOR STATEMENT PURSUANT TO THE PRIVATE SECURITIES 
LITIGATION REFORM ACT OF 1995

         This report contains "forward-looking statements" within the meaning of
Federal securities laws. The forward looking statements are subject to risks and
uncertainties,  including, but not limited to, the risks related to fluctuations
in  the  Company's  quarterly  operating  results;   inventory  and  receivables
requirements  for direct  billed  medical  equipment  sales;  volatility  in the
markets for electrotherapy;  the effects of reimbursement and other governmental
or private agency actions on the Company's  sales;  competition  and other risks
that may be detailed in the Company's  filings with the  Securities and Exchange
Commission.

ITEM 7.  FINANCIAL STATEMENTS.

         The following  financial  statements and financial  statement schedules
are attached as a separate section  immediately  following the signature page of
this Annual Report on Form 10-KSB:

         Report of Independent Accountants
         Balance Sheets as of June 30, 1997 and 1996
         Statements  of  Operations  for the years  ended June 30, 1997 and 1996
         Statement of Changes in  Stockholders'  Equity for the years ended June
            30, 1997 and 1996 
         Statements of Cash Flows for the years ended June 30, 1997 and 1996 
         Notes to Financial Statements  
         Supplemental  Schedule for the years ended June 30, 1997 and 1996:
            Schedule II - Valuation and Qualifying Accounts           

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
FINANCIAL DISCLOSURE.

         None.



<PAGE>


                                    PART III

ITEM  9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 
COMPLIANCE WITH SECTION 16(A)OF THE EXCHANGE ACT.

 DIRECTORS
                            Director     Principal occupation and business
       Name          Age     since        experience for past five years
------------------- -----  ----------    ----------------------------------

Robert C. Wingrove   65    June 1972     Chairman of the Board of the Company
                                         since 1984; Chief Technical Officer of
                                         the Company since 1990.

William R. Hibbs     54    August 1989   Partner with the Dorsey & Whitney law 
                                         firm (counsel to the Company) since 
                                         1974.    

David B. Kaysen      48    March 1992    President and Chief Executive Officer
                                         of the Company since March 1992.

Donn O. Berkeland    39    June 1992     Founder, President and Chief Executive
                                         Officer of Two Rivers Center, Inc. (an
                                         outpatient physical therapy and sports
                                         medicine clinic located in Coon Rapids,
                                         Minnesota) since 1981.

John H. P. Maley     62    December 1996 Chairman of Magister Corporation (a
                                         developer and marketer of consumer
                                         healthcare products) since July 1995; 
                                         from March 1976 to December 1994,
                                         Chairman and CEO of Chattanooga Group
                                         (a manufacturer of physical therapy
                                         products).

Richard E. Jahnke    49    January 1997  President and Chief Operating Officer 
                                         of CNS, Inc. (a manufacturer of 
                                         consumer products, including the 
                                         Breathe Right nasal strip) since 1993;
                                         from 1991 to 1993, Executive Vice
                                         President and Chief Operating Officer
                                         of Lemna Corporation (a manufacturer
                                         of waste water treatment systems).

 EXECUTIVE OFFICERS

       Name             Age                     Position
--------------------   -----  ------------------------------------------------

Robert C. Wingrove      65    Chairman and Chief Technical Officer

David B. Kaysen         48    President and Chief Executive Officer

W. Glen Winchell        50    Vice President of Finance and 
                              Chief Financial Officer

William J. Sweeney      54    Vice President of Sales and Marketing
 
See the biographical information on Messrs. Wingrove and Kaysen under Directors.

W. Glen Winchell started with the Company as Vice President of Finance and Chief
Financial  Officer in September  1993.  From December 1990 to September 1993, he
was self-employed as a financial  consultant and owner/operator of several small
retail businesses.

William J.  Sweeney  started  with the  Company as Vice  President  of Sales and
Marketing in April 1996. From June 1993 to April 1996, he was employed by CIRCON
and Surgitek, Inc., a company acquired by CIRCON, both manufacturers of surgical
products,  most recently as Corporate Business Development Manger. From May 1992
to May  1993,  he was  Director  of  Sales  for  Applied  Medical  Resources,  a
distributor of vascular, urology and surgical products.


<PAGE>



COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires executive officers
and directors and persons who beneficially own more than 10 percent (10%) of the
Company's  Common  Stock to file  initial  reports of  ownership  and reports of
changes  in  ownership  with  the  Securities  and  Exchange  Commission  (SEC).
Executive  officers,  directors  and greater than ten percent  (10%)  beneficial
owners are required by SEC regulations to furnish the Company with copies of all
Section 16(a) forms they file.

Mr. Wingrove, an officer of the Company, filed late a report on Form 4 reporting
exercise of an option to purchase  30,000 shares of the  Company's  common stock
and his related  surrender of 19,535 shares of such stock as  consideration  for
the  exercise  price.  The Company  believes  that,  except with  respect to the
foregoing  report,  its  executive  officers  and  directors  complied  with all
applicable  Section  16(a)  filing  requirements  during and with respect to the
fiscal year ended June 30, 1997.

ITEM 10.  EXECUTIVE COMPENSATION.

The following table sets forth the cash and noncash  compensation  awarded to or
earned by the Chief Executive  Officer of the Company and each executive officer
of the  Company  who earned  salary and bonus in excess of  $100,000  during the
fiscal year ended June 30, 1997.

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

                                                                     Long-Term
                                        Annual Compensation         Compensation              
                                        -------------------             (2)           All
                                                                    ------------     Other  
       Name and                                          Other                    Compensation                               
  Principal Position       Year   Salary     Bonus    Compensation  Options (3)       (4)                
  ------------------       ----   ------     -----    ------------  -----------       ---                
<S>                        <C>    <C>        <C>      <C>           <C>              <C>
                                                                                                         
David B. Kaysen            1997   $163,125  $28,260        -           15,000        $750
  President and Chief      1996    155,531     -           -           15,000         904
  Executive Officer        1995    141,659     -           -           15,000         420

Robert C. Wingrove         1997   $125,800  $19,042        -           10,000        $753
  Chief Technical          1996    121,500     -           -           10,000         842
  Officer                  1995    115,500     -           -           15,000         524

W. Glen Winchell           1997   $ 97,692  $16,302        -            5,000        $759
  Vice President of        1996     91,875     -           -           10,000         788
  Finance and Chief        1995     79,000    1,280        -           20,000         500
  Financial Officer

William J. Sweeney         1997   $ 90,599  $16,325     20,000 (1)     10,000        $763
  Vice President of Sales  1996     20,249     -           -           30,000          -
  and Marketing (5)

----------
<FN>
(1)        Represents relocation expense allowance.

(2)        The Company did not award any restricted stock or make any 
           long-term incentive payments to executives.

(3)        Represents  the number of shares of Company  common stock that can be
           purchased upon the exercise of stock options granted during the year.

(4)        Represents Company contributions to a 401 (k) plan.

(5)        Mr.  Sweeney was employed as Vice  President of Sales and Marketing 
           in April 1996.
</FN>

</TABLE>


<PAGE>


OPTION GRANTS IN FISCAL 1997

The following  table sets forth  information  relating to options granted during
the twelve  months ended June 30, 1997 to the executive  officers  listed in the
Summary Compensation Table.
<TABLE>
<CAPTION>

                   Number of     % of Total Options
                    Shares           Granted to
                  Underlying        Employees in
   Name             Options          Fiscal Year        Exercise Price        Expiration Date
--------------   -------------  -------------------   ------------------    ------------------
<S>                 <C>                <C>                   <C>                  <C>    

Mr. Kaysen          15,000             23.1%                 $3.3125               9/9/01

Mr. Wingrove        10,000             15.4%                 $3.3125               9/9/01

Mr. Winchell         5,000             7.7%                  $3.3125               9/9/01

Mr. Sweeney         10,000             15.4%                 $3.3125               9/9/01
</TABLE>


OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES

The following  table  summarizes  the value of options held at the end of fiscal
1997 by the executive officers named in the Summary Compensation Table.
<TABLE>
<CAPTION>

                                                                                         Value of Unexercised
                                                  Number of Unexercised                  In-the-Money Options
                    Shares                     Options at End of Fiscal 1997           at End of Fiscal 1997 (2)
                   Acquired      Value         -----------------------------           -------------------------
                      on        Realized 
      Name         Exercise       (1)        Exercisable         Unexercisable    Exercisable        Unexercisable
----------------- ----------- ------------- ------------------------------------ ----------------------------------
<S>                <C>          <C>            <C>                  <C>             <C>                <C>
                                                          
Mr. Kaysen         100,000      $162,500       30,000               30,000          $34,688            $20,625

Mr. Wingrove        80,000      $111,250       23,000               22,000          $28,000            $17,000

Mr. Winchell          -            -           41,000               24,000          $54,688            $25,000

Mr. Sweeney           -            -           14,000               26,000           $ 375             $ 1,500

    --------
<FN>
    (1)      Represents the difference  between fair market value at date of exercise
             and the exercise price.

    (2)      Represents the difference between $3.50 (the last sales price at June 30, 1997) and the exercise
             price multiplied by the number of shares

    (3)      The Company loaned Mr. Kaysen $162,500 for the acquisition of these
             shares  pursuant to a promissory  note secured by 85,729  shares of
             Company  common stock owned by Mr.  Kaysen and bearing  interest at
             the prime rate.
</FN>
</TABLE>

SEVERANCE AGREEMENTS

The Company has entered into  Severance  Pay  Agreements  with Mr.  Kaysen,  Mr.
Winchell and Mr.  Sweeney which  provide for certain  payments in the event of a
change in control of the Company and the subsequent termination of the executive
by the Company  without cause or  voluntarily  by the executive for good reason,
all as defined in the agreements.  The terms of the agreement are two years. The
payments to be made in such event would be (i) the base salary earned and unpaid
through the date of  termination;  (ii) any earned and unpaid bonus with respect
to the fiscal year  preceding the  termination;  (iii) a pro rata portion of any
bonus  that  would  have  been  earned  in the  current  fiscal  year  based  on
annualizing the Company's financial and business performance through the date of
termination; (iv) any accrued vacation not taken; and (v) an amount equal to two
times Mr.  Kaysen's  and one  times Mr.  Winchell's  and Mr.  Sweeney's  average
annualized  cash  compensation  for the most recent five  taxable  years  ending
before the date of change in  control,  or such  portion of such  period  during
which such executive performed services for the Company.  The agreements provide

<PAGE>

that no amounts be paid  which  would  constitute  "excess  parachute  payments"
within the  meaning  of Section  280G of the  Internal  Revenue  Code of 1986 as
amended, or any successor provision or regulations promulgated thereunder.

COMPENSATION OF DIRECTORS

Directors who are not also officers or employees of the Company  receive fees of
$1,000 per quarter;  an option to purchase 2,500 shares of the Company's  common
stock under its 1988 Restated  Stock Option Plan on July 1 of each year; and are
reimbursed for their expenses in attending board meetings.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following  table sets forth, as of September 16, 1997,  certain  information
with respect to  beneficial  ownership of the  Company's  Common Stock as to (i)
each person or entity known by the Company to own  beneficially  more than 5% of
the  Company's  Common  Stock;  (ii) each  director of the  Company;  (iii) each
executive  officer of the Company named in the Summary  Compensation  Table; and
(iv) all  executive  officers and  directors as a group.  Except as indicated by
footnote,  the persons named in the table below have sole voting and  investment
power with respect to all shares of Common Stock shown as beneficially  owned by
them.

                                 Shares Beneficially
                                      Owned (1)              Percent Owned
                                ----------------------    -------------------
Woodland Partners LLC                865,200 (2)                17.8
60 South Sixth Street
Minneapolis, MN  55402

U.S. Bancorp                         424,450 (3)                 8.7
601 Second Avenue South
Minneapolis, MN  55402

Heartland Advisors, Inc.             400,000                     8.2
790 North Milwaukee Street
Milwaukee, WI  53202

Robert K. Anderson                   360,660                     7.4
8070 No. Coconino 
Paradise Valley, AZ 85253

Robert E. Buuck                      272,500 (4)                 5.6
9900 Bren Road East, Suite 421 
Minneapolis, MN 55343

Robert C. Wingrove                   209,684                     4.3

David B. Kaysen                      128,010                     2.6

W. Glen Winchell                      63,012                     1.3

William J. Sweeney                    20,000                      *

William R. Hibbs                      81,499                     1.7

Donn O. Berkeland                     25,000                      *
  
John H. P. Maley                       4,500                      *

Richard E. Jahnke                      4,500                      *

All Directors and Officers           536,205                    10.6
as a group (8 persons)

  *Less than 1%

<PAGE>

(1)    Includes for Mr. Wingrove, Mr. Kaysen, Mr. Winchell, Mr. Sweeney, 
       Mr. Hibbs, Mr. Berkeland, Mr. Maley, Mr. Jahnke and all directors and 
       officers as a group, 32,000 shares; 42,000 shares; 58,000 shares; 20,000
       shares; 12,500 shares; 12,500 shares; 4,500 shares; 4,500 shares;and
       186,000 shares, respectively, which can be purchased by exercise of 
       options which become exercisable within 60 days.

(2)    Woodland Partners LLP has sole voting power for 732,100 of these shares.

(3)    Includes 3,750 shares for which First Bank System, Inc. has shared 
       dispositive power.

(4)    Includes 187,500 shares held by the Buuck Family Partnership of which 
       Mr. Buuck is the trustee.


ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

William R. Hibbs,  a director of the  Company,  is a partner of Dorsey & Whitney
LLP. Dorsey & Whitney LLP provides legal services to the Company.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

             (a)  Index of Exhibits

Number                   Description
------                   -----------

  3       Restated Articles of Incorporation (c)

  3.1     Articles of Amendment to Restated Articles of Incorporation (f)

  4.1     Bylaws of the Company (c)

  4.2     1988 Restated Stock Option Plan, as amended (b)

  4.3     1994 Employee Stock Purchase Plan (d)

  4.4     Form of Incentive Stock Option Agreement (b)

  4.5     Form of Nonqualified Stock Option Agreement (a)

  4.6     Investment Agreement dated October 22, 1987 between the Company and 
          Mentor (a)

 10.1     Letter Agreement dated March 4, 1992 between the Company and David B. 
          Kaysen (d)

 10.2     Construction Loan Agreement dated October 20, 1994 between the Company
          and Norwest Bank  Minnesota,  N.A.,  together with related Real Estate
          Note;  Security Agreement;  and Mortgage Security  Agreement,  Fixture
          Financing Statement and Assignment of Leases and Rents (e)

 10.3     Contract for Private  Redevelopment dated October 20, 1994 between 
          the Company and the City of New Brighton, Minnesota (e)

 10.4     First Amendment dated January 10, 1995 to Contract for Private  
          Redevelopment dated October 20, 1994 between the Company and the     
          City of New Brighton, Minnesota (f)

 10.5     Agreement  for the Loan of Economic  Recovery  Funds dated October 20,
          1994  between  the Company  and the City of New  Brighton,  Minnesota,
          together with $199,900 Note and Mortgage (e)

 10.6     First  Amendment  dated December 19, 1994 to Agreement for the Loan of
          Economic Recovery Funds dated October 20, 1994 between the Company and
          the City of New Brighton,  Minnesota,  together with $199,900 Note and
          Mortgage (f)


<PAGE>

 10.7     Subordination  Agreement  dated  March 3,  1996  between  the  City 
          of New  Brighton  and Twin  Cities-Metro Development Company, as 
          authorized representative of the U.S. Small Business Administration 
          (SBA) (f)

 10.8     U.S.  Small  Business  Administration  Certified  Development  Company
          Program  "504" Note dated  March 3, 1995 for  $786,000  payable by the
          Company  to  Twin  Cities-Metro  Development  Company,  together  with
          related Loan Agreement, Mortgage and Assignment of Mortgage to SBA (f)

 10.9     Assessment  Agreement dated April 26, 1994 between the Company and the
          City of New  Brighton  and  Certification  by County  Assessor  of the
          County of Ramsey, State of Minnesota (f)

10.10     $65,000 Limited Revenue Tax Increment Note payable to the Company by 
          the City of New Brighton (f)

10.11     Credit Agreement dated December 1, 1994 between the Company and 
          Norwest Bank Minnesota, N.A. (f)

10.12     First  Amendment  dated June 27, 1996 to Credit  Agreement  dated  
          December 1, 1994  between the Company and Norwest Bank Minnesota, 
          N.A.(g)

10.13     Form of Severance Pay Agreement (h)

10.14     Stock Pledge Agreement and Promissory Note dated March 11, 1997 
          between the Company and David B. Kaysen

 23.1     Consent of Independent Public Accountants - Price Waterhouse LLP

 23.2     Consent of Independent Public Accountants - Arthur Andersen LLP

   99     Safe Harbor Statement pursuant to the Private Securities Litigation 
          Reform Act of 1995

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

  (a)     Incorporated  by reference to the Company's Form 10 filed with the 
          Commission on June 27,  1988 (File Number 0-9407)

  (b)     Incorporated  by reference to the Company's Form 10-Q for the quarter 
          ended  September 30, 1988 (File Number 0-9407)

  (c)     Incorporated by reference to the Company's Form 10-Q for the quarter 
          ended  December 31,  1992  (File Number 0-9407)

  (d)     Incorporated by reference to the Company's  Registration  Statement on
          Form S-2 filed on June 24, 1993 (File Number 33-64884)

  (e)     Incorporated  by reference to the Company's  Form 10-Q for the quarter
          ended September 30, 1994 (File Number 0-9407)

  (f)     Incorporated by reference to the Company's Form 10-KSB for the year 
          ended June 30, 1995 (File Number 0-9407)

  (g)     Incorporated by reference to the Company's Form 10-KSB for the year 
          ended June 30, 1996 (File Number 0-9407)

  (h)     Management contract




             (b) Reports on Form 8-K.  No reports on Form 8-K were filed  during
                 the quarter ended June 30, 1997.

<PAGE>



                                   SIGNATURES


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

                                REHABILICARE INC.


Dated:  September 25, 1997        By:    /s/ David B. Kaysen
                                         ---------------------------------------
                                         David B. Kaysen
                                         President and Chief  Executive Officer


         In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following  persons on behalf of the  registrant  and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>

                    NAME                                         TITLE                                 DATE
                    ----                                         -----                                 ----
<S>                                                <C>                                      <C>    

                                                   Chairman, Chief Technical
/s/ Robert C. Wingrove                             Officer and Director                     September 25, 1997
---------------------------------------------
Robert C. Wingrove


/s/ David B. Kaysen                                President, Chief Executive Officer       September 25, 1997
---------------------------------------------
David B. Kaysen
                                                   Vice President of Finance
                                                   (Principal Financial and
/s/ W. Glen Winchell                               Accounting Officer)                      September 25, 1997
---------------------------------------------
W. Glen Winchell


/s/ Donn O. Berkeland                              Director                                 September 25, 1997
---------------------------------------------
Donn O. Berkeland


                                                   Director                                 September 25, 1997
---------------------------------------------
William R. Hibbs



/s/ Richard E. Jahnke                              Director                                 September 25, 1997
---------------------------------------------
Richard E. Jahnke



/s/ John H.P. Maley                                Director                                 September 25, 1997
---------------------------------------------
John H.P. Maley


</TABLE>
<PAGE>







                                Rehabilicare Inc.

                           Financial Statements as of
                           June 30, 1997 and 1996 and
                              Supplemental Schedule
                             Together With Report of
                         Independent Public Accountants


<PAGE>








                        Report of Independent Accountants


    August 8, 1997

    To the Board of Directors and
     Shareholders of Rehabilicare, Inc.

    In our opinion, the accompanying balance sheet and the related statements of
    operations,  of changes in  stockholders'  equity and of cash flows  present
    fairly, in all material  respects,  the financial  position of Rehabilicare,
    Inc. at June 30, 1997 and the results of its  operations  and its cash flows
    for the year then ended in conformity  with  generally  accepted  accounting
    principles.  These  financial  statements  are  the  responsibility  of  the
    Company's  management;  our responsibility is to express an opinion on these
    financial  statements  based on our audit.  We conducted  our audit of these
    statements in accordance with generally  accepted  auditing  standards which
    require  that we plan and perform the audit to obtain  reasonable  assurance
    about whether the financial statements are free of material misstatement. An
    audit includes examining,  on a test basis,  evidence supporting the amounts
    and  disclosures  in the  financial  statements,  assessing  the  accounting
    principles used and significant estimates made by management, and evaluating
    the overall  financial  statement  presentation.  We believe  that our audit
    provides a reasonable  basis for the opinion  expressed above. The financial
    statements  of the Company for the year ended June 30, 1996 were  audited by
    other independent accountants whose report dated August 9, 1996 expressed an
    unqualified opinion on those statements.

    PRICE WATERHOUSE LLP


<PAGE>
                                                  


                                REHABILICARE INC.

                          BALANCE SHEETS AS OF JUNE 30
<TABLE>
<CAPTION>
                                                                                          
       ASSETS                         1997         1996        LIABILITIES AND STOCKHOLDERS'        1997          1996
                                  -----------  -----------            EQUITY                     -----------   ------------
<S>                                <C>         <C>                                               <C>           <C>    

CURRENT ASSETS:                                              CURRENT LIABILITIES:
  Cash                             $  46,529   $   32,553      Note payable                      $  340,000    $   555,000
  Receivables, less reserve for                                Current maturities of 
   uncollectible accounts of                                     long-term debt                     296,250        293,890
   $1,353,000 and $1,410,000       5,850,686    5,506,121      Accounts payable                     472,674        529,523
                                                               Accrued liabilities -                              
                                                                Payroll                             213,296         87,954          
  Inventories -                                                 Commissions                         185,015        178,118
   Raw materials                     497,206      542,439       Taxes                               197,573        145,120        
   Finished goods                  2,032,210    2,056,868       Other                                52,693         95,461  
                                   ---------    ---------                                            ------         ------  
  Deferred income tax benefit        575,000      496,000                                                         
  Prepaid expenses                   216,998      260,749         Total current liabilities       1,757,501      1,885,066
                                     -------      -------                                                           
                                                               LONG-TERM DEBT                     1,957,834      2,251,908
     Total current assets          9,218,629    8,894,730                                  
                                                               COMMITMENTS AND CONTINGENCIES
                                                                 (Note 7)                                                  
 PROPERTY AND EQUIPMENT:                                                         
  Land                               150,000      150,000      STOCKHOLDERS' EQUITY:
  Building                         1,615,431    1,607,885      Preferred stock, not par value;
  Clinical and rental equipment    1,296,295    1,353,851       authorized 5,000,000 shares; 
  Production equipment               822,026      783,894       none issued and outstanding           -              -          
  Office furniture and equipment   1,052,711    1,001,605      Common stock, $.10 par value;
                                   ---------    ---------       authorized 10,000,000 shares;
                                   4,936,463    4,897,235       issued and outstanding 4,853,590 
  Less accumulated depreciation                                 and 4,670,288 shares                485,359        467,029
   and amortization               (2,618,667)  (2,470,155)     Additional paid-in capital         5,546,759      5,264,448
                                  ----------   ----------      Less note receivable from                           
     Total property and equipment  2,317,796    2,427,080       officer/stockholder                (162,500)         - 
                                                               Retained earnings                  2,017,101      1,453,359    
  Intangible assets                   28,129        -                                             ---------      ---------          
                  
  Other assets                        37,500        -            Total stockholders' equity       7,886,719      7,184,836     
                                 -----------  -----------                                         ---------      ---------
                                 $11,602,054  $11,321,810                                       $11,602,054    $11,321,810
                                 ===========  ===========                                       ===========    ===========
              
The accompanying notes are an integral part of these balance sheets.
</TABLE>
<PAGE>


                                REHABILICARE INC.

                            STATEMENTS OF OPERATIONS

                           For the Years Ended June 30


                                                     1997            1996
                                                ------------     ------------

NET SALES AND RENTAL REVENUE                    $ 10,991,105     $ 8,703,418
                                                                   
COST OF SALES AND RENTALS                          2,759,633       2,333,704
                                                   ---------       ---------
                                                                   
     Gross profit                                  8,231,472       6,369,714

OPERATING EXPENSES:
   Selling, general and administrative             6,682,899       5,209,753
   Research and development                          527,845         495,398
                                                     -------         -------
                                                   7,210,744       5,705,151 
                                                   ---------       --------- 

     Income From Operations                        1,020,728         664,563

OTHER INCOME (EXPENSE):
   Interest expense                                 (249,233)       (231,632)
   Other income                                       57,247          14,332
                                                      ------          ------
                                                    (191,986)       (217,300)
                                                    --------        --------

     Income before income taxes                      828,742         447,263

PROVISION FOR INCOME TAXES                           265,000         165,000
                                                     -------         -------
                                                                     
     Net income                                 $    563,742     $   282,263
                                                ============     ===========
                                                                     

NET INCOME PER  COMMON SHARE AND COMMON SHARE   $       0.12     $      0.06
EQUIVALENTS                                     ============     ===========
                                                   
                                                                        
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON       4,886,714       4,868,633
SHARE EQUIVALENTS OUTSTANDING                      =========       =========

The accompanying notes are an integral part of these financial statements.
                                                               
<PAGE>


                                REHABILICARE INC

                  Statements of Changes in Stockholders' Equity

                           For the Years Ended June 30


<TABLE>
<CAPTION>

                                                                                              Note                         
                                                                            Additional     Receivable                         
                                                   Common Stock              Paid-In      From Officer/    Retained          
                                              Shares         Amount          Capital       Stockholder     Earnings       Total
                                           ----------------------------    ------------   -------------  ------------  -----------
<S>                                         <C>            <C>              <C>           <C>             <C>           <C>

BALANCE, June 30, 1995                      4,609,001      $  460,900       $5,116,962    $               $1,171,096    $6,748,958
 Exercise of stock options and related                                                                  
  tax benefits                                 52,490           5,249          124,899         -               -           130,148
 Common stock issued through Employee                                                                                  
  Stock Purchase Plan                           8,797             880           22,587         -               -            23,467
 Net income                                       -               -                -           -             282,263       282,263
                                           ------------   -------------    -------------  -------------  ------------  -----------

BALANCE, June 30, 1996                      4,670,288         467,029        5,264,448         -           1,453,359     7,184,836

 Exercise of stock options and related
  tax benefits                                181,965          18,196          277,618       (162,500)         -           133,314
 Common stock issued through Employee                      
  Stock Purchase Plan                           1,337             134            4,693         -               -             4,827
 Net income                                       -               -                  -         -             563,742       563,742
                                           ------------   -------------    -------------  -------------   -----------  -----------

BALANCE, June 30, 1997                      4,853,590     $   485,359       $5,546,759     $ (162,500)     $2,017,101   $7,886,719
                                            =========     ===========       ==========     ==========      ==========   ==========


The accompanying notes are an integral part of these financial statements

</TABLE>
<PAGE>



                                REHABILICARE INC.

                            STATEMENTS OF CASH FLOWS

                           For the Years Ended June 30

                                                      1997             1996
                                                  ------------     ------------
OPERATING ACTIVITIES
  Net income                                       $ 563,742        $ 282,263
          
    Adjustments  to reconcile net income 
    to net cash generated by or used in
    operating activities:
      Depreciation                                   148,512          252,020
      Deferred income taxes                          (79,000)        (233,000) 
      Loss on  disposition  of property 
      and  equipment                                                    2,478
      Changes in current assets and liabilities:
       Receivables                                  (344,565)        (300,836) 
       Inventories                                   127,447         (730,453) 
       Prepaid expenses                               43,751           23,062
       Accounts payable                              (56,849)          43,389
       Accrued liabilities                           141,924          136,104
                                                     -------          -------
         Net cash generated by or used in 
          operating activities                       544,962         (524,973)
                                                     -------         -------- 
INVESTING ACTIVITIES           
  Purchase of property and equipment, net            (96,784)        (109,891)
  Increase in intangible assets                      (28,129)           -  
  Increase in other assets                           (37,500)           -
                                                     --------        ---------
                                                                   
         Net cash used in investing activities      (162,413)        (109,891)
                                                    --------         --------
FINANCING ACTIVITIES                  
   Principal borrowings (repayments) on 
     long-term debt, net                            (291,714)         553,098
   Proceeds from (payments on) line of credit, net  (215,000)         (95,000)
   Proceeds from exercise of stock options           133,314          130,148
   Proceeds from purchases of stock by employees       4,827           23,467
                                                       -----           ------
         Net cash provided or used in financing 
          activities                                (368,573)         611,713
                                                    --------          -------

         Net increase (decrease) in cash              13,976          (23,151)
         
CASH AT BEGINNING OF YEAR                             32,553           55,704
                                                      ------           ------
                                                                               
CASH AT END OF YEAR                                $  46,529       $   32,553
                                                   =========       ==========
SUPPLEMENTAL DISCLOSURES 
 Cash paid during the year for:
   Interest                                        $ 249,233       $  231,632
                                                   =========       ==========
   Income taxes                                    $ 284,183       $  125,391
                                                   =========       ==========
        
 The accompanying notes are an integral part of these financial statements.
<PAGE>





                                REHABILICARE INC.
                          Notes to Financial Statements
                             June 30, 1997 and 1996


1.       ORGANIZATION:

Rehabilicare  Inc. (the Company),  is a designer,  manufacturer  and provider of
electromedical pain management and rehabilitation products and services used for
clinical,  home health care and occupational medicine applications.  The primary
market for the Company's products is in the United States.


2.       Summary of Significant Accounting Policies:

REVENUE RECOGNITION

The Company  generates  revenue from sales of its products to medical  equipment
dealers and from rental or sales directly to patients and health care providers.
Revenue  is  recognized  at the time of  shipment  to dealers  and  health  care
providers or upon  notification  from a health care provider that  equipment has
been  prescribed  and provided to a patient.  All revenue is  recognized  net of
estimated sales allowances and returns.

PROVISION FOR UNCOLLECTIBLE ACCOUNTS

Revenue  from rental and sale of products  directly to patients  and health care
providers accounted for approximately 80 percent of total revenue in fiscal 1997
and 77 percent in fiscal 1996. A significant  portion of the related receivables
are from insurance companies or other third-party reimbursing agents. The nature
of these  receivables  within  this  industry  has  typically  resulted  in long
collection cycles. The Company establishes a reserve for uncollectible  accounts
based upon  factors  surrounding  credit  risk of specific  insurance  carriers,
historical trends, patient responsibility and other information.

USE OF ESTIMATES

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management 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 revenue  and  expenses  during the  reporting  period.
Ultimate results could differ from those estimates.

INVENTORIES

Inventories  are  valued at the  lower of cost  (first-in,  first-out  basis) or
market.  Finished  goods  includes  products held on  consignment by health care
providers or other third parties for rental or sale to patients.




<PAGE>


PROPERTY AND EQUIPMENT

Property and equipment are stated at cost.  Depreciation  is computed  using the
straight-line  method for financial  reporting proposes and accelerated  methods
for  income  tax  reporting  purposes.  Estimated  useful  lives  for  financial
reporting purposes are as follows:

         Building                                   39 years
         Office furniture and equipment           3-10 years
         Production equipment                      3-5 years
         Clinical and rental equipment               5 years

INTANGIBLE ASSETS

Intangible assets consist primarily of patents.  These assets are being 
amortized using the straight-line method over estimated useful lives of 14 
years.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed when incurred.

EARNINGS PER SHARE

Earnings per share is computed by dividing  net income by the  weighted  average
number of common shares and common share equivalents outstanding,  including the
dilutive effects of stock options and warrants.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments  primarily consist of cash,  receivables and
payables for which  current  carrying  amounts  approximate  fair market  value.
Additionally,  interest  rates on  outstanding  borrowings  are at  rates  which
approximate   market  rates  for  borrowings  with  similar  terms  and  average
maturities

RECENTLY ISSUED ACCOUNTING STANDARDS

In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting Standard (SFAS) No. 128 "Earnings per Share." SFAS No. 128
requires dual  presentation of basic earnings per share and diluted earnings per
share and is required to be adopted by the Company during fiscal 1998.
Implementation of SFAS No. 128 is not expected to have a material effect on 
reported earnings per share.


3.       Notes Payable:

The Company  maintains a revolving line of credit with a bank which provides for
borrowings up to $2,000,000,  limited by eligible  receivables,  as defined. The
borrowing base limit and amounts  outstanding  at June 30, 1997 were  $1,518,800
and $340,000,  respectively.  Borrowings under this line bear interest,  payable
monthly,  at the bank's prime rate (8.5% at June 30, 1997).  Amounts outstanding
are  collateralized by receivables,  inventories,  furniture and equipment.  The
Company was in compliance with all financial  covenants  contained in the credit
agreement as of June 30, 1997.


<PAGE>


Selected data on the Company's  borrowings under its revolving line of credit is
shown below:

                                                      1997              1996
                                                   ----------        ----------
Average balance outstanding                        $  534,000        $  817,000
Maximum balance outstanding                        $  845,000        $1,095,000
Weighted average interest rate                           8.3%              8.5%
                                                                    



4.       Long-Term Debt:

Long-term obligations at June 30 consisted of the following:

                                                         1997          1996
                                                     -----------   ------------
Mortgage note payable, principal and interest 
due in monthly installments through May 2015,
interest at 7.37%, collateralized by the Company's
land and building                                    $  742,942    $   762,418

Mortgage note payable, principal and interest
due in monthly installments through May 2005
and a balloon payment at that date, interest 
at 9.56%, collateralized by the Company's land
and building                                            734,596        749,372

Notes payable, principal and interest due in 
monthly installments through June 1999, 
interest at prime (8.5% at June 30, 1997), 
collateralized by the Company's receivables,
inventories, furniture and equipment                    399,996        600,000

Capital lease obligations                               327,175        384,634

Other                                                    49,375         49,374
                                                         ------         ------
                                                      2,254,084      2,545,798
Less-Current maturities                                (296,250)      (293,890)
                                                       --------       -------- 
                                                     $1,957,834     $2,251,908
                                                     ==========     ==========

Under terms of the  various  loan  agreements,  the  Company  must meet  certain
financial  covenants,  including  maintaining  certain  levels of  stockholders'
equity and meeting or exceeding  certain  financial ratios. As of June 30, 1997,
the Company was in compliance  with all such  covenants  relating to significant
loan agreements.

Future  maturities  due in each  fiscal  year with  respect to  long-term  debt,
excluding obligations under capital leases, are as follows:

                  1998                           $   237,216
                  1999                               240,429
                  2000                                43,939
                  2001                                47,753
                  2002                                51,905
                  Thereafter                       1,305,667
                                                   ---------
                                                 $ 1,926,909
                                                 ===========


<PAGE>


Capital Leases

The Company has commitments  under various capital leases which bear interest at
rates  ranging  from  6.15% to 14.1% and are  payable  in  monthly  installments
through  May 2002.  Aggregate  principal  payments  due in each fiscal year with
respect to these obligations are as follows:


                  1998                           $  59,034
                  1999                              61,235
                  2000                              66,468
                  2001                              52,042
                  2002                              47,248
                  Thereafter                        41,148
                                                    ------
                                                 $ 327,175
                                                 =========


5.       Income Taxes:

Deferred  income taxes  represent the tax effects of timing  differences  in the
recognition  of revenue and  expenses  for  financial  reporting  and income tax
purposes.  Federal tax credits are recorded as a reduction of income tax expense
in the year the credits are utilized.

The following summarizes the components of the provision for taxes:

                                       1997                  1996
                                 -----------------    -------------------
Currently payable:
  Federal                            $311,000               $322,000
  State                                33,000                 76,000
Deferred                              (79,000)              (233,000)
                                      -------               -------- 
                                     $265,000               $165,000
                                     ========               ========

A  reconciliation  of the  Company's  reported  provision  for  income  taxes as
compared to that using statutory federal rates follows:

                                       1997                  1996
                                 -------------------   -------------------
Statutory rate applied to 
  income before taxes                $282,000              $152,000
State income taxes, net of 
  federal tax benefit                  30,000                19,000
Other                                 (47,000)               (6,000)
                                      -------                ------ 
                                     $265,000              $165,000
                                     ========              ========

A summary of deferred income tax benefits as of June 30 is as follows:

                                              1997                 1996
                                         ---------------      ----------------
Deferred tax benefits arising from:
  Reserve for uncollectible accounts        $472,000              $384,000
  Accruals and other reserves                132,000               149,000
  Depreciation                               (76,000)              (84,000)
  Uniform capitalization                      47,000                47,000
                                              ------                ------
                                            $575,000              $496,000
                                            ========              ========


<PAGE>


6.       Stockholders' Equity:

Stock Options

The Company  has  925,000  shares of its common  stock  reserved  under its 1988
Restated Stock Option Plan for issuance to key employees,  consultants, or other
persons  providing  valuable  services  to the  Company.  Options are granted at
prices  not  less  than  the fair  market  value  on the  date of grant  and are
exercisable in cumulative installments over a term of five years.

The following table summarizes information with respect to such plan:

                                       Option Price on Dates  
                                             of Grants        Number of Shares
                                       ---------------------  ----------------
Balance outstanding at June 30, 1995      $0.625 -$3.125           431,000
  Granted                                  2.625 - 4.750            97,500
  Exercised                                0.625 - 3.125           (52,500)
  Canceled                                 2.375 - 3.000           (30,500)
                                           -----   -----           ------- 
Balance outstanding at June 30, 1996      $0.750 -$4.750           445,500
  Granted                                 3.3125 - 4.313            92,500
  Exercised                                0.750 - 2.109          (201,500)
  Canceled                                 1.875 - 4.313            (6,000)
                                           -----   -----            ------ 


Balance outstanding at June 30, 1997      $0.750 - 4.750            330,500
                                                                    =======  
Exercisable at June 30, 1997              $0.875 - 4.750            173,000
                                                                    =======  
Available for grant at June 30, 1997                                113,840
                                                                    =======  

In fiscal year 1997, the Company adopted the disclosure-only  provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the Company's stock plans. Had compensation expense
for the Company's  stock-based  compensation  plans been determined based on the
fair value at the grant dates  consistent  with the method of SFAS No. 123,  the
Company's  net income and  earnings per share would have been reduced to the pro
forma amounts indicated below:

                                             1997                 1996
                                        --------------       ---------------

Net Income                As reported      $563,742              $282,263
                          Pro forma         511,041               247,943
Net income per share
                          As reported      $    .12              $    .06
                          Pro forma             .10                   .05

Pro forma net income  reflects only options and other stock based awards granted
in 1997 and 1996.  Therefore,  the full impact of calculating  compensation cost
for stock  options  under  SFAS No.  123 is not  reflected  in the pro forma net
income  amounts  presented  because  compensation  cost is  reflected  over  the
options' vesting periods,  which are normally five years, and compensation  cost
for options granted prior to fiscal year 1996 is not considered.


<PAGE>


The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions  used for grants in 1997 and 1996:  dividend  yield of 0%;  expected
volatility of 61.95%;  risk-free  interest  rate of 6.2% and 6.0%;  and expected
lives of 4.5 years.

The  weighted-average  fair  value per  option at the date of grant for  options
granted in 1997 and 1996 was $2.01 and $1.95, respectively.

In March 1997,  the Company  loaned  $162,500 to an officer for the  exercise of
certain stock options. This loan is secured by a promissory note and a pledge of
85,729  shares of Company  common  stock and bears  interest at the bank's prime
rate (8.5% on June 30,  1997).  Payments are due  quarterly,  including  accrued
interest, commencing in fiscal 1998 and ending in fiscal 2001.

At June 30, 1997 the Company had 75,000 warrants outstanding to purchase shares 
of its common stock at $2.25 per share.  The warrants expire in August 1998.

Stock Purchase Plan

The Company  has  reserved  200,000  authorized  shares of its common  stock for
issuance under its Employee  Stock  Purchase  Plan. All full-time  employees are
eligible  to  participate  in the plan by having  amounts  deducted  from  their
earnings.  Fair  value  disclosures  under  SFAS No.  123 have not been made for
shares acquired under this plan as such values are immaterial.


7.       Commitments and Contingencies:

Litigation

The Company is a party to certain claims,  legal actions and complaints  arising
in the ordinary course of business. In the opinion of management, the resolution
of these matters will not have a material  impact on the  financial  position or
results of operations of the Company.

401(k) Plan

The Company has a 401(k) plan in which  substantially all employees are eligible
to participate.  Participants  may contribute up to 15% of eligible  earnings to
the  plan.  Company  contributions  are 100% for the  first 2% of  participants'
contributions  and  25%  for  the  next  4%  up  to a  maximum  matching  annual
contribution  of $750  per  participant.  In  addition,  the  Company  may  make
additional  discretionary  contributions to the plan as determined annually. The
Company contributed $34,399 and $27,288 to the plan for the years ended June 30,
1997 and 1996, respectively. No discretionary contributions were made for fiscal
1997 or fiscal 1996.


<PAGE>




                                REHABILICARE INC.

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

                   For the Years Ended June 30, 1997 and 1996

<TABLE>
<CAPTION>

                                                                         
                                      Balance at                              Balance          
                                      Beginning        Net                   at End of   
                                       of Year      Additions    Deductions     Year
                                      ----------   ----------   ----------   ----------       
<S>                                   <C>          <C>          <C>          <C>    

RESERVE FOR UNCOLLECTIBLE ACCOUNTS:
  Year ended June 30, 1996            $  599,000   $  812,000   $    1,000   $1,410,000  
  Year ended June 30, 1997             1,410,000    1,362,000    1,419,000    1,353,000
                                      
RESERVE FOR WARRANTY REPAIRS:
   Year ended June 30, 1996               61,900         --         16,900       45,000
   Year ended June 30, 1997               45,000         --         15,000       30,000
                                          
RESERVE FOR INVENTORY OBSOLESCENCE:
   Year ended June 30, 1996              213,000       65,000         --        278,000
   Year ended June 30, 1997              278,000       66,020      118,920      225,100
                                         
</TABLE>
<PAGE>

                                                                   Exhibit 10.13


                             SEVERANCE PAY AGREEMENT

                 This Agreement is made as of the ____th day of May, 1997, 
between Rehabilicare Inc., a Minnesota corporation (the "Company")and 
_________________________("Executive").

                  WITNESSETH THAT:

                  WHEREAS,  it is the purpose of this  Agreement  to specify the
financial  arrangements  that the Company  will  provide to the  Executive  upon
Executive's  separation from employment with the Company or with a subsidiary of
the Company or one of its subsidiaries under the circumstances described herein;
and

                  WHEREAS, this Agreement is adopted in the belief that it is in
the best  interests  of the  Company  and its  shareholders  to  provide  stable
conditions of employment for Executive,  thereby  minimizing  personnel turnover
and  enhancing the Company's  and its  subsidiaries'  ability to recruit  highly
qualified people.

                  NOW,  THEREFORE,  to assure the Company  that it will have the
continued  dedication of Executive  notwithstanding  the possibility,  threat or
occurrence of a bid to take over control of the Company, and to induce Executive
to  remain  in the  employ  of the  Company,  and for  other  good and  valuable
consideration, the Company and Executive agree as follows:

                  1.       Term of Agreement.

                  This Agreement  shall be for a two-year term commencing on the
date  hereof.  This  Agreement  may be renewed  for  additional  one-year  terms
thereafter  upon written  agreement of Executive and the Company;  provided that
this  Agreement  shall continue for at least two years after a Change of Control
that occurs during the term of this Agreement.

                  2.       Termination of Employment.

                  (i) If a Change in Control (as defined in Section 3(i) hereof)
occurs during the term of this  Agreement and any of the following  events occur
within two years after such Change of Control, the terminated Executive shall be
entitled to receive the cash payment provided in Section 4 hereof:

                           (a)  the Company shall have exercised its right to 
                  terminate the Executive without cause; or

                           (b) the Executive  shall have  voluntarily  exercised
                  his option to  terminate  his  employment  for Good Reason (as
                  defined in Section 3(ii)  hereof).  Notice of election of this
                  option must  identify the  Executive  who desires to terminate
                  his  employment  and set forth in reasonable  detail the facts
                  and circumstances claimed to constitute Good Reason.

                  (ii)  From and  after  the date of a Change  in  Control,  the
Company shall have the right to terminate  Executive from employment at any time
during  the term of this  Agreement  for Cause (as  defined  in  Section  3(iii)
hereof),  by written notice to the Executive,  specifying the particulars of the
conduct of Executive forming the basis for such termination, and Executive shall
not be entitled to any payment pursuant to Section 4 for termination for Cause.

                  (iii)  From and after the date of a Change in  Control  during
the term of this Agreement,  Executive shall not be removed from employment with
the Company  except as provided in Section 2(i) or (ii) hereof or as a result of
Executive's  Disability  (as  defined  in  Section  3(iv)  hereof) or his death.

<PAGE>

Executive's  rights upon  termination of employment prior to a Change in Control
or after the expiration of the term of this  Agreement  shall be governed by the
standard employment  termination policy applicable to Executive in effect at the
time of termination.

                  Any notice given by Executive pursuant to this Section 2 shall
be effective five (5) business days after the date it is given by Executive.

                  3.       Definitions

                  (i)      A "Change in Control" shall mean the occurrence of 
any of the following events as a result of a transaction or series of
transactions:

                           (a) a change in  control  of the  Company of a nature
                  required  to be  reported in response to Item 6(e) of Schedule
                  14A  of  Regulation  14A  promulgated   under  the  Securities
                  Exchange Act of 1934, as amended ("Exchange Act"),  whether or
                  not the Company is then subject to such reporting requirement;

                           (b) any  "person"  (as such term is used in  Sections
                  13(d)  and  14(d)  of the  Exchange  Act)  is or  becomes  the
                  "beneficial owner" (as defined in Rule 13d-3 promulgated under
                  the Exchange Act),  directly or  indirectly,  of securities of
                  the Company  representing  50% or more of the combined  voting
                  power of the Company's then outstanding securities;

                           (c) individuals who at the date hereof constitute the
                  Board  of  Directors  of the  Company  cease to  constitute  a
                  majority  thereof,  provided that such change is the direct or
                  indirect  result of a proxy fight and  contested  election for
                  positions on the Board; or

                           (d) the Board of Directors of the Company determines,
                  in its sole and  absolute  discretion,  that  there has been a
                  change in control of the Company.

Provided,  however,  that a Change of Control that results from any acquisition,
combination,  merger or similar  transaction  under active  consideration by the
Board of  Directors  on the date of this  Agreement  shall not be  considered  a
Change of Control as defined herein.

                  (ii)      "Good Reason" shall mean the occurrence of any of 
the following events:

                           (a)  the   assignment   to  Executive  of  employment
                  responsibilities  which are not of  comparable  responsibility
                  and  status  as  the  employment   responsibilities   held  by
                  Executive immediately prior to a Change in Control;

                           (b)  a  reduction  by  the  Company  in   Executive's
                  compensation  (including  a change  in the  form of the  bonus
                  compensation  plan that makes less likely the achievement of a
                  targeted bonus) as in effect  immediately prior to a Change in
                  Control;

                           (c)  except  to  the  extent  otherwise  required  by
                  applicable law, the failure by the Company, or the entity that
                  acquires the Company, to continue in effect a material benefit
                  or compensation  plan,  stock  ownership plan,  stock purchase
                  plan,  bonus plan,  life insurance  plan,  health-and-accident
                  plan or disability  plan in which  Executive is  participating
                  immediately  prior to a Change in Control (or plans  providing
                  Executive with substantially similar benefits),  the taking of
                  any  action  by  the  Company  which  would  adversely  affect
                  Executive's participation in, or materially reduce Executive's
                  benefits under, any of such plans or deprive  Executive of any
                  material fringe benefit enjoyed by Executive immediately prior
                  to such  Change in  Control,  or the failure by the Company to
                  provide  Executive  with the number of paid  vacation  days to
                  which Executive is entitled  immediately  prior to such Change
                  in Control in accordance with the Company's vacation policy as
                  then in effect; or


<PAGE>

                           (d)  the  failure  by  the  Company  to  obtain,   as
                  specified  in  Section  6(i)  hereof  an   assumption  of  the
                  obligations  of the Company to perform  this  Agreement by any
                  successor to the Company.

For purposes of the  foregoing,  Executive  shall not be considered to have been
assigned employment of lesser  responsibility if Executive manages,  has control
over, or serves in a similar  position with a subsidiary,  division or operating
unit of an acquiring entity that generates revenues of comparable amounts to the
revenues generated by the Company before such Change in Control. Notwithstanding
the foregoing,  none of the forgoing events shall be considered "Good Reason" if
it occurs in connection with the Executive's death or disability.

                  (iii)  "Cause"  shall  mean  termination  by  the  Company  of
Executive's  employment  based upon (a) the  willful  and  continued  failure by
Executive  substantially  to perform his duties and obligations  (other than any
such failure resulting from his incapacity due to physical or mental illness) or
(b) the  willful  engaging  by  Executive  in  misconduct  which  is  materially
injurious to the Company or any of its  subsidiaries,  monetarily  or otherwise.
For purposes of this paragraph,  no act, or failure to act, on Executive's  part
shall be considered  "willful"  unless done, or omitted to be done, by Executive
in bad faith and without  reasonable  belief that his action or omission  was in
the best interests of the Company and its subsidiaries.

                  (iv) "Disability"  shall mean any physical or mental condition
which would  qualify  Executive  for a disability  benefit  under the  long-term
disability plan of the Company or the Subsidiary.

                  4.       Benefits Upon Termination Under Section 2(i)

                  Upon the  termination of the employment of Executive  pursuant
to Section  2(i)  hereof,  Executive  shall be entitled to receive the  benefits
specified in this Section 4. The amounts due to  Executive  under  subparagraphs
(a) and (b) of this  Section 4 shall be paid to  Executive  not  later  than one
business day prior to the date that the  termination of  Executive's  employment
becomes effective.

                  (a) The  Company  shall  pay to  Executive  (i) the full  base
salary  earned  by him and  unpaid  through  the date  that the  termination  of
Executive's  employment  becomes  effective,  at the rate in  effect at the time
written notice of termination  (voluntary or  involuntary)  was given,  (ii) any
amount  earned by  Executive  as a bonus with  respect to the fiscal year of the
Company  preceding  the  termination  of his  employment  if such  bonus has not
theretofore been paid to Executive, (iii) an amount equal to a pro rata portion,
based on number of days elapsed,  of the bonus  Executive  would have earned for
the year in which termination is effective, assuming for purposes or calculating
such bonus against any bonus or incentive plan, that the Company's financial and
business  performance for the current compensation year through the date of such
termination  is  annualized,  and (iii) an amount  representing  credit  for any
vacation earned or accrued by him but not taken;

                  (b) In lieu of any further  base salary  payments to Executive
for  periods  subsequent  to  the  date  that  the  termination  of  Executive's
employment  becomes  effective,  the  Company  shall  pay  as  severance  pay to
Executive a lump-sum  cash amount equal to  [one(1)/two  (2)] times  Executive's
average   annualized  cash   compensation  for  the  period  consisting  of  the
Executive's  most recent five taxable  years  ending  before the date on which a
Change in Control occurs (or such portion of such period during which  Executive
performed services for the Company);  subject,  however, to the restriction that
(i) Executive shall not be entitled under this Section 4(b) to receive more than
the amount that would be owed  Executive  had the Company paid  Executive at the
rate of  compensation  in effect on the date of his  termination  for employment
from the date of termination to the date of Executive's 65th birthday,  and (ii)
the  Executive  shall not be  entitled  to receive  any amount  pursuant to this
Agreement which constitutes an "excess parachute  payment" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended,  or any successor
provision or regulations  promulgated  thereunder.  In case of uncertainty as to
whether some portion of a payment might constitute an excess parachute  payment,
the Company  shall  initially  make the payment to the  Executive  and Executive
agrees to refund to the Company any amounts  ultimately  determined to be excess
parachute payments; and
<PAGE>

                  (c) The Company shall also pay to Executive all legal fees and
expenses  incurred  by  Executive  in seeking to obtain or enforce  any right or
benefit provided to Executive by this Agreement,  including any and all expenses
of arbitration in accordance with Section 12 below.

                  Executive  shall not be required to mitigate the amount of any
payment provided for in this Section 4 by seeking other employment or otherwise.
The amount of any  payment or benefit  provided  in this  Section 4 shall not be
reduced by any compensation earned by Executive as a result of any employment by
another employer.

                  5.       Successors; Binding Agreement; Assignment.

                  (i) The Company will require any successor  (whether direct or
indirect,  by  purchase,   merger,   consolidation  or  otherwise),  to  all  or
substantially all of the business and/or assets of the Company,  by agreement in
form and substance  satisfactory to Executive,  to expressly assume and agree to
perform  this  Agreement  in the same  manner  and to the same  extent  that the
Company would be required to perform it if no such  succession  had taken place.
Failure of the Company to obtain such agreement  prior to the  effectiveness  of
any such  succession  shall be a breach  of this  Agreement  and  shall  entitle
Executive  to  compensation  from the Company in the same amount and on the same
terms as  Executive  would be entitled  hereunder if  Executive  terminated  his
employment  after a Change in Control for Good Reason,  except that for purposes
of implementing  the foregoing,  the date on which any such  succession  becomes
effective  shall be deemed  the  Termination  Date.  As used in this  Agreement,
"Company"  shall mean the Company as  hereinbefore  defined and any successor to
its  business  and/or  assets as  aforesaid  which  executes  and  delivers  the
agreement  provided for in this Section 5(i) or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.

                  (ii) This Agreement is personal to Executive and Executive may
not  assign or  transfer  any part of his  rights or  duties  hereunder,  or any
compensation  due to him  hereunder,  to any other person.  Notwithstanding  the
foregoing,  this  Agreement  shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators, heirs,
distributees, devisees and legatees.

                  6.  Modification;  Waiver. No provisions of this Agreement may
be modified, waived or discharged unless such waiver,  modification or discharge
is  agreed  to in a  writing  signed by  Executive  and such  officer  as may be
specifically  designated by the Board of Directors of the Company.  No waiver by
either  party  hereto at any time of any breach by the other party hereto of, or
compliance  with, any condition or provision shall be deemed a waiver of similar
or dissimilar provisions or conditions at the same or at any prior or subsequent
time.

                  8.  Notice.  All  notices,  requests,  demands  and all  other
communications  required or permitted by either party to the other party by this
Agreement  (including,   without  limitation,   any  notice  of  termination  of
employment) shall be in writing and shall be deemed to have been duly given when
delivered personally or mailed by regular,  certified or registered mail, return
receipt requested, at the address of the other party, as follows:
                           
                           If to the Company, to:

                           Rehabilicare Inc.
                           1811 Old Highway 8
                           New Brighton, MN 55112

                           If to Executive, to:

                           David B. Kaysen
                           c/o Rehabilicare Inc.
                           1811 Old Highway 8
                           New Brighton, MN 55112

Either  party  hereto may change its address for  purposes of this  Section 8 by
giving fifteen (15) days' prior notice to the other party hereto.


<PAGE>

                  9. Severability. If any term or provision of this Agreement or
the  application  hereof to any person or  circumstances  shall to any extent be
invalid or unenforceable,  the remainder of this Agreement or the application of
such term or provision to persons or circumstances  other than those as to which
it is held invalid or unenforceable shall not be affected thereby, and each term
and provision of this  Agreement  shall be valid and  enforceable to the fullest
extent permitted by law.

                  10.      Headings.  The headings in this Agreement are 
inserted for convenience or reference only and shall not be a part of or control
or affect the meaning of this Agreement.

                  11.      Counterparts.  This Agreement may be executed in 
several counterparts, each of which shall be deemed an original, but all of 
which together shall constitute one and the same instrument.

                  12.  Governing   Law/Arbitration.   This  Agreement  has  been
executed and  delivered  in the State of Minnesota  and shall in all respects be
governed by, and  construed  and enforced in  accordance  with,  the laws of the
State  of  Minnesota,  including  all  matters  of  construction,  validity  and
performance.  Notwithstanding the foregoing, any dispute as to the occurrence of
a "Change of  Control,"  or as to "Good  Reason,"  shall be settled by final and
binding arbitration in accordance with the Center for Public Resources Rules for
Non-Administered  Arbitration  of Business  Disputes in effect as of the date of
this Agreement by a sole  arbitrator.  The arbitration  shall be governed by the
United States  Arbitration  Act, 9 U.S.C.  ss. 1-16, and judgment upon the award
rendered  by the  arbitrator  may be  entered by any court  having  jurisdiction
thereof.  The  place  of  arbitration  shall  be  Minneapolis,   Minnesota.  The
arbitrator is empowered to award damages in excess of compensatory damages.

                  13. Entire  Agreement.  This Agreement  supersedes any and all
other oral or written agreements or policies made relating to the subject matter
hereof;  provided that,  this Agreement  shall not supersede or limit in any way
Executive's rights under any benefit plan, program or arrangements in accordance
with their terms.
                  IN WITNESS  WHEREOF,  the Company has caused this Agreement to
be executed in its name by a duly authorized officer, and Executive has hereunto
set his hand, all as of the date first written above.

                                Rehabilicare Inc.


                                By _______________________________________
                                   Its _____________________________________





                                ------------------------------------------
                                Executive



<PAGE>


                                                                   Exhibit 10.14


                             STOCK PLEDGE AGREEMENT


                  AGREEMENT, made this 11th day of March,  1997 by and  between 
David B.  Kaysen,  a resident  of  Bloomington,  Minnesota  ("Pledgor"),  and
Rehabilicare, a Minnesota corporation ("Company").

                  WHEREAS,  as of the  eleventh  day  of  March,  1997,  Pledgor
exercised  that certain stock option to purchase from Company,  and Company sold
to Pledgor,  One Hundred  Thousand Shares  (100,000)  shares of Company's common
stock,  by payment to the  Company of one hundred  and sixty two  thousand  five
hundred  dollars  ($162,500),  the exercise  price of such option (the "Exercise
Price");

                  WHEREAS,  Pledgor has delivered to Company a promissory note 
(the  "Promissory  Note") in an amount equal to, and as payment of, the Exercise
Price; and

                  WHEREAS,  Company has required  that Pledgor grant to Company,
and Pledgor is willing to grant to Company,  a security  interest in Eighty Five
Thousand  Seven Hundred  Twenty Nine  (85,729)  shares of such common stock (the
"Pledged  Shares")  pursuant to this  agreement  as security  for the payment by
Pledgor of his obligations under the Promissory Note.

                  NOW  THEREFORE,   in  consideration   of  the  premises,   the
respective  covenants  of Company and Pledgor set forth below and for other good
and  valuable  consideration,  the  receipt  and  adequacy  of which are  hereby
acknowledged, Pledgor and Company agree as follows:

                  1.       Pledge of Stock.

                  1.1 Pledge.  As security for the prompt  payment of any amount
at any time  due,  whether  or not by  acceleration,  to  Company  from  Pledgor
pursuant to the Promissory  Note,  Pledgor hereby grants a security  interest to
Company in the Pledged Shares.

                  1.2 Delivery.  Immediately  upon execution of this  agreement,
Pledgor will deliver to Company the certificates representing all of the Pledged
Shares,  which  certificates  shall be endorsed in blank or with executed  stock
powers attached.

                  2.       Rights and Benefits of Pledged Shares.

                  2.1 General.  Except as provided in section 2.2, Company shall
receive and hold (by Company or by an agent of Company)  the Pledged  Shares and
any property (including without limitation monies or securities)  distributed or
issued with respect to the Pledged Shares,  whether as a dividend, in partial or
complete liquidation,  pursuant to a merger or reorganization plan or otherwise.

<PAGE>

Pledgor  shall cause any  securities  distributed  or issued with respect to the
Pledged  Shares to be  assigned  and  transferred  to Company and  delivered  to
Company in the manner  provided in section  1.2,  and such  securities  shall be
subject to the terms and conditions of this agreement.

                  2.2      Voting.  Unless and until a default is declared  by 
Company  pursuant  to section 5,  Pledgor  shall be entitled to vote the Pledged
Shares.

                  2.3  Assignment,  Etc.  Except  as  provided  or  specifically
permitted herein, Pledgor shall not pledge, sell, assign,  transfer or otherwise
dispose of the Pledged  Shares  without the prior  written  approval of Company.
Pledgor  may sell the  Pledged  Shares  at any  time,  provided  that all of the
proceeds  from any such sale are  applied to the Note.  Company  shall take such
actions as are  necessary to facilitate  such sale,  including the delivery of a
certificate or  certificates  to a broker for Pledgor,  subject to assignment of
all proceeds from such sale to Company.

                  3.       Legend.

                  The certificates representing the Pledged Shares shall bear an
endorsement in substantially the following form:

                  "The  shares  of stock  represented  by this  certificate  are
                  pledged under,  and are subject to the terms and conditions of
                  a Stock  Pledge  Agreement,  dated  March  11,  1997,  between
                  Rehabilicare Inc. and the registered owner of this certificate
                  as security  for the  performance  of the  registered  owner's
                  obligations under a promissory note to Rehabilicare Inc.. Such
                  shares  cannot  be sold,  assigned,  transferred,  pledged  or
                  disposed  of  except  as   provided   in  such  Stock   Pledge
                  Agreement."

                  4.       Appointment of Company as Attorney-in-Fact.

                  Pledgor hereby appoints and  constitutes  Company as Pledgor's
true and  lawful  attorney-in-fact  and with full power of  substitution  in the
premises to execute such assignments  and/or  endorsements of the Pledged Shares
as may be necessary to effect the rights and  remedies  which  Company has under
this agreement in the event of a default under this agreement.

                  5.       Event of Default.

                  The  occurrence  of an event of default  under the  Promissory
Note constitutes a default under this agreement.

                  Upon the occurrence of an event of default, Company shall have
the  option to  declare  this  agreement  in default  and  thereupon  Company is
authorized  to exercise  and shall have,  in addition to the rights and remedies
provided in this  agreement and all other  applicable  rights and remedies,  the

<PAGE>

rights and remedies of a secured party under the Uniform  Commercial Code of the
state of Minnesota and any other  applicable  laws. In  particular,  and without
limitation,  Company is authorized at its option and without  further  notice or
demand,  to cause the Pledged  Shares to be  transferred of record to Company or
its agent or nominee and shall be entitled to exercise  all rights of  ownership
in respect to the Pledged  Shares and all property  received with respect to the
Pledged  Shares.  Company shall also have the right to hold and vote the Pledged
Shares  and,  at its option  and upon  twenty  (20)  days'  notice in writing to
Pledgor of such  default,  shall have the right to sell and transfer the Pledged
Shares and the  property  received  with  respect to the  Pledged  Shares or any
portion thereof at any public or private sale, including private placement based
upon investment  representations,  and for cash or such other  consideration  as
Company shall, in its sole discretion,  determine to be reasonable,  and Pledgor
shall have no right or equity of redemption  in  connection  with any such sale;
provided,  however,  that during such twenty (20) day period  Pledgor shall have
the right to cure any  default by paying all  obligations  under the  Promissory
Note,  together  with  all  expenses  incurred  by  Company  including,  without
limitation,  reasonable  attorneys' fees and expenses in obtaining,  holding and
preparing for sale the Pledged Shares and the property  received with respect to
the Pledged Shares and in arranging for the sale.  After  deducting the expenses
of such sale, including reasonable attorneys' fees, the proceeds therefrom shall
be applied to the payment of Pledgor's obligations under the Promissory Note and
the surplus, if any, shall be paid to Pledgor.

                  6.       Release of Collateral.

                  At such  time as the  Promissory  Note has been  paid in full,
Company  shall  deliver the Pledged  Shares and any  property  distributed  with
respect to the Pledged Shares to Pledgor in accordance  with  Pledgor's  written
directions,  and Pledgor shall thereafter be discharged in full from any and all
obligations under this agreement.

                  7.       Delay; Waiver.

                  All rights and remedies of Company  under this  agreement  are
cumulative  and are in  addition  to,  but not in  limitation  of, any rights or
remedies which it may have under applicable law. No delay on the part of Company
in the exercise of any right or remedy under this  agreement  shall operate as a
waiver  thereof,  and no single or partial  exercise  by Company of any right or
remedy under this agreement shall preclude other or further  exercise thereof or
the exercise of any other right or remedy.  No waiver by Company of any right or
remedy under this  agreement  shall be deemed to be or construed as a further or
continuing  waiver of such right or remedy or as a waiver of any other  right or
remedy.

                  8.       Cooperation.

                  Upon the  execution of this  agreement and at any time or from
time to time thereafter,  Pledgor and Company agree to cooperate in carrying out
the terms of this  agreement,  including  the  execution  and  delivery  of such
further  instruments  and documents as may be  reasonably  requested in order to
more effectively carry out the terms and conditions of this agreement.
<PAGE>

                  9.       Miscellaneous.

                  This agreement shall be binding upon, and inure to the benefit
of and be enforceable by Pledgor and Company and their respective successors and
assigns,  but this agreement shall not be assignable  without written permission
of the other party.  The section  headings are for  reference  purposes only and
shall not in any way affect the  meaning or  interpretation  of this  agreement.
This agreement  shall be governed by, and,  construed and enforced in accordance
with, the laws of the state of ____________.

                  IN WITNESS  WHEREOF,  Pledgor and Company have  executed  this
agreement as of the date set forth in the first paragraph.

                                  REHABILICARE INC.



                                  By _________________________________
                                     W. Glen Winchell, Chief Financial Officer




                                    ----------------------------------
                                    David Kaysen



<PAGE>


                                 PROMISSORY NOTE

$162,500     Minneapolis, Minnesota
                                                                  March 11, 1997

          FOR VALUE RECEIVED, David B. Kaysen ("Maker") hereby promises
to pay to the order of Rehabilicare  Inc., or its successors or assigns,  as the
case may be ("Payee"),  at 1811 Old Highway 8, New Brighton,  MN 55112,  or such
other place as may be specified in writing by Payee,  the  principal  sum of One
Hundred  Sixty Two  Thousand,  Five Hundred  Dollars  ($162,500.00)  with simple
interest  on the  outstanding  principal  balance at an annual rate equal to the
rate of interest  publicly  announced by Norwest Bank Minnesota  ("Bank") as its
prime rate ("Prime Rate"),  calculated on the basis of a 360 day year and actual
days  elapsed.  The interest  rate shall change when such Prime Rate changes and
shall be  effective  at the  beginning  of the  first  business  day of the Bank
following each change in the Prime Rate.

                  The principal  amount of this promissory note shall be paid in
Twelve (12) equal installments of Thirteen Thousand,  Five Hundred and Forty One
Dollars and Sixty Six Cents  ($13,541.66)  each, the first of which shall be due
and  payable on March 11, 1998 and the  remaining  eleven (11) of which shall be
payable quarterly thereafter on the last day of each calendar quarter commencing
on June 30, 1998,  until  December 31, 2000,  when all  remaining  principal and
interest shall be payable.  Accrued  interest from the date hereof through March
11, 1998 shall be paid on March 11, 1998.  Thereafter  accrued interest shall be
payable  quarterly on the last day of each calendar  quarter  commencing on June
30, 1998 until the maturity  date,  when all accrued  interest  shall be due and
payable.

                  Maker  shall  have the right to prepay all or any part of this
promissory note at any time without penalty or premium,  but any such prepayment
shall  be  applied  first  to  the  payment  of  accrued  interest  then  to the
installments of principal due hereunder in the inverse order of maturity.

                  Upon the  occurrence  of an event of  default,  Payee may,  at
Payee's option,  declare the unpaid principal amount of this promissory note and
any accrued  interest thereon  immediately due and payable.  The following shall
constitute events of default for purposes of this promissory note:

                  (a)      Failure by Maker to make  timely  payments  of any of
                           the   installments   of  principal  or  interest  due
                           hereunder,  which is not cured  within  fifteen  (15)
                           days  after  written  notice  of such  nonpayment  is
                           delivered to Maker; or

                  (b)      There  shall  have been  filed or  commenced  against
                           Maker  an  involuntary   case  under  any  applicable
                           bankruptcy,  insolvency  or other  similar law now or
                           hereafter  in  effect or an  action  shall  have been
                           commenced   to   appoint  a   receiver,   liquidator,
                           assignee,   custodian,   trustee,   sequestrator  (or
                           similar  official)  of Maker  or for any  substantial
                           part of Maker's  property  or for the  winding-up  or

<PAGE>

                           liquidation  of Maker's  affairs  and such  action or
                           proceeding shall not have been dismissed within sixty
                           (60) days; or

                  (c)      Maker  shall  commence  a  voluntary  case  under any
                           applicable  bankruptcy,  insolvency  or other similar
                           law now or hereafter in effect;  or shall  consent to
                           the  entry of an order for  relief in an  involuntary
                           case  under any such  law;  or shall  consent  to the
                           appointment  of or taking  possession  by a receiver,
                           liquidator,     assignee,     trustee,     custodian,
                           sequestrator (or other similar  official) of Maker or
                           of any substantial part of Maker's property; or shall
                           make  any  general  assignment  for  the  benefit  of
                           creditors; or shall take any action in furtherance of
                           any of the foregoing; or

                  (c)      Default by Maker in the  performance  by Maker of any
                           of its covenants or commitments  under a stock pledge
                           agreement, dated as of the date hereof, between Maker
                           and Payee, which default is not cured by Maker within
                           fifteen (15) days after written  notice of default is
                           delivered to Maker.

                  This promissory note is secured by a security interest granted
to Payee in Eighty Five Thousand  Seven Hundred and Twenty Nine (85,729)  shares
of the  Common  Stock  of  Payee  owned  by  Maker  pursuant  to a stock  pledge
agreement, dated as of the date hereof, between Maker and Payee. Nothing in such
stock pledge agreement shall be deemed to diminish the Payee's rights to collect
this Note from Maker without  foreclosing such stock pledge and Payee shall have
all rights at law and in equity  necessary to enforce this note  independent  of
the stock pledge.

                  Maker  hereby  waives  presentment  for  payment,   notice  of
dishonor,  protest and notice of protest and, in the event of default hereunder,
Maker agrees to pay all costs of  collection,  including  reasonable  attorneys'
fees.

                  This  promissory  note  shall be  governed  by the laws of the
state of Minnesota.

                  IN WITNESS WHEREOF, Maker has executed this promissory note as
of the date first above written.


                                           ------------------------------------
                                           David B. Kaysen



<PAGE>


                                                                    Exhibit 23.1




                       CONSENT OF INDEPENDENT ACCOUNTANTS

We  hereby  consent  to the  incorporation  by  reference  in each  Registration
Statement on Form S-8 (No.  33-26053,  33-63962 and  33-63964) of  Rehabilicare,
Inc. of our report dated August 8, 1997 appearing in this Form 10-KSB.



PRICE WATERHOUSE LLP

Minneapolis, Minnesota
September 22, 1997



<PAGE>




                                                                    Exhibit 23.2





                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS



As  independent  public  accountants,  we hereby consent to the inclusion of our
report dated August 9, 1996 in the  Rehabilicare  Inc.  Form 10-KSB for the year
ended June 30, 1997.  It should be noted that we have not audited any  financial
statements  of  Rehabilicare  Inc.  subsequent to June 30, 1996 or performed any
audit procedures subsequent to August 9, 1996, the date of our report.



                                                         ARTHUR ANDERSEN LLP



Minneapolis, Minnesota
   September 22, 1997



<PAGE>



                                                                      Exhibit 99

            Safe Harbor Statement pursuant to the Private Securities
                         Litigation Reform Act of 1995

         Statements  regarding  the  future  prospects  of the  Company  must be
evaluated in the context of a number of factors that may  materially  affect its
financial  condition and results of  operations.  Disclosure of these factors is
intended to permit the Company to take  advantage of the safe harbor  provisions
of the Private  Securities  Litigation Reform Act of 1995. Most of these factors
have been  discussed  in prior  filings by the Company with the  Securities  and
Exchange Commission. Although the Company has attempted to list the factors that
it is currently aware may have an impact on its operations, other factors may in
the future prove to be important and the following  list should not  necessarily
be considered comprehensive.

         FLUCTUATIONS   IN  QUARTERLY   OPERATING   RESULTS.   The  Company  has
experienced  quarterly  fluctuations in operating  results and anticipates  that
these fluctuations will continue. These fluctuations have been caused by various
factors,  including the buying  patterns of the  Company's  target  market;  the
number and timing of new product  introductions  and enhancements by the Company
and its  competitors;  the effects of industry  evaluations  and publicity;  the
timing of product orders and shipments;  marketing and promotional programs; and
economic  conditions  in the  regions  in which the  Company  does  business.  A
significant  portion of the Company's  operating expenses is relatively fixed in
nature and planned  expenditures  are based  primarily  on sales  forecasts.  If
revenue does not meet the Company's expectations in any given quarter, operating
results may be adversely affected.

         DISTRIBUTION   SYSTEMS.   The  Company  has   consigned   inventory  to
approximately  2,200 clinics for direct  distribution to patients.  Although the
Company  attempts to obligate  such  clinics to monitor  the  inventory,  it has
experienced  inventory  losses  in  each  year  since  it has  commenced  direct
distribution and expects such losses to continue. Further, the Company generally
experiences  increased  inventory  loss with  dissatisfied  or terminated  sales
agents and there can be no assurances  that its reserves for lost  inventory are
adequate.

         In addition,  because private and government health care  reimbursement
entities (health  insurance  carriers)  require a substantial  amount of time to
approve  reimbursement for sale and rental of products,  the Company's  accounts
receivable  have grown  significantly  in recent  years.  The  Company has added
personnel  to deal with  collections  and  record  keeping  and has  established
reserves, which it believes are adequate, for uncollectible receivables and lost
inventory.  Nevertheless,  there  can be no  assurances  that  the  Company  can
continue to generate increasing  revenue;  that all the revenue it generates can
be collected;  that its reserves for uncollectible accounts will be adequate; or
that its relationships with clinics can be maintained.

         VOLATILE  MARKETS.  The  electrotherapy  pain  management  market  is a
relatively mature and competitive market, subject to significant fluctuations in
profitability caused by foreign competition,  questions of therapeutic efficacy,
governmental  regulation and private rates of reimbursement.  The electrotherapy
rehabilitation  market is an  evolving  and  fragmented  market with a number of
different  companies offering competing  treatments without any clear indication
of industry preference.  There can be no assurance that the Company will ever be
able to capture a significant  portion of the pain management  market or that it
can  establish  a  significant  position  in the  electrotherapy  rehabilitation
market.

         NEW   PRODUCTS.    The   Company    recently    introduced   its   CTDx
Electrostimulation  System and is currently engaged in an intensified  marketing
program with a number of potential  industrial  users of such product.  Although
the Company has  commissioned a clinical study that supports the efficacy of the
CTDx, the market for  electrotherapy  solutions to carpal tunnel  syndrome is in
its infancy and the Company is faced with a considerable  educational  effort in
selling this product. Because of the youth of the market and this electrotherapy
application,  the sales cycle has been longer than anticipated for the CTDx. The
Company  anticipates  that sales will  require  less effort and support once the
product is more widely used, but can give no assurances to such affect.

         COMPETITION.  Competition  in the medical  device  industry  from other
electrotherapy pain management and rehabilitation  device companies,  as well as
from  pharmaceutical  companies and  biotechnology  companies,  is intense.  The
market  for  the  Company's  products,  and  particularly  its  pain  management
products,  is  extremely  competitive.  Although the Company  believes  that the
rehabilitation products it sells distinguish it from its competitors,  there can
be no assurance that the Company will be able to compete effectively in the sale
or rental of its products.

         REIMBURSEMENT  RATES. Most of the Company's products are sold or rented
on  prescription  and the sales or rental price is  reimbursed to the Company or

<PAGE>

its dealers by the  patients'  insurers.  Both  private  insurers and the United
States  Government as the  administrator of Medicare and Medicaid will reimburse
patients for the cost of such products  based on scheduled  rates that they have
established.  Generally the Company,  and other  providers of medical  products,
attempt  to  sell  and  lease  their  products  at  prices  approximating  these
reimbursement   rates.   Nevertheless,   private  and   government   payers  are
increasingly  vigorous in their  attempts to contain  health care costs  through
limitations on the level of  reimbursement  and scrutiny of items  submitted for
reimbursement.  In some instances,  such payers have made  determinations that a
form of  electrotherapy  is not an acceptable form of treatment and have refused
all reimbursement for that electrotherapy  modality.  To the extent such private
insurers or Medicare or Medicaid  decrease the rate of  reimbursement  or refuse
reimbursement  with  respect to any product or line of products,  the  Company's
profit margins and revenues will be adversely effected.

         CLINICAL  EFFICACY.  TENS sales were negatively  affected several years
ago, and may continue to be affected,  by publications  questioning the efficacy
of TENS for pain relief.  The mechanism through which a number of electrotherapy
modalities  relieve  pain  is not  precisely  understood  and  although  studies
generally  indicate  that TENS and other  modalities  offered by the Company are
effective in relieving  chronic  pain,  there can be no assurance  that contrary
studies or  publicity  will not  negatively  impact  sales in the  future.  Such
studies  have,  and can be expected to  continue to have,  a negative  impact on
reimbursement.

         GOVERNMENTAL REGULATION. The Company's products are subject to changing
Federal  regulation  governing the use,  marketing and sale of medical products.
Generally,  medical  products  must be  "substantially  equivalent"  to existing
medical products or will be subject to an extensive  premarket  approval process
that often requires clinical testing. The Company has received approval from the
Food and Drug Administration  (FDA) for ability to market its existing products,
including its CTDx and Ortho Dx, based on substantial equivalence. Nevertheless,
there can be no  assurance  that  approval to market such  products  for broader
medical  applications,  or other  products  the Company may  introduce,  will be
granted on such basis. The FDA also regulates the manufacture of medical devices
under its "good  manufacturing  practices"  regulations  and  requires  that the
manufacturing  process follow certain  pre-established  procedures.  The FDA and
state regulatory bodies also regulate the form of advertisement and methods used
to sell and distribute medical products.  Although the Company believes that its
manufacturing processes comply with good manufacturing practices and that all of
its  advertising  and sales  practices  comply with  applicable  law, a contrary
finding by a regulatory body could have an adverse effect on its operations.

         PRODUCT LIABILITY. Like most producers of medical products, the Company
faces the risk of product  liability  claims and  unfavorable  publicity  in the
event that the use of its products  causes injury or has other adverse  effects.
Although  the  Company  has  product  liability  insurance  for  risks  of up to
$2,000,000  and  has  not  been  subject  to any  material  claims  for  product
liability,  there  can be no  assurance  that it will be able to  avoid  product
liability exposure.

         LACK OF PROPRIETARY  PROTECTION.  The Company holds only one patent and
has filed one other application but has not applied for protection on any of the
technology  incorporated  into the  other  products  that it  currently  offers,
although it may seek  protection  for certain  technology in the future.  In the
absence of proprietary protection, the Company is vulnerable to competitors that
may attempt to copy its products.

         In addition,  although the Company has never been the subject of a suit
for patent or trademark  infringement  and does not believe that the  technology
incorporated into its products  infringes upon the proprietary rights of others,
there can be no assurance that third parties will not assert infringement claims
against the Company in the future or that any such  assertion will not result in
royalty payments or costly litigation.

         DEPENDENCE  ON  KEY  PERSONNEL.  The  Company's  success  depends  to a
significant  extent upon  certain  key  personnel,  including  Mr.  Kaysen,  its
President and Chief  Executive  Officer.  The loss of Mr.  Kaysen,  or other key
management  or  technical  personnel,   could  adversely  affect  the  Company's
business.  In  addition,  the  Company's  success  will depend on its ability to
attract and retain skilled personnel in all areas of its business.  There can be
no assurance  that the Company will be successful  in  attracting  and retaining
such personnel.

         LIMITED PUBLIC MARKET/POSSIBLE VOLATILITY OF STOCK PRICE. To date there
has been only a  limited  trading  market in the  Company's  Common  Stock.  The
Company  believes that factors such as new product  announcements by the Company
and  quarter-to-quarter  variations in financial  results could cause the market
price of the Common Stock to  fluctuate  substantially.  In addition,  the stock
market  in  general  has  recently  experienced  significant  price  and  volume
fluctuations unrelated to the performance of individual companies.  Broad market
fluctuations as well as general  economic or political  conditions may adversely
affect the market price of the Common Stock.