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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

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

For the Fiscal Year Ended June 30, 2002

Commission File Number 0-9407

REHABILICARE INC.

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|---------------------- |  | ----------------------------------
|Minnesota              |  | 41-0985318                        
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|                      
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|State of Incorporation |  | I.R.S. Employer Identification No.

1811 Old Highway 8
New Brighton, Minnesota 55112-3493
(651) 631-0590

Securities registered under Section 12(b) of the Exchange Act: None

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 Securities Exchange Act of 1934 during the preceding 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 o

Check if disclosure of delinquent filers pursuant to Item 405 of Regulations
S-K 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-K or any amendment to
this Form 10-K. x

The aggregate market value of voting stock held by non-affiliates of
Registrant, as of September 16, 2002, was approximately $42,428,866 (based upon
the last sale price of such stock on such date as reported by the NASDAQ
National Market System).

The number of shares outstanding of each of the Companys classes of common
stock, as of September 16, 2002, was: Common Stock, $.10 par value, 10,952,652
shares.

DOCUMENTS INCORPORATED BY REFERENCE

Certain specified portions of the Companys definitive proxy statement for the
annual meeting of shareholders to be held December 12, 2002 are incorporated by
reference in response to Part III.





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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

Our Annual Report on Form 10-K contains a number of forward-looking
statements where we indicate that we anticipate, believe, expect or
estimate or use similar words to indicate what might happen in the future.
These forward looking statements represent our expectations about future
events, including anticipated product introductions; changes in markets,
customers and customer order rates; changes in third party reimbursement rates;
expenditures for research and development; growth in revenue; taxation levels;
and the effects of pricing decisions. When used in this 10-K, the words
anticipate, believe, expect, estimate and similar expressions are
generally intended to identify forward-looking statements. You should evaluate
these forward-looking statements in the context of a number of factors that may
affect our financial condition and results of operations, including the
following:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     Like many medical device companies that rely on third party
reimbursement entities for payment, we have a large balance of
uncollected accounts receivable. We also have a reserve for the portion
of those receivables that we estimate will not be collected based on our
historical experience. The uncollectible portion of receivables includes
both sales allowances for contracted or negotiated selling prices and
rental rates and bad debts. If we cannot collect an amount of
receivables that is consistent with historical collection rates, we might
be required to increase our reserve and charge off the portion of
receivables we cannot collect. This additional provision for
uncollectible accounts could significantly impact our operating results.
|
| |     In the United States, our products are subject to reimbursement by
private and public healthcare reimbursement entities that generally
impose limits on reimbursement and strict rules on applications for
reimbursement. Changes in the rates, eligibility or requirements for
reimbursement, or failure to comply with reimbursement requirements,
could cause a reduction in our income from operations.                                                                                                                                                                                                                                                                                                                                                                 
|
| |     We maintain significant amounts of finished goods inventory on
consignment at clinics for distribution to patients. We may not be able
to completely control losses of this inventory and, if inventory losses
are not consistent with historical experience, we might be required to
write off a portion of the carrying value of inventory.                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |     The clinical effectiveness of our electrotherapy products has
periodically been challenged and the effectiveness of electrotherapy
products such as those offered by Compex for fitness and health
applications has sometimes been questioned. Publicity about the
effectiveness of electrotherapy for pain relief or other clinical
applications and continued questions about the effectiveness of
electrotherapy for conditioning could negatively impact revenue and
income from operations.                                                                                                                                                                                                                                                                            
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| |     We have periodically been the subject of litigation that has caused
additional expense, including a Medicare whistleblower suit settled in
2000 for approximately $1.6 million. The costs of these actions, have
negatively affected, and the resolution of other actions that may arise,
may continue to negatively affect our operating results.                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |     Approximately 34% of our revenue for the year ended June 30, 2002 was
generated by Compex SA, a subsidiary headquartered in Switzerland that
does business primarily in Europe. There are risks in doing business in
international markets which could adversely affect our business,
including:                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



| |  |  | regulatory requirements;                                           
| | - |  | -------------------------------------------------------------------
|
| |  |  | export restrictions and controls, tariffs and other trade barriers;
|
| |  |  | difficulties in staffing and managing international operations;    
|
| |  |  | fluctuations in currency exchange rates;                           
|
| |  |  | reduced protection for intellectual property rights;               
|
| |  |  | seasonal reductions in business activity; and                      
|
| |  |  | potentially adverse tax assessments.                               

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PART I

Item 1. Description of Business.

Background

Rehabilicare Inc. was incorporated as Medical Devices, Inc., a Minnesota
corporation, in 1972. Our name was changed to Rehabilicare Inc. in 1994.
Through our U.S. operations, we manufacture, sell and rent electromedical
rehabilitation and pain management products and services used in clinical, home
healthcare, and occupational medicine applications. We also distribute certain
product manufactured by others for similar applications. Through our Swiss
subsidiary, Compex SA, we provide similar medical products and also manufacture
and sell electrical muscle stimulators to enhance muscle performance for
athletic training.

Since 1998, we have expanded the scope of our operations through
acquisitions. On March 17, 1998, we merged with Staodyn, Inc., a corporation
headquartered in Longmont, Colorado that was in the same business but had more
than twice the amount of our annual revenue. In this transaction, accounted
for as a pooling-of-interests, we issued shares of our common stock valued at
about $16.5 million. On August 7, 1998, we acquired the Homecare division of
Henley Healthcare, Inc., another electrotherapy products business, for cash of
$3.65 million.

On July 16, 1999, we acquired Compex SA, a Swiss-based medical products
and sports training products company for cash of approximately $11.0 million.
The acquisition was financed principally with debt and provided for additional
contingent consideration of up to $2 million based on the performance of Compex
through December 31, 2000. That additional consideration was paid during
fiscal 2000 and 2001.

During the year ended June 30, 2002, we focused on increasing sales
through several new product introductions, through greater penetration of the
markets in which we offer our sports products, and through more focused patient
services. In September 2001, we received FDA clearance to market our new
ProMAX TENS devices, and introduced those devices, which will replace most of
our historical TENS products, in October 2001. In October 2001, we introduced
the Medi-Compex, a new product designed to serve the aesthetic and well-being
marketplace in Europe. In November 2001, we introduced the Theta Sound in
Europe, a new ultrasound product that we believe has unique features designed
to maximize therapeutic effect. Importantly, in April 2002, we received FDA
clearance to market the Compex Sport products in the United States for physical
training. Although we anticipate contribution from these products in future
periods, we do not anticipate completing the steps necessary to sell these
products in the United States until the middle of our 2003 fiscal year.

We were successful in the year ended June 30, 2002, in significantly
increasing our penetration of Compex products in European markets. Although
Italy remains our largest market for Compex, we substantially increased sales
in Spain and made significant inroads in Germany. Overall, sales at Compex
increased 40% in fiscal 2002 from 2001 and constituted approximately 34% of our
overall revenue in fiscal 2002, up from 28% in fiscal 2001.

We also increased our focus in the United States on patient services and
were successful in completing a greater percentage of rentals initiated by
prescription through more focus on careful billing practices. The increased
revenue from these practices in our direct billing division offset declines in
our wholesale division caused by competition from lower-priced foreign
products. Overall, our operations were not significantly affected by economic
conditions after September 11, 2002 and we recorded healthy increases in
revenue and net income for the year ended June 30, 2002.

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Products

We offer a number of electrotherapy devices for rehabilitation, and
chronic and acute pain management and, through our Swiss subsidiary Compex,
electrical muscle stimulators to enhance muscle performance for sports
training.

We have not significantly integrated the products offered in the United
States and for export under the Rehabilicare name with the products we offer in
Europe and for export under the Compex name. Compex, which generates most of
its revenue from consumer products, offers and sells in Europe its own series
of products for electromedical applications and does not currently market
Rehabilicare products. Rehabilicare recently received 510(k) clearance to
begin marketing one of Compexs consumer products for physical training in the
United States and expects to introduce this product in test markets during the
fiscal year ending June 30, 2003. All of these products involve
electrotherapy, the use of current for therapeutic purposes, and involve
similar technologies.

Although rehabilitation and pain management products sold primarily
through physician prescription continue to account for the largest portion of
our revenue, consumer products sold in Europe through our Compex subsidiary
have accounted for an increasing percentage of our revenues during the past
three years. Rehabilitation products accounted for approximately 20% of our
revenue in fiscal 2002, 19% of revenue in fiscal 2001 and 20% of revenue in
fiscal 2000. Pain management products accounted for approximately 20% of our
revenue in fiscal 2002, 22% of revenue in fiscal 2001 and 24% of revenue in
fiscal 2000, respectively. Consumer products, sold through our Compex
subsidiary, accounted for approximately 27% of our revenue in fiscal 2002, 22%
of revenue in fiscal 2001 and 21% of revenue in fiscal 2002. The balance of our
revenue resulted from the sale of accessories and supplies used with treatment
modalities.

We expect that our revenue from consumer products will continue to grow,
both in absolute terms and in terms of the percentage of our overall product
revenue, in future periods, particularly if we are successful in the
introduction of the Compex Sport product in United States markets.

Products Sold in the United States and for Export under the Rehabilicare name.

Rehabilitation Products

We offer a variety of electrotherapy products in the United States for the
rehabilitation market, including neuromuscular stimulators and pulsed direct
current devices. These products consist of small, portable, battery-powered
electrical pulse generators, which are connected by wires to electrodes placed
on the skin.

Neuromuscular Electrical Stimulation (NMES) Devices.NMES devices are
designed to facilitate faster recovery and function in diseased or injured
muscles and other soft tissues. NMES has proven effective in producing
controlled muscle contractions, which assist in increasing or maintaining the
strength and mobility of a limb and preventing deterioration of muscle tissue.
Common uses of NMES therapy include muscle re-education associated with knee
injuries; relaxation of muscle spasms in the neck and back; reduction of
swelling; reduction of spasticity in children; and increase in range of motion.
Our NMES products include the NM III, which features 16 preset programs
covering the most common applications, and the EMS+2, which includes a unique
pulsed direct current waveform. Both devices are ideal for clinical or home
use.

Pulsed Direct Current Devices (PDC).PDC devices utilize pulsed direct
current to reduce pain and swelling, influence local blood circulation and
increase range of motion. PDC is typically used post-operatively and for
traumatic injuries. Our PDC products include the GV II, a high voltage device
used primarily for sprains and strains. In addition, the Rehabilicare
SPORTX®
features both a PDC and TENS channel, and is used extensively in sports
medicine, particularly by orthopedic surgeons, professional, college, and other
organized athletic teams.

Ortho
DX Electrotherapy System.Introduced in 1998, the Rehabilicare
Ortho DX Electrotherapy System is designed for post-surgical knee
rehabilitation and is comprised of a unique proprietary electromedical
stimulator and electrode configuration. It combines both the PDC and NMS
waveforms into one stimulator, allowing physicians and therapists to increase
local blood circulation to address post-surgical swelling of the knee while
simultaneously re-educating and strengthening key muscle groups in the leg.
This innovative system reduces the post-surgical treatment time and therefore
reduces costs while speeding the

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recovery time for the patient. The
Ortho DXis designed for ease of
application and use in hospital settings, in clinics or at home.

Pain Management Products

We offer a wide variety of electrotherapy products under the Rehabilicare
name for acute and chronic pain management. These include transcutaneous
electrical nerve stimulators, interferential stimulators and iontophoresis
devices.

Transcutaneous Electrical Nerve Stimulation Devices (TENS).TENS devices
have been used as a non-narcotic alternative to drug therapy for the relief of
chronic and acute pain for over 25 years. These devices are most frequently
used to treat persistent conditions such as neck and low back pain. TENS has
also been used in treating pain resulting from a variety of other conditions
including postoperative pain, tendonitis, phantom limb pain, and childbirth.
TENS devices generally reduce pain during treatment and the effects can
continue for an extended period of time after use.

There are two theories that explain how TENS alleviates pain. The gate
control theory states that the electrical impulses from TENS devices block or
interrupt the neurological transmission of pain signals from the site of the
trauma to the brain. A second theory suggests that the electrical impulses
stimulate the production of enkephalins or endorphins, the bodys natural pain
suppressing agents. Under either theory, TENS relieves pain without the
undesirable side effects and physiological problems of prolonged drug use,
including addiction, stupor, depression, disorientation, nausea, and ulcers.

During the year ended June 30, 2002, we consolidated our line of
Rehabilicare TENS devices. Our current TENS line is focused on four different
products. Our premier TENS unit, the ProMax, is a state-of-the-art device
that we designed with input from both patients and clinicians and that has
become our best selling TENS device. Our most recently introduced TENS device,
the Maxima®, is a streamlined, easy to use TENS that is available exclusively
for wholesale customers. We also offer a specialized TENS device, the NuWave®,
for low back pain. A clinical trial conducted by the Pain Treatment Center of
the University of Tennessee in 1990 concluded that the NuWave often proved
beneficial in patients with post-laminectomy or peripheral neuralgic pain.
According to this trial, the patients responded favorably to the NuWave even if
they had not responded to other types of TENS therapy. The Maxima® II is a
traditional TENS device with programming flexibility. This is sold primarily
to the wholesale customer market.

We also manufacture and distribute in the United Kingdom a modified TENS
unit, the BabiTENS®, for pain control during labor and childbirth. It is
distributed directly to expectant mothers and currently through a large
pharmacy chain in the United Kingdom. It is a widely accepted alternative to
narcotic pain management. The use of a TENS device in the European Union does
not require a doctors prescription, although a medical referral is normally
required for third-party reimbursement.

Interferential Stimulation Devices.Interferential is another form of
electrical stimulation commonly used in physical therapy. Our IF II
interferential stimulator delivers a continuous high-energy output that
provides deep tissue penetration directly into the affected area. The IF II is
used to reduce pain associated with back problems, joint injuries, overuse
injuries as well as many podiatric applications.

Distributed Products

Iontophoretic Drug Delivery System.In the United States, we market
Iontophoretic Drug Delivery Systems manufactured by IOMED Corporation under the
IOMED name to physicians, physical therapists, and other healthcare
specialists treating acute and chronic pain. Iontophoretic delivery involves
the use of mild electrical stimulation to enhance the delivery of a medication
(usually a local anesthesia) through the electrode into tissue. Iontophoretic
drug delivery is noninvasive and does not require the use of a needle or
ingestion of medication.

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Cervical and Lumbar Traction Devices.We also market in the United States
The Saunders Cervical Hometrac® and
The Saunders Lumbar Hometrac® devices
manufactured by Saunders Medical to physicians, physical therapists, and other
healthcare specialists treating neck and back pain. These traction devices use
a handheld pump to produce varying pounds of traction to the cervical and
lumbar areas of the spine. These devices provide easy, at-home traction and
offer a cost-effective option to continuing clinical traction treatments.

Accessories and Supplies

Users of medical rehabilitation and pain management devices require
various accessories and supplies. We sell self-adhesive and reusable electrode
pads, disposable electrodes, leadwires, batteries, and a power pack that
eliminates the need for batteries in some of our devices. We purchase all of
our electrodes and accessories from outside suppliers. Accessories and
supplies, including those provided separately to clinics with initial product
rentals, accounted for approximately 33%, 37% and 35% of revenue in fiscal
2002, 2001 and 2000, respectively.

Products Sold in Europe and for Export by Compex SA

We acquired Compex SA, a designer, developer and marketer of home use
electrotherapy products for the medical, sports and fitness markets in Europe,
in July 1999. Compex, headquartered near Lausanne, Switzerland, was
established in 1986. Compex accounted for $24.7 million or 34% of our revenue
in fiscal 2002, $17.4 million or 28% of our revenue in fiscal 2001 and $16.5
million or 28% of our revenue in fiscal 2000. Compex sells products for three
principal applications: clinical products for medical applications, consumer
products for sport and fitness applications and consumer products for health
and wellness applications.

Clinical Products. Although the line of clinical products offered by
Compex in Europe is designed to perform many of the same rehabilitation and
pain management functions as the products we market under the Rehabilicare name
in the United States, the Compex products are larger (less portable) and each
is designed to provide a full range of therapies rather than a single form of
therapy. All of these products, although amenable to home use, are designed
primarily for clinical use. Compex sells to medical markets in Switzerland,
France and Italy but its products do not require prescriptions.

The Compex Micro offers the pain management modalities of TENS as well as
endorphic modalities similar to pulsed galvanic or interferential and
modalities to combat disuse atrophy similar to our neuromuscular stimulation
devices. The Micro+ offers many of the same features as the Micro, plus
modalities for capillarization and iontophoretic modalities. The Compex 2 adds
to these features the fitness programs offered in the Compex Sport products and
programmability and smart cards to store the results of each treatment. The
Compex Theta-Sound adds to these clinical capabilities a unique ultrasound
product that calculates body composition to maximize treatment efficacy. These
clinical products accounted for sales of $4.1 million or 17% of Compexs sales
in fiscal 2002, $2.4 million or 14% of Compexs sales in fiscal 2001 and $3.1
million or 19% of Compexs sales in fiscal 2000.

Sports and Fitness.Compex sells a line of products directly to athletes
for strength training and for assisting in muscle recovery after strenuous
workouts. These products, which are hand-held portable products, include a
range of products that may be customized for both elite athletes and weekend
warriors and are sold at sporting goods shops. The Compex Sport is the base
product targeted for nonprofessional athletes and offers programs for
endurance, strength training, resistance and recovery and increased
capillarization. The Sport 3 combines the features of the Sport in a
modernized case with additional modalities for pain management and recovery.
The full featured Sport 400, Compexs newest sport product, offers all of the
features of the Compex 2 clinical device and enhanced fitness programs for
sport training for the serious athlete. Sport and fitness products accounted
for sales of $19.3 million or 78% of Compexs sales in fiscal 2002, $13.7
million or 79% of Compexs sales in fiscal 2001, and $12.7 million of 73% of
sales in fiscal 2000.

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Health and Wellness.In October 2001, Compex introduced in Europe the
Medi-Compex, an electrotherapy device targeted specifically for health and
wellness to build muscle tone, reduce muscle pain and improve well-being. This
product is targeted primarily to non-athletic markets for physiological
appearance and aesthetics. It accounted for roughly 7.5% of Compexs sales.

Markets and Marketing. Compex markets its products through demonstrations
at sport shops, attendance and demonstrations at major athletic events across
Europe and through product endorsements by Olympic and other top athletes and
teams.

In France, Switzerland, Germany and Spain, Compex sells its products
directly or through subsidiary corporations. In Italy, products are sold
through an exclusive distribution arrangement with Filsport Assistance S.r.l.
Filsport Assistance S.r.l. accounted for 44% of Compexs sales in fiscal 2002
and 51 percent in fiscal 2001. This represents 14% and 13% of Rehabilicares
consolidated revenue in fiscal 2002 and 2001, respectively. If this
distribution arrangement with Filsport Assistance S.r.l. were to end, it would
have a material adverse impact on the revenue of Compex.

In April 2002, we received clearance from the Food and Drug Administration
(FDA) to market the Compex® Sport muscle stimulator over-the-counter in the
United States. We plan to replicate in the United States the successful
marketing strategy that Compex has developed in Europe. The actual product
launch is expected to occur during the quarter ending December 31, 2002 and
contribute to revenue during the last half of fiscal 2003.

Sales and Marketing

We distribute our products in the United States both on a direct basis to
healthcare providers and their patients and on a wholesale basis to home
healthcare dealers. Our products are currently sold only on prescription in
the United States. Accordingly, decisions to use our products are normally
made by physical therapists, athletic trainers, occupational therapists,
podiatrists, chiropractors, neurologists, dentists, physiatrists, general
practitioners and orthopedic surgeons.

DirectDistribution

Historically, we had approached healthcare decision makers through a
network of home healthcare and specialty equipment dealers. Since the early
1990s however, like most of the industry, we have emphasized direct rentals and
sales to patients through healthcare providers and third-party payors rather
than through dealers. In such direct rentals and sales, we make consignment
inventory available at treating clinics and other dispensing locations. When a
treating clinician determines that a specific device is beneficial to a
patient, a physicians prescription is obtained and the patient is trained in
the use of the device. The product is then taken home by the patient for
in-home therapy.

We maintain a nationwide network of independent and employee sales
representatives for our direct distribution activities who devote varying
portions of their time to Rehabilicare products. As of June 30, 2002, our
direct sales force consisted of 130 representatives. Our retail sales force
calls on about 9,500 active accounts, including physical and occupational
therapy clinics, orthopedic groups, sports medicine practices, and other
providers of our products and the products of our competitors.

Our billing and support operations for the direct distribution business
are located in Tampa, Florida. These operations include (1) distribution
support staff that provides next day service of products and supplies to
providers and patients; (2) billing and collecting staff that work with
physicians, clinicians and reimbursement entities to ensure prompt and accurate
billing and collection of sales and rental fees for our products; (3) a
telemarketing sales staff which follows up with patients to ensure that they
have adequate product and supplies

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to meet their needs; and (4) patient care personnel that assist patients in the
purchase and reimbursement process.

To supplement the assistance offered by the Tampa sales support operation,
we also employ clinicians who communicate with patients by phone from a
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

Our Rehabilicare products are also sold on a nonexclusive basis to
approximately 200 home healthcare and durable medical equipment (DME) dealers.
These dealers sell or rent our products to individual users who are referred by
a physician, physical therapist, or other medical professional. Wholesale
sales amounted to 5% of our revenue in fiscal 2002.

In addition to our sales through Compex, we sell our Rehabilicare products
internationally through foreign distributors and our majority-owned subsidiary,
Rehabilicare (UK) Ltd., a subsidiary formed in February 1999 that acquired the
business of one of our distributors. Although most of our revenue in the
United Kingdom consisted of refurbishing our Babi-TENS units for a large
pharmacy chain, the relationship with that pharmacy chain declined during
fiscal 2002 and will end in fiscal 2003. We have therefore established a
marketing arrangement with another company for our BabiTENS product. We
nevertheless expect that sales through Rehabilicare (UK) Ltd. will decline
after termination of our current contractual relationship with the pharmacy
chain.

New Product Development

We maintain separate development staff in the United States to develop new
forms of our rehabilitation and pain management products and research and
development staff at Compex to develop new versions and new products for the
Compex product line. During the past year, our Rehabilicare development staff
has focused on developing pain management devices using digital solid state
electronics that may be manufactured at a reduced cost. In September 2001, we
introduced the ProMax, a new fully-digital version of TENS product that will
replace the Max III product.

The Compex research and development staff have focused both on introducing
new versions of existing products with enhanced features and on developing
products that expand the treatment modalities that Compex offers. During fiscal
2002, Compex completed and introduced the Medi-Compex, a new product designed
expressly for use in muscle toning to penetrate a new market segment health and
well-being. Compex also introduced the Sport 400, its most technologically
advanced stimulation unit, for use in the professional sport training market.
In the clinical market, Compex introduced the Theta-Sound, a new ultrasound
device that allows calibration of the intensity and form of the ultrasound beam
based on patient body composition to maximize therapeutic effect. Compex is
currently working on several additional products for each of these three
markets.

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Competition

Rehabilicare Products

The market for electrotherapy neuromuscular stimulation and pain
management products in the United States is relatively mature and discrete.
Although several other companies in the U.S. currently manufacture and
distribute these devices, we believe that our principal competitor is Empi,
Inc. For sales through dealers, as opposed to direct sales, there is also
substantial and increasing competition from distributors of low cost TENS units
manufactured by foreign entities. We compete in these markets primarily on the
basis of the variety and quality of our product offerings, marketing and
distribution presence and service. The electrotherapy rehabilitation market
for modalities other than NMS, such as interferential, pulsed galvanic, and
microcurrent, is more fragmented and more difficult to define. We believe that
our ability to offer all of these modalities is in contrast to the focus of our
competitors. We further believe that there are no dominant competitors for
these other modalities and that the number of modalities we offer, together
with the distinctive features of our products, allow us to compete favorably in
this market.

Compex Products

Compex products compete in Europe both in the markets for clinical
electrotherapy and in the consumer markets for sport and fitness products and
for health and wellness products. As in the United States, the market for
clinical products is relatively mature and Compexs products compete in these
markets primarily on the basis of breadth of features, flexibility, portability
and cost. In contrast, the consumer markets for sport and fitness and health
and wellness products are less developed and Compexs products are, in many
instances, the first products for these uses. Although Compexs consumer
products are well known and marketed currently in six European countries, as
they become more accepted they also face competition from numerous new market
entrants. Most of these new entrants tend to be smaller companies and the
degree of competition they present varies considerably by each individual
country. Nevertheless, Compexs fitness products have been subject to
increasing competition on the basis of price in a number of these countries.
Compex competes in part with these new entrants by continually enhancing its
products to offer new features and by reducing cost on older featured products.
We believe that Compex also competes favorably on the basis of the size of its
product line, higher quality of its products and the range of prices at which
its products are offered.

Manufacturing and Sources of Supply

Our U.S. electrotherapy devices are manufactured at our headquarters and
manufacturing facility in New Brighton, Minnesota. Manufacturing operations
consist primarily of installing electronic components and materials onto
printed circuit boards and assembling them into the final product. To maximize
quality and reliability and decrease size and weight, most of our products
incorporate surface mount technology and we use machinery that automates
surface mounts and through-hole circuit board manufacturing.

Some Compex SA products incorporate components manufactured in other
countries that are shipped to a Swiss contracted engineering company. Other
products are manufactured in France by another company. Compex requires the
contract manufacturers to assemble Compex products using strict quality
requirements, and technology specifications that it supplies.

Our electronic devices involve electromechanical assemblies and
proprietary electronic circuitry. Most of the raw materials and manufactured
components used in our products are available from a number of different
suppliers. We maintain multiple sources of supply for most significant items
and believe that alternative sources could be developed, if required, for
present single supply sources without a material disruption of our operations.

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Patents and Trademarks

Because we believe that patent protection does not offer a significant
competitive advantage in the marketplace for electrotherapy devices, we have
not pursued patent protection on the features of most of our products. During
the past two fiscal years, we have submitted several more patent applications
for approval, which remain pending. One of the companies that we acquired
maintained a more aggressive approach to patent protection and the majority of
its products are covered by more than 25 U.S. and Canadian patents. We may
also apply for additional protection for some of the features of the products
developed by Compex. In the absence of patent protection, we rely on trade
secrets, know-how and continuing technological innovation to enhance our
competitive position. We do, however, maintain trademark registration for all
of our branded product names.

We believe that we own or have the right to use all proprietary technology
necessary to manufacture and market our current products and those under
development. We have no knowledge that we are infringing upon any patents held
by others.

Government Regulation

The medical devices that we manufacture and market are subject to
regulation by the Food and Drug Administration (the FDA) and, in some
instances, by foreign governments. Under the Federal Food, Drug and Cosmetic
Act and regulations issued by the FDA under that act, we must comply with
controls that regulate the testing, manufacturing, packaging, and marketing of
our medical devices. This system of regulation creates 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, which are life supporting or life
sustaining, or are of substantial importance in preventing impairment of human
health, are generally subject to a clinical evaluation program before receiving
premarket approval from the FDA for commercial distribution. Class II devices
are subject in some cases to performance standards which 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 our medical products, have not
been adopted so only Class I controls apply. Class I devices are subject only
to general controls, such as compliance with labeling and record-keeping
regulations. We believe that all our currently marketed products are Class II
products under this classification system and that they do 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 before 1976 and has been continuously marketed since
1976, 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 regulatory review
typically takes from three to twelve months. 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, we are also subject to regulation by
the FDA of our manufacturing processes and facilities under the FDAs QSR
requirements (formerly Good Manufacturing Practices) and other similar
regulations. These regulations require that we manufacture our products and
maintain documents in a prescribed manner with respect to manufacturing,
testing and control activities. We believe that our manufacturing and quality
control procedures substantially conform to the requirements of the FDA
regulations. Our products are also subject to laws and regulation in foreign
countries.

The FDA and various state agencies also regulate the labeling of our
medical devices, including any promotional activities sponsored or marketing
materials distributed by us or on our behalf. While the FDA cannot prohibit a
licensed health care professional from using a device for purposes other than
indicated in its labeling (i.e., an off-label use), if the FDA determines
that a manufacturer or seller is engaged in off-label marketing of a product
subject to FDA regulations, the FDA may take administrative, civil or criminal
actions against the manufacturer or seller. The regulations of state agencies
with respect to the advertisement and promotion of medical devices may be even
more restrictive.

Reimbursement

Governmental and other efforts to reduce healthcare spending have
affected, and will continue to affect, our operating results. The cost of a
significant portion of medical care in the United States is funded by

10



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government and private insurance programs, such as Medicare, Medicaid, health
maintenance organizations, and private insurers, including Blue Cross/Blue
Shield plans. Government imposed limits on reimbursement of hospitals and
other healthcare providers have significantly curtailed their spending budgets.
Under certain government insurance programs, a healthcare provider is
reimbursed a fixed sum for services rendered in treating a patient, regardless
of the actual charge for such treatment. Private and third-party reimbursement
plans are also developing increasingly sophisticated methods of controlling
healthcare costs through redesign of benefits and exploration of more
cost-effective methods of delivering healthcare. In general, these government
and private cost-containment measures have caused healthcare 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 healthcare 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 our products by third-party payors could have an adverse impact on
our operations. We attempt to establish relationships with such payors to
assure coverage of our products and make the timing and extent of reimbursement
more predictable.

The Health Care Financing Administration (HCFA), the federal agency
which determines Medicare reimbursement levels, recently announced a reduction
in the amounts patients will be reimbursed for use of TENS devices. Although
Medicare reimbursement has historically constituted only a small portion of our
revenue, private insurance programs often follow HCFA in reducing reimbursement
rates. If the HCFA reductions are implemented and private insurance programs
take similar measures, our revenue and operations would be adversely affected.

In addition to establishing the rates of reimbursement, HCFA and the
agencies that administer Medicare reimbursement require compliance with a
detailed set of regulations and forms as a prerequisite to reimbursement.
Failure, or alleged failure, to comply with these regulations can result in
administrative action and civil action under whistleblower statutes. We were
the subject of a whistleblower suit in 1999 that we settled with the United
States Government by payment of $1,588,510. As part of this settlement, we
also entered into a five-year corporate integrity agreement with the Office of
the Inspector General. The corporate integrity agreement requires that, to the
extent that we obtain Medicare reimbursement in the future, our operations will
be subject to audit and close scrutiny by federal regulatory agencies.

Employees

As of June 30, 2002, we had 278 full-time employees in the U.S. This
includes 131 employees in sales and marketing, 7 in research and development,
51 in manufacturing, and 89 in finance and administration. Geographically, we
had 92 employees in our New Brighton facility, 150 employees in Tampa and 36
employees in various regional U.S. field locations.

As of June 30, 2002, we had 92 full-time international employees. This
includes 43 in sales and marketing, 10 in research and development, 17 in
operations, and 22 in finance and administration. Geographically, our
international employees include 52 in Switzerland, 21 in France, 9 in Germany,
10 in Spain and 4 in the United Kingdom.

Our employees are not represented by any collective bargaining
organization and we have never experienced a work stoppage. We believe that
our relations with our employees are satisfactory.

Item 2. Properties

Our corporate headquarters are located in a 30,000 square foot facility in
New Brighton, Minnesota, a suburb of St. Paul, Minnesota. This facility houses
all of our corporate activities including administration, finance, sales and
marketing, research and development, and manufacturing. We own this facility.

We entered into a 10-year lease effective June 1, 1999 for 26,000 square
feet of office space in Tampa, Florida for our direct sales, customer service,
patient support and billing and collection activities.

11



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We currently lease four facilities in Europe that total approximately
7,600 square feet of leased space. These leases range in duration from one to
three years and are all renewable.

We believe that our headquarters and direct billing facilities provide
adequate space for our administrative, billing and support operations in the
United States for the foreseeable future. We also believe that our current
facilities near Lausanne, Switzerland are adequate for our European
administrative operations for the coming year. We believe that additional
leasehold space is currently readily available in all jurisdictions at
favorable rates.

Item 3. Legal Proceedings.

In late January 2001, we were served with documents in connection with a
product liability case brought in the California Superior Court for Solano
County. Although we had no record of the proceedings, the action had
progressed to the entry of a default judgment on January 11, 2001. We appealed
the default judgment to the California Court of Appeals in March 2001. On May
10, 2002, the appeals court overturned the default judgment holding that there
was no valid complaint against us.

From time to time, we have also been a party to other claims, legal
actions and complaints arising in the ordinary course of our business. We do
not believe that the resolution of such matters has had or will have a material
impact on our 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 our shareholders during the quarter ended June 30, 2002.

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PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

Our shares are traded on The Nasdaq Stock Market under the symbol REHB.
The table below sets forth the high and low closing sale prices of our common
stock for the periods indicated, as quoted by Nasdaq:

|                                |                |  |      |       |     |  |   |       | 
|------------------------------- | -------------- |  | ---- | ----- | --- |  | - | ----- | 
|                                |                |  | High |       | Low
|                                |                |  |      |       |    
|Fiscal year ended June 30, 2002 |                |  |      |       |     |  |   |      
|                               
|                               
|                               
|                               
|                                | First Quarter  |  | $    | 3.450 |     |  | $ | 2.270 | 
|                               
|                               
|                               
|                               
|                                | Second Quarter |  |      | 5.150 |     |  |   | 2.790 | 
|                               
|                               
|                               
|                               
|                                | Third Quarter  |  |      | 5.450 |     |  |   | 4.250 | 
|                               
|                               
|                               
|                               
|                                | Fourth Quarter |  |      | 6.490 |     |  |   | 4.270 | 

|                                |                |  |      |       |     |  |   |       | 
|------------------------------- | -------------- |  | ---- | ----- | --- |  | - | ----- | 
|                                |                |  | High |       | Low
|                                |                |  |      |       |    
|Fiscal year ended June 30, 2001 |                |  |      |       |     |  |   |      
|                               
|                               
|                               
|                               
|                                | First Quarter  |  | $    | 3.188 |     |  | $ | 2.438 | 
|                               
|                               
|                               
|                               
|                                | Second Quarter |  |      | 2.969 |     |  |   | 1.969 | 
|                               
|                               
|                               
|                               
|                                | Third Quarter  |  |      | 3.375 |     |  |   | 2.375 | 
|                               
|                               
|                               
|                               
|                                | Fourth Quarter |  |      | 3.600 |     |  |   | 2.563 | 

The last sale price reported by Nasdaq on September 16, 2002 was $3.98 per
share. As of September 16, 2002, there were approximately 785 shareholders of
record (not including beneficial holders) and we estimate there were
approximately 3,000 beneficial holders.

We have never declared or paid a cash dividend on our common stock. We
presently intend to retain all earnings for use in the operation and expansion
of our business and therefore do not anticipate paying any cash dividends in
the foreseeable future.

Item 6. Selected Financial Data.

|                       |                       |  |                              |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |            |  
|---------------------- | --------------------- |  | ---------------------------- | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- |  |  | - | ---------- | -
|                       |                       |  | For the Years Ended June 30,
|                       |                       |  |                             
|                       |                       |  | 2002                         |            | 2001 |  | 2000 |            | 1999 |  | 1998
|                      
|Operating results -    |                       |  |                              |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |           
|                      
|                      
|                      
|                      
|                       | Revenue               |  | $                            | 72,506,677 |      |  | $    | 62,957,415 |      |  | $    | 59,574,612 |  |  | $ | 41,795,373 |  |  | $ | 33,812,453 |  
|                      
|                      
|                      
|                      
|                       | Gross profit          |  |                              | 48,972,916 |      |  |      | 43,245,085 |      |  |      | 41,337,561 |  |  |   | 29,847,069 |  |  |   | 22,676,520 |  
|                      
|                      
|                      
|                      
|                       | Net income (loss)     |  |                              | 4,942,010  |      |  |      | 3,319,989  |      |  |      | 2,202,777  |  |  |   | 2,859,834  |  |  |   | (1,008,683 | )
|                      
|Per common share -     |                       |  |                              |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |           
|                      
|                      
|                      
|                      
|                       | Net income (loss)     |  | $                            | .44        |      |  | $    | .31        |      |  | $    | .21        |  |  | $ | .27        |  |  | $ | (.10       | )
|                      
|Financial data/other - |                       |  |                              |            |      |  |      |            |      |  |      |            |  |  |   |            |  |  |   |           
|                      
|                      
|                      
|                      
|                       | Cash                  |  | $                            | 2,086,650  |      |  | $    | 759,611    |      |  | $    | 2,227,352  |  |  | $ | 561,207    |  |  | $ | 919,765    |  
|                      
|                      
|                      
|                      
|                       | Working capital       |  |                              | 25,777,799 |      |  |      | 22,391,874 |      |  |      | 21,495,832 |  |  |   | 21,547,312 |  |  |   | 19,204,614 |  
|                      
|                      
|                      
|                      
|                       | Total assets          |  |                              | 57,477,736 |      |  |      | 51,495,871 |      |  |      | 52,707,962 |  |  |   | 35,699,714 |  |  |   | 27,060,358 |  
|                      
|                      
|                      
|                      
|                       | Shareholders Equity  |  |                              | 35,281,190 |      |  |      | 28,459,216 |      |  |      | 25,269,554 |  |  |   | 23,053,309 |  |  |   | 20,091,230 |  
|                      
|                      
|                      
|                      
|                       | Long-term obligations |  |                              | 6,455,209  |      |  |      | 10,433,542 |      |  |      | 13,662,792 |  |  |   | 4,066,914  |  |  |   | 3,299,705  |  
|                      

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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.

Overview

We discuss the factors that significantly affected our financial results
and our financial condition in this Managements Discussion and Analysis of
Financial Condition and Results of Operations. For a more complete
understanding of these factors, you should also review our consolidated balance
sheets at June 30, 2001 and June 30, 2002, our consolidated statements of
operations, statements of shareholders equity and statement of cash flows for
the three years ended June 30, 2002, and the notes to those financial
statements. These financial statements and the report of Ernst & Young LLP on
our financial statements are included at Item 8 of this Form 10-K.

Critical Accounting Policies

We prepare our financial statements in accordance with generally accepted
accounting principles as in effect in the United States. Nevertheless, the
preparation of these financial statements requires that we make estimates and
judgments that affect the reported amounts of our assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. We
base these estimates on historical experience and on various other assumptions
that we believe are reasonable under the circumstances. It is our policy to
evaluate and update these estimates on an ongoing basis. The judgments and
policies that we believe would have the most significant impact on the
presentation of our financial position and results are as follows:



| |  |  | Revenue Recognition and
Provisions for Credit Allowances and Returns. In
our retail electrotherapy business, we recognize revenue upon
notification from a health care provider that equipment has been
prescribed and provided to a patient and approved by the patient or
his/her insurance provider. Many providers reimburse at rates which
differ from our invoice rate based on contracts, buying agreements or
negotiated rate adjustments. In addition, patients sometimes return
units after initial acceptance when they determine that their
responsibilities for co-payments, deductibles or other charges is more
than expected. We provide for these credit allowances and returns by
recognizing only a portion of the invoiced amount and by recording such
amount as part of the reserve for uncollectible accounts receivable. We
estimate the amount of this provision for credit allowances and returns
based on our historical experience with the various reimbursement
entities, any recent notifications of changes in reimbursement rates and
our historic rates of product returns. Possible changes in the number of
units returned by patients or the rates of reimbursement could cause this
provision for credit allowances and the reserve for uncollectible
accounts to be inadequate.                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Reserve for Uncollectible Accounts Receivable.Managing our
accounts receivable represents one of our biggest business challenges.
The process of determining what products will be reimbursed by third
party payors and the amounts that they will reimburse is very complex and
the reimbursement environment is constantly changing. We maintain a
reserve for uncollectible receivables, and provide for additions to the
reserve, to account for the risk of nonpayment. We set the amount of the
reserve, and adjust the reserve at the end of each reporting period,
based on a number of factors, including historical rates of collection,
trends in the historical rates of collection and current relationships
and experience with insurance companies or other third party payors. If
the rates of collection of past-due receivables recorded for previous
fiscal periods changes, or if there is a trend in the rates of collection
on those receivables, we may be required to change the rate at which we
provide for additions to the reserve. Such a change, even though small
in absolute terms, can significantly affect financial performance in
current periods. A change in the rates of our collection can result from
a number of factors, including turnover in personnel, changes in the
reimbursement policies or practices of payors, or changes in industry
rates of reimbursement. Further, the reserve may be affected by
significant charge-offs if a related group of receivables become
doubtful. Accordingly, the provision for uncollectible accounts recorded
in the income statement has fluctuated and may continue to fluctuate
significantly from quarter to quarter as such trends change.
|
| |  |  | Carrying Value of Inventory.We maintain a large balance of
electrotherapy products on consignment at clinics and other health care
providers that are not under out control. In the course of our business,
some of this product is lost. Although we have the right in most cases
to seek reimbursement for the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

14



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| |  |  | lost product from our sales representatives or the health care providers,
in some instances we forgo that right in order to maintain favorable
relationships. We maintain a reserve for the amount of consignment
inventory that may be lost based on our experience as developed through
periodic field audits. We cannot be certain that future rates of product
loss will be consistent with our historical experience and we could be
required to increase the rate at which we provide for such lost
inventory, thus adversely affecting our operating results.                                                                                                                             
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Carrying Value of Intangible Assets.We had a balance of intangible
assets of approximately $11 million at June 30, 2002, most of which
constituted goodwill and the value of acquired technology, from several
acquisitions. We are required to charge-off the carrying value of
identifiable intangibles, long-lived assets and related goodwill to the
extent it may not be recoverable. We annually assess the impairment of
identifiable intangibles, long lived assets and related goodwill or
whenever events or changes in circumstances indicate the carrying value
may not be recoverable. Factors we consider important which could
trigger an impairment review include the following:



| |  |  | significant under-performance relative to expected historical or projected future operating results;                   
| | - |  | -----------------------------------------------------------------------------------------------------------------------
|
| |  |  | significant changes in the manner of use of the acquired assets or our overall business strategy;                      
|
| |  |  | significant negative industry or economic trends;                                                                      
|
| |  |  | significant decline in our stock price for a sustained period
and our market capitalization relative to net book value.

|
|
|
|

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Results of Operations

The following table sets forth information from the statements of
operations as a percentage of revenue for the periods indicated:

|                             |                                     |                          |                    |      |                     |     |       |      |      |     |       |      |      |     | 
|---------------------------- | ----------------------------------- | ------------------------ | ------------------ | ---- | ------------------- | --- | ----- | ---- | ---- | --- | ----- | ---- | ---- | --- | 
|                             |                                     |                          |                    |      | Year Ended June 30,
|                             |                                     |                          |                    |      |                    
|                             |                                     |                          |                    |      | 2002                |     | 2001  |      | 2000
|                             |                                     |                          |                    |      |                     |     |       |      |     
|Net sales and rental revenue |                                     |                          | 100.0              | %    |                     |     | 100.0 | %    |      |     | 100.0 | %   
|                            
|                            
|                            
|                            
|Cost of sales and rentals    |                                     |                          | 32.5               |      |                     |     | 31.3  |      |      |     | 30.6  |     
|                             |                                     |                          |                    |      |                     |     |       |      |      |     |       |     
|Gross profit                 |                                     |                          | 67.5               |      |                     |     | 68.7  |      |      |     | 69.4  |     
|                            
|                            
|                            
|                            
|Operating expenses           |                                     |                          |                    |      |                     |     |       |      |      |     |       |     
|                            
|                            
|                            
|                            
|                             | Selling, general and administrative |                          |                    | 52.0 |                     |     |       | 54.5 |      |     |       | 55.4 |     
|                            
|                            
|                            
|                            
|                             | Research and development            |                          |                    | 2.9  |                     |     |       | 3.0  |      |     |       | 2.2  |     
|                            
|                            
|                            
|                            
|                             | Medicare settlement expense         |                          |                    |     |                     |     |       |     |      |     |       | 3.5  |     
|                             |                                     |                          |                    |      |                     |     |       |      |      |     |       |     
|                             |                                     | Total operating expenses |                    |      | 54.9                |     |       |      | 57.5 |     |       |      | 61.1 |    
|                             |                                     |                          |                    |      |                     |     |       |      |      |     |       |     
|Income from operations       |                                     |                          | 12.6               |      |                     |     | 11.2  |      |      |     | 8.3   |     
|                            
|                            
|                            
|                            
|                             |                                     |                          | Other expense, net |      |                     | 0.9 |       |      |      | 1.9 |       |      |      | 1.0 | 
|                            
|                            
|                            
|                            
|Income tax provision         |                                     |                          | 4.9                |      |                     |     | 4.0   |      |      |     | 3.6   |     
|                             |                                     |                          |                    |      |                     |     |       |      |      |     |       |     
|Net income                   |                                     |                          | 6.8                | %    |                     |     | 5.3   | %    |      |     | 3.7   | %   
|                             |                                     |                          |                    |      |                     |     |       |      |      |     |       |     

Comparison of Year Ended June 30, 2002 to Year Ended June 30, 2001

Our revenue increased 15% from $62,957,000 in fiscal 2001 to $72,507,000
in fiscal 2002. The largest component of this increase was from our Compex
operation, where revenue increased 42% in fiscal 2002 compared to fiscal 2001.
Although Compexs revenue increase resulted from volume increases in all
markets, the most significant improvements occurred in Spain, where we were
successful in introducing the Compex product line in a major retail chain, and
to a lesser extent in Germany. Compex revenue was also favorably impacted by
improvements in the exchange ratio of the Euro versus the dollar. Revenue from
our U.S. operations increased 5% in fiscal 2002 compared to the same period in
fiscal 2001. Increases in revenue from direct rentals or sales to patients of
10% resulted primarily from increased sales of supplies, a portion of which was
due to price increases. Those increases were offset by declines in sales to
medical product dealers and distributors as many of them converted some of
their purchases to lower priced, generally imported units.

Our gross profit as a percentage of revenue declined slightly to 67.5% in
fiscal 2002 compared to 68.7% of revenue for fiscal 2001. In general, sales of
Compexs consumer products carry lower margins than sale of products for
medical applications and Compex has been increasing its sales to retail sports
stores (at wholesale prices) and deemphasizing direct to consumer sales (at
retail prices). Accordingly, the decline in the gross margin percentage
resulted from continued growth of Compex revenue as a percent of total revenue
and further reductions in the Compex gross margin percentage as a result of
changes in product mix toward lower price sport and fitness products. We
expect overall margins to stabilize and continue in the mid to upper sixties.

16



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Our selling, general and administrative expenses increased 10% to
$37,695,000 in fiscal 2002 from $34,337,000 in fiscal 2001. As a percentage of
revenue, those expenses declined to 52% in fiscal 2002 from 55% in fiscal 2001.
The decline as a percentage of revenue in fiscal 2002 resulted primarily from
Compex, where revenue increased faster than expenses as investments for
infrastructure in newer markets made in 2001 began generating significant
revenue in 2002. Part of the decline also resulted from a change in accounting
principles relating to the amortization of intangibles. Amortization of
goodwill was discontinued at the beginning of fiscal 2002 in accordance with
FAS 141. Amortization of goodwill was $834,000 in fiscal 2001. The declines
were offset by $563,000 of administrative expense incurred in connection with a
severance package to our former chief executive officer. After adjusting for
this expense, and for the
effect of discontinued amortization of goodwill our selling, general and administrative expense as a
percentage of revenue was relatively constant from fiscal 2001 to fiscal 2002.

Research and development expenses increased 11% to $2,090,000 in fiscal
2002 compared to $1,886,000 during the same period in fiscal 2001. This
increase reflects the cost of new product development activities both in the
U.S. and Compex operations. Our most significant project in the U.S. was the
new Promax TENS unit for which production started in October 2001. In Europe,
four new products were introduced during fiscal 2002. We anticipate that
research and development expenses will remain relatively constant as a
percentage of revenue in future periods.

Our interest expense decreased 47% from $1,277,000 for fiscal 2001, to
$675,000 for fiscal 2002. The decrease resulted from lower interest rates and
overall lower borrowings under our credit facility. We expect interest expense
to continue to decline with the lower overall balance of our indebtedness.

The provision for income taxes was 42% for fiscal 2002 compared to 43% in
fiscal 2001. We operate in various countries in Europe as well as the United
States. Some countries have higher tax rates than the United States as well as
different rules on the deductibility of expenses and the availability of
credits for taxes paid to other jurisdictions. We believe that 42% is a
reasonable estimate of the effective rate for fiscal 2002 based on most recent
estimates of tax liabilities in the U.S. and in the various European tax
authorities for the entire fiscal year. The Internal Revenue Service has
recently completed an examination of our federal income tax returns for the
years ended June 30, 1997 and 1998 and has proposed adjustments pursuant to
such audit, most of which relate to the timing of revenue or expense
recognition. We have filed a formal appeal of certain proposed adjustments and
believe its provision for income taxes and related reserves are adequate.

As a result of all the above activity, our net income increased from
$3,320,000 for fiscal 2001 to $4,942,000 for fiscal 2002. Diluted earnings per
share increased from $.31 in fiscal 2001 to $.44 in fiscal 2002.

Comparison of Year Ended June 30, 2001 to Year Ended June 30, 2000

Our revenue increased 6% to $62,957,000 in fiscal 2001 from $59,575,000 in
fiscal 2000. This increase was primarily attributable to United States
operations where revenue increased 6% in fiscal 2001 over the same period in
fiscal 2000. Our revenue in fiscal 2001 was adversely affected by negative
publicity from a whistleblower lawsuit disclosed in fiscal 2000. Our Compex
operations also contributed to the increased revenue, accounting for
$17,416,000 of revenue in fiscal 2001, compared to $16,463,000 in fiscal 2000.
Although our Compex operations grew, revenue from Compex was lower than
expected in fiscal 2001 due to the effects of a strengthening U.S. dollar
against European currencies, to competitive pressures and to slower than
anticipated orders from Compexs Italian distributor.

Our gross profit was 68.7% of revenue for fiscal 2001, compared with 69.4%
of revenue for fiscal 2000. Cost of sales in fiscal 2000 included a one-time
charge of $645,000 related to the step-up in basis of inventory recorded in
connection with the Compex acquisition. Without that charge, gross profit
would have been 70.5% of revenue for fiscal 2000. The reduced gross profit in
fiscal 2001 resulted primarily from increased focus on sales of Compex sport
products at wholesale prices to retail store outlets, rather than direct to
consumers at retail prices.

Our Selling, general and administrative expenses increased slightly to
$34,337,000 in fiscal 2001 from $32,986,000 in fiscal 2000. As a percentage of
revenue, selling, general and administrative expenses declined to 54% in fiscal
2001 from 55% in fiscal 2000. The reductions as a percent of revenue reflect
lower selling expenses related to the Compex retail sales strategy and certain
economies of scale.

17



---



##### 



Our research and development expenses increased 44% to $1,886,000 in
fiscal 2001, from $1,311,000 in fiscal 2000. This increase reflects expanded
new product development activities both in the U.S., particularly related to
the ProMax product which was introduced in September 2001, and in Europe where
one new sport product was introduced in April 2001.

Our interest expense decreased 20% from $1,600,000 for fiscal 2000, to
$1,277,000 for fiscal 2001. The decrease resulted from slightly lower interest
rates and lower outstanding borrowings under our credit facility.

The provision for income taxes for fiscal 2001 was 43% compared to 49% in
fiscal 2000. The effective tax rate for fiscal 2000 before the impact of the
Medicare lawsuit settlement expense, which was higher due to the
non-deductibility of the majority of the settlement costs, was 42%.

As a result of all the above activity, net income increased from
$2,203,000 for fiscal 2000 to $3,320,000 for fiscal 2001. Diluted earnings per
share increased from $.21 in fiscal 2000 to $.31 in fiscal 2001.

Liquidity and Capital Resources

For the fiscal year ended June 30, 2002, our operations provided cash of
$4,874,000, mainly from net income of $4,942,000 plus depreciation and
amortization and less the net increase in current assets. Prepaid expenses
declined due to lower value added tax prepayments by Compex. Accounts
receivable increased $4,079,000, as a result higher sales by Compex and a
decision by its major customer to pay in accordance with normal terms rather
than making early payments to obtain a cash discount. The decrease in accounts
payable relates to timing differences and the payment of year-end accruals.

We used $819,000 in investing activities in fiscal 2002 for net purchases
of property and equipment, including clinical and rental equipment.

Our financing activities used $3,472,000 of cash during fiscal 2002,
mainly for the repayment of $3,888,000 of long-term debt under our $20,000,000
credit facility. These repayments included a voluntary payment of $800,000
from excess cash that was in addition to the required payments under the loan
agreement. At June 30, 2002, a total of $7,297,000 is outstanding under this
facility. This credit facility has a maturity date of June 30, 2004, at which
time all outstanding borrowings are to be repaid. We expect that all or
substantially all of the borrowings under this credit facility will be repaid
prior to the maturity date. If any borrowings remain outstanding at maturity,
we believe that the agreement could be extended with the current financial
institution or that another facility could be put in place on favorable terms.

We currently have no material commitment for capital expenditures. We
expect, however, to invest in sales and marketing, and in inventory and
infrastructure, over the following twelve months to introduce Compex sport
products to the United States markets. We intend to start this process in a
single state and to invest more based on experience in that market.

We believe that available cash and borrowings under our credit line will
be adequate to fund cash requirements for the current fiscal year and the
foreseeable future.

Item 7a.
Quantitative and Qualitative Disclosures About Market Risk

During the year ended June 30, 2002, our revenue originating outside the
U.S. was 35.7% of total revenue, substantially all of which was denominated in
the local functional currency. Currently, we do not employ currency hedging
strategies to reduce the risks associated with the fluctuation of foreign
currency exchange rates.

Our international business is subject to risks typical of an international
business, including, but not limited to: differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely impacted by changes in these or other
factors.

18



---



##### 



We are exposed to market risk from changes in the interest rates on
certain outstanding debt. The outstanding loan balance under our $20 million
credit facility bears interest at a variable rate based on the banks prime
rate or LIBOR. Based on the average outstanding bank debt for fiscal 2002, a
100 basis point change in interest rates would not change interest expense by a
material amount.

Item 8. Financial Statements.

Financial Statement Index

|                                                                                                            |  |      |       | 
|----------------------------------------------------------------------------------------------------------- |  | ---- | ----- | 
|Schedule                                                                                                    |  | Page
|Report of Ernst & Young LLP                                                                                 |  |      | 20    | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Consolidated Balance Sheets as of June 30, 2002 and 2001                                                    |  |      | 21    | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Consolidated Statements of Operations for the years ended June 30, 2002, 2001 and 2000                      |  |      | 22    | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Consolidated
Statements of Changes in Stockholders Equity for the years
ended June 30, 2002, 2001 and 2000 |  |      | 23    | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000                      |  |      | 24    | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Notes to Consolidated Financial Statements                                                                  |  |      | 25-37 | 

19



---



##### 



Report of Independent Auditors

To the Board of Directors and
Stockholders of Rehabilicare Inc.

We have audited the accompanying consolidated balance sheets of Rehabilicare
Inc. as of June 30, 2002 and 2001 and the related consolidated statements of
operations, stockholders equity, and cash flows for each of the three years in
the period ended June 30, 2002. Our audits also included the financial
statement schedule listed in the index at Item 15(a). These financial
statements and schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Rehabilicare Inc.
at June 30, 2002 and 2001 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended June 30, 2002,
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for goodwill to conform to the statement of
Financial Accounting Standards No. 142 effective July 1, 2001.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
August 23, 2002

20



---



##### 



REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30

|                                   |                                                                                                                                   |                 |            |                                      |           |      |            |            |           |  |            | 
|---------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | --------------- | ---------- | ------------------------------------ | --------- | ---- | ---------- | ---------- | --------- |  | ---------- | 
|                                   |                                                                                                                                   |                 |            |                                      |           | 2002 |            | 2001      
|                                   |                                                                                                                                   |                 |            |                                      |           |      |            |           
|                                   |                                                                                                                                   |                 |            | ASSETS                               |           |      |            |            |           |  |            | 
|                                  
|                                  
|                                  
|                                  
|Current Assets:                    |                                                                                                                                   |                 |            |                                      |           |      |            |           
|                                  
|                                  
|                                  
|                                  
|                                   | Cash and cash equivalents                                                                                                         |                 | $          | 2,086,650                            |           |      | $          | 759,611    |          
|                                  
|                                  
|                                  
|                                  
|                                   | Receivables, less reserves of $12,891,864 and $11,141,407                                                                         |                 |            | 23,629,117                           |           |      |            | 18,998,132 |          
|                                  
|                                  
|                                  
|                                  
|                                   | Inventories -                                                                                                                     |                 |            |                                      |           |      |            |            |          
|                                  
|                                  
|                                  
|                                  
|                                   |                                                                                                                                   | Raw materials   |            |                                      | 2,368,203 |      |            |            | 2,039,665 | 
|                                  
|                                  
|                                  
|                                  
|                                   |                                                                                                                                   | Work in process |            |                                      | 80,265    |      |            |            | 55,895    | 
|                                  
|                                  
|                                  
|                                  
|                                   |                                                                                                                                   | Finished goods  |            |                                      | 6,522,790 |      |            |            | 6,552,155 | 
|                                  
|                                  
|                                  
|                                  
|                                   | Deferred tax assets                                                                                                               |                 |            | 4,655,631                            |           |      |            | 4,075,317  |          
|                                  
|                                  
|                                  
|                                  
|                                   | Prepaid expenses                                                                                                                  |                 |            | 1,641,378                            |           |      |            | 2,156,646  |          
|                                   |                                                                                                                                   |                 |            |                                      |           |      |            |            |          
|                                   |                                                                                                                                   |                 |            | Total current assets                 |           |      | 40,984,034 |            |           |  | 34,637,421 | 
|                                  
|                                  
|                                  
|                                  
|Property, plant and equipment, net |                                                                                                                                   |                 | 4,679,778  |                                      |           |      | 5,025,969  |           
|                                  
|                                  
|                                  
|                                  
|Goodwill,
net                      |                                                                                                                                   |                 | 9,833,090  |                                      |           |      | 9,833,090  |           
|                                  
|                                  
|                                  
|                                  
|Other
intangible assets, net       |                                                                                                                                   |                 | 1,150,652  |                                      |           |      | 1,417,671  |           
|                                  
|                                  
|                                  
|                                  
|Deferred tax assets                |                                                                                                                                   |                 | 702,567    |                                      |           |      | 460,985    |           
|                                  
|                                  
|                                  
|                                  
|Other assets                       |                                                                                                                                   |                 | 127,615    |                                      |           |      | 120,735    |           
|                                   |                                                                                                                                   |                 |            |                                      |           |      |            |            |          
|                                   |                                                                                                                                   | $               | 57,477,736 |                                      |           | $    | 51,495,871 |           
|                                   |                                                                                                                                   |                 |            |                                      |           |      |            |            |          
|                                   |                                                                                                                                   |                 |            | LIABILITIES AND STOCKHOLDERS EQUITY |           |      |            |            |           |  |            | 
|                                  
|                                  
|                                  
|                                  
|Current Liabilities:               |                                                                                                                                   |                 |            |                                      |           |      |            |           
|                                  
|                                  
|                                  
|                                  
|                                   | Current maturities of long-term debt                                                                                              |                 | $          | 2,512,446                            |           |      | $          | 2,430,173  |          
|                                  
|                                  
|                                  
|                                  
|                                   | Accounts payable                                                                                                                  |                 |            | 3,312,767                            |           |      |            | 3,977,308  |          
|                                  
|                                  
|                                  
|                                  
|                                   | Accrued liabilities -                                                                                                             |                 |            |                                      |           |      |            |            |          
|                                  
|                                  
|                                  
|                                  
|                                   |                                                                                                                                   | Payroll         |            |                                      | 607,409   |      |            |            | 787,314   | 
|                                  
|                                  
|                                  
|                                  
|                                   |                                                                                                                                   | Commissions     |            |                                      | 437,530   |      |            |            | 338,491   | 
|                                  
|                                  
|                                  
|                                  
|                                   |                                                                                                                                   | Income taxes    |            |                                      | 2,670,766 |      |            |            | 1,631,710 | 
|                                  
|                                  
|                                  
|                                  
|                                   |                                                                                                                                   | Other           |            |                                      | 5,656,988 |      |            |            | 3,080,551 | 
|                                   |                                                                                                                                   |                 |            |                                      |           |      |            |            |          
|                                   |                                                                                                                                   |                 |            | Total current liabilities            |           |      | 15,197,906 |            |           |  | 12,245,547 | 
|                                  
|                                  
|                                  
|                                  
|Long-Term Liabilities:             |                                                                                                                                   |                 |            |                                      |           |      |            |           
|                                  
|                                  
|                                  
|                                  
|                                   | Long term-debt                                                                                                                    |                 |            | 6,463,538                            |           |      |            | 10,433,542 |          
|                                  
|                                  
|                                  
|                                  
|                                   | Deferred tax liabilities                                                                                                          |                 |            | 535,102                              |           |      |            | 357,566    |          
|                                   |                                                                                                                                   |                 |            |                                      |           |      |            |            |          
|                                   |                                                                                                                                   |                 |            | Total liabilities                    |           |      | 22,196,546 |            |           |  | 23,036,655 | 
|                                  
|                                  
|                                  
|                                  
|Stockholders Equity:              |                                                                                                                                   |                 |            |                                      |           |      |            |           
|                                  
|                                  
|                                  
|                                  
|                                   | Common
stock, $.10 par value: 30,000,000 shares authorized;
issued and outstanding 10,922,618 and 10,792,060 shares,
respectively |                 |            | 1,092,262                            |           |      |            | 1,079,206  |          
|                                  
|                                  
|                                  
|                                  
|                                   | Preferred
stock, no par value: 5,000,000 shares authorized; none
issued and outstanding                                           |                 |            |                                     |           |      |            |           |          
|                                  
|                                  
|                                  
|                                  
|                                   | Additional paid-in capital                                                                                                        |                 |            | 21,564,096                           |           |      |            | 21,420,378 |          
|                                  
|                                  
|                                  
|                                  
|                                   | Less note receivable from officer/stockholder                                                                                     |                 |            |                                     |           |      |            | (189,417   | )        
|                                  
|                                  
|                                  
|                                  
|                                   | Unearned compensation on restricted stock                                                                                         |                 |            | (77,813                              | )         |      |            | (186,563   | )        
|                                  
|                                  
|                                  
|                                  
|                                   | Accumulated other non-owner changes in equity                                                                                     |                 |            | 735,564                              |           |      |            | (689,459   | )        
|                                  
|                                  
|                                  
|                                  
|                                   | Retained earnings                                                                                                                 |                 |            | 11,967,081                           |           |      |            | 7,025,071  |          
|                                   |                                                                                                                                   |                 |            |                                      |           |      |            |            |          
|                                   |                                                                                                                                   |                 |            | Total stockholders equity           |           |      | 35,281,190 |            |           |  | 28,459,216 | 
|                                   |                                                                                                                                   |                 |            |                                      |           |      |            |            |          
|                                   |                                                                                                                                   | $               | 57,477,736 |                                      |           | $    | 51,495,871 |           
|                                   |                                                                                                                                   |                 |            |                                      |           |      |            |            |          

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

21



---



##### 



REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30

|                                                  |                                     |                            |            |                          |            |            |            |            |            |            |            |            |            |            |            | 
|------------------------------------------------- | ----------------------------------- | -------------------------- | ---------- | ------------------------ | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | 
|                                                  |                                     |                            |            |                          |            | 2002       |            | 2001       |            | 2000      
|                                                  |                                     |                            |            |                          |            |            |            |            |            |           
|Net sales and rental revenue                      |                                     | $                          | 72,506,677 |                          |            | $          | 62,957,415 |            |            | $          | 59,574,612 |           
|                                                 
|                                                 
|                                                 
|                                                 
|Cost of sales and rentals                         |                                     |                            | 23,533,761 |                          |            |            | 19,712,330 |            |            |            | 18,237,051 |           
|                                                  |                                     |                            |            |                          |            |            |            |            |            |            |            |           
|                                                  |                                     | Gross profit               |            |                          | 48,972,916 |            |            |            | 43,245,085 |            |            |            | 41,337,561 |           
|                                                 
|                                                 
|                                                 
|                                                 
|Operating expenses:                               |                                     |                            | 37,694,707 |                          |            |            | 34,337,362 |            |            |            | 32,986,395 |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Selling, general and administrative |                            |            | 2,090,110                |            |            |            | 1,885,711  |            |            |            | 1,310,694  |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Research and development            |                            |            |                         |            |            |            |           |            |            |            | 2,093,537  |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Medicare lawsuit expenses           |                            |            |                         |            |            |            |           |            |            |            |           |           
|                                                  |                                     |                            |            |                          |            |            |            |            |            |            |            |            |            |            |            | 
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                     |                            |            | Total operating expenses |            |            | 39,784,817 |            |            |            | 36,223,073 |            |            |            | 36,390,626 | 
|                                                  |                                     |                            |            |                          |            |            |            |            |            |            |            |           
|                                                  |                                     | Income from operations     |            |                          | 9,188,099  |            |            |            | 7,022,012  |            |            |            | 4,946,935  |           
|                                                 
|                                                 
|                                                 
|                                                 
|Other income (expense):                           |                                     |                            |            |                          |            |            |            |            |            |            |            |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Interest expense                    |                            |            | (674,737                 | )          |            |            | (1,276,623 | )          |            |            | (1,599,642 | )         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Gain on sale of building            |                            |            |                         |            |            |            |           |            |            |            | 1,075,680  |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Other                               |                            |            | 6,648                    |            |            |            | 78,600     |            |            |            | (81,196    | )         
|                                                  |                                     |                            |            |                          |            |            |            |            |            |            |            |           
|                                                  |                                     | Income before income taxes |            |                          | 8,520,010  |            |            |            | 5,823,989  |            |            |            | 4,341,777  |           
|                                                 
|                                                 
|                                                 
|                                                 
|Income tax provision                              |                                     |                            | 3,578,000  |                          |            |            | 2,504,000  |            |            |            | 2,139,000  |           
|                                                  |                                     |                            |            |                          |            |            |            |            |            |            |            |           
|                                                  |                                     | Net income                 |            | $                        | 4,942,010  |            |            | $          | 3,319,989  |            |            | $          | 2,202,777  |           
|                                                  |                                     |                            |            |                          |            |            |            |            |            |            |            |           
|Net
income per common and common
equivalent share |                                     |                            |            |                          |            |            |            |            |            |            |            |           
|                                                  |                                     | Basic                      |            | $                        | .45        |            |            | $          | .31        |            |            | $          | .21        |           
|                                                  |                                     |                            |            |                          |            |            |            |            |            |            |            |           
|                                                  |                                     | Diluted                    |            | $                        | .44        |            |            | $          | .31        |            |            | $          | .21        |           
|                                                  |                                     |                            |            |                          |            |            |            |            |            |            |            |           
|Weighted average number of shares outstanding     |                                     |                            |            |                          |            |            |            |            |            |            |            |           
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  |                                     |                            | Basic      |                          |            | 10,867,744 |            |            |            | 10,638,422 |            |            |            | 10,543,978 |           
|                                                  |                                     |                            |            |                          |            |            |            |            |            |            |            |           
|                                                  |                                     |                            | Diluted    |                          |            | 11,115,322 |            |            |            | 10,692,866 |            |            |            | 10,615,142 |           
|                                                  |                                     |                            |            |                          |            |            |            |            |            |            |            |           

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

22



---



##### 



REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED JUNE 30

|                       |                                                                    |                            |            |              |   |            |           |                 |   |             |            |            |   |          |          |               |   |                 |          |            |   |   |          |             |   |       |            |           |   |   |            |           |           | 
|---------------------- | ------------------------------------------------------------------ | -------------------------- | ---------- | ------------ | - | ---------- | --------- | --------------- | - | ----------- | ---------- | ---------- | - | -------- | -------- | ------------- | - | --------------- | -------- | ---------- | - | - | -------- | ----------- | - | ----- | ---------- | --------- | - | - | ---------- | --------- | --------- | 
|                       |                                                                    |                            |            |              |   |            |           |                 |   |             |            |            |   |          |          |               |   |                 |          |            |   |   |          | Accumulated |   |       |            |           |   |   |            |          
|                       |                                                                    |                            |            |              |   |            |           |                 |   |             |            |            |   |          |          | Note          |   | Unearned        |          | Other Non- |   |   |          |             |   |       |            |          
|                       |                                                                    |                            |            |              |   |            |           |                 |   |             |            |            |   |          |          | Receivable    |   | Compensation on |          | Owner      |   |   |          |             |   | Total
|                       |                                                                    |                            |            | Common Stock |   | Additional |           | From Officer/   |   | Restricted  |            | Changes in |   | Retained |          | Stockholders
|                       |                                                                    |                            |            | Shares       |   | Amount     |           | Paid-In Capital |   | Stockholder |            | Stock      |   | Equity   |          | Earnings      |   | Equity         
|                       |                                                                    |                            |            |              |   |            |           |                 |   |             |            |            |   |          |          |               |   |                
|Balance, June 30, 1999 |                                                                    |                            | 10,494,908 |              |   | $          | 1,049,491 |                 |   | $           | 20,740,650 |            |   | $        | (237,500 | )             |   | $               |         |            |   | $ | (1,637   | )           |   | $     | 1,502,305  |           |   | $ | 23,053,309 |          
|                      
|                      
|                      
|                      
|                       | Net income                                                         |                            |            |             |   |            |           |                |   |             |            |           |   |          |          |              |   |                 |          |           |   |   |          |            |   |       |            | 2,202,777 |   |   |            | 2,202,777 |          
|                      
|                      
|                      
|                      
|                       | Translation adjustments                                            |                            |            |             |   |            |           |                |   |             |            |           |   |          |          |              |   |                 |          |           |   |   |          | (153,082    | ) |       |            |          |   |   |            | (153,082  | )        
|                       |                                                                    |                            |            |              |   |            |           |                 |   |             |            |            |   |          |          |               |   |                 |          |            |   |   |          |             |   |       |            |           |   |   |            |          
|                       |                                                                    | Total comprehensive income |            |              |  |            |           |                 |  |             |            |            |  |          |          |               |  |                 |          |            |  |   |          |             |  |       |            |           |  |   |            |           | 2,049,695 | 
|                      
|                      
|                      
|                      
|                       | Exercise of stock options and related tax benefits                 |                            |            | 26,766       |   |            |           | 2,677           |   |             |            | 33,500     |   |          |          |              |   |                 |          |           |   |   |          |            |   |       |            |          |   |   |            | 36,177    |          
|                      
|                      
|                      
|                      
|                       | Common stock issued through Employee Stock Purchase Plan           |                            |            | 37,036       |   |            |           | 3,703           |   |             |            | 99,587     |   |          |          |              |   |                 |          |           |   |   |          |            |   |       |            |          |   |   |            | 103,290   |          
|                      
|                      
|                      
|                      
|                       | Payments on note receivable                                        |                            |            |             |   |            |           |                |   |             |            |           |   |          |          | 27,083        |   |                 |          |           |   |   |          |            |   |       |            |          |   |   |            | 27,083    |          
|                       |                                                                    |                            |            |              |   |            |           |                 |   |             |            |            |   |          |          |               |   |                 |          |            |   |   |          |             |   |       |            |           |   |   |            |          
|Balance, June 30, 2000 |                                                                    |                            | 10,558,710 |              |   |            | 1,055,871 |                 |   |             | 20,873,737 |            |   |          | (210,417 | )             |   |                 |         |            |   |   | (154,719 | )           |   |       | 3,705,082  |           |   |   | 25,269,554 |          
|                      
|                      
|                      
|                      
|                       | Net income                                                         |                            |            |             |   |            |           |                |   |             |            |           |   |          |          |              |   |                 |          |           |   |   |          |            |   |       |            | 3,319,989 |   |   |            | 3,319,989 |          
|                      
|                      
|                      
|                      
|                       | Translation adjustments                                            |                            |            |             |   |            |           |                |   |             |            |           |   |          |          |              |   |                 |          |           |   |   |          | (534,740    | ) |       |            |          |   |   |            | (534,740  | )        
|                       |                                                                    |                            |            |              |   |            |           |                 |   |             |            |            |   |          |          |               |   |                 |          |            |   |   |          |             |   |       |            |           |   |   |            |          
|                       |                                                                    | Total comprehensive income |            |              |  |            |           |                 |  |             |            |            |  |          |          |               |  |                 |          |            |  |   |          |             |  |       |            |           |  |   |            |           | 2,785,249 | 
|                      
|                      
|                      
|                      
|                       | Exercise of stock options and related tax benefits                 |                            |            | 8,158        |   |            |           | 816             |   |             |            | 20,185     |   |          |          |              |   |                 |          |           |   |   |          |            |   |       |            |          |   |   |            | 21,001    |          
|                      
|                      
|                      
|                      
|                       | Common stock issued through Employee Stock Purchase Plan           |                            |            | 45,192       |   |            |           | 4,519           |   |             |            | 94,456     |   |          |          |              |   |                 |          |           |   |   |          |            |   |       |            |          |   |   |            | 98,975    |          
|                      
|                      
|                      
|                      
|                       | Issuance of restricted stock                                       |                            |            | 180,000      |   |            |           | 18,000          |   |             |            | 432,000    |   |          |          |              |   |                 |          | (450,000   | ) |   |          |            |   |       |            |          |   |   |            |          |          
|                      
|                      
|                      
|                      
|                       | Amortization of unearned compensation                              |                            |            |             |   |            |           |                |   |             |            |           |   |          |          |              |   |                 |          | 263,437    |   |   |          |             |   |       |            |           |   |   |            | 263,437   |          
|                      
|                      
|                      
|                      
|                       | Payments on note receivable                                        |                            |            |             |   |            |           |                |   |             |            |           |   |          |          | 21,000        |   |                 |          |           |   |   |          |            |   |       |            |          |   |   |            | 21,000    |          
|                       |                                                                    |                            |            |              |   |            |           |                 |   |             |            |            |   |          |          |               |   |                 |          |            |   |   |          |             |   |       |            |           |   |   |            |          
|Balance, June 30, 2001 |                                                                    |                            | 10,792,060 |              |   |            | 1,079,206 |                 |   |             | 21,420,378 |            |   |          | (189,417 | )             |   |                 | (186,563 | )          |   |   | (689,459 | )           |   |       | 7,025,071  |           |   |   | 28,459,216 |          
|                      
|                      
|                      
|                      
|                       | Net income                                                         |                            |            |             |   |            |           |                |   |             |            |           |   |          |          |              |   |                 |          |           |   |   |          |            |   |       |            | 4,942,010 |   |   |            | 4,942,010 |          
|                      
|                      
|                      
|                      
|                       | Translation adjustments                                            |                            |            |             |   |            |           |                |   |             |            |           |   |          |          |              |   |                 |          |           |   |   |          | 1,425,023   |   |       |            |          |   |   |            | 1,425,024 |          
|                       |                                                                    |                            |            |              |   |            |           |                 |   |             |            |            |   |          |          |               |   |                 |          |            |   |   |          |             |   |       |            |           |   |   |            |          
|                       |                                                                    | Total comprehensive income |            |              |  |            |           |                 |  |             |            |            |  |          |          |               |  |                 |          |            |  |   |          |             |  |       |            |           |  |   |            |           | 6,367,033 | 
|                      
|                      
|                      
|                      
|                       | Exercise of stock options and related tax benefits                 |                            |            | 133,373      |   |            |           | 13,337          |   |             |            | 291,009    |   |          |          |              |   |                 |          |           |   |   |          |            |   |       |            |          |   |   |            | 304,346   |          
|                      
|                      
|                      
|                      
|                       | Common stock issued through Employee
Stock Purchase Plan           |                            |            | 45,896       |   |            |           | 4,590           |   |             |            | 107,256    |   |          |          |              |   |                 |          |           |   |   |          |            |   |       |            |          |   |   |            | 111,846   |          
|                      
|                      
|                      
|                      
|                       | Amortization of unearned compensation                              |                            |            |             |   |            |           |                |   |             |            |           |   |          |          |              |   |                 |          | 108,750    |   |   |          |            |   |       |            |          |   |   |            | 108,750   |          
|                      
|                      
|                      
|                      
|                       | Stock surrendered in payment of note receivable and other advances |                            |            | (48,711      | ) |            |           | (4,871          | ) |             |            | (254,547   | ) |          |          | 189,417       |   |                 |          |           |   |   |          |            |   |       |            |          |   |   |            | (70,001   | )        
|                       |                                                                    |                            |            |              |   |            |           |                 |   |             |            |            |   |          |          |               |   |                 |          |            |   |   |          |             |   |       |            |           |   |   |            |          
|Balance, June 30, 2002 |                                                                    |                            | 10,922,618 |              |   | $          | 1,092,262 |                 |   | $           | 21,564,096 |            |   | $        |         |               |   | $               | (77,813  | )          |   | $ | 735,564  |             |   | $     | 11,967,081 |           |   | $ | 35,281,190 |          
|                       |                                                                    |                            |            |              |   |            |           |                 |   |             |            |            |   |          |          |               |   |                 |          |            |   |   |          |             |   |       |            |           |   |   |            |          

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

23



---



##### 



REHABILICARE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30

|                                               |                                                       |                                                                                  |                                                               |                                           |   |            |            |            |   |            |            |             |   |           |             |  
|---------------------------------------------- | ----------------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------------------------------------------- | ----------------------------------------- | - | ---------- | ---------- | ---------- | - | ---------- | ---------- | ----------- | - | --------- | ----------- | -
|                                               |                                                       |                                                                                  |                                                               |                                           |   | 2002       |            | 2001       |   | 2000      
|                                               |                                                       |                                                                                  |                                                               |                                           |   |            |            |            |   |           
|Operating Activities:                          |                                                       |                                                                                  |                                                               |                                           |   |            |            |            |   |            |            |            
|                                              
|                                              
|                                              
|                                              
|                                               | Net income                                            |                                                                                  | $                                                             | 4,942,010                                 |   |            | $          | 3,319,989  |   |            | $          | 2,202,777   |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                       | Adjustments to reconcile net income to net cash provided by operating activities |                                                               |                                           |   |            |            |            |   |            |            |             |   |          
|                                              
|                                              
|                                              
|                                              
|                                               |                                                       |                                                                                  |                                                               | Gain on sale of building                  |   |            |           |            |   |            |           |             |   |           | (1,075,680  | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                       |                                                                                  |                                                               | Depreciation and amortization             |   |            | 1,654,202  |            |   |            | 2,300,466  |             |   |           | 1,979,343   |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                       |                                                                                  |                                                               | Amortization of unearned compensation     |   |            | 108,750    |            |   |            | 263,437    |             |   |           |            |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                       |                                                                                  |                                                               | Change in deferred taxes                  |   |            | (644,360   | )          |   |            | (1,065,066 | )           |   |           | (1,302,656  | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                       |                                                                                  |                                                               | Minority interest                         |   |            |           |            |   |            |           |             |   |           | (24,681     | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                       |                                                                                  |                                                               | Changes in current assets and liabilities |   |            |            |            |   |            |            |             |   |           |             |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                       |                                                                                  |                                                               | Receivables                               |   |            | (4,078,898 | )          |   |            | (11,359    | )           |   |           | 142,142     |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                       |                                                                                  |                                                               | Inventories                               |   |            | 156,731    |            |   |            | (372,426   | )           |   |           | 2,013,480   |  
|                                              
|                                              
|                                              
|                                              
|                                               |                                                       |                                                                                  |                                                               | Prepaid expenses                          |   |            | 826,152    |            |   |            | 43,810     |             |   |           | (713,706    | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                       |                                                                                  |                                                               | Accounts payable                          |   |            | (1,246,490 | )          |   |            | (569,991   | )           |   |           | (596,905    | )
|                                              
|                                              
|                                              
|                                              
|                                               |                                                       |                                                                                  |                                                               | Accrued liabilities                       |   |            | 3,155,714  |            |   |            | 255,330    |             |   |           | 2,723,964   |  
|                                               |                                                       |                                                                                  |                                                               |                                           |   |            |            |            |   |            |            |             |  
|                                               |                                                       |                                                                                  |                                                               | Net cash provided by operating activities |   |            | 4,873,811  |            |   |            | 4,164,190  |             |   |           | 5,348,078   |  
|                                              
|                                              
|                                              
|                                              
|Investing Activities:                          |                                                       |                                                                                  |                                                               |                                           |   |            |            |            |   |            |            |            
|                                              
|                                              
|                                              
|                                              
|                                               | Purchase of property and equipment                    |                                                                                  |                                                               | (837,255                                  | ) |            |            | (716,654   | ) |            |            | (1,233,028  | )
|                                              
|                                              
|                                              
|                                              
|                                               | Cash paid in asset acquisitions, net of cash received |                                                                                  |                                                               |                                          |   |            |            | (200,000   | ) |            |            | (13,034,143 | )
|                                              
|                                              
|                                              
|                                              
|                                               | Disposal of property, plant and equipment, net        |                                                                                  |                                                               | 1,500                                     |   |            |            |           |   |            |            | 1,696,429   |  
|                                              
|                                              
|                                              
|                                              
|                                               | Change in other assets, net                           |                                                                                  |                                                               | 16,979                                    |   |            |            | (80,703    | ) |            |            |            |  
|                                               |                                                       |                                                                                  |                                                               |                                           |   |            |            |            |   |            |            |             |  
|                                               |                                                       |                                                                                  |                                                               | Net cash used in investing activities     |   |            | (818,776   | )          |   |            | (997,357   | )           |   |           | (12,570,742 | )
|                                              
|                                              
|                                              
|                                              
|Financing Activities:                          |                                                       |                                                                                  |                                                               |                                           |   |            |            |            |   |            |            |            
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from new financing                           |                                                                                  |                                                               |                                          |   |            |            |           |   |            |            | 15,000,000  |  
|                                              
|                                              
|                                              
|                                              
|                                               | Principal payments on long-term obligations           |                                                                                  |                                                               | (3,887,731                                | ) |            |            | (2,948,545 | ) |            |            | (4,958,677  | )
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from (payments on) line of credit, net       |                                                                                  |                                                               |                                          |   |            |            | (1,200,000 | ) |            |            | (1,200,000  | )
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from exercise of stock options               |                                                                                  |                                                               | 304,346                                   |   |            |            | 21,001     |   |            |            | 36,177      |  
|                                              
|                                              
|                                              
|                                              
|                                               | Proceeds from employee stock purchase plan            |                                                                                  |                                                               | 111,845                                   |   |            |            | 98,975     |   |            |            | 103,290     |  
|                                               |                                                       |                                                                                  |                                                               |                                           |   |            |            |            |   |            |            |             |  
|                                               |                                                       |                                                                                  | Net cash provided by (used in) financing activities           |                                           |   | (3,471,540 | )          |            |   | (4,028,569 | )          |             |   | 8,980,790 |            
|                                              
|                                              
|                                              
|                                              
|                                               | Effect of exchange rates on cash and cash equivalents |                                                                                  |                                                               | 743,544                                   |   |            |            | (606,005   | ) |            |            | (91,981     | )
|                                               |                                                       |                                                                                  |                                                               |                                           |   |            |            |            |   |            |            |             |  
|                                               |                                                       |                                                                                  | Net increase (decrease) in cash and cash equivalents          |                                           |   | 1,327,039  |            |            |   | (1,467,741 | )          |             |   | 1,666,145 |            
|                                              
|                                              
|                                              
|                                              
|Cash and Cash Equivalents at Beginning of Year |                                                       |                                                                                  | 759,611                                                       |                                           |   |            | 2,227,352  |            |   |            | 561,207    |            
|                                               |                                                       |                                                                                  |                                                               |                                           |   |            |            |            |   |            |            |             |  
|Cash and Cash Equivalents at End of Year       |                                                       | $                                                                                | 2,086,650                                                     |                                           |   | $          | 759,611    |            |   | $          | 2,227,352  |            
|                                               |                                                       |                                                                                  |                                                               |                                           |   |            |            |            |   |            |            |             |  
|Non-cash transaction                           |                                                       |                                                                                  |                                                               |                                           |   |            |            |            |   |            |            |            
|                                              
|                                              
|                                              
|                                              
|                                               |                                                       |                                                                                  | Repayment of shareholder notes receivable with existing stock |                                           |   | 259,417    |            |            |   |           |            |             |   |          |            
|                                              
|                                              
|                                              
|                                              
|Supplemental Cash Flow Information:            |                                                       |                                                                                  |                                                               |                                           |   |            |            |            |   |            |            |            
|                                              
|                                              
|                                              
|                                              
|                                               |                                                       |                                                                                  | Interest paid                                                 |                                           | $ | 674,432    |            |            | $ | 1,276,610  |            |             | $ | 1,512,613 |            
|                                               |                                                       |                                                                                  |                                                               |                                           |   |            |            |            |   |            |            |             |  
|                                               |                                                       |                                                                                  | Income taxes paid                                             |                                           | $ | 3,408,220  |            |            | $ | 3,383,228  |            |             | $ | 2,093,488 |            
|                                               |                                                       |                                                                                  |                                                               |                                           |   |            |            |            |   |            |            |             |  

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

24



---



##### 



REHABILICARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Summary of Significant Accounting Policies:

Revenue Recognition

Rehabilicare Inc. (the Company) generates revenue in the United States
from sales of its products to medical equipment dealers and from rental or
sales directly to patients and health care providers. In Europe and other
international markets, revenue is generated from sales to health care providers
and to consumers directly or through sport shops. Revenue is recognized at the
time of shipment to dealers, health care providers and sport shops or upon
notification from a health care provider that equipment has been prescribed and
provided to a patient and approval by the patient or his/her insurance
provider. All revenue is recognized net of estimated sales allowances and
returns.

Principles of Consolidation

The consolidated financial statements include the accounts of Rehabilicare
Inc. and its subsidiaries. All significant inter-company transactions and
accounts have been eliminated.

Provision for Uncollectible Accounts

Revenue from rental and sale of products directly to patients and health
care providers accounted for approximately 61 percent of total revenue in
fiscal 2002, 64 percent in fiscal 2001 and 63 percent in 2000. 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 various factors,
including credit risk, historical trends, patient responsibility and other
information. Such reserves have gradually increased as third-party payors have
delayed payments and restricted amounts to be reimbursed for products and
services provided by the Company.

Use of Estimates

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. The most significant
management estimates used in the preparation of the financial statements are
associated with the reserves established for sales allowances and returns,
uncollectible accounts, lost consignment inventory and inventory obsolescence.

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.

25



---



##### 



Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method for financial reporting purposes 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   

Goodwill

In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001, with early adoption permitted for companies with
fiscal years beginning after March 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives are no longer amortized but
will be subject to annual impairment tests in accordance with the statements.
Other intangible assets will continue to be amortized over their useful lives.

The Company adopted the new rules on accounting for goodwill and other
intangible assets effective July 1, 2001. Amounts previously recorded as
separately identifiable intangibles for acquired work force and customer list
have been subsumed to goodwill in accordance with FAS 141, increasing goodwill
by $1.6 million as of the date of adoption. Effective with the adoption of FAS
142, goodwill is no longer amortized but is instead subject to an annual
impairment test. The transitional and annual impairment tests conducted in
connection with the adoption of FAS 142 resulted in no required provision for
impairment.

Goodwill and other intangible assets resulting from acquisitions of
business and the formation of the Company consist of the following:

|                              |                              |   |               |            |               |   |            |            | 
|----------------------------- | ---------------------------- | - | ------------- | ---------- | ------------- | - | ---------- | ---------- | 
|                              |                              |   | June 30, 2002 |            | June 30, 2001
|                              |                              |   |               |            |              
|Goodwill                      |                              | $ | 11,504,520    |            |               | $ | 11,504,520 |           
|                             
|                             
|                             
|                             
|Less accumulated amortization |                              |   | 1,671,430     |            |               |   | 1,671,430  |           
|                              |                              |   |               |            |               |   |            |           
|                              | Net goodwill                 |   |               | 9,833,090  |               |   |            | 9,833,090  | 
|                             
|                             
|                             
|                             
|Other intangible assets:      |                              |   | 1,783,686     |            |               |   | 1,783,686  |           
|                             
|                             
|                             
|                             
|Less accumulated amortization |                              |   | 633,034       |            |               |   | 366,015    |           
|                              |                              |   |               |            |               |   |            |           
|                              | Net other intangible assets  |   |               | 1,150,652  |               |   |            | 1,417,671  | 
|                              |                              |   |               |            |               |   |            |           
|                              | Total intangible assets, net |   | $             | 10,983,742 |               |   | $          | 11,250,761 | 
|                              |                              |   |               |            |               |   |            |           

26



---



##### 



The following table presents the results of the Company as if goodwill had
not been amortized during any of the periods presented:

|                                                      |  |                             |           |      |  |      |           |  |  |   |           | 
|----------------------------------------------------- |  | --------------------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                      |  | Twelve Months Ended June 30
|                                                      |  |                            
|                                                      |  | 2002                        |           | 2001 |  | 2002
|                                                      |  |                             |           |      |  |     
|Reported net income attributed to common shareholders |  | $                           | 4,942,010 |      |  | $    | 3,319,989 |  |  | $ | 2,202,777 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Add back goodwill amortization, net of tax provision  |  |                             |          |      |  |      | 475,611   |  |  |   | 380,132   | 
|                                                      |  |                             |           |      |  |      |           |  |  |   |           | 
|Adjusted net income attributed to common shareholders |  | $                           | 4,942,010 |      |  | $    | 3,795,600 |  |  | $ | 2,582,909 | 
|                                                      |  |                             |           |      |  |      |           |  |  |   |           | 
|Diluted net income per share:                         |  |                             |           |      |  |      |           |  |  |   |           | 
|                                                     
|                                                     
|                                                     
|                                                     
|Reported net income attributed to common shareholders |  | $                           | .44       |      |  | $    | .31       |  |  | $ | .21       | 
|                                                     
|                                                     
|                                                     
|                                                     
|Goodwill amortization                                 |  |                             |          |      |  |      | .05       |  |  |   | .03       | 
|                                                      |  |                             |           |      |  |      |           |  |  |   |           | 
|Adjusted net income attributed to common shareholders |  | $                           | .44       |      |  | $    | .36       |  |  | $ | .24       | 
|                                                      |  |                             |           |      |  |      |           |  |  |   |           | 

Research and Development

Research and development costs are expensed when incurred.

Stock-Based Compensation

The Company has adopted the disclosure-only provisions of SFAS No. 123,
which disclosures are presented in Note 7. Accordingly, the Company continues
to account for stock-based compensation using the intrinsic value method as
prescribed under Accounting Principles Board Opinion (APB) No. 25 and related
Interpretations.

Earnings Per Share

Basic earnings per share is computed based on the weighted average number
of common shares outstanding. Diluted earnings per share is computed based on
the weighted average number of common shares outstanding adjusted by the number
of additional shares that would have been outstanding had the potential
dilutive common shares been issued. Potential dilutive shares of common stock
include stock options and other stock-based awards granted under stock-based
compensation plans.

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.

Foreign Currency Translation

Assets and liabilities are translated to United States dollars at year-end
exchange rates. Elements of the statement of operations are translated at
average exchange rates in effect during the year. Foreign currency transaction
gains and losses are included in the statement of operations as selling,
general and administrative expense. Adjustments arising from the translation
of most net assets located outside the United States (gains and losses) are
recorded as a component of accumulated other non-owner changes in equity.

Shipping and Handling Costs

Shipping and handling costs related to unit and supplies fulfillment
services are included in cost of goods sold.

27



---



##### 



Reclassification

Certain prior year items have been reclassified to conform with the
current year presentation.

Selected Financial Statement Data

|                                |                                |                                   |            |               |           |      |            |            |           | 
|------------------------------- | ------------------------------ | --------------------------------- | ---------- | ------------- | --------- | ---- | ---------- | ---------- | --------- | 
|                                |                                |                                   |            | As of June 30
|                                |                                |                                   |            |              
|                                |                                |                                   |            | 2002          |           | 2001
|                                |                                |                                   |            |               |           |     
|Property, plant and equipment - |                                |                                   |            |               |           |      |            |           
|                               
|                               
|                               
|                               
|                                | Land                           |                                   | $          | 150,000       |           |      | $          | 150,000    |          
|                               
|                               
|                               
|                               
|                                | Buildings                      |                                   |            | 1,683,614     |           |      |            | 1,683,614  |          
|                               
|                               
|                               
|                               
|                                | Clinical and rental equipment  |                                   |            | 1,598,064     |           |      |            | 1,571,049  |          
|                               
|                               
|                               
|                               
|                                | Production equipment           |                                   |            | 3,253,952     |           |      |            | 3,301,856  |          
|                               
|                               
|                               
|                               
|                                | Office furniture and equipment |                                   |            | 7,599,521     |           |      |            | 6,701,427  |          
|                                |                                |                                   |            |               |           |      |            |            |          
|                                |                                |                                   | 14,285,151 |               |           |      | 13,407,946 |           
|                               
|                               
|                               
|                               
|                                | Less accumulated depreciation  |                                   |            | (9,605,373    | )         |      |            | (8,381,977 | )        
|                                |                                |                                   |            |               |           |      |            |            |          
|                                |                                | Net property, plant and equipment |            | $             | 4,679,778 |      |            | $          | 5,025,969 | 
|                                |                                |                                   |            |               |           |      |            |            |          

Included in the Companys consolidated balance sheet at June 30, 2002 are
net property, plant and equipment of the Companys foreign operations, which
are located in Europe and which total $1,262,269.

2. Acquisition of Compex:

On July 16, 1999, the Company acquired substantially all the assets of
Compex SA, a Switzerland based medical products company, for cash of
approximately $11 million. In connection with the acquisition, the purchase
consideration and transaction costs were allocated as follows:

|                       |  |   |            | 
|---------------------- |  | - | ---------- | 
|Net assets acquired    |  | $ | 1,612,085  | 
|                      
|                      
|                      
|                      
|Goodwill               |  |   | 9,060,772  | 
|                      
|                      
|                      
|                      
|Developed technology   |  |   | 1,400,000  | 
|                      
|                      
|                      
|                      
|Existing workforce     |  |   | 1,400,000  | 
|                      
|                      
|                      
|                      
|Debt structuring costs |  |   | 346,970    | 
|                       |  |   |            | 
|                       |  | $ | 13,819,827 | 
|                       |  |   |            | 

Also included in goodwill are contingent payments made during fiscal 2001
and 2000 to the former Compex shareholders in the aggregate amount of $2
million. Pro forma operating results for fiscal 2000 are not separately
presented due to the immaterial operating results for the 18 days that Compexs
results are not included in the Companys consolidated results.

3. Sale of Building

In fiscal 2000, the Company recorded a gain on the sale of a building in
the amount of $1,075,680. The company exercised its option to purchase that
building in the first quarter of fiscal 1999 and closed the purchase and
immediate sale in July 1999.

4. Notes Payable and Long-Term Debt:

In conjunction with its acquisition of Compex SA, the Company entered into
a new $20,000,000 credit facility, which provides for both term and revolving
borrowings at varying rates based either on the banks prime rate or LIBOR.
Borrowings under the new facility are secured by substantially all assets of
the Company other than those pledged as collateral on existing lease or
mortgage obligations. The initial term loan of $15,000,000

28



---



##### 



was used to fund the acquisition and repay the balance of a mortgage note
and a revolving loan provided under a credit facility with another bank.

The interest rate on the term loan was 3.875% at June 30, 2002. There
were no borrowings under the Companys revolving line of credit as of June 30,
2002 and 2001.

The Company was in compliance with all covenants of its credit agreement
as of June 30, 2002.

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

|                               |  |      |           |      |  |   |           |  
|------------------------------ |  | ---- | --------- | ---- |  | - | --------- | -
|                               |  | 2002 |           | 2001
|                               |  |      |           |     
|Average balance outstanding    |  | $    | 317,000   |      |  | $ | 463,000   |  
|                              
|                              
|                              
|                              
|Maximum balance outstanding    |  |      | 2,400,000 |      |  |   | 2,000,000 |  
|                              
|                              
|                              
|                              
|Weighted average interest rate |  |      | 4.32      | %    |  |   | 8.73      | %

29



---



##### 



5. Long-Term Debt:

Long-term obligations at June 30 consisted of the following

|                                                                                                                                                                                                                                                                                                                                                     |  |      |            |      |  |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                                                                                                                                                                                                                                                                                                                                     |  | 2002 |            | 2001
|                                                                                                                                                                                                                                                                                                                                                     |  |      |            |     
|Term loan, principal payments due on a quarterly basis and interest due in monthly installments through June 2004; interest at the bank reference rate or LIBOR plus a margin (3.875% at June 30, 2002); collateralized by substantially all assets of the Company other than those pledged as collateral on existing lease or mortgage obligations. |  | $    | 7,297,000  |      |  | $ | 10,797,000 |  
|                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                    
|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.                                                                                                                                                                                    |  |      | 620,902    |      |  |   | 649,020    |  
|                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                    
|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.                                                                                                                                                 |  |      | 635,394    |      |  |   | 659,180    |  
|                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                    
|Capital lease obligations                                                                                                                                                                                                                                                                                                                            |  |      | 373,313    |      |  |   | 709,140    |  
|                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                    
|Other                                                                                                                                                                                                                                                                                                                                                |  |      | 49,375     |      |  |   | 49,375     |  
|                                                                                                                                                                                                                                                                                                                                                     |  |      |            |      |  |   |            |  
|                                                                                                                                                                                                                                                                                                                                                     |  |      | 8,975,984  |      |  |   | 12,863,715 |  
|                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                    
|Less current maturities                                                                                                                                                                                                                                                                                                                              |  |      | (2,512,446 | )    |  |   | (2,430,173 | )
|                                                                                                                                                                                                                                                                                                                                                     |  |      |            |      |  |   |            |  
|                                                                                                                                                                                                                                                                                                                                                     |  | $    | 6,463,538  |      |  | $ | 10,433,542 |  
|                                                                                                                                                                                                                                                                                                                                                     |  |      |            |      |  |   |            |  

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, 2002,
the Company was in compliance with all such covenants.

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

|           |  |   |           | 
|---------- |  | - | --------- | 
|2003       |  |   | 2,264,754 | 
|          
|          
|          
|          
|2004       |  |   | 5,168,340 | 
|          
|          
|          
|          
|2005       |  |   | 76,697    | 
|          
|          
|          
|          
|2006       |  |   | 82,530    | 
|          
|          
|          
|          
|2007       |  |   | 88,883    | 
|          
|          
|          
|          
|Thereafter |  |   | 921,467   | 
|           |  |   |           | 
|           |  | $ | 8,602,671 | 
|           |  |   |           | 

30



---



##### 



Leases

The Company has commitments under various operating and capital leases
which bear interest at rates ranging from 4.95% to 13.58% and are payable in
monthly installments through various dates. Future minimum lease payments
under non-cancelable operating and capital leases are as follows:

|                                            |            |   |          |         |           |   |           |         | 
|------------------------------------------- | ---------- | - | -------- | ------- | --------- | - | --------- | ------- | 
|                                            |            |   | Capital  |         | Operating
|                                            |            |   | Leases   |         | Leases   
|                                            |            |   |          |         |          
|                                            | 2003       |   | $        | 274,787 |           |   | $         | 239,994 | 
|                                           
|                                           
|                                           
|                                           
|                                            | 2004       |   |          | 120,964 |           |   |           | 247,184 | 
|                                           
|                                           
|                                           
|                                           
|                                            | 2005       |   |          |        |           |   |           | 254,599 | 
|                                           
|                                           
|                                           
|                                           
|                                            | 2006       |   |          |        |           |   |           | 262,237 | 
|                                           
|                                           
|                                           
|                                           
|                                            | 2007       |   |          |        |           |   |           | 270,104 | 
|                                           
|                                           
|                                           
|                                           
|                                            | Thereafter |   |          |        |           |   |           | 540,227 | 
|                                            |            |   |          |         |           |   |           |         | 
|Total future minimum lease payments         |            |   | 395,751  |         |           | $ | 1,814,345 |        
|Less amount representing interest           |            |   | (22,438  | )       |           |   |           |        
|                                            |            |   |          |         |           |   |           |         | 
|Present value of net minimum lease payments |            |   | 373,313  |         |           |   |           |        
|                                           
|                                           
|                                           
|                                           
|Less current portion                        |            |   | (256,021 | )       |           |   |           |        
|                                            |            |   |          |         |           |   |           |         | 
|Long-term capital lease obligation          |            | $ | 117,292  |         |           |   |           |        
|                                            |            |   |          |         |           |   |           |         | 

Rent expense under operating leases for fiscal 2002, 2001 and 2000 was
$332,307, $431,226 and $454,130, respectively.

6. 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 income before taxes:

|         |  |      |           |      |  |      |           |  |  |   |           | 
|-------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|         |  | 2002 |           | 2001 |  | 2000
|         |  |      |           |      |  |     
|Domestic |  | $    | 5,698,384 |      |  | $    | 4,582,941 |  |  | $ | 2,878,694 | 
|        
|        
|        
|        
|         |  |      | 2,821,626 |      |  |      | 1,241,048 |  |  |   | 1,463,083 | 
|         |  |      |           |      |  |      |           |  |  |   |           | 
|Foreign  |  | $    | 8,520,010 |      |  | $    | 5,823,989 |  |  | $ | 4,341,777 | 
|         |  |      |           |      |  |      |           |  |  |   |           | 

The following summarizes the components of the provision for taxes:

|                    |         |   |           |           |      |   |            |           |  |   |            |           | 
|------------------- | ------- | - | --------- | --------- | ---- | - | ---------- | --------- |  | - | ---------- | --------- | 
|                    |         |   | 2002      |           | 2001 |   | 2000      
|                    |         |   |           |           |      |   |           
|Currently payable - |         |   |           |           |      |   |            |           |  |   |            |          
|                   
|                   
|                   
|                   
|                    | Federal |   | $         | 2,724,140 |      |   | $          | 2,647,161 |  |   | $          | 1,950,488 | 
|                   
|                   
|                   
|                   
|                    | State   |   |           | 398,797   |      |   |            | 751,853   |  |   |            | 329,793   | 
|                   
|                   
|                   
|                   
|                    | Foreign |   |           | 1,099,433 |      |   |            | 292,434   |  |   |            | 1,161,375 | 
|Deferred            |         |   | (644,360  | )         |      |   | (1,187,448 | )         |  |   | (1,302,656 | )        
|                    |         |   |           |           |      |   |            |           |  |   |            |           | 
|                    |         | $ | 3,578,000 |           |      | $ | 2,504,000  |           |  | $ | 2,139,000  |          
|                    |         |   |           |           |      |   |            |           |  |   |            |           | 

31



---



##### 



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

|                                    |  |      |           |      |  |      |           |   |  |   |           |  
|----------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                                    |  | 2002 |           | 2001 |  | 2000
|                                    |  |      |           |      |  |     
|Statutory rate                      |  | $    | 2,982,004 |      |  | $    | 1,980,156 |   |  | $ | 1,476,204 |  
|                                   
|                                   
|                                   
|                                   
|State taxes                         |  |      | 316,258   |      |  |      | 332,421   |   |  |   | 232,697   |  
|                                   
|                                   
|                                   
|                                   
|Nondeductible goodwill amortization |  |      | 85,537    |      |  |      | 331,304   |   |  |   | 297,784   |  
|                                   
|                                   
|                                   
|                                   
|Nondeductible payment               |  |      |          |      |  |      |          |   |  |   | 255,000   |  
|                                   
|                                   
|                                   
|                                   
|Foreign                             |  |      | 131,835   |      |  |      | (129,608  | ) |  |   | (209,911  | )
|                                   
|                                   
|                                   
|                                   
|Other                               |  |      | 62,366    |      |  |      | (10,273   | ) |  |   | 87,226    |  
|                                    |  |      |           |      |  |      |           |   |  |   |           |  
|                                    |  | $    | 3,578,000 |      |  | $    | 2,504,000 |   |  | $ | 2,139,000 |  
|                                    |  |      |           |      |  |      |           |   |  |   |           |  

|                                     |                                    |   |           |           |      |   |           |           |  
|------------------------------------ | ---------------------------------- | - | --------- | --------- | ---- | - | --------- | --------- | -
|                                     |                                    |   | 2002      |           | 2001
|                                     |                                    |   |           |           |     
|Deferred tax benefits arising from - |                                    |   |           |           |      |   |           |          
|                                    
|                                    
|                                    
|                                    
|                                     | Reserve for uncollectible accounts |   | $         | 4,078,117 |      |   | $         | 3,770,528 |  
|                                    
|                                    
|                                    
|                                    
|                                     | Accruals and other reserves        |   |           | 328,126   |      |   |           | (79,689   | )
|                                    
|                                    
|                                    
|                                    
|                                     | Depreciation                       |   |           | 62,006    |      |   |           | 103,501   |  
|                                    
|                                    
|                                    
|                                    
|                                     | Inventory                          |   |           | 310,180   |      |   |           | 384,396   |  
|                                    
|                                    
|                                    
|                                    
|                                     | Other                              |   |           | 44,667    |      |   |           |          |  
|                                     |                                    |   |           |           |      |   |           |           |  
|                                     |                                    | $ | 4,823,096 |           |      | $ | 4,178,736 |          
|                                     |                                    |   |           |           |      |   |           |           |  

7. Stockholders Equity:

Stock Options

The Company has 925,000 shares of its common stock reserved under its 1988
Restated Stock Option Plan and 900,000 shares reserved under its 1998 Stock
Incentive 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. They expire seven years
after grant.

32



---



##### 



The following table summarizes information with respect to such plans as
of June 30, 2002:

|                                     |           |   |                  |      |                  |  |         |          |  
|------------------------------------ | --------- | - | ---------------- | ---- | ---------------- |  | ------- | -------- | -
|                                     |           |   | Weighted Average |      |                  |  |        
|                                     |           |   | Exercise Price   |      | Number of Shares
|                                     |           |   |                  |      |                 
|Balance outstanding at June 30, 1999 |           | $ | 2.89             |      |                  |  | 633,523 |         
|                                    
|                                    
|                                    
|                                    
|                                     | Granted   |   |                  | 3.48 |                  |  |         | 162,500  |  
|                                    
|                                    
|                                    
|                                    
|                                     | Exercised |   |                  | 2.19 |                  |  |         | (61,199  | )
|                                    
|                                    
|                                    
|                                    
|                                     | Canceled  |   |                  | 2.29 |                  |  |         | (14,132  | )
|                                     |           |   |                  |      |                  |  |         |         
|Balance outstanding at June 30, 2000 |           | $ | 3.10             |      |                  |  | 720,692 |         
|                                    
|                                    
|                                    
|                                    
|                                     | Granted   |   |                  | 2.53 |                  |  |         | 175,000  |  
|                                    
|                                    
|                                    
|                                    
|                                     | Exercised |   |                  | 2.57 |                  |  |         | (8,158   | )
|                                    
|                                    
|                                    
|                                    
|                                     | Canceled  |   |                  | 3.38 |                  |  |         | (119,508 | )
|                                     |           |   |                  |      |                  |  |         |         
|Balance outstanding at June 30, 2001 |           | $ | 2.93             |      |                  |  | 768,026 |         
|                                    
|                                    
|                                    
|                                    
|                                     | Granted   |   |                  | 3.28 |                  |  |         | 400,000  |  
|                                    
|                                    
|                                    
|                                    
|                                     | Exercised |   |                  | 2.90 |                  |  |         | (168,125 | )
|                                    
|                                    
|                                    
|                                    
|                                     | Canceled  |   |                  | 2.93 |                  |  |         | (197,829 | )
|                                     |           |   |                  |      |                  |  |         |         
|Balance outstanding at June 30, 2002 |           |   | 3.11             |      |                  |  | 802,073 |         
|                                     |           |   |                  |      |                  |  |         |         
|Exercisable at June 30, 2002         |           |   | 3.20             |      |                  |  | 380,823 |         
|                                     |           |   |                  |      |                  |  |         |         
|Available for grant at June 30, 2002 |           |   |                  |      |                  |  | 788,309 |         
|                                     |           |   |                  |      |                  |  |         |         

33



---



##### 



|               |  |        |         |                  |  |                           |  |                           |      |           |  |  |         |                  |         |   |      |  |  | 
|-------------- |  | ------ | ------- | ---------------- |  | ------------------------- |  | ------------------------- | ---- | --------- |  |  | ------- | ---------------- | ------- | - | ---- |  |  | 
|               |  |        |         |                  |  | Stock Options Outstanding |  | Stock Options Exercisable
|               |  |        |         |                  |  |                           |  |                          
|               |  |        |         |                  |  | Weighted Average          |  | Weighted Average          |      |           |  |  |         | Weighted
Average
|Range of       |  |        |         |                  |  | Remaining                 |  | Exercise Price            |      |           |  |  |         | Exercise Price  
|Exercise Price |  | Shares |         | Contractual Life |  | Per Share                 |  | Shares                    |      | Per Share
|               |  |        |         |                  |  |                           |  |                           |      |          
|$2.19 to $2.25 |  |        | 76,250  |                  |  | 3.5 Years                 |  | $                         | 2.23 |           |  |  | 51,250  |                  |         | $ | 2.24 | 
|              
|              
|              
|              
|$2.39 to $3.06 |  |        | 348,750 |                  |  | 4.6 Years                 |  |                           | 2.63 |           |  |  | 143,750 |                  |         |   | 2.92 | 
|              
|              
|              
|              
|$3.25 to $3.85 |  |        | 365,000 |                  |  | 5.2 Years                 |  |                           | 3.68 |           |  |  | 173,750 |                  |         |   | 3.55 | 
|              
|              
|              
|              
|$5.45 to $5.88 |  |        | 12,073  |                  |  | 4.9 Years                 |  |                           | 5.52 |           |  |  | 12,073  |                  |         |   | 5.52 | 
|               |  |        |         |                  |  |                           |  |                           |      |           |  |  |         |                  |         |   |      |  |  | 
|               |  |        | 802,073 |                  |  |                           |  |                           |      |           |  |  |         |                  | 380,823 |   |      |  |  | 
|               |  |        |         |                  |  |                           |  |                           |      |           |  |  |         |                  |         |   |      |  |  | 

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:

|                         |  |             |  |   |           |      |  |      |           |      |  |   |           |  |  | 
|------------------------ |  | ----------- |  | - | --------- | ---- |  | ---- | --------- | ---- |  | - | --------- |  |  | 
|                         |  |             |  |   |           | 2002 |  | 2001 |           | 2000
|                         |  |             |  |   |           |      |  |      |           |     
|Net Income               |  | As reported |  | $ | 4,942,010 |      |  | $    | 3,319,989 |      |  | $ | 2,202,777 | 
|                        
|                        
|                        
|                        
|                         |  | Pro forma   |  |   | 4,623,794 |      |  |      | 3,214,544 |      |  |   | 2,036,184 | 
|                        
|                        
|                        
|                        
|                         |  |             |  |   |           |      |  |      |           |      |  |   |           |  |  | 
|                        
|                        
|                        
|                        
|Basic earnings per share |  | As reported |  |   | .44       |      |  |      | .31       |      |  |   | .21       | 
|                        
|                        
|                        
|                        
|                         |  | Pro forma   |  |   | .42       |      |  |      | .30       |      |  |   | .19       | 

Pro forma net income reflects only options and other stock based awards
granted since 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.

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 2002, 2001 and 2000: dividend
yield of 0%; expected volatility of 57.6%, 61.6% and 62.0%; risk-free interest
rate of 4.82%, 5.45% and 6.2%; and expected lives of 5 years.

The weighted-average fair value per option at the date of grant for
options granted in 2002, 2001 and 2000 was $2.25, $1.68 and $1.66,
respectively.

The Company loaned a total of $237,500 to an officer, $189,417 of which
was outstanding as of June 30, 2001, for the exercise of certain stock options.
This loan was repaid in full on April 24, 2002 using 35,748 shares of the
Companys common stock held by the officer.

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. These reserved shares were fully utilized as of June 30, 2002 and
the plan was temporarily suspended pending proposed reservation of additional
shares at the next meeting of stockholders.

Restricted Stock Grants

On July 19, 2000, the Company issued 180,000 shares of restricted stock
grants to certain key employees. The restricted shares were issued at $2.50
per share, which was the fair market value of the Companys stock on the date
of grant. The effect of the restricted stock grant is to increase the issued
and outstanding shares of the Companys common stock. Deferred compensation
was recorded for the restricted stock grants on the date of grant and will be
amortized over the restricted stock vesting period. Restricted stock awarded
may not be voluntarily or involuntarily sold, assigned, transferred, pledged or
encumbered during the restricted period. Of the restricted shares, 25% vested
immediately, and the remaining shares vest

34



---



##### 



25% per year over a four-year period.
During the years ended June 30, 2002
and 2001, the Company recognized $108,750 and $263,437, respectively, in
selling, general and administrative expense associated with the restricted
stock grant.

8. Commitments and Contingencies:

Litigation

On September 11, 2000, the Company announced that it had reached an
agreement with the United States Government to settle allegations of improper
Medicare billing that were asserted in a lawsuit filed by a former employee.
The Company agreed to pay $1,588,510 to settle the lawsuit and that amount was
remitted to the United States Government on January 29, 2001. The Company has
denied allegations that it engaged in fraudulent Medicare billing practices.

In late January 2001, Rehabilicare was served with documents in connection
with a product liability case brought in the California Superior Court for
Solano County. Although Rehabilicare had no record of the proceedings, the
action had progressed to the entry of a default judgment on January 11, 2001.
Rehabilicare appealed the default judgment to the California Court of Appeals
in March 2001. On May 10, 2002, the appeals court overturned the default
judgment holding that there was no valid complaint against Rehabilicare on
file. The California Supreme Court refused to hear the case which has
therefore been returned to the trial court.

The Company is periodically named as a party to other claims, legal
actions and complaints arising in the ordinary course of business. In the
opinion of management, the resolution of any matters currently in process m
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 from 1% to 20% of
eligible earnings to the plan. Company contributions are 50% of the first 6%
contributed by the employee. In addition, the Company may make additional
discretionary contributions to the plan as determined annually. The Company
contributed $204,024, $193,617 and $176,577 to the plan for the years ended
June 30, 2002, 2001 and 2000, respectively.

35



---



##### 



9. Segment Information:

Rehabilicare and its consolidated subsidiaries operate in one reportable
segment, the manufacture and distribution of electromedical pain management,
rehabilitation and sports training products. The Companys chief operating
decision makers use consolidated results to make operating and strategic
decisions. Net revenue from United States and foreign sources (primarily
Europe) was as follows:

|                |       |   |                    |            |      |   |            |            |  |   |            |            |  |  |  |  | 
|--------------- | ----- | - | ------------------ | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- |  |  |  |  | 
|                |       |   | Year ended June 30
|                |       |   |                   
|                |       |   | 2002               |            | 2001 |   | 2000       |            |  |   |           
|                |       |   |                    |            |      |   |            |            |  |   |           
|U.S. revenue    |       | $ | 46,640,968         |            |      | $ | 44,435,030 |            |  | $ | 41,893,749 |           
|               
|               
|               
|               
|Foreign revenue |       |   | 25,865,709         |            |      |   | 18,522,385 |            |  |   | 17,680,863 |           
|                |       |   |                    |            |      |   |            |            |  |   |            |           
|                | Total |   | $                  | 72,506,677 |      |   | $          | 62,957,415 |  |   | $          | 59,574,612 | 
|                |       |   |                    |            |      |   |            |            |  |   |            |           

Net revenue by product line was as follows:

|                         |       |  |                    |  |  |   |            |            |      |   |            |            |  |   |            |            |  |  |  |  | 
|------------------------ | ----- |  | ------------------ |  |  | - | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- |  |  |  |  | 
|                         |       |  | Year ended June 30
|                         |       |  |                   
|                         |       |  |                    |  |  |   | 2002       |            | 2001 |   | 2000       |            |  |   |           
|                         |       |  |                    |  |  |   |            |            |      |   |            |            |  |   |           
|Rehabilitation products  |       |  |                    |  |  | $ | 14,639,997 |            |      | $ | 12,212,754 |            |  | $ | 12,057,500 |           
|                        
|                        
|                        
|                        
|Pain management          |       |  |                    |  |  |   | 14,440,064 |            |      |   | 13,697,753 |            |  |   | 14,038,541 |           
|                        
|                        
|                        
|                        
|Consumer products        |       |  |                    |  |  |   | 19,273,748 |            |      |   | 13,730,746 |            |  |   | 12,694,310 |           
|                        
|                        
|                        
|                        
|Accessories and supplies |       |  |                    |  |  |   | 24,152,868 |            |      |   | 23,316,162 |            |  |   | 20,784,261 |           
|                         |       |  |                    |  |  |   |            |            |      |   |            |            |  |   |            |           
|                         | Total |  |                    |  |  |   | $          | 72,506,677 |      |   | $          | 62,957,415 |  |   | $          | 59,574,612 | 
|                         |       |  |                    |  |  |   |            |            |      |   |            |            |  |   |            |           

During fiscal 2002 and 2001, one customer accounted for approximately 14%
and 13%, respectively, of consolidated revenue. This customer represented
approximately 9% of total accounts receivable at June 30, 2002.

10. Quarterly Data (Unaudited):

|                             |         |   |                                  |     |         |   |            |     |         |   |            |     |  |   |            |     |  |   |            |     | 
|---------------------------- | ------- | - | -------------------------------- | --- | ------- | - | ---------- | --- | ------- | - | ---------- | --- |  | - | ---------- | --- |  | - | ---------- | --- | 
|                             |         |   | For the Year Ended June 30, 2002
|                             |         |   |                                 
|                             |         |   | First                            |     | Second  |   | Third      |     | Fourth  |   |            |     | 
|                             |         |   | Quarter                          |     | Quarter |   | Quarter    |     | Quarter |   | Total     
|                             |         |   |                                  |     |         |   |            |     |         |   |           
|Revenue                      |         | $ | 16,498,504                       |     |         | $ | 17,831,717 |     |         | $ | 18,074,316 |     |  | $ | 20,102,140 |     |  | $ | 72,506,677 |    
|                            
|                            
|                            
|                            
|Gross profit                 |         |   | 11,205,681                       |     |         |   | 11,685,831 |     |         |   | 12,288,348 |     |  |   | 13,793,056 |     |  |   | 48,972,916 |    
|                            
|                            
|                            
|                            
|Net income                   |         |   | 1,191,023                        |     |         |   | 1,391,964  |     |         |   | 1,028,731  |     |  |   | 1,330,292  |     |  |   | 4,942,010  |    
|                            
|                            
|                            
|                            
|Net
income percommon share - |         |   |                                  |     |         |   |            |     |         |   |            |     |  |   |            |     |  |   |            |    
|                            
|                            
|                            
|                            
|                             | Basic   |   |                                  | .11 |         |   |            | .13 |         |   |            | .09 |  |   |            | .12 |  |   |            | .45 | 
|                            
|                            
|                            
|                            
|                             | Diluted |   |                                  | .11 |         |   |            | .12 |         |   |            | .09 |  |   |            | .12 |  |   |            | .44 | 

36



---



##### 



|                              |  |         |            |                                  |     |         |            |         |     |         |            |       |     |   |            |  |     |   |            |  |     | 
|----------------------------- |  | ------- | ---------- | -------------------------------- | --- | ------- | ---------- | ------- | --- | ------- | ---------- | ----- | --- | - | ---------- |  | --- | - | ---------- |  | --- | 
|                              |  |         |            | For the Year Ended June 30, 2001
|                              |  |         |            |                                 
|                              |  |         |            | First                            |     | Second  |            | Third   |     | Fourth  |            |       |     |  
|                              |  |         |            | Quarter                          |     | Quarter |            | Quarter |     | Quarter |            | Total
|                              |  |         |            |                                  |     |         |            |         |     |         |            |      
|Revenue                       |  | $       | 15,223,688 |                                  |     | $       | 15,154,836 |         |     | $       | 15,406,416 |       |     | $ | 17,172,475 |  |     | $ | 62,957,415 | 
|                             
|                             
|                             
|                             
|Gross profit                  |  |         | 10,435,296 |                                  |     |         | 10,471,997 |         |     |         | 10,552,018 |       |     |   | 11,785,774 |  |     |   | 43,245,085 | 
|                             
|                             
|                             
|                             
|Net income                    |  |         | 1,122,178  |                                  |     |         | 822,085    |         |     |         | 861,974    |       |     |   | 513,752    |  |     |   | 3,319,989  | 
|                             
|                             
|                             
|                             
|Net
income per common share - |  |         |            |                                  |     |         |            |         |     |         |            |       |     |   |            |  |     |   |            | 
|                             
|                             
|                             
|                             
|                              |  | Basic   |            |                                  | .10 |         |            |         | .08 |         |            |       | .08 |   |            |  | .05 |   |            |  | .31 | 
|                             
|                             
|                             
|                             
|                              |  | Diluted |            |                                  | .10 |         |            |         | .08 |         |            |       | .08 |   |            |  | .05 |   |            |  | .31 | 

Certain quarterly items have been reclassified to conform with the current year presentation.

37



---



##### 



Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

None

38



---



##### 



PART III

Item 10. Directors and Executive Officers of the Registrant.

The information contained under the headings Election of Directors,
Executive Officers and Security Ownership of Certain Beneficial Owners and
Management-Compliance with section 16(a) of the Securities Exchange Act of
1934 of our definitive proxy statement for our annual meeting of shareholders
to be held December 12, 2002 (hereafter the Proxy Statement), is incorporated
herein by reference.

Item 11. Executive Compensation.

The information under the heading Executive Compensation of the Proxy
Statement is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information under the heading Security Ownership of Certain
Beneficial Owners and Management  and under the caption Amendment of 1998
Stock Incentive PlanOptions Outstanding of the Proxy Statement is
incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

The information contained under the heading Certain Transactions of the
Proxy Statement is incorporated herein by reference.

Item 14. Controls and Procedures.

In connection with our audit for the year ended June 30, 2001, our
independent auditors suggested that we convert our manufacturing resources
planning software system to the same system that we use for billing and
financial reporting. We are implementing this software conversion over the
next few months. Except with respect to this change, there have been no
significant changes in our internal controls or in other factors that could
significantly affect these controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.



| | (a) |  | 1. Financial Statements
| | --- |  | -----------------------

The consolidated financial statements required by this item are listed in
the Index to Consolidated Financial Statements set forth on page 19.



| |  |  | 2. Financial Statement Schedules
| |  |  | --------------------------------

Schedule II  Valuation and Qualifying Accounts. Such schedule should be
read in conjunction with the consolidated financial statements. All other
schedules have been omitted because they are not applicable or not required, or
because the required information is included in the financial statements or the
notes thereto.



39



---



##### 



| |  |  | 3. Exhibits
| |  |  | -----------

|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|*3.1    |  | Restated Articles of Incorporation, as amended                                                                                                                                                                                                                                                                                                                                           
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|*3.2    |  | Restated Bylaws of Rehabilicare Inc., as amended                                                                                                                                                                                                                                                                                                                                         
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|*4.1    |  | 1988 Restated Stock Option Plan, as amended                                                                                                                                                                                                                                                                                                                                              
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|4.2     |  | 1994 Employee Stock Purchase Plan (Incorporated by reference to our Registration Statement on
Form S-2 filed on June 24, 1993 (File Number 3364884))                                                                                                                                                                                                                                    
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|4.3     |  | Rehabilicare Inc. 1998 Stock Incentive Plan (Incorporated by reference to Appendix E to the final
prospectus included in Amendment No. 1 to the our Registration Statement on Form S-4 filed
February 2, 1998 (file no. 333-44139))                                                                                                                                                      
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|10.1    |  | Construction Loan Agreement dated October 20, 1994 between Rehabilicare Inc. and Wells Fargo 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 (Incorporated
by reference to our Form 10-Q for the quarter ended September 30, 1994 (File Number 0-9407))
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|10.2    |  | 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 (Incorporated by
reference to our Form 10-KSB for the year ended June 30, 1995 (File Number 0-9407))              
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|+10.3   |  | Form of Severance Pay Agreement (Incorporated by reference to our Form 10-KSB for the year ended
June 30, 1997 (File Number 0-9407))                                                                                                                                                                                                                                                     
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|+10.4   |  | Separation Agreement dated March 31, 2002 between Rehabilicare Inc. and David B. Kaysen
(Incorporated by reference to the Companys Form 10-Q for the quarter ended March 31, 2002 (File
No. 0-9407))                                                                                                                                                                                    
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|10.5    |  | Credit Agreement dated July 14, 1999 between Rehabilicare Inc. and U.S. Bank National
Association. (Incorporated by reference to the Companys Current Report on Form 8-K filed August
2, 1999 (File No. 0-9407))                                                                                                                                                                        
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|10.6    |  | Security Agreement dated July 14, 1999 between Rehabilicare Inc. and U.S. Bank National
Association. (Incorporated by reference to the Companys Current Report on Form 8-K filed August
2, 1999 (File No. 0-9407))                                                                                                                                                                      
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|10.7    |  | Stock Pledge Agreement dated July 19, 1999 between Rehabilicare Inc. and U.S. Bank National
Association covering all shares of capital stock in Compex SA owned by Rehabilicare Inc.
(Incorporated by reference to the Companys Current Report on Form 8-K filed August 2, 1999 (File
No. 0-9407))                                                                                      
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|*10.8   |  | Amendment No. 2 dated as of June 30, 2002 to Credit Agreement dated July 14, 1999 between
Rehabilicare Inc. and U.S. Bank National Association                                                                                                                                                                                                                                           
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|*+10.9  |  | Employment Agreement dated as of May 9, 2002 between Rehabilicare Inc. and W. Glen Winchell*                                                                                                                                                                                                                                                                                             
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|*+10.10 |  | Employment Agreement dated as of August 12, 2002 between Rehabilicare Inc. and Dan Gladney*                                                                                                                                                                                                                                                                                              
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|21      |  | Subsidiaries (Incorporated by reference to Exhibit 21 to Rehabilicares Annual Report on Form
10-K for the year ended June 30, 2001 (File No. 0-9407))                                                                                                                                                                                                                                   
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|* 23.1  |  | Consent of Independent Auditors  Ernst & Young LLP*                                                                                                                                                                                                                                                                                                                                     
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|*99.1   |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|*99.2   |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                       



---

|+ |  | Management compensatory plan or agreement
|- |  | -----------------------------------------
| 
| 
| 
| 
|* |  | Filed as part of this report             

40



---



##### 



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 26, 2002 |  | By: /s/ Dan W. Gladney

Dan W. Gladney
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.

|                                           |  |                                                                        |  |                   
|------------------------------------------ |  | ---------------------------------------------------------------------- |  | ------------------
|NAME                                       |  | TITLE                                                                  |  | DATE              
|                                           |  |                                                                        |  |                   
|                                           |  |                                                                        |  |                   
|                                          
|                                          
|                                          
|                                          
|/s/ Dan W. Gladney

Dan W. Gladney         |  | President, Chief Executive Officer                                     |  | September 26, 2002
|                                          
|                                          
|                                          
|                                          
|                                           |  |                                                                        |  |                   
|                                          
|                                          
|                                          
|                                          
|/s/ W. Glen Winchell

W. Glen Winchell     |  | Vice President of Finance
(Principal Financial and
Accounting Officer) |  | September 26, 2002
|                                          
|                                          
|                                          
|                                          
|                                           |  |                                                                        |  |                   
|                                          
|                                          
|                                          
|                                          
|/s/ John H.P. Maley

John H.P. Maley       |  | Chairman and Director                                                  |  | September 26, 2002
|                                          
|                                          
|                                          
|                                          
|                                           |  |                                                                        |  |                   
|                                          
|                                          
|                                          
|                                          
|Frederick H. Ayers                         |  | Director                                                               |  | September 26, 2002
|                                          
|                                          
|                                          
|                                          
|                                           |  |                                                                        |  |                   
|                                          
|                                          
|                                          
|                                          
|/s/ Richard E. Jahnke

Richard E. Jahnke   |  | Director                                                               |  | September 26, 2002
|                                          
|                                          
|                                          
|                                          
|                                           |  |                                                                        |  |                   
|                                          
|                                          
|                                          
|                                          
|/s/ Robert C. Wingrove

Robert C. Wingrove |  | Director                                                               |  | September 26, 2002

41



---



##### 



CERTIFICATION

I, Dan W. Gladney, Chief Executive Officer of Rehabilicare Inc., certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Rehabilicare
Inc.;                                                                                                                                                                                                                                                   
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;                   

Date: September 26, 2002_

|                                                         
|---------------------------------------------------------
|/s/ Dan W. Gladney
Dan W. Gladney
Chief Executive Officer

42



---



##### 



CERTIFICATION

I, W. Glen Winchell, Chief Financial Officer of Rehabilicare Inc., certify
that:



| | 1. |  | I have reviewed this annual report on Form 10-K of
Rehabilicare Inc.;                                                                                                                                                                                                                                                   
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;                   

Date: September 26, 2002

|                                                             
|-------------------------------------------------------------
|/s/ W. Glen Winchell
W. Glen Winchell
Chief Financial Officer

43



---



##### 



Schedule II  Valuation and Qualifying Accounts

Accounts Receivable Reserve

|                           |               |                     |            |            |  |                   |   |            |               |        |                   |           |                   |  |   |           |  |  |   |            | 
|-------------------------- | ------------- | ------------------- | ---------- | ---------- |  | ----------------- | - | ---------- | ------------- | ------ | ----------------- | --------- | ----------------- |  | - | --------- |  |  | - | ---------- | 
|                           |               |                     |            |            |  |                   |   |            |               |        | Deductions        |           |                   |  |  
|                           |               |                     |            |            |  |                   |   |            |               |        |                   |           |                   |  |  
|                           |               |                     |            |            |  |                   |   |            |               |        | Charged to        |           |                   |  |   |           |  |  |  
|                           |               |                     | Balance at |            |  |                   |   |            | allowance for |        | Charged to credit |           | Balance at end of
|Description                |               | beginning of period |            | Additions  |  | doubtful accounts |   | reserve    |               | period
|                           |               |                     |            |            |  |                   |   |            |               |       
|Account Receivable Reserve |               |                     |            |            |  |                   |   |            |               |        |                   |           |                   |  |   |           |  |  |   |           
|                          
|                          
|                          
|                          
|                           | June 30, 2002 |                     | $          | 11,141,407 |  |                   | $ | 13,952,724 |               |        | $                 | 2,973,695 |                   |  | $ | 9,228,571 |  |  | $ | 12,891,864 | 
|                          
|                          
|                          
|                          
|                           | June 30, 2001 |                     |            | 9,192,271  |  |                   |   | 13,034,902 |               |        |                   | 3,211,985 |                   |  |   | 7,873,781 |  |  |   | 11,141,407 | 
|                          
|                          
|                          
|                          
|                           | June 30, 2000 |                     |            | 7,814,681  |  |                   |   | 9,971,765  |               |        |                   | 551,176   |                   |  |   | 8,042,999 |  |  |   | 9,192,271  | 

Inventory Reserve

|                  |               |                     |            |           |  |                   |   |                |            |               |            |           |            |  |  |   |  |  |   |         | 
|----------------- | ------------- | ------------------- | ---------- | --------- |  | ----------------- | - | -------------- | ---------- | ------------- | ---------- | --------- | ---------- |  |  | - |  |  | - | ------- | 
|                  |               |                     |            |           |  |                   |   |                |            |               | Deductions |           |            |  | 
|                  |               |                     |            |           |  |                   |   |                |            |               |            |           |            |  | 
|                  |               |                     | Balance at |           |  |                   |   |                | Charged to |               | Charges to |           | Balance at
|Description       |               | beginning of period |            | Additions |  | inventory reserve |   | other accounts |            | end of period
|                  |               |                     |            |           |  |                   |   |                |            |              
|Inventory Reserve |               |                     |            |           |  |                   |   |                |            |               |            |           |            |  |  |   |  |  |   |        
|                 
|                 
|                 
|                 
|                  | June 30, 2002 |                     | $          | 596,306   |  |                   | $ | 824,442        |            |               | $          | 905,735   |            |  |  |  |  |  | $ | 515,013 | 
|                 
|                 
|                 
|                 
|                  | June 30, 2001 |                     |            | 707,553   |  |                   |   | 379,107        |            |               |            | 490,354   |            |  |  |  |  |  |   | 596,306 | 
|                 
|                 
|                 
|                 
|                  | June 30, 2000 |                     |            | 1,415,751 |  |                   |   | 1,627,718      |            |               |            | 2,335,916 |            |  |  |  |  |  |   | 707,553 | 

44